Direct Taxes

Supreme Courts

1. Business expenditure — S. 43B

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

    

2. Cash credits — S. 68
   
   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 vs. P. Mohanakala [2007] 291 ITR 278 (SC), 210 CTR (SC) 20, 161 Taxman (SC) 169
    

3. Deemed Dividend — Effect of finding of fact — Sham transactions/Device adopted — S. 2(22)(e)
   
   Assessee found to invest more than Rs. 26 crores in purchase of 9 per cent RBI Relief Bonds. The said Bonds purchased from the money received from two firms in which the assessee was the partner. Assessee also had substantial interest two companies during the block period. On of the two companies made payments to the two firms enabling the assessee to make withdrawals and buy the 9 per cent RBI Relief Bonds. Department contended the payment by the company to firms was a device to evade payment of tax on accumulated profits and assessed the sum as deemed dividend in the hands of the assessee under section 2(22)(e). On appeal, the Commissioner set aside the assessment order. Department’s appeal against the order was allowed by the Tribunal. Appeal before the High Court was decided in favour of the assessee. Department preferred appeal to the Supreme Court. Held, that the conclusion of the Tribunal that the two firms were used as conduits by the assessee, was a finding of fact, Department was right in assessing the amount as deemed dividend in the hands of the assessee under section 2(22)(e). Further held, the companies having accumulated profits were required to distribute accumulated profits as dividends to the shareholders. But in practice, it is for the controlling group to decide whether the profits should be distributed as dividends or not. The section brought into force to tackle misuse of the discretion of this group done by depriving the shareholders of the profit share and advancing the said profits by way of loan to one of its shareholders so as to avoid payment of tax on accumulated profits.
   Ratio Decidendi: “Whether payment made by the company is for the benefit of shareholders or for the individual benefit of the assessee is a question of fact to be determined after taking into account all circumstances.” CIT vs. Mukundray Shah (2007) 4 SCC 327
    

4. Ex parte Order — Restoration of matter
   
   A matter 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. vs. Union of India [2007] 290 ITR 199 (SC)
    

5. Export — Deduction to supporting manufacturer — S. 80HHC(1A)
   
   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 vs. Baby Marine Exports [2007] 290 ITR 323 (SC), 209 CTR (SC) 183
    

6. Export — S. 80HHC
   
   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 vs. Lakshmi Machine Works [2007] 290 ITR 667 (SC), 210 CTR (SC) 1
    

7. Export — Ss. 80AB, 80HHC
   
   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 vs. Shirke Construction Equipments Ltd. [2007] 291 ITR 380 (SC), 161 Taxman (SC) 212.
    

8. Income — Attribution of profits to the Permanent Establishment — S. 4
   
   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 Establishment 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 vs. Hyundai Heavy Industries Co. Ltd. [2007] 291 ITR 482 (SC), 161 Taxman (SC) 191
    

9. Insurance business — S. 44
   
   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 sections 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 vs. Oriental Fire and General Insurance Company [2007] 291 ITR 370 (SC), 161 Taxman (SC) 181
    

10. Interpretation of statutes
    
    Question that arose was whether ‘dog feed’ and ‘cat feed’ sold by the appellant-assessee attracts Nil rate of duty under Entry 5 of First Schedule of the Karnataka Value Added Tax Act, 2003 (hereinafter referred to as “the Act”) — “animal feed and feed supplements, namely, processed commodity sold as poultry feed, cattle feed, pig feed, fish feed, fish meal, prawn feed, shrimp feed”. According to the appellant, dog feed and cat feed are the products which would fall in the category of animal feed under Entry 5; Entry 5 deals with animal feed, feed supplements, namely, processed commodity sold as poultry feed, cattle feed, pig feed, fish feed, fish meal, prawn feed, shrimp feed, feed supplements and mineral mixtures; the words: poultry feed, cattle feed, and pig feed etc. are the specific instances of food supplements and the word ‘namely’ after the words ‘feed supplements’ in Entry 5 shows that the Legislature intended the words ‘feed supplements’ to be confined to poultry feed, cattle feed, pig feed, fish feed, fish meal, prawn feed and shrimp feed. Held — The above quoted Entry 5 shows that animal feed and feed supplements is one category. It is after the expression “animal feed and feed supplements” that the Legislature has inserted a comma, therefore, animal feed and feed supplements constitute one class of products, they do not constitute two separate classes. Further, the expression “animal feed and feed supplements” is not only followed by a comma, it is followed by the word ‘namely’, which indicates that the items mentioned after the word ‘namely’ like poultry feed, cattle feed, pig feed, fish feed etc. are specific instances of animal feed and feed supplements, which would fall in Entry 5. That list is exhaustive. In that list, the Legislature has not included dog feed/cat feed, therefore, the products of the appellant do not fall under Entry 5 of the First Schedule of the Act. The punctuation mark “comma” has been used expressly after the words “animal feed and feed supplements”, which indicates that the Legislature intended to classify these two items as one class/category. Argument that rules of grammatical construction require that if sentences complete by themselves are connected by a conjunction, namely, the word ‘and’, the second sentence must be held to limit the first sentence was struck down observing that in the present case, the word ‘and’ in Entry 5 is placed between the words “animal feed” and “feed supplements” followed by a punctuation mark “comma”, therefore not concerned with a case where two sentences are sought to be connected; the word ‘and’ is placed by the Legislature between two types of goods, namely, animal feed and feed supplements. The punctuation mark, after categorizing “animal feed and feed supplements”, as one class, is very important. The Legislature intended, therefore, to put “animal feed and feed supplements” in one category. Durga Distributors vs. State of Kerala (2007) 4 SCC 476
     

11. Kar Vivad Samadhan Scheme — Immunity
    
    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 vs. State of Kerala and Others 210 CTR (SC) 86
     

12. Penalty — Concealment — S. 271(1)(c)
    
    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 of 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 vs. JCIT [2007] 291 ITR 519 (SC); 161 Taxman (SC) 218
     

13. Prosecution in case of companies — Tax Deduction at Source — S. 276B
    
    The Supreme Court held that it cannot be said that the prosecution against a company or its directors for default of deduction or payment of 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. vs. Union of India [2007] 290 ITR 199 (SC)
     

14. Question of Law & Question of facts
    
    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 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 vs. M.N. Moni 291 ITR 387 (SC), 161 Taxman (SC) 207
     

15. Reassessment — Change of opinion where intimation — Ss. 143(1), 148
    
    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 vs. Rajesh Jhaveri Stock Brokers P. Ltd [2007] 291 ITR 500 (SC), 210 CTR (SC) 30, 161 Taxman (SC) 316
     

16. Valuation of closing stock — S. 145
    
    The assessee valued the closing stock at net realizable price being the price quoted on the London Metallic Exchange following the principle of valuation of stock at cost or market price whichever is less. However 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 vs. Hindustan Zinc Limited [2007] 291 ITR 391 (SC), 161 Taxman (SC) 162.