Digest of SC Judgement Oct 2006- June 2007

Digest

Oct 2006- June 2007

The Supreme Court has held that since there is no specific provision under the Act to compute profits accruing in India in the hands of the foreign entity, the profits attributable to the permanent establishment of the foreign enterprises is required to be computed as per the normal accounting principles and in terms of the general principles of the Income-tax Act. Further profits of the Permanent Establishments are to be computed treating it as an independent unit.

Any profit that accrues to the non resident for operations carried out outside India would not be taxable in India.

CIT v Hundai Heavy Industries Co. Ltd [2007] 291 ITR 0482 (SC), 161 Taxman (SC) 0191

The commissioner of Excise as per the provision of rule 14(3) fixed a time for blending and a penalty for not complying with the aforesaid time limit. The Supreme Court held the amount so payable is an allowable expenditure not in the nature of penalty. It was further held that it is not a tax on manufacture and therefore provisions of section 43B would not be attracted.

CIT v Distillers Co. Ltd [2007] 290 ITR 419(SC), 209 CTR (SC) 177

The expression “the assessee offers no explanation” means that the assessee offers no proper, reasonable and acceptable explanation as regards the sum found credited in the books maintained by the assessee. The opinion of the assessing officer for not accepting the explanation offered by the assessee as not satisfactory is required to be based on proper appreciation of material and other attending circumstances available on the record.

Further, if the explanation is not acceptable then the burden is on the assessee to take the plea that the material and the attending circumstances available on record do not justify the sum found credited in the books being treated as receipt of income nature.

The Supreme Court affirmed the decision of the Tribunal that the receipt of foreign gift would be treated as income if the donor is to receive compensation for the gift.

CIT v P. Mohanakala [2007] 291 ITR 278 (SC), 210 CTR (SC) 20, 161 Taxman (SC) 169

The intimation under section 143 (1) cannot be treated as an order of assessment. The distinction between intimation and assessment is also brought out by the statutory provision as they stood at different points of time. Prior to April 1, 1989, the assessing officer had to pass an assessment order if he decides to accept the return, but under the amended provision, the requirement of passing the order has been dispensed with and instead only an intimation is required to be send.

As there is no assessment, the question of change of opinion does not arise.

Further, what is required at the time of the issue of notice under section 147 is reason to believe that the income has escaped assessment but not the established act of escapement of income.

ACIT v Rajesh Jhaveri Stock Brokers P Ltd [2007] 291 ITR 500 (SC), 210 CTR (SC) 30, 161 Taxman (SC) 316

The Supreme Court held that excise duty and sales tax cannot form part “turnover” for the purpose of calculation of deduction under section 80HHC. It was further held that while interpreting the word “total turnover “ in the formulae in section 80HHC, one has to give a schematic interpretation.

CIT v Lakshmi Machine Works [2007] 290 ITR 667 (SC), 210 CTR (SC) 1

When the supporting manufacturer receives premium from the export houses or trading houses on the F.O.B. value of the goods sold, it would be included in the profits of the business and would be eligible for deduction. The restriction that the receipt should be in foreign exchange applies to direct exporter and not to supporting manufacturer selling goods to export houses or trading houses.

CIT v Baby Marine Exports [2007] 290 ITR 323 (SC), 209 CTR (SC) 0183

The Supreme Court Held that the provisions of Kar Vivad Samadhan Scheme, 1998, such as finality of order under section 90(3) and immunity under section 91 thereof cannot be availed in proceedings under the sales-tax laws of the state.

Master Cables P Ltd v State of Kerala and others 210 CTR (SC) 0086

Section 44 dealing with the insurance business begins with a non obstante clause. Therefore the jurisdiction of the assessing officer is limited only to the extent of what is provided in the first schedule. Rule 5 of the first schedule empowers the assessing officer to make any disallowance for any expenditure or allowance which is not admissible under section 30 to 43A of the Act. “Provision for income tax” and “provision for bad and doubt full debt” not being in the nature of expenditure, the assessing officer cannot exercise any jurisdiction to disallow the same in relation to the insurance business.

Note: Rule 5(a) of the first schedule has been amended by the Finance Act 1998, with retrospective effect from 1-4-1989, so the aforesaid decision would apply only for assessment years prior to 1-4-1989.

CIT v Oriental Fire and General Insurance company [2007] 291 ITR 370 (SC), 161 Taxman (SC) 0181

Clause (c) of section 271(1) categorically states that penalty would be leviable if the assessee conceals particulars of his income or furnishes inaccurate particulars thereof. But by reason of such concealment of furnishing of inaccurate particulars alone, the assessee does not ipso facto become liable to penalty. Imposing of penalty is not automatic. The Supreme Court held that not only is the levy of the penalty discretionary in nature, but the discretion is to be exercised keeping the relevant factors in mind and the approach of the assessing officer in this behalf must be fair and objective.

“Concealment of income” and “furnishing in accurate particulars of income” are different. However both concealment and furnishing of inaccurate particulars refer to deliberate act on the part of the assessee. A mere omission or negligence would not constitute a deliberate act of suppressio veri or suggestio falsi.

In the present case where the disclosure is based on the opinion of the expert, who is otherwise also a registered valuer having been appointed in terms of the statutory scheme, merely because his opinion is not accepted or some other expert give some other opinion, the same by itself may not be sufficient to arrive at a conclusion that the assessee has furnished inaccurate particulars of his income.

Dilip N Shroff v JCIT [2007] 291 ITR 519 (SC); 161 Taxman (SC) 0218

The Supreme Court held that it cannot be said that the prosecution against a company or its directors in default of deduction or paying tax is not envisaged in the Act. The Supreme Court held that even if the tax deducted has been deposited with the central government, but if there is a delay then the assessee would be liable under section 276B for penalty for non payment of the tax within the stipulated time.

Madhumilan Syntex Ltd. v Union of India [2007] 290 ITR 0199 (SC)

In case of a reference only a question of law can be answered. Where the determination of an issue depends on basic facts without application of law, the issue raises a mere question of fact. An inference from a fact is also a question of fact and does not raise a question of law. However if the finding of the fact is arrived at by the Tribunal after improperly rejecting evidence, a question of law arises. Where the Tribunal acts on material partly relevant and partly irrelevant, a question of law arises because it is impossible to say to what extent the mind of the tribunal was affected by the irrelevant material used by it in arriving at the finding. A finding of fact becomes a question of law if the finding is without any evidence or material.

Even after the reference is made by the tribunal directly or on the basis of the direction of the High Court, it is open to the High Court not to answer reference if no question of law is involved.

Comm. of Agricultural IT v M.N. Moni 291 ITR 387 (SC), 161 Taxman (SC) 0207

A mater dismissed earlier for non appearance, can be restored on the oral or written request of the party or advocate. And, if the bench so desire, it can hear the matter immediately after restoration and there is no obligation on the bench to adjourn the matter to be heard on a future date once it is restored.

Madhumilan Syntex Ltd. v Union of India [2007] 290 ITR 0199 (SC)

Section 80AB of the Income tax Act would apply for determination of profits from the export business for the purpose of deduction under section 80HHC.Further, in determination of business profits under section 80HHC the unabsorbed business losses of the earlier year under section 72 should be set off.

CIT v Shirke Construction Equipments Ltd. [2007] 291 ITR 380 (SC), 161 Taxman (SC) 0212

The assessee valued the closing stock at net realizable price being London Metallic Exchange Price following the principle of valuation of stock at cost or market price which ever is less. How ever the assessee did not value the stock at the domestic market price which was admittedly more than the international price of the stock. The Supreme Court held the valuation to be wrong on the ground that it is merely reduction of prospective profits and not a case of anticipated profits.

CIT v Hinudstan Zink Limited [2007] 291 ITR 391 (SC), 161 Taxman (SC) 0162

The Supreme Court has referred the issue of whether the assessee should be given an opportunity of being heard before the assessing officer issues a direction for the accounts to be audited under section 142(2A) to a larger bench to reconsider its earlier decision in the case of Rajesh Kumar v DCIT [2006] 287 ITR 91 (SC).

Note: The Finance Bill, 2007 has proposed to insert a proviso to section 142(2A) with effect from June 1, 2007, providing for an opportunity to be given to the assessee before issuing a direction under section 142(2A) to get the accounts audited.

Sahara India (firms) v CIT [2007] 289 ITR 473 (SC)

The Supreme Court has held that prior to the amendment in the year 2002, in the explanation 4 to section 271, if the return is filed declaring a loss and the assessment made only reduces the loss, and there is no positive income, then penalty under section 271(1)(c)(iii) of the act cannot be levied. It was further held that the insertion of explanation 4 with effect from April 1, 1976, would also not change the above position.

Virtual Soft system Limited v CIT [2007] 289 ITR 83 (SC), 159 Taxman 155, 207 CTR 0733

The Supreme Court held that the 2002 amendment in explanation 4 to section 271 is prospective as it was consciously made effective from April 1, 2003. The fact that the notes to clauses mention the amendment to be clarificatory is also of no consequence and that the notes to clauses cannot bind the court.

The Supreme Court further held that the penal provisions should be interpreted strictly.

Virtual Soft system Limited v CIT [2007] 289 ITR 83 (SC), 159 Taxman 155, 207 CTR 0733

The premises of the director of the company and his wife were searched under section 132, and a block assessment was done in the hands of the company. The Supreme Court held that before the provisions of section 158BD are invoked against the person other then the person whose premises have been searched under section 132 or documents and other assets requisitioned under section 132A, the conditions precedent have to be fulfilled. In the present case as the assessing officer has not recorded his satisfaction, nor had he transferred the case to the jurisdictional assessing officer, the appeal of the assessee was allowed.

Manish Maheshwari v. CIT 289 ITR 341 (SC), 159 Taxman 258 (SC), 208 CTR 0097

 The assessee is engaged in the business of civil construction. The Supreme Court affirmed the decision of the tribunal and the High Court, wherein it was held that business of civil construction would not amount to carrying on any manufacturing activity for the purpose of section 32AB. Therefore the claim for investment allowance was not allowed as the assessee. 

S.A. Builders Ltd. v CIT [2007] 289 ITR 26 (SC), 159 Taxman 0230(SC)

Revision proceeding under section 263 cannot be held to become bad only because subsequently, an order of rectification was passed by the assessing officer under section 154. In such cases, the consenting party should bring the subsequent development to the notice of the commissioner so as to enable them to take same into consideration.

The principle that when an authority having discretionary power exercises the same for unauthorized purpose or on consideration of irrelevant facts, the same must be held to be bad in law is to be applied only in administrative jurisdiction; it cannot be applied in cases where an authority exercises a judicial or a quasi judicial function.
 
Further, the lower authority is bound by the order passed by the higher authority keeping in view the principles of judicial discipline.

CIT v Ralson Industries Ltd. [2007] 288 ITR 322(SC), 159 Taxman 160, 207 CTR 0201

 In the present case, the entire transaction of transfer of title in goods was completed in high sea. Since all the activities in connection with the offshore supply were outside India, therefore under section 9, income could not be deemed to accrue or arise in India. And the fact that the contract was signed in India was of no material consequence.

Once excluded from the scope of taxation under the Income-tax Act, application of Double Taxation Avoidance Treaty would not arise.

In any case, under the treaty also, it would not be taxable, since the assessee carried on business in India through a permanent establishment, hence it would be out of article 12 and would fall within the ambit of article 7. The state of permanent establishment is allowed to tax only those profits which are attributable to the permanent establishment, and in the present case the permanent establishment had no role to play in the transaction of offshore supply as the whole transaction took place abroad and therefore no profits would be attributable to the permanent establishment.

Further, the Supreme Court held that the concept of ‘a business connection’ as provided under the Income-tax Act and ‘a permanent establishment’ as provided under the Double Taxation Avoidance Treaty are distinct.
 
In relation to offshore services, under section 9(1)(vii)(c) for a technical services to be taxable in India, two condition are required to be satisfied – services must be rendered in India and the services must be utilized in India. In the present case since both the condition are not fulfilled, they will not be taxed in India under the Income-tax Act itself. The Supreme Court further held that, income must have a sufficient territorial nexus with India so as to furnish a basis for imposition of tax in India.

Ishikawajima-harima Heavy Industries Ltd. v. Director of Income tax [200] 288 ITR 408 (SC), 159 Taxman 259, 207 CTR 0361 

Even though in a best judgment assessment there is always a certain degree of guess work, the authority should try to make an honest and fair estimate of the income and should not act totally arbitrary.
 
Kachwala Gem s v JCIT [2006] 287 ITR 10 (SC)

The Supreme Court held that Explanation to section 37 has no relevance in case of allowability of business loss. The assessee was a medical practitioner. Some heroin was seized from him which formed part of his stock in trade. The court held that once the heroin formed part of stock in trade, it follows that the seizure and confiscation of such stock in trade has to be allowed as a business loss.

The Supreme Court further held that law is different from morality and a case is to be decided by courts on legal principles and not on one’s own moral views.

Dr. T. A. Quereshi v CIT [2006] 287 ITR 547 (SC), 157 Taxman 514

The Supreme Court held that interest deduction can be claimed even when the monies borrowed has been given to its sister concern as an interest free loan if it was commercially expedient to do so. The word commercial expediency includes such expenditure as a prudent business man incurs for the purpose of its business. The Supreme Court held that if the directors of the sister concern utilize the amount advance to it by assessee for its personal benefit, obviously it cannot be said that such money was advance as a measure of commercial expediency.  However, when the holding company has deep interest in its subsidiary and the loan advance is used the for the purpose of the business of the subsidiary, then the assessee would ordinarily be entitled to deduction on its borrowed loans.
 
The Supreme Court further held that the decisions relating to section 37 will also be applicable to section 36(i)(iii) as the expression “for the purpose of business” is same.

S. A. Builders Ltd. v. CIT (A) 288 ITR 001 (SC)

The assessee had purchased the undertaking and along with that, taken over the accrued and future liability of gratuity to the employees. The Supreme Court held that it was a capital expenditure as it was incurred to acquire an asset of an enduring nature.

Further no depreciation would be allowed under section 32 as gratuity liability is neither building, machinery, plant or furniture nor an intangible asset under section 32(1)(ii). The work ‘plant’ as defined under section 43(3) would also not include gratuity liability.

CIT v Hoogly Mills Co. Ltd. [2006] 287 ITR 0333 (SC)

The expression “having regard to” in section 142(2A) means that in exercising the power the assessing officer must give regard to the factor enumerated therein together with all other factors relevant for exercising such power.
 
Rajesh Kumar v DCIT [2006] 287 ITR 91 (SC), 206 CTR 0175 (SC)

The presumption under sub section (4A) of section 132 is for the purpose of search and seizure proceedings only and cannot be raised for framing regular assessments. Wherever the Legislature intended the presumption to extend to other proceedings, it has provided so. In section 132(4A), it has not been provided that the presumption would also be available for framing regular assessment under section 143 as well.

P.R. Metrani v. CIT [2006] 287 ITR 209 (SC), 157 Taxman 0325 (SC)

A direction under section 142(2A) of the Act for special audit is not an administrative order, but is a quasi-judicial order. The Supreme Court held that under section 136 the entire proceeding before the Assessing Officer is judicial, and therefore special audit being part of it cannot be an administrative order. Therefore the principles of natural justice are to be followed by the assessing officer for making an order for special audit under section 142(2A).

Further the power under section 142(2A) cannot be lightly exercised. The satisfaction should be based on objective assessment regard being had to the nature of accounts.

Rajesh Kumar v DCIT [2006] 287 ITR 91 (SC), 206 CTR 0175 (SC)

A huge sum of money was found at the premises of the appellant, who is an assistant engineer in a search conducted by the CBI. The appellant explained that the amount constituted loans taken from two money lenders and the said entries were found in the books of moneylenders.

However, the moneylenders categorically denied the advances of loan and also said that the entries were mere book entries to accommodate the huge sum of money. In view of the above statement, the money was treated as illegal gratification in the hands of the appellant.  The appellant was also found guilty of offences under section 5(1)(a) of the Prevention of Corruption Act.

R. Jankiraman v Sate of Tamil Nadu [2006] 157 Taxman 0234(SC)

The Supreme Court held that so long as the property remains in the hand of the single person, same has to be treated as separate property and, thus, he would be entitled to dispose of the co-parcenery property as his separate property, but if the son is subsequently born to him, it becomes the co-percenary property and he would acquire an interest therein.

Sheela Devi v Lal Chand (2006) 157 Taxman 0527(SC)

The Supreme Court held that the petitioner, being a third party cannot seek any remedy by way of writ of mandamus directing the authorities to file appeals against the orders passed by the tribunal. An appeal is a statutory remedy available to the department and the third party cannot seek such remedies in collateral proceedings like this.

Rajiv Ranjan Singh ‘Lalan’ & Anr v Union of India & Anr. (2006) 205 CTR 0053

By: Madhur Agrawal

Rupesh Srivastava

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