Landmark Cases (Selected Cases)

Direct Taxes

Interpretation of Statutes

In Padmasundara Rao (Decd.) vs. State of Tamil Nadu [2002] 255 ITR 147, the Supreme Court pointed out that the plain language of the statute is best understood as the declaration of the intention of the Legislature. The court cannot seek to supply omissions as such an attempt would tantamount to power to legislate, which it does not have. The plain inference cannot be dismissed on the ground that it would be unreasonable or that the language is contrary to the obvious intention of the Legislature. An example, where this salutary principle will be of great assistance, is in respect of penalty cases where Explanation to section 271(1)(c) is plain enough to avoid all possible controversies.

Agricultural Income

The locus classicus on the subject is the decision of the Supreme Court in CIT vs. Raja Benoy Kumar Sahas Roy [1957] 32 ITR 466, which has laid down the guidelines on the subject after elaborate review of the precedents and the law lexicons. Agriculture in its primary sense means cultivation of land. Cultivation involves both basic and subsequent operations. Basic operations are tilling, sowing, planting, etc. involving application of human labour and skill upon the land itself. Subsequent operations are weeding, protection from insects and pests, tilling, pruning and harvesting. Mere rendering of subsequent operations by themselves would not lead to the inference of agricultural income. The nature of the produce itself would also not be a relevant factor, so that even income from growth of commercial crops would not take away the character of agricultural income. It is not all activities connected with land which can give rise to the inference of agricultural income, so that income from livestock breeding, dairy farming, poultry farm etc. cannot constitute agricultural income. Where the issue, whether exemption is claimed in respect of agricultural lands either for capital gains tax or wealth tax, it cannot be forgotten that agricultural lands or those lands from which agricultural income is derived by agricultural operation carried on by the assessee in these lands in which he has interest.

Hindu Law

The principle of law applicable in this case is that so long as HUF property remains in the hands of a single person, it was to be treated as a separate property and, thus, he would be entitled to dispose of the coparcenary property as the same were his separate property. But if a son is subsequently born to him or adopted by him, the alienation whether it is by way of sale, mortgage or gift, will nevertheless stand, for a son cannot object to alienations so made by his father before he was born or begotten — C. Krishna Prasad vs. CIT [1975] 1 SCC 160. Once a son is born, it becomes a coparcenary property and he would acquire an interest therein. — Sheela Devi vs. Lalchand [2006] 157 Taxman 527 (SC).

It follows that the status in respect of the income from property will be HUF once the individual gets married settling a long-standing controversy in this regard. After Hindu Succession (Amendment) Act, 2005, a daughter would also acquire interest in the property on her birth.

Benami Transactions

Money is sent by a non-resident brother to his brothers in India for the purchase of property in his name, but the resident brothers purchased the property in their own names. Non-resident brother’s suit for possession was decreed by the lower court and appeal was also dismissed by the High Court and the special leave application was also dismissed by the Supreme Court. An execution application was filed on April 7, 1998, by which time the new law had intervened. Though it was allowed by the lower court overruling the objection based upon the Act, the High Court allowed the same in the view that the operation was retroactive. But the Supreme Court found for more than one reason that the decision of the High Court was erroneous. The executing court cannot go behind the decree of a court of competent jurisdiction. The Supreme Court had already decided in Rajagopal Reddy’s case that what is already found by a competent court before the law stands concluded. It was further found that the resident-brothers held the property in trust for the non-resident brother so that it could not also be covered by the benami prohibition law. Hence, in any view, execution had to be ordered. This decision tries to undo the mischief created by the inference that the law could be retrospective. — C. Gangacharan vs. C. Narayanan [2000] 242 ITR 126 (SC).

Circulars

It is true that a circular cannot override a judgment of the court. All the same, benevolent circulars were treated as binding not because the courts themselves found them to be binding on them, but the Assessing Officer was so bound and it was the duty of the Court to enforce compliance. In fact, section 119 stipulates that the authorities and persons employed in the execution of the Act “shall observe and follow such orders, instructions and directions of the Board”. This law had been explained in the case of UCO Bank vs. CIT [1999] 237 ITR 889 (SC).

Evidence

Burden of proof in income-tax matters, on question of facts, ordinarily lies on the tax-payer since he alone has access to the information relevant to his assessment. Where the tax-payer makes an admission during survey or search or even otherwise, should such admission so bind him to be incapable of retraction? Ordinarily a statement made before the officer cannot be presumed to be made under compulsion, because all official acts including the act of recording such statement should be presumed to have been done honestly. Such statements are often recorded under some compulsion is evident from the complaints recorded and accepted by Chelliah Committee which recommended that such recording of admission should be made before a lawyer [1992] 197 ITR (St.) 99 at 134.

Privy Council in Bhuboni Sahu vs. The King [AIR 1949 PC 1257] had pointed out to this tendency on the part of officials to extort confession by intimidation and coercion and required independent corroboration for such confession, a view which has been endorsed by the Supreme Court in Kashmira Singh vs. State of MP [AIR 1952 SC 159]. The prevalence of forced confession has now been recognized by the Finance Minister himself in the course of his Budget Speech, 2003 and followed up by a Board Circular No. 286/2/2003-IT(Inv.) dated 10-3-2003 requiring the Assessing Officers to avoid such compulsion. The Supreme Court in P. R. Metrani vs. CIT (2006) 287 ITR 209 (SC) held that the presumption under section 132(4A) is limited for purpose of seizure and that final assessment will rest on the finding of all relevant materials. In the light of this law, what would be the effect of section 292C inserted by the Finance Act, 2007 with retrospective effect from 1st October, 1975 making the presumption available under section 132(4A) applicable for all proceedings viz., assessment, penalty and prosecution. Does this provision neutralise the Supreme Court decision in Metrani’s case (supra)?

Theory of Legitimate Expectation

A principle similar to promissory estoppel for rendering justice is one of theory of legitimate expectation, which has also found its way to the tax laws in India as in Harshad Shantilal Mehta vs. Custodian [1998] 231 ITR 871 (SC) discussed in Income-tax Reports [1998] 232 ITR (Journal) 53. The theory of promissory estoppel has its foundation in English case in Central London Property Trust Ltd. vs. High Trees House Ltd. [1956] 1 All. ER 256 (KB), while theory of legitimate expectation also known as Wednesbury principle from another English decision in Associated Provincial Picture Houses Ltd. vs. Wednesbury Corporation [1948] 1 KB 223.

There is scope for application of the principle of promissory estoppel in matters of assurance by persons who are competent to give them, as in matters of promise to drop penalty proceedings, if addition is conceded, so as to require application of promissory estoppel. Theory of legitimate expectation will be applicable when authorities behave in an erratic manner contrary to normal expectation as in matters of requests for adjournment or for stay of disputed demand or against generally expected behaviour.

The expectation that the authorities would act in the same manner as they have been acting in other cases had come up in Mint Panchseel Colony vs. CIT [2005] 278 ITR 640 (All), where the Commissioner declined to condone the delay in the receipt of convertible foreign exchange but had condoned similar delay in another case, as was pointed out by the assessee, in identical circumstances. On a petition, the High Court found that the action of the Commissioner was discriminatory, so that the matter was remitted back to him for a decision in accordance with law after opportunity to the tax-payer. It is a case where theory of legitimate expectation recognised in a number of excise and sales tax cases was applied without specific reference to it. Cases where consistency is desired could be treated as covered by this principle. There is no reason why this principle in administrative law should not be applicable to the Tribunal.

Pre-commencement Receipt

An important decision has been rendered by the Supreme Court in CIT vs. Bokaro Steel Ltd. [1999] 236 ITR 315 dealing with an issue of receipt in a business which is yet to be set up. In the matter of interest received on short-term deposits, the Supreme Court had earlier decided in Tuticorin Alkali Chemicals and Fertilizers Ltd. vs. CIT [1997] 227 ITR 172 that it had to be assessed as income and could not be treated as an abatement of capital cost as claimed on the basis of converse inference from a decision of the Supreme Court in Challapalli Sugars Ltd. vs. CIT [1975] 98 ITR 167. But the Supreme Court in Bokaro Steel Ltd.’s case (supra) accepted assessee’s argument as regards miscellaneous receipts other than interest differing from the reasoning in Tuticorin Alkali Chemicals’ case (supra). The issue relating to interest did not come up before the Supreme Court but made a passing observation that the matter of interest is covered in Tuticorin Alkali Chemicals’ case. The reasoning in Bokaro Steel’s case was followed in CIT vs. Karnal Co-operative Sugar Mills Ltd. (2000) 243 ITR 1 (SC) and CIT vs. Karnataka Power Corporation (2001) 247 ITR 268 (SC) with Bongaigaon Refinery and Petrochemicals Ltd. (2001) 251 ITR 329 (SC) pointing out that in view of the later decisions “it is, therefore, no longer possible to take any view different from that taken in Bokaro Steel’s case”.

Principle of Mutuality

“Taint of commerciality” alone could vitiate the claim of mutuality as was later expressed as true test of what is taxable and what is not, in the decision of the Supreme Court in CIT vs. Bankipur Club Ltd. (1997) 226 ITR 97 (SC). In this case, the Supreme Court had approved the decision in CIT vs. Ranchi Club Ltd. (1992) 196 ITR 137 (Pat)(FB) quoting the following headnote from this case, which reads as under:

“. . . . that merely because the assessee-company had entered into transactions with non-members and earned profits out of transactions held with them, its right to claim exemption on the principle of mutuality in respect of transactions held by it with its members was not lost. The assessee was a mutual concern. The income derived by it from its house property let to its members and their guests and from the sale of liquor, etc., to its members and their guests was not taxable in its hands.”

One of the cases left to be decided by the Supreme Court in Bankipur Club’s case was one relating to Cawnpore Club Ltd’s case. The departmental appeal which was against the exemption of interest from bank deposit, was dismissed by the Supreme Court later in CIT vs. Cawnpore Club Ltd. (2004) 140 Taxman 378 (SC) in a short judgment, after observing that it did not consider it necessary to go into details, so that it can be construed that finality has been reached on this issue.

Technology transfer — Incidence of Tax

Technology has been understood as a capital asset in a number of cases by the Supreme Court as for example in Scientific Engineering House Pvt. Ltd. vs. CIT [1986] 157 ITR 86 (SC). This has also since been recognised by providing for depreciation for such intangible assets under section 32(1)(ii) as amended with effect from assessment year 1997-98. It follows that if such technology is transferred, there should be liability for capital gains tax. It was in this context, the AAR ruled in Pfizer Corporation, In re [2004] 271 ITR 101 (AAR), that such technology in the form of a dossier has to be treated as chattel and that being a capital asset, there is liability for capital gains tax, when such technology got transferred by termination of licence given to the company in India. Though it is a transfer by one non-resident foreign company to another, there could be liability under the Indian law, if the capital asset is situated in India. Since there was no Double Taxation Avoidance Agreement between India and Denmark, the liability has to be considered solely under the domestic law. Though the right over the capital gets extinguished on termination of licence, reverting to original owner in Panama, the situs of technical information in the facts of the case was not in India because the technology was contained in a dossier in Bangkok, so that the mere fact that it was the subject matter of agreement for use in India on proper licence, would not mean that the asset is located in India, so that it was not chargeable to tax in India. Since the place of right to use technology under the licence was in India, the ruling could have been different.

Charities and tied-up Grants

In Tirumala Tirupathi Devasthanam vs. CCIT [2001] 251 ITR 849 (AP), the High Court took notice of the fact that the Devasthanam was not only maintaining temples but also educational institutions, poor homes, children’s homes, hospitals, schools for the handicapped besides giving free food, free accommodation, medical relief, transport and other facilities for pilgrims without any distinction of caste or creed. The claim under section 80G on donations for the amounts received under different schemes for provision of food, accommodation, transport, etc. for all without discrimination was considered at the level of the Central Board of Direct Taxes which rejected the claim on the ground that the mixture of religious purpose with charitable purpose barred the relief. The High Court pointed out that each scheme was different and that the issue required consideration with reference to such schemes, where the fund under the scheme was not capable of being used for any other purpose for which it was framed. It is in the light of the same, the matter was remitted to the Commissioner for reconsideration of the application and disposal of the same. Such issues as covered in this case could be more easily resolved if section 80G is claimed for each of the schemes, so that ineligibility for any one scheme need not affect the exemption for any other schemes. It is because, each scheme can be considered as a separate trust, though administered by a common trustee. The decision of the Karnataka High Court in CIT vs. Karnataka Urban Infrastructure Development and Finance Corporation (2006) 284 ITR 582 (Kar) has taken similar view in the case of grants received by Government companies holding that interest in such funds made available by the Government should be treated as belonging to the Government, so as to require exclusion from the income of the company.

The doctrine of diversion by overriding title should justify the inference in these two decisions.

Schedular system of taxation — Property or Business?

An assessee had let out some portion of commercial space for use as table space with all facilities like security, power, water and other common amenities. The Assessing Officer had accepted the assessee’s claim to treat the receipt as business income but the Commissioner of Income-tax acting under section 263 remanded the matter for fresh consideration. But his order was taken up in appeal to the Tribunal. The Tribunal found that there was no case for presuming that the order of the Assessing Officer was in any manner prejudicial to revenue. The High Court, after elaborate review of the case law, reversed the finding of the Tribunal that the agreement was essentially one of tenancy and that the assessment of the income as business income was not correct on the basis of the finding that the primary intention to let out the premises was to get rent assessable as property income, but requiring the amount received to be split up between property income and other income relating to amenities as business income. The Supreme Court in Shambhu Investment P. Ltd. vs. CIT [2003] 263 ITR 143 (SC) endorsed the decision of the High Court not to interfere with the High Court’s judgment requiring the Assessing Officer to consider the nature of receipts afresh as directed by the Commissioner.

Expenses on leased land

Amount paid as premium for leasehold rights for 99 years is a capital expenditure and therefore not deductible as held by the Special Bench of the Tribunal in JT. CIT vs. Mukund Ltd. [2007] 291 ITR (AT) 249 (Mum)(SB). It cannot also be allowed on instalment basis distributing the payment during the period of lease. The claim for deduction of the entire amount on the basis of CIT vs. Madras Auto Service P. Ltd. [1998] 233 ITR 468 (SC) with reference to the special facts of the case, it was found, could have no application in the light of explanation of this decision by the High Court in CIT vs. Khimline Pumps Ltd. [2002] 258 ITR 459 (Bom).

Business loss or expenditure

Where stock is lost, such loss is a business loss. It was so held by the Supreme Court in Dr. T.A. Quereshi vs. CIT [2006] 287 ITR 547 (SC). The assessee’s loss was of stock of heroin as part of his stock of medicine and, therefore, seized, under the provisions of Narcotic Drugs and Psychotropic Substances Act, 1985. The High Court held, that such loss having occurred for infringement of law and specifically barred under Explanation to section 37 could not have been allowed as a deduction. In CIT vs. Piara Singh [1980] 124 ITR 40 (SC), the Supreme Court had ruled, that such loss would be admissible only against an illegal business, distinguishing its earlier decision in Haji Aziz and Abdul Shakoor Bros. vs. CIT [1961] 41 ITR 350 (SC), where such loss arising out of redemption fine in lieu of confiscation of illegally imported goods was disallowed against income of legitimate business. Assessee was, no doubt, committing a highly immoral act in stocking heroin. But then, moral considerations are not relevant in computation of business income. It was pointed out, that law is different from morality as pointed out by jurists like Bentham and Austin. The Supreme Court also referred to the precedent in CIT vs. S.N.A.S.A. Annamalai Chettiar [1972] 86 ITR 607 (SC), where it was pointed out, that business income is to be computed on the basis of ordinary principles of commercial accounting. Section 37 did not apply where business loss is concerned. Only where business expenditure is claimed, section 37 would be relevant.

This decision of the Supreme Court in Quereshi’s case (supra) is a watershed in development of income-tax law in distinguishing business loss from business expenditure to which alone the restrictive Explanation to section 37 would be applicable. Even the Explanation would have application for violation of law and not merely because the assessee’s activity, in the opinion of the authorities, is immoral. The correctness of the decision in Haji Aziz & Abdul Shakoor Bros.’ case (supra), was doubted by Mr. N.A. Palkhivala, expressing serious reservations and requiring reconsideration (p. 687 of Volume 1 of 8th Edition). The law would appear to get reconciled in Quereshi’s case. His objection that after Piara Singh’s case (supra) putting a person in illegal business to an advantage, may be understood, as neutralised, to a large extent.

Netting of Income — Whether Permissible?

A welcome decision after elaborate review of the precedents has been rendered in CIT vs. Shri Ram Honda Power Equipment [2007] 289 ITR 475 (Del), where it was decided that it could be only net interest, that could be excluded in computation of eligible profits under section 80HHC. The decision of the Supreme Court in Keshavji Ravji and Co. vs. CIT [1990] 183 ITR 1 (SC) rendered in the context of section 40(b) was relied upon. Notwithstanding the fact that the other part of the decisions, that even interest from captive deposits for obtaining loan for eligible activity is controversial, its finding that it is only the net interest would fall within the purview of Explanation (baa) should be welcome. It also disagreed with the decision in Rani Paliwal vs. CIT [2004] 268 ITR 220 (P&H) or CIT vs. V. Chinapandi [2006] 282 ITR 389 (Mad) in respect of computation of relief under section 80HHC.

Book Profits Tax

An important decision has been rendered by the Supreme Court in Apollo Tyres Ltd. vs. CIT [2002] 255 ITR 273 (SC), when it held that for the purpose of book profits, the only adjustments, that are permitted are those prescribed in the provision. Book profits are required to accord with the provisions of Parts II and III of Schedule VI of the Companies Act as computed by the Board of Directors, certified by the statutory auditors, adopted at the general meeting and filed before the Registrar of Companies, have to be accepted by the Assessing Officer as well. The Supreme Court pointed out that it is difficult to accept the proposition that the Assessing Officer can “rescrutinise these accounts and satisfy himself that these accounts have been maintained in accordance with the provisions of the Companies Act.” It further found that section 115J (later section 115JA now 115JB) does not empower the Assessing Officer to embark upon a fresh enquiry in regard to the entries made in the books of account of the company. It pointed out that the scheme of the Act is for adoption of the book profits as computed under company law. There cannot be two incomes, one for the company law and the other for book profit tax. If the law had the intention of authorising the Assessing Officer to recompute the income as per company law, it would not have made a cross reference to the provisions of the company law but would have used the words “the income of the company as accepted by the Assessing Officer”. It was in this context, it reversed the decision of the High Court while approving that of the Tribunal.

Reassessment Jurisdiction — How Questioned?

The law relating to the procedure, where jurisdiction is questioned by the assessee is well set after the decision in G.K.N. Driveshafts (India) Ltd. vs. ITO [2003] 259 ITR 19 (SC). An assessee, where he apprehends lack of jurisdiction, can ask for copy of the recorded reasons. Where there is such a request, it is the duty of the Assessing Officer to “furnish the reasons recorded in the assessment records....”. Even if a request is made after the return is filed, it has to be complied with. Assessee has then the right to object to the jurisdiction with reference to the recorded reasons. Where there is such an objection, it is the duty of the Assessing Officer to dispose of such objection by a speaking order before proceeding further with the matter.

The writ petition without raising objection to the Assessing Officer, when he had already communicated the reasons for issue of notice, was therefore dismissed as premature with an opportunity for the assessee to apply in case it becomes necessary as held in Arvind Mills Ltd. vs. Asst. CWT (No. 1) [2004] 270 ITR 467 (Guj); Tolins Rubbers vs. Asst. CIT [2004] 270 ITR 280 (Ker).

Revisional Jurisdiction

It is true that non-enquiry by itself may justify inference of prejudice to Revenue. But could it be said that merely because enquiry had been made, a finding cannot be found to be prejudicial if, in the opinion of the Commissioner, the finding is adverse to the interest of revenue. But the Supreme Court observed in Malabar Industrial Co Ltd. vs. CIT [2000] 243 ITR 83 (SC), that it is not every loss of revenue as a consequence of the Assessing Officer, that could be the subject matter of revision. Where there are two views equally plausible, the view taken by the Assessing Officer after due enquiry may not justify revision, so that jurisdiction could be taken as barred in such cases as held in CIT vs. Max India Ltd. (2004) 268 ITR 128 (P&H). The possibility of such two views should ordinarily be in relation to interpretation of law and not on inference on facts on which there should normally be only one view, if all the relevant facts have been gathered.

Where the Commissioner felt that the deduction should have been allowed in a year different from the year in which the Assessing Officer allowed the same, there is no prejudice to revenue as held in CIT vs. Bhanumati and Sons Trust (2004) 268 ITR 193 (Guj), where a matter is remanded by the Commissioner for verification of accounts, there is no finding, which should precede the assumption of jurisdiction, so that such an order was quashed by the High Court in B and A Plantations and Industries Ltd. vs. CIT (2007) 290 ITR 395 (Gau).

PENALTY

The Supreme Court, reversed the High Court decision laying down, after review of the law, the following prepositions in CIT vs. T. Ashok Pai [2007] 292 ITR 11 (SC).

1. Penalty proceedings are quasi-criminal in nature, so that the burden lies on the department to establish that assessee has concealed his income.

2. A finding in the assessment proceedings that there is an omission in income does not by itself lead to the inference that there is concealment, notwithstanding the fact that the omission may constitute a good evidence for concealment, but it is not conclusive.

3. Penalty proceedings are independent proceedings, where the matter has to be considered afresh from the angle required by law relating to penalty. Such law should be construed strictly in favour of the assessee; more stringent the law, more strict the construction that would be necessary.

4. The burden of proof placed on the assessee under the Explanation is subject to conditions therein. It is necessary that there should be an inference of concealment at the time of initiation of the proceedings.

5. Inference of mens rea that is necessary for concealment penalty, is essentially based on facts. Penalty has two components, one presenting conditions for imposition and the other for computation.

6. Where an assessee acts on legal advice, though wrong, the omission should be treated as bona fide with no deliberateness involved.

7. Even where a burden is placed on the tax-payer, such burden cannot be the same as that of prosecution as was decided in P.N. Krishna Lal vs. Government of Kerala [1995] Supp 2 SCC 187.

8. The omission of the word “deliberate” in the penalty provision is not of much significance, so as to change the law on penalties.

9. A mere omission or negligence does not constitute a deliberate act of suppressio veri or suggestio falsi even after the amendment to section 271(1)(c) made in the year 1964. There is no material change as to the nature of proceedings as decided in Addl. CIT vs. Jeevan Lal Sah [1994] 205 ITR 244 (SC) and K.C. Builders vs. Asst. CIT [2004] 265 ITR 562 (SC). Penalty provision under the income-tax law is not the same as provisions in commercial statute, where a breach or contravention is liable for punishment irrespective of the bona fides as provided in some cases of absolute liability, so that levy of penalty is not mandatory.

There has been another decision from the Supreme Court on these lines in Dilip N. Shroff vs. Jt.CIT (2007) 291 ITR 519 (SC), but in a Central Excise case, the Supreme Court in Union of India vs. Dharamendra Textile Processors (2007) 212 CTR (SC) 432, this decision has been referred to a larger bench as it is in conflict with the decision in SEBI vs. Shriram Mutual Fund (2006) 5 SCC 361.

Tribunal’s powers under section 254

Where the Tribunal omits to consider one of the grounds, it is bound to admit a Miscellaneous Petition under section 254 for entertaining the ground. Where it is so entertained, it would be necessary to give an opportunity by posting the case for hearing after notice both to the petitioner and the respondent as would be required in hearing the original appeal. Where the Tribunal admitted the petition, but disposed of the same on merits adversely at the time of hearing the miscellaneous petition under section 254 without giving an opportunity of hearing on merits of the issue, it was found that such an order of the Tribunal cannot be upheld in T. Jayabharathy vs. Asst. CIT [2007] 294 ITR 128 (Mad).

Source : Paper presented at Programme for Orientation & Training of New Members, Income Tax Appellate Tribunal, Mumbai, held from 12th November, 2007 to 28th November, 2007.