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HIGH COURT JUDGMENTS

Accrual of income

  1. Moneys retained by principal contractor accrues only when it is actually received (CIT v. Ignifluid Boilers (I) Ltd. (283 ITR 295 (Mad); CIT v. East Coast Construction and Ind. Ltd. 283 ITR 297 (Mad); CIT v. P & C Construction (P.) Ltd. [318 ITR 113] (Mad)
  2. Retention money accrues to contractor only when obligations under contract are fulfilled (CIT v. Associates Cables (P.) Ltd. (286 ITR 596 (Bom).
  3. Interest on securities accrues only on specified dates when it becomes due for payment (CIT v. City Union Bank Ltd. (291 ITR 144 (Mad) / CIT v. FAL Industries Ltd. 17 DTR 308 (Mad.))
  4. In a case where the change in ownership of shares is not registered and the assessee’s name is not registered in the records of the company, assessee is merely a de facto owner of shares and it has no right to receive dividend. Hence, no dividend accrues to the assessee in such case (CIT v. Aatur Holding P. Ltd.  302 ITR 92 (Bom)
  5. Addition on account of duty drawback and cash assistance on accrual basis is held to be unjustified – (CIT v. Bajaj Auto Ltd.  322 ITR 29 (Bom.))

Advance Ruling

Merely because an assessee has filed a return of income would not tantamount to pendency of proceedings and Authority for Advance Rulings can proceed with the case — Rotem Company (195 CTR (AAR) 289.

Association of Persons (AOP)

Lease rent of land owned jointly by 65 persons assessa­ble in the hands of co-owners individually and not in the status of AOP. Interest earned by co-owners on loan given to lessee for construction of hotel on leased land is assessable in the status of AOP.(CIT vs. Shivsagar Estates (AOP) 204 ITR 1 (Bom)).

Appeal

  1. Monetary Limits Prescribed for litigation by revenue - Where the appeal is filed by the department after 1/4/2000 and the tax effect involved does not exceed the limit prescribed; i.e., i) Appeal before ITAT Rs.1,00,000/- ; ii) Appeal u/s. 260A Rs. 2,00,000/-; iii) Appeal to Supreme Court Rs. 5,00,000/-; the appeals filed by the revenue would be dismissed in terms of the above policy decision taken by the CBDT. (CIT vs. Camco Colour Co.  254 ITR 565 (Bom)).
  2. Monetary limits laid down by CBDT for filing appeals before Tribunal, High Court and Supreme Court is also applicable to pending references – (CIT v. Pithwa Engg. Works 276 ITR 519 (Bom) / CIT v. Zoeb Y. Topiwala  284 ITR 379 (Bom)). 
  3. Circular dated May 15, 2008 fixing monetary limit in case of appeal by Revenue is applicable to pending cases – (CIT v. Madhukar K. Inamdar (HUF) 318 ITR 149 (Bom))
  4. New Ground in the absence of appeal or cross objection by other side - There is no prohibition in the Rules totally precluding the Tribunal from considering any ground beyond those mentioned in the memorandum of appeal filed by a party, whether the assessee or the Department, in the absence of an appeal or cross objection by the other side projecting the new ground. It is a settled principle that procedural law is the hand-maid of justice. There cannot be any estoppel against the law. However, the evidentiary facts in support of the new ground must be available on record. (Assam Company (India) Ltd. vs. CIT 256 ITR 423 (Gauhati)).
  5. High Court has to power to review its judgement u/s. 260A – (VIP Industries Ltd. v. CCE (Bom) Source: www.itatonline.org))
  6. Appeal to High Court on the Grounds not raised before Assessing Officer or Tribunal cannot be raised for time before High Court u/s. s. 260A – Alok Todi v. CIT 339 ITR 102(Cal)

Assessment - Intimation

  1. The Assessing Officer cannot make adjustments to the returned income to disallow claim of non-taxability of receipt or to disallow claim for deduction for lack of proof of claim. (S.R.F. Charitable Trust vs. Union of India (193 ITR 95 (Del)).
  2. Disallowance can be made only on the basis of information avail­able in the Return and in the documents and accounts accompanying it. Claims should be prima facie inadmissible. Expenditure on presentation articles, ex gratia, cash purchases, prior year expenses. Deduction u/s. 80HHC cannot be disallowed u/s. 143(1). (Khatau Junker Ltd. vs. K.S. Pathania (196 ITR 55 (Bom); Tanna Exports vs. M.G. Kamat  (202 ITR 219 (Bom)).
  3. Substitution of S. 143(1A) by Finance Act, 1993, while con­stitutionally valid, retrospective operations thereof is ultra vires the Constitution. (Sati Oil Udyog Ltd. vs. CIT ( 232 ITR 502 (Gau.))
  4. In view of sections 153A, 153B and 153C, pending assessments abate. Mere fact that no notice u/s. 153A was issued would not validate assessment (Abhay Kumar Shroff v. CIT (290 ITR 114 (Jharkhand)).

Assessment – issue of Notice

  1. Even in case of a reopened assessment u/s. 147, issue of notice u/s. 143(2) within a period of 12 months is statutory (CIT v. C. Palaniappan (284 ITR 257 (Mad)).
  2. The notice u/s. 16(2) (akin to notice under s. 143(2)) is required to be issued even under the wealth tax assessments and non-issue of such notice would render the assessment invalid – (CWT vs. HUF of H.H. Late Shri J.M. Scindia. (217 CTR 531 (Bom))
  3. Notice served by affixture on the last date after the office hours is not valid and assessment framed in pursuance to such notice is not valid. It is even irrelevant if the assessee appeared in the assessment proceedings – (CIT v. Vishnu & Co. (P) Ld. (230 CTR 62 (Del.))

Audit

Before a direction is given for audit of accounts u/s. 142(2A), there is no need to give an opportunity to an assessee of being heard – (Atlas Copco (India) Ltd. v. V. S. Samuel, ACIT (283 ITR 56 (Bom) reversed by M/s. Sahara India (Firm) v. CIT (300 ITR 403 (SC) – Also see amendment in proviso to s. 142(2A))

Benami Transactions

The Benami Transactions Act does not prohibit nominal transactions which fall u/s. 81 of the Indian Trusts Act. (Bathula Anasuya & Anr vs. Bathula Rayudu (182 ITR 45 (A.P.)).

Block Assessment

  1. Provisions of S. 145 are not applicable to computation of undisclosed income under the provisions of Chapter XIV-B. (CIT vs. Smt. Usha Tripathi (249 ITR 4 (All) - Note - Amendment is made by the Finance Act, 2002, to make provision of section 145 applicable to Chapter XIV-B).
  2. Where income is already disclosed in the audited balance sheet or that amount is duly accounted for in regular books of account, such income/amount could not be treated as undisclosed income for purposes of block assessment. [CIT vs. Shamlal Balram Gurbani (248 ITR 562 (Cal.)]
  3. What is assessed under Chapter XIV-B is undisclosed income of block period and not total income or loss of previous year which is required to be assessed under regular assessment, scope of which is very different from scope of assessment under block assessment. ITO cannot estimate undisclosed income under Chapter XIV-B on arbitrary basis [CIT vs. Dr. M.K.E. Memon (248 ITR 310 Bom); CIT vs. Rajendra Prasad Gupta (ITR 350 (Raj.)]
  4. Assessment under Chapter XIV-B is to be based on the material found/detected as a result of search and not otherwise. (CIT vs. Ravi Kant Jain (250 ITR 141 (Del.).
  5. Addition under Chapter XIV-B cannot be made merely on the basis of the report of the Departmental Valuer valuing property higher than the cost of construction. [CIT vs. Vinod Danchand Ghodawat (247 ITR 448 (Bom)].
  6. Income below taxable limit of any previous year in block period is to be included as undisclosed income. [CIT vs. M.M. George (254 ITR 45 (Ker)] - Note - Section 158BC (c) is amended by the Finance Act, 2002, to exclude income below taxable limit from the purview and scope of undisclosed income.
  7. In case where an assessee has paid advance tax but has not filed his return of income, such income cannot be considered to be undisclosed income — ACIT vs. A. R. Enterprises (274 ITR 110 (Mad). Reversed by ACIT v. A. R. Enterprises CA No. 2688 of 2006 (SC) dated 14.01.2013.
  8. ‘Such other materials or information as are available with Assessing officer’ – Does not include material gathered during survey proceedings u/s 133A – (CIT v. G K Sennippan [284 ITR 220 (Mad.))
  9. Loss and unabsorbed depreciation are to be set off against the total income in computing the undisclosed income of the assessee for the block period – (H. E. Distilleries P) Ltd. V. DCIT (229 CTR 457 (Kar.))
  10. Notice for filing return: Satisfaction must be of the officer issuing notice and not of another officer. (Subhash Chandra Bhaniramka Vs. Asst. (320 ITR 349 (Cal.)
  11. If no incriminating material is found during search proceedings, merely on the basis of statement of third party, no addition can be made on account of undisclosed income. – CIT v. Concore Capital Management Co Ltd 334 ITR 346 (Del)

Business Expenditure

  1. The cases where the expenditure is held allowable:
  1. Expenditure on maintenance of Mandir for employees benefit and depreciation thereon. (Atlas Cycle Industries Ltd. vs. CIT (134 ITR 458 (P & H)).
  2. Premium payable on redemption of debentures allowable proportionately spread over the life of debenture. (National Engg. Industries Ltd vs. CIT (236 ITR 577 (Cal)
  3. Remuneration paid to Managing Director for discharging his duties even if approval for its payment has been refused by the Central Govt. (CIT vs. Tinplate Co. of India Ltd. (207 ITR 729 (Cal)).
  4. Expenditure on a advertisement in Souvenir published by All India Congress Committee. (Indian Trading Corpn vs. CIT (216 ITR 751 (Gauhati)).
  5. Expenditure incurred on replacement of the roof. (CIT vs. Binny Ltd. (215 ITR 537 (Mad)).
  6. Retrenchment compensation and notice pay paid to employee under Voluntary Retirement Scheme. (CIT vs. Shri Ramvilas Services Ltd. (211 ITR 763 (Mad). (Also refer Section 35 DDA))
  7. Expenditure on sponsoring horse race and golf competition ; presentation of articles to dealers not advertisement; holding of conference of dealers not entertainment. (Sarda Plywood Industries Ltd. vs. CIT (238 ITR 354 (Cal)).
  8. Expenditure on replacement of worn out electric motors. (CIT vs. Sree Narasimha Textiles P.Ltd. (238 ITR 351 (Mad)).
  9. Shifting of factory - allowance paid to employee  (CIT vs. Bimetal Bearing Ltd. (215 ITR 675(Mad))
  10. Expenditure on shifting factory  (CIT vs. L.M. Van Moppes Dismond Tools India Ltd (151 CTR 435 (Mad)).
  11. Expenditure incurred on asphalting existing kaccha road (Bharat Forge Co. Ltd 240 ITR 654 (Bom))
  12. The expenditure for providing wooden partition, painting, glass work and other petty repairs in leased premises (CIT vs. Escorts Finance Ltd [155 Taxman 559] (Delhi))
  13. Expenditure on website would not change the fixed capital of an assessee even though website might provide enduring benefit to the assessee. (CIT v. Indian Visit Com. (P) Limited (176 Taxman 164 (Del.))
  14. Membership fees to sports club. (Gujarat State Export Corpn. Ltd. vs. CIT (209 ITR 649, 654 (Guj) / American Express International Banking Corp v. CIT (258 ITR 601 (Bom) / CIT v. Samtel Color Ltd. (19 DTR 295 (Del.))
  15. Bad debts
  • Bad debt w/off is not deductible if not arising directly from the carrying on of business. (Indequip Ltd. vs. CIT (202 ITR 417 (Bom)).
  • After the amendment to section 36(i)(viii) w.e.f. 1/4/1989, mere writing off in books is sufficient (CIT vs. Girish Bhagwatprasad (256 ITR 772 (Guj.) /  CIT v. Star Chemicals (Bombay) P Ltd. (220 CTR 319 (Bom) / DIT v. Oman International Bank SAOG [223 CTR 382 (Bom)) / T.R.F. Limited v. CIT (35 DTR 156 (SC)
  • If brokerage offered to tax, the principal debt qualifies as a “bad debt” u/s 36(1)(vii) r.w.s. 36(2) - CIT vs. Shreyas S. Morakhia (342 ITR 285 (Bom))
  1. Interest expenditure
  • Where genuineness of credits was accepted in earlier years, interest thereon could not be disallowed on ground that creditors were persons to whom payment of interest was not established. [CIT vs. P.K. Narayanan [2000] 241 ITR 175 (Ker)].
  • Interest paid by assessee on money borrowed for expansion of its business was to be allowed as a deduction- Held, yes – (CIT v. Carborandum Universal Ltd. - 177 Taxman 347 (Mad))
  • Upfront payment of discounted interest on debentures, not allowable in entirety in year of payment. To be spread over the tenure of debentures. Taparia Tools Ltd. vs. Jt. CIT (260 ITR 102 (Bom)
  • The word “Interest” would include interest on unpaid purchase price (CIT vs. Vijay Ship Breaking Corpn. (261 ITR 113 (Guj)).
  1. Expenditure on raising convertible debentures is revenue expenditure - CIT v. ITC Hotels Ltd. - 334 ITR 109 (Karn).
  2. As there is no relationship of employer and employee between a firm and its partners, benefit extended by the firm to its partners is benefit to the firm itself. Accord­ingly, rent paid for flat occupied by partners while dis­charging their outstation duties is not deductible. (Lovelock & Lewes vs. CIT (208 ITR 95 (Cal)).
  3. The expression ‘for the purpose of business’ in Sec. 37 includes expenditure incidental to the carrying on of busi­ness which may not be for the purpose of earning profit. (CIT vs. Southern Publications Ltd. (211 ITR 397 (Mad)).
  4. In case of a Company retirement gratuity is deductible u/s. 37(1) S. 40(c) and 40 A(5) are not applicable. (SAPT Textile Product (India) Ltd vs. CIT (217 ITR 378 (Bom)).
  5. Disallowance u/s. 40A(3) - Cash payment exceeding certain limit paid under exceptional circumstances, covered by Rule 6DD (j) and genuineness of payment established, amount could not be disallowed. (CIT vs. Choudhari & Co. (217 ITR 431 (All)).
  6. Liability to pay royalty accrues in terms of agreement and not in the year in which RBI’s permission is granted. (CIT vs. Super Scientific Clock Co. (238 ITR 731 (Guj)).
  7. Royalty payable would accrue only in the year in which approval by government is granted and not in the year in which agreement was entered into. (C.I.T. vs. John Fowler (India) Ltd. (239 ITR 312 (Bom)).
  8. Expenses on VRS are allowable in year of payment (CIT vs. Bhor Industries Ltd. (264 ITR 180 (Born) (Also refer to section 35DDA inserted by Finance Act, 1999 w.e.f. 1-4-2000).
  9. The word “sum” in section 40A(3) refers to single payment – CIT v. Kothari Sanitation and Tiles P. Ltd. (282 ITR 117 (Mad).
  10. If there were funds available both interest free and overdraft and / or loans taken a presumption would arise that investment would be out of the interest free funds generated or available with the company – (CIT vs. Reliance Utilities and Power Ltd. (313 ITR 340 (Bom.))
  11. Amounts paid by the assessee to its employees towards overseas maintenance allowance constitutes only reimbursement for expenses incurred by the employees and would not form part of the salary in the hands of the recipient. Hence, provisions of s. 40(a)(iii) would not be applicable. (CIT v. Information Architects (322 ITR 1 (Bom))
  12. Amendment by FA 2010 to provide the extended time for payment is retrospective in nature and hence no disallowance u/s. 40(a)(ia) can be made on that count - CIT vs. M/s Virgin Creations (Cal) (Source: www.itatonline.org)
  13. The employees contribution towards the provident fund and ESI would qualify for deduction even if paid after due date prescribed under the Provident Fund Act / ESI Act but before the due date of filling the return of income – (CIT v. AIMIL (188 Taxman 265 (Del.))
  14. The expenditure incurred on issue of bonus shares is held to be revenue expenditure —CIT v. WMI Cranes Ltd (326 ITR 523 (Bom))
  15. Partnership deed need not quantify partner’s remuneration in order to be eligible for deduction - CIT vs. M/s. The Asian Marketing (Raj) (Source: www.itatonline.org) – Against: Sood Brij & Associates vs. CIT (Delhi) (Source: www.itatonline.org)
  16. Disallowance of expenses u/s. 14A
  • The nexus between the expenditure and the income is required in order to disallow expenses invoking s. 14A. The onus to prove the nexus is on the Assessing Officer - CIT v. Hero Cycles Ltd. (189 Taxman 50 / 323 ITR 518 (P&H))
  • The provisions of s. 14A(2) and 14(3) read with Rule 8D are notified w.e.f. 24.03.2008 and hence the same are applicable w.e.f. A.Y. 2008-09. IN respect of the earlier years, reasonable disallowance may be made having regard to the facts of the case — (Godrej & Boyce Mfg. Co. Ltd v. Dy. CIT & Anr. (234 CTR 1 (Bom))
  • Prior to Rule 8D, the administrative expenses cannot be disallowed u/s. 14A–(CIT v. Catholic Syrian Bank Ltd (237 CTR 164 (Ker))
  • No s. 14A disallowance of interest on borrowed funds if AO does not show nexus between borrowed funds & tax-free investment - CIT vs. K. Raheja Corporation Pvt Ltd (Bom) (www.itatonline.org)
  • The provisions of s. 14A cannot be invoked at appellate stage and the Tribunal not justified in directing to consider disallowance u/s. 14A - Topstar Mercantile P. Ltd. v. ACIT (334 ITR 374 / 225 CTR 351 (Bom).
  • No disallowance can be made u/s. 14A if the Assessee has not earned any exempt income – CIT v. Delite Enterprises (Bom) (Unreported)
  • Investment in Stock in trade cannot be considered for the purpose of working out the disallowance u/s. 14A – CCI Ltd. v. JCIT – 206 Taxman 563 (Karn.)
  1. Encashment of bank guarantee by the Apparel Export Promotion Council on failure to fulfill conditions of export obligation is not penalty and hence allowable as compensatory in nature – CIT v. Ragalia Apparels Pvt. Ltd. 352 ITR 71 (Bom)
  2. The difference between market price and the option price of ESOP is deductible as expenditure – CIT v. PVP Ventures Ltd. (Mad.) (unreported)

Capital Gains – Taxability

  1. Taxability of tenancy rights
  • Surrender of tenancy right in exchange for ownership flat in another building, does not attract liability to tax on capital gains. Cadell Weaving Mills Co. Pvt. Ltd. vs. CIT (249 ITR 265 (Bom); CIT vs. M. Appukutty (253 ITR 159 (Ker.) Note : In view of change in law these decisions will not be applicable from A.Y. 1995-96.
  • Conversion of tenancy rights into ownership rights and transfer thereafter. Cost to be taken of ownership rights represented by its market value on date of conversion for the purpose of computing Capital gains. Also, expenses incurred for removing encumbrance to the transfer was allowable CIT vs. Abrar Alvi (247 ITR 312 (Bom).
  1. When shares are purchased and sold by a non-resident in India, Rule 115 has no application. Amounts are not to be converted into foreign currency for calculating capital gains (Asbestos Cement Ltd. 203 ITR 358 (Bom)).
  2. While computing capital gains on redemption of prefer­ence shares, consideration received to be considered as Nil if same amount was already taxed as dividends u/s. 2(22) (CIT vs. Surat Cotton Spg. & Wvg. Mills (P) Ltd. (202 ITR 932 (Bom)).
  3. Split of capital gain arising from sale of land and building is possible even if the assets are sold as one unit. (CIT vs. Dr. D. L. Ramchandra Rao 147 CTR 314 (Mad.) / CIT vs. C. R. Subramanian (242 ITR 342 (Kar) / CIT v. Citibank N.A. (261 ITR 570 (Bom))
  4. The definition of “capital assets” u/s. 2(14) is not of any relevance for the purpose of operation of S. 46(2). S. 46(2) operates independent of S. 2(14). (CIT vs. N. Bhagavathy Ammal (240 ITR 451 (Mad)).
  5. Cost of right shares should be price that was paid for such shares plus diminishing in value of originally shares. (CIT vs. Suhashbhai Vadilal (239 ITR 362 (Guj)). [The above decision to be read subject to amendment in S. 55(2)(aa) made with effect from A.Y. 1996-97].
  6. There is no transfer on a firm registering itself as a company under Part IX of the Companies Act. CIT vs. Texspin Engg. & Mfg. Works (263 ITR 345 (Bom).
  7. In view of s. 45(4), on retirement of a partner, capital gains would be liable to tax. (CIT vs. A. N. Naik Associates (265 ITR 346)
  8. For the purpose of s. 45(4), dissolution of firm alone would not be sufficient. There should be distribution of asset also to trigger the section and attract the capital gains tax liability. – (CIT v. Vijaylakshmi Metal Industries  256 ITR 540 (Mad))
  9. Where under the terms of the development agreement between the assessee and the developer, a limited power of Attorney was intended to be given to the developer to deal with the property and if the contract, read as a whole, indicates passing of or transferring of complete control over the property in favour of the developer, then the date of the contract would decide the year of chargeability. (Chaturbhuj Dwarkadas Kapadia v. CIT - 260 ITR 491 (Bom)).
  10. Capital gains on transfer of development rights in an immovable property was chargeable in the year in which actual physical possession of the property is given to the purchaser even though the agreement is entered into in earlier year – (CIT v. Geetadevi Pasari (17 DTR 280 (Bom.))
  11. Re-arranging shareholding of assessee under a family settlement to avoid possible litigation among themselves and necessity to control companies by major share holders  to produce better and active supervision would not amount to transfer of assets so as to attract capital gains – (CIT v. Kay Arr Enterprise - 299 ITR 348 (Mad))
  12. Assessee becoming owner of land though operation of law- No cost of acquisition- Capital gains tax could not be charged (CIT v. Amrik singh 299 ITR 14 (P&H))
  13. If without removing any encumbrance sale or transfer could not effected then the amount paid for removing that encumbrance will fall under clause (i) of section 48 and hence would be eligible for deduction – (Gopal Nath Paul & Sons v. CIT 147 Taxman 629)
  14. The renunciation of right to subscribe to rights shares in favour of general public did not amount to transfer. The loss suffered therein is a notional loss and hence not deductible—(CIT v. United Breweries Ltd. 325 ITR 485 (Karn))
  15. In case of transfer by gift, will, trust, etc indexed cost is to be determined with reference to holding by previous owner - Arun Shungloo Trust vs. CIT 205 Taxman  456 (Del) / CIT vs. Manjula J. Shah 204 Taxman 691 (Bom))

Capital Gains - Exemption

  1. If assessee has acquired substantial domain over new house and has made substantial payment towards cost of construction within a period specified u/s. 54, then assessee can be said to have complied with requirements for claiming exemption u/s 54 even if construction of building is not completed within a specified period. (CIT vs. Hilla J.B. Wadia (216 ITR 376 (Bom)).
  2. Section 54 nowhere requires that to avail exemption sale consideration itself should be utilised for purchase of new house [ITO vs. K. C. Gopalan – (107 Taxman 591 (Ker)].
  3. Expression “a residential house” should not be understood to indicate a singular number. Assessee having purchased two residential flats, exemption under section 54 was available, more so as these flats are situated side by side and the builder as effected modification of the flats to make it as one unit. – (CIT v D. Ananda Basappa (20 DTR 266 (Kar))
  4. As per section 161, Trustee is entitled to benefits available to beneficiary and therefore, trustee can claim exemption u/s. 54 of the Act. - Mrs. Amy F. Cama (Trustee of the Estate of Late M.R. Adenwalla) vs. CIT (237 ITR 82 (Bom).
  5. Exemption u/s. 54E is available with respect to capital gains chargeable u/s. 50 on transfer of depreciable assets — CIT vs. ACE Builders (P.) Ltd. (281 ITR 210 (Bom); CIT v. Raka Food Products (277 ITR 261 (Mad).
  6. The assessee entered into joint development agreement for development of her residential property into 8 residential units. The assessee was entitled to get 4 flats as her share. The assessee was entitled to benefit u/s. 54 in respect of entire value of four flats —(CIT v. Smt. K.G. Rukminiamma 196 Taxman 87 (Kar) / 331 ITR 211 (Kar))
  7. The deposit in capital gain account scheme by the time limit provided u/s. 139(4) is sufficient for claiming deduction u/s. 54F. -  CIT v. Jagtar Singh Chawla (P & H) (Unreported)

Cash Credits

Department must show that investment made by subscribers in the share applicaiton money with the assessee company actually emanated from coffers of assessee to be treated as undisclosed income of assessee – (CIT v. Value Capital Services P. Ltd. - 307 ITR 334 (Del.) / CIT v. Stellar Investment Ltd., (192 ITR 287 / CIT v. Sophia Finance Ltd., (205 ITR 98)) approved in CIT v. Lovely exports Ltd. (2008) 216 CTR 195 (SC))

Casual Income

If any amount of Capital Gains is not taxable for any reason, that amount cannot be treated automatically as casual or non-recurring receipt u/s. 10(3) [Cadell Weaving Mill Co. P. Ltd. vs. ACIT (249 ITR 265 (Bom)].

Charitable Trusts

  1. Contributions collected by organising charity show and by taking advertisements in souvenir are voluntary in nature for the purpose of S. 12(1). (Trustees of Visha Nima Charity Trust (28 CTR. 227 (Bom.)).
  2. Filing of audit report in Form 10B along with return of income is a directory and not mandatory. (CIT vs. Devradhan Madhavlal Genda Trust (230 ITR 714 (MP.))
  3. Philanthropy is not restricted to giving a free treatment only to the extreme poor but also to giving treatment at a concessional rate to those who are not poor but cannot afford normal cost. Further there is also no bar on the concessional treatment to staff members – The application for exemption cannot be rejected on such grounds – (Breach Candy Hospital Trust v. CCIT (322 ITR 246 (Bom.))

Clubbing of Income

Transfer of asset to spouse before marriage, income from transferred asset is not to be included in total income of assessee. (CIT vs. Ashok Kumar (217 ITR 251 (All)).

As per divorce decree, assessee created a trust for benefit of minor child. Income from trust not includible in total income of assessee – CIT v. Behram B. Dubash (279 ITR 377 (Bom)).

Deductions from Income

  1. A private trust having beneficiaries with indeterminate shares is eligible for deduction u/s. 80L. (Ramesh Mahesh Sanjay Trust & Ors. vs. C.I.T. 150 CTR 329 (Mad.))
  2. Status of trustees is that of individual -  deduction u/s. 80L allowable – (CIT v. Sae Head Office Monthly Paid Employees Welfare Trust - 271 ITR 159 (Del.))
  3. Discretion u/s. 80HHC(2)(a) for allowing further time to bring sale proceeds into India is not dependent on making of an application nor it is necessary that said discretion should be exercised before expiry of period of six months. (Azad Tobacco Factory (P) Ltd. vs. CIT 85 Taxman 281 (All.); Mayor & Co. vs. CIT [2001] 248 ITR 162 (P&H)].
  4. The amount of sale proceeds from export not brought into India within six months is not includible in total turnover [CIT vs. Abad Fisheries (259 ITR 641 (Ker)].
  5. Where income or other charges are found to be part of operational income, Explanation (baa) could not be invoked [CIT vs. Bangalore Clothing Co. ( 260 ITR 371 (Bom)].
  6. Section 80HH(9) only talks about priority to be given to section 80HH, in case where assessee is entitled to deduction u/s. 80-I as well as 80HH it does not refer to quantum. (CIT vs. Nirma Specific Family Trust [2001] 248 ITR 29 (Bom) / Associated Capsules Pvt. Ltd. v. CIT (237 CTR 408 (Bom))
  7. Requirement of filing audit report u/s.80–I along with the return is not mandatory and the claim for deduction u/s.80-I is admissible even if the report is filed by the assessee before completion of the assessment - (CIT vs. Panama Chemicals Works [207 CTR 249] (MP))
  8. Assessee having maintained separate books of accounts for export business and local business deduction under section 80HHC is to be computed on the basis of total turnover, export turnover and profits of the business of the export division alone and not the total turnover and the profits of the entire business of the assessee. – (CIT vs. Sivagami Match Industries (24 DTR 109 (Mad.))
  9. Under the provisions of s. 80-HHC – Explanation (baa), netting of income from expenditure is not allowed (CIT v. Asian Star Co.)
  10. The assessee had a contract for design, development and resting of a software outside India. Under the contact, the scope of work involved the provision of analysis, programming and testing skills. The assessee had deputed qualified personnel under the contract. It was therefore held that the assessee was engaged in onsite development of computer software outside India and the assessee was entitled to deduction u/s. 80-HHE – (CIT v. Information Architects (322 ITR 1 (Bom.)
  11. S. 10A/ 10B deduction allowable without set off of losses of non-eligible units - CIT vs. Black & Veatch Consulting Pvt.Ltd (Bom)  (Source: www.itatonline.org)
  12. Interest income
  • Interest received by the assessee on overdue payments from customers is eligible for deduction u/s. 80-IA – (CIT v. Advance Detergent Ltd. (188 Taxman 15 (Del) / Midas Polymer Compounds P. Ltd. v. ACIT (331 ITR 68 (Ker))
  • Interest received by the assessee on unsecured loans does not represent profits derived from the undertaking and hence does not constitute business income for the purpose of s. 80-IB – (CIT v. Vidyut Corporation 324 ITR 221(Bom))
  • Interest on fixed deposits with bank, though under business compulsion, is not income derived from industrial undertaking for purposes of relief under s. 80-IB - (Jay Bharat Maruti Ltd. v. CIT 322 ITR 599 (Del.))
  • Interest and sales tax set off included in business income entitled to deduction u/s. 80HHC (Alfa Laval India Ltd. vs. Dy. CIT 266 ITR 418 (Bom).
  • Interest in clause (baa) of section 80HHC refers to net interest (CIT v. Shri Ram Honda Power Equip ( 289 ITR 475 (Bom).
  1. Where advance amounts are collected from prospective flat buyers and the same are parked in bank deposits, interest is received on such funds qualifies for deduction u/s. 80-IB – (CIT v. Lok Holdings 189 Taxman 452 (Bom))
  2. Exchange rate difference arises out of and is directly related to the sale transaction involving export of goods of the industrial undertaking and therefore, the difference on account of exchange fluctuation is entitled to deduction u/s. 80-IB – (CIT v. rachna Udyog (230 CTR 72 (Bom.))
  3. For claiming deduction u/s. 80-HHC, foreign exchange need not be brought in India. If the sale proceeds from foreign country are used for repayment of foreign currency loan directly without bringing the foreign exchange in India, deduction cannot be denied – CIT v. Essar Oil Ltd.  - 345 ITR 443 (Bom.)
  4. Pursuant to the introduction of the clause (iiid) in s. 28 by Finance Act, 2005, entire sale consideration on transfer of DEPB credit is assessable as business profits and not only the profit from such DEPB credits. The law laid down by the special bench in Topman Exports which was overruled in CIT v. Kalpataru Colours And Chemicals 328 ITR 362 (Bom) is now restored and approved in Topman Exports Ltd. 342 ITR 49 (SC)
  5. The option or privilege granted to the assessee in claiming the depreciation cannot be availed for the purpose of calculating the profits derived from industrial undertaking for Chapter VIA. The depreciation is to be worked out while computing the deduction u/s. 80-IA even if not claimed in the computation of income – (Scoop Industries (P) Ltd .v. CIT (289 ITR 195 (Bom) / Plastiblends India Ltd. v. Addl. CIT & Anr. 227 CTR 1 (FB) (Bom))
  6. Process of manufacturing
  • The process of making transformer core from cold rolled coils amounts to “manufacture” and the assessee is entitled to the deduction u/s. 80-IB—(CIT v. Alfa Lamination 329 ITR 417 (Guj))
  • Conversion of limestone into limestone powder constitutes manufacture – (CIT v. Janak Raj Bansal 329 ITR 417 (HP))
  • The activity of cutting ,policing and sizing of granites amounts to production and assessee engaged in such activity is entitled to exemption under section 10B – (CIT v Fateh Granite (P) Ltd (222 CTR 638(Bom))
  • Conversion of paper corrugated sheets into printed laminated cartons. Is manufacture eligible for deduction u/s. 80 IB. (CIT v. Supreme Graphics (P) Ltd. (197 CTR 657 (Bom))
  1. Prior to A.Y. 05-06, a project approved as “housing project” by local authority is eligible for deduction u/s. 80-IB(10) irrespective of extent of commercial user – (CIT v. Brahma Associates (333 ITR 289 Bom)
  2. “Housing Project” is eligible for deduction u/s. 80-IB(10) of the Act even if the Developer is not “owner” of land – (CIT vs. Radhe Developers 341 ITR 403 (Guj))
  3. Multiple housing project on 1 acre of land is eligible for deduction u/s. 80-IB – CIT v. Vandana Properties – 206 Taxman 584 (Bom))
  4. The retrospective effect to the introduction of 3rd and 4th Proviso to s. 80HHC is ultra vires and constitutionally invalid. The said amendment can only be held to be prospective in nature – Vijaya Silk House (Bangalore) Ltd. v. CIT (Bom) (Unreported)

Demand in Abeyance

  1. Discretion for keeping demand in abeyance u/s. 220(6), if used, must be discretion of a reasonable man and with due reason of such a man and not abrupt. ( N. Rajan Nair vs. ITO (165 ITR 650 (Ker.), Dunlop India Ltd. (No.2) vs. ACIT (183 ITR 532 (Cal.), Lalit Khanna vs. Controller of Estate Duty (207 ITR 955 (All)].
  2. CBDT inst. No. 334 dt. 3.4.1982 is to be followed and recovery proceeding must be stayed, where assessed income is substantially higher than the returned income, disputed tax shall remain in abeyance. [Mrs. R. Mani Goyal [1996] 217 ITR 641(All); Maharana Shri Bhagwati Singhji of Mewar vs. ITAT  223 ITR 192 (Raj.)].
  3. Hon’ble ITAT has exclusive jurisdiction and implied power to stay recovery proceeding during the pendency of appeal or reference. (Shivshakti Rubber & Chemical Works vs. ITAT (213 ITR 299 (All)).
  4. CIT(A) has inherent power to stay recovery proceeding during the pendency and final disposal of appeal before the appellate authority. (Paulsons Litho Works vs. ITO (208 ITR 676 (Mad), Prem Prakash Tripathi vs. CIT (208 ITR 461 (All)).
  5. Assessee need not approach the A.O. or DCIT before applying to CIT(A) for stay of recovery of tax etc. CIT(A) bound to consider direct application expeditiously. (Tin Manufacturing Co. vs. CIT (212 ITR 451 (All)).
  6. There is no express provision which authorizes the DCIT to review his own stay order. He has only power of rectification and not power of review. (A.P. Kuruvilla & Co. vs. CBDT (214 ITR 183 (Ker)).
  7. Power to grant stay on tax collection is an inherent and incidental power of appellate authority for effective exercise of appellate powers. (Debasish Moulik vs. DCIT 150 CTR 387 (Cal.)).
  8. Authorities to dispose of stay application in accordance to law. Parameters to be complied with by authorities on stay applications laid down - KEC International Ltd. vs. B.K. Balakrishnan (251 ITR 158 (Bom).
  9. When the assessee had already moved an application for rectification u/s. 154 and the matter was pending, recovery proceedings could not be carried out. [Sultan Leather Finishers Pvt. Ltd. vs. ACIT (191 ITR 179 (All)].
  10. For the purpose of ascertaining the directors’ liability u/s. 179, the amount of demand does not include penalty – (Dinesh T. Tailor v. Tax Recovery Officer and Ors. 41 DTR 6 (Bom.))

Depreciation

  1. Where depreciation was claimed in the original return but the claim was withdrawn while filing the revised return, depreciation could not be enforced. (Shri Someshwar Sahakari Sakhar Karkhana Ltd. 177 ITR 443 (Bom). See also Friends Corporation, 180 ITR 334 (P & H)). Mahendra Mills - 243 ITR 56 (SC). Optional prior to 1/4/2002 [CIT vs. Sree Senhavalli Textiles P. Ltd. (259 ITR 77 (Mad.)].
  2. Machinery purchased under IDBI deferred payment scheme. Entire amount of bill of exchange will form part of actual cost of asset for the purpose of depreciation. (CIT vs. Widia (India) Ltd., (193 ITR 475 (Kar). Contrary view - Rajaram Bandekar (202 ITR 514 (Bom)) after referring Widia (India) Ltd..
  3. Depreciation cannot be refused in respect of motor vehicles on the ground that ‘vehicles’ are not registered in the name of the assessee. (CIT vs. Mirza Ataullaha Baig (202 ITR 291 (Bom)).
  4. Increased liability of forex loan obtained for purchase of capital assets due to exchange rate fluctua­tions forms part of actual cost for the purpose of depreciation. (Pudumjee Pulp & Paper Mills Ltd. vs. CIT (210 ITR 97(Bom); (CIT vs. Hindustan Aluminium Corporation Ltd. (207 ITR 670 (Bom)).
  5. Depreciation is allowable on the house acquired through acquisition of shares in co-operative society [Surana Pharmaceuticals (P) Ltd. vs. CIT – (243 ITR 218 (Kar)].
  6. Pharma building held as plant (DCIT vs. Astra IDL Ltd. 115 ITR 623)
  7. Production studio for manufacture of cinematographic films is "plant" — (CIT vs. Navodaya (271 ITR 173 (Ker.))
  8. Explanation 4A to section 43(1) inserted w.e.f. 1-10-1996 is not retrospective and does not apply to claim of depreciation for A.Y. 1996-97. Accordingly, depreciation would be available on assets purchased and given back of lease (sale and lease back) on cost — (Om Sindhoori Capital Investments Ltd. vs. Joint Commissioner of Income Tax (274 ITR 427 (Mad.))
  9. There is no requirement for filing return for intermittent years for benefit of carry forward of unabsorbed depreciation as in case of loss – CIT v. Haryana Hotels Ltd. (276 ITR 521 (P & H).
  10. Assessee is entitled to depreciation when the best judgement assessment is made and income is estimated – (Shri Ram Jhanwar lal v. ITO (321 ITR 400 (Raj.))
  11. Despite non-user of the assets, depreciation is allowable, if it is part of “Block of assets” (CIT v. Oswal Agro Mills Ltd. (341 ITR 467 (Del))
  12. Business information, contracts, records etc are “intangible assets” & eligible for depreciation - Areva T&D India Ltd vs. DCIT (Del) (Source: www.itatonline.org)
  13. To be an “intangible asset” u/s 32(1)(ii), the rights must be “in rem” and transferable.  A “non-compete right” is not an “intangible asset” – Sharp Business System v. CIT 254 CTR 233 (Del)

Diversion of Income

Certain partners of assessee firm of Chartered Accountants retired and firm was under legal obligation to pay outstanding fees to retiring partners. Held, such fees cannot be treated as assessee’s income. (CIT vs. G. Basu & Co.  182 ITR 472 (Cal.); CIT vs. Mulla & Mulla & Craigie, Blunt & Caroe (190 ITR 198 (Bom)).

Divi­dend Income and Deemed dividend income

  1. Distribution of profit through redeemable preference bonus shares constitutes “dividend” at the stage of redemption involving release of assets. (Shashibala Navnitlal vs. CIT( 54 ITR 478 (Guj.)) .
  2. Dividend u/s. 2(22)(e) can be assessed only in the hands of the registered shares holder – (CIT v. Hotel Hilltop. - 217 CTR 527  (Raj)) / (CIT v. Rajkumar Sing and Co. - 295 ITR 9 - (All)) [Also see CIT vs. Bhaumik Color (P) Ltd. [120 TTJ 865] (Mum.) (SB) where it is held that ‘such shareholder’ in the concern to which loan is advanced must be both a registered shareholding as also beneficial shareholding]
  3. S. 2(22)(e) does not apply to “non-gratuitous” advances to substantial shareholder - Pradip Kumar Malhotra vs. CIT (203 Taxman 110 (Cal))
  4. S. 2(22)(e) of the Act does not apply to “Trade Advances” as they are not loans and advances for the purpose of the said section - CIT vs. Arvind Kumar Jain (Del) (www.itatonline.org)

Executor

Assessment of income of the estate of deceased person can be made only in the hands of the executor. Provisions of S. 168 are mandatory. (CIT vs. Mrs. Usha D. Shah [1981] 127 ITR 850 (Bom)).

Firm

  1. On minor attending majority and electing to become partner, if there is no change in loss sharing ratio, there is no change in constitution of firm requiring fresh deed and/or registration under I.T. Act. (CIT vs. Fazal Hussain & Sons  233 ITR 32 (All.)).
  2. Where there is no interlacing and interlocking of funds of two firms, even if partners’ profit sharing ratio and nature of contracts are same, income of two firms cannot be clubbed. [CIT vs. Seth Talwar & Co. - 243 ITR 190 (Del)].

Gift Tax

Premium paid on policies under Married Women’s Property Act is not a gift to beneficiaries under policy.(CGT vs. Seth Arvind N. Mafatlal - 184 ITR 580 (Bom)).

Gratuity Exemption

The words ‘completed service’ would mean employees’ total service under different employers at different times (CIT vs. P.N. Mehra [1993] 201 ITR 903 (Bom)).

Hindu Undivided Family

  1. Mere fact that coparcener wrongly treats HUF property as individual property does not make it so. (J.P. Verma vs. CIT (187 ITR 465 (All)).
  2. Whether joint family property does not loose its character merely because at one point of time there was only one male member or one coparcener – (Dr. Prakash B. Sultane v. CIT - 148 Taxman 353] (Bom))

Income or Capital

  1. When dividends are received by the Co. from another co. and the two companies are amalgamated in the same financial year no dividend income arises. (New Shorrock Spg. & Mfg. Co. Ltd. vs. CIT ( 208 ITR 765 (Bom)).
  2. Notional interest on interest free advance cannot be assessed on the ground that interest ought to have been charged. [B & A Plantations and Industries Ltd. vs. CIT  242 ITR 22 (Gau)].
  3. Amount received by partner on relinquishment of his share in firm is Capital receipt. (CIT vs. Tahir Husain (217 ITR 869 (All)).
  4. Deposits received by manufacturer of soft drinks for bottles and crates cannot be considered to be income. (CIT vs. Soft Beverage (P.) Ltd. (129 Taxman 227 (Mad))
  5. Surplus on purchasing and redemption of own debentures does not constitute income (CIT v. Industrial Credit & Development Syndicate Ltd. (285 ITR 310 (Kar)).
  6. Amount received as loan by the assessee for trading activity and ultimately, retained in the business upon waiver of the loan is taxable under s. 28(iv) – (Solid Containers Ltd. v. DCIT (222 CTR 455 (Bom.))
  7. Whether the waiver of a loan is taxable as income or not depends on the purpose for which the loan was taken. If the loan was taken for acquiring a capital asset, the waiver thereof would not amount to any income exigible to tax u/s 28(iv) or 41(1). On the other hand, if the loan was taken for a trading purpose and was treated as such from the very beginning in the books of account, its waiver would result in income more so when it was transferred to the P&L A/c in view of decision of Supreme Court in TV Sundaram Iyengar 222 ITR 344 (SC). – (Logitronics Pvt. Ltd. v. CIT (333 ITR 386 (Del))
  8. Trading liability shown as outstanding in books and not written back cannot be taxed on account of remission or cessation of liability merely on account of passage of time – (CIT v. Smt. Sitadevi Juneja 187 Taxman 96 (P&H)); (CIT v. G. P. International (2010) 229 CTR 86 (P&H))
  9. A family settlement does not result in a transfer and compensation received to remove inequalities in family settlement is not taxable as income – CIT v. Ashwani Chopra (P & H) (Unreported)
  10. Cessation of liability to repay loan taken for capital purposes is not assessable as income – CIT v. Xylon Holdings Pvt. Ltd. (Bom) (Unreported)

Income from House Property

  1. Notional interest on interest free deposit would not form part of actual rent received or receivable under section 23(1)(b). (CIT vs. J. K. Investors (Bombay) Ltd. (248 ITR 723 (Bom). / CIT v. Asian Hotels Ltd. (323 ITR 490 (Del.)) / CIT v. Hemraj Mahabir Prasad Ltd (148 Taxman 623))
  2. Having regard to concept of “annual value” income from house property in existence for less than one year would be assessable as income from other sources and not under house property chapter. [P. J. Expen vs. CIT (241 ITR 572 (Ker)].
  3. S. 23 (1)(a) requires determination of the “fair rent” being “the sum for which the property might reasonably be expected to let from year to year”. If the Assessing Officer finds that the actual rent received is less than the “fair/market rent‟ because the assessee has received abnormally high interest free security deposit, he can undertake necessary exercise in that behalf. However, by no stretch of imagination, the notional interest on the interest free security can be taken as determinative factor to arrive at the “fair rent‟. – (CIT v. Moni Kumar Subba (333 ITR 38 (Del) (FB) / 53 DTR (Del (FB))

Interest Payable

  1. Charge of interest at 2% “pm or part thereof” does not mean that interest is to be paid for full month even if delay is less than a month. Interest must be charged only for period of delay and not for full month. (Lamina Suspension Products Pvt. Ltd. vs. State of A.P. & Anr.(187 ITR 105 (A.P.)).

Interest u/s. 234A/B/C/244A

  1. Self assessment tax paid is to be treated as tax paid in pursuance of assessment for purpose of interest u/s. 244(1A). [CIT vs. NGEF Ltd. –(244 ITR 665 (Kar)].
  2. Shortfall in payment of advance tax in view of income being determined u/s. 115J would attract interest u/s. 234B and 234C (CIT vs. Kotak Mahindra Finance Ltd. 265 ITR 119 (Bom)).
  3. Where the payer fails to deduct tax at source on the payments made by him to the payee, no interest u/s. 234B of the Act can be imposed. – DIT (International Taxation) v. NCG Network Asia LLC 222 CTR 86 (Bom.))
  4. Where the assessee had made a request for adjustment of seized cash against advance tax liability, though the amount remained unadjusted, interest cannot be levied u/s. 234B and 234C after the date of application for such adjustment made by the Assessee – CIT v. Arun Kapoor - 334 ITR 351 (P&H)
  5. Where the liability for payment of advance tax could not have been anticipated because of a subsequent amendment with retrospective effect covering the year under consideration, interest could not be levied either u/s. 234B or s. 234C – Emami Ltd v. CIT  - 337 ITR 470 (Cal).

International Taxation

The liaison office of the Assessee in India was engaged in purchase of goods and also carrying out vendor identification and recommendation, review of costing data, quality control and uploading of material prices into internal product data management system. Such activities are not confined to purchase of goods for export alone. On these facts, the liaison office can be said to be a permanent establishment of the foreign company and income attributable to it would assessable in India—Columbia Sportswear Company, In re 337 ITR 407 (AAR)

Interpretation and Principles

  1. When it does not make a difference to the Department, it should not contest whether a particular income is taxable in one year or the next. (Nagari Mills Ltd. 33 ITR 681 (Bom)).
  2. In absence of a decision from the jurisdictional H.C. the Tribunal is bound by decision of any other H.C. if there are no conflicting judgements. (CIT vs. Smt. Nirmalabai K. Darehar (186 ITR 242 (Bom)). However, conversely held in Consolidated Pneumatic Tool Co. (India) Ltd. vs. CIT (209 ITR 277 (Bom) that the decision of one High Court is not binding on Courts or Tribunals outside its territori­al jurisdiction. Only decisions of SC are binding on all courts of India.
  3. Binding nature of precedents explained. (CIT vs. The Thane Electricity Supply Ltd. (206 ITR 727 (738-739)(Bom)).
  4. If construction of a particular provision is considered in a particular way for a long time it should not normally be departed from. (Chamber of Income-tax Consultants & Others vs. CBDT (209 ITR 660 (Bom)).
  5. When explanation is added to a section with effect from a particular date, the court cannot travel beyond that date while interpreting the section before the addition. (CIT vs. Rajasthan Mercantile Co. (211 ITR 400 (Del)).
  6. It is the duty of tax authorities to assess tax liability correctly [Assam Company (India) Ltd. vs. CIT (256 ITR 423 (Gau)].
  7. Provisions of a fiscal statute have to be construed strictly. Court is not supposed to give a liberal meaning to make it just and serve justice. It is only when the language is not clear or is ambiguous that the court can lean towards the object for which it was enacted (Hilltop Holdings India Ltd. v. CIT (278 ITR 501 (Cal).
  8. Words not defined in a statute which deals with matters relating to general public must be presumed to have been used in their popular meaning rather that a narrow, legal or technical sense ((M. N. Dastur & Co. Ltd. v. UOI (279 ITR 147 (Cal)).
  9. Circulars which are in force during the relevant assessment year is the circular which would be applicable and subsequent circulars either withdrawing or modifying the earlier circular have no application – (BASF (India) Ltd. (280 ITR 136 (Bom)).
  10. Any benefit derived by the assessee within framework of law is legitimate and it is only colourable devices and dubious method that are to be discouraged. If result of normal transaction is tried to be achieved through a scheme, with only intention to avoid tax, then such scheme can be described as colourable device even though such scheme may be within framework of law. (Taparia Tools Ltd v. CIT - 260 ITR 102 (Bom))

Minimum Alternative Tax

  1. Deduction u/s. 80-HHC is to be worked out on the basis of the adjusted books profits u/s. 115 JB of the Act - (CIT v. Ambika Cotton Mills Ltd. (321 ITR 448 (Mad.)) – Decision in the case of CIT v. Ajanta Pharma Ltd. (318 ITR 252 (Bom.) dissented from.
  2. Only that book profit which is approved at annual general meeting of the shareholders of the company had to be considered. – (Dy. CIT v. Arvind Mills Ltd [314 ITR 251 (Guj))

Method of Accounting

  1. Fact that the assessee had maintained his accounts on cash basis would not convert every kind of receipt as income unless the receipt could be held to have accrued as income; i.e., assessee had acquired a right to receive the said sum as income. (CIT vs. Sankarnarayan Construction Co. (197 ITR 688 (Kar)).
  2. The term ‘obtained’ used in S. 41(1) cannot be given a meaning “capable of being obtained”. It contemplates actual receipt of amount. For S. 41(1), system of accounting followed is of no relevance. (Meghdoot Laminart Pvt. Ltd. vs. Rajiv Sinha (238 ITR 918(Guj.))
  3. The tax department is not obliged to adjust opening stock value in a case where assessee suo motu voluntarily changed method of closing stock valuation. (Melmould Corporation vs. CIT (202 ITR 789 (Bom.))
  4. While estimating net profit after rejecting accounts, depreciation is required to be worked out separately. (CIT vs. Jain Construction Co. ( 245 ITR 527 Raj)).
  5. Principles laid down in ALA Firm (189 ITR 285 (SC)) would not apply to a situation where stock in trade of a proprietary concern has been transferred to partnership as a part of capital contribution. [CIT vs. R. Venkatachari (241 ITR 658 (Mad.)].
  6. Corollary to principles enunciated by SC in ALA firm (189 ITR 285), Opening stock of new firm which was constituted by some partners of dissolved firm is to be valued at market price. [V.S. Chandraprakasa Nadar & Co. vs. CIT (244 ITR 298 (Mad.)].
  7. To give effect to s. 145A, if there is any change in the closing stock at the end of the year then there must necessarily be a corresponding adjustment made in the opening stock of that year. – (CIT vs. Mahavir Alluminium Ltd (297 ITR 77 (Delhi)). / CIT vs. Mahalaxmi Glass (318 ITR 116 (Bom.))

Mutuality Concept

  1. On the principles of mutuality, surplus of contribution made by members of cement manufacturer association held not assessable as association’s income. [CIT vs. Cement Allocation & Co-ordinating Organisation (236 ITR 553 (Bom)].
  2. Transfer fees received by the assessee, whether from out going or incoming members, was not liable to tax on the Ground of mutually - Sind Co-operative Society v ITO (226 CTR 145 (Bom))
  3. Since object of contribution in form of non-occupation charges was for purpose of increasing society’s funds, which could be used for objects of society’s, non-occupancy charges were also not taxable in the hands of assessee being governed by principle of mutuality – Mittal Court Premises Co-operative Society Ltd. v. ITO. (184 Taxman 292 / 320 ITR 414 (Bom))
  1. TDR Premium received by a Co-operative housing Society from its members is exempt on ground of “mutuality” – (CIT v. Jaihind Co-operative Housing Society Ltd. (Bom) – 209 Taxman 163 (Bom))

PAN

Delay in allotting PAN - In a writ petition filed for non-allotment of Permanent Account Number by the Income-tax authorities, it was held that in the case of issuance of PAN number and card, the maximum period is three months from the date of application.[Chandrakant Kandlal Sheth vs. Union of India and Others, 255 ITR 407 (Cal.)]

Penalty

  1. Waiver u/s. 273A or u/s. 18B of W.T. Act may be made at one stroke for one or more assessment years but not again for the same assessee. [Ram Sarandashar Swaroop Mal & Anr. vs. CIT (186 ITR 503 (All); Surendra Prakash vs. C.W.T. (187 ITR 456 (All).
  2. The requirement of getting books of accounts audited could arise only where the books of accounts itself are not maintained. The assessee committing the default of not maintaining the books cannot be subjected to penalty for subsequent default of not carrying out the audit – (CIT v. S. K. Gupta & Co. (322 ITR 86 (All.))
  3. There is a distinction between an infraction of law committed in the carrying on of a lawful business and an infraction of law committed in a business inherently unlaw­ful and constituting a normal incident of it. Penalty for breach of Customs Act falls in the former case and is not deductible. (Garden Silk Weaving Factory vs. CIT (207 ITR 394 (Guj)).
  4. Penalty cannot be imposed u/s. 271(1)(c) where agreed assessment of cash credit is made as “undisclosed income” and department has failed to prove that amount is concealed income of the assessee. [Girdharilal Soni vs. CIT (179 ITR 111 (Cal)].
  5. Assessee having filed return previously, no penalty under s. 271 (1) (c) could be imposed by invoking Explanation. 3 for A.Y. 1997-98 – The amendment by the Finance Act, 2002 w.e.f. 1st April, 2003, by which the worlds “who has not previously been assessed under this Act” were omitted - would not apply to assessment year in question – (CIT vs. Smt. Lata Shatilal Shah - 221 CTR 778 (Bom))
  6. Legal opinion contained in tax audit Manual published by the Bombay Chartered Accountants Society constituted reasonable cause for the bona fide belief of the assessee that the provisions of s. 44AB are not applicable in its case and therefore, penalty under section 271B is not leviable. -
    (ITO v Sachinam Trust (21 DTR 1 (Guj.))
  7. Penalty under section 158BFA(2) is discretionary and not mandatory – (CIT vs. Dodsal Ltd (2009) 312 ITR 112 (Bom))
  8. Assessee having surrendered additional income along with an explanation in the revised return filed in pursuance of notice under section 148, and the assessing authority having not taken, any objection that the assessee’s explanation was not bona fide, penalty under section 271(1)(c) is not leviable. - (CIT vs. Rajiv Garg & Ors. (224 CTR 321 (P & H) / 313 ITR 256 (P& H))
  9. Assessee filing return and receiving notices of initiation of penalty proceedings. Penalty order was passed after death of assessee, the Court held that no penalty can be levied against legal representative. – (ACIT vs. Late Shrimant F. P. Gaekwad (313 ITR 192 (Guj.))
  10. Making a wrong claim of deduction in not at par with the concealment or giving inaccurate information – Hence no penalty can be levied u/s. 271(1)(c) – (CIT v. Shahabad Co-op. Sugar Mills Ltd. (322 ITR 73 (P&H))
  11. Loss suffered on sale of machinery was wrongly set off against profits of business. When the said mistake was realized, he accepted the decision of the Assessing Officer. In such circumstances, it cannot be said that the mistake committed in furnishing the inaccurate particulars due to negligence of the counsel was not a deliberate attempt to evade tax – (CIT v. Sidhartha Enterprises (322 ITR 80 (P&H))
  12. The change in the year of taxability would not call for penalty action u/s. 271(1)(c) – (CIT v. National Mining Co. 311 ITR 289 (P&H))
  13. Prior to A.Y. 2003-04, the provisions of expln. 3 to S. 271(1)(c) is not applicable to existing assessees and non-furnishing of the return would not tantamount to concealment of particulars of income by an existing assessee and penalty u/s. 271(1)(c) cannot be levied. – (CIT v. Smt. Lata Shatilal Shah 323 ITR 297 (Bom))
  14. When the surrender of income is made on condition that no penalty would be levied and the department has no other evidence of concealment of income, no penalty is leviable in such case - CIT v. Subhash Kumar Jain 335 ITR 364 (P&H)
  15. Repayment of loans or deposits otherwise than by account payee cheque or draft and repayment by debit of account through journal entries  contravenes provision of s. 269T and hence penalty provisions are applicable. But the Court held that the penalty can be avoided on showing reasonable cause.- CIT v. Triumpth International Finance (I) Ltd  - 345 ITR 270 (Bom)
  16. Only if payee fails to pay tax directly, the payer can be held to be in default. If the tax is paid by payee, the liability of payer is only for interest and penalty – Jagran Prakashan Ltd v. DCIT 345 ITR 288 (All)
  17. If a wrong claim is due to mistake of a Chartered Accountant or a tax consultant, no penalty can be levied on the Assessee – CIT v. Somany Evergreen Knits Ltd. (Bom) (Unreported)
  18. If income is not offered due to inadvertent mistake of the Assessee, no penalty can be levied on the addition made  - CIT v. Bennet Coleman & Co. Ltd. (Bom) (Unreported)
  19. If the quantum appeal is admitted by the High Court, it amounts to debatable issue and hence penalty cannot be levied on such addition admitted by High Court – CIT v. Liquid Investment Trading Co. (Del) (Unreported)
  20. If the Assessee does not offer income under the bonafide belief that the same was not taxable and upon query of the Assessing Officer, the assessee immediately offered that amount to tax, no penalty should be levied. Ignorance of law caused by complicated provisions of the Act amounts to bonafide belief – CIT v. Hans Christian Gass (Bom) (Unreported)

Powers and Duties of Tribunal

  1. If Tribunal holds an expenditure to be capital expenditure, it is duty of Tribunal, even without an alternative submission, to pass necessary consequential orders suo motu for allowing development rebate and depreciation (Ciba of India Ltd. vs. CIT (202 ITR 1 (Bom)).
  2. Tribunal has power to grant relief even though no specific appeal or cross-objection was filed by the assessee, however, such relief was claimed before the Assessing Officer. - (CIT vs. Smt. S. Vijayalaxmi (242 ITR 46 (Mad))

Powers of A.O.

Existence of pending proceedings is a condition precedent to exer­cise of power u/s. 131(1) by the Assessing Officer. (Smt. Rina Sen vs. C.I.T [1999] 235 ITR 219 (225-226) Pat.) / Jamnadas Madhavji & Co. Ltd. vs. I.T.O. (162 ITR 331 (Bom.))

Prosecution

  1. A company being a juristic person cannot be prosecuted u/s. 276B. The prin­cipal officer of the Co. is liable for prosecution. (Adding Machine (India) Private Limited vs. State (167 ITR 171 (Cal.))
  2. In view of existing guidelines issued by the CBDT, where an accused is more than seventy years of age, any prosecution against him should be dropped. (Kishan Lal vs. UOI (179 ITR 206 (All)

Reassessment

  1. Change of opinion not justified even after the amended provision of section 147 w.e.f. 1/4/1989 (CIT vs. Kelvinator of India Ltd. (256 ITR 1 (Del.) (FB))
  2. If the explanation of assessee is accepted in original assessment and the same is rejected in the re-assessment proceedings, it would amount to change of opinion which is not permissible and that hence such assessment is liable to be quashed – (M.J. Pharmaceticals Ltd. v. DCIT – (297 ITR 119 (Bom) / Asteroids Trading and Investments P.  Ltd. v. DCIT – (308 ITR 190 (Bom.) / Asian Paints Ltd. v. DCIT (308 ITR 195 (Bom.))
  3. Reopening after four years where assessment completed u/s. 143(3) and where there was no failure on part of assessee to disclose fully and truly all material facts, is bad in law (Bhor Industries Ltd. vs. ACIT (183 CTR (Bom) 248 / Parikh Petrol Chem. Agencies (P.) Ltd. v. ACIT (129 Taxman 574 (Bom) / CIT vs. Maharashtra Sugar Mills Ltd. (263 ITR 180 (Bom) / Caprihans India Ltd. v. Dy. CIT (132 Taxman 123 (Bom)).
  4. In absence of new material to form a belief that the assessee’s income for the relevant year had escaped assessment, other than the facts disclosed by the assessee before the Assessing Officer during earlier years, reopening of assessment was not valid. The Assessing Officer merely relied upon the audit objection – (Purity Techtextile (P) Ltd. V. ACIT (230 CTR 157 (Bom.))
  5. The validity of the re-assessment has to be seen on the face of the reasons recorded and cannot be supported by the affidavit. What is written in the reasons recorded can only be seen and not beyond that. - Aayojan Developers v. ITO 335 ITR 234 (Guj.)
  6. Reopening on the basis of subsequent Supreme court decision is not valid – (CIT vs. Ramchandran Hatcheries (215 CTR 370 (Mad))
  7. The CIT’s Sanction u/s. 148/151 if mechanical and without reasons is invalid.– (The Central India Electric Supply Co. Ltd. v. CIT 333 ITR 237 (Del))
  8. In the present case, the notice based on report from DIT that credit entry in accounts of assessee was an accommodation entry. Before reopening, the Assessing Officer did not examine the evidence received from DIT. It was held that the notice u/s. 148 was not valid  – Signature Hotels P. Ltd. v. ITO 338 ITR 51 (Del)
  9. Reopening of assessment based on revenue audit objection is invalid – Vijay Rameshbhai Gupta (Guj.) (Unreported) / ICICI Home Finance Co. Ltd. c. ACIT 114 Tax LR 2724 (Bom))
  10. Unless there is fresh material available with the Assessing Officer, even the return which is accepted vide intimation u/s. 143(1) cannot be reopened – CIT v. Orient Craft Ltd. (Del) (Unreported)

Rectification

  1. ITO can rectify order in respect of matters not the subject matter of appeal, there is merger of his order in that of AAC’s only in respect of matters which were the subject matter of appeal. (CIT vs. K.P. Subbarama Sastrigal & Others (203 ITR 342 (Ker)). / Mitsubishi Corporation v. CIT 337 ITR 498 (Del).
  2. Tribunal cannot amend its order because it failed to consider arguments as this is not a mistake apparent from record. (CIT vs. Ramesh Electric & Trading Co. (203 ITR 497(Bom)).
  3. Where the Tribunal refers to any decision not referred to in the course of arguments or in the order of lower authorities, it would render the order liable for rectification u/s. 254(2). Lakhmini Deval Das vs. ITO (84 ITR 649 (Cal.)
  4. The Appellate Tribunal need not blindly follow the earlier decision if it did not reflect the correct position in law – (CIT v. Hi Tech Arai Ltd. (321 ITR 477 (Mad.))
  5. Issue whether the deduction u/s. 80-IB in respect of Duty Drawback is available is a debatable issue and hence no rectification is permitted – (CIT v. TTK Prestige Ltd. 322 ITR 390 (Karn))
  6. The assessment based on the Supreme Court decision cannot be rectified on subsequent retrospective amendment of law – (Shriram Chits (Bang) Ltd. v. JCIT 325 ITR 219 / 233 CTR 199 (Kar.))
  7. The Tribunal, while passing a judgement, relied upon an order without giving an opportunity to either parties. The order of tribunal is said to be suffering from mistake apparent on record u/s. 254 – (Inventure Growth and Securities Ltd. v. ITAT 324 ITR 319 (Bom) / Naresh K. Pahuja v. ITO 224 CTR 284 (Bom.))

Refund

  1. Adjustment of refund without giving prior intimation to the assessee u/s. 245 is illegal. (J.K. Industries Ltd. vs. CIT (238 ITR 820 (Cal)).
  2. A.O. is entitled to determine quantum of refund also in a regular assessment. (CIT vs. Bakelite Hylam Ltd. (237 ITR 392 (AP)).

Relief

Assessee was not entitled to full relief u/s 91 as deduction of 50% was allowed to him u/s. 80RRA. Relief u/s 91 is available only in respect of income which is subjected to double taxation. (CIT vs. M.A. Mois (210 ITR 284 (AP)).

Revised Return

A revised return can be filed only if there was any omission, mistake or wrong statement in the original re­turn. Otherwise it would not fall within the ambit of S. 139(5) (Sunanda Ram Deka vs. CIT (210 ITR 988 (Gau)).

Salary Income

  1. For perquisite valuation u/r. 3(a)(iii), fair rental value of accommodation is to be determined with reference to standard rent payable under Rent Control Act. (M.A.E. Paes vs. CIT (230 ITR 60 (Bom.)).
  2. Power given to Board to identify ‘fringe benefit’ and ‘amenity’ cannot be challenged on ground that it is unguided, arbitrary and such powers suffers from vice of excessive delegation (BHEL Employees’ Association vs. Union of India (261 ITR 15 (Kar); Aditya Cement Staff Club vs. Union of India (131 Taxman 609 (Raj) / P. N. Tiwari vs. Union of India (133 Taxman 482 (All))

Scientific Research

Expenditure on approach road to research laboratories was expenditure of scientific nature and entitled for deduction u/s. 35 notwithstanding that the road may be used for other purposes (CIT vs. Sandoz India Ltd. (206 ITR 385 (Bom)).

Search and Seizure

  1. Immovable property cannot be seized in proceedings u/s. 132. (Nand Kishore Mangharani vs. DIT (Invs.) (210 ITR 1071 (All)).
  2. Assessment made based on search warrant issued in the name of dead person held to be invalid – (CIT vs. Rakesh Kumar (313 ITR 305 (P & H)) (SLP rejected (2009) 313 ITR 29 (ST))

Settlement Commission

Principles laid down in CIT vs. ITSC (246 ITR 63 (Bom) -

  1. Legality of Settlement Commission’s order u/s. 245D(1) could always be examined in writ jurisdiction while examining ultimate final order passed by Settlement Commission u/s. 245D(4).  
  2. While passing order u/s. 245D(4) Settlement Commission is obliged to take into account the report submitted by Commissioner u/s. 245D(1)/(3). 
  3. Mere co-operation of an assessee could not be basis or criteria for granting immunity from prosecution and penalty; it is obligatory on the part of Settlement Commission to address itself on question as to whether full and true disclosure of income and mode and manner in which such income had been derived had been done by the applicant or not.

Survey

Documents cannot be impounded u/s. 133A. Once survey operation is started during the business hours, it may continue even after business hours. (N.K. Mohnot vs. DCIT ( 215 ITR 275 (Mad)).

Set off and Carry Forward of Losses

  • The expression ‘be entitled to’ in S. 71 does not mean that an assessee has an option in the matter of set off of business loss against income under any other head. (CIT vs. British Insulated Calendars Ltd. (202 ITR 354 (Bom). Also see CIT vs. Mahendra Kanhiyalal (HUF)  202 ITR 701 (Guj) for a different view).
  • Loss from share trading activity has to be first considered and set off against the other business income in order to determine what the gross total income comprises off. If the gross total income, after such set off comprises of income from other heads, the Explanation to s. 73 would not apply - CIT vs. Darshan Securities Pvt. Ltd (341 ITR 556 (Bom))
  • Deeming provisions of s. 73 applies to the entire business and hence once it is proved that part of the business involves in purchase and sale of shares, the entire resultant profit or loss has to be treated as part of the speculative business and not only the part of it – CIT v. Loma Newspapers P. Ltd. (322 ITR 43 (Bom))

Tax Clearance (TC) u/s. 230(1)

Person giving guarantee for TC u/s. 230(1) can be held liable only for taxes o/s on date of departure and not for liabilities arising long thereafter. (Laura Hamilton vs. V.S.K.P. Menon, TRO (184 ITR 252 (Bom)).

Tax Collection at Source

  1. Tax is recoverable on price paid; i.e., inclusive of excise duty — Vinod Rathore vs. Union of India & Ors. (278 ITR 122 (MP). Note : Principle laid down in this decision may equally apply to tax deduction at source (TDS) and TDS may be required to be deducted on amounts inclusive of Service Tax and other taxes.
  2. For the purpose of TCS, price would include price inclusive of excise duty – (Vinod Rathore v. Union of India (278 ITR 122 (MP)).

Tax Deduction at Source

  1. Payments made by the assessee to the employees employed by it on daily wage basis cannot be said to be a contractual payment, as such the assessee in such cases was not required to deduct tax from such payments u/s. 194C of the Act – (CIT vs. Dewan Chand (17 DTR 337 (Del.))
  2. No deduction of Tax at Source required where remittance to non-resident was only for reimbursement of expenditure incurred by the non-resident [CIT vs. TELCO Ltd. (245 ITR 823].
  3. Discount given by the State Government to stamp vendors is not commission or brokerage and is not liable to TDS u/s. 194H – Kerala Stamp Vendors Association v. Officer of the Accountant-General (282 ITR 7 (Ker))
  4. Printing of labels as per assessee’s specifications amounts to sale and not a works contract liable to TDS u/s. 194C – (BDA Ltd. v. ITO (281 ITR 99 (Bom) / CIT v. Dabur India Ltd. (198 CTR 375 (Del)).
  5. Assessee being a C & F agent, collected freight charges from exporters who intended to send goods through a particular airline and paid amount to airline or its general agents. For such services rendered, assessee charged commission from airlines. Since contract was actually between exporter and airline and assessee was only an intermediary, assessee was not liable to deduct tax u/s. 194C – (CIT v Cargo Linkers 179 Taxmann 151 (Delhi))
  6. Once a decree is passed, it is a judgement and order of the Court which culminates into final decree being passed which has to be discharged only on payment of amount due under the said Decree and therefore the judgement debtor is not liable to TDS on interest component of decree – (Madhsudan Srikrishna v Emkay Exports  188 Taxman 195 (Bom.))
  7. Transfer pricing provisions would not be attracted to the contribution of shares of India Company if the contribution of shares to its subsidiary company is without any consideration. As no capital gains are chargeable, the provisions for withholding tax would not be applicable – (Amiamit International Holdings Ltd., in Re (230 CTR 19 / 35 DTR 178 (AAR))
  8. The words, “carrying out any work” in S. 194 C are limited to any work which, on being carried out, culminates in to a product or result. If the assessee renders services to its customers do not involve carrying out any work which result into production of the desired object, it would be outside the preview of s. 194C. – (The east India Hotels v. Central Board of Direct Taxes (223 CTR 133 (Bom))
  9. “Transaction charges” paid to BSE is “fees for technical services” u/s 194-J and hence liable to TDS. Non-deduction or non-payment of such TDS results in disallowance of deduction u/s. 40(a)(ia). However, since in this case, the department and the assessee, both were unaware of the correct position in law for years, the Court held that no disallowance may be made in such bonafide cases - CIT vs. Kotak Securities Limited (340 ITR 333 (Bom))

Trust

Income of trust carrying on business is not the income of trustees and it belongs to the beneficiaries.(K. T. Doctor 124 ITR 501 (Guj.).

Valuation of Stock

Value of Closing Stock of dissolved firm if taken at market price, then value of Opening Stock of reconstituted firm should be taken at market price. [V.S. Chandraprakasa Nadar & Co. vs. CIT (244 ITR 298 (Mad)].

Writ

Writ cannot be issued if there is an adequate alternate remedy under the Income-tax Act. (Surya Restaurant vs. UOI (211 ITR 63 (MP)).

WEALTH-TAX (W.T.)

Association of Persons (AOP)

  1. AOP (except Trustees) not liable for W.T. Clubs held not liable to W.T. (Orient Club vs. WTO (123 ITR 395 (Guj); Orient Club vs. CWT (136 ITR 697 (Bom) & Willingdon Sports Club v. C.B. Patil, Addl. WTO (137 ITR 83 (Bom))
  2. Mere possession or joint possession unaccompanied by the right to be in possession or ownership of property would not bring the property within the definition of net wealth for it would not have been an asset belonging to the assessee. (CIT v. Smt. Badhurani Deepinder Kaur & Others - 262 ITR 403 (P&H)).

Assets

  1. An incomplete building under construction is not an asset and is not liable to WT as it neither falls within the definition of a building nor within the purview of ‘Urban Land’. – (CIT v. Neena Jain Smt. (330 ITR 157 (P&H))

Debts owed

  1. Security deposit received against the lease of chargeable property is debt owned and that the deposit invested in securities exempt from wealth-tax is not relevant. The said debt is deductible while computing the net wealth – (Miss Deanna J. Jeejeebhoy v. WTO 330 ITR 149 (Bom))

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