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Series 2


Finding in the assessment- has probative value at penalty stage

The Amristsar bench of ITAT in Hoshiarpur Roller Flour Mills vs. ITO (2005) 97ITD595 observed that it is settled law that though the quantum and penalty proceedings are different but the findings in the assessment order have probative value at the penalty stage. In this case the assessee agreed to the quantum addition and did not challenge the assessment order before the CIT (A). The bench suggested that the assessee at the initiation stage should explain the issue on merits even while he chose not to file an appeal against an addition. In this case no reply whatsoever was filed before the Assessing Officer to explain the issue on merits, which proved that the assessee has failed to offer any explanation before the Assessing Officer.


It is thus always advisable to submit the bonafide of the claim and also support the same with an explanation combined with evidence such as CA certificate, reports, disclosure in the return, opinion obtained etc. to avoid burden of penalty. All said and done the income tax file must carry minutes of the discussion held in regard to any such claim to prove the bonafide of the case.


Penalty process- A O’s satisfaction is a must


In the context of 271(l)(c) vide Deputy Commissioner of Income-tax vs. Suresh Kumar (2005) 97ITD527 (Kol) it is settled that the word “may” in the first instance is discretionary while the other word “shall” has mandatory effect. The A O is empowered to impose penalty only if there exists one or more of the circumstances enumerated in els. (a), (b), (c ) and (d) of s. 271(1) but not otherwise.

Use of documents/statements against assessee- confrontation and cross examination must


It is well settled in Kishinchand Chellaram v. CIT [1980] 125 ITR 7131 (SC) that before the Income-tax authorities could rely upon certain documents, it is incumbent upon them to confront the assessee with such documents. The Assessing Officer is similarly bound to confront statements of third parties to the assessee and allow an opportunity to cross-examine the person whose statement was recorded and being relied upon, if it is also an evidence to be used against the assessee. If not confronted, the same is not admissible evidence.


This view is reaffirmed by the Supreme Court in the case of R.B. Shreeram Durga Prasad & Fatechand Nursing Das v. Settlement Commission [1989] 176 ITR 169.


Reference in this regard is invited to the decision of Kolkata High Court in Bagsu Devi Bafna vs. Commissioner of Income-tax (63ITR333). The Court held therein that if an order was made relying upon materials collected behind the back of a party and without giving the party an opportunity of contesting the legality or binding effect of such materials, the order must be treated as bad for having been made in violation of the principles of natural justice.



Interest income- generally considered as other source


It is a settled law vide Apex Court ruling in the case of CIT v. Govinda Choudhury & Sons [1993] 203 ITR 881 that interest income can be assessed under ‘Income from other sources’ only if it cannot be brought within one or the other specific heads of charge.


Charitable institutions profits- governed by the commercial principles


The Chennai bench of ITAT in A.R.R. Trust vs. Assistant Commissioner of Income-tax, Kumbakonam (2005) 97ITD203 restated the settled position of law so that even in case of charitable organizations or other such organizations, for calculating profits and other things, commercial principles of business are applicable.


Exemption twist


The exemptions can only be available when plainly authorized by the statute. It is well settled by the Supreme Court in case of Novopan India Ltd. v. Collector of Central Excise and Customs, Hyderabad (73) ELT 769 that exemption being in the nature of exception to be construed strictly at the stage of determination whether assessee falls within its terms or not and in case of a doubt or ambiguity, benefit of it must go to the State. But once the provision is found applicable to him, full effect must be given to it. Similarly it is also a settled law that the onus is on the assessee to prove that he qualifies for the deduction.


Show cause notice


It is settled in Mahanagar Telephone Nigam Ltd. vs. Chairman, Central Board, Direct Taxes (2004) 267ITR647 that  against show cause notice litigation should not be encouraged.


Legal fictions


The Apex Court in Bengal Immunity Co. Ltd. v. State of Bihar [1955] 2 S.C.R. 603 held that legal fictions are created only for some definite purpose and these must be limited to that purpose and should not be extended beyond that legitimate field..


DTA vs IT Act


It is also well settled law by the special bench decision in Assistant Director of Income-tax v. Bank of Tokyo Mitsubishi Ltd.(2006) 280ITR AT 117 –SB that in the absence of any express provisions in the Treaty, contrary to the general provisions of the Act, the general provisions of the Act will prevail.


Fictional sale


The proposition of law that nobody can make profit out of self nor can trade with self nor earn from self is well settled by the Supreme Court in the case of Sir Kikabhai Premchand v. CIT [1953] 24 ITR 506.




Gopal Nathani


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