30. S.4 : Charge of income-tax – Share capital received for allotment of flats is a capital receipt and not income – Refundable deposits received by the housing company for allotment of flats and future maintenance is business income – The principles of mutuality does not apply to such transactions. [S.28(i)]

The Karnataka High Court held, following Shree Nirmal Commercial vs. CIT 193 ITR 694 (Bom.) and 213 ITR 361 (FB), that share capital received by a housing company from its shareholders in consideration of allotting area to them is assessable as business profits. It was also held that the principles of mutuality are not applicable. It was also held that deposits received from the shareholders for future maintenance is assessable as business income. On appeal to the Supreme Court HELD:

The amount (Rs. 45,84,000/-) on account of share capital received from the various shareholders ought not to have been treated as business income. (CA Nos. 7379-7380 of 2016, dt. 9-8-2016.)(AY.1996-97). Order of the High Court was modified. Insofar as the issue of short-term capital gains with respect to property T1 and T2 and maintenance deposit is concerned, the court did not fund any infirmity in the order of the High Court so as to require any modification.

G. S. Homes & Hotels P. Ltd. v. Dy. CIT (SC), www.itatonline.org

31. S.10(23C) : Exempt income -Educational institution – The fact that institution makes profit does not necessarily mean it exists for profit – Exemption cannot be denied

Dismissing the appeal of Revenue the Court held that where an educational institution carries on the activity of education primarily for educating persons, the fact that it makes a surplus does not lead to the conclusion that it ceases to exist solely for educational purposes and becomes an institution for the purpose of making profit. The predominant object test must be applied. The purpose of education should not be submerged by a profit making motive. A distinction must be drawn between the making of a surplus and an institution being carried on “for profit”. No inference arises that merely because imparting education results in making a profit, it becomes an activity for profit. If after meeting expenditure, a surplus arises incidentally from the activity carried on by the educational institution, it will not cease to be one existing solely for educational purposes. The ultimate test is whether on an overall view of the matter in the concerned assessment year the object is to make profit as opposed to educating persons. Considering the overall facts and circumstances of the case, the object of the Petitioner institution, was solely to impart education in a specialised field.

CCIT v. St. Peter’s Educational Society (2016) 385 ITR 66/ 240 Taxman 392/ 287 CTR 132(SC)

32. S.28(i) : Business income – Income from house property – Rent received from property – Finding that assessee had discontinued all other business activities and only carried on leasing of property – Business of assessee to lease property and earn rent – Rent taxable as income from business, not house property

Assessee had only one business and that was of leasing its property and earning rent and therefore, the income so earned should be treated as its business income.

Chennai Properties and Investments Ltd. v. CIT [2015] 373 ITR 673 (SC) followed. (AY. 2003-04 to 2008-09)

Rayala Corporation P. Ltd. (2016) 386 ITR 500 (SC)

33. S.32A : Investment allowance – Excluded items – Machinery for manufacture of alcoholic liquor – Effluent treatment plant – Exclusion does not apply -Allowance available

Where the High Court granted the benefit of investment allowance under section 32A on the investment made by the assessee in respect of an effluent treatment plant in its unit for manufacture of alcoholic liquor, held, affirming the decision of the High Court, that keeping in view the specific provisions contained in sub-section (2C) of section 32A of the Act, there was no error in the view taken by the High Court in this behalf. (AY. 1989-90)

CIT v. United Spirits Ltd. (2016) 386 ITR 718 (SC)

34. S.45 : Capital gains – Transfer – Surrender of Floor Area Ratio (‘FAR’) would amount to transfer, thus, consideration received would be taxable as capital gains. [S. 2(47)]

Assessee was in business of real estate and owned acres of land. Out of total land area, major portion was used for business under a joint development agreement. The remaining land area was kept for personal use. During the course of search, documents were seized which depicted that assessee received consideration for surrendering the FAR in respect of land area kept for personal use. The AO treated surrender of FAR as transfer u/s. 2(47) and taxed the consideration as capital gains which was confirmed by CIT(A). The Tribunal, however, set aside the order on the ground that the land retained by assessee was not a capital asset and there was no transfer of immovable property as defined u/s. 2(47) of the Act. On appeal, the High Court held that surrender of FAR is relinquishment of rights amounting to ‘transfer’ as defined u/s. 2(47). The view of HC was upheld by SC. (AY. 1999-2000)

Dinesh D. Rankha v. (2016) 239 Taxman 262 (SC)

35. S.50B : Capital gains – Slump sale – Assets were put to sale after their valuation hence cannot be assessed as slump sale – Capital gains on liquidation of a firm are chargeable to tax [S. 2(14), 2(42C), 45]

Dismissing the appeal of assessee the Court held that

(i) Asset of the firm that was sold was the capital asset within the meaning of Section 2(14) of the Act. Once it is held to be the “capital asset”, gain herefrom is to be treated as capital gain within the meaning of Section 45 of the Act.

(ii) The assessees, however, are attempting the wriggle out from payment of capital gain tax on the ground that it was a “slump sale” within the meaning of Section 2(42C) of the Act and there was no mechanism at that time for computation of the capital gain in such circumstances, which was provided for the first time by Section 50B of the Act with effect from April 1, 2000. However, this argument fails in view of the fact that the assets were put to sale after their valuation. There was a specific and separate valuation for land as well as building and also machinery. Such valuation has to be treated as that of a partnership firm which already stood dissolved.

(iii) As per the aforesaid definition, sale in question could be treated as Slump sale only if there was no value assigned to the individual assets and liabilities. This has obviously not happened. Not only value was assigned to individual assets, even the liabilities were taken care of when the amount of sale was apportioned among the outgoing partners, i.e. the assessees herein.

(iv) Once it is held that the sale in question was not slump sale, obviously Section 50B also does not get attracted as this section contains special provision for computation of capital gains in case of slump sale. In the aforesaid scenario, when the Official Liquidator has distributed the amount among the nine partners, including the assessees herein, after deducting the liability of each of the partners, the High Court had rightly held that the amount received by them is the value of net
asset of the firm which would attract capital gain.

(v) When the said legal principle to the facts of the instant case were applied it was found that the partnership firm had dissolved and thereafter winding up proceedings were taken up in the High Court. The result of those proceedings was to sell the assets of the firm and distribute the share thereof to the erstwhile partners. Thus, the ‘transfer’ of the assets triggered the provisions of Section 45 of the Act and making the capital gain subject to the payment of tax under the Act.

(vi) Insofar as argument of the assessees that tax, if at all, should have been demanded from the partnership firm is concerned, the Court held that on the facts of this case that may not be the situation where the firm had dissolved much before the transfer of the assets of the firm and this transfer took place few years after the dissolution, that too under the orders of the High Court with clear stipulation that proceeds thereof shall be distributed among the partners. Insofar as the firm is concerned, after the dissolution on December 6, 1987, it had not filed any return as the same had ceased to exist. Even in the interregnum, it is the AOP which had been filing the return of income earned during the said period. The High Court had touched upon this
aspect in greater detail in para 30 of its judgment.

(vii) Second submission of the learned senior counsel for the assessees pertained to the payment of tax on the income which the business earned from April 1, 1994 till November 20, 1994. The learned counsel argued that as per the orders of the High Court in the winding up petition, 40% of this income was retained by AOP-3 as a tax component because of the reason that for business income of the earlier years, after the dissolution, the same was taxed as an AOP. Therefore, the individual partners could not be taxed on the said business income in the year in question, as held in M/s. Radhasoami Satsang, Saomi Bagh, Agra v. Commissioner of Income Tax (1992) 1 SCC 659: 193 ITR 321 and Commissioner of Income Tax v. Excel Industries Ltd. (2014) 13 SCC 459: 358 ITR 295 His related submission was that in any case this amount was not received by the assessees as it was retained by AOP-3 and, therefore, tax was not payable by the assessees. It is argued that insofar as income of the firm in the Assessment Year in question is concerned, it could not be taxed at the hands of the assessees.

(viii) The Court found merit in this submission. First, and pertinently, it was an admitted case that 40% of the said income was allowed by the High Court to be retained by the successful bidder (AOP-3) precisely for this very purpose. This 40% represented the tax which was to be paid on the income generated by the ongoing concern being run by the Association of Persons, as authorised by the High Court. Secondly, in the previous years, the Department had taxed the AOP and this procedure had to continue in the Assessment Year in question as well. This aspect has been dealt with very cursorily by the High Court without taking into consideration the aforesaid aspects. The upshot of the aforesaid discussion would be to allow the appeals partly only to the extent that business income/revenue income in the Assessment Year in question is to be assessed at the hands of AOP-3, in terms of the orders of the High Court, as AOP-3 retained the tax amount from the consideration which was payable to the assessees herein and it is AOP-3 which was supposed to file the return in that behalf and pay tax on the said revenue income. (CAl No. 1234 of 2012,
dt. 18-10-2016)

Vatsala Shenoy v. JCIT (SC), www.itatonline.org

36. S.80-IA : Industrial undertakings – Infrastructure development – Dismissal of petition was held to be justified – SLP was dismissed

On assessee’s filing of Special Leave Petition against the High Court’s order, the Apex Court dismissed it. Assessee seeking benefit of deduction should state correct facts initially and not when defects are pointed out by the CBDT.

Balwas Reality & Infrastructure (P.) Ltd. v. CBDT (2016) 239 Taxman 394 (SC)

37. S.147 : Reassessment – Delay of 234 days – SLP dismissed on ground of delay against High Court ruling [S. 32, 148]

Assessee had claimed depreciation on ATMs at rate of 60%. There was no failure on part of the assessee to disclose fully and truly material facts.High Court quashed notice of reassessment. Reassessment could not be initiated to reduce depreciation allowed. Aggrieved, the Department filed a Special Leave Petition before the Supreme Court with a delay of 234 days. The Supreme Court rejected the SLP filed by the Department as there was no justifiable reason for condonation of huge delay. (AYs. 2005-06, 2006-07)

CIT v. State Bank of Patiala (2016) 240 Taxman 4 (SC)

38. S.147 : Reassessment – SLP of revenue was dismissed – There was no failure on the part of the assessee – Change of opinion. [S. 4, 5, 148]

There being no failure on part of assessee to disclose fully and truly all material facts necessary for its assessment, reopening of assessment beyond four years from end of relevant year on ground that assessee had paid more cane price than price fixed by Govt. under Sugar (Control) order which was nothing but distribution of profit resulting in escapement of income, was without jurisdiction. Where in original assessment, issue of payment of more cane price than price fixed by Government was gone into detail, reopening of assessment within four years on ground that excess payment was nothing but distribution of profit would amount to change of opinion.
(AY. 2007-08)

ITO v. Shree Madhi Vibhag Sahkari Khand Udhyog Mandli Ltd ( 2016) 240 Taxman 181 (SC)

39. S.147 : Reassessment – Income – Accrual – Increase of rent with retrospective effect – No right to receive income arose in previous year – Notice for reassessment was held to be not valid [Ss. 22, 148]

Premises belonging to the assessee were let to the Government of India. The rent for the premises was enhanced from Rs. 4 to Rs. 8.11 per sq. ft. per month effective from September 1, 1987 by a letter dated March 29, 1994 of the Estate Manager of the Government of India making it clear that the enhancement was subject to conditions including execution of a fresh lease agreement and communication of acceptance of the conditions incorporated therein. Such acceptance was communicated to the assessee by letter dated March 30, 1994. Notice was issued under section 148 of the Act seeking to reopen the concluded assessment of the assessee for the assessment year 1989-90. On a writ petition, the High Court upheld the validity of the notice. On appeal to the Supreme Court: Held, allowing the appeal, that the income to be chargeable to tax must accrue or arise at any point of time during the previous year. Income can be said to have accrued or arisen only when a right to receive the amount in question is vested in the assessee. No such right to receive the rent accrued to the assessee at any point of time during the assessment year in question, inasmuch as such enhancement though with retrospective effect, was made only in the year 1994. The retrospectivity was with regard to the right to receive rent with effect from an anterior date. The right, however, came to be vested only in the year 1994. The notice seeking to reopen the assessment for the assessment year 1989-90 was without jurisdiction or authority of law. (AY. 1989-90)

[The court made it clear that it had not expressed any opinion on the rights and liabilities of the parties in respect of the receipt in question with regard to any subsequent year and that these would be governed by the relevant provisions of the Act.]

P.G. and W. Sawoo P. Ltd v. ACIT (2016) 385 ITR 60/ 286 CTR 460 / 239 Taxman 257 (SC)

40. S.158BB : Block assessments -Statements recorded prior to search would not amount to disclosure of income – Unearthed money during search and subsequent enquiries would be undisclosed income. [Ss. 131, 132(4), 158(b)]

Allowing the appeal of revenue, the Court held that; that where the assessee had never filed their regular returns of income, amount found deposited in their bank accounts which were unearthed during the course of search, would be treated as undisclosed income. Merely a statement was recorded u/s. 131 prior to search giving details of such bank accounts, would not amount to disclosure of income. On Special Leave Petition, the Supreme Court affirmed the findings of the High Court. (BP 1-4-1986 to 26-4-1996)

Shibu Soren v. CIT (2016) 239 Taxman 512 (SC)

41. S.158BE : Block assessment -Search and seizure – Limitation – Time during which interim order of High Court in force to be excluded – Time to be reckoned from date of last panchnama

A petition for review of the decision of the Supreme Court (see [2016] 384 ITR 1) to the effect (a) that the period between August 24, 2000, i.e. the date on which the interim order was passed by the High Court staying the direction for special audit under section 142(2A), and December 15, 2016, i.e. when the High Court passed the order setting aside the direction for special audit, should be excluded in counting the period of limitation for concluding the block assessment, and (b) that the limitation should be counted from the last date of search when the search operation completed, i.e. August 5, 1998, and that therefore, the assessment was within time was dismissed by the Supreme Court.

VLS Finance Ltd. v. CIT (2016) 386 ITR 407 (SC)

42. S.194J : Deduction at source – Fees for professional or technical services – SLP was dismissed. [Ss. 194C, 201]

SLP dismissed against High Court ruling that wheeling charges paid for transportation of electricity was not liable for TDS u/s. 194J, as the same could not be characterised as fees for technical services. (AY. 2005-06)

CIT (TDS) v. Delhi Transco Ltd. (2016) 239 Taxman 263 (SC)

43. S.226 : Collection and recovery – Modes of recovery – Where revenue sought recovery of dues against assessee-sick industry who put on sale its property, as scheme of rehabilitation had expired, action of revenue was justified [Sick Industrial Companies (Special Provisions) Act, 1985 (‘SICA’) Ss. 18(9), 18(12), 22]

On appeal before the Supreme Court, the Supreme Court held that the High Court proceeded on a palpably wrong presumption that the sanctioned scheme was still under operation and, therefore, bar under section 22 of the SICA applied. For this reason, it directed that the only remedy left for the revenue was to approach the Board for lifting of the bar under section 22 of the SICA. From the facts and events noted above, this surmise and assumptions are clearly erroneous and contrary to record. It is seen that the scheme had already expired and that the net worth of the company had turned positive and it was no more a sick company. Thus, the revenue had right to recover arrears of income tax after 2007. The issue as to what would be quantum of dues that revenue has to recover from the assessee is not decided in the present appeal and the parties are permitted to approach the Board seeking clarification as to what was meant by the words ‘to consider’ i.e., whether the Board meant that it was mandatory on the part of the revenue to waive the interest and penalty or it was only recommendatory and, therefore, it was up to the revenue to agree or not to agree to the said request. The Income Tax Department shall be entitled to take steps for attachment of the properties of the assessee, including Mumbai unit as per the provisions of the Income-tax Act and shall be entitled to sell the same. If there are any secured creditors in respect of these properties, such attachment and sale shall be subject to the rights of those creditors. Out of the proceeds, the principal amount of tax due to the Income-tax Department and even the admitted excise dues shall be paid to the revenue. Insofar as payment of interest and penalty is concerned, that would be dependent upon the decision which the Board would give.

DGIT v. GTC Industries Ltd (2016) 240 Taxman 209/286 CTR 355 (SC)

44. S.260A : Appeal – High Court – Power to recall order – Order passed on appeal was not ex part – Recall of the order was set aside [Code of Civil Procedure Code, 1908, O.XLI .r 21 ]

Allowing the appeal of Revenue, against the order of the High Court recalling it order dated August 27, 2013 (CIT v. Sburata Roy ( 2016) 385 ITR 547 (All)(HC)) passed on appeals under section 260A(7) of the Act read with Rule 21 of Order XLI of the Code of Civil Procedure, 1908 ; held that a perusal of the order of the Court dated August 27, 2013 on the appeals would go to show that it was not an ex parte order . The participation of the assesse in the hearing of the appeals was also evident from various other parts of the order. Not only was the order not an ex parte order as contemplated by R. 21 of Order XLI, the order passed by the High Court clearly contained findings to the contrary. In these circumstances the High Court did not have the jurisdiction under R. 21 of order XLI of the Code to recall the final Order dated August 27, 2013 passed in the income tax Appeals. The power available under R. 21 of order XLI is hedged by certain pre-conditions and unless the pre-conditions are satisfied the power thereunder cannot be exercised. The order of the High Court recalling its order was liable to be set aside leaving the assessee at liberty to challenge the order dated August 27, 2013 in accordance with law, if so advised. Decision of Allahabad High Court was set aside.

CIT v. Subrata Roy ( 2016) 385 ITR 570 (SC)

45. S.271(1)(c) : Penalty – Concealment – Where against basic principle of accountancy, assessee claimed capital loss on sale of fixed assets in profit and loss account – And had not revised return voluntarily – penalty for concealment of income was justified – SLP of assessee was dismissed [S.28(i)]

Where against basic principle of accountancy, assessee claimed capital loss on sale of fixed assets in profit and loss account and had not revised return voluntarily penalty for concealment of income was justified. SLP filed by the assessee was dismissed by the Supreme Court (AY 2006-07).

NG Technologies (in liquidation) v. CIT (2016) 240 Taxman 6 (SC)

46. S.271(1)(c) : Penalty – Concealment – SLP dismissed against the decision of the Calcutta High Court wherein it was held that the levy of penalty was justified even when the assessee had disclosed the income subsequent to the date of search as it was not disclosed earlier

The Hon’ble Apex Court dismissed the Special Leave Petition filed against the decision of the Hon’ble Calcutta High Court in the case of CIT v. Prasanna Dugar 279 CTR 86, wherein it was held that the penalty is leviable in respect of the disclosure in the return of income filed after the search but within the due date under Section 139(4), which was not disclosed in the return of income filed earlier under Section 139(1) and that clause (b) of Explanation 5A to Section 271(1) is not applicable in the case where the return of income is filed already. (AY. 2008-09)

Prasanna Dugar v. CIT (2015) 373 ITR 681 / 279 CTR 536/ (2016) 240 Taxman 305 (SC)

47. S.271D : Penalty – Deposit in cash exceeding specified limit -Limitation – Penalty provisions invoked after period of six months – Cancellation of penalty proper [S. 271E]

Setting aside the penalty imposed on the assessee on the ground that the provisions of sections 271D and 271E had been invoked after six months of limitation was proper. (AYs. 1993-1994, 1994-1995, 1995-1996

CIT v. Hissaria Brothers (2016) 386 ITR 719 (SC)