S.32 : Depreciation – Intangible assets – Commercial agreements Even prior to the insertion of “intangible assets” in S. 32, intellectual property rights such as trademarks, copyrights and know-how constitute “plant” for purposes of depreciation. The department is not entitled to rewrite the terms of a commercial agreement

The Supreme Court had to consider whether in AY 1995-96, when s. 32 did not make any distinction between tangible and intangible assets, the Assessee was entitled to any benefit under Section 32 of the Act read with Section 43(3) thereof for the expenditure incurred on the acquisition of trademarks, copyrights and know-how. HELD by the Supreme Court upholding the claim:

(i) The definition of ‘plant’ in Section 43(3) of the Act is inclusive. A similar definition occurring in Section 10(5) of the Income-tax Act, 1922 was considered in Commissioner of Income Tax v. Taj Mahal Hotel (1971) 3 SCC 550 wherein it was held that the word ‘plant’ must be given a wide meaning. The question is, would intellectual property such as trademarks, copyrights and know-how come within the definition of ‘plant’ in the ‘sense which people conversant with the subject-matter with which the statute is dealing, would attribute to it’? In our opinion, this must be answered in the affirmative for the reason that there can be no doubt that for the purposes of a large business, control over intellectual property rights such as brand name, trademark etc. are absolutely necessary. Moreover, the acquisition of such rights and know-how is acquisition of a capital nature, more particularly in the case of the Assessee. Therefore, it cannot be doubted that so far as the Assessee is concerned, the trademarks, copyrights and know-how acquired by it would come within the definition of ‘plant’ being commercially necessary and essential as understood by those dealing with direct taxes.

(ii) Section 32 of the Act as it stood at the relevant time did not make any distinction between tangible and intangible assets for the purposes of depreciation. The distinction came in by way of an amendment after the assessment year that we are concerned with. That being the position, the Assessee is entitled to the benefit of depreciation on plant (that is on trademarks, copyrights and know-how) in terms of Section 32 of the Act as it was at the relevant time. We are, therefore, in agreement with the view taken by the Tribunal in this regard that the Assessee would be entitled to the benefit of Section 32 of the Act read with Section 43(3) thereof;

(iii) The Act does not clothe the taxing authorities with any power or jurisdiction to re-write the terms of the agreement arrived at between the parties with each other at arm’s length and with no allegation of any collusion between them. ‘The commercial expediency of the contract is to be adjudged by the contracting parties as to its terms.

(iv) There is a clear finding of fact by the Tribunal that the legal expenses incurred by the Assessee were for protecting its business and that the expenses were incurred after 18th November, 1994. There is no reason to reverse this finding of fact particularly since nothing has been shown to us to conclude that the finding of fact was perverse in any manner whatsoever. That apart, if the finding of fact arrived at by the Tribunal were to be set aside, a specific question regarding a perverse finding of fact ought to have been framed by the High Court. The Revenue did not seek the framing of any such question. The High Court was not justified in upsetting a finding of fact arrived at by the Tribunal, particularly in the absence of a substantial question of law being framed in this regard. (Civil Appeal Nos. 10547-10548 of 2011, dt. 15-10-2015) (AY. 1995-96)

Mangalore Ganesh Beedi Works v. CIT (SC); www.itatonline.org

S.32 : Depreciation – Plant – Prawn ponds – The “functional” test has to be applied to determine whether an asset is “plant”. Even a pond designed for rearing prawns can be “plant”

(i) Applying the ‘functional test’, since the ponds were specially designed for rearing/breeding of the prawns, they have to be treated as tools of the business of the assessee and depreciation was admissible on these ponds.

(ii) In Commissioner of Income Tax v. Anand Theatres 224 ITR 192 it was held that except in exceptional cases, the building in which the plant is situated must be distinguished from the plant and that, therefore, the assessee’s generating station building was not to be treated as a plant for the purposes of investment allowance. It is difficult to read the judgment in the case of Anand Theatres so broadly. The question before the Court was whether a building that was used as a hotel or a cinema theatre could be given depreciation on the basis that it was a “plant” and it was in relation to that question that the court considered a host of authorities of this country and England and came to the conclusion that a building which was used as a hotel or cinema theatre could not be given depreciation on the basis that it was a plant. We must add that the Court said, “To differentiate a building for grant of additional depreciation by holding it to be a plant in one case where a building is specially designed and constructed with some special features to attract the customers and the building not so constructed but used for the same purpose, namely, as a hotel or theatre would be unreasonable.” This observation is, in our view, limited to buildings that are used for the purposes of hotels or cinema theatres and will not always apply otherwise. The question, basically, is a question of fact, and where it is found as a fact that a building has been so planned and constructed as to serve an assessee’s special technical requirements, it will qualify to be treated as a plant for the purposes of investment allowance

ACIT v. Victory Aqua Farm Ltd. (2015) 280 CTR 32 (SC)

S.32 : Depreciation – Gas cylinders – Manufacturing business – Lease – Lease income is assessed as business income – Entitle to depreciation

The assessee purchased gas cylinders. Since the manufacturing unit had not started to function, assessee leased out the gas cylinders to two parties to earn some income. The income was assessed as business income. The Assessing Officer disallowed depreciation on the ground that the gas cylinders were not purchased for leasing business. Disallowance was confirmed by High Court. On appeal allowing depreciation the Supreme Court held that the assessee has proved ownership of gas cylinders and use of gas cylinders for business purposes. Once these ingredients are proved, the assessee was entitled to depreciation. (AY 1986-87)

K.M. Sugar Mills Ltd. v. CIT (2015) 373 ITR 42 / 231 Taxman 245 / 278 CTR 100 (SC)

S. 37(1) : Business expenditure – Legal expenses incurred for protecting the business of the firm- Held to be allowable business expenditure

Tribunal held that legal expenses incurred for defending the business of the going concern and for protecting its interest could not be said to be personal in nature nor could it could be said that the expenses were unreasonable or not bona fide. High Court reversed the finding of Tribunal. On appeal allowing the claim the Court held that the High Court was not justified in upsetting a finding of fact arrived by the Tribunal particularly in the absence of a substantial question of law being framed in this regard. Accordingly the order of Tribunal was restored. (Civil Appeal Nos. 10547-10548 of 2011, dt. 15-10-2015) (AY 1995-96)

Mangalore Ganesh Beedi Works v. CIT (SC); www.itatonline.org

S.40A(3) : Expenses or payments not deductible – Cash payments exceeding prescribed limits – Amendment w.e.f. 1st April, 1996 restricting the disallowance at 20 per cent being substantive in nature cannot be applied retrospectively

Dismissing the appeal of assessee the Court held that, amendment made in section 40(A)(3) w.e.f .1st April, 1996 restricting disallowance to 20% being substantive in nature, cannot be applied retrospectively and therefore, the benefit of this amendment cannot be allowed over the entire block period beginning from 1st April, 1986 and ending on 13th September, 1996 , simply because the date of amendment falls within the aforesaid block period. [BP. 1-4-1986 to 13-9-1996)

M.G. Pictures (Madras) Ltd. v. ACIT (2015) 373 ITR 39 / 278 CTR 105/ 231 Taxman 241 (SC)

S.44BB : Mineral oils – Computation – The “pith and substance” test has to be applied to determine the dominant purpose of each agreement. If the dominant purpose is mining, the income is assessable only u/s. 44BB and not as “fees for technical services”

The Supreme Court had to consider the following question: “Whether the amounts paid by ONGC to non-resident assessees /foreign companies for providing various services in connection with prospecting, extraction or production of mineral oil is chargeable to tax as “fees for technical services” under Section 44D read with Explanation 2 to Section 9(1)(vii) of the Income-tax Act or will such payments be taxable on a presumptive basis under Section 44BB of the Act”? HELD by the Supreme Court:

(i) ” The Income-tax Act does not define the expressions “mines” or “minerals”. The said expressions are found defined and explained in the Mines Act, 1952 and the Oil Fields (Development and Regulation) Act, 1948. While construing the somewhat pari materia expressions appearing in the Mines and Minerals (Development and Regulation) Act 1957 regard must be had to the provisions of Entries 53 and 54 of List I and Entry 22 of List II of the 7th Schedule to the Constitution to understand the exclusion of mineral oils from the definition of minerals in Section 3(a) of the 1957 Act. Regard must also be had to the fact that mineral oils is separately defined in Sections 3(b) of the 1957 Act to include natural gas and petroleum in respect of which Parliament has exclusive jurisdiction under Entry 53 of List I of the 7th Schedule and had enacted an earlier legislation i.e. Oil Fields (Regulation and Development) Act, 1948. Reading Section 2(j) and 2(jj) of the Mines Act, 1952 which define mines and minerals and the provisions of the Oil Fields (Regulation and Development) Act, 1948 specifically relating to prospecting and exploration of mineral oils, exhaustively referred to earlier, it is abundantly clear that drilling operations for the purpose of production of petroleum would clearly amount to a mining activity or a mining operation. Viewed thus, it is the proximity of the works contemplated under an agreement, executed with a non-resident assessee or a foreign company, with mining activity or mining operations that would be crucial for the determination of the question whether the payments made under such an agreement to the non-resident assessee or the foreign company is to be assessed under Section 44BB or Section 44D of the Act.

(ii) The test of pith and substance of the agreement commends to us as reasonable for acceptance. Equally important is the fact that the CBDT had accepted the said test and had in fact issued a circular as far back as 22-10-1990 to the effect that mining operations and the expressions “mining projects” or “like projects” occurring in Explanation 2 to Section 9(1) of the Act would cover rendering of service like imparting of training and carrying out drilling operations for exploration of and extraction of oil and natural gas and hence payments made under such agreement to a non-resident/foreign company would be chargeable to tax under the provisions of Section 44BB and not Section 44D of the Act. We do not see how any other view can be taken if the works or services mentioned under a particular agreement is directly associated or inextricably connected with prospecting, extraction or production of mineral oil. Keeping in mind the above provision, we have looked into each of the contracts involved in the present group of cases and find that the brief description of the works covered under each of the said contracts as culled out by the appellants and placed before the Court is correct.

(iii) The above facts would indicate that the pith and substance of each of the contracts/agreements is inextricably connected with prospecting, extraction or production of mineral oil. The dominant purpose of each of such agreement is for prospecting, extraction or production of mineral oils though there may be certain ancillary works contemplated thereunder. If that be so, we will have no hesitation in holding that the payments made by ONGC and received by the non-resident assessees or foreign companies under the said contracts is more appropriately assessable under the provisions of Section 44BB and not Section 44D of the Act. (AYs 1985-86 & 1986-87)

Oil & Natural Gas Corporation Limited v. CIT (2015) 376 ITR 306/121 DTR 289/ 278 CTR 153 (SC)

S.54G : Capital gains – Shifting of industrial undertaking from urban area – Section does not require that the machinery etc. has to be acquired in the same Assessment Year in which the transfer takes place. It is sufficient if the capital gain is “utilised” towards purchase of P&M by giving advances to suppliers. Section 24 of the General Clauses Act applies also to ‘omissions’ along with ‘repeals’ and saves rights given by subordinate legislation

The assessee, a private limited company, had an industrial unit at Majiwada, Thane, which was a notified urban area. With a view to shift its industrial undertaking from an urban area to a non-urban area at Kurukumbh Village, Pune District, Maharashtra, it sold its land, building and plant and machinery situated at Majiwada, Thane to Shree Vardhman Trust for a consideration of Rs. 1,20,00,000/-, and after deducting an amount of Rs. 11,62,956/-, had earned a capital gain of Rs. 1,08,33,044/-. Since it intended to shift its industrial undertaking from an urban area to a non-urban area, out of the capital gain so earned, the appellant paid by way of advances various amounts to different persons for purchase of land, plant and machinery, construction of factory building etc. Such advances amounted to Rs. 1,11,42,973/- in the year 1991-92. The appellant claimed exemption under Section 54G of the Income- tax Act on the entire capital gain earned from the sale proceeds of its erstwhile industrial undertaking situate in Thane in view of the advances so made being more than the capital gain made by it. The AO & CIT(A) rejected the claim though the Tribunal upheld it. The High Court reversed the Tribunal and held that as the notification declaring Thane to be an urban area stood repealed with the repeal of the Section under which it was made, the appellant did not satisfy the basic condition necessary to attract Section 54G, namely that a transfer had to be made from an urban area to a non-urban area. Further, the expression “purchase” in Section 54G cannot be equated with the expression “towards purchase” and, therefore, admittedly as land, plant and machinery had not been purchased in the assessment year in question, the exemption contained in Section 54G had to be denied. On appeal by the assessee HELD reversing the High Court:

(i) On a conjoint reading of the aforesaid Budget Speech, notes on clauses and memorandum explaining the Finance Bill of 1987, it becomes clear that the idea of omitting Section 280ZA and introducing on the same date Section 54G was to do away with the tax credit certificate scheme together with the prior approval required by the Board and to substitute the repealed provision with the new scheme contained in Section 54G. It is true that Section 280Y(d) was only omitted by the Finance Act, 1990 and was not omitted together with Section 280ZA. However, we agree with learned counsel for the appellant that this would make no material difference inasmuch as Section 280Y(d) is a definition Section defining “urban area” for the purpose of Section 280ZA only and for no other purpose. It is clear that once Section 280ZA is omitted from the statute book, Section 280Y(d) having no independent existence would for all practical purposes also be “dead”. Quite apart from this, Section 54G(1) by its explanation introduces the very definition contained in Section 280Y(d) in the same terms. Obviously, both provisions are not expected to be applied simultaneously and it is clear that the explanation to Section 54G(1) repeals by implication Section 280Y(d).

(ii) From a reading of the notes on clauses and the Memorandum of the Finance Bill, 1990, it is clear that Section 280Y(d) which was omitted with effect from 1-4-1990 was so omitted because it had become “redundant”. It was redundant because it had no independent existence, apart from providing a definition of “urban area” for the purpose of Section 280ZA which had been omitted with effect from the very date that Section 54G was inserted, namely, 1-4-1988. We are, therefore, of the view that the High Court in not referring to Section 24 of the General Clauses Act has fallen into error.

(iii) It is clear that even an implied repeal of a statute would fall within the expression “repeal” in Section 6 of the General Clauses Act. This is for the reason given by the Constitution Bench in M.A. Tulloch & Co. that only the form of repeal differs but there is no difference in intent or substance. If even an implied repeal is covered by the expression “repeal”, it is clear that repeals may take any form and so long as a statute or part of it is obliterated, such obliteration would be covered by the expression “repeal” in Section 6 of the General Clauses Act.

(iv) On omission of Section 280ZA and its re-enactment with modification in Section 54G, Section 24 of the General Clauses Act would apply, and the notification of 1967, declaring Thane to be an urban area, would be continued under and for the purposes of Section 54A.

(v) A reading of Section 54G makes it clear that the assessee is given a window of three years after the date on which transfer has taken place to “purchase” new machinery or plant or “acquire” building or land. We find that the High Court has completely missed the window of three years given to the assessee to purchase or acquire machinery and building or land. This is why the expression used in 54G(2) is “which is not utilised by him for all or any of the purposes aforesaid….”. It is clear that for the assessment year in question all that is required for the assessee to avail of the exemption contained in the Section is to “utilise” the amount of capital gains for purchase and acquisition of new machinery or plant and building or land. It is undisputed that the entire amount claimed in the assessment year in question has been so “utilised” for purchase and/or acquisition of new machinery or plant and land or building.

(vi) The aforesaid construction by the High Court of Section 54G would render nugatory a vital part of the said Section so far as the assessee is concerned. Under sub-section (1), the assessee is given a period of three years after the date on which the transfer takes place to purchase new machinery or plant and acquire building or land or construct building for the purpose of his business in the said area. If the High Court is right, the assessee has to purchase and/or acquire machinery, plant, land and building within the same assessment year in which the transfer takes place. Further, the High Court has missed the key words “not utilised” in sub-section (2) which would show that it is enough that the capital gain made by the assessee should only be “utilised” by him in the assessment year in question for all or any of the purposes aforesaid, that is towards purchase and acquisition of plant and machinery, and land and building. Advances paid for the purpose of purchase and/or acquisition of the aforesaid assets would certainly amount to utilisation by the assessee of the capital gains made by him for the purpose of purchasing and/or acquiring the aforesaid assets. We find therefore that on this ground also, the assessee is liable to succeed. (AY 1991-92)

Fibre Boards (P) Ltd. v. CIT (2015) 279 CTR 89 (SC)

S.80HHC : Export business – Conditions under third and fourth provisos to S. 80HHC inserted by Taxation Laws (Second Amendment) Act, 2005 would not operate retrospectively and, for the period prior to that, cases of exporters having a turnover below Rs. 10 crore and those above Rs. 10 crore would be treated similarly

Amendment to S. 80HHC(3) was made by the Taxation Laws (Second Amendment) Act, 2005 with retrospective effect i.e. with effect from 1st April, 1998 (AY 1998-99 onwards). By this amendment, benefit of deduction u/s. 80HHC was also extended to income taxable u/ss. 28(iiid) and 28(iiie). Such benefit under the amendment was carved out for two categories of exporters, namely,

(i) Those whose export turnover was less than Rs. 10 crores during the previous year and (ii) those whose export turnover was more than Rs. 10 crores during the previous year. Insofar as entitlement of these benefits to exporters having turnover of more than Rs. 10 crores was concerned, the amendment provided that deduction would be available only if the exporter had satisfied two conditions stipulated in the third and fourth provisos to the said amendment, i.e., the assessee has necessary and sufficient evidence to prove that:

a) He had an option to choose either the duty drawback or the Duty Entitlement Pass Book Scheme, being the Duty Remission Scheme; and

b) The rate of drawback credit attributable to the customs duty was higher than the rate of credit allowable under the Duty Entitlement Pass Book Scheme, being Duty Remission Scheme.

The assessees, being exporters falling under the second category (i.e. whose exports were greater than 10 crore), filed a writ petition challenging the conditions mentioned in the third and fourth provisos to S. 80HHC(3) contending that these conditions are severable and therefore these two conditions should be declared ultra vires. The High Court decided the issue in favour of the writ petitioners by concluding that the operation of the above stated conditions under third and fourth provisos to S. 80HHC could be given effect from the date of amendment and not in respect of earlier assessment years on the basis that, the retrospective amendment should not be detrimental to any assessee having an export turnover of more than Rs. 10 crore and whose assessments were still pending. On a Special Leave Petition filed by the Department, the Supreme Court concurred with the judgment given by the High Court, and gave a direction that conditions stipulated in the third and fourth provisos to S. 80HHC would not operate retrospectively and cases of exporters having a turnover below Rs. 10 crore and those above Rs. 10 crores would be treated similarly during the period prior to the amendment (i.e. 1st April, 2005).

CIT v. Avani Export (2015) 119 DTR 352/ 232 Taxman 357 / 232 Taxman 357 (SC)

S.94(7) : Transaction in securities – Dividend stripping – Loss – Set off – Loss arising in the course of a dividend stripping transaction before the insertion of S.94(7) w.e.f. 1st April, 2002 cannot be disallowed

Loss arising in the course of a dividend stripping transaction before the insertion of S. 94(7) w.e.f. 1st April, 2002 cannot be disallowed. CIT v. Walfort Share & Stock Brokers (P) Ltd. (2010) 326 ITR 1 (SC) followed.

CIT v. Globe Capital Market Ltd. (2015) 373 ITR 58 / 278 CTR 264/120 DTR 311 (SC)

S.147 : Reassessment – Change of opinion – Original assessment completed under section 143(1) – No question of change of opinion – Main issue not addressed by High Court – Order set aside and matter remanded to Tribunal

Notice was issued to the assessee for reassessment for the assessment year 1991-92 on the ground that capital gains chargeable to tax had escaped assessment in that year. Challenging the validity of this notice, the assessee preferred a writ petition which the High Court allowed, quashing the reassessment proceedings. Meanwhile pursuant to the notice, the Assessing Officer had passed an assessment order on the merits rejecting the contention of the assessee that the transaction in question did not amount to a sale in the assessment year in question and the assessee’s appeal before the Commissioner (Appeals) was dismissed. On further appeal, the Appellate Tribunal simply following the judgment of the High Court in the writ petition, allowed it. On appeal :

Held, allowing the appeal, that the main issue involved in the case had not been addressed by the High Court. The Department had taken a contention that since the assessee’s return was accepted under section 143(1) of the Act, there was no question of “change of opinion” inasmuch as while accepting the return no opinion was formed and, therefore, on this basis, the notice issued was valid. The judgment of the High Court had to be set aside. Since the judgment of the High Court had been set aside, as a result, the order passed by the Appellate Tribunal also would stand set aside. Accordingly the matter is remanded to Tribunal for decision of appeal on the merits. (AY 1991-92)

CIT v. Zuari Estate Development and Investment Co. Ltd. (2015) 373 ITR 661/279 CTR 527 (SC)

S.194I : Deduction at source – Rent – In deciding whether a payment is for “use of land”, the substance of the transaction has to be seen. If the payment is for a variety of services and the use of land is minor, the payment cannot be treated as “rent ” – Charges for landing and take-off services as well as parking charges aircraft paid by airlines to AAI are surcharges for various services and facilities hence such charges cannot be treated as rent – No liability to deduct tax at source

The Supreme Court had to consider the conflict of judicial opinion between the Delhi High Court in CIT v. Japan Airlines Co (2010) 325 ITR 298 (Del.) and that of the Madras High Court in CIT v. Singapore Airlines Ltd. (2013) 358 ITR 237 (Mad.) on the question whether landing/ parking charges paid by an airline company to the AAI were payments for a contract of work under Section 194-C or in the nature of ‘rent’ as defined in Section 194-I. The Delhi High Court decided the issue in favour of the department following its earlier decision in the case of United Airlines v. CIT (2006) 287 ITR 281. It took the view that the term ‘rent’ as defined in Section 194-I had a wider meaning than ‘rent’ in common parlance as the definition included any agreement or arrangement for use of land. The High Court further observed that the use of land began when the wheels of an aircraft touched the surface of the airfield and similarly, there was use of land when the aircraft was parked at the airport. However, the Madras High Court dissented from the view of the Delhi High Court. HELD by the Supreme Court reversing the Delhi High Court and affirming the Madras High Court:

(i) From the reading of s. 194-I, it becomes clear that TDS is to be made on the ‘rent’. The expression ‘rent’ is given much wider meaning under this provision than what is normally known in common parlance. In the first instance, it means any payment which is made under any lease, sub-lease, tenancy. Once the payment is made under lease, sub-lease or tenancy, the nomenclature which is given is inconsequential. Such payment under lease, sub-lease and/or tenancy would be treated as ‘rent’. In the second place, such a payment made even under any other ‘agreement or arrangement for the use of any land or any building’ would also be treated as ‘rent’. Whether or not such building is owned by the payee is not relevant. The expressions ‘any payment’, by whatever name called and ‘any other agreement or arrangement’ have the widest import. Likewise, payment made for the ‘use of any land or any building’ widens the scope of the proviso;

(ii) The charges which are fixed by the AAI for landing and take-off services as well as for parking of aircraft are not for the ‘use of the land’. That would be too simplistic an approach, ignoring other relevant details which would amply demonstrate that these charges are for services and facilites offered in connection with the aircraft operation at the airport. There are various international protocols which mandate all such authorities manning and managing these airports to construct the airports of desired standards which are stipulated in the protocols. The services which are required to be provided by these authorities, like AAI, are aimed at passengers’ safety as well as on safe landing and parking of the aircraft. Therefore, it is not mere ‘use of the land’. On the contrary, it is the facilities, that are to be compulsorily offered by the AAI in tune with the requirements of the protocol, which is the primary focus;

(iii) When the airlines pay for these charges, treating such charges as charges for ‘use of land’ would be adopting a totally naïve and simplistic approach which is far away from the reality. We have to keep in mind the substance behind such charges. When matter is looked into from this angle, keeping in view the full and larger picture in mind, it becomes very clear that the charges are not for use of land per se and, therefore, it cannot be treated as ‘rent’ within the meaning of Section 194-I of the Act;

(iv) However, the reason given by the Madras High Court that the words ‘any other agreement or arrangement for the use of any land or any building’ have to be read ejusdem generic and it should take it colour from the earlier portion of the definition namely “lease, sub-lease and tenancy” and to thereby, limit the ambit of words ‘any other agreement or arrangement’ is clearly fallacious. A bare reading of the definition of ‘rent’ contained in explanation to Section 194-I would make it clear that in the first place, the payment, by whatever name called, under any lease, sub-lease, tenancy which is to be treated as ‘rent’. That is rent in traditional sense. However, second part is independent of the first part which gives much wider scope to the term ‘rent’. As per this whenever payment is made for use of any land or any building by any other agreement or arrangement, that is also to be treated as ‘rent’. Once such a payment is made for use of land or building under any other agreement or arrangement, such agreement or arrangement gives the definition of rent of very wide connotation. To that extent, High Court of Delhi appears to be correct that the scope of definition of rent under this definition is very wide and not limited to what is understood as rent in common parlance. It is a different matter that the High Court of Delhi did not apply this definition correctly to the present case as it failed to notice that in substance the charges paid by these airlines are not for ‘use of land’ but for other facilities and services wherein use of the land was only minor and insignificant aspect. Thus it did not correctly appreciate the nature of charges that are paid by the airlines for landing and parking charges which is not, in substance, for use of land but for various other facilities extended by the AAI to the airlines. Use of land, in the process, become incidental. Once it is held that these charges are not covered by Section 194-I of the Act, it is not necessary to go into the scope of Section 194-C of the Act. (AY 1997-98 to 1999-2000 )

Japan Airlines Co. Ltd. v. CIT (2015) 279 CTR 1(SC)

S.234B : Interest – Advance tax – Interest is automatic if conditions are met. Form I.T.N.S. 150 is a part of the assessment order and it is sufficient if the interest has been calculated there even though the assessment order does not contain any direction to charge interest

The assessment order did not contain any direction for the payment of interest. The ITAT and the Delhi High Court held that since no direction had actually been given in the assessment order for payment of interest, the case was covered by the decision of the Supreme Court in ‘Commissioner of Income Tax & Ors. v. Ranchi Club Ltd.’ [(2001) 247 ITR 209] which merely dismissed the appeal affirming the High Court judgment reported in ‘Ranchi Club Ltd. v. Commissioner of Income Tax’ [(1996) 217 ITR 72]. The Department claimed before the Supreme Court that in view of the decision in ‘Kalyankumar Ray v. Commissioner of Income Tax, West Bengal-IV, Calcutta [1992 Supp (2) SCC 424] interest under Section 234B is part of Form I.T.N.S. 150 which is not only signed by the Assessing Officer but it is really part of the assessment order itself. HELD by the Supreme Court allowing the appeal:

It will be seen that under the provisions of Section 234B, the moment an assessee who is liable to pay advance tax has failed to pay such tax or where the advance tax paid by such an assessee is less than 90 per cent of the assessed tax, the assessee becomes liable to pay simple interest at the rate of one per cent for every month or part of the month. The levy of such interest is automatic when the conditions of Section 234B are met. The facts of the present case are squarely covered by the decision contained in Kalyankumar Ray’s case inasmuch as it is undisputed that contained a calculation of interest payable on the tax assessed. This being the case, it is clear that as per the said judgment, this Form must be treated as part of the assessment order in the wider sense in which the expression has to be understood in the context of Section 143, which is referred to in Explanation 1 to Section 234B. This being the case, we set aside the judgment of the High Court and allow the appeal of the Revenue.

CIT v. Bhagat Construction Co. Pvt. Ltd. (2015) 279 CTR 185 (SC)

S.245HA : Settlement Commission – Provision for abatement of proceedings where no order passed by cut-off date – Discrimination likely among applicants for factors not under their control – Provisions arbitrary – To be read down so that proceedings treated as abated only where failure owing to reasons attributable to applicant – Direction to proceed with applications as if not abated where delay not attributable to applicant – Supreme Court – No interference. [Constitution of India, Article 14, 226]

On petitions challenging the validity of Section s245HA(1)(iv) and (3) of the Income-tax Act, 1961, as amended by the Finance Act, 2007, the High Court found the provisions violative of Article 14 of the Constitution, but did not invalidate the provisions, and instead, read them down, in particular, the provisions of section 245HA(1)(iv), so that only where the application could not be disposed of for any reasons attributable on the part of the applicant would proceedings abate under section 245HA(1)(iv). The court directed the Settlement Commission to consider whether the proceedings had been delayed on account of reasons attributable to the applicant and if they were not, to proceed with the application as if not abated. On appeal to the Supreme Court :

Held, affirming the decision of the High Court, that the judgment of the High Court was a well-considered one and did not call for any interference.

UOI v. Star Television News Ltd. (2015) 373 ITR 528/231 Taxman 341/ 124 DTR 225/279 CTR 531 (SC)

S.260A : Appeal – High Court –Instructions – Monetary limits – CBDT Instruction No. 3/2011 dated 9-2-2011 specifying monetary limits for filing appeals by the department applies only to appeals filed after that date and not to pending appeals

The Supreme Court had to consider whether Instruction No. 3/2011 dated 9-2-2011 issued by the Central Board of Direct Taxes setting out limits for filing appeals to the ITAT and the High Courts applied even to appeals filed before the date of the Instruction. The High Court dismissed the appeals of the Department on the ground that the said Instruction applied even to appeals filed before that date. On appeal by the department to the Supreme Court HELD reversing the High Court:

The appeals and review petitions preferred by the department before the High Court, were disposed of on the basis of the instructions issued by the Central Board of Direct Taxes dated 9-2-2011. It is not a matter of dispute, that all the appeals were preferred prior to 2011, whereas, the instructions dated 9-2-2011 clearly indicate in paragraph 11 thereof, that they shall not govern cases which have been filed before 2011, and that, the same will govern only such cases which are filed after the issuance of the aforesaid instructions dated 9-2-2011. In view of the above, the instant appeals are allowed, the impugned orders passed by the High Court hereby set aside. The matters are remitted back to the High Court for re-adjudication of the appeals on merits, in accordance with law.

CIT v. Suman Dhamija (2015) 279 CTR 329/124 DTR 169 (SC)

S.260A : Appeal – High Court –Power of review – High Courts, being Courts of Record under Article 215, have the inherent power of review. There is nothing in s. 260A(7) to restrict the applicability of the provisions of the CPC to S. 260A appeals

In an appeal under s. 260A, the Guwahati passed an order (332 ITR 91) in which it held that transport subsidies and other incentives were not eligible for relief u/s. 80-IB. The assessee filed a review petition (358 ITR 551) in which it contended that the High Court had gone on to answer the questions without first framing substantial questions of law. The High Court allowed the review petition and recalled the judgement. Thereafter, it passed a judgement (CIT v. Meghalaya Steels Ltd. [2013] 356 ITR 235) in which it held that the said transport subsidies and other incentives were eligible for relief u/s 80-IB. The department argued before the Supreme Court that under section 260A(7), only those provisions of the Civil Procedure Code could be looked into for the purposes of Section 260A as were relevant to the disposal of appeals, and since the review provision contained in the Code of Civil Procedure is not so referred to, the High Court would have no jurisdiction under Section 260A to review such judgment. HELD by the Supreme Court dismissing the appeal:

High Courts being Courts of Record under Article 215 of the Constitution of India, the power of review would in fact inhere in them. This was in fact so decided in a slightly different context while dealing with the power of review of writ petitions filed under Article 226 by a judgment reported in AIR 1963 SC 1909 5 (Shivdeo Singh & Ors. v. State of Punjab and Ors.). It is also clear that on a cursory reading of Section 260A (7), the said Section does not purport in any manner to curtail or restrict the application of the provisions of the Code of Civil Procedure. Section 260A(7) only states that all the provisions that would apply qua appeals in the Code of Civil Procedure would apply to appeals under Section 260A. That does not in any manner suggest either that the other provisions of the Code of Civil Procedure are necessarily excluded or that the High Court’s inherent jurisdiction is in any manner affected.

CIT v. Meghalaya Steels Ltd. (2015) 279 CTR 189 (SC)

S.261 : Appeal – Supreme Court – Company wound up and no person to pursue the appeal –Appeal dismissed

Against the order of the High Court dismissing the assessee’s appeal on the question of allowance of depreciation for the block period, holding that the Tribunal had arrived at findings of fact after appreciating the evidence on record, including material seized during the course of search and seizure proceedings, and no substantial question of law arose out of the order of the Tribunal, the Supreme Court, taking note of the fact that the assessee-company had been wound up and there was nobody to pursue the appeals, dismissed the appeals.

Patira Food Products P. Ltd. v. ACIT (2015) 373 ITR 165 (SC)

S.261 : Appeal – Supreme Court – Assessment – Valuation Officer – Whether report of, called for by Assessing Officer, can be made basis for assessment – Appeal dismissed leaving question open

Against the decision of the High Court dismissing the Department’s appeal against the order of the Tribunal holding that the Assessing Officer could not have relied upon the report of the Valuation Officer called for on a commission under section 131(1)(d), the Department appealed to the Supreme Court : The Supreme Court dismissed the appeal in view of the meagreness of the amount involved in the appeal, keeping the question of law open.

CIT v. Om Prakash Bagadia (HUF) (2015) 373 ITR 670 / 267 CTR 621 / 233 Taxman 131 (SC)

S.261 : Appeal – Supreme Court – Cash credit – Tax effect low and no substantial question of law

The Assessing Officer treated a sum claimed to be a loan as unexplained cash credit and the Commissioner (Appeals) upon examination of the documentary evidence sustained the addition and this was upheld by the Tribunal, and the High Court, holding that the finding of the Tribunal being based on cogent material could not be said to be perverse and no substantial question of law arose from the order of the Tribunal. On appeal : The Supreme Court dismissed the appeal, holding that the tax effect was very nominal and that even otherwise, there was no substantial question of law which arose for consideration. (AY 1998-19)

Krishan Kumar Aggarwal v. Assessing Officer, Income-tax (2015) 373 ITR 679 /124 DTR 288/ 280 CTR 35 (SC)

S.261 : Appeal – Supreme Court – Small tax effect – Matter has a cascading effect – Circular dt. 9th February 2011, should not be applied ipso facto – Liberty given to the department to move High Court

Allowing the appeal of Revenue the Court held that; where the matter has a cascading effect, there are cases in which common principle may be involved in subsequent group matters or large number of matters, in such cases attention of High Court has to be drawn. Circular dt. 9 th Feb, 2011 (2011) 332 ITR 1 (St.), should not be applied ipso facto. Liberty wass given to the department to move High Court.

CIT v. Century Park (2015) 373 ITR 32 / 278 CTR 110 / 120 DTR 308 (SC)

S.261 : Appeal – Supreme Court – Depreciation – Studio – Plant – Low tax effect – Appeal not entertained

The assessee, engaged in the production of cinematograph films, claimed higher depreciation on its studio which was situated in a big landscape. The building was designed in such a way that the wooden partitions could be removed for creating different settings or scenes. On the question whether a part of the studio building constituted plant, the High Court held that part of the studio building would come within the term “plant” entitled to depreciation at the rate applicable to plant and machinery. On appeal to the Supreme Court :

Having regard to the fact that the tax effect was minimal, the Court refused to interfere with the appeals and dismissed them, leaving the question of law open. Refer CIT v. Navodaya [2004] 271 ITR 173 (Ker.)(HC).

CIT v. Navodaya (2015) 373 ITR 637 (SC)

S.261 : Appeal – Supreme Court – Business expenditure – Fines and penalties – Tax effect low – Appeal not entertained

Penalty of Rs. 10,61,698 imposed on the assessee-bank by the Reserve Bank of India for committing violation of provisions of the Reserve Bank of India Act, 1934, and the Banking Regulation Act, 1949, was claimed as business expenditure by the assessee-bank in respect of the assessment years 1984-85 to 1991-92. The High Court allowed it. On appeal :

The Supreme Court dismissed the appeals without going into the merits, having regard to the smallness of the amount, but left the question of law open. (AY. 1984-1985 to 1991-92)

CIT v. Dhanalakshmi Bank Ltd. (2015) 373 ITR 526 / 124 DTR 228/ 279 CTR 439/V (SC)

S.261 : Appeal – Supreme Court – Small tax effect – Appeal was dismissed solely on the ground that the tax effect thereof is Rs. 4,22,830/-.

Appeal filed by the assessee is not entertained and is entertained and is dismissed solely on the ground that the tax effect is Rs. 422, 830/ only. The issue involved was taxability of capital gain in respect of sale of agricultural land. (AY. 1986-1987)

Alexander George v. CIT (2015) 373 ITR 49 / 278 CTR 112 / 120 DTR 310 (SC).

S.261 : Appeal – Supreme Court – Intercorporate dividends – Estimated expenditure – Tax effect low and matter being old, appeal was not entertained

From the judgment of the High Court answering in favour of the assessee the question whether the Department was entitled to import the rule of proportionate expenditure and interest contemplated by section 20 of the Income-tax Act, 1961, as it then stood into section 80M of the Act, the Department appealed to the Supreme Court:

The Supreme Court refused to entertain the appeals holding that the tax effect was nominal and the matter was very old. (AY 1970-71)

CIT v. Central Bank of India (2015) 373 ITR 524 (SC)

Wealth-tax Act, 1957.

S.7 : Valuation of property – Vacant land subject to the Land Ceiling Act – Excess land would have to be valued at Rs. 2 lakh for purpose of Wealth Tax. [S. 2(e), 2(m), 2(q), 3, Urban Land Ceiling Act, 1962, Ss. 6, 11(6), 20]

The Supreme Court had to consider whether for the purposes of Wealth Tax Act, the market value of the vacant land belonging to the assessee should be taken at the price which is the maximum compensation payable to the assessee under the Urban Land Ceiling Act, 1962?

The factual position is as follows:

(i) The Assessment Years in respect of which question was to be determined were 1977-1978 to 1986-1987.

(ii) Ceiling Act had come into force w.e.f. 17-2-1976 and was in operation during the aforesaid Assessment Years.

(iii) The Competent Authority under the Ceiling Act had passed orders to the effect that as per Section 11(6) of the Ceiling Act, the maximum compensation that could be received by the assessee was Rs. 2 lakhs. In accordance with Section 30 of the Ceiling Act, the declaration dates back to 17-2-1976 on which date the Ceiling Act was promulgated in Karnataka.

(iv) The order of the Competent Authority was challenged by the assessee by filing appeal before the Karnataka Appellate Tribunal. This appeal was, however, dismissed on 15-7-1998.

Against that order, writ petition was filed wherein provisions of the Ceiling Act were also challenged. Because of the pendency of these proceedings or due to some other reason, notification under Section 10(1) of the Ceiling Act was not passed.

(v) In the year 1999, Ceiling Act was repealed. At that stage, the writ petition filed by the assessee was still pending. The effect of this Repealing Act was that the property in question remained with the assessee and was not taken over by the Government.

HELD by the Supreme Court:

(i) “It is clear that the valuation of the asset in question has to be in the manner provided under Section 7 of the Act. Such a valuation has to be on the valuation date which has reference to the last day of the previous year as defined under Section 3 of the Income-tax Act if an assessment was to be made under that Act for that year. In other words, it is 31st March immediately preceding the assessment year. The valuation arrived at as on that date of the asset is the valuation on which wealth tax is assessable. It is clear from the reading of Section 7 of the Act that the Assessing Officer has to keep hypothetical situation in mind, namely, if the asset in question is to be sold in the open market, what price it would fetch. Assessing Officer has to form an opinion about the estimation of such a price that is likely to be received if the property were to be sold. There is no actual sale and only a hypothetical situation of a sale is to be contemplated by the Assessing Officer.

(ii) Thus, the Tax Officer has to form an opinion about the estimated price if the asset were to be sold in the assumed market and the estimated price would be the one which an assumed willing purchaser would pay for it. On these reckoning, the asset has to be valued in the ordinary way.

(iii) The High Court has accepted, and rightly so, that since the Property in question came within the mischief of the Ceiling Act it would have depressing effect insofar as the price which the assumed willing purchaser would pay for such property. However, the question is as to what price the willing purchaser would offer in such a scenario?

(iv) The combined effect of the aforesaid provisions, in the context of instant appeals, is that the vacant land in excess of ceiling limit was not acquired by the State Government as notification under Section 10(1) of the Ceiling Act had not been issued. However, the process had started as the assessee had filed statement in the prescribed form as per the provisions of Section 6(1) of the Ceiling Act and the Competent Authority had also prepared a draft statement under Section 8 which was duly served upon the assessee. Fact remains that so long as the Act was operative, by virtue of Section 3 the assessee was not entitled to hold any vacant land in excess of the ceiling limit. Order was also passed to the effect that the maximum compensation payable was Rs. 2 lakh. Let us keep these factors in mind and on that basis apply the provisions of Section 7 of the Wealth Tax Act.

(v) One has to assume that the property in question is saleable in the open market and estimate the price which the assumed willing purchaser would pay for such a property. When the asset is under the clutches of the Ceiling Act and in respect of the said asset/vacant land, the Competent Authority under the Ceiling Act had already determined the maximum compensation of Rs. 2 lakh, how much price such a property would fetch if sold in the open market? We have to keep in mind what a reasonably assumed buyer would pay for such a property if he were to buy the same. Such a property which is going to be taken over by the Government and is awaiting notification under Section 10 of the Act for this purpose, would not fetch more than Rs. 2 lakh as the assumed buyer knows that the moment this property is taken over by the Government, he will receive the compensation of Rs. 2 lakh only. We are not oblivious of those categories of buyers who may buy “disputed properties” by taking risks with the hope that legal proceedings may ultimately be decided in favour of the assessee and in such an eventuality they are going to get much higher value. However, as stated above, hypothetical presumptions of such sales are to be discarded as we have to keep in mind the conduct of a reasonable person and “ordinary way” of the presumptuous sale. When such a presumed buyer is not going to offer more than Rs. 2 lakh, obvious answer is that the estimated price which such asset would fetch if sold in the open market on the valuation date(s) would not be more than Rs. 2 lakh. Having said so, one aspect needs to be pointed out, which was missed by the Commissioner (Appeals) and the Tribunal as well while deciding the case in favour of the assessee. The compensation of Rs. 2 lakh is in respect of only the “excess land” which is covered by Sections 3 and 4 of the Ceiling Act. The total vacant land for the purpose of Wealth Tax Act is not only excess land but other part of the land which would have remained with the assessee in any case. Therefore, the valuation of the excess land, which is the subject matter of Ceiling Act, would be Rs. 2 lakh. To that market value of the remaining land will have to be added for the purpose of arriving at the valuation for payment of Wealth Tax. (AY. 1977-78 to 1986-87)

S. N. Wadiyar (Dead) Through LR v. CWT(2015) 378 ITR 9/ 280 CTR 233/ 125 DTR 330 (SC)

S.40(3)(vi) : Company – Exemption – Building used for business – Used by subsidiary – Not exempt

Portion of factory building used by subsidiary of assessee for carrying out job work for assessee. Assessee charging subsidiary licence fee and subsidiary charging assessee for work done. Independent entities–Portion of building used by subsidiary not used by assessee for purpose of its business. Dismissing the appeal the Court held that user must be by assessee for purposes of its business hence on facts the assesse is not entitled to claim exemption. (AY. 1984-85)

Kapri International (P) Ltd. v. CWT (2015) 373 ITR 50 / 231 Taxman 34 / 277 CTR 463 / 277 CTR 463/ 231 Taxman 34 (SC)

Companies (Profits) Surtax Act, 1964

S.24AA : Exemption – Agreement with foreign company – Mineral Oils – Scope of exemption cannot be expanded by a judicial pronouncement – Principles of interpretation of a law conferring an exemption or concession

The Supreme Court had to consider the scope of Notification bearing No. GSR 307(E) dated 31-3-1983 issued under Section 24AA of the Surtax Act by which exemption was granted in respect of surtax in favour of foreign companies with whom the Central Government has entered into agreements for association or participation of that Government or any authorised person in the business of prospecting or extraction or production of mineral oils. ONGC was notified as the “authorised person”. The question was whether the exemption could be extended to agreements entered into by ONGC with different foreign companies for services or facilities or for supply of ship, aircraft, machinery and plant, as may be, all of which were to be used in connection with the prospecting or extraction or production of mineral oils. Such agreements did not contemplate a direct association or participation of ONGC in the prospecting or extraction or production of mineral oils but involved the taking of services and facilities or use of plant or machinery which is connected with the business of prospecting or extraction or production of mineral oils. HELD by the Supreme Court:

(i) The law is well settled that a person who claims exemption or concession has to establish that he is entitled to that exemption or concession. A provision providing for an exemption, concession or exception, as the case may be, has to be construed strictly with certain exceptions depending upon the settings on which the provision has been placed in the statute and the object and purpose to be achieved. If exemption is available on complying with certain conditions, the conditions have to be complied with. The mandatory requirements of those conditions must be obeyed or fulfilled exactly, though at times, some latitude can be shown, if there is a failure to comply with some requirements which are directory in nature, the non-compliance of which would not affect the essence or /substance of the notification granting exemption.

(ii) Section 24-AA of the Surtax Act was brought into the statute book by Act 16 of 1981 i.e. Finance Act, 1981 with effect from 1-4-1981. The explanatory notes on the provisions of Finance Act [Paragraph 11(4) and 26(1)] clearly goes to show that the legislative intent behind inclusion of Section 24-AA is to encourage foreign companies to enter into participating contracts with the Union Government in the business of oil exploration or production. The further legislative intent was to seek greater participation of foreign companies in the matter of providing services including supply of ships, aircrafts, machinery or plant in connection with business of extraction or production of mineral oils. The aforesaid legislative intent which is two-fold is manifested by the two limbs of sub-section 2 of Section 24AA of the Surtax Act to which the power of exemption was intended to operate i.e. sub-sections 2(a) and 2(b) of Section 24AA. If out of the two limbs where the power of exemption was intended to operate, the repository of the power i.e. Central Government, had consciously chosen to grant exemption in one particular field i.e. foreign companies covered by sub-section 2(a) of Section 24-AA, the scope of the grant cannot be enhanced or expanded by a judicial pronouncement which is what the arguments made on behalf of the appellants intend to achieve. Any such interpretation must, therefore, be avoided. Consequently, we see no reason to depart from the basic principles of interpretation, as already noticed, that should govern the present issue. We, accordingly, do not find any merit in any of the appeals under consideration. (AY. 1986-87)

Oil & Natural Gas Corporation Limited v. CIT (2015) 377 ITR 117/ 121 DTR 302/ 278 CTR 166 (SC)

Precedent – Binding nature –Decision of Co-ordinate Bench of High Court is binding on another Co-ordinate Bench

Division Bench of the High Court having disagreed with the earlier opinion of the Co-ordinate Bench ought to have referred the matter to a Larger Bench instead of rendering a contrary decision. Decision of Co-ordinate Bench of High Court is binding on another Co-ordinate Bench .

ACIT v. Victory Aqua Farm Ltd. (2015) 280 CTR 32/ 125 CTR 117 (SC)

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