1. Appeal – Third Party – Writ under Article 226 of the Constitution

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. An appeal is a statutory remedy available to the department and it is not open to a third party to seek such remedies in collateral proceedings.

Rajiv Ranjan Singh ‘Lalan’ & Anr. vs. Union of India & Anr. (2006) 205 CTR 53

2. Audit – S. 142(2A)

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 vs. DCIT [2006] 287 ITR 91 206 CTR 175

3. Best Judgment Assessment – S. 144

Even though there is always a certain degree of guess work in a best judgment assessment, the authority should try to make an honest and fair estimate of the income and should not act totally arbitrarily.

Kachwala Gems vs. JCIT [2006] 287 ITR 10.

4. Business loss – S. 37, 72

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 vs. CIT [2006] 287 ITR 547 157 Taxman 514

5. Deduction of interest on borrowed capital – S. 36(iii)

The Supreme Court held that interest deduction can be claimed even when the monies borrowed have been given to a 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 advanced to it by assessee for their personal benefit, obviously it cannot be said that such money was advanced as a measure of commercial expediency. However, when the holding company has deep interest in its subsidiary and the loan advanced is used 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. vs. CIT 288 ITR 1 (SC)

6. Depreciation – S. 32

The assessee had purchased an undertaking and along with it, taken over the accrued and future liability of gratuity to the employees. The Supreme Court held that the gratuity liability taken over formed part of the purchase consideration and 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 word ‘plant’ as defined under section 43(3) would also not include gratuity liability.

CIT vs. Hoogly Mills Co. Ltd. [2006] 287 ITR 333

7. Doctrine of Promissory Estoppel – Article 14

Pursuant to incentives and concessions notified by State, appellant made expansion and diversification of its industries in State. Board of Revenue having found appellant eligible for sales tax exemption under notification granted tax exemption of seven years to appellant. Subsequently, State issued notification withdrawing tax exemption from a specific date. Assistant Commissioner of Sales Tax issued notices proposing to impose penalty on appellant for failure to pay purchase tax. Single Judge dismissed writ petition and remanded matter to sales tax authorities. Appeal was also dismissed by Division Bench — Held, doctrine of promissory estoppel has been repeatedly applied by Supreme Court to statutory notifications. Where a right has already accrued, for instance, right to exemption of tax for a fixed period and conditions for that exemption have been fulfilled, then withdrawal of exemption during that fixed period cannot affect already accrued right. Impugned action on part of State Government was highly unfair, unreasonable, arbitrary and, therefore, same was violative of Article 14 of Constitution. Appeal allowed MRF Ltd., Kottayam vs. Asst. Commissioner (Assessment) Sales-tax & Ors. (2006) 8 SCC 702

8. Interpretation of statutes

1. Creative Interpretation – The Act was enacted in the year 1948. Information Technology at that time far from being developed was unknown. Constitution of India is a living organ. Creative interpretation had been resorted to by the Court so as to achieve a balance between the age old and rigid laws on the one hand and the advanced technology, on the other. The Judiciary always responds to the need of the changing scenario in regard to development of technologies. It uses its own interpretative principles to achieve a balance when Parliament has not responded to the need to amend the statute having regard to the developments in the field of science.
   
   State of Punjab and Others vs. Amritsar Beverages Ltd. & Ors. (2006) 7 SCC 607
    

2. An interpretation of a provision which renders certain other provisions redundant or otiose cannot be accepted.
   
   Sadhu Singh vs. Gurudwara Sahib Narike (2006) 8 SCC 75

9. Meaning : “Having regard to”

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 vs. DCIT [2006] 287 ITR 91 206 CTR 175

10. Natural Justice

1. By now it is a well settled principle of law that doctrine of principle of natural justice is not embodied Rule. It cannot be applied in a straight jacket formula. To sustain the complaint of violation of the principle of natural justice one must establish that he has been prejudiced by non-observance of principle of natural justice. As held by the High Court the appellant has not been able to show as to how he has been prejudiced by non-furnishing of the copy of the enquiry report. The appellant has filed a appeal before Appellate Authority which was dismissed as noticed above. It is not his case that he has been deprived of making effective appeal for non-furnishing of copy of enquiry report. He has participated in the enquiry proceedings without any demur. It is undisputed that the appellant has been afforded enough opportunity and he has participated throughout the enquiry proceedings, he has been heard and allowed to make submission before the enquiry Committee.
   
   Om Prakash Mann vs. Director of Education (Basic) & Ors. (2006) 7 SCC 558
    

2. Natural justice is an inseparable ingredient of fairness and reasonableness. It is even said that the principles of natural justice must be read into unoccupied interstices of the statute, unless there is a clear mandate to the contrary.
   
   Suresh Chandra Nanhorya vs. Rajendra Rajak & Ors. (2006) 7 SCC 800
    

3. The principles of natural justice were also not required to be complied with as the same would have been an empty formality. The court will not insist on compliance of the principles of natural justice in view of the binding nature of the award. Its application would be limited to a situation where the factual position or legal implication arising thereunder is disputed and not where it is not in dispute or cannot be disputed. If only one conclusion is possible, a writ would not issue only because there was a violation of the principles of natural justice.
   
   Punjab National Bank & Ors. vs. Manjeet Singh & Anr. (2006) 8 SCC 647

11. Penalty

Admittedly, the appellant did not file the return either within the time specified in the statute for doing so or within the extended period of time. The returns were filed beyond the extended period for filing the return. Interest on the amount due and penalty are two different and distinct concepts. Interest is the accretion on the capital whereas conclusion penalty is a punishment imposed on a wrong-doer.

Amin Chand Pyarelal vs. Inspecting ACIT (2006) 7 SCC 483

12. Revenue expenditure – Bonus Shares – S. 37

Assessing Officer disallowed expenses incurred by assessee-company in connection with issuance of bonus shares as capital expenditure. On appeal, CIT (Appeals) held expenditure allowable as revenue expenditure. and High Court confirmed allowance — Held, issue of bonus shares by capitalization of reserves is merely a reallocation of company’s funds, there is no inflow of fresh funds or increase in capital employed; hence, expenditure on issuance of bonus shares is revenue expenditure. Appeal, accordingly, dismissed.

CIT vs. General Insurance Corpn. (2006) 8 SCC 117

13. Search & Seizure – Presumption – S. 132(4A)

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 vs. CIT [2006] 287 ITR 209, 157 Taxman 325