Gist of Imp jusgements & Tribunal orders reported in Oct

Gist Of Important Judgements & Tribunal Orders Reported in Oct 2007 Subject Index: Supreme Court 1. Interest awarded to the assessee by the High Court for illegal seizure of stock-in-trade of the assessee was converted to costs of Rs. 75,000/- towards the claim for interest 2. Lease rent paid by the lessee for acquiring leasehold rights for ten years to extract minerals is a capital expenditure High Court: 1. Block assessment – Undisclosed income is required to be computed on the basis of evidence found during the search or directly relatable to evidence found during the search 2. Penalty under section 271(1)(c) – Mere rejection of claim of the assessee – Does not amount to concealment 3. Income from undisclosed sources – Alleged understatement of sale consideration without proper enquiry – Additions not justified 4. Expenditure incurred on repairs and renovation of rented office premises are Revenue Expenditure 5. Profit – Profit and Loss Account of company certified by authorities under Companies Act –Binding on Assessing Officer 6. Clause (f) of section 43b arbitrary, unconscionable TRIBUNAL: 1. Book profit – Sec. 115JB – Deferred tax liability – Not to be increased by Explanation while computing book profit – A.Y. 2002-03 2. Book profit – S. 115JB – Tax paid on distributed dividend u/s. 115-O – Similar to Fringe Benefit Tax – Allowable as deduction while computing book profit – A.Y. 2004-05 3. Book profit – S. 115JA – Lease equalization charges – Does not amount to ‘reserve’ – Not to be added while computing book profit – A. Y. 1998-99 4.Capital gains – Ss. 2(47) & 45(4) – Reduction of profit sharing ratio of existing partners on reconstitution of firm – Revaluation of assets & crediting partners capital account – Not transfer within the meaning of sections 2(47) and 45(4) – A.Y. 1994-95 5. Deductions – Sec. 80-IB – Operation of cold storage – Income either from job work or on account of purchase, storage and sale of goods have direct nexus with cold storage plant – Eligible for deduction u/s. 80-IB – A.Ys. 2001-02 to 2003-04 6. Deduction – Sec. 80HHE – Total turnover – Export of computer software manufactured in SEEPZ unit – Only turnover of SEEPZ unit is to be considered – A.Y. 1993-94 SUPREME COURT 1. Interest awarded to the assessee by the High Court for illegal seizure of stock-in-trade of the assessee was converted to costs of Rs. 75,000/- towards the claim for interest Director-General of Income-tax & Anr. vs. Diamondstar Exports Ltd. & Ors. [293 ITR 438 (SC)] 1. On a writ petition filed by the assessee challenging the seizure of certain jewellery and ornaments belonging to the assessee, the High Court held that the search and seizure were invalid and illegal. The High Court ordered that interest at the rate of 8% per annum should be paid on the value of diamonds and jewellery worth Rs. 84.68 lakhs from the date of seizure till payment. 2. Allowing the departmental appeal the Supreme Court held as under : "Without going into the question as to the payability of interest on the value of goods found by the court to have been illegally seized, we hold that the appellants are liable to compensate the respondents at least by way of costs. The loss obviously suffered by the respondents during the pendency of the proceedings before the High Court was further aggravated by the delay in complying with the High Court’s decision. In the circumstances, we direct the appellants to pay a sum of Rs. 75,000/- to the respondents on account of costs which the respondents will accept in full and final settlement of the claim towards the quantum of interest under the impugned order. Such payment is to be made within a period of four weeks. In the event such payment is not made, this appeal will stand dismissed with costs." 2. Lease rent paid by the lessee for acquiring leasehold rights for ten years to extract minerals is a capital expenditure Enterprising Enterprises vs. DCIT [293 ITR 437 (SC)] 1. The assessee, which had a taken a quarry on lease for ten years, claimed deduction of a proportionate part of the rent as deduction for the period January 10, 1991 to October 31, 1991. 2. When the matter reached the Supreme Court, it was held that the proportionate part of the lease rent was not deductible. The Supreme Court observed as under while disallowing the claim of the assessee: " ….. Having considered the decisions of this court in Pingle Industries Ltd. vs. CIT [1960] 40 ITR 67 (SC), Gotan Lime Syndicate vs. CIT [1966] 59 ITR 718 (SC) and Aditya Minerals P. Ltd. vs. CIT [1999] 8 SCC 97, we are of the opinion that the distinction lies between a case where royalty or rent is being paid on the one hand and where the entire amount of lease is paid either at a time or in instalments. Whereas in the former case it would be a revenue expenditure in the latter it would be a capital expenditure. In this view of the matter, we are of the opinion that this not a case where the High Court could have interfered with the order of the Tribunal. The High Court was thus right to dismiss the appeal of the appellant." Note:- In Aditya Minerals Pvt.Ltd. vs. CIT (239 ITR 817), the assessee had obtained lease in respect of a land for a period of 15 years at payment of certain amount calculated at the basis of the monthly rent, which was payable in advance and to be adjusted towards the rent for every month. The lease granted to the assessee was at the liberty to use the land for excavation purposes and subsidiary purposes. Considering the fact that there was payment once for all, the Constitution Bench of the Supreme Court came to the conclusion that the expenditure was capital expenditure. B. V. Jhaveri Advocate HIGH COURT 1. Block assessment – Undisclosed income is required to be computed on the basis of evidence found during the search or directly relatable to evidence found during the search CIT vs. Balaji Wire (P) Ltd. [2007] 212 CTR (Del) 35 The assessee’s business and residential premises were subjected to search operations under section 132(1) of the Act on 11th September, 2001 along with the Bansal Group. During the search operations nothing incriminating except the books of accounts of the assessee was found and the revenue wanted to verify their correctness. Accordingly the statement of one Mr. V.P. Jain was recorded on 25th September, 2001 in which he had made purchases of Rs. 25 crores from the Bansal Group out of which delivery was made to the extent of about 2 or 3 crores and for balance only bills were issued. Subsequently V.P. Jain retracted his statement and therefore another statement was recorded on 14th December, 2001 when he was cross examined by one of the members of the Bansal Group. In the statement he stated that the goods were directly sent to his customers and therefore he did not have physically received the goods in his shop. However, the Learned Assessing Officer has passed the Assessment Order by making additions on account of undisclosed income in the hands of the assessee by observing that V.P. Jain was only preparing false bill for the Bansal Group for which he received a commission. The assessee preferred an appeal against the Assessment Order. The Learned CIT(A) confirmed the Assessing Officer’s action. Being aggrieved by the Order of the CIT(A) the assessee preferred an appeal to the Income-tax Appellate Tribunal. The Appellate Tribunal allowed the appeal filed by the assessee on the ground that during the course of search, no evidence was found of any bogus payments. The statements of V.P. Jain were post search statement having no nexus with the search and they could not have been relied upon for the purpose of proceedings under section 158BC of the Act. The Department being aggrieved by the Appellate Tribunal’s Order preferred an appeal before Hon’ble Delhi High Court under section 260A of the Act. The Hon’ble High Court upheld the order of the Appellate Tribunal with the observations that in the absence of recovery of any incriminating material during the search conducted in the premises of the assessee group, the statement of a third party recorded after the search proceedings could not be used against the assessee as it could not be said to be directly connected with the recovery of any incriminating material during the search. 2. Penalty under section 271(1)(c) – Mere rejection of claim of the assessee – Does not amount to concealment CIT vs. Caplin Point Laboratories Ltd. [2007] 212 CTR (Mad.) 58 The assessee before the Hon’ble Madras High Court was a company engaged in manufacture and sale of pharmaceutical products. The assessee has filed the return of income claiming deduction under sections 80HHC and 80-I of the Act. However the assessment was completed disallowing the claim of the assessee. The AO has also levied penalty under section 271(1)(c) of the Act. Being aggrieved by the order of the Assessing Officer the assessee preferred an appeal before the Commissioner of Income Tax (Appeals). The first appellate authority allowed the appeal filed by the assessee and deleted the penalty levied by the AO. Being aggrieved by the above order of the Commissioner of Income Tax (Appeals), the revenue filed an appeal before the Income Tax Appellate Tribunal. However, the Hon’ble Tribunal dismissed the appeal filed by the department. Being aggrieved by the above order of the Appellate Tribunal, the revenue filed an appeal before the Hon’ble Madras High Court under Section 260A of the Act. The Hon’ble High Court dismissed the appeal filed by the revenue and held that CIT(A) and the Tribunal recorded a concurrent finding that there was no concealment of income by the assessee in showing interest income as "business income" instead of "income from other sources" for the purpose of claiming deduction under sections 80HHC and 80-I. 3. Income from undisclosed sources – Alleged understatement of sale consideration without proper enquiry – Additions not justified CIT vs. Emerald Construction (P) Ltd. [2007] 212 CTR (Raj) 20 The assessee before the Hon’ble Rajasthan High Court was a private limited company. The Learned Assessing Officer passed the assessment order by observing that the status of transferred shop as semi-finished was only for the purpose of paying less stamp duty, but actual transfer was of finished shops and thereby made additions as income from undisclosed sources by taking the sale consideration at 8 per cent higher then stated in the sale deed. On appeal the first appellate authority granted relief by deleting the additions. Being aggrieved the revenue preferred an appeal to the Income-tax Appellate Tribunal. The Hon’ble tribunal dismissed the appeal of the revenue. Being aggrieved by the Order of the Appellate Tribunal, the revenue filed an appeal before the Hon’ble Rajasthan High Court under section 260A of the Act. Hon’ble High Court upheld the order of the Appellate Tribunal and held that in the absence of any material on record to show that the actual consideration received by assessee for transfer of shops in question was more than what has been stated in the transfer deed, no addition can be made. 4. Expenditure incurred on repairs and renovation of rented office premises are Revenue Expenditure CIT vs. Dr. A.M. Singhvi [2007] 212 CTR (Raj) 1 The assessee before the Hon’ble Rajasthan High Court was an advocate. The assessee has filed return of income claiming the expenditure incurred on office repairs and maintenance as revenue expenditure. The assessment was completed by disallowing the expenditures incurred on repairs and maintenance by treating the same as capital expenditure. Being aggrieved by the order of the Assessing Officer, the assessee preferred an appeal before the Commissioner of Income-tax (Appeals). The first appellate authority allowed the appeal of assessee. Being aggrieved by the above order, revenue preferred an appeal before the Income-tax Appellate Tribunal. Hon’ble Tribunal had dismissed the appeal of the revenue. The Department being aggrieved by the Appellate Tribunal’s Order preferred an appeal before Hon’ble Delhi High Court under section 260A of the Act. The Hon’ble High Court upheld the order of the Appellate Tribunal with the observations that expenditure incurred by assessee, an advocate, on repairs and renovation of rented office premises for running the profession smoothly and more profitably, was revenue in nature. 5. Book profit – Profit and Loss Account of company certified by authorities under Companies Act –Binding on Assessing Officer CIT vs. Kovai Maruthi Paper and Board P. Ltd. [2007] 294 ITR 57 (Mad). The assessee before the Hon’ble Madras High Court had filed return of income declaring nil income. However the provisions of section 115JA were attracted on the facts of the assessee’s case. Hence, tax liability on the book profit was computed and paid. The return was accepted under section 143(1). Subsequently the assessment was revised under section 154 to tax the amount of government subsidy which was received by the assessee but has not been reduced from the cost of machinery on which claim of depreciation in excess of eligible limit was allowed. Being aggrieved by the order of the Assessing Officer, the assessee preferred an appeal before the Commissioner of Income-tax (Appeals). However, the first appellate authority had affirmed the view of the Learned Assessing Officer. Being aggrieved by the above order, assessee preferred an appeal before the Income-tax Appellate Tribunal. Hon’ble Tribunal allowed the appeal of the assessee. Being aggrieved by the Order of the Appellate Tribunal, the revenue filed an appeal before the Hon’ble Delhi High Court under section 260A of the Act. Hon’ble High Court has dismissed the appeal of the revenue with the observation that once the profit and loss account prepared by the assessee is certified by the authorities under the Companies Act, 1956, as having been properly maintained in accordance with the Companies Act, the Assessing Officer has only the limited power of making increases and reductions as provided in the Explanation to section 115J of the Income-tax Act, 1961, and he does not have the jurisdiction to go behind the net profit shown in the profit and loss account. 6. Clause (f) of section 43b arbitrary, unconscionable Exide Industries Limited & Anr. vs. Union of India & Ors. [2007] 212 CTR (Cal) 206. The appeal before the Division bench of the Hon’ble Calcutta High Court was against the rejection of a Writ Petition challenging the validity of Section 43B(f) on behalf of the assessee it was contented that such sub-section was ultra vires the law of the land in view of the fact that the assessee, being a body corporate, was entitled to maintain its account by mercantile system of accounting which is permissible in law. Hence, the amount payable to its employees as leave encashment was to be shown in the balance sheet as a liability for each and every year and the employer was entitled to have deduction not only in the year in which it was actually paid but also for the years when provision was made. It was further contended that section 43B was introduced by the Finance Act, 1983, w.e.f. 1st April, 1984 for the purpose of preventing the attempt of the assessee to get deduction on the unpaid statutory liability instead of discharging the same. Clause (f) had no nexus with such object for which the said provision was enacted. Assuming the legislature was entitled to bring clause (f) by way of amendment by incorporating the same within the ambit of s. 43B such amendment is ultra vires the Act in absence of non-disclosure of the objects. Incorporation of clause (f) was unreasonable, arbitrary and inconsistent with the object disclosed while inserting s. 43B. The Hon’ble Court allowed the appeal with the observation that section 43B had undergone several changes from time to time and on each and every occasion the legislature came out with the objection and reasons disclosed therefore. While inserting clause (f) no special reasons were disclosed. Such disclosure was not mandatory provided the subject amendment could be termed as in furtherance to widen the scope of the original section on the identical objects and reasons as disclosed at the time of enacting the original provision. The original section was incorporated to plug in deduction claimed by not discharging statutory liabilities. Provision was subsequently made to restrict deduction on account of unpaid loan to the financial institutions. Leave encashment is neither statutory liability nor a contingent liability. It was a provision to be made for the entitlement of an employee achieved in a particular financial year. The legislature by way of amendment restricts such deduction in case of leave encashment unless it is actually paid in that particular financial year. The legislature is free to do so after they disclose reasons for that and such reasons are not inconsistent with the main object of the enactment. No reasons have been provided. Such enactment is also not consistent with the original provision being section 43B which was originally inserted to plug in evasion of statutory liability. Therefore, section 43B(f) is struck down being arbitrary and unconscionable. K. Gopal Advocate TRIBUNAL 1. Book profit – Sec. 115JB – Deferred tax liability – Not to be increased by Explanation while computing book profit – A.Y. 2002-03 Maharaja Shree Umaid Mills Ltd. vs. ACIT (2007) 17 SOT 72 (Jp); Order dated 31-7-2007 & ACIT vs. Balrampur Chini Mills Ltd. (2007) 111 TTJ 230 (Kol); Order dated 9-3-2007 The amount of Deferred tax liability neither falls within the ambit of clause (a) of Explanation to sub-section (2) of section 115JB being not the amount of income-tax paid or payable and the provisions thereof nor within the ambit of clause (c) of the Explanation to section 115JB(2) being an ascertained liability. Thus, for the purpose of section 115JB, the book profit does not need to be increased by the amount of deferred tax liability. 2. Book profit – S. 115JB – Tax paid on distributed dividend u/s. 115-O – Similar to Fringe Benefit Tax – Allowable as deduction while computing book profit – A.Y. 2004-05 ACIT vs. Balrampur Chini Mills Ltd. (2007) 111 TTJ 230 (Kol); Order dated 9-3-2007 Tax on distributed profit is different from income tax payable and the provision of section 115-O is similar to fringe benefit tax payable under Chapter XII-H, since both are payable at the time of incurring certain expenditure, which is in the form of fringe benefit tax to employees or dividend to shareholders. Thus, the tax paid on distributed dividend u/s.115-O is allowable deduction in computing book profit. 3. Book profit – S. 115JA – Lease equalization charges – Does not amount to ‘reserve’ – Not to be added while computing book profit – A. Y. 1998-99 GE Capital Transportation Financial Services Ltd. vs. ACIT (2007) 17 SOT 173 (Del); Order dated 20-7-2007 Lease equalization charge could not be regarded as an amount transferred to reserves as envisaged in Explanation (b) to section 115JA(2) and thus, could not be added while computing book profit u/s. 115JA. 4. Capital gains – Ss. 2(47) & 45(4) – Reduction of profit sharing ratio of existing partners on reconstitution of firm – Revaluation of assets & crediting partners capital account – Not transfer within the meaning of sections 2(47) and 45(4) – A.Y. 1994-95 ITO vs. Smt. Paru D. Dave (2007) 111 TTJ 288 (Mum); Order dated 22-12-2006 No transfer under section 2(47) was involved either on revaluation of assets of firm or on reduction of share ratio of existing partners on reconstitution of firm by bringing in new partners and section 45(4) was not attracted and hence, no capital gains arose on such transactions. 5. Deductions – Sec. 80-IB – Operation of cold storage – Income either from job work or on account of purchase, storage and sale of goods have direct nexus with cold storage plant – Eligible for deduction u/s. 80-IB – A.Ys. 2001-02 to 2003-04 Sumaraj Seafoods (P.) Ltd. vs. ITO (2007) 17 SOT 33 (Mum); Order dated 26-6-2007 In the case of an industrial undertaking which operates its cold storage plant, the profits eligible for deduction would be restricted to the profits generated from activity of operating the cold storage plant which would include – (i) the activity of storage of goods belonging to others against charges, and (ii) activity of storage of its own goods for sale. So long as the activity of operation of cold storage is distinct and independent small-scale industrial unit, its income either by job work or on account of purchase, storage and sale of goods having a direct nexus with cold storage plant would be eligible for deduction u/s. 80-IB. 6. Deduction – Sec. 80HHE – Total turnover – Export of computer software manufactured in SEEPZ unit – Only turnover of SEEPZ unit is to be considered – A.Y. 1993-94 Datamatics Ltd. vs. ACIT [2007] 111 TTJ 55 (Mum); Order dated 14-2-2007 Assessee maintaining separate books of account in respect of SEEPZ unit where it was manufacturing and exporting computer software, the total turnover for the purpose of computing deduction under section 80HHE was only the turnover of the SEEPZ unit and not of the entire business activity. Reepal Tralshawala Chartered Accountant Rupesh Srivastava e.mail: rupesh@thetaxcorp.com PH: 9225908041 (Goa) 9243408041 ( Karnataka ) Source : Tax Constultant Chambers,