DIRECT TAXES – Supreme Court

Research Team

  1. S.32 : Depreciation – Prior to insertion of Explanation 5 to S.32 of the Act – Optional and could not be thrust upon – Matter remanded

    On appeal by the Revenue, the Court held that High Court had not had the benefit of the decision in Plastiblends India Ltd v. Add. CIT (2017) 398 ITR 568 (SC), accordingly the matter was remanded to the High Court. (AYs. 2003-04 to 2006-07)

    CIT (LTU) v. Reliance Industries Ltd. (2019) 410 ITR 466 (SC)

    Editorial : Order of Bombay High Court in CIT (LTU) v. Reliance Industries Ltd. (ITA Nos 1550/ 1592/1775 and 1881 of 2014 dt. 22-8-2017, 23-8-2017 is affirmed (2019) 410 ITR 468 (Bom) (HC)

  2. S.36(1)(iii) : Interest on borrowed capital – When interest- free funds available with assessee are sufficient to meet investment, presumption is that investments in subsidiaries were out of interest free funds – No disallowance can be made

    Dismissing the appeal of the Revenue the Court held that interest-free funds available with assessee were sufficient to meet investment. Presumption is that investments in subsidiaries were out of interest free funds accordingly no disallowance can be made. (AYs. 2003-04 to 2006-07)

    CIT (LTU) v. Reliance Industries Ltd. (2019) 410 ITR 466 (SC)

    Editorial : Order of Bombay High Court in CIT (LTU) v. Reliance Industries Ltd. (ITA Nos 1550/ 1592/1775 and 1881 of 2014 dt 22-8 2017, 23-8 2017 is affirmed (2019) 410 ITR 468 (Bom)(HC)

  3. S.37(1) : Business expenditure – Sharing of profit – The AO has to take into account the manner in which the business works, the modalities and manner in which SAP/additional purchase price/final price are decided and determine what amount forms part of the profit – Whatever is the profit component is sharing of profit/distribution of profit and the rest is deductible as expenditure – Question of law is answered partly in favour of the revenue and partly in favour of the assessee – Matter is remitted to the AO to undertake the exercise as stated in the judgment after giving an opportunity to the respective assessees. [S.40A(2)]

    AO held that the difference between the price paid as per Clause 3 of the Control Order, 1966, determined by the Central Government, and the price determined by the State Government under Clause 5A of the Control Order, 1966 (and consequently paid by the assessee to the cane growers) can be said to be a distribution of profit, as in the price determination under Clause 5A of the Control Order, 1966, there is an element of profit and therefore the price paid to the cane growers determined by the State

    Government is excessive and therefore it is not deductible as expenditure, and is required to be included in the income of the assessee. AO also held that cane price paid to the cane growers over the SMP is disallowable as per Section 40A(2)(a) of the Act by observing that purchase price paid is excessive and unreasonable. On appeal CIT(A) allowed the appeal following SB in Dy. CIT v. Manjara Shetkari Sakhar Karkhana Ltd. (2004) 91 ITD 361 (SB) (Mum.) (Trib.) (dt. 19-8-2004). Order of CIT(A) was affirmed by Tribunal. High Court dismissed the appeal of the Revenue following the decision in CIT v. Manjara Shetkari Sahakari Sakar Karkhana Ltd. (2008) 301 ITR 191 (Bom) (HC). On appeal by the Revenue the Supreme Court considering the decision in Maharashtra Rajya Sahkari Sakkar Karkhana Sangh Ltd. v. State of Maharashtra (1995) Supp. (3) SCC 475 the Court held that the AO has to take into account the manner in which the business works, the modalities and manner in which SAP/additional purchase price/final price are decided and determine what amount forms part of the profit. Whatever is the profit component is sharing of profit/ distribution of profit and the rest is deductible as expenditure. Question of law is answered partly in favour of the Revenue and partly in favour of the assessee. Matter remitted to the AO to undertake the exercise as stated in the judgment after giving an opportunity to the respective assessees. (CA. No 8890 of 2012, dt. 5-3-2019)

    CIT v. Tasgaon Taluka S.S.K. Ltd. (2019) 103 taxmann.com 57 (SC), www.itatonline.org

  4. S.37(1) : Business expenditure – Capital or revenue – Pre- Operative expenses – Expenditure incurred on estimate basis could be reduced from dividends
    – Transfer Pricing adjustment to consultancy charges – High Court has failed to independently evaluate the merits – Matter remanded to High Court for fresh consideration [S.80M, 92C]

    Allowing the appeal of the Revenue the Court held that on the questions whether pre- operative expenses are allowable as revenue expenses, whether the expenditure incurred on estimate basis could be reduced from dividends and whether transfer pricing adjustment to consultancy charges is justified or not, the High Court has failed to independently evaluate the merits of the departmental appeals. The matter was remanded to High Court for consideration afresh. (AYs. 2003-04 to 2006-07)

    CIT (LTU) v. Reliance Industries Ltd. (2019) 410 ITR 466 (SC)

    Editorial : Order of Bombay High Court in CIT (LTU) v. Reliance Industries Ltd. (ITA Nos. 1550/ 1592/1775 and 1881 of 2014 dt. 22-8-2017, 23-8-2017 is affirmed (2019) 410 ITR 468 (Bom)(HC)

  5. S.68 : Cash credits – Bogus share capital/premium – The assessee is under legal obligation to prove the receipt of share capital/ premium to the satisfaction of the AO, failure of which, would justify addition of the said amount to the income of the assessee – Mere mention of income tax file number of an investor is not sufficient to discharge the onus – Credit worthiness of the investor companies was not discharged – Order of AO is confirmed

    Allowing the appeal of the Revenue the Court held that the practice of conversion of un- accounted money through cloak of Share Capital/Premium must be subject to careful scrutiny especially in private placement of shares. Filing primary evidence is not sufficient- The onus to establish credit worthiness of the investor companies is on the assessee. There was no explanation whatsoever offered as to why the investor companies had applied for shares of the assessee company at high premium of ₹ 190 per share even though the face value of the share was ₹ 10 per share. None of the so-called investor companies established the source of funds from which the high share premium was invested. Mere mentioning of the income tax file number of an investor is not sufficient to discharge the onus under S.68 of the Act. Credit worthiness of the investor companies was not discharged. The assessee is under legal obligation to prove the receipt of share capital/premium to the satisfaction of the AO, failure of which, would justify addition of the said amount to the income of the assessee. (SLP (Cl) No. 29855 of 2018, dt. 5-3-2019)(AY. 2009-10)

    PCIT v. NRA Iron & Steel Pvt. Ltd. (2019) 103 taxmann.com 48 (SC), www.itatonline.org

  6. S.80DD : Medical treatment of dependent – Disability – Jeevan Aadhar – Amount of annuity under the policy is to be released only after the death of the person assured – Purpose is to secure the future of the person suffering from disability, after the death of the parent /guardian – Provision is valid in law – Considering the several difficult situations where the handicapped person may need the payment on annuity or lump sum basis even during the life time of their parents / guardians, it is for the legislature to take care of theses aspects and to provide suitable provision by making necessary amendments in S.80DD [Art. 14]

    Constitutional validity of the provision of S. 80DD was challenged on the ground that the entitlement of disabled dependent to get annuity or lump sum payment under LIC policy only after the death of the subscriber in respect of the policy named ‘Jeevan Aadhar’. Apex Court held that the provision is valid in law. Court also observed that, considering the several difficult situations where the handicapped person may need the payment on annuity or lump sum basis even during the life time of their parents / guardians, it is for the legislature to take care of these aspects and to provide suitable provision by making necessary amendments in S.80DD of the Act.

    Ravi Agarwal v. UOI ( 2019) 173 DTR 194/306 CTR 177(SC)

  7. S.80HH : Newly established industrial undertakings – Deduction has to be computed on the profits and gains without deducting therefrom ‘depreciation’ and ‘investment allowance’ & not from income as computed under the Act. S. 80AB is prospective. [S.80AB, 80I]

    Deduction has to be computed on the ‘profits and gains’, without deducting therefrom ‘depreciation’ and ‘investment allowance’ & not from ‘income’ as computed under the Act.
    S. 80AB is prospective. Motilal Pesticides (I) Pvt Ltd. v. CIT ( 2000) 243 ITR 26 (SC) is reversed) (CA Nos. 1581-1582 of 2005, dt. 1-3-2019) (AYs. 1979 -80, 1980-81)

Vijay Industries v. CIT (SC), www.itatonline.org

  1. S.80-IC : New Industrial undertaking – Special Category States – Initial assessment year – An assessee availing exemption of 100% tax on setting up of a new industry, which is admissible for 5 years, and either on the expiry of 5 years or thereafter (but within 10 years) from the date when these assessees started availing exemption, they carried out substantial expansion of its industry would become ‘initial assessment year’, and from that assessment year, assessee shall been entitled to 100 per cent deductions from that year

    Dismissing the appeal of the Revenue the Court held that an assessee availing exemption of 100% tax on setting up of a new industry, which is admissible for 5 years, and either on the expiry of 5 years or thereafter (but within 10 years) from the date when these assessees started availing exemption, they carried out substantial expansion of its industry would become ‘initial assessment year’, and from that assessment year, assessee shall be entitled to 100 per cent deductions. (CIT v. Classic Binding Industries (2018) 407 ITR 429 (SC) is held not good law and reversed). (CA 1784 of 2019, dt. 20-2-2019)

    PCIT v. Aarham Softronics (2019) 102 taxmann.com 343 (SC), www.itatonline.org

  2. S.147 : Reassessment – Based on subsequent finding of DRP that there was no Permanent Establishment of the assessee in India – AO dropped reassessment proceedings – Order passed by High Court upholding validity of those proceedings was to be set aside [S.148]

    In course of a survey carried out at the premises of assessee’s Indian subsidiary, a non-resident company, AO found that the subsidiary constituted assessee’s PE in India. Assessment of non-resident assessee was reopened. Subsequently, DRP recorded a finding that there was no PE of assessee in India. AO passed an order dropping the reassessment proceedings. Supreme Court set aside the judgment of the High Court which upheld the validity of the reassessment proceedings. (SLP Nos. 19655 to 19657, 19659 to 19661, 19667 to 19669, 19671 to 19673 of 2017 dt. 23-11-2017) (AYs. 2004-05, 2005-06).

    Principal Officer, Honda Access Asia & Oceania Co. Ltd. v. ADIT. (2018) 168 DTR 425 /255 Taxman 77 (SC)

    Editorial: Principal Officer, Honda Access Asia & Oceania Co. Ltd. v. ADIT(IT) (2014) 271 CTR 663/ 108 DTR 201/368 ITR 401/226 Taxman 204 (All) (HC) is set aside

  3. S.226 : Collection and recovery – Modes of recovery – Illegal Recovery – Strictures against DCIT – Adjustment of refund – High Court was not justified in its remarks against the DCIT and in issuing directions that (i) ‘deadwood’ should be weeded out (ii) personal costs of ₹ 1.5 lakh should be imposed (iii) adverse entry should be made in the Annual Confidential Report (iv) Denial of promotion etc. The directions were wholly unnecessary to the lis before the Court & are expunged [S.234]

    Claim of the refund was rejected by the AO on the ground that the refund had been adjusted against the tax demand relating to subsequent assessment years. In view of the fact that notice of demand under S. 156 for subsequent years was never served on the assessee order was set side with the direction to grant the refund and cost of ₹ 50 lakh was levied which was to be recovered from the salary of the Officer. Superiors were directed to take appropriate action. Revenue filed SLP before the Apex Court. Apex Court held that High Court was not justified in its remarks against the DCIT and in issuing directions that (i) ‘deadwood’ should be weeded out (ii) personal costs of ₹ 1.5 lakh should be imposed (iii) adverse entry should be made in the Annual Confidential Report (iv) Denial of promotion etc. The directions were wholly unnecessary to the lis before the Court & are expunged. (SLP No. 48031/2018, dt. 1-3-2019)

    Sanjay Jain v. Nu Tech Corporate Service Ltd. (SC), www.itatonline.org

    Editorial: Nu-Tech Corporates Ltd. v. ITO (2018) 259 Taxman 183 (Bom) (HC) www.itatonline.org

  4. S.260A : Appeal – High Court – Delay of 362 days – Difference of opinion between two officers – Appeal was filed on the basis of legal opinion – Delay was condoned and remanded the matter to High Court to decide on merits – Cost of ₹ 1 lakh is awarded on department which is to be paid to the assessee

    Allowing the appeal of the Revenue the Court held that main cause of delay was a difference of opinion between two officers of the Department on whether an appeal was to be filed from the order of the Tribunal, and ultimately a legal opinion was taken and it was decided to file the appeal. In view of this and having regard to the importance of the matter, the High Court should hear the appeal on the merits. Delay of 362 days was condoned subject to payment of cost of ₹ one lakh by the Department to the assessee, and remitted the matter to the High Court for decision of the appeal on the merits.

    CIT v. Progressive Education Society (2019) 410 ITR 370 (SC)

    Editorial : Order in CIT(E) v. Progressive Education Society (2019) 410 ITR 371 (Bom) (HC) is set aside.

  5. S.261 : Appeal – Supreme Court – Adjournment cannot be sought on the ground that Counsel is out of station – Opportunity was given to the counsel to argue the matter, however he could not argue the matter – The appeal was dismissed for non-prosecution – Court also observed that under no circumstances, application for restoration shall be entertained

When the matter was called for hearing the counsel asked for an adjournment on the ground that the counsel for the appellant was not present in the Court as he was out of station. Court held that this was no ground to seek an adjournment. Accordingly the Court rejected the request for adjournment and asked the counsel to argue the matter. However the counsel present submitted that he did not know anything about the case. In these circumstances, the Court dismissed the appeal for non- prosecution. Court also made it clear that since the ground on which adjournment was sought was not found it to be a good ground, under no circumstances, application for restoration would be entertained. (CA Nos. 9142-9144 of 2010, dt. 7-2-2019)

        Ram Siromani Tripathi v. State of U.P. (SC), www.itatonline.org 

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