2. Appeal – Dismissal of an appeal by High Court by a Non Speaking Order – S. 260A

The Supreme Court remanded back the matter to the High Court for fresh consideration on merits as the High Court had merely dismissed the appeal of the assessee stating that no substantial question of law arises, without passing a speaking order.

Speed Lines (P) Ltd. vs. CIT (2008) 214 CTR 13 (SC)

3. Business Expenditure – Allowability of Finance Charges – S. 37

Assessee established phosphoric acid project as an extension to its present business activities and for that purpose obtained foreign currency loan from IDBI which in turn was refinanced by COFACE subject to the assessee paying finance charges to COFACE which according to the assessee was similar to payment of interest. The Department disallowed the said item on the ground that finance charges paid to COFACE on foreign currency loan was in the nature of interest and commitment charges and since the charges have been paid in relation to the project of manufacturing phosphoric acid which did not commence production during the assessment year under consideration, the expenses incurred were capital in nature. The Department also placed reliance in this connection on Explanation 8 to section 43(1) of the Income-tax Act, 1961. The Apex Court held thus:

"On facts and circumstances of this case, once the Department equated the charges payable to COFACE with interest, our judgment in the case of Dy. Commr. of Income Tax, Ahmedabad vs. Core Health Care Ltd. in Civil Appeal Nos. 3952-55 of 2002 comes in. Accordingly, the said question No. (2) is also answered in favour of the assessee and against the Department."

DCIT vs. Gujarat Alkalies & Chemicals Ltd. [(2008) 10 RC 374] (2008) 167 Taxman 203 (SC)

4. Business Expenditure – Commitment Charges – S. 37

Assessee had borrowed Rs. 30 crores (approximately) from IDBI which in turn was refinanced by COFACE which foreign company had charged interest, commitment charges and insurance charges payable by the assessee. The said "commitment charges" was upfront payment. The Apex Court following its earlier decision in the case of Addl. CIT vs. Akkamamba Textiles Ltd. (227 ITR 464) and CIT vs. Sivakami Mills Ltd. (227 ITR 465) held that "commitment charges" can be allowed as deduction under section 37.

JCIT vs. United Phosphorus Ltd. (2008) 10 RC 365

5. Business Expenditure – Interest – S. 37

Where the assessee had purchased land and building and demolished the building and sold the scrap and offered it as business income, the Supreme Court held that interest paid for delay in paying the consideration would be allowed as business expenditure in view of the fact that the department itself has charged the income as business income.

Kerala Road Lines vs. CIT (2008) 299 ITR 343 (SC)

6. Depreciation – Option to claim – Block of Assets – S. 32(1), 34(1)

Section 34(1) of the Income-tax Act, 1961 (for short, "1961 Act") has been omitted w.e.f. 1-4-1988. Therefore, remanded the matter back to the High Court after setting aside the impugned order of the High Court on this question, with the direction to the High Court to consider: whether the assessee has an option in law to claim partial depreciation in respect of block of assets. In the case of Mahendra Mills (supra) the concept of block of assets was not there. In view of the Hon’ble Apex Court, substantial question of law did arise for determination before the High Court under section 260A of the 1961 Act, particularly when section 34(1) of the 1961 Act stood omitted w.e.f. 1-4-1988. The High Court is also requested to consider whether the judgment of this Court in the case of Mahendra Mills (supra) would apply to the assessment years under consideration. In this connection the High Court is also requested to take into account the scope of Explanation 5 to section 32(1) of the 1961 Act, made by the Finance
Act, 2001.

JCIT vs. United Phosphorus Ltd. [(2008) 10 RC 365] 299 ITR 9

7. Export – Deduction – S. 80HHC (3)(b)

Assessee engaged in business of export of ‘trading goods’; as per provisions, exporter of trading goods entitled to deduction in respect of export turnover as reduced by direct costs and indirect costs attributable to such export. Assessee claimed 10% adjustment of export incentive against indirect cost of trading goods while allowing deduction under section 80HHC of Act. Claim disallowed by authorities as well as High Court. Hence, present appeal.

Held, ‘Attributable’ mentioned in section 80HHC(3)(b) of Act indicates that apportionment (principle of attribution) not omitted from section 80HHC(3)(b) of Act. Accordingly, assessee entitled to claim deduction of expenses incurred by him from export turnover. Estimated 10% adjustment rightly calculated. Thus, assessee’s claim for 10% adjustment of export incentive against indirect costs attributable to such exports justified and allowed. Order of High Court set aside, appeal allowed.

Hero Exports vs. CIT [(2008) 10 RC 103]

8. Export – S. 80HHC

The amendment by the Finance (No. 2) Act, 1991, in section 80HHC to the effect that business profit will not include receipts by way of brokerage, commission, interest, service charges, etc., is only prospective and not retrospective in nature. Order of High Court set aside and appeal allowed.

K. K. Doshi and Co. vs. CIT (2008) 297 ITR 38 (SC), 215 CTR 114

9. Export of tea – S. 80HHC

The Supreme Court held that deduction under section 80HHC was to be allowed only after the appropriation of the income from tea under rule 8(1) of the Income Tax Rules and not on the total income.

The Supreme Court further held that important word in section 80HHC are "profits derived from export". The word derived would mean derived from the source. The source has to be in section 14. Income covered by section 10(1); i.e., agricultural income which is not chargeable to tax, does not fall under section 14 and therefore will not fall under the various computation sections; i.e., sections 15 to 59.

CIT vs. Williamson Financial Services (2008) 297 ITR 17 (SC)

10. Gross Total Income – Deduction under Chapter VIA – S, 80AB

The Supreme Court held that loss from one division is required to be set off with the profit of another division before determining the gross total income on which deduction under Chapter VIA could be claimed. And if the effect of the adjustment is that the gross total income is nil then the assessee is not entitled to claim any deduction under Chapter VIA .

The Supreme Court further held that it is well settled that where the majority of High Courts have taken a certain view on the interpretations of certain provisions, the Supreme Court should lean in favour of that view.

Synco Industries Limited vs. Assessing Officer (2008)299 ITR 444 (SC)

11. Interest – S. 36(1)(iii)

Interest paid in respect of borrowings on capital assets not put to use in the concerned financial year is allowable deduction under section 36(1)(iii) as covered by DCIT vs. Core Health Care 215 CTR 1 (SC).

CIT vs. Ishwar Bhuvan Hotels Ltd. 215 CTR 14 (SC)

Section 36(1)(iii) is a code in itself and has to be read in its own terms. Prior to the insertion of the proviso by the Finance Act, 2003, section 36(1)(iii) made no distinction between moneys borrowed to acquire a capital asset or a revenue asset. All that the section required was that the assessee must borrow capital and the purpose of borrowing must be for the purpose of business carried on by the assessee in the year. Unlike in section 37 where an expenditure of capital nature is expressly excluded, there is no such restriction under section 36(1)(iii).

Accordingly, the Supreme Court held that prior to the amendment; the assessee was entitled to the deduction in relation to moneys borrowed for the purpose of machinery even though the assessee had not used the machinery in the year of borrowing.

DCIT vs. Core Health Care Limited (2008) 298 ITR 194 (SC), (2008) 215 CTR 1

12. Perquisites – Employees stock option – S. 17(ii)

Under the scheme warrants were issued to the employees and the employees had to retain the warrant for a minimum of 12 months and then the shares were allotted for a consideration which was again subject to the lock in period during which it was held in the trust only. The Supreme Court held that the issue of warrant was mere a right without an obligation to buy and therefore "perquisite" could not be said to have accrued at the time when warrants were granted. And as the shares were having a lock in period the benefit which arose on the date when the option stood exercised was only a notional benefit whose value was unascertainable and therefore not taxable.

The Supreme Court further held that sub clause (iiia) of section 17(2) which was inserted w.e.f. April 1, 2000, was prospective and could not be held to be retrospective.

CIT vs. Infosys Technology Ltd. (2008) 297
ITR 167 (SC), (2008) 214 CTR 293, (2008) 168 Taxman 204

13. Search & Seizure – Moneys in the bank account is not equivalent to cash cannot be impounded – S. 132

The Supreme Court held that cash in bank is conceptually different from cash in hand and it is not permissible for the department to convert asset to cash and thereafter impound it in case of search conducted under section 132 of the Act.

The relationship between the banker and the customer is not that of trustee and beneficiary but is one of debtor and creditor.

K. C. C. Software Limited vs. DIT (Investigation) (2008) 298 ITR 1 (SC), (2008) 214 CTR 553

14. Search & Seizure – Surcharge in case of search and seizure matter – S. 158BB, 113

The Supreme Court held that surcharge is leviable even in cases of block assessments under section 158BB. It further held that the proviso to section 113 inserted by the Finance Act 2002, is clarificatory in nature and therefore would not change the position prior to the insertion of the proviso.

CIT vs. Suresh N. Gupta (2008) 297 ITR 322 (SC), 214 CTR 274

15. Summons – Business – Inference by the Assessing Officer – S. 131

The question before the AO was whether the assessee is a trader or a commission agent. The AO summoned five parties who were in the state, but could not summon other 5 which were outside the State. The five parties within the State came and gave the evidence that the assessee is a commission agent. On the basis of the fact that the other five did not give any evidence the AO took the view that the assessee is a trader. The Supreme Court held that the fact that other five parties did not give any evidence would not allow the AO to draw the inference that the assessee is a trader and that the assessee could not be held responsible for the non appearance of the other 5 traders.

Anish Ahmad and Sons vs. CIT (2008) 297 ITR 441 (SC), (2008) 214 CTR 457