Direct Taxes

Supreme Courts

1. Appeal u/s. 260A to the High Court
   Judges must administer law according to the provisions of law. It is the bounden duty of judges to discern legislative intention in the process of adjudication. Justice administered according to individual’s whim, desire, inclination and notion of justice would lead to confusion, disorder and chaos. Indiscriminate and frequent interference under section 100 C.P.C. in cases which are totally devoid of any substantial question of law is not only against the legislative intention but is also the main cause of huge pendency of Second Appeals in the High Courts leading to colossal delay in the administration of justice in civil cases in our country.

2. Block assessment — S. 158BD
   
   The premises of the director of the company and his wife were searched under section 132, and a block assessment was done in the hands of the company. The Supreme Court held that before the provisions of section 158BD are invoked against the person other then the person whose premises have been searched under section 132 or documents and other assets requisitioned under section 132A, the conditions precedent have to be fulfilled. In the present case as the assessing officer has not recorded his satisfaction, nor had he transferred the case to the jurisdictional assessing officer, the appeal of the assessee was allowed.
   
   Manish Maheshwari vs. CIT 289 ITR 341 (SC), 159 Taxman 258 (SC), 208 CTR 97
    

3. Consolidation of cases
   
   A joint trial can be ordered by the court if it appears to it that some common question of law or fact arises in both proceedings or that the right to relief claimed in them are in respect of or arise out of the same transaction or series of transactions or that for some other reason it is desirable to make an order for joint trial. Where the plaintiff in one action is the same person as the defendant in another action, if one action can be ordered to stand as a counter claim in the consolidated action, a joint trial can be ordered. An order for joint trial is considered to be useful in that, it will save the expenses of two attendance by counsel and witnesses and the trial judge will be enabled to try the two actions at the same time and take common evidence in respect of both the claims. It does not appear to be necessary that all the questions or issues that arise should be common to both actions before a joint trial can be ordered. It will be sufficient if some of the issues are common and some of the evidence to be let in is also common, especially when the two actions arise out of the same transaction or series of transactions.
   
   A joint trial is ordered when a Court finds that the ordering of such a trial, would avoid separate overlapping evidence being taken in the two causes put in suit and it will be more convenient to try them together in the interests of the parties and in the interests of an effective trial of the causes. This power inheres in the Court as an inherent power. It is not possible to accept the argument that every time the Court transfers a suit to another court or orders a joint trial, it has to have the consent of the parties. A Court has the power in an appropriate case to transfer a suit for being tried with another if the circumstances warranted and justified it.
   
   tate Bank of India vs. Rajan Chemicals Ltd. — (2007) 1 SCC 97
    

4. Income — From offshore supply’s and offshore services — Taxability under the Act And treaty — S. 9
   
   In the present case, the entire transaction of transfer of title in goods was completed on high sea. Since all the activities in connection with the offshore supply were outside India, therefore under section 9, income could not be deemed to accrue or arise in India. And the fact that the contract was signed in India was of no material consequence.
   Once excluded from the scope of taxation under the Income-tax Act, application of Double Taxation Avoidance Treaty would not arise.
   
   In any case, under the treaty also, it would not be taxable, since the assessee carried on business in India through a permanent establishment, hence it would be out of article 12 and would fall within the ambit of Article 7. The state of permanent establishment is allowed to tax only those profits which are attributable to the permanent establishment, and in the present case the permanent establishment had no role to play in the transaction of offshore supply as the whole transaction took place abroad and therefore no profits would be attributable to the permanent establishment.
   
   Further, the Supreme Court held that the concept of ‘a business connection’ as provided under the Income-tax Act and ‘a permanent establishment’ as provided under the Double Taxation Avoidance Treaty are distinct.
   
   In relation to offshore services, under section 9(1)(vii)(c) for a technical services to be taxable in India, two condition are required to be satisfied – services must be rendered in India and the services must be utilized in India. In the present case since both the conditions are not fulfilled, they will not be taxed in India under the Income-tax Act itself. The Supreme Court further held that, income must have a sufficient territorial nexus with India so as to furnish a basis for imposition of tax in India.
   Ishikawajima-Harima Heavy Industries Ltd. vs. Director of Income tax [200] 288 ITR 408 (SC), 159 Taxman 259, 207 CTR 361
    

5. Interpretation — Notes to clauses
   
   The Supreme Court held that the 2002 amendment in Explanation 4 to section 271 is prospective as it was consciously made effective from April 1, 2003. The fact that the notes to clauses mention the amendment to be clarificatory is also of no consequence and that the notes to clauses cannot bind the court.
   
   The Supreme Court further held that the penal provisions should be interpreted strictly.
   
   Virtual Soft Systems Limited vs. CIT [2007] 289 ITR 83 (SC), 159 Taxman 155, 207 CTR 733
    

6. Investment allowance — S. 32AB
   
   The assessee is engaged in the business of civil construction. The Supreme Court affirmed the decision of the Tribunal and the High Court, wherein it was held that business of civil construction would not amount to carrying on any manufacturing activity for the purpose of section 32AB. Therefore the claim for investment allowance was not allowed as the assessee.
   S.A. Builders Ltd. vs. CIT [2007] 289 ITR 26 (SC), 159 Taxman 230 (SC)
   
    

7. Penalty — S. 271(1)(c)
   
   The Supreme Court has held that prior to the amendment in the year 2002, in the explanation 4 to section 271, if the return is filed declaring a loss and the assessment made only reduces the loss, and there is no positive income, then penalty under section 271(1)(c)(iii) of the Act cannot be levied. It was further held that the insertion of explanation 4 with effect from April 1, 1976, would also not change the above position.
   
   Virtual Soft Systems Limited vs. CIT [2007] 289 ITR 83 (SC), 159 Taxman 155, 207 CTR 733
    

8. Revision — Scope of power — S. 263
   
   Revision proceeding under section 263 cannot be held to become bad only because subsequently, an order of rectification was passed by the assessing officer under section 154. In such cases, the consenting party should bring the subsequent development to the notice of the Commissioner so as to enable him to take same into consideration.
   
   The principle that when an authority having discretionary power exercises the same for unauthorized purpose or on consideration of irrelevant facts, the same must be held to be bad in law is to be applied only in administrative jurisdiction; it cannot be applied in cases where an authority exercises a judicial or a quasi judicial function.
   
   Further, the lower authority is bound by the order passed by the higher authority keeping in view the principles of judicial discipline.
   
   CIT vs. Ralson Industries Ltd. [2007] 288 ITR 322(SC), 159 Taxman 160, 207 CTR 201
    

9. Special Audit — S. 142(2A)
   
   The Supreme Court has referred the issue of whether the assessee should be given an opportunity of being heard before the assessing officer issues a direction for the accounts to be audited under section 142(2A) to a larger bench to reconsider its earlier decision in the case of Rajesh Kumar vs. DCIT [2006] 287 ITR 91 (SC).
   
   Note: The Finance Bill, 2007 has proposed to insert a proviso to section 142(2A) with effect from June 1, 2007, providing for an opportunity to be given to the assessee before issuing a direction under section 142(2A) to get the accounts audited.
   Sahara India (Firms) vs. CIT [2007] 289 ITR 473 (SC)