1. India is perhaps the first country to statutory require companies to undertake corporate Social Responsibility (CSR). The provisions in Section 135 are to be read with Companies (Corporate Social Responsibility Policy) Rules, 2014 (CSR Rules).

2. Section 135(1) of Companies Act, 2013 and Rule 3(1) and Rule 3(2) of the Companies (CSR) Rule, 2014

The Section applies to every Company including its holding or subsidiary and a foreign company defined under section 2(42) of the Act having its branch office or project office in India, which fulfils any one of the following criteria set in section 135(1), if such company in any financial year has:

  1. Networth of rupees five hundred crores or more, or
  2. Turnover of rupees one hundred crores or more; or
  3. A net profit of rupees five crores or

The requirement applies irrespective of the nature of activities carried on by the Company.

The company meeting the above financial criteria to constitute a Corporate Social Responsibility Committee of the Board consisting of three or more directors, out of which at least one director shall be an independent director.

3. Meaning of Net Worth, Turnover and Net Profit

‘Networth” is defined in Section 2(57) and means the aggregate value of the paid up share capital and all reserves created out of profits and securities premium account, after deducting the aggregate value of accumulated losses, deferred expenditure and miscellaneous expenditure not written off, as per the audited balance sheet but does not include reserves created out revaluation of assets, write back of depreciation such amalgamation.

“Turnover” is defined under section 2(91) means the aggregate value of realization of amount made from the sale, supply or distribution of goods or on account of services rendered or both, by the company during a financial year.

“Net Profit”: It shall be calculated as per the provisions of Section 198 of the Companies Act, 2013 for the purposes of section 135.

“Net Profit” has been defined in Rule 2(b) of the Companies Corporate Social Responsibility Policy, Rules, 2014 to mean the net profit of the Company as per its financial statement prepared in accordance with the applicable provisions of the Act, but shall not include the following namely,

  1. Any profit arising from any overseas branch or branches of the company whether operated as a separate company or otherwise; and
  2. Any dividend received from other Companies in India, which are covers under and complying with the provisions of Section 135 of 2013

However, the net profit  in respect  of a financial year to which the relevant statements were prepared in accordance with the provisions of the companies Act, 1956 shall not be required to be recalculated in accordance with the provisions of the Act;

Further, in case of a foreign company covered under these Rules, net profit means the net profit of such company as per profit and loss account prepared in terms of Section 381(1)(a) read with Section 198 of the Act.

Section 198: Calculation of profits requires making adjustments to the profit or loss as derived from the profit and loss account of the financial statement.

4. Interpretation of Rule 3(2) of Companies (CSR) Rules 2014:

Sub-section (1) requires any of the three financial criterions to be determined during the financial year. However, General Circular No.21/2014,  MCA has clarified that “Any Financial Year” referred to in sub-section (1) of Section 135 of the Act read with Rule 3(2) of Companies CSR Rule, 2014, implies “any of the three preceding financial years” Rule 3(2) of Companies (CSR) Rules, 2014 specifies that every company, which ceases to be a company covered under Section 135(1) of the Act for three consecutive financial years shall not be required to:

  • Constitute a CSR committee;
  • Comply with provisions contained in sub-section (2) to (5) of the said section, till such time that it meets with criteria as set in sub-section (1) of section

In order to determine the applicability, the company would need to ascertain fulfilment of any of the three financial criterion in following manner:

Any of the financial criterion fulfilled in either of the three years CSR provisions applicable for
2011-12, 2012-13, 2013-14 2014-15
2012-13, 2013-14, 2014-15 2015-16

5.  Role of Corporate Social Responsibility Committee Section 135(3):

Corporate Social Responsibility Committee shall formulate and recommend to the Board, a Corporate Social Responsibility Policy which shall indicate the activities to be undertaken by the company, recommend the amount of expenditure to be incurred on the Corporate Social Responsibility activities and monitor the Corporate Social Responsibility activities and monitor the Corporate Social Responsibility Policy of the Company from time to time.

The activities to be undertaken by the company are as under:

  1. Protection of national heritage, art and culture including restoration of buildings and sites of historical importance and works of art, setting up of public libraries, promotion and development of traditional arts and handicrafts.
  2. Ensuing environmental sustainability, ecological balance, protection of flora and fauna, animal welfare, agroforestry, conservation of natural resources and maintaining quality of soil, air and
  3. Promoting gender quality and empowering women and hostels for women and orphans, setting up old age homes, day care centers and such other facilities for senior citizens and measures for reducing inequalities faced by socially and economically backward
  4. Promoting Education including special education and employment, enhancing vacation skills among children, women elderly and differently abled and livelihood enhancement projects;
  5. Eradicating hunger and poverty and malnutrition, promoting health care including preventing healthcare and sanitation and making available safe drinking
  6. Measures for the benefit of armed forces veterans’ war evidence and their
  7. Training to promote rural sports, nationally recognized sports and para-Olympic sports and Olympic
  8. Contribution to Prime Minister’s National Relief Fund or any other fund set up by the Central Government or the State Governments for Socioeconomic development and relief and funds for the welfare of the Scheduled castes, the Scheduled tribes, other backward classes, minorities and women, and,
  9. Contributions or funds provided to technology incubators located within academic institution which are approved by the central
  10. Rural development
  11. Slum area development

Explanation: For the purpose of this item, the term “slum area” shall mean any area declared as such by the Central Government or any State Government or any other competent authority under any law for the time being in force.

6. Board of Directors and Corporate Social Responsibility Policy:

The Board of Directors of every company shall approve the Corporate Social Responsibility Policy as recommended by Corporate Social Responsibility Committee. The Board shall also disclose contents of such policy in its report and also place it on the company’s website  and ensure that the activities as are included in the CSR policy of the Company are undertaken by the Company.

Thus onus is placed on the Board of Directors of a Company to approve the policy, place it on the website of the Company and ensure that the activities mentioned therein are undertaken by the Company.

7. Contribution towards corporate Social Responsibility activities: The Board of every Company shall ensure that in every financial year, the Company spends at least 2 percent of the average profits of the Company made during the three immediately preceding financial years towards Corporate Social Responsibility “Average” net profit shall be calculated in accordance with the provisions of Section 198. Whilst the net profit to ascertain applicability is net profit as per the financial statements.

The Company should give preference to local area and areas around it where it operates for spending the amount one corporate social Responsibility activities.

The Board shall specify in its report the reasons for not spending the amount, if the company fails to spend such amount.

8. Expenditure on CSR is at mandatory

The expression used in the section is “shall ensure”. It suggests that there is a mandate to spend 2% of average net profits of last three years on CSR activity. Proviso to Section 135(5) repairs the Board to specify the reasons for not spending the amount, where the company has failed to do so.

CSR expenses is an item of expenses for the company which needs to be charged to the statement of profit and loss amount.

9. Availability of CSR expenditure for tax deduction:

Expenditure on CSR activities is non- deductible for tax purposes unless falling within sections 30 to 36 of the Income-tax Act, 1961.

Tax collection has ever been the basis of many a diplomatic or administrative or military battle over the past two centuries. The basis of determination of tax has been invariably linked to the residence and source concepts of many fiscal regimes. For corporates, especially MNE’s the primary taxing jurisdiction has always been the seat of incorporation of the MNE, although complex arrangements like POEM and source based taxation are steadily taking root. And for individuals barring a few cases, taxation has almost always been linked to residence of the individual. The importance of the term “resident” can be gauged from the fact that the term itself has a reference to in about 45+ times in both the OECD and UN Model Conventions.

Even the Indian treaty network comprising of about 90 countries, most of them, are structured around the framework of the OECD/UN model treaty, thus references are more or less congruent quantitatively. Thus, the importance of the term cannot be underscored enough.

The existing tax treaty network all through the world has about 3000 treaties in existence, comprising of both bilateral and multilateral tax treaties. A discussion on conflicts of residence factors of all the treaties would require a treatise on its own. For the sake of simplification this study will deal with residence aspects of non- individuals of only bilateral tax treaties of Germany, France, Netherlands, United States, United Kingdom and India. The reason for choosing the above jurisdictions is manifold

  • All the jurisdictions have well defined network of tax treaties
  • All the jurisdictions have a well developed domestic tax jurisprudence.
  • All are in some way connected to both the OECD and the United nations

As for the approach this paper is divided into two parts. Firstly we shall deal with the background and theoretical framework behind the interplay, with a particular reference to the renvoi clause of the OECD and the United Nations Frameworks. For the second part of the study, the residence issues along with domestic law excerpts and possible conflicts of all the states as per domestic law and treaty with India is discussed.


The term “resident” is of prime importance with respect to tax liability determination with respect to the international tax treaty network. It is very important in any taxing framework to determine who is liable or what is liable for tax and in the event of any conflict the true determination thereof. In fact, the EATLP (European Association of Tax Law Professors) had at the 2017 congress dedicated an entire feature on Corporate Tax Residency.

Article 4 of the OECD and UN frameworks’ address as to what a resident should be defined as, as a guideline in tax treaties.

An important exception is provided in Article 4(1) wherein there is a leeway provided for any person who by way of residence is liable to tax under that state only.

By way of the renvoi clause of the Model Treaties1, both the Model treaties, have provided for primacy for the domestic laws to override in matters of residence2. Having said that, the interpretation should be gauged with reference to Article 31 and 32 of the Vienna Convention, inter alia, implying that

  1. In case domestic law meaning is assigned to residence in primacy, then such application must in good faith be considered in consonance with treaty Ideally speaking, the domestic law (which can be unilaterally amended) should not render the treaty meaning as absurd.
  2. In case the domestic law is inconclusive with respect to residence, then recourse should be had to the treaty provisions, and supplementary  means of interpretation in accordance with the provisions of the VCLT. Even the OECD model commentary would serve as a supplementary means of But, having said that, it would be a fallacy to treat the OECD model commentary as a blanket landmark, without having regards to the facts and circumstances of each case under consideration.
  3. Resort to MAP although is suggested and is a part of all the treaties under consideration but having said that, it seems a better option that solutions might be arrived at with interpretation. As it is highly unlikely that the case of resolution by an assessee would not go into domestic litigation after MAP. In fact, approaching the judiciary in matters of interpretation not clearly defined seems to be a good As is prevalent in all common law jurisdictions, guidance from judiciary generally trumps over guidance from administration.

Although the materials that are to be considered for such a study are exhaustive, but considering the efficacy limits, the author has tried to adhere to the restrictions, which could not happen without cutting down on the content.



Article 209 of the French Tax code allocates taxing powers of the companies mentioned in Article 206. Under Article 206, non-individual entities like

  • Public limited companies  (sociétés anonymes, SA),
  • Partnerships limited by shares (sociétés en commandite par actions, SCA)
  • Simplified limited companies (sociétés par actions simplifiées, SAS)
  • Private limited companies (sociétés à responsabilité limitée, SARL)
  • Private limited companies with a single shareholder (entreprises unipersonnellesà responsabilité limitée)
  • Professional corporations (sociétés d’exercice libéral),
  • Civil Law Entities,
  • Partnerships and partners, and Banking Institutions are liable to tax under the territoriality

Since France uses a territorial taxing system therefore it follows that in normal jurisdictional parlance, there is no distinction between resident

  1. OECD Model Convention on Income and On Capital 2017/ UN Model Double Taxation Convention 2017
  2. Article 3(2) of both the OECD and UN Model conventions

and non-resident taxpayers. Furthermore, since it’s a territorial taxation system, all income within the territorial jurisdiction of the country are subject to tax. It also implies that all companies having their seat of incorporation in France are subject to French tax. However, if there are profits from foreign activities and those are attributable to a PE which is taxed in a foreign country, then the profits as are attributable to the PE are not liable to tax in France. POEM provisions are also applicable in France3 and this is an important distinction with the territorial system. Any profits in entities who are although incorporated in France but have their POEM outside France are not liable to tax in France.

However, the above are defined in accordance with administrative notifications and not a part of the domestic law in France itself as defined in the French Tax Code. Interestingly, the French Tax Code also doesn’t have reference to the expression Liable to Tax.


The India France Tax treaty has a renvoi clause in article 4(3),and refers to the POEM of the corporate entity, and thus is in congruence with the administrative notification earlier. Article 4(1) of the treaty however, refers, to a person “liable to tax”, which concept although is well defined in Indian jurisprudence, it doesn’t carry any value in the Civil Law of France. Furthermore, the treaty has been updated under the BEPS MLI to deny treaty benefits for abusive tax practices.


This could essentially lead to a situation wherein the term “liable to tax” might lead to confusions or essential disagreements in the application of the MAP, in case of any dispute resolution.

Also it could also mean that resort to the non- discrimination clause under the treaty would be open to wide interpretation.

Also to be borne in mind that tax being an exact law in both the states, India has detailed POEM rules quantifying on what and how an entity can be subject to POEM rules, however, the same detailed scope is not available in the case of its French counterparts. This could again lead to some issues of application as the tax treaty explicitly uses the nondiscrimination clause in details.



Under the domestic tax code in Germany the definition of residence is defined as an entity who either has their Registered Office or Place of Effective Management in Germany. Non- individual entities are liable to tax on their worldwide income, if the criteria set out in either section 10 or section 11 are satisfied.

The Tax code of Germany in section 10 describes a Registered office as “Business management” shall mean the centre of commercial executive management.”4

Section 11 describes  Place  of Mangement as “Corporations, associations or pools of assets shall have their registered office at the place which is determined by law, articles of partnership, statutes, acts of foundation or similar provisions.”5

The term business management is defined under common law of Germany as well as codified under fiscal code. However, the terms “liable to tax” and “residence” and “domicile” are still not clearly defined in the German Tax Code.

  1. BOI-IS-CHAMP-60-10-20
  2. Translated from German
  3. Translated from German

The following are the non-individual types in Germany

  • Partnerships
  • Simple Partnership
  • Un-Incorporated  Association; Non- Commercial/Idealistic Purposes Only
  • General Partnership
  • Limited Partnership
  • Partnership Company; Only For Professional Services
  • Incorporated Association; Non- Commercial/Idealistic Purposes Only
  • Publicly Traded Partnership
  • Company With Limited Liability (Minimum Equity 25000 Euros)
  • Entrepreneurship Company (With Limited Liability)
  • Corporation (Minimum Equity 50000 Euros)
  • Public  Law Corporation With No Commercial Objectives
  • Trusts Under Public Law
  • Foundations Under Public Law

Since Germany uses a worldwide taxation system, it follows that all companies having either their POEM in Germany, or their seat of residence in Germany would be taxed on their worldwide Income.


The treaty law on residence almost functionally mirrors the position as stated in Article 4(1) of the OECD model convention, barring political and statutory bodies. Article 4(1) also carries reference to “liable to tax” and “domicile” and “residence”, terms which have not been defined in the German Fiscal Code. Article 4(1) also makes reference to income from capital explicitly. The treaty does not make the explicit definition of capital, despite making an explicit definition of “immoveable property”.


Since the term “capital” is not defined in the German Tax Code, therefore, the general meaning of the term would be ascribed to as per VCLT. Furthermore, as with the French case, the lack of definitions  and common law on the terms “liable to tax”, “domicile”, “resident” would be an issue in case things come to MAP. Although, resort to the VCLT and supplementary aid in terms of the Commentary to the OECD model is a viable way. It could also pave way to resort to Non-Discrimination enshrined in Article 24 of the Double Tax Treaty, since the terms “liable to tax” and “resident” and “domicile” are well enshrined in the Indian law by way of jurisprudence as well as codification. Furthermore, the German Supreme Court had held the case of preference to later legislation, either treaty or domestic law, in the matters of tax conflict.

In case a legislation is enacted subsequent to entering into a treaty, the later legislation will have legal supremacy6.


Netherlands operates a worldwide taxation system. So effectively, if the entity is a resident in the Netherlands the it will be taxed on it’s worldwide income. The corporate tax code is enshrined in the CITA7 (Wet op de

6. German Federal Constitution Court Order of 15 December 2015 – 2 BvL 1/12

7. Corporate Income Tax Act

vennootschapsbelasting  1969).  Under Article 2 of the CITA the following types of entities are  explicitly  considered  to  be  resident in Netherlands if, they are “established” in Netherlands

  • Public Limited Liability Companies, Private Limited Liability Companies, Open Limited Partnerships and other companies whose capital is wholly or partly divided into shares
  • Cooperatives And Associations on a cooperative basis
  • Mutual Insurance Associations And Associations acting on a mutual basis as an insurer or bank
  • Associations And Foundations that are admitted by Royal Decree under the Housing Act as institutions that operate in the interest of public housing
  • Associations And Foundations not mentioned above, as well as legal entities other than public law, if and insofar as they conduct a business
  • Mutual Funds
  • Legal Entities Under Public Law, not being the State, that are not already liable for tax under subparagraphs a, b, c, d and e, insofar as they conduct an

Reverse hybrid entities are defined under the CITA Article 2(12). An important clause under 2(11) of the CITA which is more of a clarificatory nature states that “ For the purposes of this Act, a legal person under public law is understood to mean a Dutch legal entity under public law as well as a comparable foreign legal entity.”8 It is important to note that reverse hybrid entities are not recognized in India. Permanent establishment is defined under article 3(4) of the CITA.

What could constitute the POEM for a company has been defined to have a multitude of positions to be considered, before arriving on9

  • Where the principal management of the company performs it tasks.
  • The principal management is generally equated to be the Board of Directors or its
  • The determination shall be company specific, having regard to its
  • Characteristics like type of business, geographical spread, organization of business, nature and size, et
  • Also to consider whether, the company’s main tasks are actually carried by people other than the board, and also to consider other relevant


The India-Netherlands treaty as modified by the Multilateral Instrument, defines a resident under article 4(1) as a person who is “liable to tax” in either one of the contracting states, by virtue of “residence” or “domicile”. Article 4(3) of the India- Netherlands tax convention, has been modified by the MLI to specify the application of MAP in case of any conflict in determination of Residential Status. An in case of no agreement between the competent officials of the two jurisdictions, tax benefits would be denied to the entity claiming such.

There is no explicit mention of immoveable property, or capital in either the definitions or the Resident clause 4(1).


Again, the expressions “liable to tax”, “residence” “domicile” are not defined in the Dutch Corporate tax code, this thus presents a

8. Translated from Dutch, Article 2(11) of the CITA

9. 23 September 1992, BNB 1993/193, Hoge Raad

point of contention. However, the same has been attended to by the common law interpretation by the Adjudicating Courts in Netherlands. However, it might be take into consideration that the Netherlands uses the VCLT, and OECD model and commentary as a significant tool for interpretation on Tax treaties. POEM has also been defined and detailed under common law in Netherlands and that provides specific guidance as discussed supra. However, as has been witnessed, Netherlands, has been the home to a lot of hybrid and reverse hybrid corporate entities and that has been a bone of contention amongst its treaty partners. Although Netherlands has gone to a long extent to address the issues of residence and thus allocation of taxing rights for the income streams associated with the hybrids, the issue of also having tax havens as its dependent colonies (Dutch Antilles), has been a vexed issue with its treaty partners. India has on its part in the first quarter of 2017, issued a number of circulars and notifications regarding determination of POEM, which are more or less congruent with the guidelines as provided by the Supreme Court of Netherlands (Hoge Raad). The issue of denial of benefits in case of non- allocation of taxing rights on the case of jurisdiction by residence has more or less been dealt with by the amendments brought by the Multilateral Instruments (MLI). In this context it is to be noted that the issue of hybrids and reverse hybrids is a contentious issue which has been dealt exhaustively by the Hoge Raad, and there are multiple judgements issued which might be of interest to the reader.10



The United Kingdom has an exhaustive domestic common and civil law centred around the concept of residence for corporations and treaty purposes11. In fact it was as early as later part of the 19th century that the Court of the Exchequer had decided on the Central Management and Control aspect of residence of corporate seat12. It was held that the seat of residence of a company for tax purpose where the CMC was situated. Pursuant to the enactment of the Corporation Tax Act, as a general rule companies whose seat of incorporation is in the United Kingdom are treated as tax resident companies in the United Kingdom.

The exception being if the company, in accordance with the DTAA, is treated as a tax resident in the other jurisdiction. This concept flows probably from the concept of Central Management and Control, as discussed supra. The United Kingdom, taxes Permanent Establishments as a corporation by general rules. The PE rules are based largely on Article 5 of the OECD model convention. However, there are exceptions again, being, if the profits are generated from dealing and construction and rental from land and immoveable properties. In any of those cases, the profits of the corporation are taxable in the United Kingdom.

However, having said the above, the United Kingdom domestic corporate law again lacks the

10. Hoge Raad 15 October 2005, BNB 2006/79 , Hoge Raad 17 December 2004, BNB 2005/105 and 106

11. De Beers Consolidated Mines, Limited v Howe, Court of Appeal, 6 June 1905, Unit Construction Co Ltd v. Bullock [1960] AC 351 (HL), Laerstate BV v. HMRC [2009] UKFTT 209 (TC) , Untelrab v. McGregor [1996] STC (SCD) 1., Wood v Holden , [2004] STC (SCD) 416

12. Calcutta Jute Mills Company Nicholson 1 TC83, (1876)

definitions of the terms “domicile”, “residence” and POEM. Although at this juncture, it might be noted that due to the exhaustive, common law commentary, and decisions of higher courts at the United Kingdom, the concept of POEM is more or less concrete in the United Kingdom.

There are various other adjustments allowed under the Corporation tax Act like, Group Relief, A separate condensed set of requirements for application by Small Companies, which are available separately.


The treaty law for residence under the India UK DTAA is more or less centered around the OECD model Article 4, subject to the renvoi clause in Article 3(2). This treaty was amended by the MLI protocol pursuant to the OECD BEPS project, for particularly abusive practices, and hybrid and reverse hybrid mismatches. Furthermore there is a distinction under Article 4(1)(b) of the treaty whereby non corporate non individual entities are to be subject to tax by way of residence of their ultimate beneficiaries. This was also possibly done as to a conflicting judgement by the Calcutta High Court13.

Article 4(3) as amended by the MLI in the synthesised text seeks to counter tax abuse and aggressive tax planning practices, and denies tax treaty benefits to entities whose residence cannot be established in either jurisdiction even after application of MAP under Article 25.


The United Kingdom treats partnerships as transparent entities under tax law. As was held by the Calcutta High Court in the case above supra, the assessee escaped tax liability, since the partnership was entitled to tax treaty definitions under the renvoi clause under 3(2). This was a possible source of conflict, however, post the development of Article 4(1)(b) it seems that the same has been resolved. It also seems that post the MLI anti abuse measures for hybrid mismatches the same has been effectively countered, since if the corporation has no clear residence even after MAP under Article 25, treaty benefits would be denied.


The United States stands on a different footing as it uses neither the UN or the OECD models as bases for negotiating tax treaties. It has its own United States model which it uses while negotiating treaties. And lets face the facts, the United States can rule by brute force when it comes to matters including tax treaties. It might be put forward that the United States has not ratified the Vienna Convention also.


The United States corporation tax laws operated on a worldwide income basis, before the Tax Cuts and Jobs Act 2017, whereby then thereafter it moved to a territorial system. The TCJA itself moved into radical changes into the IRS Code.

The residence of a corporation in the United States is defined under IRS Code 7701. It defines domestic companies as any company which is created or organized in the United States, and any foreign company as not being incorporated in the United States. Therefore, all companies which are not created or organized in the United States are regarded as foreign.

Again, there is no definition of liable to tax, residence and domicile in the IRS Code for corporations.

13. P&O Nedlloyd & Others vs ADIT WP 457 of 2005

However, there is the concept of Effectively Connected Income 864(c) in the IRS code which effectively taxes income which is generated on American soil by way of trade or services or manufacturing activities.

This tax is available for setoff till the extent it has been paid in the United States.

Witholding tax rules apply.

Income from real estate situated in the United States is taxed in the United States, and the United States also imposes a branch profits tax of 30% in order to counter hybrid mismatches. The Dividends Article or the Interest Articles under the DTAA might be available to reduce withholding taxes to 5% or Nil%.

There are also specific anti abuse rules with relation to US Trusts and Partnerships, whereby any Trust being transferred to foreign lands would have to pay taxes on the appreciation value of the property inherent in the taxes (IRC 721(c)).


The United States India DTAA has a comprehensive arrangement, when it comes to determination of residence, and anti-abuse measure regarding determination of residence, it also has a specific clause with regards to non-availability of credit on account of any penalties or the like under Article 2(1). The treaty uses the terms “place of management” in consonance with the Indian Law and “place of incorporation” in consonance with the US law in Article 4(1).

Article 4(3) of the DTAA stands on a different footing from others in that it states that in case of corporations who have a dual residency in accordance with Treaty laws (either in terms of the renvoi clause Article 3(2) or otherwise), then the entire treaty won’t be applicable except for certain exceptions like Dividends, MAP, Non- Discrimination,

Information Exchange, or Administrative Assistance provided in the Treaty.


As might be visible the domestic tax law requirement of the United States is neither used in and “or” concept or an “and” concept in article 4(1). Whether that would constitute a conflict to be allocated to the MAP is possibly an open question. Then also treaty override of the United States is a common phenomenon. IRS code 7852 (d) specifically provides for primacy of neither treaty law or domestic law, thereby leaving the question of treaty override open for discussion.

Furthermore, Tax courts in the United States have been generally inclined to follow the later legislation in question14, thereby providing fuel to the fire of treaty override. Thus any reference to residency in the domestic laws of the United States, if the assessee at all decides to approach the courts, if changed subsequently, leaves open the question of interpretation of the Courts, who in general have had a superior hand in dealing with matters related to subjects than the administration.

14. Watt Alaska Radzanower v. Touche,Ross & Co., 426 U.S. 148 (1976);United States v. United Cont’l Tuna Corp, 451 U.S. 259 (1981);., 425 U.S. 164

Arm’s Length Price (‘ALP’)?

As per the Organisation for Economic Co- operation and Development (‘OECD’) Transfer Pricing Guidelines Arms’ Length Price means a price, at which transactions between persons other than associated enterprises are carried out in uncontrolled circumstances.

As defined by section 92F of the Income Tax act, 1961 (“the Act”), an Arm’s-length price is a price that is applied or proposed to be applied in a transaction between persons other than associated enterprises, in uncontrolled conditions. Section 92C of the Act prescribes various methods for the determination of the arm’s-length price  and provides  that such a price will be calculated using the most appropriate method.

  1. Comparable Uncontrolled Price Method (CUP)
  2. Resale Price Method (RPM)
  3. Cost Plus Method (CPM)
  4. Profit Split Method (PSM)
  5. Transactional Net Margin Method (TNMM)
  6. Such other methods as may be prescribed by the

This article deals with the subject of anomalies / issues in determining Arms’ Length Price (ALP).

The Most Appropriate Method

Under the Income Tax Act, 1961 [“the Act” for short] no particular method has been accorded a greater or lesser priority. The most appropriate method for a particular transaction shall be determined by the assessee on the bases of the nature of the transaction, class of transaction, associated persons and functions performed by such persons, as well as various other relevant factors. The Assessee has to identify and understand the intra-group transactions, identify the characteristics that would make a particular transaction or function, make appropriate adjustments to the comparables, etc. while selecting the most appropriate method.

On this it has been held that the onus to select and justify the most appropriate method for calculation of ALP lies on the assessee, by the Hon’ble Income Tax Appellate Tribunal [“the ITAT], Mumbai in the case of Kodak Polychrome Graphics (I) P. Ltd [ITA No.1577 / Mum / 2009]. If the Revenue authorities are of the opinion that the ALP was not applied to the transaction or that the assessee did not maintain / produce adequate and correct documents / information / data, the total taxable income of the assessee may be recomputed after a hearing opportunity is granted to the assessee. While the revenue can challenge the selection of the most appropriate method, the method could not be discarded in preference over other methods, unless the revenue authorities could demonstrate the fallacies in the application of standard methods. (MSS India [ITA NO.393/MUM/2007].

On change of a method already adopted / followed by the assessee recently, in case of Aquity Solutions India Pvt Ltd [ITA NO.1161/ MUM/2019, ITA NO.1351/BANG/2011 and ITA

NO.1644/BANG/2012] ITAT, Mumbai held “there was no bar under the Act or Rules restricting assessee to change method of determining ALP but also elucidated that change of method should be for bonafide reasons and not in an arbitrary manner just to circumvent adjustment proposed by the TPO”

The various methods prescribed under the Act, have their own specific application and consequently have issues specific to their application. In this section we have tried to identify certain issues / anomalies each method wise while determining the ALP. They are as follows:

1. Comparable Uncontrolled Price Method (CUP)

Under this method to determine ALP the price charged for property or services transferred in a controlled transaction is compared to the price charged for property or services transferred in a comparable uncontrolled transaction in comparable circumstances. The CUP method may be based on either “internal” comparable transactions or on “external” comparable transactions. However, while applying CUP method for determining the ALP it is required to be compared with actual sales and purchases with unassociated enterprises or transactions between unassociated enterprises. The Hon’ble ITAT Mumbai in the case of Redington India Ltd [ITA No.808 / Mds / 2011] held that CUP analysis should not necessarily be done on the basis of list price especially when the prices charged by Assessee are lower than the list price for both associated as well as non-associated enterprises. Further, in the case of Arvind Mills Ltd [ITA 1304 / Ahd /2006] Hon’ble ITAT, Ahmedabad observed that the product comparability cannot be the sole basis for application of CUP method. Even minor differences in contractual terms or economic conditions, geographical areas, risks assumed, functions assumed, etc. could  affect the amount charged in an uncontrolled transaction. As such, while applying CUP, it is essential to note that its not just the similarity of the product but also all other factors which could affect the price.

In an interesting judgement, it was observed by the ITAT, Mumbai that for benchmarking royalty, CUP is the Most Appropriate Method since in that case royalty was not linked to profit [Ref. Syngenta India Limited [ITA 2977 / Mum /2006]. However, in another case, the ITAT, Mumbai has held that CUP method is not applicable in benchmarking royalty in the absence of data relating to uncontrolled transactions [Ref: Cabot India Ltd. vs. Dy. Commissioner of Income-tax I.T.A. No. 6622/ Mum/2009] 

2. Resale Price Method (RPM)

Rule 10B (b) lays down that RPM may be applied for transactions of purchase of goods or services from AE which are then resold to unrelated parties. The ITAT observed that in the case of an assessee performing pure distribution functions without any value addition on sale of traded goods it is appropriate to apply the RPM method [Ref: Textron India Pvt Ltd vs Dy. Commissioner of Income Tax [IT(TP)A No.2972/Bang/2018]. Also, the ITAT, Delhi in the case of Burberry India Pvt Ltd v/s ACIT [I.T.A. No. 758/Del/2017] has held that incurring high advertising and marketing expenses by the assessee does not in any manner affect the determination of ALP under the RPM. Further in the case of Celio Future Fashion P. Ltd [I.T.A. No. 1928/Mum/2016 it has been held in the case of an Assessee who is a distributor of Men’s wear imported from the AE, that RPM is the Most Appropriate Method and merely because high advertising / marketing expenses were incurred by it did not lead to any value addition justifying application of another method. The ITAT, Mumbai has in the case of Mattel Toys (I) Pvt. Ltd vs DCIT [I.T.A. No. 2476/Mum/2008] observed that product similarity is not a vital aspect for RPM, but operational comparability has to be seen.

3. Cost Plus Method

Cost Plus Method is prescribed under clause (c) of Rule 10B. Under this method, the Arm’s Length Price is determined by applying normal gross profit mark- up arising from similar uncontrolled transactions, after adjustment for functional and other differences, to the direct and indirect costs of production incurred by the assessee on its transaction. It is mostly applied to manufacturing or assembling activities and relatively simple service providers. It has been observed that CPM is the most appropriate method where the transactions involve commodity-type products, but the differences between the products are minor [Ref: DCIT vs GE BE Pvt. Ltd.- ITA No.815/Bang/2010].

However, the CUP method is not suitable in the case of the manufacturer who owns valuable intangibles, performs R&D activities, and generally has operations that are more complex than those of the sales company

4. Profit split method (PSM)

The Profit Split Method is applicable when the transfer of unique intangibles is involved or in multiple international transactions which are so interrelated that they cannot be evaluated separately for the purpose of determining the arm’s length price of any one transaction. This method can be applied to the cases where both sides of the controlled transaction contribute valuable intangible property to the transaction and cases involving highly interrelated transactions that cannot be analyzed on a separate basis. It is to be noted that it has been held by the ITAT that this method of ALP determination cannot be applied for Royalty benchmarking as there was an absence of an associated enterprise’s role in the assessee’s profit-making [Ref: Toyota Kirloskar Auto Parts Pvt Ltd [IT(TP) A No.1915/Bang/2017]. In the case of Infogain India Pvt Ltd [ITA No. 6134/Del/2012], the ITAT Held that PSM cannot be rejected as a method merely on the basis that it may be difficult to identify external benchmarks for allocation of profits amongst entities.

5. Transactional Net Margin Method (TNMM)

Transactional Net Margin Method (TNMM) is provided in Rule 10B(1) (e). Under this method, the net margins of companies are compared to analyze if the related party transactions have been undertaken on arm’s length basis. Transactional Net Margin Method is most commonly used by assessees for practical reasons as the method often provides a useful check on the accuracy and reasonableness of the traditional transaction methods or is used to supplement these methods. It is also easier to find comparable in applying this method. The TNMM is used to analyse transfer pricing issues involving tangible property, intangible property or services. It may be applied when one of the associated enterprises employs intangible assets, the appropriate return to which cannot be determined directly.

The Hon’ble ITAT Bangalore in the case of ITO v/s Simulation  Technologies Pvt Ltd [IT(TP)A No.100/Bang/2014] observed that broad functional similarity is sufficient for determining ALP under the TNMM method. Opined that the functions performed need not be identical. Remarked, “A broad similarity, in our view, would suffice for the purpose of picking up a comparable”. Further, the Hon’ble ITAT Mumbai in the case of Golawala Diamonds [I.T.A. No. 2346/ Mum/2006] observed that the entity level margins need not be considered for ALP computation under the TNMM method. In yet another judgment, the ITAT, Mumbai reversed the action of the TPO in determining Nil ALP for Royalty payments observing that receipt of technical assistance by the Assessee from the AE justified royalty and it could not be said that the same is not payable [Ref: Dow Agro Sciences ITA No.1051/ Mum/2015]. This issue of jurisdiction of the TPO to determine ALP at Nil is also discussed in subsequent paragraphs.

6. Such other methods as may be prescribed by the board.

Section 92C of the Act provides that CBDT may prescribe any other method for the determination of ALP. Accordingly, Rule 10AB was introduced w.e.f. 01.04.2012 as per which, such other method for determination of the arm’s  length price in relation to an international transaction shall be any method that takes into account the price which has been charged or paid, or would have been charged or paid, for the same or similar uncontrolled transaction, with or between non-associated enterprises, under similar circumstances, considering all the relevant facts. In Toll Global Forwarding India Pvt Ltd [I.T.A. No. 5025/Del/10] the Hon’ble ITAT observed that ‘the methods of determination of arm’s length prices have to be essentially implemented in a reasonable and pragmatic  manner so as to achieve its laudable objectives without any collateral damage. Further, in Global One India Private Limited [ITA No. 5571/Del/2012] it was ruled that if the PSM, as applied by the Taxpayer, did not fall within the strict definition of PSM provided in Rule 10B(1)(d), then the same could be considered as “The Other Method”. In the case of Tally Solutions Private Ltd [ITA No. 1235/Bang/2010] use of the ‘Excess Earning Method’ for determining arm’s length price using ‘discounted cash flow’ for the sale of ‘intellectual property rights’ was upheld by the ITAT.

Other issues in the determination of ALP:

  1. If the variation does not exceed 1% of the wholesale price and 3% in other cases of international or specified domestic transactions, then the actual transaction price shall be taken as ALP as notification CBDT Income Tax Notification 124/2021 29/10/2021: Transfer Pricing (ALP) Variation Tolerance Limits AY 2021-22.
  2. The Hon’ble ITAT Delhi in the case of McCain Foods India Pvt Ltd [ITA No. 5597/ Del/2018] has held that disallowance u/s 40(a)(ia) and 92CA(3) cannot operate simultaneously as this would lead to double taxation. It was observed that liability u/s 40(a)(ia) to deduct the requisite tax at source and such deduction was liable to be added to the assessee’s total income. It was further observed that if ALP was determined by TPO as NIL, it also amounted to an addition to the assessee’s total income again.
  1. In another case, it was observed that overruling the  wrong  application of a method doesn’t mean ruling out the selection  of that method  as If the wrong application of a method is corrected then the same could be selected again as the most appropriate method. However, at the same time, the Hon’ble ITAT rejected the Miscellaneous Application (MA) seeking directions to the TPO to adopt only a specific method [Ref: Carraro India Private Limited vs DCIT M.A. No.01/PUN/2020].
  2. No adjustment can be made by the TPO on the presumption of international transaction without any tangible evidence to prove so [Ref: Whirlpool of India Ltd [ITA 610/2014, Hon’ble Delhi High Court following Maruti Suzuki – ITA 110 of 2014 ]
  3. It has also been held that recharacterization or non-recognition of a transaction fully or partially, is not permissible for the Revenue Authorities. Recharacterizing the transaction of Share Application Money as a loan transaction was rejected by Hon’ble Delhi High Court in CIT vs Alpex Exports – (2014) 361 ITR 29. In the case of DIT v/s Besix Kier Dabhol – (2012) 210 Taxman 151 (Bombay) Hon’ble Bombay High Court rejected the re-characterization of debt as equity. In Aegis Limited [ITXA 1248 OF 2016] re-characterization of investment in preference shares as to loan was not accepted by the Hon’ble Bombay High Court
  4. Hon’ble Bombay High Court CIT vs Lever India Exports Ltd. – ITXA 1306 of 2014 has held that expenses cannot be rejected by the It was remarked that, “… It is not part of the TPO’s jurisdiction to consider whether or not the expenditure which has been incurred by the respondent- assessee passed the test of Section 37 of the Act and/or genuineness of the expenditure… The jurisdiction of the TPO is specific and limited i.e. to determine the ALP of an International Transaction in terms of Chapter X of the Act read with Rule 10A to 10E of the Income Tax Rules.. Therefore, the adhoc determination of ALP by the TPO dehors Section 92C of the Act cannot be sustained.”. Hon’ble Karnataka High Court in the case of Luwa India Pvt. Ltd. [ITXA No. 296/Mum/2017] has taken the same view following the ruling of the Hon’ble Bombay High Court.
  1. Further, ad-Hoc determination of ALP by TPO is not sustainable in Law as ruled in CLSA India Private Limited vs DCIT [ITA No.6748/Mum/2017].
  2. In the case of Indo-American Jewellery [I.T.A. 6194/Mum/2008] ITAT, Mumbai held that the external comparables selected by the assessee were from the public database and the assessee had complied with all the necessary rules and had followed a detailed search process while making an analysis therefore the transfer pricing study of the assessee and ALP of international transactions determined on the basis of study simply cannot be rejected without any cogent reasons by the TPO.
  3. It has been held that a comparable should not be rejected simply on the ground that its margin is extremely high (or low) in relative comparison to the data pertaining to its [Ref: JCIT vs Amway India Enterprises Pvt. Ltd. I.T.A. No. 2833/ DEL/2018].
  4. Foreign Associate Enterprises as comparable has been accepted in Ranbaxy Laboratories Ltd [IT(TP)A 1782/Del/2014]. Recently Madras High Court in the case of Virtusa Consulting Services Private Limited [T.C.A.No.996 of 2018] held that “the findings rendered by the TPO, DRP and the Tribunal foreclosing the assessee’s claim to refer to the foreign AEs as the tested party is legally not sustainable.” However, for selection of the comparable, in the case of Intervet India P. Ltd [39 SOT 93 (Mum)],  the ITAT has made an observation that the geographical contiguity of two countries need not mean similar economic and market conditions.
  1. In the case of Galaxy E Solutions India Pvt Ltd [IT(TP)A No.389/Bang/2021] ITAT, Bangalore made an observation that “… there is no principle of estoppel that applies in determining tax ”
  2. The TPO cannot question the assessee’s business decision. It was also held that it was not within TPO’s purview to question the benefit from royalty payment as held by the Hon’ble Bombay High Court in SI GroupIndia Limited [ITXA 965 of 2017]
  3. Hon’ble Bombay High Court in the case of WIKA Instruments India Pvt Ltd [ITXA 1141 of 2016] has ruled that there is no bar against the assessee rejecting its own comparables.
  1. The Hon’ble Delhi High Court on mere disagreement on the application of one or other methods for determining ALP between the assessee and the revenue authorities opined “…the mere circumstance of a disagreement either between the assessee and the Revenue authorities or amongst the Revenue authorities in the application of one or other methods for determining ALP ipso facto does not constitute question of law. This, however, not to say that if in a given case the aggrieved party is able to show that the rule applied has led to distortion or prejudice as the case may be, the question of law does not arise” in the case of McCain Foods India Pvt Ltd [ITXA 965 of 2017] 


Despite Transfer Pricing Law being there for more than 20 years, the primary aspect of determining ALP keeps evolving day in and day out. It is, therefore, felt that the entire process be streamlined. Further, it is preferable that just as it is done in service tax, a specific method/ rate/margin be prescribed for certain common transactions which are industry-specific / transaction-specific.

“Take up one idea, make that one idea your life. Think of it, dream of it, Live on that idea let the brain, muscles, nerves, every part of your body be full of that idea, and just leave every other idea alone. This is the way to success.”

— Swami Vivekananda


The existing section 37 of the Income Tax Act, 1961 provides that any expenditure which has been incurred for the purpose of business or profession shall be allowed as expenditure. To claim the deduction under section 37 following ingredients should be present

  1. The expenditure should not be a capital expenditure
  2. The expenditure should not be covered under any heads in section 30 to 36
  3. The expenditure should be incurred for the purpose of business or in the course of business
  4. The expenditure should not be a personal expenditure
  5. The expenditure incurred should not be in nature mentioned under sub section 2A of section 37 i.e. advertisement expenses supporting any political
  6. The Expenditure incurred should not be for any purpose which is an offence or which is prohibited by

This section serves as a residuary section for claiming of the expenses which do not fall under section 30 to 36 and thus the Objective of Section 37 of the Act is to claim business expenditure incurred by assessee.

This article deals with only the last limb of the above i.e Expenditure incurred should not be for any purpose which is an offence or which is prohibited by law alongwith the Hon’ble Supreme court decision in the case of M/s. Apex Laboratories Pvt. Ltd. vs. DCIT [2022] S.L.P. (Civil) No. 23207 of 2019. 

Background of amendment in section 37(1)

The Finance [No. 2] act, 1998 introduced an explanation 1 to section 37(1) w.r.e.f 01-04-1962 which reads as follows

“Explanation 1 – For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence of which is prohibited by law shall not be deemed to have been incurred for the purposes of business or profession and no deduction or allowance shall be made in respect of such expenditure.”

The CBDT also issued a circular No. 05/2012 dated 01-08-2012 and stated that the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 imposes a prohibition on the medical practitioner and their professional associations from taking any gift, travel facility, hospitality, cash or monetary grant from the pharmaceutical and allied health sector industries.

Accordingly, the CBDT clarified that claim of any expenses incurred in providing abovementioned or similar beliefs benefits are in violation of the regulations of the Indian Medical Council (Professional Conduct, Etiquette And Ethics)

Regulations, 2002 shall be inadmissible under section 37(1) being expenses prohibited by law.

This circular was challenged in Himachal Pradesh High Court in the case of Confederation of Indian Pharmaceutical Industry vs. CBDT (2013) 335 ITR 388 (HP), in which the High Court rejected the petition and the validity of the CBDT circular was upheld by holding.

“The regulation of the Medical Council prohibiting medical practitioners from unveiling a freebies is a very salutary regulation which is in the interest of patients and the public. This court is not oblivious to the increasing complaints that the medical practitioners do not prescribe generic medicines and prescribe branded medicines only in lieu of the gifts and other freebies granted to them by some particular pharmaceutical industries. Once this has been prohibited by the Medical Council under the powers vested in it, section 37(1) comes into play. The petitioners contention that they circular goes beyond the section is not acceptable. In case the assessing authorities are not properly understanding the circular then the remedy lies for each individual assessee to file an appeal but the circular which is totally in line with section 37 (1) cannot be said to be illegal to satisfy the AO that the expense is not in violation of the Medical Council regulations.”

The very Genesis of this Circular was also challenged in Delhi High court in the case of Max hospital vs. Medical Council of India in WP no. 1334 of 2013 in which it was held that the provisions of Medical Council of India only mind the medical professionals and not others, such as hospitals and pharmaceutical companies. In this given case a complaint was filed with the Ethics Committee of Medical Council of India alleging that the death of the patient was caused due to medical negligence of the doctor. The Ethics Committee passed an order punishing the erring doctors but this order had certain adverse remarks against the Max hospital as well.

Aggrieved by the adverse remarks, Max hospital filed writ petition contending that the Medical Council of India (Professional Conduct, Etiquette And Ethics) Regulations, have been framed in exercise of the power confirmed under section 20-A read with section 33(m) of the Indian Medical Council Act, 1956 and these regulations do not govern or have any concern with the facilities, infrastructure or running of the hospitals and secondly, that the Ethics Committee of the MCI acting under the regulations had no jurisdiction to pass any direction of judgment on the infrastructure of any hospital which power rests solely with the concerned state government. While dealing with this grievances, Hon’ble Delhi High Court noted and held that the respondent i.e the Ethics Committee had no jurisdiction to pass any order against the petitioner hospital under the 2002 Regulations.

Based on the aforesaid  judgments,  there have been various Decision’s of the Income Tax Appellate Tribunals and in some of these decisions have held that these expenses to be not allowable under section 37 (1) the Act, while in some it has been held it to be allowable.

Analysis and comments by the Hon’ble Supreme Court in Apex Laboratory’ Case

The Hon’ble Supreme Court Observed the following

  1. Section 37 of the act is the residuary provision and any business or professional expenditure it does not ordinarily fall under section 30 to 36 of the IGT act which are not in the nature of capital expenditure or personal expenses can claim the benefit of this exemption. However, the same is not
  2. The explanation one which has been inserted in 1998 r.e.f 1st April, 1962, Restricts the application of such exemption for, “any purpose which is an offence or which is prohibited by law.”

However they Income Tax Act does not provide the definition of these terms and therefore one has to look the following

  1. The General Clauses Act, 1897, which interalia defines “offence” as “any act or omission made punishable by any law for the time being in ”; &
  2. The Indian Penal code, section 40 defines it as “a thing punishable by this code”, read with section 43 which defines “illegal” as being applicable to “everything which is an offence or which is prohibited by law or which furnishes ground for civil action”
  1. Thus, the Hon’ble court held that Explanation 1 contains within its ambits all such activities which are illegal prohibited by law and/or
  2. It further held that the circular 05/2012 dated 01-08-2012 issued by CBDT is clarificatory in nature, was in effect from the date of implementation of regulation 6.8 of 2002 regulations which inter alia were published in the Official Gazette on 14th December 2009 Shall become effective from the date of it’s publication in the Official Gazette.
  1. It further held that though the Memorandum of Finance Bill, 1998 elucidated within its ambit of Explanation 1 to include “Protection money extortion, hafta, bribes, ”, yet ipso facto by no means is the embargo envisaged restricted to those examples. Such a narrow interpretation of explanation 1 to section 37(1) of the act defeats the purpose for which it was inserted, i.e. to disallow a taxpayer from claiming a tax benefit for its participation in an illegal activity and thus held that It is logical that when acceptance of freebies is punishable by the Medical Council of India (The range of penalties and sanctions extending to ban imposed on the medical practitioner), pharmaceutical companies cannot be granted the tax benefit for providing such freebies and thereby (actively and with full knowledge) enabling the Commission of the act which attracts such opprobrium.
  1. Howsoever, the Hon’ble Supreme Court accepted the contention that the petitioner did not indulge in any illegal activity by committing an offence, as there was no corresponding penal provisions in the 2002, Regulations applicable to it, but it held that there is no doubt that the action of the petitioner fell within the purview of “prohibited by law” by observing as under:-

“27. It is also a settled principle of law that no court will lend its aid to a party that roots it’s cause of action in an immoral or illegal act (ex dolo malo non ortitur action) meaning that none should be allowed to profit from any wrongdoing coupled with the fact that statutory regimes should be coherent and not self-defeating. Doctors and pharmacists being complementary and supplementary to each other in the medical profession, a comprehensive view must be adopted to regulate their conduct in view of the contemporary statutory regimes and regulations. Therefore, denial of tax benefits cannot be construed as penalising the assessee pharmaceutical company. Only its participation in what is plainly an action prohibited by law, preclude the assessee from claiming it is deductible expenditure.”

  1. The Hon’ble SC further held that that one arm of the law cannot be utilised to defeat the other arm of law and doing so would be opposed to public policy and bring the law into ridicule and further fortified the views taken in judgements of the High Court in CIT vs. Kap Scan and Diagnostic Center Pvt. Ltd. (2012) 344 ITR 476 (P & H) and Confederation of Indian Pharmaceutical Industry (SSI) CBDT (2013) 353 ITR 388( HP) where in it was held that it will be against public policy to allow the benefit of deduction under one statue, of any expenditure incurred in violation of the provisions of another statute or any penalty imposed under another statue.
  1. The Hon’ble court further observed the following from its own judgment in the case of T. Girish vs. Y. Subba Raju (D) by
  2. Rs. & Ors. (2022) SCC Online SC 60

“79. The illegality goes to the root of the matter. the illegality is not trivial or venial. …The illegality cannot be skirted nor got around. the plant if is confronted with it and he must face its consequence. the matter is clear. we do not require to rely upon any parliamentary debate or search for the purpose beyond the plain meaning of the law. the object of the law is set out in unambiguous terms….”

  1. In coming to the conclusion that the pharmaceutical companies gifting freebies to doctors etc is clearly “prohibited by law” and not allowed to be claimed as a deduction under section 37(1) of the act.


  1. There have been numerous Judgments wherein it has been held that the CBDT cannot provide “casus omissus”, i.e for a situation omitted from or not provided for by statute or regulation and therefore governed by the common law, to a statute or notification or any regulation which has not been expressly provided therein . The CBDT can tone down the rigours of law and ensure a fair enforcement of the provisions by issuing circulars and by clarifying the statutory provisions. CBDT circulars act like “contemporaneous expositio” in interpreting the statutory provisions and to ascertain the true meaning enunciated at the time when statute was enacted. However, the CBDT in its power cannot create a new impairment adverse to and assessee or to a class of assessee without any sanction of law. the circular issued by the CBDT must confirm to tax laws and for purpose of giving administrative relief or for clarifying the provisions of law and cannot impose a burden on the assessee, leave alone creating a new burden by enlarging the scope of different regulation issued under a different act so as to impose any kind of hardship or liability to assessee. It is a trite law that the CBDT circular which creates a burden or a liability or imposes a new kind of imparity, the same cannot be reckoned retrospectively. the beneficial circular may apply retrospectively but a circular imposing a burden has to be applied prospectively only.
  1. It appears that to overcome the above, an Explanation 3 has been inserted by Finance Act, 2022 w.e.f 01-04-2022 which inter alia is for the removal of doubts, & thus it is clarified that the expression “expenditure incurred by and assessee for any purpose which is an offence or which is prohibited by law” under Explanation 1, shall include and shall be deemed to have always included the expenditure incurred by an assessee –
    1. For any purpose which is an offence under, or which is prohibited by, any law for the time being in force, in India or outside India; or
    2. to provide any benefit or perquisite, in whatever form to a person, whether or not carrying on a business or exercising a profession and acceptance of such benefit or perquisite by such person is in violation off any law or rule or regulation or guideline, as the case may be for the time being in force,governing the conduct of such person; or
    3. to compound offence under any law for the time being in force, in India or outside (emphasis provided)
  1. At the same time, The Finance Act 2022, has also inserted a new section 194R, which requires any person responsible for providing to a resident, any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession, by such resident, shall before providing such benefit or perquisite, as the case may be, 2 such resident ensure that tax has been deducted in respect of such benefit or perquisite…..
  2. Further, clause (iv) of section 28 requires any person in receipt of such benefit or perquisite, whether convertible into money or not, arising from the business or the exercise of the profession to be included as income in that person’s
  3. The government has blown hot and cold at the same time by inserting an explanation for disallowance of expenditure incurred by way of providing any benefit or perquisite which is in violation of any law or rule or regulation or guideline governing the conduct of such person and at the same time the person providing such benefit or perquisite also has to ensure a tax has to be deducted before providing such benefit or benefit which was always taxable in the hands of the recipient. Thus now such benefits will not only be taxed in the Hands of the recipient but also be disallowed in the hands of the provides of such benefits, leading to double
  4. Further, many of the issue’s, which were more or less settled, the illustrative list of which is as under
    1. Payment of Ransom money.
    2. Payment of money for settlement upon infringements of extra territorial laws.
    3. Payments for Fines and penalties which are compensatory in Nature.
    4. Expenses incurred on goods which have been imported without valid licences.
    5. Payment of Secret commission.
    6. Payment for Regularisation/ Violation of Procedures.
    7. Legal Expenses incurred to for defending any issues which is an offence or which is prohibited by


  1. With due respect to the Judgment of the Hon’ble SC, the Question now arises, has this judgment given a legal sanctity that circulars or notification issued by the CBDT will have a legal binding precedent more particularly when there was no law in respect of the same e. whether the circulars or notifications issued when there is no law, can override the Act?
  2. In view of this new development and find an answer, in my opinion the same will have to be tested before the Hon’ble courts, when there have been numerous judgements on the point that CBDT cannot provide “casus omissus” i.e. it cannot provide a supplement to a statute or notification or any regulation which has not been expressly provided therein prior to the enactment of the law.

The Finance Act 2020 and the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 have made certain amendments in Sections 6(1) and 6(6) of the Income tax Act (Act) and has inserted Section 6(1A) in the Act.

Section 6(1) of the Act

Sub-section (1) of section 6 of the Act provides for situations in which an individual shall be resident in India in a previous year. Clause (c) thereof provides that the individual shall be Indian resident in a year, if he,-

  1. has been in India for an overall period of 365 days or more within four years preceding that year, and
  2. is in India for an overall period of 60 days or more in that

Clause (b) of Explanation 1 of said sub-section provides that an Indian citizen or a person of Indian origin (PIO) shall be Indian resident if he is in India for 182 days instead of 60 days in that year (Type I category). This provision provides relaxation to an Indian citizen or a PIO allowing them to visit India for longer duration without becoming resident of India.

An additional category of individuals (Type II category) has been added in Clause (b) of Explanation 1 of the said sub-section with effect from assessment year 2021-22. Under this amendment, the requirement of 60 days mentioned in condition (b) above has been substituted by 120 days, if an individual satisfies the following conditions:

  • the individual is a citizen of India or PIO; and
  • his total income (other than income from foreign sources) exceeds INR 15 lac during the previous

For the above purposes, “income from foreign sources” means income which accrues or arises outside India (except income derived from a business controlled in or profession set up in India).

Thus, an individual satisfying the aforesaid conditions will become a resident in India only if his stay in India is 120 days or more and has been in India in the four preceding years for 365 days or more.

An individual who becomes a resident of India upon applying the above additional criteria would become a “resident but not ordinarily resident” under Section 6(6) of the Act.

As per memorandum explaining the provisions of the Finance Act, 2020 instances have come to notice where period of 182 days specified in respect of an Indian citizen or PIO visiting India during the year, was misused. Individuals, who are actually carrying out substantial economic activities from India, manage their period of stay in India, so as to remain a non-resident in perpetuity and not be required to declare their global income in India. In order to discourage this Type II category of persons added in Clause (b) of Explanation 1 the said sub-section.

For Type II category persons, the relaxation of 120 days applies only if the total income (excluding income from foreign sources) exceeds INR 15 lac during the previous year.

The above amendment can give rise to treaty conflict as the individual can be a resident of another state and claim treaty benefit.

Section 6(1A) of the Act

A new sub-section (1A) to Section has been inserted with effect assessment year 2021-22 to provide that notwithstanding anything contained in sub-section (1), an individual, shall be deemed to be resident in India in any previous year if the following conditions are satisfied:

  1. The individual is a citizen of India;
  2. His total income (excluding income from foreign sources) exceeds INR 15 lac during the previous year;
  3. He is not liable to tax in any other country or territory; and
  4. He is not so liable by reasons of-
    1. his domicile; or
    2. residence;
    3. any other criteria of similar

For the removal of doubts, it is clarified that the sub-section (1A) shall not apply in case of an individual who is said to be resident in India in previous year under sub-section (1) to Section 6.

As per memorandum explaining the provisions of Finance Act, 2020 the issue of stateless persons has been bothering the tax world for quite some time. It is entirely possible for an individual to arrange his affairs in such a fashion that he is not liable to tax in any country or jurisdiction during a year. This arrangement is typically employed by high net worth individuals (HNWI) to avoid paying taxes to any country/ jurisdiction on income they earn. Tax laws should not encourage a situation where a person is not liable to tax in any country. The current rules governing tax residence make it possible for HNWIs and other individuals, who may be Indian citizen not to be liable for tax anywhere in the in the world. Such a circumstance is certainly not desirable; particularly in the light of current development in the global tax environment where avenues for double non-taxation are being systematically closed.

This amendment is an anti-abuse provision to tax “stateless persons”. The individual who satisfies the aforesaid conditions would be deemed to be a resident even if has not stayed in India for a single day in the relevant previous year.

The individual covered by Section 6(1A) will be deemed to be “resident but not ordinarily resident” under Section 6(6) of the Act.

If a person, who was a citizen of India, becomes a citizen of other country, he will not be covered by Section 6(1A) even if he is not liable to tax in that country. Further, this provision will not apply to a PIO.

Section 6(1A) applies only if an individual is not liable to tax in any other country. Most of the countries in the Middle East do not levy any tax on individuals. As a result, Indian citizens employed in these countries may become deemed resident under the above criteria since they would not be liable to tax in middle eastern countries. However, as a relief to millions of Indians employed in middle eastern countries, the Central Board of Direct Taxes (CBDT) has issued a press release on 2 February 2020 clarifying that the above provision is an anti-abuse provision and is not intended to tax bonafide workers in foreign countries.

The phrase ‘liable to tax’ is subject matter of interpretation. Does the individual have to actually pay tax in that country for being regarded a liable to tax? The Supreme Court in the case of UOI v. Azadi Bachao Andolan (132 Taxman 373) has held that merely because exemption has been granted to respect of taxability of particular source of income, it cannot be postulated that the entity is not liable to tax. Liability to taxation is not the same as payment of tax. Liability to taxation is a legal situation; payment of tax is a fiscal fact. Although the above observations were made by the Supreme Court in the context of a Double Tax Avoidance Agreement (DTAA), they would equally apply to Section 6(1A) of the Act. Therefore, the expression ‘liable to tax’ does not necessarily imply that the person should actually be liable to tax in the other country and that it is enough if other country has right to tax such person, whether or not such a right is exercised.

Section 6(1A) provides relaxation for Indian citizens who do not earn substantial income in India (i.e. total income (excluding income from foreign sources) upto INR 15 lac. In the above presee release the CBDT has further clarified that in case of an Indian citizen who becomes deemed resident of India under this proposed provision, income earned outside India by him shall not be taxed in India unless it is derived from an Indian business or profession.

Model Conventions (OECD and UN) give the definition of resident in positive manner inasmuch as a person who is liable to tax in a State by reason of his domicile, residence or any other criteria of similar nature is a resident of that State; whereas Section 6(1A) defines a ‘resident’ in a negative manner, that is, a person who is not liable to tax in any other country by reason of his domicile or residence or any other criteria of similar nature.

Significantly, any individual who is treated as a “deemed resident” may not be eligible to avail benefits under any tax treaty entered into by India, as he/she may not qualify as tax resident of any other country. However, he/she may still be able to avail the benefit of foreign tax credit (FTC) in India of some of the taxes paid in other countries on income, which is also getting taxed in India.

Typically, countries have followed residence based tax system and/ or source based tax system or a balanced mixture of both. Presently, only two countries in the world levy tax based on citizenship – the US and Eritrea. As a departure from the normal rule, the Section 6(1A) seeks to treat an individual as an Indian tax resident based on citizenship rather than on residence or period of stay in India. The element of nationality or citizenship is now relevant for the purposes of determining the residential status of an individual taxpayer. Interestingly, such a provision, if applied to all Indian citizens (who do not pay taxes in their respective country of residence) can be characterized as a tax on citizenship.

The effects of the above amendments will now to be examined in various other provisions under the Act, which are discussed in following paras.

Scope of Total Income

As per Section 5(1) of the Act the total income of an individual who is resident and ordinarily resident includes all income form whatever source derived which-

  1. is received or is deemed to be received in India in such year by or on behalf of such person; or
  2. accrues or arises or is deemed to accrue or arise to him in India during such year; or
  3. accrues or arises to him outside India during such year

In the case of a person not ordinarily resident in India, the income which accrues or arises to him outside India shall be so included only if it is derived from a business controlled in or a profession set up in India.

Section 5(2) provides that the total income of any previous year of a non-resident individual includes all income from whatever source derived which-

  1. is received or is deemed to be received in India in such year by or on behalf of such person; or
  2. accrues or arises or is deemed to accrue or arise to him in India during such

Thus, before the amendment, an individual who is now a deemed resident would have been regarded as non-resident and would have been taxed only on his Indian income. Now in view of the above amendments such an individual will now be taxed on Indian income plus income which accrues or arises to him outside India if it is derived from a business controlled in or a profession set up in India. Therefore, the distinction between an ‘ordinarily resident’ and a ‘resident but not ordinarily resident’ is important since in the case of former, global income is taxable in India and in later case, Indian income plus income which accrues or arises to him outside India if it is derived from a business controlled in or a profession set up in India will only be taxed in India.

Disclosure of the Assets outside India Section 139(1) provides that every individual shall furnish his return of income if his total income exceeds the maximum amount not chargeable to income tax. As per fourth proviso to Section 139(1) a person, being a resident other than not ordinarily resident in India within the meaning of Section 6(6), who is not required to furnish a return under this sub-section and who at any time during the previous year holds, as a beneficial owner or otherwise, any asset (including any financial interest in any entity) located outside India or has signing authority in any account located outside India or is a beneficiary of any asset (including any financial interest in any entity) located outside India is required to furnish his return of income in India alongwith the disclosure of the assets outside India.

As the fourth proviso to Section 139(1) applies to a resident and ordinarily resident not to a resident but not ordinarily resident, a deemed resident will not have to disclose the details of foreign assets as required under the said proviso.

Similarly, the provisions of Sections 49 and 50 (rigorous imprisonment and fine for non- disclosure of foreign assets) of the Black Money (Undisclosed Foreign Income and Asset) and Imposition of Tax Act, 2015 would not be applicable to deemed resident.

Provisions related to tax deduction at source (TDS)

Certain TDS provisions are applicable to a payee, who is a resident, viz, Section 193 (interest on securities), Section 194 (dividend), Section 194A (interest  other  than interest on securities), Section 194C (payment to contractors), Section 194DA (payment in respect of life insurance policy), Section 194I (rent), Section 194IA (payment on transfer of immovable property), Section 194J (fees for professional or technical services), etc. All these provisions would now be applicable if the payment is made to a deemed resident. The provisions of Section 195 would not be applicable if the payment is made to a deemed resident.

Transfer Pricing Regulations

The transfer pricing provisions apply to an international transaction between two or more associated enterprises out of which atleast one is a non-resident. Prior to the insertion of Section 6(1A), an individual now regarded as deemed resident was regarded as a non-resident and hence, any transaction undertaken by him with a resident in India was an international transaction which was subject to the transfer pricing regulations. Now post amendment such non-resident person will become a deemed resident and therefore, the transfer pricing provision would not apply to an international transaction undertaken by such deemed resident. The transaction between the deemed resident and another non-resident will continue to be subject to transfer pricing provision.

Concessional Tax Regime – Chapter XII-A

Chapter XII-A provides special concessional provisions relating to certain income of non- residents. A ‘non-resident Indian’ being an individual, being citizen of India or PIO, who is not a resident of India is entitled for concessional rate of tax under Chapter XII-A. Now, since the individual covered by Section 6(1A) is deemed to be a resident, he will be able to claim concessional provision in Chapter XII-A only if he opts for a declaration under Section 115H; the said section provides that where a non-resident Indian in any previous year becomes assessable as resident in India in respect of the total income of any subsequent year, he may furnish to the assessing officer a declaration in writing alongwith his return of income under Section 139 for the assessment year for which he is so assessable, to the effect that the provisions of Chapter XII-A shall continue to apply to him in relation to the income specified in Chapter XII-A and if he does so, the provisions of the Chapter shall continue to apply to him in respect of such income for that assessment year and for every subsequent assessment year until the transfer or conversion (otherwise than by transfer) into money of such assets.


Globally, consensus have reached against taxpayers who manage to avoid or substantially reduce their global tax burden by spreading their stay or businesses across different tax jurisdictions. This highlights the intention of tax departments across the world in this regard. The new residency rule is an anti-abuse provision planned to plug loopholes in the system and not intended to tax income earned by those working bonafide overseas. If a genuine non-resident Indian is earning something in a jurisdiction where there is no tax, the government is not interested in including such income into Indian income that has been generated there. The recent law relating to “deemed resident” is a significant step taken by India to address the challenges faced in bringing “stateless” persons to tax. However, it will be interesting to see how the Indian tax department implements and enforces this law against non-resident individuals.

The new residency rule is an anti-abuse provision planned to plug loopholes in the system and not intended to tax income earned by those working overseas. If a genuine non-resident Indian is earning something in a jurisdiction where there is no tax, the government is not interested in including such income into Indian income that has been generated there.

  1. The Indian legal system is the product of It is rooted in our soil; nurtured and nourished by our culture, languages and traditions; fostered and sharpened by our genius and quest for social justice; reinforced by history and heritage inspired and strengthened by English Law guided and enriched by concepts and precepts of justice, equity and good conscience which are indeed the hallmarks of the common law.
  1. The doctrine of binding precedent has merit of promoting certainty and consistency in judicial decisions and enables an organic development of law ‘besides providing assurance to an individual as to the consequence of transaction, forming part of his daily UOI v. Raghubir Sing 178 ITR 548 (SC)
  2. As per the doctrine of precedent, all lower Courts, Tribunals and authorities exercising judicial or quasi-judicial functions are bound by the decisions of the High Court within whose territorial jurisdiction these Courts, Tribunals & authorities functions. CIT v. Thana Electricity Supply Ltd. (1994) 206 ITR 727 (Bom).

Consolidated Pneumatic Tool Co. (India) Ltd. v. CIT (1994) 209 ITR 277 (Bom).

In the case of Shah Faesal (Dr.) v. UOI (2020) 4 SCC 727 (5-Judge Bench) the Hon Court held that the doctrine of precedents and stare decisis are the core values of our legal system. They form the tools which further the goal of certainty, stability and continuity in our legal system. Arguably, Judges owe a duty to the concept of certainty of law, therefore they justify their holdings by relying upon the established tenets of law. Court also held that the decision rendered by a coordinate Bench is binding on the subsequent Benches of equal or lesser strength. Followed National Insurance Co. Ltd v. Pranay Sethi (2017) 16 SCC 680. 

  1. ‘Stare decisis’ is a Latin phrase which means ‘to stand by decided cases’ or ‘to uphold precedents’. Doctrine of stare decisis is a general maxim which states that when a point of law has been decided, it takes the form of a precedent which is to be followed subsequently and should not normally be departed

By virtue of Article 141 of the Constitution of India, the judgments pronounced by the Supreme Court have the force of law and are binding on all the Courts in India. However, the Supreme Court itself is free to review its earlier decision and depart from it if the situation so warrants.

  1. The Madras High Court in Peirce Leslie & v. CIT [1995] 216 ITR 176 (Mad.) observed that the doctrine of stare decisis is one of the policy grounded on the theory that security and certainty require that accepted and established legal principles, under which rights may accrue, be recognised and followed, though later found to be not legally sound, but whether a previous holding of the Court shall be adhered to or modified, or over-ruled, is within the Court’s discretion under the circumstances of a case before it.

Income Tax Act, being a Central Act of Parliament, uniformity of construction by the various High Courts should be followed unless there are overriding reasons for taking a divergent view.

  1. If the revenue has not challenged the correctness of the law laid down by the High Court and has accepted it in the case of one assessee then it is not open to the Revenue to challenge its correctness in the case of other assessee without just
    • UOI Satish Panalal 249 ITR 221 (SC);
    • UOI Kaumudini N. Dalal 249 ITR 219 (SC)
    • CIT J. K. Charitable trust (2008) 308 ITR 161 (SC)
    • Difference between “Res Judicata” and “Consistency Principle”

While “res judicate” does not apply to income-tax matters, the principles of consistency does. If the Revenue has accepted a practice and consistently applied and followed it, the Revenue is bound by it. The Revenue can change the practice only if there is a change in law or change in facts and not otherwise PCIT v. Quest Investment Advisors Pvt. Ltd, ITA no. 280 of 2016, dtd: 28/06/2018 (Bombay High Court)

Recently the Mumbai ITAT in case of The Municipal Co-op Bank Ltd., v. DCIT-1(3) (2) [ITA No.6512/Mum/2019 dt 23/5/2022] applied the principle of consistency and observed that “the principle of consistency is required to be maintained by the Revenue. Reliance in this regard is placed on the decision of the Hon’ble Supreme Court in the case of Radhasoami Satsang reported in 193 ITR 321(SC). The facts prevailing in earlier years and subsequent years are exactly identical to the facts in the year under consideration. Hence, we have no hesitation to hold that the receipts from members in the sum of Rs.2,09,32,478/- being amount received from members towards SGF as capital receipts not chargeable to tax.”

  1. The Supreme Court in Sakhi Union of India AIR 2004 SC 3566 at 3577 observed : “Stare decisis is a well known doctrine in legal jurisprudence. The doctrine of stare decisis, meaning to stand by decided cases, rests upon the principle that law by which men are governed should be fixed, definite and known, and that, when the law is declared by Court of competent jurisdiction authorized to construe it, such declaration is absence of palpable mistake or error, is itself evidence of the law until changed by competent authority. It requires that rules of law when clearly announced and established by a Court of last resort should not be disregarded and set aside but should be adhered to and followed. What it precludes is that where a principle of law has become established by a series of decisions, it is binding on the Courts and should be followed in similar cases. It is a whole-some doctrine which gives certainty to law and guides the people to mould their affairs in future”.

In case of Bajaj Auto Finance Ltd. v. CIT (2018) 404 ITR 564 (Bom.)(HC)

Interpretations given by High Courts and Tribunals cannot be ignored by the Assessing Officers.

  1. Ratio decidendi is a Latin phrase meaning “the reason” or “the rationale for the decision”. The ratio decidendi is “the point in a case which determines the judgment” or “the principle which the case establishes”. In other words, ratio decidendi is a legal rule derived from, and consistent with, those parts of legal reasoning within a judgment on which the outcome of the case
  2. The substance of the above expression means the reasons given by the court or tribunal for deciding the issue and not every The judicial view on this subject is as under:

“The underlying principle of a judicial decision which forms its authoritative element for the future, is termed ratio decidendi. It is contrasted with an obiter dictum or that part of a judgment which consists of the expression of the Judges’s opinion on a point of law which is not directly raised by the issue between the litigants.” [Stephen Commentaries (Vol. I P. 11)]—referred to in CWT v. Dr. Karan Singh (1993) 200 ITR 614 (SC)

The expression ‘ratio decidendi’ means the reasons given by the court for deciding the issue before it. Where two reasons are given for arriving at a particular decision then, both reasons would form the ratio decidendi for the said decision and both reasons would be binding. Fibre Boards (P.) Ltd v. CIT( 2015) 376 ITR 596 ( SC)

  1. It is well settled that a decision as an authority for what it actually decides. What is of the essence in a decision is its ratio and not every observation found therein nor what logically follows from the various observations made therein… It would, therefore, be not profitable to extract a sentence here and there from the judgment and to build upon it because the essence of the decision is its ratio and not every observation found therein…. The enunciation of the reason or principle on which a question before a court has been decided is alone binding between the parties to it, but it, is the abstract ratio decidendi, ascertained on a consideration of the judgment in relation to the subject matter of the decision, which alone has the force of law [UOI v. Dhanwanti Devi (1996) 6 SCC 44]

At this juncture, would like to refer the decision of the Hon’ble apex court in CIT Sun Engineering Works (1992) 198 ITR (SC) wherein the court observed “while applying the decision to a later cases, the court must carefully try to ascertain the true principal laid down by the decision of the Supreme Court and not to pickout words or sentences from the Judgment divorced from the context of question under consideration by the court to support their reasoning.”

Thus, it is clear that it is the ratio of the decision which must be ascertained by the court/tribunal before applying the same.

  1. In case of Iskrareco Regent v. CIT (2011) 313 ITR 317 (Mad.)(High Court) it was held that Judgment cannot be read like a statute. Courts should not place reliance on decision without discussing factual situation involved in the said decision and how it would apply to the facts involved in the subsequent case. A ratio laid down by a higher forum should not be taken out context and construed like a statute.
  1. It is also well settled that the judgment of the Hon’ble Supreme Court or the High Court must be read as a whole and the observations from the judgment have to be considered in the light of the question, context and the facts of that It is neither desirable nor permissible to pick out a word or a sentence from the judgment of the Hon’ble apex Court, divorced from the context of the question under consideration and treat it to be the complete law laid down by the Hon’ble Court. It is also equally well settled that a decision is to be followed for what it actually decides and not necessarily for what logically follows from it.

ACIT v. Affection Investments Ltd. (2003) 80 TTJ 278 / (2004) 2 SOT 165 (Ahd.)(Trib.) 


  1. A decision of a Division Bench and Third Member Bench is binding on the Single Member A decision of a Special Bench is binding on all the Benches of the Tribunal. A decision of the Special Bench can be distinguished or disregarded if there is any contrary view of the jurisdictional High Court or of the Supreme Court. A co-ordinate Bench should follow the view of another co-ordinate Bench or else refer the matter to a larger Bench through the President.
  2. For the sake of uniformity, one Bench of the Tribunal is bound to follow the view expressed by another Bench of the Tribunal unless the earlier view is per incurious – CIT L.G. Ramamurthi 110 ITR 453 (Mad) ; CIT v. S. Devaraj 73 ITR 1 (Mad).
  3. Tribunal should not come to a conclusion totally contradictory to the conclusion reached by the earlier Bench of the Tribunal. Where a Bench differs from an earlier Bench, the matter should be referred to a larger Bench – CIT v. Goodlass Nerolac Paints Ltd. 188 ITR 1 (Bom). UOI v. Paras Laminates Pvt. Ltd. (1990) 186 ITR 722 (SC) ; Pradip Chandra Parija v. Pramod Chandra Patniak (2002) 254 ITR 99 (SC)
  1. One bench cannot differ from the view of another Co-ordinate Bench. Mercedes Benz India Pvt. Ltd. v. UOI (2010) 252 ELT 168 (Bom) ITO vs Baker Technical Services Pvt. Ltd. (2010) 125 ITD 1 (Mum)(TM)
  1. In case of Hatkesh Co-op Housing Society v. ACIT (Bom.)(HC); [2016] 243 Taxman 213 (Bombay) the court observed that that when an identical issue, which had earlier arisen before the Coordinate Bench of the Tribunal on identical facts and a view has been taken on the issue then judicial discipline would demand that a subsequent bench of the Tribunal hearing the same issue should follow the view taken by its earlier Coordinate Bench. No doubt this discipline is subject to the well settled exceptions of the earlier order being passed per incurim or sub silentio or in the meantime, there has been any change in law, either statutory or by virtue of judicial pronouncement. If the earlier order does not fall within the exception which affects its binding character before a coordinate bench of the Tribunal, then it has to follow it. However, if the Tribunal has a view different then the view taken by its Coordinate Bench on an identical issue, then the order taking such a different view must record its reasons as to why it does not follow the earlier order of the Tribunal on an identical issue, which could only be on one of the well settled exceptions which affect the binding nature of the earlier order. It could also depart from the earlier view of the Tribunal if there is difference in facts from the earlier order of Coordinate Bench but the same must be recorded in the order. The impugned order is blissfully silent about the reason why it chooses to ignore the earlier decision of the Tribunal rendered after consideration of Sind Co. Op. Hsg. Society (Bom High court), and take a view contrary to that taken by its earlier Coordinate Bench. It is made clear that in case a subsequent bench of the Tribunal does not agree with the reasons indicated in a binding decision of a coordinate bench, then for reason to be recorded, it must request the President of the Tribunal to constitute a larger bench to decide the difference of view on the issue.

Non Consideration of decision citied of the Co-ordinate Bench amounts to mistake apparent on record as held in Honda Siel Power Products Ltd. v. CIT (2007) 295 ITR 466 (SC)

  1. Special Bench decision of three members should have precedence over Third Member

Oman International Bank 286 ITR 8 (AT) (SB). Third Member decision is like the decision of Special Bench should be followed in same manner.


  1. The First Appellate Authority or the Assessing Officer are bound by the orders of the Even where the assessee or the department has pursued the matter in reference proceedings, it does not act as a kind of stay of operation of the order of the Tribunal.
  2. The Assessing Officer cannot ignore the decision taken by the Tribunal in favour of the assessee and take a contrary view – ITO v. Siemens India & another 156 ITR 11 (Bom). Bank of Baroda v. H.C. Shrivastava (2002) 256 ITR 385 (Bom).
  1. The Assessing Officer cannot refuse to follow the order passed by the Commissioner against the application u/s.132(11) on the ground that the Commissioner had no jurisdiction over the matter – Union of India Pradip Kumar Saraf & Others 207 ITR 679 (Cal), Sree Rajindra Mills Ltd. v. CIT (1970) 28 STC 483, Union of India v. Kamlakshi Finance Corpn. Ltd. 1992 AIR SC 711 (712).Sub-Inspector Rooplal & Anr. v. Ltd. Governor & Ors. (2000) 1 SCC 644.; Gammon India Ltd v. Commissioner of Customs (2011) 10 GSTR 134 (SC); Nirma Ltd
  2. Commissioner of Central Excise, Ahmedabad 2012 (276) ELT 283 (Trib.) (Ahd.)
  3. It is neither permissible nor legal for any Court and Tribunal to comment upon the decision of the Supreme Court/High Similarly, it is also not permissible for the Tribunal to comment upon the manner in which a particular decision was rendered by the Supreme Court/High Court. It is also not permissible for the Tribunal to sidetrack or/and ignore the decision of the High Court on the ground that it did not take into consideration a particular provision of law. If such an approach is resorted to by subordinate Courts/Tribunals, then it is held to be not in conformity with the law laid down by the Supreme Court. It was deprecated by the Supreme Court as being improper.

National Textile Corporation Ltd., v. CIT (2008) 338 ITR 371 / 5 DTR 117 (MP)(High Court)

  1. The Hon’ble Bombay High Court in CIT Thana Electricity Supply 206 ITR 727 (738-739) after considering various judgements of Supreme Court laid down the following propositions with regard to binding precedent :
  1. The law declared by the Supreme Court being binding on all courts in India, the decisions of the Supreme Court are binding on all courts, except, however, the Supreme Court itself which is free to review the same and depart from its earlier opinion if the situation so warrants. What is binding is, of course, the ratio of the decision and not every expression found
  2. The decision of the High Court are binding on the subordinate courts and authorities or Tribunals under its superintendence throughout the territories in relation to which it exercises It does not extend beyond its territorial jurisdiction.
  3. The position in regard to the binding nature of the decision of High court on different Benches of the same court may be summed up as follows:
    1. A Single judge of High Court is bound by  the  decision of another single judge or a Division Bench of the same High It would be judicial impropriety to ignore that decision. Judicial comity demand that a binding decision to which his attention had been drawn should neither be ignored nor overlooked. If he does not find himself in agreement with the same, the proper procedure is to direct the papers to be placed before the Chief Justice to enable him to constitute a larger bench to examine the question (see, Food Corporation of India v. Yadav Engineering & Contractor, AIR 1982 SC 1302).
    2. A Division Bench of High Court should follow the decision of another Division Bench of equal strength or a Full Bench of the same High If one division bench differs from another division bench of the same High Court, it has to refer and transfer the case to a large Bench.
    3. Where there are conflicting decision of courts of coordinate  jurisdiction, the later decision is to be preferred if reached after full consideration of the earlier
  4.  The decision of the High Court is binding precedent neither for another High Court nor for courts or Tribunal outside its own territorial It is well settled that the decision of a High Court will have the force of binding precedent only in the State or territories over which the Court has jurisdiction. In other States outside the territorial jurisdiction of that High Court it may, at best, have only persuasive effect. By no amount of stretching of the doctrine of stare decisis, can judgments of one High Court be given the status of a binding precedent so far as other High Courts or Courts or Tribunals within their territorial jurisdiction are concerned. Any such attempt will go counter to the very doctrine of stare decisis and also the various decisions of the Supreme Court which have interpreted the scope and ambit thereof. The fact that there in only one decision of any one High Court on a particular point or that a number of different High Courts have taken identical views in that regard is not at all relevant of that purpose. Whatever may be the conclusion, the decisions cannot have the force of binding precedent on other High Courts or on any subordinate courts or Tribunals within their jurisdiction. That status is reserved only for the decisions of the Supreme Court which are binding on all court s in the country by virtue of article 141 of the Constitution.

[CIT v. Thana Electricity Supply Ltd., (1994) 206 ITR 727, 7380-39 (Bom). Also see, Consolidated Pneumatic Tool Co. (India) Ltd. v. CIT. (1994) 209 ITR 277, 282 (Bom)]. 

  1. A High Court must not brush aside the binding precedent or the judgment of a co-ordinate Bench simply because some of the arguments were either not canvassed or if canvassed were not considered. The binding precedent can be ignored only if it is per incurium

CIT v. Impact Containers Pvt. Ltd. (2014) 367 ITR 346 (Bom.) (HC)

  1. It is clear that when there are conflicting judgements of the jurisdictional High Court, normally the latter judgement would prevail provided it has referred to the earlier decision and distinguished the However, if the earlier judgement is not referred to at all, and there are two conflicting judgements, it is open to the Tribunal to follow that judgement, the reasoning of which appeals to the Tribunal. Since both the jurisdictional High Court judgement are binding the Tribunal has to prefer one or the other judgment and in such a case it can prefer either of the two judgments. Amarsingh Yadav v. Santi Devi AIR (1987) Patna 191 and CIT v. Madhukant M. Mehta (1981) 132 ITR 159 (Guj).
  1. Tribunal has to follow the decision of the jurisdictional High Court without making any comment upon the said decision, it is not permissible for the Tribunal to sidetrack and / or ignore the decision of the jurisdictional High Court on the ground that it did not take into consideration a particular provision of Dy. CIT v. Gujarat Ambuja Cements Ltd. (2011) 57 DTR 179 (Mum.)(Trib.)

Department cannot reargue settled/ concluded issues :

In the case of PCIT v. JWC Logistics Park Pvt. Ltd (2018) 404 ITR 310 (Bom.)(HC) the Court has passed, strictures against Department’s Advocate for “most unreasonable attitude” of seeking to reargue settled concluded issues and not following the judicial discipline and law of precedents.

Also see CIT v. Dedicated Healthcare Services (TPA) India Pvt. Ltd. (2018) 408 ITR 36 (Bom.) (HC) 

  1. The Sales Tax Officer passed an order refusing to follow the judgment of Bombay High Court in CST v. Pee Textiles 26 VST 281 on the ground that the said judgment “is not accepted by the sales tax department and the department has appealed against the same”. On a writ petition filed by the assessee, the High Court has taken the view that as the said judgment in Pee Vee Textiles is not stayed “the refusal to follow and implement the judgment of this Court by the Sales Tax officer in our considered view prima facie amounts to contempt of this Court” Garware Polyester v. State of Maharashtra and Ors. Source : www.itatonline.org
  1. Not following Binding  decision of High Court will amount to “Judicial Indiscipline”:

The ITAT passed an order in HDFC Bank Limited v. DCIT (2015) 155 ITD 765 (Mum)

(Trib) in which it held that the presumption laid down in CIT v. HDFC Bank Ltd (2014) 366 ITR 505 (Bom.) and CIT v. Reliance Utilities and Power Ltd (2009) 313 ITR 340 (Bom) that investments in tax-free securities must be deemed to have come out of own funds and (ii) Law laid down in CIT v. India Advantage Securities Ltd ( 2016) 380 ITR 471 (Bom) that s. 14A and Rule 8D does not apply to securities held as stock- in-trade cannot be applied as both (2015) propositions are contrary to Godrej & Boyce Mfg. Co Ltd v. Dy. CIT ( 2010) 328 ITR

81 (Bom). On a Writ Petition filed by the assesse the court held reversed the ITAT’s order on the ground that it is “Judicial Indiscipline” leading to complete chaos and anarchy in the administration of law. The court also held that, Tribunal to decide it afresh on its own merits and in accordance with law. However the Tribunal would scrupulously follow the decisions rendered by this Court wherein a view a has been taken on identical issues arising before it. It is not open to the Tribunal to disregard the binding decisions of this Court, the grounds indicated in the impugned order which are not at all sustainable. Unless the Tribunal follows this discipline, it would result in uncertainty of the law and confusion among the tax paying public as to what are their obligations under the Act. Besides opening the gates for arbitrary action in the administration of law, as each authority would then decide disregarding the binding precedents leading to complete chaos and anarchy in the administration of law. When the assessee have more interest free funds than interest bearing funds, presumption is that investment in tax free securities has been made from interest free funds hence no disallowance is permissible. (AY.2008-09)

HDFC Bank Ltd. v. DCIT (2016) 383 ITR 529 (Bom.)(HC) Editorial: Order of Tribunal in HDFC Bank v. Dy CIT (2015) 155 ITD 765/ 173 TTJ 810/ 130 DTR 21 (Mum)(Trib) is set aside.

  1. The law laid down by the High Court must be followed by all authorities and subordinate Tribunals and they cannot ignore it either in initiating proceedings or deciding the rights involved in such a If in spite of the earlier exposition of law by the High Court having been pointed out and attention being pointedly drawn to that legal position, proceedings are initiated, it must be held to be a wilful disregard of the law laid down by the High Court and would amount to civil contempt as defined in section 2(b) of the Contempt of Courts Act, 1971.

Kaira District Co-op. Milk Producers Union Ltd v. Dy. CIT (2016) 386 ITR 633 (Guj)(HC)

30. Binding order – Larger Bench – On Division Bench :

Similarly a Division bench of a High Court is fully bound by the view taken by a larger Bench of the Court, regardless of the fact that another High Court prefers a different view. (A.Ys. 2002-03 & 2003-04)

KLM Royal Dutch Airlines v. ADIT (2007) 292 ITR 49 (Delhi)(High Court)

  1. BINDING NATURE OF HIGH COURT DECISION ON OTHER HIGH COURT Although the judgments given by a High Court is not binding on another High Court(s), they hold persuasive A High Court when not following another High Court should record its dissent along with the reasons therefore. Pradip J. Mehta v. CIT (2008) 300 ITR 231 (SC)
  1. The decision of one High Court is not a binding precedent upon another High Court and at best can only have persuasive Humayun Suleman Merchant v. CCIT (2016) 387 ITR 421/ 242 Taxman 189/140 DTR 209 (Bom)(HC)
  1. The law laid down by the High Court is binding on all the State CIT v. Raghuvir Synthetics Ltd( 2017) 394 ITR 1 (SC) 
  1. In the absence of any contrary view, decisions of non jurisdictional High Court have to be followed by the

The Mumbai ITAT in case of ACIT v. Dish TV India Ltd. (2018) 194 TTJ 897 / 169 DTR

253 (Mum.)(Trib.) held that in Absence of any decision by jurisdictional High Court, decision of non-jurisdictional High Court which is favorable to the assessee has to be accepted


  1. It is not permissible for the authorities below to ignore the decision of the higher forum on pretext that an appeal is filed in the Supreme Court, which is pending or that steps are to be taken to file an appeal.

Addl. CIT v. Royal Bank of Scotland N. V. (2011) 130 ITD 305 (Kol.)(Trib.) Similarly in case of MSD Pharmaceuticals (P) Ltd. v. Add.CIT (2018) 162 DTR 149 / 191 TTJ 702 (Delhi) (Trib.) it was held that merely because a binding judicial precedent from jurisdictional High Court had been challenged by revenue authorities before Supreme Court—Binding nature of a judicial precedent, as long as it hold field i.e. was not overturned, remained unaffected Similarly in case of PCIT v. Associated Cable Pvt. Ltd. (Bom.)(HC), (ITXA. No. 293 of 2016 dt. 03.08.2018) it was held that merely filing of an SLP would not make the order of this Court bad in law or give a license to the Revenue to proceed on the basis that the order is stayed and/or in abeyance.

Also Assessing Officer is bound by decision of Tribunal-Pendency of an appeal would not amount to an order of stay. LIC Employees Co-Operative Bank Ltd. v. ACIT (2018) 408 ITR 287 (Mad) (HC)

  1. Judgement of a non-jurisdictional High Court has to be preferred over the judgement of a Special Bench of the ITAT . Nanubahi D. Desai v. ACIT (2014) 149 ITD 16 (SB)(Ahd)(Trib) Minda Sai Ltd. v. ITO (Delhi)(Trib.); www.itatonline.org 
  1. In matters arising under public law, when the validity of a particular provision or levy is challenged, the legal position is that when the Supreme Court declares the law and holds either a particular levy to be valid or invalid it is wrong to contend that the law laid down by the Supreme Court in that judgment would bind only those parties who were before the court and not others in respect of whom appeal had not been To do so would be to ignore the binding nature of a judgement of the Supreme Court under article 141 of the Constitution of India. To contend that the conclusion reached by the Supreme Court in a case relating to the validity of a levy would apply only to the parties before the court is to destroy the efficacy and integrity of the judgement and to make the mandate of Article 141 illusory. U P. Pollution Control Board & Others v. Kanoria Industries Ltd. & Anr. (2003) 259 ITR 321 (SC) 
  • Decision of Supreme Court interpreting Excise Act – Not binding in interpreting provisions of Income-tax Act – Object of legislation.
  1. While it is true that any law declared by the Supreme Court is one to be followed and applied by all courts in the country in view of the mandate under article 141 of the Constitution of India, it is only such law that is declared in a particular context and in respect of the particular statutory provisions and not in general. An interpretation placed on a particular enactment cannot be just engrafted to the provisions of another

CIT v. Ecom Gill Coffee Trading P.Ltd. (2014) 362 ITR 204 (Karn.)(HC) CIT v. B. Fouress P. Ltd. (2014) 362 ITR 204 (Karn.)(HC)

In the case of UOI v. M. V. Mohan Nair (2020) 5 SCC 421 the Supreme court observed that the pronouncement of the law on point shall operate as a binding precedent on all courts within India. Law declared by the Supreme Court has to be essentially understood as a principle laid down by the Court and it is this principle which has the effect of a precedent. A principle as understood from the word itself, is a proposition which can only be delivered after examination of the matter on merits. It can never be a summary manner, much less be rendered in a decision delivered on technical grounds, without entering in to merits at all. A decision unaccompanied by reasons can never be said to be a law declared by the Supreme Court, though it will bind the parties inter se in drawing the curtain on the litigation. (CA No. 2016 of 2020 dt 5-3-2020)

  1. Decision of Advance rulings Authority on similar facts in respect of same subject matter can be followed DIT v. Dun and Brand Street Information Services India P. Ltd. (2011) 338 ITR 95 (Bom.)(High Court)
  1. Similarly the Andhra Pradesh High Court held that the Advance Ruling Authorities order under section 67(4)(11) was binding not only on the applicant but also similar situated other dealers.

Tirupati Chemicals, Vijaywada & Anr. v. Dy. Commercial Tax Officer (2011) 52 APSTJ P. 48 (AP)(High Court)


  1. A judicial decision acts According to Blackstonian theory, it is not the function of the Court to pronounce a “new rule” but to maintain and expound the “old one”. In other words, judges do not make law they only discover or find the correct law. The law has always been the same. If a subsequent decision alters the earlier one, it (the later decision) does not make new law. It only discovers the correct principle of law which has to be applied retrospectively. To put it differently, even where an earlier decision of the court operated for quite some time, the decision rendered later on would have retrospective effect clarifying the legal position which was earlier not correctly understood.
  1. It is no doubt true that the Court has accepted the doctrine of “prospective overruling”. It is based on the philosophy; “the past cannot always be erased by new judicial declaration”. It may, however, be stated that this is an exception to the general rule of doctrine of (A.Y. 1996-97) ACIT v. Saurashtra Kutch Stock Exchange Ltd. (2008) 305 ITR 227 SC
  1. Normally, a decision of the Supreme Court enunciating a principle of law is applicable to all cases irrespective of the stage of pendency, because it is assumed that what is enunciated by the Supreme Court is in fact, law from inception. It is for the Supreme Court to indicate whether the decision in question will operate In other words, there shall be no prospective overruling unless it is so indicated in the particular decision. Murthy M.A. v. State of Karnataka & Others (2003) 264 ITR 1 (SC)
  1. It is axiomatic that a decision of the Supreme Court does not make the law but it only declares the law as always existing since its inception .

Mark (India) Ltd v. CIT (2017) 393 ITR 91 (Bom)(HC) 

  1. The discipline demanded by a precedent or the disqualification or diminution of a decision on the application of the per incuriam rule is of great importance, since without it, certainty of law consistency of rulings and comity of Courts would become a costly casualty. A decision or judgment can be per incuriam if any provision in a statute, rule or regulation, which was not brought to the notice of the Court. A decision or judgement can also be per incuriam if it is not possible to reconcile its ratio with that of a previously pronounced judgement of a Co-equal or Larger Bench; or if the decision of a High Court is not in consonance with the views of Supreme Court. The per incuriam rule is strictly and correctly applicable to the ratio decidendi and not to obiter dicta. Sundeep Kumar Bafna v. State of Maharashtra & Anr. AIR 2014 SC 1745 
  1. The Andhra Pradesh High Court in CIT B.R. Constructions [1993] 202 ITR 222 states that a precedent ceases to have a binding force in the following situations –
    1. if it is reversed or over-ruled by a higher court;
    2. when it is affirmed or reversed on a different ground;
    3. when it is inconsistent with the earlier decisions of the same rank;
    4. when it is sub silentio (non- speaking judgment)
    5. when it is rendered per incuriam (decision decided without referring to a statutory provision or a precedent).
  1. If a  principle laid down by SC is demonstrably inconsistent with the scheme of the Constitution, it becomes the duty of court to correct the wrong principle laid down. It is also the duty of SC to correct itself as early as possible in the matters of the interpretation of constitution “as perpetuation of mistake will be harmful to public interest”.

Desiya Murpokko Dravida Kazhagam & Anr v. Election Commission of India (2012) AIR Supreme Court 2191

  1. If subsequent decision of smaller Bench of Supreme Court interpreting decision of larger Bench of Supreme Court is placed before a High Court, latter is bound to follow subsequent decision by smaller Bench which interprets decision of Larger Bench because that is interpretation of larger Bench of Supreme Court and High Court cannot make a different interpretation than one made by subsequent decision of Supreme Court which is binding upon CIT v. Oberoi Hotels (P) Ltd. (2011) 334 ITR 293 (Cal.)(High Court) 
  1. Word ‘Obiter’ means ‘by the way’, ‘in passing’, ‘incidentally’. Obiter  dictum is the expression of opinion stated in the judgment by a Judge on a question immaterial to the ratio However, these are of persuasive value. They are unnecessary for the decision of a particular case.
  2. In Mohandas Issardas Santhanam (A.N.) AIR 1955 Bom. 113 it was held that it would be incorrect to say that every opinion of the Supreme Court would be binding on the High Courts. Only the opinion expressed on a question that arose for the determination of a case is binding



  1. Finality to assessment facilitates the assessee to plan his affairs and to decide the business planning for long term However tax authorities feel that there is no finality to any assessment as the principle of Res Judicata is not applicable to tax proceedings.
  2. The word ‘Res Judicata’ is derived from the Latin language. It means a case or suit already The principles of Res Judicata, in the eye of law, is that if on any facts and/or law, a particular decision is made than subsequently if any lis on similar facts and/or law is to be decided between the same parties, it should be same as made earlier.
  3. As per The Law Lexicon “Res adjudicata” means “A matter adjudged; a thing judicially acted upon or decided; a thing or matter settled by judgment; a thing definitely settled by judicial decision, the thing adjudged”.
  4. Section 11 of The Code of Civil Procedure, 1908, defines “Res Judicata” as under:- “No court shall try any suit or issue in which the matter directly and substantially in issue has been directly and substantially in issue in a former suit between the same parties, or between parties under whom they or any of them claim, litigating under the same title, in a court competent to try such subsequent suit or the suit in which such issue has been subsequently raised, and has been heard and finally decided by such court.”
  5. The doctrine of Res Judicata is based on three maxims:
    1. Nemo debet lis vaxari pro eadem causa (no man should be vexed twice for the same cause);
    2. Interest republicae ut sit finis litium (it is in the interest of the state that there should be an end to a litigation); and
    3. Re judicata pro veritate occipitur (a judicial decision must be accepted as correct).
  1. The Bombay High Court, in A. Shah and Co. v. CIT (1956) 30 ITR 618 (Bom.) has held that “the principle of estoppel or res judicata does not strictly apply to the Income Tax authorities” and yet declaring that:

“An earlier decision on the same question cannot be reopened if that decision is not arbitrary or perverse, if it had been arrived at after due inquiry, if no fresh facts are placed before the Tribunal giving the later decision and if the Tribunal giving the earlier decision has taken into consideration all material evidence.”

  1. The courts have cautioned that the doctrine of Res Judicata should not be stretched too far under direct tax laws. A Tribunal should extremely be slow to depart from its earlier
  2. In Radhasoami Satsang CIT (1992) 193 ITR 321 (SC) the Hon’ble Apex Court observed as under:

“16. We are aware of the fact that strictly speaking res judicata does not apply to income tax proceedings. Again, each assessment year being a unit, what is decided in one year may not apply in the following year but where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year”.

  1. In the case of Municipal Corporation of City of Thane Vidyut Metallics Ltd & Anr. (2007) 8 SCC 688, wherein the facts were that in earlier litigation, the court had considered the evidence of Quality control Manager who was described as “expert” on the point and accepting his evidence, the court held that the goods imported by the company were ferrous in nature and not non ferrous and the company was right in paying octroi under item 71. It was thus a “fundamental factor” and the nature of goods imported by the company was directly and substantially in issue, on the basis of which the decision was taken. The Hon’ble Supreme Court observed that in taxation matters, the strict rule of res judicata as envisaged by section 11, CPC 1908 has no application. As a general rule, each year’s assessment is final only for that year and does not govern later years, because it determines the tax for a particular period.

The Hon’ble Supreme Court further observed that in facts of present case it was not possible to hold that the earlier decision would not continue to operate in subsequent years unless it is shown that there are changed circumstances or the goods imported by the company in subsequent years was different than the one which was imported earlier and in respect of which decision had been arrived at by the court. Therefore, it was held that the Revisional Court as well as the High Court were right in giving benefit of the decision in the earlier litigation to the respondent company. The Hon’ble Supreme Court upheld the observation of Supreme Court in case of Radhaswami Satsang (Supra).

  1. Further principles of res judicata not applicable in cases where order is passed without jurisdiction. Hence would not be binding on other party even if no appeal filed against the UOI & Anr v. Association of Unified Telecom Service Providers of India & Ors AIR 2012 SC 1693
  1. On going through the various judicial pronouncement following principles emerge:
    1. As a general rule principle of res judicata or estoppel is not applicable to income-tax An assessment of particular year is final and binding in relation to the assessment year in which the decision is given.
    2. In income-tax proceedings though the principle of res judicata does not apply, yet rule of consistency does apply e., if no fresh facts come to light on investigation, the Assessing Officer is not entitled to reopen the same question on mere ground of suspicion or change of opinion. This is based on principle of natural justice and expediency. The principle of comity lends weight to this preposition.
    3. A finding arrived at in a subsequent year ignoring, without material, the conclusion arrived at earlier would be vitiated in law. There should be no deviation/variation from earlier year’s decision unless there are fresh circumstances to warrant a deviation from such previous decision unless it otherwise emerges that the previous decision is wrong.
    4. Principle of res judicata or estoppel and principle of consistency or expediency apply with equal force to both Income-tax authorities on one hand and the Tribunal/High Courts on the other.
    5. This principle broadly safeguards the interests of the assessees against arbitrary actions arising out of prerogative interpretations and biased action.
  1. Principle of res judicata does not apply in matters pertaining to tax of different assessment The reason for following the earlier year decision is not because of principle of res judicata but because of theory of precedent. This is subject only to the gateways of distinguishing the earlier decisions and where the earlier decision is per incuriam. Bharat Sanchar Nigam Ltd. & Anr. v. UOI & Ors. (2006) 282 ITR 273 (SC) 


  1. A mere dismissal of SLP does not mean that High Court decisions is approved on merits so as to be a judicial precedent. In Tej Kumari v. CIT (2001) 247 ITR 210 Full Bench of the Patna High Court held that when a SLP is summarily rejected or dismissed under Art 136 of the Constitution such dismissal does not lay down any law. The decision of the High Court against which the SLP is dismissed in limine would not operate as res-judicata.

Dismissal of SLP in limine at threshold without giving any detailed reasons , does not constitute declaration of law or binding precedent . State of Orissa v. Dhirendra Sundar Das (2019) AIR SC 2331

However, when Supreme court dismisses an SLP with reason it might be taken as the affirmation of the High Court views on merits of the case, thus there is no reason to dilute the binding nature of precedents in such cases.

The fact that the Special leave petition against the decision of the High Court was dismissed by the Supreme Court would not amount to a confirmation of the view of the High Court. Palam Gas Service v. CIT (2017) 394 ITR 300 (SC)

In case of Khoday Distilleries Ltd. v. Sri Mahadeshware Sahakara Sakkare Kharkhane Ltd (LB) ( 2019) 262 Taxman 279/ 308 CTR 1 104 (SC) it was held that Special leave petition was dismissed against High Court order in limine without giving any reasons, review petition filed by appellant, in High Court would be maintainable.

[Followed in Dhiraj Manoharro Chore v. State of Maharashtra AIR 2020 Bom 65 (FB)] / Zahedabi Abdul Razaque Shete and Ors. v. Maharashtra State Board of Waqf Pan Chakki Aurangabad AIR 2020 Bom. 100]

  1. Under Article 136 of the Constitution the Supreme Court may reverse, Modify or affirm the judgement-decree or order appealed against while exercising its appellate jurisdiction and not while exercising the discretionary jurisdiction disposing the petition for special leave to
  2. The Hon’ble Bombay High Court in the case of CIT M/s. Pamwi Tissues Ltd. (2008) 3 DTR 66 (Bom) / 215 CTR 150 (Bom) while considering the issue of interpretation of Sec. 43B, 2(24)(x) r/w sec. 36(1)(va) as to the claim of deductions in respect of PF, ESIC Contribution held that the Hon’ble Supreme Court in CIT v. M/s. Vinay Cement Ltd. had dismissed the SLP, [(2007) 213 CTR 268] as it was not a fit case for grant of a SLP therefore cannot be said to be the law decided on the subject and it was not a binding precedent as per Article 141 of the Constitution of India.
  1. In State of Orissa & v. M.D. Illyas, (2006) 1 S.C.C.275 the Supreme Court has held that a decision is a precedent on its own facts and that for a judgment to be a precedent it must contain the three basic postulates. A finding of material facts, direct and inferential. An inferential finding of fact is the inference which the Judge draws from the direct or perceptible facts; (ii) statements of the principles of law applicable to the legal problems disclosed by the facts; and (iii) Judgment based on the individual effect of the above.
  2. In Delhi Administration Madan Lal Nangia AIR 2003 SC 4672 it was held that if a SLP is summarily dismissed, this cannot prevent other parties from filing a SLP against the same judgement.
  3. The Supreme Court in Indian Oil Corporation v. State of Bihar & Ors. (1987) 167 ITR 897 (SC) has clarified that the dismissal of a special leave petition by the Supreme Court by a non-speaking order would not operate as res judicata by observing that- “When the order passed by this Court was not a speaking one, it is not correct to assume that this Court had necessarily decided implicitly all the questions in relation to the merits of the award, which was under challenge before this Court in the special leave petition. A writ proceeding is a wholly different and distinct proceeding. Questions which can be said to have been decided by this Court expressly, implicitly or even constructively while dismissing the special leave petition cannot, of course, be reopened in a subsequent writ proceeding before the High Court. But neither on the principle of res judicata nor on any principle of public policy analogous thereto, would the order of this Court dismissing the special leave petition operate to bar the trial of identical issues in a separate proceeding, namely, the writ proceeding before the High Court merely on the basis of an uncertain assumption that the issues must have been decided by this Court at least by implication. It is not correct or safe to extend the principles of res judicata or constructive res judicata to such an extent so as to found it on mere guesswork”.
  1. In all cases of admission of the SLP the further decision on merits follows whereas in every case of dismissal there is no question of further decision or proceedings from the Supreme Court and effectively the order of the lower Court/authority which is challenged before the apex Court is affirmed and becomes In such a situation the question whether the person/s aggrieved by the order of the lower Court could agitate his grievance by way of an application for review or rectification of mistakes apparent from record so as to pursuade the lower authority to modify its final order in the light of the application for rectification or review, to the extent and in the manner found appropriate is still open for consideration. The respondent often pleads that the order of the lower Court having been affirmed by the Supreme Court it is no more open to the lower authority, after the dismissal of the SLP to entertain any application and/or decide the same for the purpose of review, revision or modification of the order which has been upheld by the Supreme Court. The controversy is not free from doubt. The effect of dismissal of SLP by the Supreme Court is that the order of the Supreme Court does not constitute res judicata to deny the petitioner the right to agitate matters on merits before the competent Court / Tribunal.
  1. Before the Delhi Tribunal Special Bench in the case of CIT Circle II Meerut v. Padam Prakash (HUF) [2009] 117 ITD 129 (Del.) (SB) the assessee had filed a Miscellaneous Application against the decision of the Special Bench alleging certain mistake in the decision. On the date of hearing it was noticed that the decision of Special Bench was challenged in appeal before High Court u/s. 260A of the Act and the Hon’ble High Court held that the order of Spl. Bench was not sustainable. In view of the above the Tribunal held that as the Special Bench decision was merged with the order of High Court there was no question of rectification.
  2. Similarly where a question has been decided in favour of the assessee or the Department, as the case may be by the High Court, the mere fact that a SLP from the judgment of the High Court is pending before the Supreme Court will not be a ground for allowing an application u/s. 256(2) of the Act, for directing the Tribunal to state the case and refer a question of law to the High Court because, until the question is finally decided by the Supreme Court, the High Court would be bound by its own earlier decision. [See CIT v. Desai Brothers Ltd. (1991) 189 ITR 88 (Bom) and CIT v. Godavari Sugar Mills Ltd. (1992) 198 ITR 196 (Bom)]
  1. Before the Delhi Special Bench in the case of Medicare Investments v. Jt. CIT Sp.
  2. 20 (2008) 114 ITD 34 the issue arose for consideration was, whether the decision of Hon’ble Delhi High Court dismissing the appeal filed by the Revenue against the order of the Tribunal passed in the case of Abhinandan Investment Ltd. & Ors. [2002] 254 ITR 538 (Del.) holding that no substantial question of law arose, is a decision on merits and constitutes a binding precedent which this Special Bench is bound to follow.
  1. The Delhi Bench relied on the judgement Hon’ble Gujarat High Court (2006) 283 ITR 402 (Guj), wherein it had been held that dismissal of tax appeal by the High Court holding that no substantial question of law arises implies that the order of the Tribunal on the issue stands merged in the order of the High Court and for all intents and purposes, it is the decision of the High Court which is operative and which is capable of being given effect to. The Hon’ble Gujarat High Court, observed that a plain reading of
  2. 260A inclusive of sub-sections of the said section makes it clear that the only jurisdictional powers that the High Court can exercise are to hear an appeal and the High Court does not have any powers under the statute to grant any leave as such for filing an appeal. Explaining further, it was observed by their Lordships that the person filing the appeal is not required to seek any leave from any authority much less the High Court prior to filing of the appeal and it is, therefore, not possible to bifurcate the jurisdiction or powers available to the High Court while dealing with an appeal under s. 260A of the Act.
  3. It was held that in all eventualities, what merges is the operative part of the order under appeal after its confirmation, reversal or modification and there would be a merger even in a case where the reasoning of the subordinate forum is not expressly It was held that if the merger is issue-specific, there is fusion of order only to that limited extent but it cannot be successfully contended that where the appellate Court merely accords approval to the reasoning of the lower Court or forum, there is no decision of the appellate Court or forum. It was also clarified by the Hon’ble Gujarat High Court that where the appeal is dismissed on account of being barred by limitation, being defective in nature or the appellant having no locus standi to prefer the appeal, the theory of merger of the order of the subordinate forum in the order of the superior forum cannot be applied because there is no “order” made by the superior forum on merits and the controversy between the parties has not been gone into by the appellate forum. It was also held that it is thus not open to any person to contend that there is no decision of the High Court and the subordinate forum is entitled to take a contrary view than the one adopted in the earlier proceedings which has been affirmed by the High Court by a process of dismissal of appeal simpliciter.
  1. In view of the above Gujarat High Court decision the Spl. Bench held that Hon’ble Delhi High Court in the case of Abhinandan Investment & Ors. (supra), upholding the order of the Tribunal and dismissing the appeal filed by the Revenue on a similar issue holding that no substantial question of law arose, is a decision on merits and since the issue involved in the present case as well as all the material facts relevant thereto, as discussed above, are similar to that of Abhinandan Investment Ltd. & Ors. (supra), the said decision is binding on the subordinate forums within the jurisdiction of Hon’ble Delhi High Court including this Special Bench.
  1. The term merger means to sink or disappear in something else, to become absorbed or extinguished to be combined or be swallowed Merger in law is defined as the absorption of a thing of lesser importance by a greater, whereby the lesser ceases to exist. The doctrine is neither a doctrine of Constitutional law nor a doctrine statutorily recognized. It is a common law doctrine founded on the principles of propriety in the hierarchy of justice delivery system.
  2. It is a settled law that when the SLP is dismissed, whether by a speaking or non-speaking order whether in limine or on contest, second SLP would not lie. However the statement cannot be stretched and applied to hold that such an order attracts applicability of doctrine of merger and excluded jurisdiction of the court or authority passing the order to review the
  3. It may be that inspite of having granted leave to appeal , the Court may dismiss the appeal on such grounds as may have provided foundation for refusing the grant at the earlier But that will be a dismissal of appeal. The decision of the Supreme Court would result in superseding the decision under appeal attract doctrine of merger. But if same reason has prevailed with the Court for refusing leave to appeal, the order would not have been an appellate order but only an order refusing to grant the leave to appeal.
  4. The Supreme Court considered the scope of Article 136 in a case Kunhayammed v. State of Kerala (2000) 245 ITR 360 (SC) where the main issue related to the doctrine of merger and the effect of dismissing a special leave petition by either a speaking or non speaking order. After a brief discussion of the earlier case law on the subject, the court summarized its conclusions as under:-
    1. Where an appeal or revision is provided against an order passed by a court, tribunal or any other authority before superior forum and such superior forum modifies, reverses or affirms the decision put in issue before it, the decision by the subordinate forum merges in the decision by the superior forum and it is the latter which subsists, remains operative and is capable of enforcement in the eye of
    2. When the leave to appeal is granted the special leave petition is converted into an
    3. An order refusing special  leave to appeal may be a non speaking order or a speaking one. In either case it does not attract the doctrine of If the Petition seeking grant of leave to appeal is dismissed, it is an expression of opinion by the Court that a case for invoking appellate jurisdiction of the Court was not made out. Therefore, neither the doctrine of merger nor Article 141 of the Constitution will apply to such a case.
    4. If the order refusing leave to appeal is a speaking order e. gives reasons for refusing the grant of leave, then the order has two implications. Firstly, the statement of law contained in the order is a declaration of law by the Supreme Court within the meaning of Article 141 of the Constitution. Secondly, other than the declaration of law, whatever is stated in the order are the findings recorded by the Supreme Court which would bind the parties thereto and also the court, tribunal or authority in any proceedings subsequent thereto by way of judicial discipline, the Supreme Court being the Apex Court of the country.
    5. Once leave to appeal has been granted and appellate jurisdiction of supreme court has been invoked the order passed in appeal would attract the doctrine of merger; the order may be of reversal, modification or merely
    6. On an appeal having been referred or a petition seeking leave to appeal having been converted into an appeal before Supreme Court the jurisdiction of the High Court to entertain a review petition is lost thereafter as provided by sub rule(1) of Rule (1) of order 47 of the
    7. Inspite of a petition for special leave to appeal having been filed, the judgment, decree or order against which leave to appeal has been sought for continues to be final, effective and binding as between the Once leave to appeal has been granted, the finality of the judgement, decree or order appealed against is put in jeopardy though it continues to be binding and effective between the parties unless it is a nullity or unless the court may pass a specific order staying or suspending the operation or execution of the judgment, decree or order under challenge.
  1. The Hon’ble Apex Court in case of M. Salgaocar & Bros. P. Ltd. (2000) 243 ITR 384 (SC) held that when an appeal is dismissed by the Supreme Court by a non speaking order the order of the High Court or the Tribunal from which the appeal arose, merges with that of the Supreme Court. In such a case the Supreme Court upholds the decision of the High Court or the Tribunal from which the appeal is provided under clause (3) of Article 133 of the Constitution.

Foreign Judgement: Execution and enforcement : Civil Procedure Code, 1908 sec. 44A, Order 21 Rule 22 :

  1. The CPC provides specific provisions for execution of the decree passed by the court in reciprocating The reciprocating territory means the territory as is defined under section 44-A of the CPC. It is clear even from the specific provision that any foreign judgment or decree cannot be put for execution unless there is reciprocating agreement or treaty as contemplated. The national or international treaties and or conventions and or agreements have their own value for the purposes of inter-border transactions and various such jurisdictional aspects. Everything is under control of the respective provisions of the respective States and the countries. Nothing is free and or no one can take any steps in any country without the sanction/permission and or the filtrations so contemplated under the respective acts of the country. Section 13 contemplates when a foreign judgment shall be conclusive so that appropriate suits and or proceedings can be initiated by the concerned court/ parties in India. It provides the procedure to be followed before accepting the foreign judgment’s conclusiveness. It also means the merits of such judgments. Section 14 contemplates presumption so far as the foreign judgments are concerned. Section 114 of the Evidence Act deals with the presumptive value, even of the foreign judgment. The concept presumption itself means that it is always rebuttable if a case is made out. Therefore, merely because it is a foreign judgment and or decree, that itself is not conclusive judgment for the purpose of final execution in India. Both required pre testing or pre filtrations as provided under the CPC and other relevant laws and rules. There are no provisions whereby any party/person can directly invoke the insolvency Act, based upon such foreign ex-parte judgment/ decree. Even the foreign award cannot be executed in such fashion in India. It is also subject to the procedural filtration and the challenge.

Abraaj Investment Management Ltd v. Neville Tuli & Ors. AIR 2013 (NOC) 91 (Bom.)

Foreign judgement is enforceable before court in India. Foreign judgement passed after considering evidence on merits, hence enforceable.

Masterbaker Marketing Ltd. v. Noshir Mohsin Chinwalla. AIR 2015 (NOC) 771 (Bom.)

  1. On bare reading of Order 21, Rule 22, it is clear that where an application is made for execution of a decree filed under the provisions of 44-A, the Court executing the decree has to issue a notice to the person against whom execution is applied for requiring him to show cause as to why the decree should not be executed against him. On conjoint reading of sec. 44A with order 21, Rule 22, it is clear that unless execution application for enforcement of cost certificates issued by foreign Court was filed in the court having jurisdiction and unless notice under Order 21, Rule 22 of Code of Civil Procedure 1908 is filed by the decree holder for enforcement of such decree and/or order passed by foreign court and unless show cause notice is issued by court having jurisdiction, such foreign decree and/or order cannot be executed. Filing notice under Order 21, Rule 22 and issuance of show cause notice by court is mandatory and till such notice is allowed, such decree and/or order passed by foreign court cannot be enforced.

Cost imposed by English Court and Execution in India. The relevant date for determining rate of conversion of Sterling Pounds into Indian Rupees would be date on which decree became executable and not the date of issuance of cost certificate by foreign court. Janardhan Mohandas Rajan Pillai v. Madhubhai Z. Patel & Ors AIR 2014 (NOC) 374 (Bom.)

  1. In Coal India Ltd v. Canadian Commercial Corporation AIR 2013 (NOC) 265 (Cal.) the parties had agreed, that the arbitration would be held at Geneva, Hence, the Swiss law could be the curial law. The parties agreed, rules framed by ICC, Paris would be the appropriate procedure. In any event, Indian law would have no role to play when the parties expressly agreed that they would have sitting of arbitration abroad where Indian law would have no force. When there was no express designated venue the law applicable to the seat of arbitration would be the curial law

If a contracting party feels, his counter part in contract committed any breach, place of committing of breach would be ordinarily place where he should ventilate his grievance. Similarly, when arbitration is held in a particular place and losing party feels, the Tribunal did not decide issue in way it ought to have, he has to approach Court where arbitration was held and/ or award was published unless parties mutually agreed to be guided by another law or law of place where contract was performed.

  1. Similarly in case of Alcon Electronics Ltd v. Celem S A AIR 2013 Bom 108. The Defendant-Judgment Debtor challenged the order dated 15th April, 2011 passed by the learned District Judge-2, Nashik, rejecting the Petitioner’s Application for declaration that the recovery proceeding filed by the Respondents-original Plaintiffs be disposed off/dismissed for lack of jurisdiction or even otherwise on facts and holding that the execution proceeding filed by Respondents being maintainable and the judgment and order dated 19th October, 2006 passed by High Court of Justice, Chancery Division, Patents Court is executable before District Court at Nashik.

The Respondents-original Plaintiffs filed a Suit against the Petitioner-original Defendant in the High Court of Justice, Chancery Division, Patents Court in the England. In the said Suit, the Petitioner preferred Application dated 11th May, 2006 for declaration that the High Court of Justice, Chancery Division, Patents Court, U.K. have no jurisdiction to entertain the Claim. The said Application was rejected by the Hon’ble High Court of Justice, Chancery Division, by an order dated 19th October, 2006 and imposed a costs in the sum of £ 12,429.75 equivalent to Rs. 10,16,753.55 paise with interest at the rate of 8% per annum. Thereafter, the Respondents-original Plaintiffs filed Special (Civil) Darkhast in the Court of District Judge -2, Nashik for execution of the order passed by the Foreign Court, for recovery of sum of Rs. 10,16,753.55 towards decretal amount under Order dated  19th October, 2006 (costs)  and

Rs. 67,786/- towards interest at the rate of 8% per annum on the principal amount from the date of the order date i.e. 19th October, 2006 to 14th August, 2007 and further interest till the recovery of the amount. In the said Execution Petition, the Petitioner preferred on 1st March, 2008 for declaration that the Execution Application filed by the Respondents is not maintainable as the same is in respect of the costs imposed by the foreign Court at the time of dismissing the Petitioner’s Interim Application, whereas, the main matter is still pending for hearing and final disposal on its own merits. The said Application is rejected by the District Judge-2, Nashik by impugned order dated 15th April, 2011 and hence, the Civil Revision Application was filed before the Hon’ble Court.

The Hon’ble Court observed that the explanation in section 44A of Code of Civil Procedure shows that legislation intentionally has included even judgment within the meaning of the term decree for purpose of section 44A of CPC. The intention was to expand or enlarge the scope of term decree for the purpose of this section. Therefore, an order which may not amount to a decree but may amount to judgment would be a judgment for the purpose of Section 44A of CPC. Thus, awarding costs would amount to decree within the meaning of section 44A and can be recovered by executing order under section 44A of CPC.

The issue of jurisdiction of the Court to execute order/decree of a country having reciprocal arrangement with our country was decided by the Division Bench of the Court in the matter of Janardhan Mohandas Rajan Pillai (deceased through Lrs.) & Anr. (2010) 4 AIR Bom R. 230.

Therefore, the Execution Petition filed by the Respondents for execution of the order dated 19th October, 2006 passed by the English Court was maintainable in law.

Reliance on foreign Judgement as precedent not related to a parties :The courts in independent India have repeatedly relied on decisions from other common law jurisdictions, mostly of the United Kingdom, United States of America, Canada and Australia. The opinions of foreign courts have been readily cited and relied on in landmark constitutional cases dealing with questions such as –

  1. Ambit of the right to privacy (Kharak Singh v. State of Uttar Pradesh) AIR 1963 SC 1295
  2. Freedom of press (Bennett & Coleman v. Union of India) AIR 1973 SC 106
  3. Restraints on foreign travel (Maneka Gandhi v. Union of India) AIR 1978 SC 597
  4. Constitutionality of the death penalty (Bachan Singh v. Union of India) AIR 1980 SC 898

In M.H. Hoskot v. State of Maharashtra AIR 1978 SC 802 the Supreme Court explicitly relied on American decisions to hold that indigent persons were entitled to receive free legal services. The idea of ‘substantive due process’ was interpreted so as to imply that free legal services are an ‘imperative processual piece of criminal justice’ implicit in Art. 21. A few years later, the Court reinforced this entitlement in Khatri v. State of Bihar AIR 1981 SC 928 wherein it held that the state cannot plead lack of financial resources as a ground for not extending legal services to indigent persons.

With regard to the extent of ‘freedom of speech and expression’, the Indian Courts have repeatedly cited decisions related to the First Amendment to the

U.S. Constitution. In Indian Express Newspapers v. Union of India AIR 1986 SC 515 the Supreme Court held that the imposition of a tax on the publication of newspapers violated the constitutional right to freedom of expression, which also incorporates freedom of the press. In Rangarajan v. Jagjivan Ram and Union of India (1989) 2 SCC 574 the Court ruled that the censorship of a film which criticized the policy of caste-based reservations in public employment is inconsistent with the principle of freedom of expression. In this case reliance was placed on the ‘clear and present danger’ test for placing restraints on speech that was developed in Schenck v. United States. 247 U.S. 4 (1919)

In this era of globalization of legal standards, there is no reason to suppress the judicial dialogue between different legal systems which build on similar values and principles. But, undoubtedly, none of these foreign decisions are binding upon the Indian Supreme Court but they are authorities of high persuasive value to which Courts may legitimately turn for assistance.

  1. Execution of power of attorney authenticated by foreign notary – Recognition of notarial act : Notaries Act sec 14 Acceptance of notarial attestation and notarial certificates of Notary public of India by reciprocal country. Mutual reciprocity being established, notification in official gazette to declare notrial acts as legal, not required. Notarial attestation on power of attorney, proper.

Jaldhi Overseas PTE. Ltd. v. Bhushan Power & Steel Ltd. : AIR 2017(NOC) 1111 (CAL)

Thus Doctrine of precedent has various facets, and one needs to understand each such principle in harmonious manner. The doctrine of binding precedent promotes certainty and consistency in judicial decisions.

Dear Friends,

I am immensely glad to connect with you for the sixth month with the summer season ending and the onset of the monsoon.

The members would be busy now with the filing of returns and Advance Tax Payments apart from the regular GST filings.

During the previous month we had seminars across all zones imparting education to the members.

During the Month of May, we had very successful One Day Tax Conclave in Jaipur having more than 400 delegates which was full of Zeal, Enthusiasm and after the Jaipur, it was again Eastern Zone who organized a very good One Day Conference at Jamshedpur TATA NAGAR. CONGRATULATIONS TO Central Zone and Eastern Zone RESPECTIVELY.

Unfortunately, the NTC organized in Srinagar had to be cancelled for conditions beyond the control of the organizers and I wish to place my gratitude to the Conference and the Northern Zone Team for putting in their best efforts to make it successful, but as they say, destiny had it otherwise. I would be failing if I don’t personally thank the Chairman of the Northern Zone, Shri H. L. Madanjee for agreeing to refund the whole delegate fees and the Hotel charges paid by the delegates.

The Southern Zone has planned a RRC on 25th and 26th June, 2022 at Thanjavur, members are requested to enroll for the same.

We have planned an International Study Tour to Dubai from the 28th August, 2022 to 2nd September, 2022, This will be the first International Tour of the Federation post COVID, so all the members are requested to enroll in large numbers with family. Response is very good and we are expecting to form another group of delegates for this international Tour.

The Srinagar NTC has been converted to NTC at Delhi TO BE ORGANISED on 6th to 7th August at INDIA HABITAT CENTRE, NEW DELHI.

Another NEC with NTC at JAMNAGAR (Gujarat) has also been approved to be organized by Western Zone on 1st to 2nd OCTOBER COUPLED with Dwarka Darshan.

Foundation Day Celebration of AIFTP coupled with Amrit Mahotsav shall also be celebrated and details of Programme shall be shared soon with you.

The National Convention at Jaipur from 16th to 18th December, 2022 has also been announced, members are requested to enroll for the same.

Therefore, arrange your diary to participate to best of your availability through this year of 2022.

We are also in the process of finalizing some new publications and the publications team is working on it, the details would be announced soon.

Friends the Corona cases have started growing again, so I would like to request the members to travel safe and stay masked and take very good care of yourself and your family members. HAPPY MANSOON.

Thanking you Yours faithfully,

D. K. Gandhi

National President, A.I.F.T.P.

Dear Friends,

Tribunalisation and the service conditions of the Members of Tribunals has taken the centre stage since the Central Government embarked upon its exercise of reforming the functioning of the various Tribunals across the country. Given that these Tribunals have opened up areas of practice for various professionals that were traditionally in the exclusive purview of Advocates, as an association we have a keen interest in their smooth functioning. Though a lot of observations have been made by the Supreme Court in various petitions with regards to various Tribunals, I plan to address today the recent development with regard to the Income Tax Appellate Tribunal.

Perhaps the most significant update regarding the Income Tax Appellate Tribunal is with regard to the order of the Supreme Court in the case of Advocate Association Bengaluru v. Anoop Kumar Mendiratta Contempt Petition (Civil) No 708 of 2021 in Writ Petition (Civil) No 502 of 2021 dated 17th of May, 2022. The contempt proceedings related to the appointment of Members to the Income Tax Appellate Tribunal. While discussing the issue of the appointment of the Members, the Supreme Court was pleased to hold that it would not be expedient in the interest of justice to pursue proceedings under the contempt jurisdiction and directed that the Contempt Petition be renumbered as an Interlocutory Application. Perhaps what is of more academic interest is that the affidavit of the secretary to the Department of legal affairs contain the tabular update about the vacancies before the tribunal. The table suggests that the pendency before the tribunal has fallen sharply from the year 2017-18 to 2021-22. While for the year 2017-18 the pendency at the end of the year was at 92,817 the pendency at the end of 2021-22 is reflected to be 50,426. It has been argued that the drop could be due to the amnesty scheme and the withdrawal of appeals due to the enhancement of the tax threshold. It is also brought out that nearly 5.5 lakh appeals are pending before the Commissioner of Income Tax (Appeals). It is noted in the order that the Union Government has not taken any decision on the appropriate strength of the Tribunal. The positions taken by the Learned Attorney General suggest that we may yet see changes to the strength and the service conditions of the Members.

In the field of The Goods and Service Tax, the Judgement of the Supreme Court in Union of India and Another v. Mohit Minerals Pvt. Ltd. Civil Appeal No. 1390 of 2022 dated 19th Of May 2022, seems to have elicited much debate wherein the Supreme Court has concluded that the recommendations of the GST Council are neither binding on the Union government nor the State government. The court held that the recommendations of the Council are a product of a collaborative dialogue and are recommendatory in nature. It was held that to hold them as binding would disrupt fiscal federalism where both the Union and the States are given equal powers to legislate on GST and that it was not imperative that one of the federal units must always possess a higher share in the power for federal units to make decisions. Notably it was held that “Indian federalism is a dialogue between cooperative and uncooperative federalism where the federal units are at liberty to use different means of persuasion ranging from collaboration to contestation”. Given the overarching discussions regarding the federalism in our country, it is yet to be seen how this judgement will affect the relationship between the Centre and states in tax administration.

Needless to say, we live in interesting times in as far as both taxation and tax administration are concerned. The re-emergence of taxation to the forefront of the national debate is a resounding affirmation of it being an important instrumentation of policy execution.

In this issue of the AIFTP Journal there are articles on very important topics. I thank all the professionals for taking out their valuable time to contribute to this issue of the journal.

K. Gopal,




Aalok Traders v.

Commissioner Commercial Taxes and 2 Others

[Suriya Prakash Kesarwani & Jayant Banerjee, JJ]

Writ Tax No. 419 of 2022

Date of Decision: April 27, 2022

Interest —Denial of—Tax & penalty imposed u/s 129—Bank draft accepted for release of goods—respondent mistakenly showed deposit under the State Act instead of IGST Act— Moreover, ID created temporarily without giving password to petitioner— Refund granted much later—Denial of interest thereof on delay refund— Held mistake of respondent—Respondent not to take advantage of its own wrong—Interest order to be granted.

While accepting deposit of tax and penalty by bank draft from the petitioner for release of goods under section 129 (3) of the U.P.GST Act, the officer mistakenly showed the deposit under the aforesaid Act instead of IGST Act and further committed an error by depositing

the said amount by creating a temporary ID at its own, without informing any password to the petitioner. After allowing of appeal, the petitioner applied for refund physically as it could not do so online. The respondents were bound to refund along with interest but on one hand they did not grant refund for more than 33 months and on the other hand they did not grant interest on the delay refund of that amount. The principal amount deposited was refunded the petitioner much later.

The court has observed that the respondents have 1st committed wrong by showing the deposit under IGST Act, secondly by showing the deposit by creating temporary ID at its own and thirdly, not informing the petitioner the password for that ID, to enable him to apply in the prescribed form. It is well settled “construction which permits one to take advantage of one’s own wrong or to impair one’s own objections under a statute should be disregarded . The interpretation should as far as possible be beneficial in the sense that it should suppress the mischief and advance the remedy without doing violence to the language’’.Thus the respondents cannot be allowed to take advantage of their own wrong. The respondents are directed to pay interest to the petitioner for the period mentioned at the rate notified under section 56 of the act. The writ is allowed.


Rajdhani Security Force Pvt Ltd v.

Union of India

[Sheel Nagu & Maninder S . Bhatti, JJ] Writ petition No. 11498 of 2021

Date of Decision: April 25, 2021

Appeal— Condonation of Delay— Cancellation of Registration—Appeal Filed after One and Half Years—Dismissal of Being Time-Barred—Wait Disallowed in View of No Sufficient Reason Explained for the Delay

On account of filing of returns the registration was cancelled. An appeal was filed which was dismissed being time-barred. The court has observed that the appeal was filed after almost one and ½ years from the date of order of cancellation. There has been no sufficient reason explaining the delay. Therefore, they does not seem to be any error in dismissing the appeal. The writ is dismissed.


Hubbali Dharwad Advertisers Assn v.

State of karnataka [Suraj Govindraj, JJ]

Writ Petition No. 104172 of 2021

Date of Decision: April 21, 2022

Advertisement Tax—Power Of Municipal Corporation—Advertisement agency—Writ Filed Against The Demand Raised By The Corporation On The Petitioners With Regard To Advertisement Hoardings Used By Them—Contention Raised By The Petitioner

That GST Already Paid On The Transaction And Levy Of Advertisement Tax Amounts To Double Taxation—The Court Observed That GST Paid By The Petitioner Was Actually Tax Collected By It From Its Clients With Respect To Services Rendered— Transaction With The Corporation Related To The Permission For License Granted For Putting Up Hoardings On Land Belonging To Either Corporation Or Private Party—Both Transactions Are Distinct— Incidence Of Tax On Both Of Them Is Also Distinct—Corporation Empowered To Levy Advertisement Fee under Section 134 Of The Karnataka Municipal Corporations Act— Writ Dismissed

It is contended by the petitioner that despite the Association of advertising agencies ( petitioners) making payments of advertisement tax Under the GST Act regularly, a notice has been issued by the respondents to pay tax as regards advertisement hoardings used by them. It is contended by the petitioners that the authority cannot levy advertisement tax after the enactment of GST Act.

The court has observed that the petitioners are carrying on advertisement business and collecting GST from the clients and the making it to the authorities. It is not that the petitioners are making payments of GST out of their own pockets. In this transaction the petitioner is only a collecting agency collecting GST payable on the service rendered and depositing the authorities. The incidence of GST is on the service rendered by the petitioner to its clients and has nothing to do with respondent municipal Corporation. The transaction with the municipal Corporation is the permission for license granted by a court putting hoardings on the land belonging to the Corporation or on the

land belonging to a private party. There are 2 distinct transactions and the incidence of tax on both these are different. Therefore, the writ is dismissed. There is no conflict between the power to levy GST under the act and power of municipal Corporation to levy advertisement fee or advertisement tax under section 134 of the Karnataka municipal Corporation Act


Theco India Pvt Ltd v.

The Secretary, The Anti National Profiteering Authority

[Anita Sumanth, J]

Writ Petition No. 15527 of 2020

Date of Decision: October 27, 2021

Antiprofiteering—Suomoto Investigation in Terms of Rule133 of CGST Rules— Widening Scope of Enquiry to Include Suomoto Review from July 2017 till Date of Complaint in 2018— Complaint Lodged against the Petitioner Much Earlier than insertion of CGST Rules i.e. 2019— Notice Issued after Suomoto Investigation Conducted in Terms of Rule 133 of the Rules—Contention Raised That Power of Suomoto Investigation Available Only from June 2019 ,Should Operate Prospectively and Not with Regard Complaint Filed Prior thereto—Held power invoked under Rule 5(a)—considering objective of antiprofiteering, submission of prospective operation cannot be accepted— anti competitive Act similar to antiprofiteering in objectives thereby rejecting argument of distinguishment of cases falling in support of respondents—opportunity of hearing provided after issuance of notice no violation of law—writ dismissed

A notice was issued by the National anti-

profiteering authority 10 days after a report by the director general of the authority was prepared dated July 1, 2020. The said investigation was conducted after a complaint was filed on 6/1/2018 by a customer that the petitioner had not passed ITC to it in respect of purchases made by it from the petitioner. The petitioner has challenged the said order contending that the power of suomoto investigation in terms of Rule 133 of the CGST rules was available to the authority from June 2019 and should prospectively not in respect of any complaint filed prior thereto.

The court has observed that section 171 of the CGST Act provides for measures to prevent profiteering by supplier of goods and services. Rules 122 to 137 in chapter XV vest power to put In place methodology and procedure to determine instances of profiteering in the authority. Rule 5(a) has been followed in so far as the authority has expanded the scope of enquiry to all business transactions between the period July 2017 2019 .The director-general has called the petitioner before forming its report dated 01/07/2020 and there is no violation of the procedure as contemplated. Based on the report the authority has issued the notice seeking explanation as to why the report accepted and liability towards profiteering be determined. Bearing in mind the objective of antiprofiteering measures, the submission that Rules are prospective in operation and can be applied respect of complaints filed prior to the date of insertion of the rules is not acceptable.


Varun Gupta v.

Union of India and Another

[Surya Prakash Kesarwani & Jayant Banerji, JJ]

Date of Decision: May 11, 2022

Provisional Attachment—Importance Of Notice—Provisional Attachment Order Passed Under Section 83—No Prior Notice Issued As Required Under Section 74— Argument Regarding Amendment Of Section 83 Of The Act Not Acceptable As The Said Amendment Came Into Force Later Than Date Of Passing Of Impugned Order—Writ Allowed

The petitioner has challenged the provisional attachment order. The respondent contended that proceedings under section 74 of the CGST Act were pending at the time of attachment. As per section 74 issuance of service of notice is provided where it is believed that there has been any suppression of facts to evade tax. It is submitted that no notice under section 74 had been issued on the date of attachment. Consequently, the attachment order is without jurisdiction and hence not sustainable. The respondent also pleaded that there had been an amendment in section 80 3 w.e.f.1/1/22. Thus the make provision of section 83 was not available on the date the impugned attachment order was passed. The petitioners allowed and the impugned order is quashed.


Lakshmi Sowjanya Enterprises v.

Asst Commissioner

[Praveen Kumar & V. Sujatha, JJ] WrIt petition No. 5999 of 2021

Date of Decision: April 20, 2022

Natural Justice—Furnishing of Material before Passing Order—Impugned Order under Section 79 Proposing to Auction Petitioner’s Premises—No Material before Passing an Order Supplied To Petitioner as required u/s 75—Contention That Material Could Be Collected by Petitioner from Toll Plaza—Violation of Natural Justice—Writ Allowed—Remanded For Fresh Hearing

An order under section 79(1)(d) of APGST Act was passed proposing to conduct auction of the petitioner ’s premises to recover an amount under the GST Act. It is contended that the impugned proceedings came to be issued without furnishing the material relied upon by the authority concerned by directing the petitioner to pay tax of a certain amount. In other words as per section 75 of the ACT the petitioner should be given material relied upon while passing an order against him failing which the same would be in violation of principles of natural justice. However the respondents contained that the material collected was from the toll plaza the same would be collected by the petitioner. It is held that since the impugned orders were never supplied to the petitioner, there has been a violation of principles of natural justice. Even if the petitioner has committed a grave offence, an opportunity to defend his case should have been provided.. Hence the writ petition is allowed and the impugned order to set aside and the matter was remanded back to the respondent to deal with the same after giving an opportunity of hearing.


Sri J.K. Yugandhar Singh


Deputy Asst Commissioner [Praveen Kumar and V. Sujatha, JJ] Writ Petitioner No: 22975 of 2021

Date of Decision: March 29, 2022

Natural justice—goods detained on account of lack of documents—notice of confiscation passed thereof—Written reply submitted— Impugned order of confiscation contested on the ground that section 129 to be invoked before passing of order under section 130— held that section 129 and 130 of GST Act are independent of each other—respondents allegation that written reply states no further requirement of hearing by petitioner—in such eventuality the facts being disputed, an appeal ought to have been filed

The petitioner ’ s goods were in transit when they were detained on account of lack of documents. The next day a notice of confiscation of goods was passed for levy of penalty and fine. The petitioner claims to have submitted his reply giving reasons as to how there was an error in levying of tax. However, the impugned order of confiscation of the goods and conveyance was passed. The petitioner has contested against the above-mentioned order on the grounds that no opportunity of hearing was provided to it.

To sum up , the petitioner has assailed the order alleging that the procedure under section 129 of the Act is required to be followed before detaining or seizing the words. It is held that sections 129 &130 of the Act are independent and the Act does not contemplate invoking section 129 before passing an order under section 130 of the Act.

The court has observed that in the reply stated by the petitioner it is written that

no personal hearing is required which is of course disputed by the petitioner. Since factual aspects of record is warranted, the petitioner ought to have preferred an appeal. The scope of interference under article 226 is very limited.

The petitioner is directed to pay the tax in penalty as order button so far as the payment of fine the amount was reduced from 9.

4 lakhs. Since the goods confiscated the authorities since acquitted time the amount as ordered may be reduced.


Madhav Copper Ltd v.

State of Gujarat

[J.B. Pardiwala and Ms Nisha M. Thakore, JJ]

Special Civil Application No. 2776 of 2022 Date of Decision: May 4, 2022

Registration— Revocation of—bank accounts and finished goods attached— registration cancelled—after courts orders passed consensus regarding finished goods, receivables from 47 debtors, raw materials etc. reached between the applicant respondents— at this juncture the court has permitted as an exceptional case for revocation of registration without insisting for online registration—larger issues to be taken up later

The facts state that the bank accounts of the petitioner are attached along with the finished goods. The court had earlier passed an order that the endeavour of the Department should be secure the amount from the debtors of the writ applicant rather than asking them not to make the payment. The goods that are attached are to be supplied to the Indian

Railways. They should not be any difficulty in allowing to supply those goods so that the payment of the same can be received in the bank accounts. However the GST registration has already been cancelled and there is an application for revocation of the same. The 3rd issue was regarding the statutory wages and dues.

Now at this juncture, that the parties have arrived at a consensus the writ applicant should be allowed to make an application in physical form for revocation of registration as an exceptional case and should not be insisted to file it online. The Department may permit the applicant to make payments towards staff, electricity bills etc. from the cash credit account. The debtors shall be intimated within one week. The larger issue shall be looked into when the matter is taken for further hearing.


Rajdhani Security Force Private Limited v.

Union of India

[Hon’ble Chief Justice Sheel Nagu and Hon’ble Chief Justice Maninder S. Bhatti]

Writ Petition No. 11498 of 2021

Date of Decision: April 25, 2022

Appeal—Limitation—Registration— Cancellation of—Appeal Filed after One and ½ Years — These Are for Delay Not Explained— Absence of Reasons in the Memo of Appeal—Dismissal of Appeal— Held Even after 4 Months Appeal Not Preferred—Unexplained Delay of One and ½ Years-Appeal Rightly Dismissed—Writ Disallowed

On account of non-filing of returns the GST registration was cancelled and the petitioner

filed an appeal which was dismissed as being time-barred. The court observed that the appeal was filed after one and ½ years from the date of order of cancellation of registration. Section 107 of the Act provides that the limitation period for filing of appeal is 3 months and further 1 month if it is shown that the appellant was prevented by sufficient cause.

It is held that despite 4 months the appeal was not preferred by the appellant nor even in the memo of appeal sufficient reasons for not filing for disclosed. The delay of one and ½ years has not been explained. The writ petition stands dismissed.


Income of every kind which is not to be excluded from the total income under this Act shall be chargeable to income-tax under the head “Income from other sources”, if it is not chargeable to income-tax under any of the heads specified in section 14, items A to E.

Section 14: Save as otherwise provided by this Act, all income shall, for the purposes of charge of income-tax and computation of total income, be classified under the following heads of income:—

A.—Salaries. B.—[***]

B.—Income from house property.

C.—Profits and gains of business or profession.

D.—Capital gains.

E.—Income from other sources.

In other words, the following conditions must be satisfied before an income can be taxed under the head “Income from Other Sources”:

  • there must be an income;
  • such income is not exempt under the provisions of this Act;
  • such income is not chargeable to tax under any first four heads viz., “Income from Salary”, “Income from House Property”, “Profits and Gains of Business or Profession” and “Income from Capital Gain”.

Income from other sources is, therefore, a residuary head of income

All receipts are not income, similarly all capital

receipts are not subject to capital gains tax. (Cadell Wearing Mills Co. Pvt. Ltd v. CIT (2001) ITR 265 (Bom.). However, if the capital receipt is not taxable under section 45 of the Act the same cannot brought to tax under residency head of ‘Income from other sources’.

The Apex court in the case of CIT v. D.P. Sandu Bros. Chembur Pvt. Ltd. (2005) 273 ITR 1 (SC.) at page 7 has observed that “There is no dispute that a tenancy right is a capital asset the surrender of which would attract section 45 so that the value received would be a capital receipt and assessable if at all only under item E of section 14. That being so, it cannot be treated as a casual or non-recurring receipt under section 10(3) and be subjected to tax under section 56. The argument of the appellant that even if the income cannot be chargeable under section 45, because of the inapplicability of the computation provided under section 48, it could still impose tax under the residuary head is thus unacceptable. If the income cannot be taxed under section 45, it cannot be taxed at all. (See S.G. Mercantile Corporation Pvt. Ltd. v. CIT [1972] 83 ITR 700 (SC.))

Furthermore, it would be illogical and against the language of section 56 to hold that everything that is exempted from capital gains by the statute could be taxed as a casual or non-recurring receipt under section 10(3) read with section 56. We are fortified in our view by a similar argument being rejected in Nalinikant Ambalal Mody v. S.A.L. Narayan Row, CIT [1966] 61 ITR 428 (Sc.), 432, 435.

Where an income can appropriately fall under section 28 as business income or any other specific head of income, no resort can be made to section 56 (Mercantile Corpn. (P) Ltd. v. CIT 83 ITR 700 (SC)).

Instances of Classification of Certain Incomes:

Different kind of Income calls for different types of classification. Few examples being:

  • Pension vs. Family Pension: Pension will be taxable under the Head “Salary”, however, Family Pension will be taxable under the Head “Income from Other Sources”.
  • Rent Income vs. Sub-letting Income: Rent Income from Owned House shall be taxable under the Head “House Property” whereas Sub-letting of a Rented Premises shall be taxable under the Head “Income from Other Sources”.
  • Interest Income: Interest earned from loans lended from regular Business Sources shall be taxable under the Head “Business / Profession”. In case, the Interest is earned out of regular savings, then it is taxable under the Head “Income from Other Sources”.
  • Director’s Sitting Fees: Sitting Fees paid to Directors is neither in the nature of Salary nor Business. Hence, it is taxable under the Head “Income from Other Sources”.

Method of accounting for computing the Income under the head “Income from Other Sources”

  • Section 145: income chargeable under this head, is to be computed in accordance with the method of the accounting regularly employed by the assessee. If the books of account are maintained on mercantile system, the income is to be computed on due basis. On the other hand, if books of account are maintained on cash system,

income is taxable on receipt basis and expenditure shall be allowed as a deduction on payment basis.

  • Juggilal Kamlapat Bankers v. CIT (1975 101 ITR 40 (All); J.K. Bankers v. CIT (1974) 94 ITR 107 (All) : The option regarding adoption of a system of accounting is with the assessee and not with the department. The department cannot compel an assessee to adopt the mercantile system of accounting. If the assessee chooses to adopt cash system of accounting under section 56, he cannot be assessed on the accrual basis.

SECTION 57(iii)

The income chargeable under the head “Income from other sources” shall be computed after making the following deductions, namely :—

  1. in the case of dividends, or interest on securities, any reasonable sum paid by way of commission or remuneration to a banker or any other person for the purpose of realising such dividend or interest on behalf of the assessee;

    (ia) in the case of income of the nature referred to in sub-clause (x) of clause (24) of section 2 which is chargeable to income-tax under the head “Income from other sources”, deductions, so far as may be, in accordance with the provisions of clause (va) of sub- section (1) of section 36;

  2. in the case of income of the nature referred to in clauses (ii) and (iii) of sub-section (2) of section 56, deductions, so far as may be, in accordance with the provisions of sub-clause of clause (a) and clause (c) of section 30, section 31 and sub-sections (1) and (2) of section 32 and subject to the provisions of section 38;

    (iia) in the case of income in the nature of family pension, a deduction of a sum equal to thirty-three and one-third per cent of such income or fifteen thousand rupees, whichever is less.

    Explanation.—For the purposes of this clause, “family pension” means a regular monthly amount payable by the employer to a person belonging to the family of an employee in the event of his death;

  3. any other expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income;
  4. in the case of income of the nature referred to in clause (viii) of sub-section (2) of section 56, a deduction of a sum equal to fifty per cent of such income and no deduction shall be allowed under any other clause of this section:

Provided that no deduction shall be allowed from the dividend income, or income in respect of units of a Mutual Fund specified under clause (23D) of section 10 or income in respect of units from a specified company defined in the Explanation to clause (35) of section 10, other than deduction on account of interest expense, and in any previous year such deduction shall not exceed twenty per cent of the dividend income, or income in respect of such units, included in the total income for that year, without deduction under this section.

Clauses (i), (ia), (ii) & (iia) of section 57 specifically mention to deductions available while computing the income chargeable under the head ‘Income from other sources’. Clause (iii) to section 57 makes admissible the deduction of any other expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income (income chargeable under the head “income from other sources“).

Section 57(iii) of the Act is in line with the section 37(1) of the Act which in general (subject to its Explanation) makes available deduction of any expenditure (not being expenditure of the nature described in sections 30 to 36 of the Act and not being in the nature of capital expenditure or personal expenses of the assessee) laid down or expended wholly and exclusively for the purposes of the business or profession while computing the income chargeable under the head “Profit and gains of business or profession.

It may be pertinent to mention the distinction in the language used by the legislature in section 37(1) of the Act and 57(iii) of the Act. Section 37 provides for deduction of expenditure incurred wholly and exclusively “for the purpose of business” whereas section 57(iii) provides for deduction only of expenditure incurred wholly and exclusively “for the purpose of making or earning such income”. “Such income” refers to “income from other sources”.

Pre-requisites for claiming Deduction u/s 57(iii)

The Gujarat High Court in Virmati Ramkrishna

  • CIT (1981) 131 ITR 659, has observed the following propositions in respect of deduction of an expenditure under sec. 57(iii) of the Act (See also Eastern Investments Ltd. v. CIT (1951) 20 ITR 1 (SC), Seth R. Dalmia vs. CIT (1977) Taxation 49(3)-57, 110 ITR 644 (SC):
  • In order to decide whether an expenditure is a permissible deduction u/s 57(iii), the nature of the expenditure must be examined.
  • The expenditure must not be in the nature of capital expenditure or personal expenses of the assessee;
  • The expenditure must have been laid out or expended wholly and exclusively for the purpose of making of earning “income from other sources”;
  • The purpose of making or earning such income must be the sole purpose for which the expenditure must have been incurred, that is to say, the expenditure should not have been incurred for such purpose as also for another purpose, or for a mixed purpose;
  • The distinction between purpose and motive must always be borne in mind in this connection, for, what is relevant is the manifest and immediate purpose and not the motive or personal considerations weighing the mind of the assessee in incurring the expenditure;
  • If the assessee has no option except to incur the expenditure in order to make the earning of the income possible, such as when he has to incur legal expenses for preserving and maintaining the source of income, then undoubtedly, such expenditure would be an allowable deduction; however, where the assessee has an option and the option which he exercises has no connection with the making or earning of the income and the option depends upon personal considerations or motives of the assessee, the expenditure incurred in consequence of the exercise of such option cannot be treated as an allowable deduction;
  • It is not necessary, however, that the expenditure incurred must have been obligatory; it is enough to show that the money was expended not of necessity and with a view to an immediate benefit to the assessee but voluntarily and on the ground of commercial expediency and in order indirectly to facilitate the making or earning of the income;
  • If, therefore, it is found on application of the principles of ordinary commercial trading that there is some connection, direct or indirect, but not remote, between the expenditure incurred and the income earned, the expenditure must be treated as an allowable deduction;
  • It would not, however, suffice to establish merely that the expenditure was incurred in order indirectly to facilitate the carryingon of the activity which is the source of the income; and nexus must necessarily be nexus must necessarily be between the expenditure incurred and the income earned;

  • It is not necessary to show that the expenditure was a profitable one or that in fact income was earned;
  • The test is not whether the assessee benefited thereby or whether it was a prudent expenditure which resulted in ultimate gain to the assessee but whether it was incurred legitimately and bonafide for making or earning the income;
  • The question whether the expenditure was laid out or expended for making or earning the income must be decided on the facts of each case, the final conclusion being on of law.

Case Law References

  • Interest paid on the loan obtained for acquiring the shares – not allowed in absence of Nexus:

CIT v. Smt. Amirtaben R. Shah (1999) 152 Taxation 721 (Bom.): Under section 57(iii), deduction will not be allowed if the expenditure is not incurred for the purpose of earning income falling under the head “income from other sources”. the expenditure incurred by way of interest on the loan taken by the assessee for the said purpose cannot be held to be an expenditure incurred wholly and exclusively for the purpose of earning income by way of dividends. From the nature of transaction, it is clear that the expenditure was not for the purpose of earning income by way of dividends but for the purpose of acquiring controlling interest in the company and, therefore, it would not be allowable as a deduction under Section 57(iii) of the Act.

Sri Saytasai Properties and Investment P. Ltd. Y CIT (2014) 361 ITR 641 (Cal)

The interest which the assessee is liable to pay on the amount borrowed by him for the purpose of making investments is undoubtedly an expenditure laid out or expended wholly and exclusively for the purpose of making or earning income chargeable under the head “Income from Other sources”

Jaswantrai P. Mehta v CIT (1991) 192 ITR 577(Guj)

The interest which the assessee has become liable to pay on account of his failure to pay interest cannot be said to be an expenditure laid out or expended wholly and exclusively for the purpose of earning such income. The assessee is entitled of only the interest payable on the principal amount, but not the additional interest on the overdue interest.

Mathew Joseph v ACIT (2017) 87 ITR 317 (Kerala)

Without obtaining consent of bank, a part of loan taken for promotion of export was diverted to sister concern which was doing a different business, though interest was earned by assessee from sister concern at same rate it paid interest to bank, income could not be said to have exclusive nexus with expenditure; interest so earned could not be set off against interest expenditure paid to bank.

  • Expenditure in issuing the circulars to indirectly facilitate the earning of the director’s fees is allowable as it has direct nexus with earning Director’s Fees; however, expenditure incurred in collecting the proxies from the shareholders cannot be regarded as expenditure, even indirectly connected with the earning of the director’s fees:

Kasturbhai Lalbhai (1968) 70 ITR 267 (Guj.): The assessee was director of A & Co. Ltd., of which K. N. Co. Ltd. was the managing agent. Due to certain mismanagement and change in the directorate of K. N. Co. Ltd., there were difference between the assessees and the other directors of A & Co. Ltd. The assessees therefore sent out two circulars to the shareholders pointing out the mismanagement. They also collected proxies for a meeting of A & Co. Ltd. requisitioned in the meantime. Before the said meeting could be held, the differences were settled and ultimately the first assessee was elected chairman of the board of directors of A & Co. Ltd. The assessees jointly spent about Rs. 33,299 for sending out the circulars and collecting the proxies and claimed to deduct this amount in their respective assessment both under section 10(2)(xv) and under section 12(2) of I. T. Act, 1922 (which corresponds to section 37(1) & 57 of I. T. Act, 1961, respectively). The departmental authorities negatived this claim, but the Tribunal allowed the expenditure as a permissible deduction under section 12(2). The Tribunal, however, rejected the contention of allowability under section 10(2)(xv). On a reference to the Gujarat High Court, it held as follows:

  • as the assessees had incurred the expenditure in issuing the circulars on the ground of commercial expediency in order to indirectly facilitate the earning of the director’s fees, the expenditure relating thereto was an expenditure incurred solely for earning the director’s fees and hence was allowable under sec. 12(2).
  • The expenditure incurred in collecting the proxies from the shareholders cannot be regarded as expenditure, even indirectly connected with the earning of the director’s fees and, hence, was not allowable under section 12(2).
  • Expenditure for deduction u/s 57(iii) does with relation to any income is made or earned:

CIT v. Rajendra Prasad Moody (1978), Taxation 51 (3)-52, 115 ITR 519 (SC) : CIT vs. Murli Manohar (1998) IX SITC 673 (All) : CIT vs. Rampur Timber & Turney Co. Ltd. (1981) 129 ITR 58 (All.) : CIT vs. Administrator General of Madras (1998) 142 Taxation 85 (Mad.): The plain natural construction of the language of section 57(iii) of the Act, irresistibly leads to the conclusions that to bring a case within that section it is not necessary that any income should in fact have been earned as a result of the expenditure. What section 57(iii) requires is that the expenditure must be laid out or expended wholly and exclusively for the purpose of making or earning income. The section does not require that this purpose must be fulfilled in order to qualify the expenditure for deduction it does not say that the expenditure shall be deductible only if any income is made or earned.

West Palm Developments LLP (Formerly West Palm Developments Pvt. Ltd.) v. ACIT (Karnataka High Court): Section 57(iii) of the Act does not require that the expenditure incurred is deductible only if expenditure has resulted in actual income. As long as the purpose of incurring expenditure is to earn income, the expenditure would have to be allowed as a deduction under Section 57(iii) of the Act. Under Section 57(iii) of the Act a nexus between the expenditure and income has to be ascertained. The assessee was therefore, entitled to deduction under Section 57(iii) of the Act.

CIT v. Sujani Textiles P. Ltd (1985) 151 IT 653 (Mad).

Where there is no possibility of income from a particular source, expenditure incurred in relation to such investment cannot be allowed as a deduction.

  • Interest payment on overdrafts to meet the personal liability is not allowable: H. H. Maharaja Martand Singh Ju Deo v. CIT (1989) Taxation 92(3)-199, 174 ITR 515 (MP): Padmavati Jai Krishna v. Addl. CIT (1987) Taxation 86(2)-1: 166 ITR 176 (SC): Where the dominant purpose of the assessee in taking overdrafts was not to earn income but to meet the personal liability, interest payment on overdrafts was held to be not allowable deduction under section 57(iii) of the Act.
  • There should be some nexus, either direct or indirect, between the expenditure and the earning of the income: Addl. CIT v. Madras Fertilisers Ltd. (1980) 122 ITR 139 (Mad.) : Vijaya Laxmi Sugar Mills Ltd. v. CIT (1991) 191 ITR 641 (SC): CIT v. Dwaraka Chit Funds Pvt. Ltd. (1996) 132 Taxation 109 (Mad.): Connection between the expenditure and earning of income need not be direct and it may be indirect. But, since the expenditure must have been incurred for the purpose of earning that income, there should be some nexus between the expenditure and the earning of the income.


As discussed, Section 56(1) seeks to bring all the Residuary Income which cannot be classified under other Heads of Income within the ambit of the Income Tax Act, 1961. The provisions of the Income-tax Act state that the expenditure sought to be deducted should have a nexus to the Income earned. The allowable expenditure as envisaged by Section 57(iii) of the Act should not be in the nature of capital or personal expenditure and it should have been incurred wholly and exclusively for the purpose of making or earning the income which is chargeable under the head “Income from Other Sources” under Section 56 of the Act.