SOME RECENT REPORTED DIRECT TAXES JUDGEMENTS (Part I)

  By Subash Agarwal, Advocate

(A)    SUPREME COURT

1.       Price Waterhouse Coopers (P.) Ltd. vs. CIT 348 ITR 308

Penalty for concealment of income u/s 271(1)(c)- no penalty in case of a bonafide error

Held,

The facts of the case are rather peculiar and somewhat unique. The assessee is undoubtedly a reputed firm and has great expertise available with it. Notwithstanding this, it is possible that even the assessee could make a 'silly' mistake and indeed this has been acknowledged both by the Tribunal as well as by the High Court.

The fact that the tax audit report was filed along with the return and that it unequivocally stated that the provision for payment was not allowable under section 40A(7) indicates that the assessee made a computation error in its return of income. Apart from the fact that the assessee did not notice the error, it was not even noticed by the Assessing Officer who framed the assessment order. In that sense, even the Assessing Officer seems to have made a mistake in overlooking the contents of the tax audit report.

   3SC#PricePri

2.       CIT vs. Ahmedabad Stamp Vendors Association 348 ITR 378

Section 194H of the Income-tax Act, 1961 - Deduction of tax at source – not applicable in the case of discount on stamp purchases

Held,

Discount given to the Stamp Vendors is for purchasing the stamps in bulk       quantity and the said discount is in the nature of cash discount.

In the circumstances, we concur with the impugned judgement that the impugned transaction is a sale. Consequently, section 194H of the Income-tax Act, 1961, has no application.

       

3.       CIT vs. Gebilal Kanhaialal HUF 348 ITR 561

Section 271(1)(c) r/w explanation 5 - Penalty for concealment of income in search cases - To grant immunity from penalty, no time-limit for payment of tax is prescribed under clause 2 of Explanation 5 to section 271(1)(c)

Held,

a)                Three conditions have got to be satisfied by the assessee for claiming immunity from payment of penalty under clause (2) of Explanation 5 to section 271(1)(c ). The first condition was that the assessee must make a statement under section 132(4) in the course of search stating that the unaccounted assets and incriminating documents found from his possession during the search have been acquired out of his income, which has not been disclosed in the return of income to be furnished before expiry of time specified in section 139(1). Such statement was made by the Karta during the search which concluded on 1-8-1987. It is not in dispute that condition No.1 was fulfilled. The second condition for availing of the immunity from penalty under section 271(1)(c) was that the assessee should specify, in his statement under section 132(4), the manner in which such income stood derived. Admittedly, the second condition, in the present case also stood satisfied. According to the Department, the assessee was not entitled to immunity under clause (2) as he did not satisfy the third condition for availing the benefit of waiver of penalty under section 271(1)(c) as the assessee failed to file his return of income on 31-7-1987 and pay tax thereon particularly when the assessee conceded on 1-8-1987 that there was concealment of income. The third condition under clause (2) was that the assessee had to pay the tax together with interest, if any, in respect of such undisclosed income.

b)                However, no time limit for payment of such tax stood prescribed under clause (2). The only requirement stipulated in the third condition was for the assessee to 'pay tax together with interest'.

c)                 In the present case, the third condition also stood fulfilled. The assessee has paid tax with interest up to the date of payment. The only condition which was required to be fulfilled for getting the immunity, after the search proceedings got over, was that the assessee had to pay the tax together with interest in respect of such undisclosed income up to the date of payment. Clause (2) did not prescribe the time limit within which the assessee should pay tax on income disclosed in the statement under section 132(4).

d)                 For the above reasons, it was held that the assessee was entitled to        immunity under clause (2) of Explanation 5 to section 271(1)(c).

Author’s Note: Section 271(1)(c) r/w explanation 5 is applicable to search cases only upto31.5.2007. In cases of searches initiated after that date, new provision of penalty i.e., sec. 271AAA becomes applicable.

4.       CIT vs. Dynavision Ltd. 348 ITR 380

Section 145:  Where assessee had been consistently following a method of valuation of stock and Assessing Officer revalued closing stock by adding the element of excise duty without making any adjustment to opening stock, any addition on account of under valuation of closing stock was unjustified

Held,

a)    It is not in dispute that the assessee has been following consistently the method of valuation of closing stock which is "cost or market price whichever is lower." Moreover, the AO conceded before the CIT(A) that he revalued the closing stock without making any adjustment to the opening stock . Though under section 3 of the Central Excise Act, 1944, the levy of excise duty is on the manufacture of the finished product the same is quantified and collected on the value (i.e. selling price). In the case of Chainrup Sampatram v. CIT [1953] 24 ITR 481(SC), it has been held that, "valuation of unsold stock at the close of the accounting period was a necessary part of the process of determining the trading results of that period. It cannot be regarded as source of profits. That, the true purpose of crediting the value of unsold stock is to balance the cost of the goods entered on the other side of the account at the time of the purchase, so that on cancelling out of the entries relating to the same stock from both sides of the account would leave only the transactions in which actual sales in the course of the year has taken place and thereby showing the profit or loss actually realized on the year's trading. The entry for stock which appears in the trading account is intended to cancel the charge for the goods bought which have remained unsold which should represent the cost of the goods". (see also : para 8 of the judgment in the case of CIT v. Hindustan Zinc Ltd. [2007] 291 ITR 391(SC)

b)      The addition of Rs. 16,39,000/- to the income of the assessee on the ground of undervaluation of the closing stock was wrong..

5.       CIT vs. Bannari Amman Sugars Ltd  210 Taxman 271

Sec 145: Closing stock may be valued below the cost price/market price in spl. circumstances

By virtue of Essential Commodities Act, 1955 and Sugar control order a sugar manufacturer was required to sell 40 per cent of its production at notified levy price to Public distribution system which is lower than cost. However as per Incentive scheme, 40 per cent of total sugar production was permitted to be sold at market price (i.e. incentive sugar).

Held,

The said scheme  came up for consideration before Supreme Court in case of CIT v. Ponni Sugars & Chemicals Ltd. [2008] 306 ITR 392  in which Court held that excess amount realized by manufacturer over notified price on sale of incentive sugar should be treated as a capital receipt which was not taxable under the Act. In view of said decision, assessee, who was engaged in business of manufacture and sale of sugar was right in valuing closing stock of incentive sugar at levy price.

6.       CIT v.S. Khader Khan Son 210 Taxman 248

Section 133A :  Survey

Section 133A does not empower A.O to examine any person on oath; so statement recorded under section 133A has no evidentiary value and any admission made during such statement cannot be made basis of addition.

           

(B)     HIGH COURTS

1.       CIT vs. Indeo Airways (P.) Ltd. 349 ITR 85 (Del)

Sec 132 (4A) :  once a presumption had been drawn as to the contents of documents  recovered during search being true, revenue cannot require assessee to produce materials in support of expenditure entries contained in very same documents

HELD,

If the revenue was of the opinion that the expenses claimed towards 'green boxes' was inadmissible or was excessive, or not genuine, in order to reject the entries in the books of account and other documents of the assessee, seized during the search, it ought to have relied on other materials. Having once drawn the presumption that the contents of the documents (of the assessee) taken into possession during the search were true, the revenue could not have, consistently with that presumption, proceeded to require the assessee to produce materials in support of the expenditure entries. Such an inconsistent approach in respect of the contents of the same book appears to have been founded only on suspicion that they were not genuine. However, suspicion cannot replace proof. Moreover, the full effect of the presumption should be given effect to, whenever the statute directs a particular non-existent state of affairs to be assumed

2.       Harshad J. Choksi vs. CIT 349 ITR 250 (Bom)

Section 28(i), r/w section 36(1)(vii) and section 36(2):If an amount claimed as bad debt is held to be not deductible in view of non-compliance of condition provided under section 36(2), same could be considered as an allowable business loss

Held,

a)                On the basis of the decision in Badridas Daga vs. CIT [1958] 34 ITR 10 (SC) , it can be concluded that even if the deduction is not allowable as bad debts, the Tribunal ought to have considered the assessee's claim for deduction as business loss. This is particularly so, as there is no bar in claiming a loss as a business loss, if the same is incidental to carrying on of a business. The fact that condition of bad debts were not satisfied by the assessee would not prevent him from claiming deduction as a business loss incurred in the course of carrying on business as share broker.

b)                In fact, the Bombay High Court in the case of CIT vs. R.B. Rungta & Co. [1963] 50 ITR 233 upheld the finding of the Tribunal that the loss could be allowed on general principles governing computation of profits under section 10 of the Indian Income-tax Act, 1922, which is similar/identical to section 28 of the 1961 Act. The revenue in that case urged that the assessee having claimed deduction as a bad debt the benefit of the general principle of law that all expenditure incurred in carrying on the business must be deducted to arrive at a profit cannot be extended. This submission was negatived by the Court and it was held that even where the debt is not held to be allowable as bad debts yet the same would be allowable as a deduction as a revenue loss in computing profits of the business under section 10(1) of the Indian Income-tax Act, 1922.

3.       CIT vs .Dinesh Jain HUF 211 Taxman 23 ( Del)

Sec 69B: Without a finding that assessee invested more than what was recorded in its books of account, section 69B cannot be invoked.

Held,

a)                Section 69B does not permit an inference to be drawn from the circumstances surrounding the transaction that the purchaser of the property must have paid more than what was actually recorded in his books of account for the simple reason that such an inference could be very subjective and could involve the dangerous consequence of a notional or fictional income being brought to tax contrary to the strict provisions of article 265 of the Constitution of India and Entry 82 in List I of the Seventh Schedule thereto which deals with 'Taxes on income other than agricultural income'.

b)                Applying the logic and reasoning in K.P. Varghese v. ITO [1981] 131 ITR 597 ( SC) , for the purposes of section 69B it is the burden of the Assessing Officer to first prove that there was understatement of the consideration (investment) in the books of account. Once that undervaluation is established as a matter of fact, the Assessing Officer, in the absence of any satisfactory explanation from the assessee as to the source of the undisclosed portion of the investment, can proceed to adopt some dependable or reliable yardstick with which to measure the extent of understatement of the investment. One such yardstick can be the fair market value of the property determined in accordance with the Wealth Tax Act.

c)                 Whether the basis adopted by the Assessing Officer is an acceptable one or not may depend on the facts and circumstances of the particular case. That question may, however, arise only when actual understatement is first proved by the Assessing Officer. It is only to this extent that the rigour of the burden placed on the Assessing Officer may be relaxed in cases where there is evidence to show understatement of the investment, but evidence to show the precise extent thereof is lacking.

4.       Maganbhai Hansrajbhai Patel vs. CIT 211 Taxman 386(Guj)

         

Sec 179: Only tax due of company, and not interest or penalty, can be recovered from directors; if no misfeasance, gross negligence or breach of duty is alleged, recovery under section 179 from director cannot be made; director is liable only if recovery cannot be made from company

Held,

a)                The liability of the director to pay the dues of the company arises in terms of section 179(1) and such liability would be co-extensive as provided in the said provision which refers to tax dues. The director may be considered an assessee under section 2(7) of the Act which provides that assessee means a person by whom any tax or any other sum of money is payable under the Act. However, the same must be qua the tax of the company which was due and remained unpaid. By virtue of section 179(1) the director cannot be held liable for interest and penalty and thereupon be treated as an assessee under section 2(7) as a person by whom any tax or any other sum of money is payable under the Act.

b)                Section 179(1) provides for a vicarious liability of the director of a public company for payment of tax dues which cannot be recovered from the company. However, such liability could be avoided if the director proves that the non-recovery cannot be attributed to any gross negligence, misfeasance or breach of duty on his part in relation to the affairs of the company. It is of course true that the responsibility of establishing such facts is cast upon the director. However, once the director places before the authority his reasons why it should be held that non-recovery cannot be attributed to any of the three factors, the authority would have to examine such grounds and come to a conclusion in this respect. Significantly, the question of lack of gross negligence, misfeasance or breach of duty on part of the director is to be viewed in the context of non-recovery of the tax dues of the company. In other words, as long as the director establishes that the non-recovery of the tax cannot be attributed to his gross neglect, etc., his liability under section 179(1) would not arise. Here again the Legislature advisedly used the word gross neglect and not a mere neglect on his part.

5.       CIT vs. Usha International Ltd 348 ITR 485 (Del)(FB)

Sec 147: change of opinion- various facets

Held,

a)      Reassessment proceedings can be validly initiated in case return of income is processed under section 143(1) and no scrutiny assessment is undertaken. In such cases there is no change of opinion?

b)      Reassessment proceedings will be invalid in case the assessment order itself records that the issue was raised and is decided in favour of the assessee. Reassessment proceedings in the said cases will be hit by principle of 'change of opinion'.

c)       Reassessment proceedings will be invalid in case an issue or query is raised and answered by the assessee in original assessment proceedings but thereafter the Assessing Officer does not make any addition in the assessment order. In such situations it should be accepted that the issue was examined but the Assessing Officer did not find any ground or reason to make addition or reject the stand of the assessee. He forms an opinion. The reassessment will be invalid because the Assessing Officer had formed an opinion in the original assessment, though he had not recorded his reasons.

d)      Where an Assessing Officer incorrectly or erroneously applies law or comes to a wrong conclusion and income chargeable to tax has escaped assessment, resort to section 263 is available and should be    resorted to. But initiation of reassessment proceedings will be invalid on the ground of change of opinion.

e)       There may be cases where the Assessing Officer does not and may not raise any written query but still the Assessing Officer in the first round/ original proceedings may have examined the subject matter, claim etc., because the aspect or question may be too apparent and obvious. To hold that the Assessing Officer in the first round did not examine the question or subject matter and form an opinion, would be contrary and opposed to normal human conduct. Such cases have to be examined individually. Some matters may require examination of the assessment order or queries raised by the Assessing Officer and answers given by the assessee but in others cases, a deeper scrutiny or examination may be necessary. The stand of the revenue and the assessee would be relevant. Several aspects including papers filed and submitted with the return and during the original proceedings are relevant and material. Sometimes application of mind and formation of opinion can be ascertained and gathered even when no specific question or query in writing had been raised by the Assessing Officer. The aspects and questions examined during the course of assessment proceedings itself may indicate that the Assessing Officer must have applied his mind on the entry, claim or deduction etc. It may be apparent and obvious to hold that the Assessing Officer would not have gone into the said question or applied his mind. However, this would depend upon the facts and circumstances of each case     

f)       Assessment proceedings cannot be validly reopened under Section 147 of the Act, even within four year, if an assessee has furnished full and true particulars at the time of original assessment with reference to income alleged to have escaped assessment.

6.       CIT v. Arts Beauty Exports 211 Taxman 155(Del.)(mag)

Section 10B  - Export Oriented undertaking

Held,

 A mere reconstitution of partnership firm does not amount to splitting up or reconstruction of partnership business already in existence so as to deny exemption under section 10B.

7.       CIT v.Income-tax Settlement Commission 210 Taxman 529 (Guj)

Section 245C - Settlement Commission- Application for settlement of cases - Maintainability of

Held,

Where by efflux of time, it is not open for Assessing Officer to pass an order of assessment, merely because return was accepted under section 143(1), case of assessee cannot be deemed to be pending for assessment only because final order of assessment under section 143(3) was not passed.

Where assessments had become time-barred without any notice under section 143(2) and even final time-limit for passing orders, even if such notices were issued, had expired and the assessee filed his application for settlement before Commission, the assessee's application was not maintainable.