Deductions, Rebates & Relief’s
Sub: Deduction u/s 80HHC in MAT Scenario- Legislative Intent
The manner of computation of deduction u/s 80HHC for export profits earned is often a core of contention between an assessee and the assessing officer.
Due to business deductions such as depreciation, 100% deduction of scientific research expenditure, bad debts, full write off of deferred revenue expenditure, unabsorbed claims for losses and depreciation of earlier years etc. the income computed under the head business is found to be insufficient to absorb eligible deduction u/s 80HHC.
For instance assuming the net profit before such statutory deductions is 1000 and the aggregate amount of statutory deductions is 800,in which case the business income would be 200 only. Assuming the ratio of export turnover to total turnover is 50% the normal tax liability at 35% tax rate would be 35%(200-50%*200)= 35. Since the MAT liability would be higher at 67.5 assuming we adopt the deduction u/s 80HHC at 100 only based computed with reference to profits computed under the head business after taking into account such statutory deductions and disallowances.
Now the question arises if it is permissible to compute deduction for export profits u/s 80HHC with reference to the amount of net profit or book profit rather than the sum arrived as per infra in the context of present section 115JB of the Income tax Act, 1961.
The answer to this question would in affirmative when one would go deep to understand the intent behind such insertion in the section.
The latest in the row of cases on this subject is the decision of the Kerala High Court in the case of CIT v. G T N Textiles Ltd. (248ITR372). Though this decision pertains to section 115J yet would be supporting the assesses case in the newly drafter section 115JB.
In referring to both sections 115J & 80HHC the Court explained that under clause (iii) of the Explanation, it is not the profit as computed under the head “ Profits and gains of business or profession” that is to be applied. Instead of the words “ profits and gains of business or profession” occurring in sub section (3) and (3A) of section 80HHC or sub section (3) of section 80HHD, the word “profit” that is mentioned in section 115J has to be applied. Clause (iii) does not say that section 80HHC of the Act is applicable as such. It only says that the profit shall be determined in the manner provided in that section. Section 80HHC is made applicable to the extent only for calculating the deduction. The Court further held that the Circulars issued by the Board which are not against the section could be looked into while interpreting the provision.
Further in the Circular No. 559 dated 4.5.90 the Board has clarified that the intention for inserting such incentive provision in section 115J is to exclude profits that are otherwise 100% exempt under the Act. The object remaining the same there is no reason to hold a contention different from the one which hold good in the context of section 115J. Thus even for the purposes of section 115JB workings the deduction is to be computed with reference to book profits or net profit as shown in the profit and loss account. Further in Circular NO. 680 dated 21.2.94 such an intention is exemplified. The circular clarifies as under: –
“Clause (iii) of the Explanation under section 115J, which was inserted by the Direct Tax Laws (Amendment) Act, 1989, with effect from assessment year 1989-90, provides for a deduction from the book-profits attributable to a business, the profits from which are eligible for deduction under section 80HHC or 80HHD. It also provides that the amount of deduction shall be computed “in the manner specified” in sub-section (3) or (3A) of section 80HHC or sub-section 3 of section 80HHD. Certain doubts have been expressed as to whether the amount quantified under section 80HHC(3) or (3A) or section 80HHD(3) itself should be deducted under Explanation (iii) under section 115J or whether only the manner of computation specified in those sections should be followed to quantify the amount of deduction.
- It may be noted that while deductions under sections 80HHC and 80HHD are related to the profits computed under the head “Profits and gains of business or profession” section 115J is concerned only with book profits. While explaining the scope of Explanation (iii) under section 115J, it was stated in para 9.2 of the Board’s Circular No. 559 dated 4-5-1990 (see  184 ITR (St.) 91), that the intention behind introduction of the said Explanation was to ensure that the provisions of section 115J, which provided for a tax on the book-profits, did not take away the 100 per cent. exemption which was to be allowed in respect of export profits and the profits from tourism-related industry. It was also stated therein that the intention was that 100 per cent. of such profits should be exempt in such cases. In para 9.3(a) of the same circular, it was elaborated that for the purposes of the subject Explanation, the “net profit” to be excluded shall be computed in the same manner as provided for in section 80HHC(3) or (3A) or section 80HHD(3).”
In the author’s opinion it is therefore possible to claim deduction for export profits with reference to book profits for the following two reasons: –
- Section 115J begins with a non obstante clause due to which “book profit” will have superior value than the profit computed under head “business or profession”
- By adopting the figure as computed under the head business for computing such relief would be against the legislative intent.
Heading: Capital gains
Sub: Time factor concept- A Rational Angle
Capital gains can enjoy income tax exemptions where proceeds are reinvested in specified assets within prescribed period. Often the assessee face difficulty in meeting such time limitations, which would mean denial of exemption by the assessing officer.
In the case of ITO v. H P Vishweswaraiah (250ITR863) the assessee received additional /enhanced compensation for compulsory acquisition of land by the Central Government. Section 54E(3) before it was omitted from 1.4.88 provides for an exemption if the compensation amount is reinvested in specified bonds etc. In this case the compensation was physically received only subsequent to the date of withdrawal of exemption from the statute book.
In this case the revenue sought remand of the order passed by the Tribunal. In showing concern over the manner of passing of the silent order by the Tribunal the Division Bench however pointed out that while construing beneficial provisions that are specifically put on the statute book for a specific purpose, namely, to give to the assessee certain benefit which the law confers because of the fact that otherwise, in situations such as compulsory acquisition where the assessee is left with a large capital amount if the normal principles of taxation were to apply, a greater part of receipt would virtually be confiscated. The Court at this stage required a harmonious application of law to achieve the effective purpose of law.
In another case of the Commissioner of Income-tax Vs. Roda Mistry (Smt.)(231ITR12) the assessing officer denied a similar exemption claim in the case of an assessee in whose case the acquisition dater pertained to the period prior to coming into force of such exemption 54E. The Andhra Pradesh High Court held that there is no warrant to confine the provision contained in section 54E(3) of the Income-tax Act only to the additional compensation received in respect of the acquisitions that take place after the introduction of the provisions. Such a narrow interpretation is not warranted, either going by the language of the section or by having recourse to the purposive interpretation.
The Karnataka High Court taking note of the AP High Court ruling came heavily on the department for battling in unnecessary litigations. The Court pointed out that despite the AP High Court virtually setting out guidelines indicating where the lower authority has gone wrong it is not proper to seek any remand as that would lead to unnecessary litigation. In this regard the Court explained that in the majority of cases that are remanded a kind of ego problem comes up in so far as the feathers get ruffled and an even more foolish order emerges. Ultimately, in order to put a full stop to the litigation going in the circles on the second or third occasion, purely, out of a sense of fatigue, it is the High Court which ultimately decides the issue and sets it at rest. On these very facts the High Court chose not to remand the case and instead e reiterated the principles laid down by the AP High Court.
The Karnataka High Court in this sounding judgment finally held that when the compensation was enhanced that notionally dated back to the original receipt which in turn got modified. It thus held that the assessee was entitled to exemption even if the provisions of section 54E(3) were no longer in the statute book in so far as the same were omitted.
Good news is that a new section 54H was inserted in 1991 to take care of such problems which went unnoticed in this judgment. It says that the exemption would be given if the proceeds of compensation are invested within six months from the date of receipt irrespective of the fact whether on such date the exemption section remains on the statute book or not.
Defect in Appeal- Only of Academic Interest
An appeal before the Commissioner (Appeals) shall ordinarily be presented within thirty days of the order of assessment, but the Appellate Commissioner may admit an appeal after the expiration of the period if he is satisfied that the appellant had sufficient cause for not presenting it within that period.
In the case of Mela Ram & Sons v CIT (29ITR607) the appeal against the assessment was out of time by 19 days. The appeal was posted for hearing and a notice was issued.
At the hearing, the Department took the objection that the appeals were presented out of time, and were therefore liable to be dismissed. The assessee prayed for condonation of the delay in view of certain excep-
tional circumstances preventing it from presenting the appeals in time.
The Appellate Commissioner held that there was not sufficient ground for condoning the delay, and rejected them in limine. Both the Tribunal and the High Court upheld the order of the lower authorities.
It was contended before the Supreme Court that any appeal which is barred by limitation cannot be considered as an appeal properly presented under section 30 of the Indian Income-tax Act, 1922.
This court rejected that contention observing:
” If an appeal is not presented within that time (within the prescribed time) does that cease to be an appeal as provided under section 30(1)? It is well-established that rules of limitation pertain to the domain of adjectival law, and that they operate only to bar the remedy but not to extinguish the right. An appeal preferred in accordance with section 30(1) must, therefore, be an appeal in the eye of law, though having been presented beyond the period mentioned in section 30(2) it is liable to be dismissed in limine. “
In the similar manner an order rejecting the appeal in limine for non-compliance with the provisions of section 249(4) for not depositing the requisite amount, disposes of the appeal presented before the appellate authority. Such an order comes within the purview of section 250 of the Act and is appealable to the Tribunal under section 253 of the Act. In other words such appeals though may be suffering from some defects remain appealable instead and need to admitted as otherwise any omission therein or any fatality attached to it is really of academic interest only.
The Delhi High Court facing a similar such situation in the case of Rajpal & CO. v. CIT (250ITR832). In this case an authorised person did not sign the Form 35. To this the Commissioner dismissed the appeal and the Tribunal followed suit in not entertaining the appeal and did not went into the merits of the case altogether.
Following the Apex Court ruling in Mela Ram & Sons the High Court directed the Tribunal to hear the appeal on merits without attaching any importance as to whether the first appeal was competent and entertainable or not. The Court found the question as only of academic interest.
In an appeal filed by the assessee in the case of Rai Shri Krishna Ji Vs. Commissioner of Income-tax (45ITR612) in the memorandum of appeal presented to the Tribunal, the assessee impleaded the Commissioner of Income-tax as the respondent instead of the Income-tax Office. Rule 13 of the Appellate Tribunal Rules, 1963 talk of the respondent in an appeal by an assessee. It reads as follows:
“ In an appeal by an assessee under sub-section (1) of section 253 the Income-tax Officer concerned shall be made a respondent to the appeal.”
The Allahabad High Court held that the object of courts is to decide the rights of parties and not to punish them for mistakes that they make in the conduct of their cases by deciding otherwise than in accordance with their rights and that, if the error or mistake is not fraudulent or intended to overreach the court, amendment should be allowed in order to rectify the mistake and, if that is done, it is not a matter of favour or grace, but what is required by the interest of justice.
Principle of double taxation.
Rowlatt J. in Commissioners of Inland Revenue v. Frank Bernard Sanderson 8 T. C. 38, 44, 45. (1921) in a classic dictum illustrated the two stages of passage of money in his inimitable words as under :
” It is often said, but not always understood, that in income-tax the same income is not taxed twice. That means that you cannot tax it more than once on one passage of the money in the form of one sort of income. If a man earns £ 100 by his profession and gives it to his son to clothe himself, or to his daughter, for the year, the son or the daughter does not pay income tax ; there is only one passage of the money in the form of that income. If a man earns £ 100 and pays it to somebody else for services rendered in a trade or profession by that other person, the sum of £ 100 enters upon another passage, in another form of income, and therefore attracts income tax again. “
The Supreme Court however in the case of Jain Brothers Vs. Union of India (77ITR107) held that the facile analogy of passage of money given by Rowlatt J. as per infra will not carry the matter further where the statute has made an express provision for the income of the firm and the income in the hands of the partners being both liable to tax. The Apex Court in referring to the firm-partner tax scheme held that if any double taxation is involved the legislature itself has, in express words, sanctioned it. It is not open to any one thereafter to invoke the general principles that the subject cannot be taxed twice over.
In the past so far as registered firms were concerned the tax payable by the firm itself has to be assessed and the share of each partner in the income of the firm was to be included in his total income and assessed to tax accordingly. However the statute did provided for an appropriate relief provision as well as differential tax treatment.
Following the Apex Court exception rule the Rajasthan High Court in the case of CIT v. Sriram Jagannath (250ITR689) held the assessment of different persons in respect of the same income would not absolve one from liability to be taxed. In this case it was found that the income actually belonged to the assessee who made certain transactions allegedly in the name of other persons and actually diverted his profits to other persons. The assessee claimed that the other persons have already submitted the returns in respect of such income and have also been assessed on the basis of declaration submitted by them. The High court did not find any taste in this argument and said that they are not concerned with the remedies which the other person may follow.
Revised Return- Effect after Survey/Enquiry by the Revenue
Normally a revision of return is made for making claims for deductions or exemptions that were omitted to be made in the original return. In the case of CIT v. V Narashima Prasad (250ITR852) the premises of the assessee were surveyed by the revenue. The assessee having already filed the return at a very low income of the previous three years without wasting any time revised such returns and returned income at almost fifty (50) times the amount returned originally.
On the basis of such declaration only the assessing officer levied penalty for concealment on the ground that the revised returns were filed after the survey. The Tribunal held that merely because the return has been revised after the survey would not be sufficient to call for any penalty action under the Act. The Karnataka High Court upheld the order of the Tribunal.
On the other hand in the case of Vanaja Textiles Ltd. Vs. Commissioner of Income-tax (249ITR374) the assessee filed a return of income declaring a net income of Rs. 8,790 after claiming deduction of more than Rs. 1 crore for depreciation, investment allowance, etc. The assessee filed a revised return of income supposedly after the conduct of an enquiry by the revenue into the alleged huge deductions which otherwise were not available to him in that accounting year. It also claimed the benefit of the amnesty scheme.
The revenue claimed that after the return filed by the assessee the Revenue had conducted an enquiry and had knowledge about falsification of documents and claiming deduction of very huge amounts to which the assessee was not entitled in that accounting year. It was thus alleged by the revenue that the subsequent return filed by the assessee was not voluntary (key requirement of the section) after finding out the bona fide mistake committed by it. The assessee was denied the benefit under the amnesty scheme. The action on the part of the revenue was affirmed by thee Kerala High Court in this case.
Further the Nagpur High Court in the case of Waman Padmanabh Dande Vs. Commissioner of Income-tax (22ITR339) held that where an assessee seeks permission to revise the return as originally filed after the assessee’s dishonesty has come to the notice of the Income-tax Officer a penalty for concealment can be imposed.
Gifts made to Dealers/Distributors- Is Trading Receipt
Often manufacturers come out with incentive schemes from time to time whereunder gifts in kind such as gold, vehicles or even free foreign trips are provided to the dealers/distributors for outstanding sales performances. Such gifts in kind are in the nature of benefit or perquisite arising from the exercise of business. The cash equivalent of the value of such gifts is to be charged to tax in the hands of such dealers/distributors u/s 28(iv). The clause (iv) only apply to receipts otherwise than in cash.
In the case of Boeing v. CIT (250ITR667) the assessee being a dealer of cloth received an ambassador car under a gift scheme formulated by the company in the company’s centenary year for having purchased bulk materials. The assessing officer made an addition of Rs.50k as cash equivalent of the value of such car. The Madras High Court held that the amount of Rs.50k received by the assessee from the manufacturer whose goods it sold as a dealer/retailer, was by reason of the fact that it had achieved the target, for achieving which, incentives by way of gifts have been promised by the manufacturer. The Court further held that there would have been no occasion for the assessee to receive this amount had it not been a dealer for the manufacturer, and had it not put in the additional efforts for which the incentive scheme had been drawn up by the manufacturer. The Court held that the receipt clearly was a trading receipt.
The High Court also held that the incentive so received is not very different from what a workman in a manufacturing concern would receive by way of production bonus for achieving higher production, or the amount that a preacher would receive from those who wish to support his preaching by making payments to him for practicing the profession.
In such case it is further desired of the manufacturer to consider such cash equivalent in the discharge of obligations for deduction of tax at source u/s 194H of the Income tax Act, 1961
Income from Other Sources
Income from Undisclosed Source- Fictitious Purchase
In the case of CIT v. La Medica (250ITR575) the assessee, a manufacturer of allopathic drugs and being assessed under Delhi jurisdiction shown to have made purchases from a Calcutta party. The assessing officer found that the rate charged in the bill was high and to verify this he issued summons in the name of Calcutta party, which was received back, unserved. In this case personal visit was made by the ITO/Inspector for on the spot enquiry on the genuineness of the party. From such enquiries and upon further enquiries with the bank it was found that the party turned out to be bogus and non-existing. The assessing officer treated the sums withdrawn from the seller’s bank as the assessees income from undisclosed sources.
Both the Commissioner (Appeals) and the Tribunal concluded in favour of the assessee on the following grounds: –
- the goods have been pledged with the bank after the alleged purchase;
- non existence of the seller could not be the basis for doubting the genuineness of the purchases and /or to infer that there were fictitious purchases.
Arijit Pasayat, CJ of the Delhi High Court in a fine ruling pointed out that the Tribunal instead of answering the question whether the purchases were made from the Calcutta Party, as were claimed by the assessee in this case all through without any choice, acted on irrelevant materials such as pledge of stocks with banks, purchases from some other source etc. and thus attempted to make out a third case where the assessee necessarily must have made identical purchases from some other party to pledge such stocks.
In an exparte order though but the High Court held that it was not open to the Tribunal to make out a third case, which was not even the case of the assessee, to hold that the transaction were real and not fictitious. The Court found that the Tribunal had improperly rejected evidence in support of the revenue which has converted the question of fact into a question of law.
Reopening of assessment – Foundation for issue of notice
The assessing officer is given a specific power under the Act to assess income that has escaped assessment in the original proceedings Under the law it is desired that the assessing officer must have a reason beforehand to initiate action for reopening of an assessment. Often there has remained a controversy in the past on the exercise of power u/s 147 at the instance of a valuation report of the Government valuer. While the Courts of Rajasthan, Calcutta and Punj. & Har. Have held such action improper whereas the Madras and the Delhi Courts have ruled in favour of the revenue. In one more attempt the Calcutta High Court in Kajaria Investment & Properties P. Ltd. v. ITO (250ITR619) held that valuation is always a question of opinion and one the audited accounts and supporting vouchers and documents are produced in the original assessment the assessing officer in a later action taken u/s 147 cannot claim that the assessee did not produce any material. The Court requited that it is for the assessing officer concerned at the point of original assessment either to accept or reject or to believe or disbelieve the materials at that juncture only. The High Court quashed the very notice issued in this case.
The scope of such action has been further widened after 01.04.1989, which apparently went unnoticed by the Calcutta High Court. Arijit Payasat of the Delhi High Court in the case of Bawa Abhai Sngh v. Dy. Commissioner of I Tax (2001) 117TAX12 in a lucid manner however dealt with the amended provision viz. a viz. earlier drafting and found that the only condition for action under section 147 is that the assessing officer should have reason to believe that income has escaped assessment, which belief can be reached in any manner and is not qualified by a pre-condition of faith and true disclosure of material fact by an assessee as contemplated in the pre-amended section 147(a). In other words action under section 147 is possible even in case where the assessee has disclosed fully and truly all the material facts. In this case the High Court held that valuation officer’s report can form the basis to reopen the assessment even when the other High Courts of Rajasthan, Calcutta and Punj. & Har. have held that such a report constitute a mere opinion and therefore cannot constitute the foundation or an information to invest jurisdiction on the assessing officer to reopen completed proceedings. In another ruling in the case of New Light Trading Co. v. CIT (2001) 117TAX741 the Delhi High Court held that reopening on the basis of a pointer by the audit party is valid under the law.
Statutory liability and contractual liability.
In the case of Deputy Commissioner of Income-tax vs. Esquire Video Film Services (P.) Ltd (74ITD57) the assessee who followed the mercantile system of accounting though provided for interest to banks yet disputed such liability. The banks had filed a suit against the assessee for recovery of the principal amount along with interest. At the close of the year the suit was pending in the High Court. The Mumbai Bench of the Tribunal was to answer the question whether the liability provided in the books of account is an accrued liability or a contingent liability.
Before addressing the issue in this appeal the Bench brought out a distinction between a statutory liability and contractual liability. It held that the principles of law applicable in respect of the statutory liabilities differ with the principles of law applicable to contractual liabilities. In the case of statutory liability the liability that is accrued under the statute is allowable as a deduction notwithstanding the fact that the assessee has disputed the liability either by way of an appeal or otherwise. This is however further now subject to actual payment after insertion of section 43B under the Income tax Ac
In the case of contractual liability the Bench held that the law is totally different. In referring to the Bombay High Court view and the Apex Court decision in the case of CIT v. Swadeshi Cotton & Flour Milk (P.) Ltd. (53 ITR 134).
In this case the assessee had received certain waivers, which it offered to tax in the later years. In other words, the assessee has ultimately not been held liable to interest for which a provision was made in the accounts for assessment years 1986-87 and 1987-88. Following the law of the land the Mumbai Bench restored the additions of Rs. 53,40,607 and Rs. 54,99,305 for assessment years 1986-87 and 1987-88 respectively and directed the assessing officer to delete the amount assessed in assessment year 1989-90 out of the above additions rather than calling upon the assessee to take appropriate action u/s 154 in A .Y. 1989-90 seeking withdrawal of amount offered for tax u/s 41 which action would be just and reasonable.
Also the Allahabad High Court in the case of Commissioner of Income-tax Vs. Oriental Motor Car Co. (P.) Ltd. (124ITR74) held that the mere fact that an assessee keeps his accounts on the mercantile system does not give him a handle to debit liability of every kind whatsoever. The liability that can be debited is only that which is certain, and which arises in present. In this case the amount of infringement commission so claimed was negotiable and was therefore not definite.
under the mercantile system of accounting it is not
left to the sweet will of the assessee to debit in its account any amount
towards its expenses and claim that the provision so made will have to be
allowed by the tax authorities. It is true that under the mercantile
system of accounting all items of credit are brought into credit immediately
they become legally due and before they are actually received, and all
expenditure is debited for which a legal liability has been incurred before
it is actually disbursed. But before a credit or debit entry can legitimately
be made in the accounts it must be shown that a certain enforceable
liability has accrued or arisen. Such liability must be one that has been
ascertained and capable of being enforced by the person in whose favour
the debit has been raised. The mercantile system can never be “stretched
to embrace all sorts of provisional, notional or contingent payments which
the assessee considers that he might ultimately be called upon to pay.
It is well settled that anticipated losses and contingent liabilities can-
not be claimed under the mercantile system of accounting. The liability
must be definite and real.
However any liability arising under any breach of contract when ascertainable would not be in the nature of a contingent liability and hence would be deductible. In other words when there is no uncertainty or when the very incurring of the expenditure is not tentative the liability would be deductible. The Delhi High Court decision in the case of Commissioner of Income-tax v. Dalmia Dadri Cement Ltd. (195ITR290) is a direct pointer on this very principle of deduction.
In the case of Commissioner of Income-tax Vs. Seshasayee Bros. (P.) Ltd. (239ITR471) the assessee who entered into a managing agency agreement was entitled to claim remuneration at a certain percentage, on a sliding scale, from the profit of the company as computed under the provisions of sections 349 to 351 of the Companies Act, 1956. The assessee-company was entitled to a minimum remuneration of Rs. 30,000. The assessee-company entered into another agreement with another party and there also the assessee was entitled to claim remuneration of 10 per cent. of the net profit in addition to a minimum remuneration of Rs. 12,000 per annum. Under the agreement the additional remuneration could be drawn by the assessee only after the audited balance sheet and profit and loss account of the relevant year were placed before the general body meeting and approved by the general body meeting. According to the Assessing Officer, the additional remuneration became due to the assessee and it was assessable in the year in which the minimum remuneration was payable and the fact that it was paid subsequently was not a relevant consideration. The Tribunal allowed the appeal of the assessee. The Madras High Court held that the additional remuneration became due only after the audited balance sheet and profit and loss account of the company were laid before the company’s general body meeting and approved by the same. Since the additional remuneration was based on the profit, unless the amount of profit was known, it was not possible to hold that the additional remuneration accrued at the end of the relevant accounting year.
Directors including managing directors, apart from a fixed monthly remuneration are often entitled to certain commission as percentage of net profits as additional remuneration. Such commission is though provided in accounts of the preceding year but the payment of the same is made subject to the approval of accounts in the general meeting. On this basis such commission is both made subject to tax deduction at source at the time of payment in the succeeding year. Further the director concerned offer such sum to tax in the previous year in which the same is received even though the employer take a deduction of the same in the immediately preceding year. The assessing officer in such cases often attempt to tax such commission in the preceding year in which a deduction is claimed by the employer. Any such action can be challenged on the basis of the ruling of the Madras High Court.
In the light of the Patna High Court ruling in the case of H.P. Biswas &Co. v. CIT (105TAX469) it may be possible to defer tax payment in respect of incomes provided in the books of account but held under dispute. In this case the assessee had made a claim for a work done in the course of carrying the business of civil construction. The matter went into arbitration and the assessee returned the entire amount received on the basis of an award in the year of ultimate receipt. The assessee contended that since the claim was under dispute no income could be said to have accrued at any time till the award was given. Following the Supreme Court ruling in CIT v. Hindustan Housing & Development Trust Ltd. (161ITR524) the Court held in favour of the assessee. In that case the compensation could not be made liable to tax until final adjudication. The Allhabad High Court in CIT v. Amrit Cold Storage (229ITR641) also took the same view in the context of an assessee who collected certain cold storage charges but kept them in reserve account pending ruling of High Court on the petition against ordinance desiring such collection.
MAT- deductions permissible
The Bombay High Court in their ruling in the case of CIT v. Echjay Forgings Pvt. Ltd. (251ITR15) held that the following amounts are not to be added back to the net profit shown in the profit and loss account: –
- Wealth tax payment /provision;
- Provision for bad and doubtful debts. Madras High Court decision in Beardsell case given in the context of an order passed u/s 143(1) (a) found inapplicable;
- Provision for Gratuity;
- Provision for bonus;
- Foreign exchange fluctuations on moneys borrowed for purchase of machinery even though for normal tax such amount has to be disallowed and to be taken for the purpose of computing depreciation claim instead.
Even the Bombay High Court in an earlier judgment held that the provision for doubtful debts debited to profit and loss account is further eligible for deduction u/s 36(1) (vii). This finding is overturned by the Finance Act, 2001 in an amendment made with effect from 01.04.1989. But since the provisions of section 115J/JA/JB override section 36 it would be possible to prefer such claim in the MAT computation even after such an amendment in the Act.
Investible funds & investment period – Limitations, if any
The Kerala High Court in the case of ITO v. K.C. Gopalan (107TAXC591) held that there is no restriction under the law that the sale consideration itself should be utilized by the assessee for the purchase or construction of the new house property. In other words one can use any other source for this purpose.
Further on the question of roll over exemption available u/s 54 for reinvestment of proceeds in a new property the Allahabad High Court in the case of Commissioner of Income-tax Vs. Kapoor (H.K.)(Decd.) (234ITR753) held that it was immaterial that the construction of the new building was started before the sale of the old building. In this case the ITO rejected the contention of the assessee that the construction of the house at place ‘X’ had been completed by the assessee within a period of two years from the date of sale of the house at place ‘Y’. The assessee alternatively sought relief with reference to another property ‘z’ of which he started construction even before the sale of the impugned property. The ITO, however, took the view that the assessee had started construction of the ‘z’ property even before the sale of ‘ x’ house.
The second case by necessary implication affirms the finding in the first case as per infra.
Display of Hoardings
The Calcutta High Court in the case of Mukherjee Estate ( P ) Ltd. v. CIT (113TAX313) held that putting up of hoarding for advertisement is neither let out of any building nor the land appurtenant thereto and any such income would be assessable under the head income from other sources. In this case the assessee permitted some companies to display their boards on hoarding. However in case the agreement is drafted to let out the roof area then it may be possible to bring such charge under the head income from house property.
Search Action- Scope
In the course of survey conducted u/s133A the authorities seized books of account and certain documents in the case of R.T. Rajeswary v. DIT (105TAX441) (KER.). The High Court directed the authorities to for the return of the original documents and books and allowed the authorities to retain only the photocopies of the said documents, as impounding of original documents would cause adverse affect on the business of the assessee.
In another ruling the MP High Court in the case of Bapurao Vs. Assistant Director of Income-tax (247ITR98) took strong exception to the department action when the department officer in the course of search formed a view that undisclosed investment has been made in certain immovable properties and since it was not practical or feasible to take possession of the those properties, he passed prohibitory order under section 132(1) of the Act directing the petitioner not to part with or dispose of the said properties without his permission.
The High Court held that such power is limited to the articles and things mentioned in sub-section (1). The section does not include within its ambit immovable properties. A plain reading of section 132(1)(B) would show that while the authorised officer has power to enter and search any building, place, vessel or aircraft, he can seize only the books of account, other documents, money, bullion, jewellery or other valuable article or thing kept therein. He has no power to seize the building and the place itself that he has searched or other immovable properties of the assessee. Needless to add that an order of retention under sub-section (5) of section 132 can be made only in respect of things and articles seized under sub-section (1) and not with respect to the building or the place searched. There is absolutely nothing in section 132 which may authorise the officer to seize or retain any immovable property.
In yet another case of Banke Bihari Lal Agarwal Vs. Union of India (226ITR498) the Rajasthan High Court in the context of a writ filed on the ground that the seized records & books of account have not been made available to the assessee for inspection and lost by the department, thus causing difficulty for the assessee in explaining the queries raised by the officer. Calling it as an act of unreasonableness the Rajasthan High Court held that the act of search and seizure is an invasion on the rights of the subjects and cannot be indiscriminately used. Proper care has to be taken at all stages so as to justify even the act of seizure. Whenever a search is made and books of account are seized by the authorised officer, he is responsible for the safe custody of those seized records. If the said record has been handed over to some other officer/custodian, then the other officer or custodian is responsible for it. The protection under section 293 of the Income-tax Act, 1961, is not available to an officer who has lost the books of account so seized, because such an action cannot be said to be done in good faith.
Further the Court held that the books of account could be removed after the seizure in the following circumstances:
- The person from whose possession the books of account have been seized may be interested in removing the same so as to escape his liability to tax/prosecution. This could be in connivance with the staff of the officer in whose possession the books of account are.
- The officer in order to harm the assessee may remove books of account, so that he may not be in a position to explain the disputed entries.
- The officer or his staff in connivance with the assessee may remove the books of account.
- There may be gross negligence on the part of the officer seizing the books of account in not taking it with him.
A Government Officer, who has a duty to perform a particular act, has a personal responsibility to see that the State revenue is not lost for any act of his. If the loss of revenue is caused by inaction, he can be made personally responsible. The officers responsible could be taken to task by the Department by taking disciplinary action against them and making them personally responsible for the loss of revenue. They cannot be absolved of personal responsibility on the ground that the act performed was during the course of official duty. If the Department finds that the assessee was responsible for removal of the books, they can file prosecution/ criminal complaint against the assessee. An assessee who has lost his books of account can also claim damages for the loss of the books of account from the officer who has seized the said books of account. The loss or compensation to the assessee cannot be determined in proceedings under article 226 of the Constitution. The proper remedy for the assessee is to file a suit in respect thereof.
Refund & demand
Process of appeal made nugatory and ineffective- held as excessive, unwarranted and unreasonable
In a very fine ruling the Mumbai Bench of the Tribunal in the case of RPG Enterprises Limited v. Dy. CIT (251ITR20) came down heavily over an unfair headstrong & enthusiastic action by an assessing officer in recovering monies out of assesses bank account by not following the procedures established by law. The Bench concurred the fact that by such an action the taxpayer has suffered humiliation and has been deprived of remedies available to it under law. In so holding the Hon’ble Judicial Member, M A Bakshi pronounced, showing regrets from the revenue action, the following golden words: –
“ We consider our duty to arrest the wrong so that the taxpayers’ confidence and faith in the rule of law is not shattered.”
In this case the assessment got completed on 15.03.99 raised a demand of RS. 19L. Quite naturally the assessee went in appeal and requested the AO to hold on till the disposal of appeal. The order of Commissioner (Appeals) dated 24.02.2000 upholding the action of the AO was received on 07.03.2000. The AO wrote a letter dated 16.03.2000 requiring deposit of tax within three days of receipt of such letter. Such letter dated 16.03.2000 was received on 27.03.2000 thereby demanding payment by 30.03.2000.
Taking immediate action the assessee filed an appeal to the TAT on 27.03.2000 itself and moved an application for stay to the Commissioner (Admn.) with an intimation of such action to the AO. On 29.03.2000 the assessee was informed by the AO that the stay petition to the CIT is rejected. In an ironical act the AO even before the actual receipt by the assessee of such rejection of stay at about 5.55 pm withdrew the tax from the assesses bank account in a so called exercise of powers u/s 226(3) of the Income tax Act, 1961.
After hearing arguments of both sides the Bench laid down the following established procedures that must be adhered to by the revenue officer(s) in the disposal of stay petitions and subsequent resulting action : –
- That when an application for stay of recovery was pending before the Commissioner of Income tax, no action could be taken for recovery of the disputed demand;
- That the assessing officer cannot resort to any coercive action before the expiry of period prescribed in the notice;
- That the Commissioner of Income tax would be wrong if he/she disposes of the stay application without giving an opportunity of being heard to the assessee;
- That the recovery of the disputed demand by resorting to coercive action even before the expiry of the statutory time prescribed for appeal to the Tribunal would be illegal;
- That the Commissioner of Income tax would be wrong if he/she disposes of the stay application without passing a speaking order narrating precise facts of the case and the reasons for the exercise of discretion;
- That the assessee is entitled to refund of the amount collected in an unfair manner like in this case of complete misuse of powers by an assessing officer. This would perhaps be a unique case where such a direction is ever given.
Advance tax payment defaults- Bonafide case
In a case before the Bombay High Court of CIT v. Sulphur Refinery (P.) Ltd. (105TAX400) the assessee had filed an estimate of loss. However, profits accrued subsequently when the assessing officer held that the estimate filed by the assessee was malafide and unreal who then levied a penalty u/s 273. Following its earlier ruling in the case of Hind Products Pvt. Ltd. V. CIT (121ITR903) the Court reaffirmed its view that an incorrect or inaccurate view or approximation of the trend of the business in the future will not necessarily make the estimate with regard to income an untrue one.
In such cases the assessee is expected to bring on record the material on which he has bases his estimate to escape from the levy of penalty u/s 273 for any alleged false estimate or failure to pay advance tax. In the context of the substituted law under sections 234A,Band C for levy of mandatory interest the CBDT by way of a notification provided for a remedy to escape from such levy upon filing of a waiver petition in appropriate cases and circumstance to the Chief Commissioner of Income tax. In such cases the assessee is similarly expected to bring the relevant material on record to prove his bonafide.
Time of income accrual- Worth Exploring
Under Income tax Act any income is taxable at the point of its accrual irrespective of actual receipt. For any non-receipt the only action possible of income recovery would be to claim a write off in the year such debt is proved as irrecoverable to the satisfaction of the assessing officer.
On this crucial question on the time of income accrual the Delhi High Court is the first to apply the Supreme Court ruling in the case of Godhra Electricity Co. Ltd. v. CIT  225 ITR 746.
The brief relevant facts in the case before the High Court in the Commissioner of Income-tax Vs. Modi Rubber Ltd. (No.1) (230ITR817) were that the assessee had sold goods on credit to a customer. The buyer did not promptly pay the sale price. On the amount outstanding the assessee-company raised a debit note for interest and taken such credit to the profit and loss account. The debtor did not honor the debit notes raised by the assessee-company. In the subsequent year amount was actually waived off by directors and therefore written off in the books.
The assessee claimed exclusion of such income credited in the preceding year in the course of assessment.
Both the Assessing Officer and the Commissioner of Income-tax (Appeals) held that so far as the assessment year in which the debit entry was made is concerned, the amount of interest would be treated as an income accrued and then it could be treated as a bad debt in the year in which it was written off.
Reversing the stand taken earlier the Tribunal held that the mere unilateral act of the assessee debiting the books of account with the amount of interest, the liability for payment whereof was not accepted or agreed to by the debtor, did not amount to income really accrued to the assessee
The Revenue relied on the majority judgment in State Bank of Travancore v. CIT  158 ITR 102, decided byì¥Á7 ð¿ UJ
bjbjUU ‑Ø 7|7|UF ÿÿÿÿÿÿl ²T›T›T›T›<ì¥Á7 ð¿ UJ
bjbjUU ‑Ø 7|7|UF ÿÿÿÿÿÿl ²T›T›T›T›< Industrial Investment Corporation Ltd. Vs. Commissioner of Income-tax (237ITR889). The Apex Court in the ultimate held the view that the assessee’s method of accounting transferring the doubtful debt to an interest suspense account and not treating it as profit until actually received is in accordance with the well-accepted accounting practice.
Before the High Court it was claimed on behalf of the assessee that the question stands concluded by two Supreme Court decisions, namely, Godhra Electricity Co. Ltd. v. CIT  225 ITR 746 and CIT v. Shoorji Vallabhdas and Co.  46 ITR 144. In both the abovesaid cases, the law laid down by their Lordships is that income tax is a levy on income. Though the Income-tax Act takes into account two points of time at which the liability to tax is attracted viz., the accrual of the income or its receipt, yet the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in bookkeeping, an entry is made about a “hypothetical income”, which does not materialize. Where income has, in fact, been received and is subsequently given up in such circumstances that it remains the income of the recipient, even though given up, the tax may be payable. Where, however, the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income, even though an entry to that effect might, in certain circumstances, have been made in the books of account.
The Delhi High Court held that the issue having been concluded by at least two pronouncements of the Supreme Court referred to in the above, the question is rendered a mere academic one.
Powers & Duty of AO
The Income-tax Officer is not fettered by technical rules of evidence and pleadings, and that he is entitled to act on material which may not be accepted as evidence in a court of law. The Spl. Bench of the ITAT at Delhi in the case of Kailash Moudgil Vs. Deputy Commissioner of Income-tax (248ITR059) held that it is equally important to know that in making the assessment under sub-section (3) of section 143 of the Income tax Act, the assessing officer is not entitled to make a pure guess and make an assessment without reference to any evidence or any material at all. There must be something more than bare suspicion to support the assessment under section 143(3).
The Apex Court in Dhakeswari Cotton Mills Ltd. Vs. Commissioner of Income-tax (26ITR775, 782) earlier on the point estimation of gP Ratio held that in making an assessment under section 23(3) ( correspomnding to section 143(3) of 1961 Act) of the Indian Income-tax Act, 1922, the Income-tax Officer is not fettered by technical rules of evidence and pleadings, and he is entitled to act on material which may not be accepted as evidence in a court of law, but the Income-tax Officer is not entitled to make a pure guess and make an assessment without reference to any evidence or any material at all. There must be something more than bare suspicion to support the assessment under section 23(3). The Apex Court approved the rule of law on this subject so stated by the Lahore High Court in the case of Seth Gurmukh Singh v CIT  12 ITR 393.
In this case Seth Gurmukh Singh was assessed to Income tax on an income of Rs. 11,142/-. Some time later the Income-tax Officer was informed that the assessee had received some income which had accrued to him in Siam and he consequently reopened his case and ultimately added a sum of Rs. 40,000/- on that account and assessed him accordingly. The assessee took an appeal to the Assistant Commissioner challenging the finding of the Income-tax Officer that income had accrued to the assessee in Siam and that he had received it in the accounting year. The Assistant Commissioner remanded the case to the Income-tax Officer, observing that ” it is absolutely necessary that there should be some data and definite material on record for the finding that some profits were received into British India during the accounting period. A further report was accordingly submitted by the Income-tax Officer which satisfied the Assistant Commissioner who then declined to interfere with anymore. The Commissioner too held that the upshot of the whole is that the assessee failed to discharge the onus that lay on him, while there was abundant circumstantial evidence to prove the existence of productive sources of income in Bangkok and influx of money from there.
The following six points of law were suggested by the assessee for a reference to the High Court: –
(1) Whether there is any evidence in support of the finding that the assessee carries on business in Siam and has rent producing property there and that he brought any earnings from Siam to Gujranwala, the extent of which is Rs. 40,000/- ?
(2) Whether the onus of proof that the assessee has no source of income outside India, and that he has not received any income from abroad, is on the assessee in an enquiry under Section 34 of the Act, particularly when during previous five years no assessment on such income was made by the Income-tax Department?
(3) Whether in law the absence of explanation by an assessee in the following matters is circumstantial evidence of the fact that he brought during the year under assessment Rs. 40,000/- from Siam to British India: –
(a) Ten years ago assessee held assets worth four lacs in Siam. No satisfactory explanation given as to disposal of these assets.
(b) Investments made in Gujranwala of Rs. 24,000/- during the year of assessment and of two lacs during the last ten years. No satisfactory explanation from where he did so, though assessee has other sources of non-taxable income.
(4) Whether it was permissible in law to base a finding on the question involved under Section 34 enquiry on the history of last ten years of assessment and was that legal evidence in the case?
(5) Whether in the circumstances of this case action under Section 34 was justified in law, and whether the Income-tax Officer could act on information which he does not place on the record?
(6) Whether it is within the competency of the Income-tax authorities to know the total amount of wealth possessed by an assessee, hoarded or otherwise, or is their jurisdiction limited to discover assessable income for a particular year?
In the absence of any uniformity in the matter of framing questions of law the High Court therefore chose to formulate the question itself keeping the substance in such form as to give the question indicated by the assessee a proper shape, or to bring out most prominently the legal aspect of the case. The Bench framed the following relevant questions for reference to a Full Bench of five Judges:-
(2)(a) Whether, after rejecting the accounts of an assessee without reference to method of accounting but otherwise, an Income-tax Officer is bound to rely on the evidence, true or false, adduced by the assessee?
(b) If he makes his own estimate, is he bound to disclose the material on which he founds that estimate to the assessee?
(c) Is he entirely debarred from relying on private sources of information which he may not disclose to the assessee at all?
(d) In case he utilises the private inquiries made by him is it enough for him to communicate the substance of information’s to the assessee?
All these questions are very relevant even in today’s context and therefore need to be well understood both by the assessing officer and the assessee.
The High Court answered the questions as under: –
- While proceeding under sub-section (3) of section 23 (corresponding to section 143 of 1961 Act) the Income-tax Officer is not bound to rely on such evidence produced by the assessee as he considers to be false;
- if he proposes to make an estimate in disregard of the evidence, oral or documentary, led by the assessee, he should in fairness disclose to the assessee the material on which he is going to found that estimate;
- he is not, however, debarred from relying on private sources of information, which sources he may not disclose to the assessee at all
- in case he proposes to use against the assessee the result of any private inquiries made by him, he must communicate to the assessee the substance of the information so proposed to be utilised to such an extent as to put the assessee in possession of full particulars of the case he is expected to meet and should further give him ample opportunity to meet it, if possible.
Refunds & Demands
Disposal of Stay Applications- Parameters Laid Down
Often it is found that the revenue authorities reject stay petitions before March 31 only as a reason to enforce recovery by unpleasant means without recording proper reasons and details in such rejection orders. These perfidious acts on the part of the department have lead the Bombay High Court to draw necessary considerations that are to be religiously followed in the fair disposal of stay applications.
The High Court in the case of KEC International Ltd. v. AO (251ITR158) therefore laid down the following four parameters to be complied with by both the AO and the Commissioner (Admn.) while passing expeditious orders on stay application filed before them pending disposal of appeal by the first appellate authority (Commissioner (A): –
- The authority has to at least set out the case of the assessee briefly. In other words the order passed must be a speaking order stating facts of the case and the prima-facie conclusion.
- If the assessed income is higher than the returned income the authority has to consider whether the assessee has made out a case for unconditional stay. If not whether looking to the questions involved in appeal, a part of the amount should be ordered to be deposited, for which reasons should be given by the authority;
- If the authority wants the assessee to deposit the amount he can briefly indicate in his order whether the assessee is financially sound and viable to deposit the amount;
- The authority concerned should not take any coercive measures of recovery such as by attachment of bank accounts etc. till such time the time limitation prescribed under the Act for filing of an appeal.
The P & H High Court in the case of Aggarwal Rice and General Mills Vs. Commissioner of Income-tax (204ITR480) also held that the Income-tax Officer was required to pass a speaking order after affording an opportunity to the petitioner in a matter of stay. In this case the following order was passed by the AO, which subsequently got quashed by the High Court: –
“Your demand fell due on November 12, 1992, and you have applied for stay of demand on November 19, 1992. You have not applied for stay of demand even within 30 days stipulated period. Your application has been carefully considered and rejected. Please make the payment within a week of receipt of this letter failing which recovery will be made through coercive measures. “
Under section 220 of the Indian Income-tax Act, 1961, the Income-tax Officer has all the discretion to stay outstanding demands as long as an appeal from the assessment remains undisposed of. Commenting on such power the MP High Court in the case of Badrilal Bholaram Vs. B.K. Srivastava, ITO (77ITR954) held that this power to treat the assessee as not being in default is a power coupled with a duty and should be exercised fairly and reasonably and not arbitrarily and capriciously. Where the appeal is not frivolous, it may, in the special circumstances of a case, be the duty of the Income-tax Officer, to refrain from enforcing payment of the tax till the appeal is disposed of. If the officer fails to discharge his duty, he may be compelled by a writ under article 226 of the Constitution to stay his hands. However, so long as the officer has exercised his discretion fairly and reasonably, the High Court will have no power to interfere. Where the Income-tax Officer finds that the assesses had willfully failed to comply with the notice of demand although they were possessed of sufficient assets to enable them to meet the demand and that the entries in their accounts showed that they have been diverting very large sums of money with a view to withhold payment of the tax in their design to defeat the tax demand, and refuses to stay the tax demand under section 45 of the Act, the High Court will not interfere by a writ or direction under article 226 of the Constitution.
Revision Application u/s 264- Commissioner’s Role
The Calcutta High Court in the case of City Express Super Market v. CIT (118TAX248) held that in disposing of an application filed by an assessee u/s 264 the Commissioner is required to examine the legality and validity of the order of the assessing officer passed exparte in a case of non-appearance. In this case the assessee defended non-appearance due to illness, as well as by reason of the delinquent act and activities of its employees. In this case an appeal was filed but later withdrawn and got substituted by a revision petition.
In further expanding the scope of the power vested in them the High Court held that it is for the revisional authority or for that matter, the appellate authority to examine the legality and validity of the order, who take care of all these things under the law.
Also the Gujarat High Court in the case of Pravin V. Ashar Vs. Jaidev, Commissioner of Income-tax (247ITR828) held, that in determining and deciding the revision under section 264 of the Act the Commissioner must afford an opportunity of hearing and also had to consider the merits of the assessee’s claim as per the revision application. The Court further held that in the absence of the same the matter would go to the root of the without giving assessee opportunity to be heard.
Further before the Allahabad High Court in the case of Sardar Bhagat Singh Pahal Vs. Commissioner of Income-tax (70ITR342) the contention of the petitioner was that despite his repeated requests for a personal hearing, he was given no opportunity for presenting his submissions orally and, therefore, the impugned orders are vitiated. The Court held that the contention is without substance. In explaining the manner of exercise of the power by the Commissioner the Court held that section 264 of the Income-tax Act, 1961, empowers the Commissioner to revise an order of an authority subordinate to him either of his own motion or on an application by the assessee for revision. The provision does not confer any right upon the assessee to a personal hearing and there is nothing in it to suggest that an assessee applying in revision is entitled to present his submissions orally before the Commissioner. Merely because the proceeding before the Commissioner in revision is a quasi-judicial proceeding, it does not imply that the party applying in revision has a right to be heard personally. In other words even disposal can be made on the basis of written submissions filed by the assessee.
This view has been dissented by the Madras High Court in the case of Industrial Rubber Products v. Commissioner of Income-tax (194ITR141). The Court held that the power of revision exercised by the Commissioner of Income-tax is a quasi-judicial one. A public duty is imposed on the revisional authority not only to entertain such application but also to deal with the same in accordance with law after giving the aggrieved party a reasonable opportunity of being heard, as the discretion vested in him is a judicial discretion and has to be exercised judiciously. The person concerned must be informed of the case against him and the evidence in support thereof and must be given a fair opportunity to meet the case before an adverse decision is taken.
Further the Orissa High Court in the case of Dulal Chand Pramanick Vs. Commissioner of Income-tax (84ITR720) held that a written submission cannot be substituted for oral argument before the Income-tax Commissioner when dealing with a revision petition. The Commissioner should fix a date for hearing and give an opportunity to the party to say what he has to say through his counsel.
The MP High Court in the case of Jaikishan Gopikishan and Sons Vs. Commissioner of Income-tax (178ITR481) also held that in the exercise of administrative powers the Commissioner is bound to afford an opportunity of hearing and to pass a reasoned order so that the person, against whom the order is passed, the result of which may be payment of penalty, interest or even prosecution or subject to denial of the benevolent scheme or refusal of the benefit of the Amnesty Scheme, by which the Government is bound, because of “promissory estoppel”. Hence, it is essential that the Commissioner of Income-tax at least should give an opportunity of hearing and pass a speaking order by giving sufficiently clear and explicit reasons in support of the order made by him, as a reasoned order promotes public confidence in the administrative process.
Principle of Consistency and Comity of Judicial Decisions
Reiterating on the principle of consistency the Gujarat High Court in the case of Arvind Boards and Paper Products Ltd. Vs. Commissioner of Income-tax (137ITR635) held that it is settled law that if two interpretations of a taxing provision are possible, the interpretation, which is favourable to the assessee, should be accepted. If one High Court has taken a possible view which is favourable to the assessee, even if another possible view favourable to the Revenue can be adopted, such futile exercise is to be avoided, for, ultimately, the view in favour of the assessee might have to be taken. In the income-tax matters, which are governed by an All India statute, when there is a decision of a High Court interpreting a statutory provision, it would be a wise judicial policy and practice not to take a different view, barring, ì¥Á7 ð¿ UJ
bjbjUU ‑Ø 7|7|UF ÿÿÿÿÿÿl ²T›T›T›T›<ì¥Á7 ð¿ UJ
bjbjUU ‑Ø 7|7|UF ÿÿÿÿÿÿl ²T›T›T›T›<tute, and there is no other view in the field, another High Court should ordinarily accept that view in the interest of comity of judicial decisions and consistency in matters of application of a taxing statute.
Late Filing- Power to Condone
Every Act lay down certain period of limitation as regard filing of appeals. applications etc. Also in most of the cases the Act empower the appropriate authority to accept such applications, appeals etc. even after the expiry of such period of limitation if the petitioner makes out reasonable and sufficient cause. But certainly in a case where the Act does not so empower any such authority, resort can be made to section 5 of the Limitation Act, 1963 in appropriate cases.
In the case of Shivam Riceland Vs. State of Haryana (123STC23) the Sales Tax Tribunal II, Haryana, Chandigarh, dismissed the appeal filed by the assessee after the statutory period on the ground that it had no power under the provisions of the Act to condone the delay. The revenue argued that in view of the provisions of section 39 of the Haryana General Sales Tax Act, 1973 the Sales Tax Tribunal has no power to condone the delay.
Terming as incorrect the decision of the Tribunal the Allahabad High Court held that section 5 of the Limitation Act, 1963 in this regard provide a remedy which shall apply to proceedings under the Sales Tax Act. Under section 5 of such Act any appeal or any application, other than an application under any of the provisions of Order XXI of the Code of Civil Procedure, 1908,(5 of 1908), may be admitted after the prescribed period if the appellant or the applicant satisfies the court that he had sufficient cause for not preferring the appeal or making the application within such period.
In this case the assessee claimed that the delay had occurred due to the mistake of his advocate who having taken the certified copy of the order of the first appellate authority had not communicated to the petitioner as a result of which the appeal could not be filed. The total delay was of 40 days in this case.
To justify its bonafide claim the assessee had placed a certificate of an Advocate, who was representing the petitioner before the Joint Excise and Taxation Commissioner. From the perusal of such certificate the Court held that it is clear from this certificate that the delay in the filing of the appeal was attributable to the counsel for which the assessee could not be blamed.
Thus Section 5 of the Limitation Act would have application in every case where any Act does not specifically so provide for a power to a specified authority for condonation of delay or unless such Act specifically exclude application of such section. The section assumes significance in lodging claims for refund after the period of limitation prescribed either under the Act or by the Circulars of the Board.
Interest free loan –Does the Benefit Accrue in All Cases
The Supreme Court in the case of V.M. Salgaocar and Bros. Pvt. Ltd. Vs. Commissioner of Income-tax (243ITR383) held that non-charging of interest could not be regarded as being a perquisite in the hands of the employee-directors who were advanced interest-free loans by the company. For the first time it is the Calcutta High Court in the case of Ishran Devi Oberoi v. ITO (250ITR362) applied this rule in the context of a person who was not a salaried employee.
In this case the assessing officer attempted to tax the benefit in regard to interest free loan u/s 2(24) (iv) and for this purpose issued a reassessment notice u/s 148 of the Income tax Act, 1961. Terming as invalid such notice the Calcutta High Court held that if there is no income the question of escapement for the purposes of section 148 does not arise. Following the Supreme Court ruling as per above the High Court held that benefit enjoyed by the assessee by way of exemption of payment of interest cannot be termed to be an income in any sense.
Going a step further the Court held that the rule of exemption laid down by the Supreme Court has general application in all cases of assessee and not just employees.
Effective 01.10.2001 such benefit is made taxable in particular in the case of salaried personnel. However in case of non salaried personnel other than a director, a substantial shareholder or in the case of a relative of such persons this benefit may not be taxable provided that the amount is advanced out of internal accruals or interest free borrowings.
Reopening – Courts cannot go into the sufficiency or correctness of the material relied by an AO
The P & H High Court in the case of Bal Ram Jakhar v. CIT (250ITR393) held that one of the purposes of section 147 is to ensure that a party cannot get away by willfully making a false or untrue statement at the time of original assessment and when that falsity comes to notice, to turn around and say ‘ you accepted my lie, now your hands are tied and you can do nothing’. It would then be a travesty of justice to allow the assessee that latitude.
In this case the assessees name figured in the hawala scam inquiry though but no charges were framed in the ultimate. Even after that the assessing officer initiated an action u/s 147 for reopening original assessment on the basis of a charge sheet filed against him under the Prevention of Corruption Act.
In declining to interfere with the action of the assessing officer the High Court stressed that the AO may start reassessment proceedings either because some fresh facts had come to light which were not previously disclosed or some information with regard to the facts previously disclosed comes in his possession which tends to expose the untruthfulness of those facts. In such situations, it is not a mere change of opinion of the drawing of a different inference from the same facts as were earlier available but acting on fresh information. Since the belief is that of the Income tax Officer, the sufficiency of reasons for forming the belief is not for the court to judge but it is open to an assessee to establish that there in fact existed no belief or that the belief was not at all a bona fide one or was based on vague, irrelevant and non- specific information.
It is therefore advisable for assessees to demand from the assessing officer the particulars of the specific information that has prompted him to issue a notice u/s 148 and then reassess the bona fide in this regard and to further see whether that material had any rational connection or a live link for the formation of the requisite belief. Based on this the assessee can challenge the conclusion arrived at by the AO before the Courts. But the assessee cannot challenge the sufficiency or incorrectness of the material in his possession.
It may however be kept in view that after 01.04.1989 the AO is empowered to take such action even when the assessee has made full and true disclosure of the material facts at the time of original assessment. But even in such a scenario the AO must have a reasonable belief on the basis of some specific information in his possession, which can be inquired by the assessee to judge the rational connection.
Cost of Raising Loans – Always Revenue in Nature in case of Running Business
The Pune Bench in the case of Chintamani Hatcheries (P.) Ltd. vs. Deputy Commissioner of Income-tax (75ITD116) held that if the business is started, interest on loan borrowed by the assessee is allowable irrespective of the purpose of the loan, that is to say, even if the loan is obtained for acquisition of capital asset, interest is still allowable. As per the Bombay High Court decision in the case of Calico Dyeing & Printing Works v. CIT (34 ITR 265) all that the assessee has to show is that the capital which was borrowed was used for the purposes of business of the assessee in the relevant year of account. It does not matter whether the capital is borrowed in order to acquire a revenue asset or a capital asset. A step further to this decision is the Supreme Court ruling in the case of CIT v. Associated Fibre & Rubber Industries (P.) Ltd. (236 ITR 471) where the Apex Court held that even though the purpose of the loan was to acquire machinery, deduction was still held allowable even though the machinery is not actually been used in the case of a business already set up or in running.
Before the Pune Bench in this case the assessee poultry farm company approached Allahabad Bank for a loan and incurred evaluation fee of RS. 80930. Relying on the decision of the Supreme Court in the case of India Cements Ltd. v. CIT (60 ITR 552), the assessee-company claimed that the loan is a liability and it could not be treated as an asset or advantage of enduring benefit. Both the Assessing Officer and Commissioner (A) held that the term loan is obtained for purchase of capital assets, any expenditure incurred in connection with the said loan will go to increase the actual cost of the assets. They tried to distinguish the case of India Cements Ltd. (supra) and observed that in that case, the loan was utilised to pay off prior debt of Rs. 25 lakhs of two companies and balance amount of Rs. 15 lakhs was utilised for working fund. Following the Bombay High Court decision in the case of CIT v. Gwalior Rayon Silk Mfg. (Weaving) Co. Ltd. (237 ITR 253) the Bench held that it is irrelevant to consider the object with which the loan was obtained.
Matching Concept Under IT Act
Section 40(b) of the Income tax Act, 1961 imposes certain ceilings and conditions on the payments made to the partners. For this purpose the section require adequate provision of such payments in the partnership deed itself. In other words in the absence of any such clause permitting such payments the assessing officer can decline the claim.
In a case before the Kerala High Court in the case of Novel Distributing Enterprises v. Dy. CIT (118TAX382) the assessee paid interest on current account balances of the partners. The assessing officer denied such claim on the pretext that the relevant clause in the deed only refer to provision of interest with reference to capital contribution. In this case the assessee approached the Commissioner u/s 264 who also declined to interfere. The High Court also rejected the appellants’ ground and held that the authorities can act only in accordance with the provisions of section 40(b). The fact that the partners so declared such income in their respective hands did not found any relevance.
This case clearly point out to that fact that utmost care must be taken in making entries in the books of account as the same shall conform to the documents /evidence produced before the assessing officer and not otherwise. Any inconsistency between the two must be avoided.
Income Accumulation – Write Specific Object Else Loose Exemption
Under section 11(2), if a charitable institutions desires to accumulate more than 25 per cent. of its income the accumulation can be done subject to the following conditions:_
- To notify the Income-tax Officer in Form No. 10. the purposes for which the accumulation is proposed;
- To invest the amount so accumulated in any Government security as specified in section 11(2)(b).
The accumulated income in the ultimate should be applied by such institution for the purpose for which the income was accumulated. Any failure in this regard would mean withdrawal of exemption under Income tax Act.
The Madras High Court in their ruling dated 30.11.1999 in the case of Commissioner of Income-tax Vs. M.Ct. Muthiah Chettiar Family Trust (245ITR400) held that the very requirement in filling up Form No. 10 for seeking an approval for accumulation of 75% income for longer duration ( five years now) is that the purposes must have some individuality and mere repetition of the objects of the trust would not meet the requirements of section 11(2) of the Act. In this case it was seen that the assessee-trust had merely repeated its objects when it filed the necessary Form No. 10. However the Income-tax Officer, on the basis of Form No. 10 furnished by the assessee, allowed its income to be accumulated for a period of ten years and then it was noticed that it was too late to question the purposes and the Revenue thus conceded that it could not now challenge the validity of Form No. 10.
Following the view taken by the Calcutta High Court in Director of I. T. (Exemption) v. Trustees of Singhania Charitable Trust  199 ITR 819 the Madras High Court held that it is not enough for the trustees to repeat the objects of the trust, but must specify a particular purpose for which the income is being accumulated.
The Delhi Bench of the Tribunal in the case of S. Singh Charitable Trust v. ADIT (251ITR47) in a dissenting judgment held that mere repetition of few objects from the object list is even sufficient for the purpose of notice in Form No. 10. In so holding the Bench distinguished the Calcutta High Court decision in Director of I. T. (Exemption) v. Trustees of Singhania Charitable Trust  199 ITR 819 on mere technical reasons without appreciating the underground thinking behind the same. By a majority decision the Bench held that it is not necessary to specify the particular purpose in Form No. 10 due to practical reasons.
In this case the assessee failed altogether in making application of its accumulated income for unavoidable reasons to the satisfaction of the Bench which gave a new lease of life (and prolonged litigation of course) to the assessee and the fortunate part had been the failure of the department to consider the application of the assessee altogether in the preceding years. The Bench thus directed the assessing officer to so reconsider the application for accumulation again.
Fortunately or unfortunately the Bench did not even consider the Madras High Court ruling which also considered the Calcutta High Court decision and concurred with the same. Even after two High Courts have held similarly the Delhi Bench prompted to take a decision in total disregard is a bit disturbing since such decisions lead to futile litigation. In the present day it is desired to have consensus among Courts and the Benches of the Tribunal at least in the matter of procedural provisions and their applications.
Also it is highly desired of the revenue authorities to dispose of the assesses applications etc. in a reasonable time in the common interest of both the revenue and the assessee.
Limited Scope of Section 43B- Statutory Payments
Section 43 B provides that all statutory taxes, duties, cess etc. can be claimed as deductible expenditure only in the year of actual payment. Now what if the assessee is also charged interest on such outstanding taxes by the relevant tax collecting agencies.
In the case of CIT v. Orient Beverages Ltd. (2001) 117TAX106 the assessee claimed deduction of interest payable to Calcutta Municipal Corporation on outstanding Municipal Taxes. The assessing officer disallowed interest u/s 43B by treating such sum as an adjunct or part of Municipal Taxes. In upholding the order of the Tribunal the Calcutta High Court held that interest payable for arrears of Municipal taxes was really compensatory in nature and not a penalty or tax and hence a legitimate deduction admissible under the Act.
Further the Bengalore Bench of the Tribunal in interpreting the words “sum payable” M.V. Textiles vs. Third Income-tax Officer (23ITD523) held that the moment a demand is raised the provisions of section 43 B would come into force irrespective of the fact that the same is stayed or disputed by the assessee.
Source of Source- Unquestionable
The Ahmedabad Bench of the Tribunal in the case of Rohini Builders v. Dy. Commissioner of I Tax (2001) 117TAX25 pointed out that unsatisfactoriness of explanation does not and need not automatically result in deeming amount of credit found in the books of the assessee as its income u/s 68 of the Act. The assessing officer is bound to consider the totality of facts and circumstances of case. In this case the assessee claimed interest on such credits in books as well as deducted tax at source on such interest. Even when the assessing officer allowed the claim for interest on the alleged unexplained credits it chose to invoke section 68.
In this case the assessee furnished copies of returns/assessment orders in some cases while it furnished the complete addresses along with GIR/PAN in all 21 cases. The capacity of the creditors was further proved on the basis that all the loans were received by account payee cheques and also even repaid in the same manner. In some cases though the summons could not be served and in some cases the creditors did not appear and in fact only 6 persons appeared though all of who acknowledged their entries but such facts alone could not, according to the Tribunal, lead to the belief that such transactions were non-genuine. Though it was found that cash was deposited in the accounts of such creditors prior to the issue of cheques in favour of the assessee but the Tribunal held that under law the assessee can be asked to provide the source of the credits in its books of account and not the source of the source. The Tribunal suggested that in such a case the action lie against such creditors under section 69 and not against the assessee.
In yet another case before the Amritsar Bench of the Tribunal in ITO v. Maan Rice & General Mills (2001) 117TAX71 the assessee showed that he received account payee cheques/drafts from persons owning sizeable wealth. To this the Tribunal held that the primary onus to prove the genuineness of the credits is discharged by the assessee.
TDS Officer/TRO can Support in the Function of an Assessing ì¥Á7 ð¿ UJ
bjbjUU ‑Ø 7|7|UF ÿÿÿÿÿÿl ²T›T›T›T›<ì¥Á7 ð¿ UJ
bjbjUU ‑Ø 7|7|UF ÿÿÿÿÿÿl ²T›T›T›T›<e would arise a question if an officer holding TRO charge whose work often starts after the assessments are framed can be offloaded with some procedural functions of assessment charge since he is directly not an assessing officer. In the following case the Allahabad High Court in the context of enquiries made by a TDS officer felt that for practical considerations and for convenience it is possible so to do. The Court held that the TDS officer can issue summons and make necessary enquiries and for this purpose issue summons so as to facilitate the work of an assessing officer while the assessing officer is not bound by his opinion. Sub section (5) of section 120 in this regard also provide for concurrent jurisdiction for proper management of work
In the case of Peerless General Finance and Investment Co. Ltd. Vs. Assessing Officer (248ITR113) the assessee having registered office at Calcutta was assessed at Calcutta. In respect of deductions of tax at source made by the assessee the tax deducted at source is paid at Calcutta and all returns in prescribed forms are filed at Calcutta except in case of salary deduction in respect of which returns and tax deposit was being made with the TDS officer having local jurisdiction over branches.
One of the TDS officers in Kanpur jurisdiction conducted an enquiry at the local branch officer of the assessee and found some irregularities and therefore issued summons in the name of the principal officer stationed at Calcutta. The asessee challenged such notice in writ stating that the TDS officer is not an assessing officer u/s 2(7A) of the Act being defined as under:
“‘Assessing Officer’ means the Assistant Commissioner or Deputy
Commissioner or Assistant Director or Deputy Director or the Income-tax
Officer who is vested with the relevant jurisdiction by virtue of directions
or orders issued under sub-section (1) or sub-section (2) of section 120 or
any other provision of this Act, and the Joint Commissioner or Joint Director who is directed under clause (b) of sub-section (4) of that section to exercise or perform all or any of the powers and functions conferred on, or assigned to, an Assessing Officer under this Act.”
The Alalhabad High Court held that no doubt it is only the Board that can issue directions or orders under section 120 but section 2(7A) not only refers to section 120 but also refers to directions or orders issued under any other provision of the Act. Under Rule 36A Assessing Officer can be
designated by the Commissioner of Income-tax within whose area the
office of the person responsible for deducting the tax under Chapter
XVII-B is situate.
The Court thus held that the expression “Assessing Officer” in section 2(7A) is hence not confined to the Assessing Officer making the regular assessment but includes others also who may come within the purview of section 2(7A).
Also the Court held that the TDS officer at kanpur can make some prima facie investigation regarding TDS matters relating to the Kanpur office of the assessee since the employees of the petitioner at Kanpur and other persons to whom the assessee has paid interest at Kanpur office can easily by contacted by the TDS officer and details regarding their TDS can be verified by the income-tax authority at Kanpur.
Further the High Court held that the provisions in question are machinery provisions and it is a settled principle of interpretation that such provisions should be interpreted to make the machinery workable, vide CIT v. Mahaliram Ramjidas  8 ITR 442 (PC); CIT v. National Taj Traders  121 ITR 535 (SC), etc.
Thus a TDS officer who is relatively less burdened can be entrusted with procedural work including prima-facie investigations to facilitate the work of an assessing officer to prosper the work of the range. In this manner it would be possible to make use of the best experience of one and all in the range.
Slump Sale or sale of individual assets
The Income tax Act, 1961 only recognize two types of sale transactions of business assets of business. One type of sale is known as slump sale (sale of going concern) and the other could be sale of individual or block assets of the business against stipulated price. The decision of any Court would rest on the finding of the Tribunal in this regard of the type of sale transaction.
On to the difference in the two types of transaction the law is fairly settled by the decision of the Supreme Court in CIT v. Artex Manufacturing Co.  227 ITR 260 but the application of the judgment again may come under fierce fighting. In this case there was a sale of the entire business as a going concern by a firm to a company formed for the purpose of such take over. The question was whether the provisions of section 41(2) (now substituted by section 50) were applicable. The Supreme
Court held that though in the agreement there was no reference of the
value of the plant, machinery and dead stock, on the basis of the information that was furnished by the assessee before the Income-tax Officer, it became evident that the amount of Rs. 11,50,400 had been arrived at by taking into consideration the value of the plant, machinery and dead stock as assessed by the valuer at Rs. 15,87,296. The Supreme Court held that it was not a case in which it could not be said that the price attributed to the items transferred was not indicated and hence section 41(2) of the Income-tax Act, 1961, could not be applied.
Thus the guiding principle is the finding, if any as to the mention of any stipulated price of the depreciable asset in the working of total sale price either as part of any agreement or from an insight in the valuation report in the custody of the revenue authorities, in which case section 41(2) or section 50 will find of any interest, else not.
In case the Tribunal holds that section 50 is inapplicable the type of sale will be known as slump sale with no tax liability until incorporation of section 50B in the statute w.e.f. 01.04.1999.
However on the issue of computation of cost of acquisition the Delhi High Court in the case of PNB Finance Ltd. v. CIT (2001) 117TAX586 while referring to the Supreme Court ruling in CIT v. Artex Mfg. Co. (1997) 227ITR260 and in CIT v. Electric Control Gear Mfg. Co. (1997) (227ITR278) held that even in the case of a slump transaction when the business is sold as a going concern, it is not impossible to determine the actual cost, viz, the cost of acquisition, even though, in a given case, it may be a self generated assets. It may be a difficult exercise but certainly is capable of evaluation on the basis of settled principles of valuation.
Parting Possession is Buzz Word
The capital gains tax can be levied as soon as the possession of the property is handed over to the proposed seller irrespective of the fact whether all payments have been received or not during the previous year. Mere fact that the certain acts and obligations between the seller and the buyer are to be executed in the future could not come to any saving.
In the case of Smt. Lalitha Ramaswamy vs. Income-tax Officer (75ITD293) the issue was whether the property was sold in the year of assessment or in the subsequent years. The Bombay Bench of the Tribunal found that the possession of the property had been given to the builder during the previous year and hence there is sale of property. In this case the assessee had received 2/3rd of the price in the previous year and the rest in the subsequent year.
In this case the CIT (A) had given a finding that the demolition of bungalow took place in the previous year which fact further proved that the possession of the property was handed over to the builder even before the end of the previous year. And this had been due to the fact that the sale agreement in this case was in respect of the land and bungalow.
Further the Supreme Court in the case of Mysore Minerals Ltd. v. CIT (239 ITR 775) held that the provisions of the Income tax Act have reference to the enjoyment of the property by the assessee as owner and nothing else. In referring to the term ‘‘owned’’ as occurring in section 32(1) of the Act the Apex Court held that it must be assigned a wider meaning. An assessee in possession of building on part payment of price would be entitled to depreciation etc. on it.
Set Aside Assessment- Rule for Claim of Refund and Interest
The Supreme Court in CIT v. Chittoor Electric Supply Corporation (212 ITR 404) held that where an assessment order is set aside and a fresh assessment is directed to be made, the assessment must be deemed to be still pending, which has to be completed. Such is the import of section 240 of the Income tax Act, 1961 as amended w.e.f. 01.04.1989. The Apex Court in this case further held that clause (a) of the proviso to section 240, added with effect from April 1, 1989, is merely clarificatory. Thus the refund if any arising in such cases will fall due only on the framing of fresh assessment. In other words it will not fall due immediately.
But in such cases the recovery proceedings tend to be infructuous too. Now what will happen in such cases of the amount already collected by the department?
In the case of Prabir Kumar Mukherjee v. Union Bank of India (118TAX119) the assessing officer withdrew sums out of assesses joint bank account (irregularity found) at the first instance on passing of the order. The Commissioner (A) set aside the order of the assessing officer. The department went in appeal before the Tribunal.
The Calcutta High Court held that in such cases the assessee should not be deprived of getting back his money. Keeping in interest both of the revenue as well of the assessee the Calcutta High directed the department to refund the amount to the concerned bank to hold such sum in short term deposit till the decision of the Tribunal. The Court also directed for out of turn hearing of the appeal. At least in this case the assessee benefited from interest on such deposit as otherwise the interest meter would have started only from the date of passing order of fresh assessment in view of section 237 requiring determination of the amount paid in excess, being possible only on such fresh assessment.
In the similar manner in the charge of interest u/s 220(2) the original notice of demand remains valid and effective to the extent that the tax is finally determined to be due and payable by the assessee.
Power of Tribunal to Rectify Order u/s 254(2)
Under section 254(2) of the Income-tax Act, 1961, the Appellate Tribunal may, ” with a view to rectifying any mistake apparent from the record “, amend any order passed by it. It is an accepted position under law that the Tribunal does not have any power to review its own order except in case of an order passed ex parte. Thus the only power, which the Tribunal possesses, is to rectify any mistake in its own order, which is apparent from the record. The extent of this power of rectification was considered by the Supreme Court in the case of T. S. Balaram, ITO v. Volkart Brothers (82 ITR 50). The Supreme Court held that:
” A mistake apparent on the record must be an obvious and patent mistake and not something which can be established by a long drawn process of reasoning on points on which there may be conceivably two opinions. A decision on a debatable point of law is not a mistake apparent from the record. “
The Patna High Court in the case of ITO Vs. Income-tax Appellate Tribunal (229ITR651) in this regard held that an order passed on a reappraisal of the material facts and circumstances and on a fresh application of the legal position is liable to be set aside as unsustainable in law and in excess of jurisdiction.
The Bombay High Court in the case of Commissioner of Income-tax Vs. Ramesh Electric and Trading Co. (203ITR497) held that failure of the Tribunal to consider an argument advanced by either party for arriving at a conclusion is not an error apparent on the record, although it may be an error of judgment. The Tribunal cannot, in the exercise of its power of rectification, look into some other circumstances, which would support or not support its conclusion.
The Orissa High Court in the case of Commissioner of Income-tax Vs. Income-tax Appellate Tribunal (196ITR590) held that in order to attract the application of section 254(2), the mistake must exist and in must be apparent from the record. “Mistake” means to take or understand wrongly or inaccurately; to make an error in interpreting; it is an error; a fault; a misunderstanding; a misconception. “Apparent” means visible; capable of being seen; easily seen; obvious; plain. A mistake which can be rectified under section 254(2) is one which is patent, which is obvious and whose discovery is not dependent on argument or elaboration.
The Kerala High Court in the case of Jose T. Mooken Vs. Commissioner of Income-tax (117ITR921) held that if the judgment has expounded a wrong construction of the Act or made any mistake, other than a clerical or accidental error, an appeal against it is open. There is no other procedure by which such mistake could be corrected.
The Allahabad High Court in the case of Commissioner of Income-tax v. Income-tax Appellate Tribunal (227ITR443) further held that reviewing and recalling an order is one thing and rectifying a mistake in the order which is apparent from the record is quite another. In exercise of power to review and recall an order, even the whole result can be reversed whereas in exercise of power to rectify a mistake apparent from the record arithmetical or clerical mistakes can be corrected.
The P&H High Court in the case of Popular Engineering Co. Vs. Income-tax Appellate Tribunal (248ITR577) also held that the possibility of forming a different opinion than the one expressed in the order passed under section 254(1) cannot be treated as a ground for entertaining an application under section 254(2).
The Delhi Bench of the Tribunal very recently in the case of Karan & Co. v. ITAT (118TAX473) dated 20.07.01 held that the scope and ambit of an application under section 254(2) is very limited.
The Tribunal in the case of CIT v. Anamika Builders (P.) Ltd. (2001) 117TAX356 firstly held that the rental income derived by the assessee as income chargeable under the head house property. Later in an application u/s 256(2) to rectify mistake apparent from record the Tribunal held such income as assessee’s business income. The Revenue before the Calcutta High Court challenged this action of the Tribunal. The High Court held that once a possible view has been taken in the appeal order that cannot be changed on a miscellaneous application. Looking at this any view taken by the Tribunal howsoever illogical or impossible it may look like yet it would remain to be a possible view once so taken and hence in such a case no fruitful result can be achieved from an application u/s 254(2).
Substance Over Form – Positive Side
In Sir Kikabhai Premchand v. CIT  24 ITR 506 (SC), the Apex Court held that in revenue cases regard must be had to the substance or true legal effect of the transaction rather than to its mere form. The revenue took full benefit of this principle in piercing the veil of the corporate in earthing transactions of tax evasion. Also in another case of Pandit Lakshmikanta Jha Vs. Commissioner of Income-tax (75ITR790) the Apex Court held that in taxing a receipt to income tax the authorities are only concerned with the legal effect or character of the transaction and not with the substance of it. The revenue had best used the effect of this rule again. In either way the revenue took full benefit of the two pronouncements to the best of their advantage in holding a transaction as in genuine.
But in a solitary case of case of CIT v. 21st Society of Immaculate Conception (2001) 118TAX137 there is found to be a positive application of this rule. In this case nuns working for a charitable society were maintained by the society for their minimal needs. The nuns on the other hand did not charge for their salaries as teachers in a school run by such institution which was part funded by the State. The assessing officer denied exemption on the pretext that the funds of the trust are being applied for the benefit of nuns who have made monetary value of contribution (teaching earnings) exceeding the limits laid down in section 13(3) (b) to the society than for the purposes of the trust. He then alleged that by incurring maintenance expenditure on the nuns the society has violated the conditions for exemption u/s 13(1) (c).
The Madras High Court held that the monetary value of contributions to the society was the difference between the amount of the salary and other payments, which they received for their work as teachers minus the amount expended on them for their maintenance. In reading the rule of substance over form the Court further held that the reality and the substance of the matter in this case is that the amount made over by the nuns to the society was only the amount which was available for use to the society was only the amount which was available for use by the society for the purposes other than their maintenance. The amounts spent on their maintenance had for the purpose of convenience been spent through the society instead of each one of the sisters paying their own bills separately. The expenditure so incurred was not out of other donations made to the society, but out of monies which the nuns themselves had earned and for the purpose on convenience made over to the society instead of deducting from such donations the amount required for their own use.
The Court held that the very sacrifice made by the nuns has been held against them by treating them as beneficiaries of their own donations. But in such a case one would wonder, in the author’s opinion, whether it is a case of application of income by way of salary which otherwise should be brought to tax in the hands of the nuns!
Beautifully commenting at the end the Court held that even while it is permissible to pierce the corporate veil in certain circumstances, while dealing with charities, it is necessary to similarly ascertain the substance of the transaction rather than merely look at the form for the purpose of withholding from a charity the exemptions which have been provided under the law.
Strong Need to Bring Legislation to Observe Uniformity and Consistency in Revenue Proceedings
Today it takes almost 4-5 years for any disposal of an appeal before Tribunal and in the case of High Court and Supreme Court the period of waiting is as much as 20-25 years. Moreover in case an appeal is set aside the period may double. Even sometimes noticing such delay the Courts hold no effect be given to their order in view of inordinate lapse of time. This is to prevent further litigation though yet such difficulty can be partly made up if one were to take a uniform and consistent approach in any proceedings under the Income tax Act, 1961. Perhaps there is an urgent need to bring in a legislation in this regard to enforce uniformity in assessment and appellate proceedings to discount the litigation immediately.
In revenue proceedings generally a reference is made to the views taken in the preceding years. It is equally important to look at the proceedings in the subsequent years when the successor officer does not chose to make the previous year additions. In such a situation it may be possible to give reference of the subsequent year inaction in the course of any assessment or appellate proceedings. The MP High Court in the case of Commissioner of Income-tax Vs. Bhatia (D.M.) Industry (222ITR482) in this regard held that a view taken uniformly should not be changed without sufficient reason.
In this case it was noticed that the Tribunal has taken an identical view in subsequent years, which has become final. The issue involved deduction of commission paid by the assessee to a proprietary concern of one of the partners of the assessee firm and that the provisions of section 40(b) of the Act were not attracted in the facts and circumstances of the case.
Also in the case of Parashuram Pottery Works Co. Ltd. v. ITO (106 ITR 1)/ AIR 1977 SC 429 it is held that:
” At the same time, it must be borne in mind that the policy of law is that there must be a point of finality in all legal proceedings, that stale issues should not be reactivated beyond stage and that lapse of time must induce repose in and set at rest judicial and quasi-judicial controversies as it must in other spheres of human activity.”
Statutory Deductions- Admissible Even in Absence of Specific Claim
In the earlier law there was a provision that where there are no profits or gains made for an assessment year or where the deduction exceeds the profits and gains made, the whole or balance of the deduction is to be carried forward and set off against the profits and gains made for the next following assessment year and so on.
In the case of CIT v. Gujarat Agro Oil Enterprises (2001) 118TAX150 the assessee made no claim for deduction u/s 80J in the previous years in view of losses. The assessee claimed carry for ward of relief in the subsequent year of profits, which was denied by the assessing officer and the Commissioner (A).
The Tribunal took the view that when some relief is permissible under the law and if no specific claim is made, even then that should be allowed by the authorities concerned. The Gujarat High Court upheld the view of the Tribunal. Similarly the Madras High Court in the case of Commissioner of Income-tax Vs. Bluemount Ceramics Ltd. (1980) 123ITR385 held that unlike section 34(1) (erstwhile), there was no statutory obligation on the part of the assessee under section 80J to furnish the necessary particulars for claiming deduction in each of the year including the year of set up.
Also the Madras High Court in Commissioner of Income-tax vs. Premier Mills Ltd. (239ITR165) held that the assessee is entitled to all statutory deductions, which are admissible under the Act, and it is impermissible for the Income-tax Officer to curtail such statutory deductions or impose conditions of any sort.
Set Up of Business – Principles
The Supreme Court in the case of Ramaraju Surgical Cotton Mills Ltd.  63 ITR 478 long back had allowed the claim of the assessee for an exemption for set up of a new unit and in this regard held that setting up is perhaps a stage anterior to the commencement of the factory when the business can be said to be ready to commence operations.
On the question of set up of business the Madras High Court in the case of CIT v. Electron India (2001) 118TAX190 held that the important criterion to hold whether a business is set up or not is the date when the plant and machinery is set up and trial or regular production commenced. It is immaterial if any sale of such production is made during the previous year. In this case it was found that the initial product manufactured was not marketable due to quality factors. The entire loss incurred is therefore found to be admissible in this case.
Further on the similar question the Gujarat High Court in the case of Commissioner of Income-tax v. Sarabhai Sons Pvt. Ltd. (90ITR318) held that obtaining land on lease, placing orders for machinery and raw materials were merely operations for the setting up of the business. It further held that the business will be established when the machinery had been installed and the factory was ready to commence business. Revenue expenditure incurred before that date would not be a permissible deduction.
Also the Calcutta High Court in the case of Commissioner of Income-tax v. Kanoria General Dealers P. Ltd. (159ITR524) held that the Income-tax officer cannot disallow the claim of the assessee for depreciation and deduction of business expenditure on the ground that the assessee had not commenced manufacturing or commercial production and that the production during the period was only on an experimental basis (trial production).
Retracting Statement- Does Not Help
In the case of Dr. S.C. Gupta v. CIT (2001) 118TAX252 the assessee made surrender during the course of survey. The assessing officer reopened assessments to give effect to surrender made for previous years. The assessee however retracted his statement in the course of reassessment proceedings. The AO made additions on the basis of such statement without collecting any other material or independent witness.
The Allhabad High Court held that an admission is an extremely important piece of evidence though it is not conclusive. Therefore, statement made voluntarily (not under duress or pressure) by the assessee could form the basis of assessment. The mere fact that the assessee retracted the statement could not make the statement unacceptable.
Character of any Payment/Receipt- Guiding principle
The capital or revenue nature of any payment is to be judged from the business viewpoint of the payer and not on the basis of the treatment given in the books of the recipient. The same rule will hold good in judging the nature of any receipt, as every payment would be a receipt for someone. The Supreme Court in the case of Empire Jute Co. Ltd. (1980) 124ITR1 held that it is not a universally true proposition that what may be a capital receipt in the hands of the payee must necessarily be capital expenditure in relation to the payer.
The Madras High Court in the case of CIT v. H Miller’s Co. Ltd. (2001) 118TAX193 in the case of a payment made for use of trade mark held that the character of the payment made by the payer need not be identical with the character of that payment when received in the hands of the payee. In this case it was found that while the payer might have acquired an advantage of enduring benefit for use of trademark for 25 years for a lump sum price, so far as the assessee was concerned, it did not part with the trademark but merely permitted its exclusive user thus retaining all its rights of ownership over the trade mark. The High Court further held that in such a case it cannot be said that the assessee had transferred any part of its asset under the agreement. Also since the assessee has retained the ownership rights with it the receipt could not be described as capital in nature.
The view of the Tribunal regarding the capital nature of such receipt on the basis that the assessee has been completely deprived of the asset, as it could not use the trade mark in the area for which the license has been granted is termed as incorrect by the High Court.
Interest Free Advances
In the case of CIT v. India Carbon Ltd. (2001) 118TAX207 the assessing officer could only prove that the interest free advances to subsidiaries were made out of cash credit account, which consisted of both interest bearing borrowings and internal accruals. In other words he failed to prove the one to one correlation or nexus between the amount borrowed and amount advanced in the absence of which the assessee won the case before the Gauhati High Court. Looking at the financial position the High Court pointed out that the assessing officer failed to take into account the share capital of the company, depreciation reserve, other reserve and cash profit generated during the previous year.
Also the MP High Court in another ruling on this subject in the case of R D Joshi & Co. v. CIT (2001) 118TAX394 held that in making any disallowance of such nature it is desirable for the authorities below to demonstrate the nexus between the borrowings and withdrawals and in this regard further pointed out that mere brushing conclusions by the appellate authority like Tribunal can never be called legal.
It is therefore advisable to advance monies always from the common pool of funds and as far as possible one should avoid back-to-back transactions in such cases.
“Reasonable Cause” – Meaning Explained
In order to get-away from penalties it is desirable for an assessee to prove a reasonable cause of any failure to discharge the statutory obligation. In the case of Woodward Governors India (P.) Ltd. v. CIT (2001) 118TAX433 penalty proceedings were initiated for failure to deduct tax on payments to an expatriate. The assessee, the Indian Company made the following two perfect arguments and claimed: –
- that since the non-resident company made the payment of remuneration therefore it was prevented by sufficient cause to deduct tax; &
- that the deeming provisions in section 9(1) (ii) cannot be extended to have any nexus with an obligation to deduct tax u/s 192.
Upholding in favour of the assessee the Delhi High Court held that levy of penalty is not automatic. In explaining the meaning of the word ‘reasonable’ it held that:
“ ‘Reasonable cause’ as applied to human action is that which would constrain a person of average intelligence and ordinary prudence. It can be described as a probable cause. It means an honest belief founded upon reasonable grounds, of the existence of a state of circumstances, which, assuming them to be true, would reasonably lead any ordinary prudent and cautious man, placed in the position of the person concerned, to come to the conclusion that the same was the right thing to do. The cause shown has to be considered and only if it is found to be frivolous, without substance or foundation, the prescribed consequences will follow.”
Gift of Immovable Property- Invalid if not registered
The Gujarat High Court in the case of Commissioner of Income-tax Vs. Mormasji Mancharji Vaid (250ITR542) observed that while interpreting the provisions contained in the taxing statute, the objectives differ and, therefore, one will have to look to the provisions contained in the Income-tax Act.
The Supreme Court in the case of CIT v. Sirehmal Nawalakha (2001) 118TAX316 ruled that though there is no requirement under the Gift tax Act that the immovable property transferred need to be registered in the name of the donee yet in such a case the general law (Registration Act and Transfer of Property Act provisions) did not stand abrogated and the requirement of complying with the provisions of such enactments had to be fulfilled without which the gift itself would be invalid.
However for the purpose of tax on capital gains under section 45 of the Income-tax Act, 1961, the Gujarat High Court in the case of Commissioner of Income-tax Vs. Mormasji Mancharji Vaid (250ITR542) held that transfer of immovable property of value exceeding Rs. 100 shall be deemed to be effected on the date of execution of the document of transfer and not either on the date of presentation of the document for registration or on the date on which registration of the deed is completed. The capital gains on the transfer has to be assessed to tax in the assessment year relevant to the previous year within which the date of execution of the deed of transfer falls, and not the subsequent assessment year relevant to the previous year in which the deed is registered.
“Transfer”, as defined in section 2(47), has to be given a simple meaning, taking into consideration the object of the Act. There cannot be different criteria to ascertain the meaning of the expression in the case of sale and lease.
Arundhati Balkrishna v. CIT  138 ITR 245 (Guj) approved.
Darbar Shivrajkumar v. CGT  131 ITR 647 (Guj) disapproved.
CIT v. Podar Cement P. Ltd.  226 ITR 625 (SC) relied on.
Registration of a deed of transfer is not an act of the transferor, but the act of the officer appointed by law to register the documents.
Income from other sources
Pre Commencement Interest Income
The Supreme Court in the case of CIT v. Karnal Cooperative Sugar Mills Ltd. (2001) (118TAX489) held that interest earned of deposit held with banks for opening of letters of credit to facilitate import of equipment in the setting up stage is capital in nature. The Apex Court held that in such a circumstance the famous case of Bokaro and not Tuticorin would apply.
The ruling is a pointer to the fact that Tuticorin case will have restricted application in both pre and post project setting up stage as in which case the interest earned will be incidental to the business. Thus all interest income is not income from other sources. However adequate care must be exercised in making a separate disclosure of such interest in accounts by setting it off against interest cost incurred.
Income from other sources
Interest on Compensation Under Dispute- When Taxable
In the case of ITO v. Bhomraj Agarwal (2001) 118TAX23 the assessee received both compensation and interest thereon. However the state had preferred an appeal to the High Court including on award of interest by the Court though the assessee was permitted to withdraw the amount of decree deposited in the court after furnishing an undertaking to refund such sums including the interest in the event Court directs against him. The Jodhpur Bench of the ITAT held that the assessee’s right to receive interest could not be said to have accrues during the previous year and in turn become taxable only when the appeal before the High Court or any further litigation gets finalized and the assessee’s right to receive interest is finally upheld thereby. The position in this regard is settled by the Supreme Court in CIT v. Hindustan Housing & Land Development Trust Ltd. (161ITR524/27TAX450A). The ratio of this decision is followed by the Allhabad High Court in the case of CIT v. Laxman Dass (2001) 118TAX609.
In the similar manner it is not advisable for an assessee to offer interest paid on refunds in assessment years until such time the assessments are finalized in appeals etc. Since there is all possibility that the amount credited earlier is reversed after decision in appeals.
Further on the issue of spread over the Bench followed the Supreme Court ruling in the case of Rama Bai v. CIT (181ITR400) in favour of the assessee.
Relief u/s 89
Section 89 is meant to provide relief from tax paid on arrears of salary received in lump sum on the basis of recalculation of salary in the preceding years on spread over of such arrears. The Delhi High Court in the case of CIT v. S N Chadha (2001) 118TAX520 held that a salaried individual is eligible for a relief u/s 89 even in respect of leave encashment that is received for a period of more than 12 months. This is a welcome decision for employees who have been relieved from services during 2000-01and have suffered higher tax rate of 35%.
On the basis of this decision it may be possible to claim similar such relief on the amount of other retiral benefits such as SAF, PF, exgratia etc.
Deduction of tax at source
Packing Material Purchase
The Pune Bench of the ITAT in the case of Wadilal Dairy International Ltd. ACIT (2001) 118TAX141 held that where the main object in buying packing material was to obtain goods for the purpose of packing and the fact that incidentally some printing was required to be done by the supplier was of no consequence in the discharge of obligations for tax deduction at source u/s 194C of the Income tax Act, 1961. Thus in order to judge one’s obligations for deduction it is desired to know the substance of the contract. In this case the Bench noted that the bill contained sales tax and excise duties being indicative of the fact that the transaction is in the nature of sale rather than in the nature of contract for work for the purpose of section 194C of the Income tax Act, 1961.
Loan to Employees- Interest Waiver Implications
If an assessee acquires a right to receive the income, the income can be said to have accrued to him though the actual receipt may fall later after being ascertained. Thus the basic conception for charge of income tax is that he must have acquired a right to receive the income. In other words there must be a debt owed to him by somebody.
In an all time decision of the Supreme Court in the case of E. D. Sassoon and Co. Ltd. v. CIT  26 ITR 27 (SC), it was explained that the expression “accrue” describes the right to receive profit and that there must be a debt owed to the assessee by somebody. Unless and until there is created in favour of the assessee a debt due by somebody it cannot be said that he has acquired a right to receive the income or that income has accrued to him.
Further in the case of Commissioner of Income-tax Vs. National Electric Supply and Trading Corporation (P.) Ltd. (248ITR794) the Delhi High Court explained that a debt is a sum of money which is now payable or will become payable in future by reason of a present obligation. The High Court for this purpose also referred to the decision of the Supreme Court of California in People v. Arguello  37 Calif. 524, in which case the Court observed as under:
“Standing alone, the word ‘debt’ is as applicable to a sum of money which has been promised at a future day as to a sum now due and payable. If we wish to distinguish between the two, we say of the former that it is a debt owing, and of the latter that it is a debt due. In other words, debts are of two kinds, ‘solvendum in praesenti’ and ‘solvendum in futuro’ . . . A sum of money which is a certainty and in all events payable is a debt without regard to the fact whether it be payable now or at a future time. A sum payable upon a contingency, however, is not a debt or does not become a debt, until the contingency has happened.”
Often employees draw loans from the employer which are concessional interest bearing either at their beginning or are made interest free subject however to certain obligations/conditions. In the second case if such obligations are not met the employer has a liberty to recover interest from retrospect date in making the full and final settlement. Also it is common that the employer in some cases choose to waive such interest. In such cases where the waiver is exercised there may arise a tax liability upon the employer since such cases are in real effect amounts to the voluntary giving up of the whole or a part of the interest. It can be claimed by the assessing officer that the interest had accrued first on the outcome of a contingency and only then there was a giving up of such right to charge interest. Such being the position, it is extremely important to first ascertain the extent of liability that may cast on the employer from such voluntarily giving up and furthermore necessary to exercise adequate precautions to avoid such liability and that too only when one is able to substantiate by ample evidence that the right to receive any amount did not arise or accrue at all.
Reopening Notice- Best Strategy
The Kerala High Court in dismissing a petition against issue of notice u/s 148 in the case of G Suresh v. CIOT (2001) 118TAX427 held that when an assessee makes a declaration of his income and verifies particularly to its correctness, he has to stand by the same and cannot object to the department pointing out that from materials collected, there appears to be an error in the returns. The Court held that the words ‘ in the course of proceedings” are wide in their amplitude and it is not necessary that a definite information be under the possession of the officer at the time of issuing notice. His subjective satisfaction would be enough. Also in another writ in the case of Mahavir Spg. & Mills Ltd. v. JCIT (2001) 118TAX453 the assessee claimed that the impugned notice is only as a result of a change in opinion, which cannot be a ground for initiation of action u/s 148. The writ failed again being premature.
Hence in the present context it may not be advisable to challenge notice u/s 148 in writ before the High Court as the provisions of section 148 are basically in the interest of the revenue and is desirable for an assessee to utilize the opportunity offered to the satisfaction of the officer rather than putting the foot down.
Further The MP High Court in the case of Sunderlal jain v. CIT (2001) 118TAX491 held that the assessing officer is not bound under law to communicate the reasons to the assessee that led to issuance of notice u/s 148. All that is required is that the reasons must be found on the files for inspection of the Courts.
Rectification of Mistake- Scope
The J & K High Court in the case of Commissioner of Income-tax Vs. Agya Wanti (2001) 248ITR641 held that if the rectification was made at a time when the issue was debatable, it cannot be supported by reference to the Supreme Court’s decision settling the issue, which was rendered after the rectification. In this case in the return filed, the assessee did not claim depreciation on assets used for the purpose of his business. The income was assessed based on the return filed. Later, the Assessing Officer rectified the order under section 154 as he found that the depreciation was not allowed even though the particulars were available.
The P& H High Court in a sharp contrast in the case of CIT v. Smt. Aruna Luthra(2001) 118TAX932 held that the power u/s 154 can be invoked even when an issue is decided by the jurisdictional High Court or a superior Court after an order had been passed.
Commission for renting of premises- Capital in Nature
Arijit Pasayat CJ of the Delhi High Court in Bharat Steel Tubes Ltd. (119TAX6) held that commission or brokerage paid for renting premises would be capital in nature. The High Court held that such sum would be similar to a premium or salami paid under any leasing arrangement, which is capital in nature. In defining the word Premium (Salami) the High Court explained that it is a single payment made for the acquisition by the lessee of the right to enjoy the benefits granted to him by the lease. Money paid to purchase the said general right is a payment on capital account.
Due to recent promotion of building infrastructure in the country these days’ large amounts are exchanged as commission and those would henceforth receive adverse tax treatment in view of this decision. Such decisions actually lead to influx of black money and it is better that suitable laws are framed keeping in mind the real life situation and considering the volume of business transacted. The decision is rendered in the context of A.Y. 1970-71 when property lease may have assumed a very small volume of business. It would therefore be desirable for the government to bring out an appropriate legislation to provide an assurance that such sums paid would be allowable as legitimate business expenditure. In the meantime officers in the department may be suitably instructed in this regard.
Also in this context it would be relevant to note the Bombay High Court decision in the case of Commissioner of Income-tax Vs. Khandelwal Mining and Ores P. Ltd. (140ITR701). In this case the assessee lesser paid Rs. 45,000 paid as brokerage and claimed that the same should be allowed to be deducted from its business income as the said expenditure was wholly and exclusively incurred for the purpose of the business of the assessee. The High Court held that when the assessee entered into a contract of lease it was not acquiring any new source of income and that the contract of lease did not create any new asset for the acquisition of which the amount of Rs.45000 was spent by the assessee. Therefore, the expenditure can be said to be laid out or expended wholly and exclusively for the purpose of earning the income in the form of rent. Also in this case the Court in the context of stamp duty claim held that the lease being for a long period of time had to be by a registered document and payment of stamp duty was a statutory necessity.
Strict Compliance with provisions of section 195- Payment to Non Residents
Section 195 cast an obligation upon the assessees to deduct tax on all payments (barring interest on securities or salary income for which separate sections hold application) to non-residents. The decision of the Hyderabad Bench of the Tribunal in the case of Cheminor Drugs Ltd. vs. Income-tax Officer (76ITD37) lay down a warning to all assessees to obtain a prior permission of the assessing officer under sub sections (2) or (3) of section 195 in all cases where it chooses not to deduct tax or choose to deduct tax at lower rate. Though this may cause some avoidable inconvenience in certain cases such as where the income is not chargeable yet the same found to be unavoidable. In this case the company had made certain remittances by way of legal charges to its Attorneys in USA and also to various non-residents towards commission against export sales.
The Bench held that the provisions contained in section 195 are strict and require an urgent compliance. It further clarified that the provisions of section 195(2) are not provisions of convenience, which the assessee may use or may not use.
In other words where the person making such payments to a non-resident thinks that the payments made by him to the non-resident would not be income chargeable in the case of the recipient, he can made an application to the Assessing Officer to determine the issue and decide whether tax is to be deducted at source or not and if it is to be deducted, to what extent. Similar such facility of consulting the Assessing Officer is available to the recipient non-resident.
In a resounding note the Bench held for the purposes of deciding whether any payment is in the nature of income chargeable or not, law provides an opportunity to the payer to approach the Assessing Officer under sub-section (2) of section 195. The consultation provided under sub-section (2) of section 195 is, therefore, to be mandatory followed by the person making the payment to the non-resident; he is otherwise liable to deduct tax at source under the provisions of sub-section (1) and thus the person making the payments to a non-resident cannot take a unilateral decision that the payments made by him are not sums chargeable to income-tax.
However the payer can take into account provisions in the Act, Circulars etc. where under the specified payments are explicitly declared exempt in which case he may desist from making any deduction. As a caution it is advisable to seek approval of the assessing officer in every case, which involve interpretation.
Rent & Major Repairs- Developing Stage
In the case of Jainsons SS vs. Assistant Commissioner of Income-tax (76ITD51) the assessee had taken certain premises on rent and carried out extensive renovation work, which went on for more than 2 years. Now in order to get a deduction of rent paid u/s 30 there must be effective user of the premises in commercial sense and the user must be so linked with the business that it can be said that there is an immediate nexus between the user and the business of the assessee. The Delhi Bench held that the deduction would not be admissible u/s 30.It further explained that section 30 operates in a limited field where the premises are used for the purposes of business or profession and in that case deduction for rent, local rates or municipal taxes etc. can be granted. It would not cover a case where the premises are not used for the purposes of business but are incidental to the carrying on of the business. In that situation, the expenditure on that count would not be of the nature described in Section 30.
In this case the assessee took an alternative plea that the premises were taken for expansion/further development of the existing business and not for setting up of a new business where it owned different outlets in parts of the city and therefore the deduction should be permissible under the residuary section 37(1).
A similar such claim was allowed by the Gujarat High Court in the case of Commissioner of Income-tax Vs. Tolat (R.) and Co. (126ITR551) where the sole purpose of taking a premises on land was ultimately to have larger office premises where the business could be carried on in a better manner and more efficiently. On the other hand in the similar set of facts in the case of Noshirwan and Co. Pvt. Ltd. Vs. Commissioner of Income-tax (77ITR822) the claim of the assessee was declined by the MP High Court.
The Bench acknowledged the controversy on this issue but inclined in favour of the assessee. In so holding the Bench also took support from the Delhi High Court ruling in CIT v. Rama Krishna Steel Rolling Mills  95 ITR 97 (Delhi). In this case the Division Bench of the Delhi High Court took the view that expenditure incurred for effecting the repairs which are necessary for carrying on the assessee’s business but in respect of which no liability is incurred by the assessee under the lease deed, though does not come within the scope of s. 10(2)(ii) of the Indian I.T. Act, 1922 ( corresponding to section 30 of 1961 Act) , but such a claim can be allowed under the general cl. (xv) of s. 10(2) ( corresponding to section 37 of 1961 Act). That was a case in which repairs were carried out to the roof of the premises, which became necessary for protecting its machinery from rain and wind and the expenses were allowed as properly deductible under s. 10(2)(xv) of the Indian I.T. Act, 1922.
Real Income Theory
In the case of Commissioner of Income-tax Vs. Modi Rubber Ltd. (No.1) (230ITR817) the assessee sold goods on credit to a customer. The buyer did not promptly pay the sale price. On the amount outstanding the assessee-company raised a debit note for interest and taken such credit to the profit and loss account. The debtor did not honor the debit notes raised by the assessee-company. In the subsequent year amount was actually waived off by directors and therefore written off in the books. The Revenue relied on the majority judgment in State Bank of Travancore v. CIT  158 ITR 102. The Delhi High Court however followed the Supreme Court decisions in the cases of Godhra Electricity Co. Ltd. v. CIT  225 ITR 746 and CIT v. Shoorji Vallabhdas and Co.  46 ITR 144 which laid down that if income does not result at all, there cannot be a tax, even though in bookkeeping, an entry is made about a “hypothetical income”, which does not materialize.
In Godhra Electricity Co. Ltd. v. CIT  225 ITR 746 the Supreme Court examined the cash system and the mercantile system of accounting in the context of hypothetical income. The Court held that the computation of income is made in accordance with the method of accounting regularly employed by the assessee. It may be either the cash system where entries are made on the basis of actual receipts and actual outgoings or disbursements; or it may be the mercantile system where entries are made on accrual basis, that is to say, accrual of the right to receive payment and the accrual of the liability to disburse or pay. However, in both cases unless there is real income, there cannot be any income tax. Considering the facts before it, the court said that although the assessee-company was following the mercantile system of accounting and had made entries in the books regarding enhanced charges for the supply of electricity made to its consumers, no real income had accrued to the assessee-company in respect of those enhanced charges in view of the fact that soon after the assessee-company decided to enhance the rate, representative suits were filed by the consumers which were decreed by the court and ultimately, after various proceedings which took place, the assessee-company was not able to realise the enhanced charges. The court held that no real income had accrued to the assessee-company and hence the entries in respect of enhanced charges did not reflect the real income of the assessee and could not be brought to tax by the Income-tax Officer.
Immediately prior to that the Supreme Court in CIT v. Shiv Prakash Janak Raj & Co. Pvt. Ltd. (222 ITR 583) the Supreme Court inferred that the case laws on the subject of real income had always indicated that under mercantile system of accounting, accrual of income had involved tax liability. The fact, that such income was not realised later, is not a determining factor. In following their earlier ruling in Morvi Industries Ltd. v. CIT  82 ITR 835 (SC) the Apex Court pronounced that where it is found that the assessee retains the right to recover such accrued income as at the end of the year, it cannot retrospectively claim that such income is not taxable.
In the Commissioner of Income-tax v. Bokaro Steel Ltd. (SC) the entry, which was initially made as interest was reversed in the next year because in fact the nature of the transaction was changed, and the assessee did not receive any real income. There was a resolution of the assessee-company in this regard and the income from interest did not result at all as the original agreement ceased to be operative ab initio. The entry in the books, which was made, was about a hypothetical income, which did not materialize, and the entry was reversed in the next year. Both the Tribunal as well as the High Court held that since this entry reflected only hypothetical income, it could not be brought to tax as income. Only real income can be brought to tax.
In another case of Saraswati Insurance Co. Ltd. v. CIT (252ITR430) the assessee made a waiver of interest in favour of its subsidiary. It claimed that it had not charged interest due to its financial condition. A resolution to this effect was passed a few days before the end of the previous year. In a total shift of stand the Delhi High Court followed the Supreme Court ruling in State Bank of Travancore case (supra) without acknowledging their stand taken in the past (Godhra case as per supra). The High Court reiterated the eight parameters laid down in this regard by the Apex Court in 158ITR102 (supra).
Thus there is a very thin line between the accrual of income and accrual of real income. One has to take a very cautious and proactive measure to convert an accrual of income into no income situation.
Leasing of Business Assets
It is a trite law that so long as assets are used as business assets, it is irrelevant whether the business assets are exploited and used by the assessee itself or someone else. Where instead of carrying on the business itself, the assessee permits someone else to use the assets and carry on the identical business, then the activity of the assessee will be judged as a business activity.
In the case of CIT v. G V Rattaiah & Co. (119TAX493) the assessee was doing business as dealers and exporters of tobacco. The assessee leased out its premises and other assets for a period of 12 years. Both the ITO and the Commissioner (Appeals) held that the income from such lease is to be taxed under the head other sources.
Following the Supreme Court ruling in the case of Commissioner of Income-tax Vs. Aryan Industries (P.) Ltd. (138ITR718) the Tribunal held that though the lease was for a longer period, the lease income should not be considered under any other head of income than ‘ business’, especially when there was no intention on the part of the assessee to abandon its business. In the case relied by the Tribunal the assessee leased out its factory for more than 22 years and the Apex Court held that as long as the assessee retained the character of an asset as a commercial asset and does not, either by word or conduct, express his intention to go out of the business by converting the commercial asset into property, the income that accrues to the assessee by the exploitation of such an asset by whatever process the assessee feels expedient to adopt, can be only business income and not income from other sources. Also the Court held that while the length of the lease period is undoubtedly a relevant circumstance in finding out in intention of the assessee, it is not conclusive. This case also offer clues to judge whether the assessee was exploiting the asset (factory) as a commercial asset or as an income yielding property which is the basis for choosing the head of income.
Thus what matters in any leasing arrangement is the conduct and intent behind such letting. The AP High Court upheld the finding of the Tribunal in this case (G V Rattaiah as per supra).
More than one remedy under the Act
Under section 264 of the Income tax Act, 1961 an assessee can move a revision petition to the Commissioner of Income tax any time within a period of one year from the date of passing of the order by the assessing officer. The commissioner is empowered to exercise powers under this section in favour of the assessee. However such section places an embargo on the power of the Commissioner to revise an order where the order has been made the subject matter of an appeal to the Commissioner of Income-tax since both the commissioner (Appeals) and the commissioner enjoy same level. In other words such power cannot be exercised during the pendency of appeal before Commissioner (Appeals).
However there is nothing in the law that prevents an assessee to move appellate jurisdiction if the effort made u/s 264 is proved unsuccessful. The Madras High Court in the case of CIT v. D. Lakshminayayanapathi (119TAX390) held that the Commissioner (A) would be justified in entertaining an appeal against the assessment even though the Commissioner had passed an order u/s 264 against the assessee. The High Court held that the present law provides for more than one remedy to the assessee and the assessee can certainly invoke all of them. In other words an assessee does not exhaust remedy u/s 246 where his previous attempt to get relief u/s 264 has proved to be unsuccessful. Also it is a well-settled principle under law that a statutory provision conferring a right of appeal should be liberally construed. In such cases the appellate authorities would be acting within their powers if they condone delay in filing an appeal before them for sufficient cause for not presenting it within that period.
MAT Adjustments – Provision for bad debts and advances
In the case of Steel Authority of India Ltd. vs. Deputy Commissioner of Income-tax (76ITD69) it was claimed by the assessing officer that the provision for doubtful debts, loans, advances etc., was in the nature of provision and not ascertained liabilities and hence called for adjustment as per clause (c) below Explanation to Sub-section (1) to Section 115J of the Income-tax Act. It was contended on behalf of the assessee before the CIT (Appeals) that the provisions for bad and doubtful debts is made against the payments from customers where outstanding are more than three years old except where a possibility of realization is there.
The Third member bench of the Delhi Tribunal held that the adjustment could be made under clause (c) only for the amount provided for unascertained liabilities or contingent liabilities. The provision made and added back by the Assessing Officer is not for meeting the unascertained or contingent liability but it is for bad and doubtful debts, which are in fact assets and not liabilities.
Substantial question of law or not- Unexplained Cash Deposit in Bank
In the case of Aradhna Oil Mills v. CIT (119TAX629) a raid was conducted on the assessee. During such raid it was found that the assessee has deposited cash in his bank account. On being questioned the assessee replied that the amount was withdrawn from the same account from time to time and re-deposited in the account after some time. All the three authorities viz. the assessing officer, the Commissioner (A) and the Tribunal did not accept the explanation of the assessee.
In an appeal preferred under the new section 260A the assessee sought interference of the MP High Court. But the High Court did not admit the appeal. The Court held that the instant question did not involve any question of law much less substantial question of law so as to empower it to admit the appeal. The Court in effect replied that the question whether a particular entry in the account books is genuine or not or whether the assessee is able to show its source is a question of fact and it involves appreciation of evidence tendered by the assessee. Only the first and the second appellate authorities are competent to examine such evidence further. But that exercise is not possible at third stage u/s 260A route.
An important learing can be drawn from the obvious conclusion made in this case that the assessee utilized the cash for purchasing the items in the earlier occasions and did not account for it in its books. It is thus advisable to desist from such actions of re-depositing cash in bank accounts.
Buzz word in uncertain law situation
The Madras High Court in Madras Fertilizers Ltd. v. Union of India (119TAX594) in dismissing a writ issued a clear pointer that in case of uncertain law situations the assessee must better pay tax under protest and secure refund thereof in event of success in its challenge to order of assessment or to the provision of law under which assessment had been made. In this case the assessee did not pay the tax since the retrospective amendment under law was in challenge before the Supreme Court.
In an uncertain law situation it is advisable that the assessee make all possible claims in the return of income upfront basing its assumptions on the legal update available on the date of filing. Later once the case is chosen for assessment the assessee can review the legal situation as different from the date on which the original claim is made in the return. If the situation has remained the same it may be a better proposition to review possibility of deposit of tax under protest after the date of assessment and the appeal process may be resorted to. This course will save the assessee both from charge of penalty and penal interest @ 15% PA (post tax 23%PA).
Often assesses are found to have been making alternative pleas in the course of assessment proceedings or even before the first appellate authorities. This kind of approach is disastrous and always weaken their main ground/plea and therefore they have to content themselves with the relief as per alternative or many a times the revenue authorities decline the relief altogether. Perhaps the reason behind adopting such strategy is to safeguard their interest in as much as the 2nd or 3rd appellate authorities may decline to admit such pleas in the absence of specific claims before the assessing authorities. But this is not true and purely a farce assumption.
In the case of Additional Commissioner of Income-tax Vs. Mohan Engineering Co. (151ITR571) the main question was whether the assessee having failed to establish his initial plea could fall back on an alternative plea. In the instant case, the initial plea, as referred to above, in order to explain the cash credit entry (ies) of Rs. 28,000, was not accepted by the Revenue authorities. The assessee before the AAC took an alternative plea. The senior standing counsel for the Department submitted that the initial plea taken by the assessee before the ITO having been found to be incorrect, the assessee, in law, could not take an alternative plea to explain the source of money introduced in his accounts. The assessee claimed that there was no bar for the assessee in taking an alternative plea in order to prove the source of money and even the Tribunal, in deciding the appeal, could allow the assessee to take even a ground/plea not set forth in the memorandum of appeal.
The Patna High Court explained that there is nothing as such laid down under the law that once the assessee fails to establish his original plea in order to prove the source of the amount, he cannot fall back upon an alternative plea. More specifically JUSTICE ASHWINI KUMAR SINHA of the Patna High Court held that the assessee, in law is not debarred from taking an alternative plea even though the assessee had failed to prove the plea initially taken by him.
It is however utmost important to see that there was positive evidence available in support of the alternative plea taken by the assessee in a case of a question of fact. However where the point of issue is relating to a question of law there would be no limitations.
Alternative Plea Allowed Part -II
In the case of CIT v. Mahalakshmi Textile Mills Ltd. (66 ITR 710) the assessee company all along in the course of assessment and before the first appellate authority claimed certain expenditure as plant and thus entitled to both depreciation and development rebate. Both the authorities refuted the claim. In the alternative, for the first time the assessee-company claimed before the Tribunal that the amount laid out was in any event expenditure for current repairs and, therefore, admissible for 100% deduction otherwise. The Tribunal though disallowed the claim of the assessee-company for development rebate upheld the expenditure as admissible deduction. In appeal, at the instance of the Commissioner, the Supreme Court held that the Appellate Tribunal was competent to grant the relief as it did since there was no restriction in the Act on the jurisdiction of the Tribunal to determine a question not raised before the departmental authorities, and all questions, whether of law or of fact, which relate to the assessment of the assessee, may he raised before the Tribunal, and if the grant of relief on either ground is justified, it would be open not only to the Tribunal but also to the departmental authorities to grant such relief as they were duty bound under law to do so, and the right of the assessee to the relief’s is not restricted to the plea raised by him.
Further in the case of Swastic Textile Co. Pvt. Ltd. Vs. Commissioner of Income-tax (150ITR155) the ITO held that receipts from erection charges, rent received on hire of machinery, export incentive and profit on sale of assets were not of manufacturing activity and, therefore, not entitled to be included in the manufacturing profit for the purpose of computation of deduction under s. 80-I. In the course of the hearing of the appeal, the assessee claimed that the ITO, and for that matter the AAC, were not justified in deducting the gross sums since, in the very nature of things, the assessee had spent some amounts for purposes of earning erection charges, or rent for hiring out the machinery or for export of goods or in sale of the assets. The Tribunal could not persuade itself to accept this alternative claim of the assessee since in its opinion the assessee did not press this in the memo of appeal as one of its grounds on which it was aggrieved by the order of the AAC and, in any case, it was not open to the assessee to raise this claim at that late stage. The appeal of the assessee, therefore, failed before the Tribunal.
Following the Apex Court ruling the Gujarat High Court in this case held that the Tribunal was not justified in the present case before us in rejecting the claim of the assessee which it had alternatively urged since, in the ultimate analysis, as has been rightly submitted by the learned counsel for the assessee, the question was as to what items should be excluded either wholly or partially from the manufacturing profit for purposes of computing the deductions under s. 80-I of the I. T. Act, 1961. The subject matter cannot be said to be a different subject matter.
Role of Counsel
In the case of Joseph Kuruvilla Vs. Commissioner of Income-tax (234ITR55) the counsel for the assessee did not raise a particular issue at the time of hearing. The assessee therefore filed a miscellaneous petition and contended that its counsel did not raise a particular issue at the time of hearing by oversight and such a situation would not preclude the assessee from raising it now since laches on the part of counsel, should not make the litigant suffer.
The Tribunal held that the particular issue would be deemed to have been decided against the assessee or alternatively it should be presumed that the concerned issue was not pressed before the Tribunal by the counsel.
In explaining the role of a lawyer the Kerala High Court held that the Courts have always considered counsels to have a discretion as to whether to argue a particular point or not and in such a situation any averment relating to the mistake of counsel or his oversight has to understood in the context of the wide discretion available to him. It held that the Tribunal has acted in consonance with the recognition of the discretion of counsel in not admitting the miscellaneous petition in this case.
It is therefore utmost important for any person who is representing the case of a company to keep into account the fact that all grounds as per memorandum of appeal are properly raised at the time of hearing.
Test of Reasonableness
In the case of CIT v. Sahni Silk Mills (P.) Ltd. (119TAX133) it was found that the assessee, a manufacturing concern had paid 16% PA interest on borrowed funds. In year 1 the assessee did not charge interest on advances to certain parties. The assessing officer made disallowance out of interest paid in respect of such advances, which was upheld in appeals. In a corrective action the assessee charged interest @ 12% PA from such parties in the succeeding year 2. The assessing officer again attempted to disallow proportionate interest on the basis of difference in interest rates paid and charged.
The matter again reached the Tribunal in year 2. In disregard of its previous year order confirming addition the Tribunal held that interest paid/charged cannot be the subject matter of the test of reasonableness and the ITO cannot determine the rate of interest in this regard.
Now this case is a clear indicator to the fact that some interest must be charged on advances made out of borrowed funds to prevent any disallowance. Further this case provides a clue that it is wise to review certain claims and deductions from year to year for any corrective measures.
Interest liability- Under the Income tax Act, 1961
Following the Supreme Court ruling in the case of Bharat Commerce and Industries Ltd. Vs. Commissioner of Income-tax (230ITR733) the Delhi High Court in the case of Usha Sales Ltd. v. CIT (119TAX472) held that all liability for interest incurred under various sections of the Income tax Act, 1961 is not deductible, be it interest for failure to deduct tax, failure to pay advance tax, failure to pay tax itself etc etc. Meaning thereby that the real cost of such interest is as much as 23% after taking tax effect. It is therefore advisable to pay taxes in advance and even on additions that are disputed. In that case a separate challan may be used to pay such tax up front and the same may bear a note “ Under Protest” on top.
Deduction of tax at source
Failure to deduct tax – Case of no loss to revenue
In the case of CIT v. Rishikesh Apartments Co-op. Housing Society Ltd. (119TAX239) the assessee failed to deduct tax u/s 194 C. But it was found that the contractor on the other hand had paid the advance tax and self-assessment tax over and above the tax payable thereby not causing any loss to the revenue. The Gujarat High Court held that in such cases if the revenue is permitted to levy interest u/s 201(1A) even in a case where the person liable to tax has paid tax on due date, the revenue would derive undue benefit by getting interest on the amount of tax which had already been paid on the due date. Such a position cannot be permitted.
Transfer of assets to spouse
The clubbing provisions have application when:
- there is transfer of asset by the assessee to his wife;
- the transfer in favour of wife by the assessee must be otherwise than for adequate consideration; and
- the income in question should have arisen or accrued to the wife directly or indirectly from the asset transferred to her by her husband.
In the case of Damodar K Shah v. CIT (119TAX882) the assessee made payments of premium on policy taken in the name of his wife. The maturity proceeds were invested and income earned thereon in the name of his wife. The assessing officer clubbed such income in the hands of the assessee. The Gujarat High Court upheld such action in the ultimate. Following the judicial pronouncements the Court held that proximity between asset and income has to be considered irrespective of time lag between transfer of asset and actual income derived.
Orders on Merit- Case of Disregard of Well-defined procedures
The Karnataka High Court in the case of Munibyrappa (119TAX204) pointed out to the cavalier and careless manner in which the Tribunal had glossed over important issues and Supreme Court rulings that were cited before it in just one sentence by stating that the judgments were distinguishable or inapplicable.
Saldanha, J. of the Karnataka High Court wrote that this could be a serious grievance. The judgment speak that it is impermissible for any forum to summarily disregard everything that has been argued since the same would become a serious handicap when the case goes up to the higher forum. It is therefore essential to record what the judgments in question are or a brief summary of the contentions raised and to record the findings thereon.
Assessees are advised to draw attention of the appellate authorities to this judgment in the ground of appeal section.
Waiver of Interest
In the case of CIT v. Punjab Agra Industries Corporation Ltd. (119TAX860) the assessee promoted a sister concern in a joint venture with a private Sector Company and advanced loans besides investing in shares. The sister concern went sick. In forming a revival plan the assessee waived off the interest on loans. The P & H High Court held that interest waived is to be allowed as legitimate business expenditure as such expenditure is made to safeguard its share capital and loan.
In the author’s opinion if such waiver is exercised in the beginning of the year it may be possible to avoid booking of income itself.
Doctrine of Res judicata or Estoppel- Inapplicable in Assessments
The MP High Court in Luchhiram Puranmal v. CIT (119TAX1) held that the assessment in earlier years does not bind the assessing authority and the assessing authority can on the material placed before it, take a different view in the subsequent years although the findings in the earlier years on the same subject matter can be considered as cogent evidence. In distinguishing the concept of judicial discipline the High Court clarified that though it is true that the orders of the higher authorities should be followed unreservedly by the subordinate authorities but the authorities at same level meaning assessing officer to assessing officer, Commissioner (A) to another Commissioner (A) can differ from year to year in which case the doctrine of Res judicata has no application among them.
Valuation of Perks Series I
The CBDT in their Circular No. 15/2001 dated 12.12.2001has issued directions and clarifications to the employers as to the computation of taxable salary. We deal with the new insertions in a series of daily updates.
Interest Free or Concessional Loans – Case Of Partial Retrospective Operation
The Board has clarified that the even sums outstanding on 01.04.2001 or 01.10.2001 are to be considered for the purpose of notional tax levy. We shall now deal with the rule making power of the Board specially considering the intent of the Section. Under the amended section 17 it is intended to widen the meaning of perquisite by including certain fringe benefits with prospective date. But in the context of old interest free or concessional loans drawn by the employees in the past the amended rule take away the prejudice caused to the assessee in the past which in our view is not in the powers of the Board by a mere issue of a Circular.
The Supreme Court in the case of ITO v. M.C. Poonnose  75 ITR 174 held that an authority, which has the power to make subordinate legislation, cannot make it with retrospective effect unless it is so authorised by the Legislature, which has conferred that power on it. The Income-tax Act itself, while conferring rule-making power on the Board, has empowered the Board by making specific provision in section 295(4) of the Income-tax Act, 1961, to give retrospective effect to any rule. This power is subject to the only restriction that no retrospective effect should be given to any rule so as to prejudicially affect the interest of the assessee.
In matters of substantive law, the amendment cannot have retrospective effect unless it is specifically made retrospective. In respect of procedural law, amendment may have effect on all matters pending as on the date on which the amendment is declared to be effective and would also be applicable to other future cases, though it may relate to assessments or proceedings earlier to the effective date, unless it has the effect of divesting rights, which had vested in the taxpayer.
Also when a fresh levy is imposed retrospectively by any legislation, the courts have tended to strike down such levy as being an unreasonable restriction on the fundamental rights guaranteed under article 19(1)(f) and (g) of the Constitution.
In the case of Shew Bhagwan Goenka v. CTO  32 STC 368, the Calcutta High Court considered the West Bengal Taxation Laws (Amendment) Act of 1969, in so far as it gave retrospective operation to a new definition of “business” incorporated retrospectively by virtue of the amendment. The retrospective amendment, the court said, imposed an unreasonable restriction upon a person’s fundamental right guaranteed under article 19(1)(f) and (g) of the Constitution and was, therefore, invalid.
The court observed that the object of the amendment was not to remove or rectify any defect in phraseology or lacuna or to validate proceedings, which had taken place on the basis of the earlier enactment. The Court found that the object of the amendment is to widen the definition of business so as to include for the first time transactions, which without the amendment fell outside the concept of business hitherto understood and judicially determined. The amendment for all intents and purposes seeks to impose sales tax for the first time on transactions, which till the amendment fell outside the purview of the Act. Debiprosad Pal J held that the effect of retrospective operation of such an amendment would be to impose an unexpected liability in respect of transactions which when took place were not subject to any charge or liability under the Act. Under the Act, a dealer will be saddled with a liability to pay sales tax with respect to transactions, which will now constitute business as defined by the amendment. He might have entered into such transactions several years back, and at the time when these transactions took place such sales were not taxable. As a result of the retrospective operation of the amendment, he is now to be treated as a dealer liable to pay tax in respect of such transactions of sales. Thus, by introducing the amendment with retrospective effect, the petitioner is subjected to pay tax, which could never be contemplated or foreseen at the time when sales were actually effected.
In the amendment carried out by the Finance Act read with rule 3 under Income tax Rules, 1962 dealing with interest free or concessional loans made available to the employee during the relevant previous year cannot be assumed to include amounts advanced or made available in the years preceding to the year of amendment as in that case it would amount to subjecting such sums to levy of tax which could never be contemplated or foreseen at the time of drawing such advances. In other words it has the effect of divesting rights, which had vested in the taxpayer.
In our view therefore an individual employee may seek relief from such tax levied on the opening outstanding balances in his personal return as this amounts to partial retrospective operation thus impairing an existing right under an enactment. The employer’s are however advised to consider such opening sums in view of the Board Circular so stating that the new rule is also applicable to opening balances. This strategy can avoid any demands for interest and penalties at a later date.
In our view the new notification viz a viz levying of tax on interest free loans shall be deemed to have come into force even in respect of previous sums made available in the preceding years, will make the notification retrospective in effect and therefore would be invalid. In our view a direct writ course is well laid out in this regard.
Valuation of Perks Series II
Furnishing Scheme- Electronic Items Assets Defined
The CBDT in their Circular No. 15/2001 dated 12.12.2001has clarified that the higher rate of depreciation is prescribed only in respect of computers and electronic items. Further the Circular reads that the electronic gadgets would mean only data storage and handling devices like computer, digital dairies and printers for their higher degree of obsolescence. Further the Circular clarifies that they do not include white goods such as washing machines, microwave ovens, mixers, hot plates, ovens, refrigerators, music systems, television etc. In such cases the value of perquisite upon transfer of such assets shall be worked out by reducing of its actual cost by reducing balance method @ 10% of cost for each completed year of use.
In our view even mobile sets would also fall in the category of electronic gadgets and therefore qualify for 50% depreciation rate. Employers are advised to relist the items in their furnishing scheme in accordance with the clarification of the Board.
Valuation of Perks Series III
Furnishing Scheme- Completed Year of Use
The terms completed year of use shall mean 365 days from the date of purchase of asset. For instance if a prescribed asset purchased by the employee on 15.01.2002 is resold to an employee on 17.01.2003 there shall be reduced depreciation charge for one year for arriving at the notional price under the rule. And if the price at which it is sold is lower than the notional price the difference will be taxable as perquisite. Now if the assets is sold before on 4.01.2003 no depreciation would be admissible and the entire cost shall be compared with the price at which the assets is transferred to such employee. Hence it is advisable that assets are resold to employees after completion of full year.
Sub-rule (5) of new rule 3 provide for a relief upto Rs.1kPA for any educational facilities allowed to an employee for meeting educational expenses of his children. Educational facilities can be availed either in an institution owned and maintained by the employer or in any other educational institution at the choice f the employee. In either case as per the proviso to sub-rule there shall be allowed a relief as per above. The employee shall be required to submit fee bills, uniform bills, books cost etc. in support thereof.
Only in case the education is provided in an institution owned and maintained by the employer shall the value of benefit is to be ascertained with reference to the cost of education in s similar institution in or near the locality.
Moreover the words “ by reason of being in employment of that employer” are specifically included to plug cases where any benefit is directly conferred on the members of the household (as defined elsewhere in rule 3) or benefits conferred by persons other than the employer in each of which case under the new rule it shall be deemed to have accrued by reason of the employment and shall be taxable under the head salary. Also the words “ in any institution” are preceded by the words” by reason of being in employment of that employer” which further prove that the relief is admissible even with reference to education obtained in any other institution not owned and maintained by the employer.
Further it is advisable that such relief must be extended all across under a scheme and also if such payments to the educational institutions are made directly by the employer, at the request of the employee.
In the present days when it is obligatory for schools to take children living in surrounding areas there is less discretion available for the choice of school either with the employer (running educational institution) or the employee. Also an employer may maintain a school in one location but not in other locations. That should not be the limiting factor as far as other employees working at such location(s) and providing education to their children in other educational institutions.
In our view the subject relief is admissible for any subsidized education even in an institution not directly or indirectly maintained by the employer.
Valuation of Perks Series IV
Credit Card and Club payments
Realizing the fact that such payments are often made in the course of entertainment of costumers, clients or constituents the Board has desired appropriate record making in this regard. As part of such details it is desired to maintain the following information;
- Date of entertainment;
- Place of entertainment;
- Amount paid;
- of persons entertained;
- Nature of entertainment;
- Purpose of entertainment.
The new rule does not impose any restrictions on residential entertainment. As such the employees may entertain guests at their residence too provided sufficient record is kept in the manner above.
In the fourth column the numeric number of persons entertained would be sufficient.
In the fifth column the kind of entertainment may be specified. For instance meals, gifts (other than free samples), Liquor etc. Further in the Explanation (ii) of sub rule entertainment to include hospitality of any kind.
In the last column it is desired to mention the necessity of such expenditure in which case it may be kept in mind that such entertainment costs was incurred only for extending customary courtesy to persons who are connected with the assessee’s business be they are vendors, customers, foreign guests, advisors/consultants, auditor’s etc.
As regard the acts or practice of being hospitable in the sense of providing meals, drinks or other wants of the persons entertained, whether they may be employees, workmen or officers, servants or agents in the service of an assessee, either as an express or implied condition of service, that would not amount to acts of entertainment. Before the Delhi High Court in the case of Commissioner of Income-tax Vs. Modern Bakeries India Limited (249ITR465) the revenue has conceded that the expenditure in connection with the conference of the assessee’s managers and on internal meetings is legitimate business expenditure not involving any entertainment.
There must be a sufficient authorization of such expenditure along with bills etc. and there must bear a clear joint declaration that the amount is incurred wholly and exclusively for business purposes.
In the case of membership of sport clubs, health resorts or any other recreation clubs it is desired that such facilities will not be charged to perquisite if they are availed at the employer’s premises so as to be available to all the employees. Since there is no such restriction as such in the rule per se the benefit of doubt can be obtained by the employer’s in that regard even in respect of memberships taken with outside clubs. Corporate memberships of clubs/credit cards would be tax-free.
Charitable Purpose – Religious Objects
In order to qualify for exemption a trust must pursue charitable objects. Charitable object is defined to mean relief of the poor, education, medical relief, and the advancement of any other object of general public utility. Now u/s 13(1) (b) a religious trust which is established for the benefit of any particular religious community or caste is declined such exemption even if it pursue some of the charitable activities.
But the reverse is not true. In other words a trust, which is established with a charitable purpose, can also pursue religious activities. Way back in the year 1965 the Supreme Court in CIT v. Andhra Chamber of Commerce (55 ITR 722) held that, if the primary or dominant purpose of an institution was charitable any other object which by itself might not be charitable but was merely ancillary or incidental to the primary or dominant purpose would not prevent the trust or institution from being a valid charity. This principle was reiterated in CIT v. Bar Council of Maharashtra  130 ITR 28 (SC).
The AP High Court in the case of Commissioner of Income-tax Vs. Social Service Centre (119TAX124) held that donation to a church or construction of a church is not a purpose, which is not of general public utility. The contention of the Department that the expenditure on religious activities could not be given exemption is not accepted particularly in the context of the polity of our country. The Court acknowledged the fact that most of the religious and charitable activities go together in this country. After referring to the language of section 11 the High Court held that once an exemption is granted for charitable activities, the religious activities are also included.
In a latest row of cases the Commissioner of I tax in the case of Tirumala Tirupathi Devathanam v. Chief CIT (119TAX251) attempted to decline benefit of exemption u/s 80G on the ground that the trust was doing religious activities too. The AP high Court set aside the order of the CIT and in this regard desired that the revenue must consider the multifarious activities carried on by the institution that are charitable in nature. Similar kind of action is taken by the AP High Court in the case of Sri Ramakrishna Seva Ashram (119TAX444).
Valuation of Perks Series V
Gifts to employees
In the new rules it is provided that gifts in kind to employees would not be taxed upto an aggregate sum of Rs. 5K in a year. These gifts can be made at any occasion such as diwali, New Year, Christmas, marriage, birthday etc. In case of gifts exceeding in value by Rs. 5K only the excess need to be considered as taxable salary.
Care must be taken to avoid building this as compensation element in the engagement terms in which case it would become contractual and not voluntary thereby preventing employee from claiming exemption. Further this limit of Rs. 5K is set for all members of the household taken together and not individually.
The limit of Rs. 50 per meal has been set as exemption limit for this purpose as staff welfare measure. Only the excess cost (net of employee recoveries) needs to be considered as taxable salary. For this purpose it is desired for an employer to have direct arrangements with the caterer/restaurant. By a specific clarification expenses on tea, coffee, non-alcoholic beverages, snacks etc. are to be ignored.
Valuation of Perks Series VI
Interest Free/Concessional Loan
On March 23, 1995, the Central Board of Direct Taxes (for short the “C. B. D. T.”), informed the Chief Commissioner of Income-tax, Hyderabad, that where the employer directly bears a part of the interest burden of the employees by reimbursing a portion of the interest payable by the employee in respect of building loans, such reimbursement is taxable as income from ‘‘salaries’’. In other words the perquisite is chargeable only in case the employee has originally incurred an obligation in favour of a lending institution such as HDFC etc. Cases where the employer has directly advanced loans to its employees either as interest free or concessional should not result in any benefit for the following reasons:
- The employee is under no obligation to pay interest or has obligation only to pay a certain interest;
- The loan facility is extended as staff welfare to all the personnel.
The attempt in the new rule to tax such staff welfare measures must be countered on the basis of corresponding claims for deduction of such notional income under the head “ income from house property” as interest expenditure deduction. Further it would be wrong to consider such loans as providing any benefit in as much as the employee is required to serve the employer for a specified period and in case of early departure is made subject to charge of interest on retrospect basis. In true effect therefore the benefit that is being made subject to tax under the new sub rule is a contingent benefit, which can be taxed only on the happening of such contingency.
Employers are advised to redraw their housing loan schemes to so specifically include a clause for payment of interest at par with the market rate of interests. Further the scheme should also provide that no interest would be charged if the employee serves the company for a particular period. In case of early exit the interest shall be charged retrospect basis. This would have two advantages:
- The loans would become interest bearing. Hence no perquisite. Employer may have to justify such interest as a mere contingent income under the scheme.
- In the alternate if the assessing officer so chooses to tax it as benefit the employee could take a deduction u/s 24 for the equivalent sum for a specific mention of interest clause in the scheme perse.
Remember it is not possible to conclude that no perquisite will be charged as well as a deduction can be clamed as that would be inconsistence with the law.
Remodeling, renovation and reconstruction Costs- Capital in Nature
In Assistant Commissioner of Income-tax vs. Nirmal Warehousing Agency (77ITD1) the assessee-firm converted the leased premises held as a warehouse to a bank. New walls were erected after the demolition of the existing walls. New roof was put up and toilets etc. were furnished and even the existing columns were reinforced for support. Pursuant to such renovation the assessee received substantial gain in his rental income. From Rs. 18,000 annual rental income, the rent jacked up to Rs. 5,76,000 PA. This the assessing officer held that the renovation is in the nature of enduring benefit and thus declined deduction of expenditure of Rs. 7,85,866 as repairs.
The CIT (Appeals), however, allowed the contention of the assessee that the expenditure in question is of a revenue nature on the ground that the assessee-firm had only undertaken repair work and as it did not own the premises but only held them as lease, the expenditure was allowable as revenue expenditure.
The Mumbai Bench of the Tribunal in reversing the order of the Commissioner (A) found that the expenditure of Rs. 7,85,866 has been incurred to convert the premises to fit banking operations and that amounted to improvement in the nature of the premises. And because of this improvement in the nature of the premises, the assessee could get a substantial rental income of Rs. 5,76,000 per annum from Dena Bank while it could get only Rs. 18,000 per annum in the earlier years. The Bench held that such expenditure amounted to extensive repairs and hence capital in nature. The Bench however allowed depreciation benefit to the assessee on such expenditure as a consequential relief.
Refusal to exercise discretion- Stay Matters
The AP High Court in laying down the concept of discretion and its exercise in the case of K S N Murthy v. CBDT (119TAX310) held that the discretion conferred by the provisions of the Act is coupled with a duty to exercise judiciously and capriciously, It cannot be construed as conferring absolute discretion upon any authority to pass any order which he pleases to pass. The person vested with such discretion is required to consider the application or request on merits and if the conditions for the exercise of the powers are made out, he is obliged to exercise the discretion in favour of the assessee. Such authority has no power to refuse to exercise the discretion and it has a statutory duty in this regard to exercise the discretion.
Exemption to Spouse
If the house property which was used for residential purpose by the assessee or his parent is sold and from the long term capital gains earned, another house property is purchased the capital gain is not taxed. In the case of CIT v. Chandanben Maganlal (120TAX38) the assessee first purchased a house property from a cash gift from her husband. Later she sold the property and to save itself from capital gains liability purchased a 15% undivided share in another house owned by her husband/son. The assessee had been living in the same house with her husband before and even after such transaction. The assessing officer denied exemption on the pretext that:
- The assessee had not purchased an new property;
- The assessee had not purchased only a portion and not the property in toto.
The Gujarat High Court held that it is the choice of the assessee whether he buys the entire property or only a portion of it. All that is required is that the property must be a residential. In this case the transaction between the husband and the wife is held to be bonafide.
This case offers a lawful planning device to the assessees even after considering the clubbing provisions of the Act. The Courts have held that income should be computed first in the hands of the transferee (spouse/minor) who is entitled to the benefits under the Act and the clubbing provision will have application after all the allowable deductions are considered in their hands.
It is therefore advisable to plan purchase of property in joint names. For this purpose the husband can gift the initial sum to the spouse for making her share of investment. On sale at a later date both of them can enjoy separate capital gains exemptions.
Export Profits Deduction-Treatment of Other Incomes
Once again the Bombay High Court in the case of CIT v. S G Jhaveri Consultancy Ltd. (119TAX735) held that business profits in the export profits determination formula do not include receipts by way of brokerage, commission, interest, rent or any other receipt of a similar nature as they generally do not have any nexus with the sale proceeds from export activities. There is therefore enough reading on the wall that other incomes do not qualify for deduction u/s 80HHC and assesses must prepare themselves for payment of taxes. Rather it would be advisable to review such claims and proactively pay tax under protest to save from heavy interest burden.
Superannuation Fund Contributions (SAF)- Not Taxable for Period Upto 01.04.1995
SAF contributions are subject to exemption u/s 10(13) on the satisfaction of certain conditions such as receipt of such sums at the time of retirement, death etc. Even otherwise than in the circumstances specified u/s 10(13) the assesses can claim exemption for such contributions for the period upto 01.04.1995 on the basis of a prospective amendment in section 17(3) made w.e.f. 01.04.1996. In the pre-amended section profit in lieu of salary included only contributions due to or received by an assessee from an unapproved SAF.
The Calcutta High Court in the case of CIT v. R K Mukherjee (120TAX198) held that the conditions of section 10(13) are fulfilled for exemption of the amount from taxation, no more required, when the amount is not a salary by the exclusion clause in section 17(3) until 31.03.1995.
Effect of Commuting a Debt
In the case of L.P. Investment Ltd. vs. Income-tax Officer (77ITD1) the assessee sold 50% interest in a property to an interested person for a sum of Rs. 4,25,000. The assessee realized Rs.225000 and for the balance the Board of Directors further resolved to realise Rs. 2 lacs in 10 equal annual installments of Rs. 20,000 each. The buyer of the property in the meantime expired. Thus the board resolution was not complied with and the assessee commuted the said amount of Rs. 2 lacs by accepting Rs. 1,10,000 from the legal heirs in settlement of the debt and claimed business loss for the balance sum of Rs.90000.
The matter in this case was referred to the third member due to difference of opinion among the regular members of the Amritsar Bench. The President held that the loss cannot be said to arise during the previous year. Even if it is admitted that the transaction is a normal business transaction, then the loss can only be considered on the basis of the terms of payment as per the Resolution of the Board and that will arise only at the end of the 10 years period when the final installment is due.
This ruling will also have significance in cases of assignment of liabilities and debts.
Employee Advances- Write Off Claim
Often assessees make mistakes in making a choice of section under which a deduction is admissible and therefore prefer alternate claims under various sections. For instance advances written off whether claimable as bad debts u/s 36(1) (vii) or business loss u/s 28(i)/29. For claiming a deduction u/s 36(1) (vii) it is desired that the impugned amount of bad debt must have been taken into account in computing the income of the assessee in the previous year in which such debt is being written off or in an earlier previous year. But that would not be true in case of advances. In that case the right choice is claim for deduction as business loss under section 28(i)/29.
In one such instance the Delhi Bench of the ITAT in the case of Jhalani & Co. vs. Assistant Commissioner of Income-tax (77ITD44) in following the classic case of Badridas Daga v. CIT  34 ITR 10 SC, held that non-returning of advance given to an employee can be readily characterised as business loss and can be written off in the year of choice of the assessee. In this case the amount was written off after five years of leaving of such employee. All that is significant is that the amount must have been advanced to such employee during the course of his service.
Deduction of Tax At Source
Check Points in Discharge of Responsibility of Tax Deduction at Source
The Rajkot Bench of the Tribunal in the case of Essar Oil Ltd. vs. Income-tax Officer (77ITD92) point out to certain important considerations that are to kept in mind while discharging the duty of tax deduction. They are:
- A certificate of lower or no deduction will in general has no retrospective effect and that the certificate issued on a particular date is applicable to the amount paid on or after that date. Date of application is not material.
- The mere fact that the Assessing Officer of the payee/recipient allowed the payer assessee to credit or pay without deduction of tax at source in the preceding years would not prove the bonafides of the payer in the subsequent year. In other words it cannot be automatically presumed that tax is not deductible because the same was not deducted during the earlier years.
- This action against any failure to deduct tax will follow even if in the case of the payee/recipient a refund is determined in assessment. In other words the theory of no loss to the revenue may not hold good. The Bench held that both the provisions for determination of refund and deduction of tax at source appearing in separate chapters have been brought on the statute for some specific purpose and both have to operate independently. The action of the department for failure to deduct tax has nothing to do with the refund, which is due to the payee/recipient.
- In the case of payment to contractors tax was to be deducted on the total amount paid to the contractor including on sums paid for material inputs even if there is entered into a separate contract for the supply of materials as long as there is a composite work contract for execution of a job. In such cases the splitting will not help. This fact will hold good even in case of splitting of rental between rent and maintenance or fixtures.
Hence assessees must check out on these for corrective measures to avoid any liabilities in future.
New Contention- When Permitted
The Madras High Court in the case of Commissioner of Income-tax Vs. West Coast Electric Supplies Corporation Ltd. (243ITR565) held that it is impermissible for an assessee to raise a new contention unless it is a pure legal without involving any investigation into facts and other materials. In this case the assessee for the first time before the High Court contended that the holding of investment itself would amount to the
business of the assessee. The High Court held that it is not open to the assessee to raise a new ground, which was not considered by the Tribunal.
In this regard the following parameters were laid down by the Apex Court in the leading case of CIT v. Scindia Steam Navigation Co. Ltd.  42 ITR 589 to judge the jurisdiction of the Court to answer any ground under appeal:
“(1) When a question is raised before the Tribunal and is dealt with
by it, it is clearly one arising out of its order;
(2) When a question of law is raised before the Tribunal but the Tribunal fails to deal with it, it must be deemed to have been dealt with by it, and is, therefore, one arising out of its order;
(3) When a question is not raised before the Tribunal but the Tribunal deals with it, that will also be a question arising out of its order;
(4) When a question of law is neither raised before the Tribunal nor
considered by it, it will not be a question arising out of its order notwithstanding that it may arise on the findings given by it.”
Assignment of doubtful debts/loans&advances- Resulting in loss of Capital nature
In the case of Greaves Ltd. Vs. Commissioner of Income-tax (251ITR190) Greaves International Ltd., under a deed of assignment
assigned doubtful debts/advances of Rs. 68,70,943.27 for a price of Rs. 21,33,987 to its sister concern, Greaves Cotton Ltd. The amount of Rs. 21,33,987 was the recoverable amount out of the total doubtful loans and advances of Rs. 68,70,943.27. The assessee-Greaves International Ltd. claimed deduction in respect of the bad debts, which, according to the surveyor’s report, were not recoverable. This was not allowed as bad debts both by the assessing officer and Commissioner (A) on the ground that the loss resulting from such transaction is directly from sale of the debts/advances hence not a bad debt.
As regard alternative claim for business loss the Bombay High Court upheld the finding of the Commissioner (A) that the said write-offs do not qualify as bad debts but is a loss on sale of the assessee’s rights in the shape of debts/advances. The Court further held that it was a sale of the assessee’s rights. There was no basis found to show as to how the loans and advances constituted trading assets. It was found that the assessee was a trader in goods and there was nothing to indicate that the assessee used to lend monies in the course of its business.
Hence in every case of assignment of a debt/advance it is desired to justify that the assignor of such debt claiming such deduction of the difference amount is a finance/investment company.
Business Expenditure- Year of Deduction
The general rule for allowance for business expenditure is that any such expenditure should be claimed in the year in which it is incurred. There are exceptions to this rule especially in cases of deduction of liability of contractual nature. In the case of CIT v. Tamilnadu Dairy Development Corpn. Ltd. (120TAX233) the assessee under an agreement with Indian Dairy Corporation (IDC) incurred certain costs on account of certain joint projects in the preceding two years in the absence of any clear understanding as to whether such costs were to be borne by the assessee or IDC. The Madras High Court held that where there was a doubt about expenditure on project costs having been incurred for the benefit of an assessee or on account of IDC, till that doubt was cleared, it was not possible for the assessee to make any such claim and such claim is admissible in the year in which the issue is clarified.
In yet another case of CIT v. Mahindra Ugine & Steel Co. Ltd. (120TAX250) the Bombay High Court upheld the decision of the Tribunal that a lump sum provision of anticipated liability to pay workers higher wages with retrospect date under protracted negotiations would be admissible as deduction in the year in which such negotiations had reached a final stage.
In the case of Commissioner of Income-tax Vs. Purshotham Gokuldas (237ITR115) the Kerala High Court held that if the assessee follows the mercantile system of accounting and the liability, which being accrued, is disputed then the same could be claimed only when the dispute is settled. However, this does not hold good in case of a statutory liability, which can be claimed only in the year of accrual, notwithstanding the fact that the same is disputed.
Surrender of Income – Never Pay
The Allhabad High Court in the case of CIT v. Saran Khandsari Sugar Works (120TAX319) held that no penalty can be imposed by an assessing officer where the assessee so agree to a higher assessment on the condition that no penalty would be imposed. In this regard the High Court followed their earlier ruling in the case of CIT v. Mansa Ram and Sons (106ITR307). It is very unfortunate to note that the same Court in a later decision in the case of Biland Ram Hargan Dass v. CIT (171 ITR 390) distinguished from the principle laid down in Mansa Ram case (as per supra). In the later decision the Court held that that mere surrender or acceptance of an amount as income by the assessee at a subsequent stage is not necessarily proof of bona fide inadvertence or omission earlier. In fact the Delhi and the AP High Court too held that in such a case there is no escape from the penalty.
It is thus advisable that no surrender of income shall be made before the assessing or appellate authority as that does not help or mitigate any loss that may result otherwise.
Relief u/s 89- VRS Payments
Under section 89 an employee can claim relief from tax for any arrears or advance of salary meaning thereby that he can take credit for any additional tax payable either by virtue of adverse change in rates or change in rate bracket otherwise applicable in his case after excluding such arrears or advance. In other words he can claim spread over of such sums and recalculate his liability for the purpose of this section.The Madras High Court in the case of Commissioner of Income-tax Vs. M. Raman (120TAX338) held that the amount received by an employee at the time of voluntary retirement of service would qualify for such relief. The same Court earlier in the case of Commissioner of Income-tax Vs. Visalakshi (J.) (74TAX532/206ITR531) held that ex gratia compensation received by an assessee consequent on his resignation from his employment is also admissible for the relief under section 89(1) of the Act. In the same manner lump sum paid to dismissed workmen for back and future wages is also entitled for such relief. This section would also apply in respect of payments received on account of encashment of accumulated leave. Alternatively an employee can claim such relief in his return in the absence of same having been granted by the employer.
Deduction u/s 80I/80IA/80HH- Gross or Net
In the case of CIT v. Canara Workshop Pvt. Ltd. (161ITR320) the Apex Court clearly stated that the principle laid down in Distributor’s Baroda case has no application in cases of deduction admissible u/s80E (corresponding to section 80I/J/HH of the 1961 Act). In keeping note of this basic fact the Andhra Pradesh High Court in the case of Commissioner of Income-tax Vs. Visakha Industries Ltd. (251ITR471) held that the deduction u/s 80I/80HH is to be allowed with reference to the particular industrial undertaking and not with reference to total income of the assessee and further held that the ratio laid down by the Apex Court in Canara Workshop has universal application even after the insertion of section 80AB and further that there is no conflict between the decisions of the Apex Court in Canara Workshop and Rama Varma (205ITR433).
On the subject of recovery of any outstanding demands arising on account of any revenue action on the adverse view taken in so granting such deductions the assesses are advised to take benefit of Board Instruction No. 1914 dated 02.012.93 where it is desired that stay could be granted if the demand in dispute has arisen because the assessing officer has adopted an interpretation of law in respect of which there exist conflicting decisions of one or more High Courts (not of the High Court under whose jurisdiction the assessing officer is working).
Further sub section (6) of section 80I overrides even section 80AB of the Act and therefore the previous adverse rulings of the Madras and Calcutta High Court on this subject reported elsewhere do not hold much water on the present date.
J.H. Metals vs. Income-tax Officer (77ITD71) the assessee, a dealer in metals made certain purchases of scrap from Kabarias, who did not issue any sale bills but the assessee recorded purchases from them by making internal vouchers as well as accounted them in his stock. The Assessing Officer examined the details of these purchases and rejected the claim of purchase of these items from Kabarias on the basis of certain inconsistencies recorded by him in his order viz a viz contents of the affidavit submitted by the kabaria and his cross examination in the case. The ITO look an alternative ground about such addition on the ground that the same was hit by Rule 6DD read with section 40A(3) of the Act. The Judicial Member allowed the claim of the assessee on the basis of residuary clause under rule 6DD wherein if the payee insists for the payment in cash the disallowance u/s 40A(32) is not warranted. In this case the assessee so stated that the Kabaria insisted for the cash payment. The Accountant member on the other hand upheld the addition on account of bogus nature of purchases. He however stated that if the purchases are held to be genuine, then the payment in cash would be covered by the exceptions envisaged under Rule 6DD(j) in favour of the assessee.
The issue therefore traveled to the President in view of the difference of opinion between the two members. He held that no addition is called for in this regard on the basis of the following finding:
- The assessing officer did not express any doubt about the source of money used for the purchase of these goods;
- The Assessing Officer also did not dispute the fact that this alleged bogus purchased formed part of the stock of the assessee which was disposed of during the year;
The President then observed that if the investment in the purchase of these items is not doubted and the items purchased were included in the turnover, the only issue that remains for consideration is in regard to” the rate of profit. And since in this case the GP rate in the relevant assessment year was comparable with that of the immediately preceding previous year the decision went in favour of the assessee. Further there was a finding that the Assessing Officer himself accepted g.p. rate in the succeeding assessment years.
The acceptance of this decision would definitely come under dispute since under the amended rule 6DD for applying section 40A(3) it is not necessary at all for the Assessing Officer to prove that the purchases are bogus and hence it is advisable to desist from the practice of making payments in cash.
Finance Lease- Need To Check Out Depreciation Claims
In the English case of Melluish (Inspector of Taxes) Vs. B.M.I. (No. 3) Ltd. (213ITR236) the assessee companies (lesser’s) carried on the business of finance leasing, i.e. the purchase of plant and the leasing to end-users of the plant. The lesser companies incurred capital expenditure on the provision of the plant and machinery for the purposes of their trade. A large part of the expenditure related to central heating equipment for installation by local authorities (Lessee) in council houses. Other expenditure was incurred on swimming pool equipment, replacement cremators for crematoria, alarm systems for installation in sheltered housing, lifts for installation in car parks and boiler equipment. In respect of each transaction a master equipment lease was executed between a taxpayer company and a local authority that specified in inserted schedules the equipment that was to be leased, and provided that the lessee would return the equipment on the expiry of the lease, and that in the event of non-payment of the rental the lease could be terminated and the equipment repossessed by the lesser. It was also provided that leased equipment would remain personal or movable property which would continue in the ownership of the lesser notwithstanding that it might have become affixed to any land or building. On the expiry of a lease the lesser had the right to require the equipment to be severed and restored to it.
The relevant terms of the master lease (including the relevant schedule) were: (a) the local authority agreed to take the equipment on lease for a term, typically, of ten years, renewable on a year to year basis thereafter, the hirer agreeing to pay a rent annually in advance to the taxpayer company for the use of the equipment. (b) The local authority agreed to use the equipment properly and to allow the taxpayer company access to inspect the equipment: clauses 2.2 and 2.6 (c) The local authority agreed to keep the equipment properly repaired and maintained: clause 2.5. (d) The local authority agreed to allow the taxpayer company to indicate its ownership on the equipment being leased: clause 2.7. (e) The local authority agreed to keep the equipment in its sole possession and not to sell, assign, mortgage, and charge or sublet the equipment: clause 2.8. (f) The local authority agreed to insure the equipment for the benefit of the taxpayer company: clause 2.9. (g) The local authority agreed to return the equipment to the taxpayer company on the expiry or sooner determination of the lease: clause 3.7. (h) The taxpayer company was given the right to repossess the equipment on the happening of certain specified events including the non-payment of rent and other breaches of the provisions of the agreement by the local authority, or the insolvency of the local authority: clause 3.8. (i) Clause 3.10 of the master lease provided:
” As between the lesser and the lessee the equipment hereby leased shall remain personal or moveable properly and shall continue in the ownership of the lesser notwithstanding that the same may have been affixed to any land or building. The lessee shall be responsible for any damage caused to any such land or building by the affixing to or removal there from of the equipment (whether such affixing or removal be effected by the lesser or the lessee) and shall indemnify the lesser against any claim made in respect of such damage.”
The issue before the Court of Appeal (CA) was whether the machinery belonged (owned by) to the lesser or the lessee. The Court of Appeal (CA) (equivalent to High Court) unanimously allowed the appeal of the revenue in relation to the plant fixed to the property of which the local authority (lessee) retained possession. It held that the future right to remove equipment at the expiry of the term or in the event of a default by the local authority did not mean that the equipment “belongs” to the assessee companies (lessor’s) so long as it remains attached to the realty.
It further held that the leasing agreements, which were made for financial reasons, gave to the assessee companies (lessor’s) contractual rights against the local authorities (lessee) for payment of rent for the equipment and, despite their rights to enter and remove the equipment on expiry of the term of a lease or in default of payment of rent, on a fair use of language the lease equipment could not be said to continue to belong to the assessee companies (Lesser’s).
After referring to the various clauses of the agreement relied by the assessee the House of Lords on Page 560 of their decision in Melluish (Inspector of Taxes) Vs. Fitzroy Finance Ltd. (218ITR548) held as under:
“I turn then to consider whether the bundle of rights enjoyed by the taxpayer companies (including the limited equitable right to which I have referred) is sufficient to justify describing the equipment as “belonging” to the taxpayer company for the purposes of section 44 (Unquote-similar to section 32 of the Indian Income tax Act, 1961). In my judgment the factors relied upon are not sufficient to constitute “belonging”. The taxpayer company has never been the owner of the equipment, whether in law or in equity; it became a fixture (and therefore the property of the local authority) before the lease was entered into. Unless and until the local authority is in default or decides not to renew the lease the taxpayer company has no right to possession of the equipment or to direct how it shall be used. Its only property right is a contingent right to become the owner at a future date. In the meantime the property is owned and enjoyed exclusively by the local authority. The fact that the taxpayer company has an equitable right which may in the future be enforceable against some third parties does not, in my judgment, carry much weight; it indicates that there are rights relating to the equipment which belong to the taxpayer company, not that the equipment itself belongs to them.”
Further in answering the question as to the ownership of the asset the HL on page 561 pointed out that the rights enjoyed by the assessee confer no immediate right of any kind to enjoyment of the asset and only nebulous, contingent, future rights so to do.
Further, on page 569 the HL explained that this principle will hold good irrespective of the fact whether the assets under such lease is movable or fixed to the land. The relevant portion of the judgment is reproduced hereunder:
“I can find no good reason why the Legislature should seek to produce differing results dependent upon whether or not the equipment purchased is fixed to the land.”
In our opinion therefore the lease transaction that is basically entered into as a means to finance certain assets can risk claim for depreciation in the hands of the Lesser and it is thus necessary to consider such an important factor upfront in determining the lease price.
Netting of Interests- Possible
The Delhi Benches of the ITAT seem to be unanimous in their view that in the case of a running business the interest income is to be set of against interest expense prior to the application of exclusion clause where under 90% of other incomes are to be excluded from business profits in the computation of deduction u/s 80HHC.
In the case of Honda Siel Power Products Ltd. vs. Deputy Commissioner of Income-tax (78ITD123) the Delhi Bench held that the assessee is entitled for netting of the two interests i.e., payment of interest and receipt of interest, not only merely in the computation of deductions u/s 80HHC but even in the context of section 80I and 80HH where such deduction is to be administered on the basis of profit derived from industrial undertaking. In this case the assessee earned interest income amounting to Rs. 1,02,44,000 arising from ICDs and bill discounting which is held to be business income.
Interest Free Loans- Business Expediency
The Calcutta Tribunal in the case of ACIT v. Perfect Project Ltd. (253ITR16) upheld the disallowance out of interest paid with reference to interest free advance made to an interested party coming under the purview of the provisions of section 40A(2) of the Income tax Act, 1961. In this case the assessee pleaded that it was using the premises of the loanee party for which it did not pay any rent but it failed to produce any agreement of that sort to justify genuine business arrangement. The Bench in rejecting such a contention held that the loan was not advanced out of any business expediency.
In yet another case of K. Somasundaram and Brothers Vs. Commissioner of Income-tax (238ITR939) the Madras High Court in referring to section 36(1) (iii) held that the words “the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession” pointed out that the capital so borrowed should not only be invested in the business, but that the amount borrowed should continue to remain in the business. So long as the amount borrowed is used in the business, the interest paid on such borrowing is expenditure, which is required to be deducted in the computation of the income from the business. The interest payable on the capital borrowed is a liability, which continues till such time as the amount borrowed is repaid. Such interest is allowable under the provision only for the reason that the amount on which interest is paid continues to be used in the business and the payment of such interest is therefore, necessary for the purpose of running the business. This provision cannot be construed as enabling an assessee to burden the business with interest even while taking the amount initially borrowed for the business, but subsequently taken out of the business by diverting it as interest- free loans to associates.
Similarly the Bombay High Court in the case of Commissioner of Income-tax Vs. Doctor and Co. (180ITR627) also upheld the disallowance based on average rate of interest paid and interest charged on concessional advances to interested parties.
However the position would be different where the recovery of the principal itself had become doubtful and therefore no interest is charged, the Calcutta High Court so held in the case of Commissioner of Income-tax Vs. Raigharh Jute Mills Ltd (132ITR702).
It is therefore advisable to review terms and conditions of all transactions with parties falling under specified categories of section 40A(2) to avoid disallowances of such nature.
AO Must Exercise Caution
Levy of a penalty is a part of the assessment proceedings and hence it signifies importance. U/s 44AA of the Income-tax Act, 1961 a duty on the assessee to maintain books of account, and on any such failure to do so the assessee can be liable to penalty under section 271A of the Act of Rs.25k. And further the same assessee is obliged to get his accounts audited in case his turnover in business exceeds the specified limit. Any failure in this regard would mean penalty upto Rs.1 Lac u/s 271B. Often the AO is found to have initiated proceedings for levy of penalty for both the offences.
The Pune Bench of the ITAT in the case of Ram Prakash C. Puri vs. Assistant Commissioner of Income-tax (77ITD210) held that when a person commits the offence of not maintaining the books of account as contemplated by section 44AA, the offence would be complete. After that, there can be no possibility of any offence as contemplated by section 44AB of getting the accounts audited. In other words no penalty can be imposed u/s 271B.
The Gauhati High Court in the case of Surajmal Parsuram Todi Vs. Commissioner of Income-tax (222ITR691) also held that no penalty could be imposed u/s 271B after penalty u/s 271A is imposed.
In such cases it may be open to the assessing officer to impose a composite penalty for multiple defaults of such kind. In the case of Durga Dutt Chunni Lal Vs. Commissioner of Income-tax (67ITR33) the Tribunal in affirming the order of the assessing officer pointed out that no authority had been cited for the proposition that the levy of a composite penalty for two offences is not permissible under the law. In fact the composite penalty in this case worked out to the benefit and advantage of the assessee since in case of separate penalties being imposed the quantum of penalties would have been much more and would have been prejudicial to the assessee.
In affirming the order of the Tribunal the Allhabad High Court further pointed out that in some cases it may be advisable to take separate proceedings but it cannot be laid down as a matter of law that proceedings for two or more defaults must invariably be taken separately and can never be disposed of by one penalty order especially when there has been no prejudice whatsoever to the assessee. In this case it was found that the maximum penalty leviable for the two defaults was well over Rs. 20K and the penalty that was levied was around Rs.6K. The Court held that the levy of a composite penalty in these circumstances was not at all prejudicial to the assessee, and, therefore, it is difficult, if not impossible, to say that any principle of natural justice has even been violated in the present case.
It would therefore be of interest for the assessing officer to either initiate proceedings only under high value penalty section or resort to levy of composite penalty to optimize the revenue.
Rent- Unused Building
The Calcutta Bench of the Tribunal in the case of Vijay International v. ACIT (253ITR26) held that the expression “ used” under section 30 with reference to deduction of rent for building does not mean, “ actually utilized”. The Bench held that even passive user would entitle deduction. In this case the assessee took a godown on rent but did not make use of it for about four years and infact thereafter surrendered by the assessee. It was noted by the Tribunal that the assessee was in expectation of getting business boosted in a very large way, which did not materialize. The Bench held that a businessman is required to have a long vision and should take into consideration the future possibilities of improvement into business and in such course if it incurs any expenditure it must be held as a deductible expense.
In an interesting note the bench held that if the godown was taken for the purpose of business and not utilized otherwise, it must be considered as having been used for the purpose of business of the assessee. It was held that such expenditure would fall under omnibus section 37(1) of the Income tax Act, 1961. The judgment is a clear pointer to the fact that even a wasteful expense can be claimed subject however to the fact that the same is incurred in the course of existing business or in the course of expansion of the existing business.
In a further note the Bench disagreed with the view held by the MP High Court in the case of Noshirwan and Co. Pvt. Ltd. Vs. Commissioner of Income-tax (77ITR822) and agreed to the view held by the Gujarat High Court in the case of Commissioner of Income-tax Vs. Tolat (R.) and Co (126ITR551). In the earlier case it was found that the building was under construction for which reason it was held that the rent paid in respect of it is not allowable as a deduction under section 30. It was further held that the expenditure incurred in payment of rent is not allowable under section 37 either, as expenditure laid out wholly and exclusively for the purposes of the business as section 37 does not apply to any expenditure of the nature described in sections 30 to 36.The Calcutta Bench however held that even if it be argued that since the godown under construction was not actually used by the assessee, the provisions of section 30 would not be applicable what it has got to be said that in such condition, the expenses would be allowable under section 37(1). The Delhi Tribunal in the case of Jainsons SS vs. Assistant Commissioner of Income-tax (76ITD51) also held so.
Deduction of Tax at Source
Failure to Deduct Tax- Burden of Interest
The liability for payment of interest stipulated in section 201(1A) accrues automatically on failure to pay the amount of tax by the due date. Has been a matter in debate recently. The Kerala High Court in the case of Commissioner of Income-tax Vs. K.K. Engineering Co. (249ITR447) and the Delhi High Court in the case of CIT v. Prem Nath Motors (p.) Ltd. (120TAX584) held that such levy of interest under section 201(1A) is justified. Even the Bombay High Court in Pentagon Engineering Pvt. Ltd. Vs. Commissioner of Income-tax (212ITR92) held the identical view. In the similar manner the Gauhati High Court in Commissioner of Income-tax Vs. Assam Small Industries Development Corporation Ltd. (219ITR324) held that section 201(1A) does not impose any restriction unlike penalty, which can only be imposed when the delay in payment of tax deducted at source was without good and sufficient reason. The Court further held that interest is levied by way of compensation and not by way of penalty. However, it is to be noted that such interest should be limited for the period for which tax is withheld, i.e., the period between the due date for deduction of tax and the date on which the tax was actually paid by the recipient of income
On the other hand the Gujarat High Court in the case of CIT v. Rishikesh Apartments Co-op. Housing Society Ltd. (119TAX239) held that if the revenue is permitted to levy interest u/s 201(1A) even in a case where the person liable to tax has paid tax on due date, the revenue would derive undue benefit by getting interest on the amount of tax which had already been paid on the due date. Such a position cannot be permitted. In this case it was found that the recipient contractor had paid his taxes before the due date of filing of return in his case.
From the available trend of the High Court decisions the issue is tilting in favour of the revenue, hence it is desired for the payer to take utmost care in making deductions at source as well as in depositing taxes. Further the Madras High Court in the case of Commissioner of Income-tax Vs. Chennai Properties and Investment Ltd. (239ITR435) held that such interest payable under section 201(1A) is not a deductible expenditure.
Payments to Sister Concerns- Excessive or Reasonable
Section 40A(2) of the Income tax Act, 1961 authorise assessing officer to examine transactions with associates and disallow sums or make additions if such transactions are not found to be arm’s length.
In one such case of CIT v. Jain Cables (P.) Ltd. (120TAX63) the assessee made certain purchases from sister concerns. The assessee officer found that higher price was paid for such purchases upon comparison of prices paid to primary producers (third parties) for similar items. The assessee contended that it had to make such purchases since there was inadequate supply by the primary producers and it had to purchases raw materials from open market to fulfill time – bound contractual obligations and avoid penal consequences sine it was supplying goods to the state electricity boards.
The Tribunal found that the sales made by alleged sister concerns to other customers in almost same range at which goods have been sold by the sister concerns and held that no excessive payment has been made than what is prevailing price in the open market. The Rajasthan High Court upheld the finding of the Tribunal in this case.
In yet another case of Commissioner of Income-tax Vs. Andhra Prabha P. Ltd. (123ITR760) the assessing officer alleged payment of higher amount as printing charges to sister concern to siphon off the profit to the advantage of the sister concern. The Tribunal went into this aspect and found that the sister concern company was being taxed at a higher rate than the assessee and that, therefore, there was no question of any tax advantage derived by the assessee company.
The Madras High Court in Mysore Fertiliser Co. Vs. Commissioner of Income-tax (30ITR734) as old as in August 1956 reiterated a well-settled maxim that the reasonableness is to be considered from the point of view of a normal prudent businessman. The reasonableness of any payment has to be judged not on any subjective standard of the assessing authority but from the point of view of commercial expediency. Though the assessing officer is entitled to examine the reasonableness of any payment by the 1961 statute yet he must see it keeping himself in the shoes of a prudent businessman.
Transfer of Assets to Spouse- II
The Madras High Court in CIT v. M S S Rajan (120TAX680) held that interest on fixed deposit made out of rentals income derived from property transferred by the husband is assessable in the hands of the wife. Similarly the capital gains arising from sale of property transferred would also be subject to clubbing provisions. The High Court further observed that section 64 could only be applied in the following situations:
- to the income directly or indirectly realized from assets transferred ;
- to the income realized from the transferred asset;
- to the income substituted for the transferred asset. Any accretion such as bonus shares would be outside the ambit of clubbing provisions.
The Delhi High Court in Dalmia (R.) Vs. Commissioner of Income-tax (133ITR169) however held that it is only the income arising out of the originally transferred assets (not substituted), which can be assessed in the husband’s name. It would have to be ascertained as to what was the value of the transferred property and only that element which can be attributed to that transfer can be taxed in the husband’s name.
A wife can thus make savings out of household expenses paid to her by her husband and the savings cannot be deemed to be assets transferred to the wife. Income from such savings cannot be deemed to be income, which is earned from assets directly or indirectly transferred to her. In the case of Dalmia (supra) the assessee’s wife, had invested a sum of Rs. one lakh in certain debentures and received an income of Rs. 10,104. The sum of Rs. 1 lakh included Rs. 90,000 being the sale proceeds of a house gifted to her by the assessee and valued at Rs. 88,100: held that that only that part of the sum of Rs. 10,104 arising out of an investment of Rs. 88,100 could be taxed in the hands of the assessee and the balance had to be excluded.
Further in the application of clubbing provisions it may be worth noting the decision of the Supreme Court in CIT v. Prem Bhai Parekh  77 ITR 27. In this case the Apex Court held that “the connection between the transfer of assets and the income must be proximate. The income in question must arise as a result of the transfer and not in some manner connected with it”. The proximity referred to is the proximity between the assets transferred and the income in question. The time lag, if any, is of no significance under section 64(1)(iv) of the Act. In the case of Damodar K Shah v. CIT (119TAX882) the assessee made payments of premium on policy taken in the name of his wife. The maturity proceeds were invested and income earned thereon in the name of his wife. The assessing officer clubbed such income in the hands of the assessee. The Gujarat High Court upheld such action in the ultimate. Following the principle laid down by the Apex Court the High Court held that proximity between asset and income has to be considered irrespective of time lag between transfer of asset and actual income derived. Thus the Gujarat High Court view is in consonance with the Madras High Court view. The Delhi High Court view is however different fro the two.
Advantage to Supporting Manufacturer
Often a manufacturer for want of quota ties up with a third party for shipping goods. The export incentives are then shared between them. In the case of Assistant Commissioner of Income-tax vs. Aswini Fisheries Ltd. (77ITD561) the supporting manufacturer recovered an additional sale consideration over and above the f.o.b value of the export. The assessing officer denied deduction u/s 80HHC with reference to such additional sum and held that is not part of the business profits derived by the assessee from the sale of goods to the Export House.
The Madras Tribunal held that when once the Export House gives a disclaimer certificate, it is not necessary that the assessee (supporting manufacturer) should show the profit that is claimed under section 80HHC results in the receipt of convertible foreign exchange. The Legislature itself extends the benefit to a supporting manufacturer who does not receive any convertible foreign exchange directly. But in respect of the transactions the Export House definitely receives the convertible foreign exchange. In the normal circumstances the Export House would have claimed relief under section 80HHC in respect of such exports. But the Legislature in its wisdom thought it fit to extend such relief to the supporting manufacturer who has made enormous investments in the plant and machinery, which enabled the Export House to export the goods and earn valuable foreign exchange for the country. The department is, therefore, not justified in not treating the additional sale price consideration as part of the business profit derived by the assessee from the sale of goods to the Export House. It is equally wrong in treating it as part of the brokerage, commission etc. specified in the Explanation (baa) to section 80HHC(4A) of the Act.
Further the Bench held that processing charges are profits of business for the purpose of relief under section 80HHC of the Act. In further explaining its point of view it observed that the processing charges received by the assessee involves utilization of the entire resources of the assessee like manpower, machinery and power, other manufacturing and administrative set up. The only difference between the regular manufacturer and the processing for others is that the assessee did not own the goods in respect of which processing has been carried out. Nonetheless, the entire set up of the assessee was engaged in processing the goods belonging to others. Such profits cannot be excluded as charges falling under Explanation (baa) to section 80HHC(4A) of the Act.
Also in an interesting note the Bench held that export incentives being earned apparently from the export business are to be considered for the purpose of claim of deduction under section 80HHC, even in cases of supporting manufacturers, if received.
Interest on Borrowed Capital- Unoccupied House
After 01.04.1995 even deduction for interest is available in respect of unoccupied (vacant) house. In other words such deduction is claimable both for self-occupied as well as for an unoccupied house. This benefit is available not only in the case where an employee stays in a different city but is even possible where he stays in the same city where such vacant owned house property is situated. The Delhi High Court in Commissioner of Income-tax Vs. Avadh Behari Rohatgi (Justice) (157ITR441) in this context held that the reference in the section is to “other place” and not “other town”.
It is however to be shown that by living in the rented house rather than his own house the employee can perform better. For instance the rented house may be closer to the office, which would mean extra hours spent for office or, the employee can justify his stand on some other office compulsion such as maintaining status. In other words some nexus must be shown between the fact of residing in a rented house and the employment, business or profession. On the other hand it can be shown that by living in his own house the employee could not perform his duties well. Thus what matters is the employer’s interest and not mere employee interest or convenience in choosing to stay in a rented house.
However no benefit of deduction of interest would be admissible even if the employee plead that his parents are staying in such other house. Sub-clause (b) of section 23(3) caters to such restriction since in that case a benefit will be derived by such employee.
Also in case the employee owns more than one house it is advisable for the employer to seek particulars of such second or subsequent house, be it is let out or not since the annual letting value of every such house would be taxable and to be considered as part of income from house property before giving any set off benefit of interest paid housing loan against salary income. The employee is supposed to provide particulars of such house(s) and income there from in Form 12C declaration.
Interest on Refund- Not Automatic
Under the Income tax Act every entity is required to deduct tax on specified payments. Often it is found that assessees deposit excess tax. And in the absence of any provisions for refund of such excess deposit of tax one has to rush to the higher authorities but unfortunately they also show their limitations in the absence of adequate instructions/directions from the Board. Thus ultimately one has to rush to the High Court in such cases. Even after such order of the High Court there is a limitation for grant of interest on such refunds of excess deposit of tax.
In ITO v. DDA (2002) 120TAX120 the ITO raised demand on the assessee for failure to deduct tax at source. The demands were quashed by the High Court. The ITO though refunded the tax but denied interest on the excess tax collected from the assessee on the ground that the amount refunded to the assessee was not the amount taxed nor involved any advance tax or the tax paid by the assessee on its own.
The Supreme Court held that the interest is payable u/s 244 where the amount became refundable to the assessee by virtue of an order passed in appeal or any proceedings under the Act.
The position would be different where the assessee actually deposits the tax deducted at source twice due to a mistake. In that case it is advisable to claim such excess tax paid as advance tax deposit in the return of income to safeguard claim for interest on such excess payment. However care must be taken to issue only one certificate of deduction at source to the payee.
Fundamental Rule for Grant of Exemption
Clause (vi) of section 10(23) provide for an exemption to an educational institution existing solely for educational purposes. The Madras High Court in CIT v. Devi Educational Institution (153ITR571) took a view that since s. 10(22)(corresponding to new section 10(23C) (vi)) uses the expression “existing solely for educational purposes”, the actual existence of the educational institution is a precondition for the application of s. 10(22) and the mere taking of steps for the establishment of the educational institution may not be sufficient to attract the exemption under s. 10(22). In a recent decision in Mr. AR. Educational Society v. CIT (253ITR589) the Madras High Court felt that the earlier judgment in Devi case (supra) require reconsideration and hence referred the matter to the division bench for reconsideration. The High Court held that the word “ existing” is not the same thing as being functional. The Court further held that the width of the provision is not required to be cut down by insisting that the educational activity must have been carried on in the relevant previous year, even though there is no doubt whatsoever that the society/institution is engaged in taking steps required to make the educational activity operative.
Even the Delhi High Court in Commissioner of Income-tax Vs. Delhi Kannada Education Society (246ITR731) explained that the primary condition precedent for availing of exemption to an educational institution under section 10(22) of the Income-tax Act, 1961, is that the educational institution must actually exist for application of the said provision and mere taking of steps would not be sufficient to attract the exemption.
Also the Kerala High Court in Commissioner of Income-tax Vs. Geetha Bhavan Trust (213ITR296) in defining the application of the section observed that the word “Exist” means “to be in present force, activity or effect at a given time”. If during the relevant year, the trust in question existed solely for educational purposes, we should think that section 10(22) is attracted to the facts of this case, when the income derived is solely from the educational institutions run by it, and the activities of the trust are not for profit.
It is therefore desired that any such institution that is established not for the purposes of profit must undertake some activities apart from mere floating to benefit exemption.
Credit Card and Club Subscriptions – Case of Real Anomaly
In the explanatory Circular No. 15/2001 dated 12.12.2001issued by the Central Board of Direct Taxes it is explained that credit card subscriptions would be chargeable to tax as a perquisite. Similar principle is suggested for annual and periodical club subscriptions when such facilities are used both for official and personal purposes. In an exception note the two relevant clauses in rule 3 dealing with these two heads specifically provide that there shall be no value of such benefit where the expenses are incurred wholly and exclusively for official purposes. Unlike section 10(14) the two clauses do not include the word “necessarily” meaning thereby that such expenditure may confer some indirect benefit to the employee, which may be ignored. Under clause (14) of section 10 the word” necessarily” is a clear pointer to the fact that no exemption is possible if any benefit, howsoever small it may be, is conferred on the employee. In other words in the absence of such word in the new clauses (v) & (vi) of sub-rule (7) of rule 3 it is not desirable to consider any value of perquisite or benefit arising to an employee for payment/reimbursement of any credit card /club membership subscription provided there is definite usage of such facility for official purpose during the previous year.
Infraction of Law- Confiscation by Customs Department
There is a distinction between an infraction of the law committed in the course of carrying on of a lawful business and an infraction of law committed in a business inherently unlawful and constituting a normal incident of it. In the former case no deduction is possible whereas in the later case the deduction is possible of the penalty levied.
The Supreme Court in CIT v. S. C. Kothari  82 ITR 794 held that for the purpose of section 10(1) of the Indian Income-tax Act, 1922 (corresponding section 28 (i) of the 1961 Act), a loss incurred in carrying on an illegal business must be deducted before the true figure of profits brought to tax can be computed. Mr. Justice Grover, then speaking for the court, observed as under (page 802):
“If the business is illegal, neither the profits earned nor the losses incurred would be enforceable in law. But, that does not take the profits out of the taxing statute. Similarly, the taint of illegality of the business cannot detract from the losses being taken into account for computation of the amount, which can be subjected to tax as ‘profits’ under section 10(1) of the Act of 1922. The tax collector cannot be heard to say that he will bring the gross receipts to tax. He can only tax profits of a trade or business. That cannot be done without deducting the losses and the legitimate expenses of the business.”
In the case of Fakr Mohmed Haji Hasan v. CIT (2002) 120TAX11 the assessee was found carrying gold bars and currency notes in his car during a search by a raiding party. On failure to explain the source the customs authorities seized such gold and currency. On this basis the ITO subjected such cash and value of gold to tax. The assessee made a claim for deduction of the confiscated sum as trading loss but failed. In upholding such addition the Gujarat High Court held that such deduction for trading loss could be allowed only if the assessee could justify that he is carrying on smuggling business.
In an exception note the High Court explained that unexplained investments, moneys, unexplained expenditure etc. are deemed incomes and such deemed incomes will not fall under either of the heads of income including income from other sources. And it is for this reason the corresponding deductions, which are applicable to the incomes under any of the heads of income, will not have application in case of deemed incomes.
Cash Loans/repayments- Full Ban Imposed
Until now there was a prohibition under the Income tax Act, 1961 for acceptance of any cash loan or deposit of any sum exceeding Rs.20K in the aggregate. Section 271D in this regard provides for imposition of penalty for the violation of section 269SS upto the amount of loan accepted otherwise than by an account payee crossed cheque or bank draft. Similarly repayment of deposits in cash was prohibited under the law. Section 271E in this regard provides for imposition of penalty for the violation of section 269T upto the amount of such repayment of loan otherwise than by an account payee crossed cheque or bank draft. Further mere fact that the loans or deposits were treated as genuine and accepted as genuine by the Department would not be a material consideration for the non-levy of penalty under either of the two sections in the Act. To escape such penalties the person accepting or repaying such sums have to show a reasonable cause.
Unlike section 269SS which dealt with the provision regarding acceptance of both loans or deposits otherwise than by account payee crossed cheque or bank draft section 269T on the other hand dealt only with deposits and thus had no application in case of repayment of loan. In Baidya Nath Plastic Industries (P.) Limited v. ITO (230 ITR 522), the Delhi High Court considered the provisions of section 269T and held that the provisions of section 269T would apply to the case of repayment of the deposits and not to cases of repayment of loans. The Madras High In a later judgment in A.M. Shamsudeen Vs. Union of India (244ITR266) also followed this conclusion of the Delhi High Court.
In the Budget 2002 it is provided that henceforth even repayments of loan of any nature will require settlement by account payee crossed cheque or draft. It is therefore advisable to completely desist from entering into any cash transactions even among family members. Similarly employees may be advised to settle their accounts, be it an imprest balance or salary advance or loan, only by an account payee crossed cheque. Similarly even employer must repay costs if any incurred by an employee out of pocket only by a bank transfer and not otherwise.
Budget 2002- Must Declare Dividend On or Before 31.03.2002
Dividend exemption is proposed to be withdrawn after 31st March 2002 with a simultaneous withdrawal of 10.2% dividend tax. Any declaration of dividend after such date would be subject to tax at the rate of 36.75% in the case of companies and 31.5% in the case of individuals. Domestic companies who make further distribution of dividend income shall however benefit deduction u/s 80M.
The Supreme Court in Dalmia (J.) Vs. Commissioner of Income-tax (53ITR83) held that a declaration by a company in general meeting gives rise to an enforceable obligation, but a resolution of the board of directors resolving to pay interim dividend or even resolving to declare interim dividend pursuant to the authority conferred upon them by the articles of association gives rise to no enforceable obligation against the company, because the resolution is always capable of being rescinded. On this basis the Income tax Act provide for taxation of interim dividend only in the year in which the dividend warrant is issued.
However in a recent amendment made in the Companies Act, 1956 the powers to rescind any such declaration of interim dividend are deemed to have been withdrawn in which case the right to claim even interim dividend is an enforceable debt on the date of such declaration. Under such amendment it is provided that the board of directors are required to deposit such interim/final dividend in a separate bank account within five days from the date of declaration and utilize it for making payment for the desired purpose only meaning that no reversal is possible. It is thus sufficient if such declaration is made on or before 31st March 2002. The actual issue of warrants/cheques can take place even after 31st March 2002 however within the statutory period of 30 days.
Budget 2002- Compensation for restraint on trading or on exercise of profession made taxable
Until now receipts of such nature were treated as capital in nature by the Courts. . In one such case of Automobile Products of India Ltd. (140 ITR 159) the assessee was carrying on business in assembling cars, which was subsequently discontinued. The licence was also cancelled. Subsequently the assessee obtained an industrial licence to manufacture diesel engines in collaboration with Meadows, a foreign company. Even though the assessee was well established in its venture, there was a change in the Government policy whereby licences were to be granted to the automobile industry where the same person should manufacture both engines as well as tractors. Due to lack of foreign exchange, it was not possible for the assessee to secure such a licence. Under the circumstances, it entered into an agreement with Premier Automobiles Limited for the transfer of its undertaking pertaining to the manufacture of Meadows engines. This is a clear case where the assessee had not only stopped its business, but its profit-making apparatus was transferred to another company. The Bombay the High Court held that the amount received by the assessee from Premier Automobiles Limited by way of compensation was a capital receipt.
The Budget however proposes to tax all such receipts under the head business. Henceforth any non-compete fees would be charged to tax as business income. Hence the assessing officer would show keen interest in every such agreement or arrangement in a transaction of sale/acquisition of a business or undertaking.
Budget 2002- Additional Depreciation
In an amendment made under section 32 of the income tax Act, 1961 it is provided that new industrial undertakings set up on or after 01.04.2002 would qualify for additional depreciation of 15% with respect to investments made in new plant and machinery. Further in the section it is also provided that such relief would even be admissible for capacity expansion by 25%. Further the terms “installed” capacity has been further defined to mean capacity of production as existing on the last day of the previous year. This would mean there must be an increase in capacity by not less than 33% of the opening installed capacity. Apparently, a mistake has resulted in stating the words as “on or after the 31st day of March, 2002” in place of “on or after the 1st day of April, 2002”.
Further it is provided that such additional relief is meant only in case of an industrial undertaking, which manufactures or produces an article or thing. The Income-tax Act does not define the expression “industrial undertaking”. Therefore one has to refer for its meaning elsewhere in similar enactments or on the basis of judicial pronouncements.
Ship Scrap Traders Vs. Commissioner of Income-tax (251ITR806) held that the concept of industrial undertaking need not necessarily be confined to
manufacture and production of articles and even in the absence of either of them there could be an industrial undertaking.
In this case issue before the High Court was whether the ship breaking could be characterized as an activity amounting to manufacture or production of an article or articles, as the case may be.
The Court observed that whether a particular activity is a manufacturing activity is dependant upon several factors and no straitjacket formula or principle can be applied. Manufacture implies a change but every change is not manufacture. There must be a transformation of kind and a new different item should have been emerged having different features. For manufacture there should be some alteration in the nature or character of the goods. By the process of manufacture something is produced and brought into existence which is different from that out of which it is made in the sense that the thing produced is by itself a commercial commodity capable of being sold or supplied. The material from which the thing or article is produced or manufactured may necessarily lose its identity or may become transformed into the basic or essential properties. Further the Court explained that the word “production” has a wider connotation than the word “manufacture”.
Budget 2002-Unreasonable Amendment
In a retrospective amendment proposed both under section 115JA and section 115JB the set off otherwise permitted for either unabsorbed depreciation or loss against current year profits is ruled out in cases where there is either only depreciation or a loss. Using such a rigid interpretation it can similarly be said in a case where the two figures of unabsorbed depreciation and loss are equal. In order to avoid such a situation it is therefore advisable to use your own set off method as shall suit the assessee’s needs in each year since the Act does not provide for any particular manner in which the previous year losses are to be set off. For instance it may be wise to set off previous year losses/depreciation against current year profits to protect unabsorbed depreciation balances.
Budget 2002 – Pay Your Advance Tax Properly
Until now the Act authorize an assessing officer to send a demand for payment of advance tax to an existing assessee if he did pay his advance tax. Henceforth such demands would be possible in case of all assesses. In other words the assessing officer will now on raise demands every year based on last assessments and force assesses to pay such demands even before filing of return. To avoid such payments the assessee is required to furnish Form No. 28A for an estimate of income and tax thereon and shall be further required to pay tax in accordance with such estimate.
Budget 2002- Clever Amendment
Dividend exemption is proposed to be withdrawn after 31st March 2002 with a simultaneous withdrawal of 10.2% dividend tax. Let us look at what made change the age-old principle of dividend taxation in the fist stage. Previously section 80M deductions caused blockade in the collection of revenue due to chain of companies. For instance earlier the dividend distributed by companies went untaxed between holding- subsidiary and sub-subsidiaries. To check such distribution the Government imposed dividend distribution tax every time the dividends are distributed. Today after the businesses are consolidated in single company the Government has brought back dividend taxation though withdrawn distribution tax, to best use the situation. In this process the person who suffer is an average investor.
Ever since this budget has been announced one can see an article each day pointing out to the companies proposing to pay interim dividends to take advantage of last drawn opportunity by making such declaration on or before 31.03.2002. In my opinion when the government can introduce clever amendments in law of such nature there is no reason whatsoever for such companies to stop themselves from making such declarations to save tax.
In the case of Income-tax Officer vs. Fashion Sports (I) (P.) Ltd. (78ITD41) the assessee received insurance claim on account of loss of goods in fire, which occurred in the factory of its sister-concern to which the assessee had sent the goods for labour job and credited such sum to the profit and loss account. The assessing officer took added such sum to the “total turnover” for the purposes of section 80HHC thus resulting in reduced benefit of deduction. The Commissioner (A) held that though the amount was includible in the business income of the company, it would not go into the ‘total turnover’. The Bombay Tribunal upheld the view of the Commissioner.
However the Tribunal also remarked that insurance claim received in respect of goods destroyed by fire has no close nexus with the export activity and in their view the connection is too remote in which case under the present section 80HHC formula it would be advisable to desist from crediting any sums to the profit and loss account. Rather it is advisable to set off such sums against the corresponding expense head wherever it is possible to establish any nexus either on the basis of any contract, agreement or arrangement.
Powers of Commissioner (Appeals)- Restrictive Nature
The Delhi High Court in CIT v. Sardari Lal & Co. (2002) 120TAX595 held that the Commissioner (A) has no power to deal with an altogether new source of income or issue, which had not been considered by the assessing officer. The High Court suggested that in such a case the remedy lie either u/s 147/148 or section 263.
Further in Mohammad Ahsan Wani Vs. Commissioner of Income-tax (106ITR84) the J& K High Court held that under section 251 of the Income-tax Act, 1961, in disposing of an appeal, while the Appellate Assistant Commissioner was legally competent to set aside the order of assessment and direct the Income-tax Officer to make a fresh assessment with regard to income from sources which had been considered by the Income-tax Officer, he was not legally competent to direct the Income-tax Officer to make assessment in respect of income from other sources which were not considered by the Income-tax Officer nor on the basis of material which had not been considered by the Income-tax Officer. Thus the powers of enhancement are only with reference to items of income dealt by the order of assessment.
Employment of second hand machinery
One of the restrictions for claiming deductions u/s 80J(corresponding sections 80IA/IB) is that the unit is not formed by the transfer to a new business of machinery or plant previously used for any purpose. In CIT v. Orissa Cement Ltd. (254ITR24) the Delhi High Court explained that such a restriction has application only as far as machinery previously used by the same assessee earlier and therefore has no application as far as purchase of old assets from outside. Hence an assessee is free to employ old assets for setting up a new unit, which qualify for the purpose of deduction u/s 80IA/IB. The Court further explained that the purpose of putting such restriction is to prevent an assessee to claim double benefit of depreciation as well as deduction under section 80IA/IB. Also the Court held that the Explanation 2 referring to 20% cap does not refute such an interpretation but rather provide an additional support to the dominant object of the Act. In other words the 20% cap has application only as far as employment of assets transferred from one unit to another unit.
The Delhi High Court in this case followed Calcutta decision in CIT v. Sainthia Rice & Oil Mills (82ITR778) to hold that the transfer for this purpose would mean transfer to the new business of the transferee of any machinery used by the said transferee in his old business. The Delhi High Court failed to make note of the earlier Supreme Court ruling in Bajaj Tempo Ltd. Vs. Commissioner of Income-tax (196ITR188) where the Court disapproved such view held by the Calcutta High Court in Sainthia case that previously used in any other business” can be construed so narrowly as to confine it to the building of the assessee only. It is not correct to say that the transfer of a building to the new business to disentitle the new undertaking to relief should have been the transfer of a building of the assessee only.
The Delhi High Court also failed to make note of their previous decision in the case of this very assessee in Orissa Cement Ltd. v. Commissioner of Income-tax (200ITR636). Following their earlier view in Ganga Sugar Corporation’s case  92 ITR 173 the High Court held that, in order to hold that an industrial undertaking had been formed by the transfer to a new business of building, machinery or plant previously used in any other business, the court should take into account the value of the transferred building, machinery or plant vis-à-vis the total cost involved in the setting up of the new industrial undertaking. If, in the context of the total cost involved in the setting up of the new industrial undertaking, the value of the transferred building, machinery or plant constitutes only a small fraction, the new industrial undertaking would not be held to have been formed by the transfer to a new business of building, machinery or plant previously used in any business. It is only if the value of the transferred building, machinery or plant is substantial when compared to the total cost involved in the setting up of the new industrial undertaking, could the said undertaking be regarded as being hit by the restriction under the section.
The percentage of old assets used in the earlier decision in the case of this very assessee was 1% while in the recent case it was noted that as much as 34% of the assets used in the formation were old. The ruling is bound to be challenged on this very ground in the Supreme Court.
Mesne Profits Are Taxable
Mesne profits are recompensed by the Court to the landlord for wrongful possession of his property by the tenant even after the termination of the lease. Often a dispute is waged on the taxability of such sum. Section 2(12) of the Code of Civil Procedure defines mesne profits as follows :
“(12) ‘mesne profits’ of property means those profits which the person in wrongful possession of such property actually received or might with ordinary diligence have received therefrom, together with interest on such profits, but shall not include profits due to improvements made by the person in wrongful possession.”
The Madras High Court in Commissioner of Income-tax Vs. Mariappa Gounder (P.)(147ITR676) held that they are Liable to be assessed as income. In explaining the true meaning of the terms “ mesne profits” the Court observed that the award of mesne profits is an award of compensation for the true owner’s deprivation of the yearly income from the property. The true principle to be applied is that where compensation is paid for deprivation of a capital asset or for a restraint on trading or the conduct of a business undertaking as such, it would be a capital receipt in the hands of the recipient of the compensation. A similar consideration will prevail in cases where compensation is received for immobilization, sterilization, destruction or loss of an assessee’s capital asset even without affecting his business as such. In such cases it can truly be said that the compensation is in substitution, not of income, but of the very source of income (Under the present legislation even such receipts would be chargeable to capital gains tax). The High Court held that mesne profits are not of that kind. Even the measure of mesne profits, as the definition in the Code of Civil Procedure makes clear, is the income which the person in wrongful possession derives from the property or might with due diligence have obtained from the property. Mesne profits are, therefore, a substitute for actual returns from investment. In this category therefore must be included any sum awarded by a court in restitution of interest, dividends or any other yield out of property, in contrast to awarding compensation, recompense or damages for any loss, sterilization or damage to capital assets as such.
The Calcutta High Court in Commissioner of Income-tax v. Lila Ghosh (Smt.) (205ITR9) held that mesne profits are in the nature of damages and, therefore, a capital receipt not chargeable to tax.
The Kerala High Court in Commissioner of Income-tax v. Annamma Alexander (Mrs.) (191ITR551) though proceeded on the lines of the interpretation made by the Madras High Court in Mariappa case (supra) yet chose to make a further distinction between “interest proper” and “damages by way of interest”. The Court held that mesne profits are only an award of compensation for the loss of property or injury to the capital. The High Court took the view that mesne profits are received for wrongful occupation of property. It is in the nature of damages, which the court may mould according to the justice of the case. Mesne profits themselves being award of compensation in the nature of damages and not taxable, interest thereon which is an integral part of the mesne profits is also not a revenue receipt and will not be taxable as income. In a dissenting note the Court pronounced that the fact that mesne profits are estimated with reference to the profits that the person in wrongful possession of such property actually received or would have ordinarily received for the purpose of computation or determination of the compensation would not in any way render them an “income” or a revenue receipt. The amount of interest received on mesne profits cannot be treated as a revenue receipt.
The Court have from time to time held that the real question, for the purpose of deciding whether the Income tax Acts apply, is whether the added sum is capital or income, not whether the sum is damages or interest. The Madras High Court has fulfilled this object in reporting its judgment while the Kerala and the Calcutta High Court perhaps missed out on this basic principle of the law.
The Patna High Court in Commissioner of Income-tax Vs. Maharajadhiraj Sir Kameshwar Singh (No. 2) (23ITR212) following this principle held that which reaches the hand of the recipient as interest upon a principal sum is income liable to income-tax, notwithstanding that it may come to him in a single sum and as the result of a hostile suit. In this case the assessee was the owner of a textile mill, which was closed several years prior to the relevant accounting year. The manager of the mill sold away the machinery of the mill and a sum of Rs. 13,363 was due from him to the assessee on this account. During the accounting year the assessee realised as a result of litigation between him and the manager a sum of Rs. 25,530, which included the principal, interest and certain other expenses. The Income-tax authorities calculated the interest to be Rs. 10,497 and taxed the amount in the assessee’s hands. The assessee contended that the amount was not taxable because it was really not interest but was in the nature of damages for retention of money. Even the Kerala and the Calcutta High Court sin the context of mesne profits and interest thereon held that they are in the nature of damages.
This sharp difference of opinion is deemed to have been arrested by the introduction of section 25B by the Finance Act, 2000. Clause (b) under this section is meant to tax sums received by way of arrears of rent that are not charged to income tax for any previous year.
Income from other sources
How to deal with section 14A PUNCH
Section 14A provide for disallowance of any expenditure such as interest expenditure incurred by an assessee in relation to income which does not form part of its income. For instance dividend income, income from tax-free bonds, agricultural income etc. Often the assessee’s borrow moneys to invest in such securities. The interest paid for this purpose then become a subject matter of disallowance in assessment.
The only way possible to deal with such a problem is to delink the nexus of such borrowings and the investments. And to make that possible the assessee’s in business may borrow fresh loans to repay the earlier one’s and claim that the new borrowing is made to repay the loan as distinct from making investments to earn income. The only case where a presumption lies on the fact that the interest paid on new loan is relatable to the original purpose is in case of second loan taken for repaying a hosing loan to protect interest of an assessee. Similarly loan taken against tax free income earning investments will qualify for deduction if they are used in business.
The Delhi High Court in Saluja Farms v. CIT (254ITR173) found that the assessee AOP raised loans from banks to repay member’s contributions and claimed that the interest paid on loans is deductible against dividend and interest income. The High Court held that the borrowings were not utilized for earning taxable income and therefore the interest cannot be allowed as deduction u/s 57.
However an assessee in business can claim deduction of interest on new loan under the head business since the words” for the purpose of business” used in section 36(1) (iii) are wider in scope than the words “ for the purpose of earning income” as used in section 57.
Thus section 14A has application only in case of direct and first utilization cases.
Scholarships are not taxable
In CIT v. Sir Kameshwar Singh  3 ITR 305 (PC) the assessee, who carried on an extensive money-lending business, made a loan of over Rs. 18,00,000. By a deed the borrower conveyed to the lender certain agricultural properties for a period of 15 years. The assessee realized certain rents from such land in consideration of such loan named as thika profits/rent. It was held that such thika profits received by the assessee as mortgagee-lessee was exempt from income tax, being agricultural income. Now the question arose that once such income is held to be agricultural in nature whether the same can still be taxed on the basis that the same constitute an income arising in the course of business of money lending carried out by the assessee.
LORD MACMILLAN pronounced that agricultural income is altogether excluded from the scope of the Indian Income-tax Act, howsoever or by whomsoever it may be received. Such income does not, therefore, lose the benefit of the statutory exemption and become assessable as business profits merely because it is received by the assessee, not as an ordinary landlord or proprietor but as a part of the income, profits or gains of a money-lending business carried on by him. “The exemption”, he said, “is conferred, and conferred indelibly, on a particular kind of income and does not depend on the character of the recipient.”
NA Palkhivala in his tax treatise pointed out that the exemption embodied in section 10 may be divided broadly into two categories, – exemption to which certain classes of income from their very nature are entitled, and exemption to which the character of the assessee entitles him. Clearly scholarships fall in the first category hence benefiting the actual recipient irrespective of any other premise or assumption under any other provision under the Act. An employer is therefore right is its course in not deducting any tax at source on the sum of scholarships made to the children of the employees.
R & D Expenditure
In Deputy Commissioner of Income-tax vs. Metalman Auto (P.) Ltd. (78ITD327) the assessee was OE supplier to M/s Kinetic Honda Motors Ltd. The assessee spent certain sum as design and development expenditure as R&D expense for the development of tools to manufacture some components. It was claimed by the assessee that it was a continuous process for alteration in the tools for achieving the maximum output by reducing mechanical processes and for saving in material consumption. As a result of consultation and designs of various tools and processes, the assessee has saved a number of manufacturing processes resulting in increase of manufacturing and sale and profitability. The assessee had cited specific items like side bumper, luggage carrier, side pipe, plate up etc. whereas a result of consultation, maximum saving in regard to processes was made. The assessee had claimed the entire expenditure as revenue in this case under the head R&D head in the profit and loss account.
The Assessing Officer noted that expenditure incurred on designs and development of tools was a part and parcel of the plant and machinery being used to manufacture the components. Expenditure incurred on designing of these tools would give the assessee benefit of enduring nature and, therefore, the same was treated as capital expenditure. The Assessing Officer hence allowed depreciation on such expenditure.
The Chandigarh Tribunal while holding in favour of the assessee gave the following finds in this case:
- There is nothing to suggest that expenditure was incurred resulting in increasing the value of capital asset. It only resulted in improving the quality of the existing product already manufactured by the assessee;
- The assessee has carried out improvements in the items/components already manufactured by it.
- The assessee had only carried out modification and improvements in the existing designs.
The Supreme Court in the case of Alembic Chemical Works Co. Ltd. v. CIT (177 ITR 377) held as under: –
“That the improvisation in the process and technology in some areas of the enterprise was supplemental to the existing business and there was no material to hold that it amounted to a new or fresh venture. The further circumstance that the agreement pertained to a product already in the line of the appellant’s established business and not to a new product indicated that what was stipulated was an improvement in the operations of the existing business and its efficiency and profitability not removed from the area of the day to day business of the appellant’s established enterprise. The financial outlay under the agreement was for the better conduct and improvement of the existing business and was revenue in nature and was allowable as a deduction in computing the business profits of the appellant.”
In Commissioner of Income-tax v. Singh (N.P.) (207ITR183) the assessee-firm incurred an expenditure of Rs. 2,96,682 which it incurred as total costs for the new gearboxes fitted to its steamer. The Income-tax Officer held that the fitting of gearboxes to the steamer resulted in an enduring benefit to the assessee and so the expenditure should be treated as capital expenditure. The Appellate Tribunal held that fitting of L. C. T. M. V. (bridge) with two gear boxes had rendered the machine more efficient, for earning more income and it is not a case where it resulted in an enduring benefit to the assessee.
Following the Alembic case (supra) the Patna High Court held that there is only an improvement in the operation of the existing business and its efficiency and profitability. In other words, the expenditure incurred was for the better conduct and improvement of the existing business.
Andhra Pradesh High Court in CIT v. Praga Tools Ltd. (157 ITR 282), which is relied on by the Chandigarh Bench of the ITAT (supra), held that expenditure for development of parts by carrying out certain modification and improvements in the design was not capital in nature.
Wide Powers of Rectification
The P&H High Court in Commissioner of Income-tax Vs. Smt. Aruna Luthra (252ITR76) explained the scope of the authority given to the assessing officer for rectification of any mistake apparent from record. In this case the assessee claimed a chit loss. Based on a jurisdictional order of the High Court in the case of Soda Silicate  179 ITR 588 the assessing officer rectified his order u/s 143(1) admitting the loss returned from chits. The Tribunal took the view that the issue regarding the admissibility of the deduction was debatable as ITAT, Delhi Bench after considering the decision of the Punjab and Haryana High Court in the case of Soda Silicate had taken a different view and, thus, it goes out of the purview of the provisions of section 154.The P&H High Court reversed such action of the ITAT in this case and held that the proceedings for rectification of an order can be initiated on the basis of an order passed by the jurisdictional High Court or the Supreme Court subsequent to the order passed by the authority under the Act.
The High Court held as under:
- Section 154 does not provide that the error has to be seen in the order with reference to the date on which it was passed. Thus a decision delivered by a court subsequent to the passing of the order can constitute an error apparent from the record so as to entitle the authority to proceed under section 154.
- Even in the case of an assessment under section 143(1), it cannot be assumed that there can be no error apparent from the record.
- The obvious intention of the Legislature is that if the mistake has come to the notice of the authority within the prescribed time, it should not be allowed to continue.
- The action can benefit the assessee as well as the Revenue.
Thus it is always advisable to review previous returns filed or assessments completed and identify issues where a favourable judgment of the jurisdictional High Court or the SC is available. If so a rectification application must be moved on the basis of this judgment.
In the present day controversy for deduction of Modvat/Excise Duty/Custom duty paid on inputs the revenue has often opined that the inclusion of such cost in the unsold closing stock with corresponding claim for deduction u/s 43B is not permissible. In CIT v. Berger Paints (India) Ltd. (254ITR498) the Calcutta High Court held that section 43B supersede any accounting method that is contrary to it. The Court while admitting that though section 43 B creates a distortion in the mercantile system yet if the statute intends it by clear words, then the Court, and even more so the assessee, must honour such distortion and accept it as a fact of business life.
The assesses are therefore on a strong wicket on such claim.
In the case of CIT v. Union Carbide (I) Ltd. (254ITR488) the assessee running existing business had set up two new plants at J&k and Hyderabad as part of the expansion exercise. One of the Plant had gone into trial production during the previous year, although not into commercial production. The Calcutta High Court held that once it is shown that the asseseee has put the machinery to use, for the purpose of the assessee’s business, then further inquiry about the degree or type of use is not permitted to be scrutinized by the language of the section.
The High Court further made a remarkable note in this case in pointing out that in the case of a running business seeking further expansion the trials are sufficient test for claiming depreciation. The Court thus made specific reference to the words “ for the purpose of business” having specific significance in an expansion case.
Further sub section (6) of section 80I overrides even section 80AB of the Act and therefore the previous adverse rulings of the Madras and Calcutta High Court on this subject reported elsewhere do not hold much water on the present date.
Optimizing Export Profits Deduction
Often the margins are found to be more in exports than in domestic business. At times the domestic business may result into a loss causing low deduction for export profits. The computing sub-section (3) in section 80HHC call for determination of eligible export profits on the pro rate basis in the ratio of export turnover to total turnover.
However it is possible to segregate the profits&/or loss in the two businesses. Nothing prevents a businessman to draw a separate trading/profit and loss account for export business and domestic business. The Madras High Court decision in CIT v. Rathore Brothers (254ITR656) is a witness to this fact. In this case the assessee succeeded in his claim for deduction on the basis of a separate accounts made for export business. The High Court held that in such cases the assessing officer cannot disallow any portion of the export earning pro rata by invoking clause (b) of sub-section (3) of section 80HHC.The Court explained that the purpose of sub-section (3) (b) of the Act is to disallow a part only when the entire deduction claimed cannot be regarded as being relatable to exports.
It may therefore be advisable for assesses to review possibility of making separate accounts for exports and other businesses for optimizing profit based deductions. It may also be possible to have such accounts made up only for the purpose of income tax assessments and not otherwise.
Deduction u/s 80I/80IA- Gross or Net- Part II
The Andhra Pradesh High Court in the case of Commissioner of Income-tax Vs. Visakha Industries Ltd. (251ITR471) held that the deduction u/s 80I/80HH is to be allowed with reference to the particular industrial undertaking and not with reference to the total income of the assessee. The department has a tendency to compute such deduction after set off of loss in one priority unit against profit from another priority unit.
In Synco Industries Ltd. v. CIT (254ITR608) the assessee running two priority undertakings incurred loss in one unit and the profit in another. The assessee claimed that the profit of each of such units are required to be determined in accordance with the provisions of the Act as if the only source of income of the assessee is the income from that unit. Making a note of sub section (6) in section 80I the Bombay High Court held that the right course is to first determine the quantum of such deduction on stand-alone basis. Thereafter if after such set off of the loss against profits from another unit there is a positive gross total income then consider the quantum arrived at in the first stage as admissible deduction. In fact in this case there is clear finding that there was no conflict in the views of the department and the assessee. The only conflict in this case was whether in case of negative GTI the deduction would still be admissible. Rightfully so the Court declined such contention.
Forward Exchange Contract
Often assessees who have exposure to forex transactions book forward contracts and in that process they incur either a loss or a profit. The assessing officer generally treats such loss as notional and do not allow deduction to the assessees.
In making such claim for loss incurred on forward contracts it may be of interest to know the Madras High Court decision in Indian Overseas Bank Vs. Commissioner of Income-tax (183ITR200). In this case the Court held that a loss or profit on foreign exchange transactions can be ascertained only after the settlement of the forward contracts and not before and so long as that stage has not been reached, the loss can only be notional and not actual or real and a notional loss cannot be claimed as a deduction. The Court held that the same principle would hold good even in case of a loss. Following this principle the High Court in their decision in Indian Overseas Bank v. CIT (2002) 121TAX16 held that the notional profit arrived at on the basis of the rate of exchange which prevailed on the last day of the accounting year, without an actual settlement of the forward contract in foreign exchange, did not represent the income of the assessee and the notional profit could not be subjected to tax.
The Supreme Court in Dharampur Leather Co. Ltd.’s case  60 ITR 165 held that allowance of depreciation is calculated on the written down value of the assets, which written down value would be the actual cost of acquisition less the aggregate of all deductions “actually allowed” to the assessee for the past years. “Actually allowed” does not mean “notionally allowed”. If the assessee has not claimed deduction of depreciation in any past year(s) it cannot be said that it was notionally allowed to him. A thing is “allowed” when it is claimed.
Further the Supreme Court in Commissioner of Income-tax Vs. Straw Products Ltd. (60ITR156) held that the expression “actually allowed” was unambiguous and connoted an idea that the allowance was actually given effect to. In refuting the arguments of the revenue on the interpretation of section 10(5) (corresponding to section 43(6) of 1961 Act) the Supremes Court observed that: –
“ We are unable to give such an artificial meaning to the expression ” all depreciation actually allowed under any laws or rules”, and we agree with the High Court that the expression “actually allowed” is unambiguous and connotes the idea that the allowance was actually given effect to. If it were intended to include any allowances which are not actually allowed then the Central Government would have added a deeming provision as the legislature did in the Explanation to section 10(5) of the Act.”
In this case the Apex Court accepted the alternative plea of the revenue on the basis of explanation contained in the Taxation Laws (Merged States) (Removal of Difficulties) (Amendment) Order, 1962. In the order it was explained that the expression “actually allowed” in section 10(5) would mean depreciation that would have been allowed had the income not been exempted under the Act.
Similar such deeming provision is contained in sections 10A/10B providing that statutory deductions relating to or allowable for any relevant assessment years shall be deemed to have been given full effect to.
Finance Act 2001 brought in an explanation (5) to section 32(1) providing that the assessee has no option to give up claim for depreciation in a particular year. In other words it is clarified by the explanation that the Act assumes that depreciation would be granted even when it is not claimed. The explanation has been inserted in the after math of the decision of the Supreme Court in the case of Mahindra Mills (243ITR56). The Apex Court held that the words “ actually allowed” in section 43(6) does not mean “ notionally allowed” and that depreciation cannot be granted even when it is not claimed. The Court observed that a privilege of claiming depreciation cannot be turned into a disadvantage even when the assessee does not claim depreciation and an option given to an assessee cannot be made into an obligation.
In the absence of any amendment in section 43(6)(ii) the new explanation may not hold great guns. The Madras High Court in a recent judgment dated 06.12.2001 in Guindy Machine Tools P Ltd. v. CIT (254ITR780) while referring to the Supreme Court decisions (supra) observed that the amendment made in section 32 by inserting Explanation (5) purporting to remove the doubts/controversy to the effect that the provisions of sub–section shall apply whether or not the assessee has claimed the deduction for depreciation is contrary to the legal position already interpreted by the Supreme Court in their decisions in Mahindra Mills/Dharampur Mills case(supra).
The assessees therefore may review their depreciation claims even after insertion of Explanation (5) in section 32(1) in the absence of any amendment in section 43(6). In fact Explanation (5) to section 32(1) of the Indian Income-tax Act, 1961 purporting to allow forced depreciation look to be ultra vires and void.
Expenses of Personal Nature
The Gujarat High Court in Sayaji Iron & Engg. Co. v. CIT (2002) 121TAX43 held that the assessing officer has no powers to disallow any expenses alleging to be of personal nature in making an assessment of a company. The Court explained that a private limited company is a distinct assessable entity as per the definition of ‘person’ u/s 2(31) of the Act. Therefore it could not be stated that when the directors’ used the vehicles even if the directors’ personally used them, the vehicles were personally used by the company, because a limited company by its very nature cannot have any ‘personal use’. The limited company is an inanimate person and there cannot be anything personal about such an entity.
In fact after the deletion of section 40A(5)/40 (c) the Act does not impose any restrictions on expenditure that is attributable to the personal purpose.
Deduction u/s 80HHC
The Delhi Bench of the ITAT in India Sugar & Gen. Industry Export Import Corpn. Ltd. v. DCIT (2002) 121TAX305 held that where the profit from manufactured goods is in negative the same is to be ignored and in such a case the deduction u/s 80HHC is to be taken at 90% of the proportionate incentive.
It is vital to understand the meaning of the two key words that join the main sub-section (3) with the proviso therein. They are “further increased”. The second word “increased” is quite self-explanatory and needs no elaboration. The word “further” as prefixed to the word “increased” is implying “over and above” i.e. supplementing the profit as computed under sub clause (a), (b) and (c) under sub – section (3).. In the Black’s Law Dictionary the word “further” reads as:
“ additional, and is equivalent to moreover or furthermore, something beyond what has been said or likewise, or also.”
From the perusal of the literal meaning of this word it is evident that the proviso is meant to supplement the benefit envisaged under section 80HHC and not meant for aggregation or set off purpose. The proviso to sub-section (3) using the words “ further increased ” is meant to provide more or extra benefit and therefore must be read independently of the clauses (a), (b) and (c) in sub-section (3) of section 80HHC. This is the plain and undoubted effect of the proviso to sub-section (3) of section 80HHC.
Any alleged attempt to set off the loss arrived at under main sub-section (3) against the additional relief admissible under the proviso thereto would defeat the purpose and legislative intent of such proviso. The proviso to sub-section (3) operates as a substantive provision and says in unmistakable and unequivocal terms that in the event of any losses computed at first stage they must be ignored. The Bombay High Court decision in IPCA Laboratories Ltd. Vs. Deputy Commissioner of Income-tax (No.1)(251ITR401) is thus distinguishable.
In CIT v. Jyoti Electric Motors Ltd. (2002) 121TAX519 the revenue alleged that since the assessee was entitled under the agreement to continue manufacture the motors even after the expiry of the period of the collaboration agreement the payment of royalty was capital in nature. The Gujarat High Court after referring to the Supreme Court ruling in Jona Woodhead case (224ITR342) held that royalty paid is revenue in nature since paid on the basis of the sales. The Court held that what is relevant to note here is that the technical documentation is returnable in the event of termination of the agreement and not the mere fact that the assessee can use the technical documentation even after the agreement period. In yet another case of CIT v. Gujarat Carbon Ltd. (2002) 121TAX526 there was a clear finding that payment of royalty pertained to services in respect o the stage after installation of the plant and hence held to be revenue in nature.
Wrong Filing of TDS Return
In Aroma Chemicals v. DCIT (2002) 121TAX31 the assessee failed to furnish return under section 206 at notified office though it had by mistake furnished it at another office of department. The Tribunal held that though there was a lapse on the part of the department in tracing down the return internally yet some failure could be attributable to the assessee for not filing the return with the specified person. The assessees must therefore exercise due caution in the furnishing of TDS returns.
Fishing Enquiries in Reopened Case- Not Permissible
In Vipan Khanna v. CIT (122 TAX1) the assessee who carried the business of transporter claimed 50% depreciation on trucks in place of 40% as per the Act. No notice was served on the assessee u/s 143(2). Thus the return filed by the assessee had become final. The assessing officer reopened the cases of the assessee for such excess claim for depreciation. However in the course of such proceedings of reopening the assessing officer called upon the assessee to furnish information such as copies of tenders/contracts, copy of agreement for carriage, expenditure incurred on each truck, bank details etc. each of which having no relevance to the issue covering excess claim for depreciation. The assessee filed a writ against the notice seeking such information. In admitting such writ the P&H High Court rightfully held that proceedings u/s 147 are open qua items of underassessment. The finality of assessment proceedings on other issues remains undisturbed. It makes no difference whether the assessment proceedings become final on account of framing of an assessment u/s 143(3) or on account of non-issue of a notice u/s 143(2) within the stipulated period.
However the assessing officer nonetheless has powers to make any other addition on the basis of any fresh information that come to his knowledge in the course of such reopened proceedings. But he has no powers to collect information without previous knowledge derived for any escaped income otherwise than on the basis of seeking information from the assessee during such proceedings.
Even the assessee in the course of any reopened proceedings cannot reagitate on questions, which had been decided in the original assessment proceedings. The Supreme Court in Commissioner of Income-tax Vs. Sun Engineering Works P. Ltd. (198ITR297) held that where reassessment is made under section 147 in respect of income which had escaped tax, the Income-tax Officer’s jurisdiction is confined only to such income which has escaped tax or has been under assessed and does not extend to revising, reopening or reconsidering the whole assessment. The Apex Court further explained that the words “such income” in section 147 clearly refers to the income which is chargeable to tax but has “escaped assessment” and the Income-tax Officer’s jurisdiction under the section is confined only to such income which has escaped assessment. It does not extend to reconsidering generally the concluded earlier assessment. Claims which have been disallowed in the original assessment cannot be permitted to be reagitated on the assessment being reopened for bringing to tax certain income which has escaped assessment, because the controversy on reassessment is confined to matters which are relevant only in respect of the income which had not been brought to tax during the course of the original assessment. Thus a matter not agitated in the concluded original assessment proceedings also cannot be permitted to be agitated in the reassessment proceedings unless relatable to the items sought to be taxed as “escaped income”. Section 147, being for the benefit of the Revenue and not the assessee, the assessee cannot be permitted to convert the reassessment proceedings into an appeal or revision in disguise, and seek relief in respect of items earlier rejected or claim relief in respect of items not claimed in the original assessment proceedings, unless relatable to “escaped income”.
Indeed in the reassessment proceedings for bringing to tax items, which had escaped assessment, it would be open to the assessee to put forward claims for deduction of any expenditure in respect of that income or regarding the non-taxability of the items at all subject however to the fact that the income, for purposes of ” reassessment ” cannot be reduced beyond the income originally assessed. In Commissioner of Income-tax v. State Agro Development Corporation (248ITR47) a return was filed declaring a loss against notice issued u/s 148. The assessment was also completed on a net loss. The Income-tax Officer, however, held that the loss determined by him could not be carried forward since the return was not filed voluntarily. Following the above principle the J&K High Court upheld the action of the assessing officer.
Today Information Technology has become a significant tool for running of the day-to-day business operations. For running such operations efficiently it is desired to make use of IT in the organizations processes and systems. The Delhi Bench of the Tribunal in Media Video Ltd. v. JCIT (122TAX28) held software expenditure of Rs.56 Lacs as of revenue nature being incurred to bring qualitative improvement in functioning of an organization. The Bench held that software has to be updated very fast for which reason it becomes obsolete very fast. Also it held that the same does not bring any long term enduring benefit for an assessee.
It may be relevant to note that such expenditure in the event of the same being capitalized in the books cause doubt in the mind of the assessing officer as to its enduring nature. It may therefore be advisable to write off such expense in the books too
Depreciation- Trials are Sufficient
In the case of ACIT v. Ashima Syntex Ltd. (122TAX230) the assessee commenced trial production on 26.03.1993 and produced some cotton fabrics. The ITO rejected claim for depreciation on the ground that only tests and trails were going on till the end of the previous year. The Gujarat High Court held that even trail production of machinery would fall within the ambit of ‘ used for the purpose of business.’ The Court further held that the law does not require that there must be optimum production for granting the benefit. In this case the assessee had capitalized all expenses prior to commercial production in its books.
Following the Madras High Court ruling in Sivakami Mills Ltd. Vs. Commissioner of Income-tax (120ITR211) the Gauhati High Court explained that whether to capitalize or to treat an expenditure to be of a revenue nature is at the option of the assessee and either option cannot lead to conclusion in law that the assessee is not eligible to claim depreciation.
Stamp Duty Payment
Often it is noticed that the consideration shown in the sale deed is not taken as rightful fair market value by the registrar. The registrar follows its own circle rates to assess the market value of the property and the consequent duty payable on the transfer. In case such value adopted for stamp duty purpose is higher than the consideration mentioned in the sale deed there is a provision incorporated in the Income tax Act, 1961 under which the difference shall be treated as taxable under the head capital gains as hidden consideration.
On the other hand even buyer of the property can also be subject to an enquiry. In the case of Ved Prakash Nagori v. ITO (2002) 122TAX130 the assessing officer on noticing such difference deputed an inspector at the site to assess the true market value and thereupon issued a notice u/s 148 reopening the assessment in the case of the buyer for the reason that the assessee may have suppressed the cost of construction and invested his unaccounted income to purchase the property. The assessee filed a writ but the P&H High Court quashed the same.
It may therefore be wise to include the entire total of actual consideration that is exchanged in order to avoid any subsequent action at the end of the revenue.
After the Apex Court rulings in Sterling foods, Tuticorn and Bokara Steel the Benches of the Tribunal are taking a narrow view on the admissibility of deductions under sections 80I/IA/IB and U/s10A/10B on the amount of interest income earned by an undertaking. In Assistant Commissioner of Income-tax vs. Gallium Equipment (P.) Ltd (79ITD41) the Delhi Bench of the ITAT in a majority decision noticed that the assessee was under a business compulsion to invest into FDRs hence allowed a deduction u/s 80I on interest income.
The Bench nonetheless further made a pointer that the case would have been certainly different if assessee was having surplus funds and purchasing FDRs and earning interest then certainly that would have been outside the purview of industrial undertaking as industrial undertaking of the assessee was to manufacture and sale of tube mill plant equipments.
It may therefore be advisable for the assessees to review past claims for immediate corrective actions to prevent heavy interest liability. Perhaps the penalties may not sustain but interest is unavoidable.
Higher Depreciation – Leasing at par with hire transaction
Appendix 1 to Income tax rules provide for higher depreciation rate of 40% on motor vehicles given on hire. The Madras High Court in CIT v. Madan & Co. (254ITR445) held that the similar benefit is available in a leasing transaction. The Court held that there is no qualitative difference between lease of the vehicle for a specified period for consideration and letting the vehicle on hire for short duration on payment of hire charges.
In explaining the effect and the purpose of the transaction in each case the court held that the lease of the vehicle enables the lessee to have possession of the vehicle, and have the right to use the vehicle as the lessee wishes, subject to the terms of any contract between the parties. The lessee during the period of user is also likely to have to maintain the vehicle subject to the terms of the contract between the parties. For having the benefit of the user of the vehicle, the lessee is required to pay a price which is the lease amount, whether called rent or hire charges. The terminology used for describing the payment makes no difference in substance. What is paid is an amount in consideration of the right obtained from the owner to have the use of the vehicle for the benefit of the lessee for the stated period, and, or the stated purpose, whether or not by employing his own drivers, and whether or not also undertaking to maintain the vehicle during the period of the lease or hire.