Right to carry on any trade or business – Article 19(1)(g)
Restrictions to be imposed under Article 19(6) should be reasonable restrictions:
Validity of the Bombay Lotteries and Prize Competitions Control and Tax Act 1948. The case was known as the Prize Competition’s case. Solution of a crossword puzzle in question depended on the exercise of skill. As they are business activities the protection of which is guaranteed by Article 19(1)(g). Restrictions imposed on such competitions was not reasonable.
RMD Chamarbaugawala v. Union of India AIR 1957 SC 628, 1957 SCR 930
Right to carry on any trade or business – Article 19(1)(g)
Restrictions to be imposed under Article 19(6) should be reasonable restrictions:
Legality of gambling, betting and competition etc:-
A competition in order to avoid the stigma of gambling must depend to a substantial degree upon the exercise of skill.
The scheme of our Constitution is to protect the freedom of each individual citizen to carry on his trade or business, that is done by Article 19(1)(g). This guaranteed right is however subject to Article 19(6) which protects a law which imposes reasonable restrictions in the interest of general public.
State of Bombay v. RMD Chamarbaugawala & Ors. AIR 1957 SC 699, 1957 SCR 874
University has no power to impose Gujarati or Hindi or both as exclusive media of instruction and examinations
Gujarat University and Anr. v. Sri Krishna Ranganath Mudholkar and Ors. AIR 1963 SC 703, 1963 Supp (1) SCR 112
Court’s jurisdiction on powers, privileges and immunities of legislative assembly under Article 194(3) of the Constitution
Contempt of Legislative Assembly and the Assembly holding Judges of High Court, Advocate and citizen responsible for having committed its contempt under Article 143, of the Constitution of India. Special Reference of case to Supreme Court by President held that a judge of a High Court who entertains or deals with a petition challenging any order or decision of a legislature imposing any penalty or issuing any process against the individual for its contempts or for infringement of its privileges and immunities, does not commit contempt of the said legislature. Further the said legislature is not competent to the take proceeding against such a Judge. No contempt was committed.
Under Article 143 of Constitution of India (Special Reference) AIR 1965 SC 745, (1965) 1 SCR 413
Reasonable classification under Article 14 of the Constitution
Legality of Land Acquisition Act (Madras Amendment) Act 23 of 1961:
Under Article 14 of the Constitution of India the state shall not deny to any person equality before the law or the equal protection of the laws within the territory of India. But this does not preclude the legislature from making a reasonable classification for the purpose of legislation which must pass two tests namely.
Classification must be based on intelligible differentia;
The differentia must have a rational relation to the object sought to be achieved by the statute in question.
It was held that the Land Acquisition (Madras Amendment) Act violates Article 14 as the classification sought to be made between person whose land are acquired for other public purpose has no reasonable relation to the object sought to be achieved
I.P. Vajravelu Mudaliar v. Special Deputy Collector of Land Acquisition AIR 1965 SC 1017, (1965) 1SCR 614
Extend of power of the Parliament to amend the Constitution of India – Articles 13 and 368
In view of Article 13 of the Constitution, the Parliament had no power to amend the fundamental right incorporated in Part III of the Constitution, an amendment of the Constitution can be nothing but law. On the basis of the doctrine of Prospective overruling the Constitution first Amendment Act and a few others like amendment subsequently made should not be disturbed and must be held to be valid.
L.C. Golak Nath and Ors. v. State of Punjab AIR 1967 SC 1643, (1967)2 SCR 762
Fundamental Rights to Property — Articles 19 and 21 of the Constitution
Infringement of fundamental rights of company and shareholders when a Banking Company was taken over by State. (Articles 19, 21 and 31).
The Court struck down the nationalization of private banks. Matter was under Banking Companies (Acquisition and Transfer of Undertakings) Act, 1969. The case dealt with the inter-relationship of Article 19 and Article 31 and the basic approach to construe the fundamental rights guaranteed in the different provisions of the Constitution. The ratio laid down proved to be the foundation for the most epoch-making development in the Indian Constitution law, namely, the introduction of due process in the area of personal liberty guarantee by Article 21 of the Constitution of India. Mr. Palkhivala contended that the apex court was not correct in holding in A. K. Gopalan’s case that each fundamental right was self contained. The Bank Nationalization Act was struck down by a majority of 10:1 the only dissenting judge being A. N. Ray.
In the words of Mr. Palkhivala, the case was “very much the victory of common man.” It struck down the law nationalizing banks without payment of what the law would regard as compensation. Excluding the shares held by Government owned corporations ninety per cent of the remaining share capitals of almost all the nationalized banks were held by hundreds of thousand of middle class citizens whose hard earned savings were invested in the banks, and the entire body of investors benefited by the judgement. That decision further vindicated the ordinary citizens right to assert that every law whatever its object or subject-matter, must respect and conform to every fundamental right. The doctrine that the object and form of the State action alone determine the extent of protection that may be claimed by an individual and that the effect of the state action on the fundamental rights of the individual is irrelevant as laid down in A.K. Gopalan’s case, AIR 1950 SC 27, was finally rejected.
Rustom Cavasjee Cooper v. Union of India (Better known as Bank Nationalisation Case) AIR 1970 SC 564, (1970) 1 SCC 248, 1970(3) SCR 530
Freedom of speech : Citizen and Corporations: Article 19
Fundamental right of shareholders, editors, printers and directors in a company owning and publishing newspaper. According to K.K. Venugopal, “Nani was able to link the Government’s regulation of the allocation of the newsprint, a scarce commodity in India at the time to the freedom of speech”. Newspapers have to be left free to determine their pages, their circulation and their new editions within their quota which has been fixed fairly.
Bennett Coleman and Co. Ltd. v. Union of India AIR 1973 SC 106, (1972) 2 SSC 788
Equality of opportunity in matter of employment: Article 16
Claim of Schedule Caste and Schedule Tribe in Public employment to be considered consistently with maintenance of efficiency. Doctrine of equality, claims of other backward classes and other weaker sections to be seen with similar considerations. No period for reservation is provided. Conclusions given in the report of Backward Classes Commission cannot always be scientifically accurate. A caste can be and quite often is a social class in India and economic criteria cannot be the sole basis for determining the backward classes of citizen contemplated by Article 16(2)
Indira Sawhney v. Union of India (Better know as Mandal Case) AIR 1993 SC 447, 1992 Supp(3) SCC 217.
Fundamental Right case — The basic structure of the Constitution of India cannot be amended. Article 13(4) read with Article 368
While upholding the validity of the Constitution (24th Amendment) by which Article 13(4) was inserted, it was laid down (by majority) the principle theory that there were certain basic features of the Constitution which could not be amended under the amending law.
Keshavand Bharati v. State of Kerala AIR 1973 SC 1461
Company — Deemed distribution of dividend — s. 23 or 34 and not under s. 23A of the 1922 Act [Sections 143, 104, 147 of the 1961 Act]
The ITO reopened the assessment of Mafatlal Gagalbhai without sending a notice under s. 34 of the IT Act. He reassessed the income of Mafatlal Gagalbhai, reducing the amounts which were deemed to be distributed in respect of the ordinary shares, and included the dividends which, he held, must be deemed to have been distributed in respect of the preference share. He added a note to the order of assessment that this action was taken to give effect to the directions of the Tribunal and issued a notice of demand.
The Court held that:
S. 23A is a mandatory section and lays down rules of computation in computing the total income of the shareholder referred to in that section. S. 23A is a procedural section and not a charging section. No assessment could be made u/s 23A. That section does not provide for any assessment being made. It only talks of the fictional income being included in the total income of the shareholders for the purpose of assessing his total income. The assessment, therefore, has to be made under the other provisions of the Act, including sec. 34, authorizing assessments.
CIT v. Navinchandra Mafatlal (1961) 42 ITR 53 (SC)
Capital gains — Chargeability [Sections 45(1), 2(29), 159, 47, 2(47), 45]
Having regard to the definition of the expression “capital assets”, it would be wrong to read “distribution of capital assets” as meaning “distribution of sale proceeds of capital asset”. Obviously, there is a clear and vital distinction between “capital assets” and their “sale proceeds”. If capital assets are sold first and a distribution of the sale proceeds is made afterwards, then what is distributed is not capital asset but the sale proceeds thereof. Secondly, it is not acceptable that the third proviso serves no purpose if the expression “distribution of capital assets” is given its natural and plain meaning, viz., distribution in specie. The purpose of the proviso is abundantly clear if the scheme of sub–ss. (1), (2) and (3) is kept in mind. Assume that there is a distribution of capital assets in specie amongst the legatees, and one of the legatees sells the capital assets which he got in one of the ways mentioned in the third proviso, he at once becomes liable to tax on the profits made on the sale. Sub-s. (3) makes that position clear and if the proviso is read in the context of the substantive provisions of s. 12B its purpose is quite clear. The purpose is this: as long as there is distribution of the capital assets in specie and no sale, there is no transfer for the purposes of the section; but as soon as there is a sale of the capital assets and profits or gains arise there from, the liability to tax arises, whether the sale be by the administrator or the legatee. It is significant that the proviso uses the words “for the purposes of this section” and not merely sub-s. (1). On the interpretation sought to be placed on the third proviso on behalf of the appellant, the administrator will escape paying tax if he sells the capital assets; but the legatee will not escape if he sells the capital assets after having received them in specie from the administrator. This is an anomaly which is against the scheme of s. 12B. The High Court rightly held that the expression “distribution of capital assets” in the third proviso to sub-s. (1) of s. 12B of the Act means distribution in specie and not distribution of sale proceeds. The question whether the sale was voluntary or involuntary is not germane to the scheme of s. 12B. On a proper reading of the proviso, the expression “by reason of” goes with the clause relating to compulsory acquisition of property and not with the distribution of capital assets. An administrator or executor of a deceased assessee was liable to capital gains tax on sale of the capital assets, like any other assessee, if there was a profit on the sale and distribution of sale proceeds of assets. It is not exempt under third proviso to s. 12B(1) of the 1922 Act.
James Anderson v. CIT (1960) 39 ITR 123 (SC)
Association of Persons [Sections 2(31), 4(1), 26]
An AOP must be one in which two or more persons join in a common purpose or common action, and as the words occur in a section which imposes a tax on income, the association must be one the object of which is to produce income, profits or gains. It is, however, necessary to add some words of caution here. There is no formula of universal application as to what facts, how many of them and of what nature, are necessary to come to a conclusion that there is an AOP; it must depend on the particular facts and circumstances of each case as to whether the conclusion can be drawn or not. In a case before the Supreme Court there was no finding that the three widows had combined in a joint enterprise to produce income. The only finding was that they had not exercised their right to separate enjoyment, and except for receiving the dividends and interest jointly, it had been found that they have done no act which has helped to produce income in respect of the shares and deposits. On these findings, according to the Supreme Court, it could not be held that the three widows had the status of an AOP within the meaning of s. 3 of the Indian IT Act.
Co-widows of Hindu governed by Mitakshara law having not exercised their right of separate enjoyment of assets inherited and doing nothing which would help them to produce income, they cannot be assessed as AOP
CIT v. Indira Balkrishna (1960) 39 ITR 546 (SC)
Business expenditure — Capital or revenue expenditure [Sections 37, 37(1)]
The stones are not lying on the surface but are part of a quarry from which they have to be extracted methodically and skilfully before they can be dressed and sold. These deposits are extensive, and the work of the assessee carries him deep under the earth. Such a deposit cannot be described as the stock-in-trade of the assessee, but stones detached and won can only be so described. This was a case in which the assessee had acquired an asset of an enduring character for which he had to put his hand in his pocket for a very large sum indeed. He paid ₹ 96,000 down, but for the rest he asked for easy terms. The amount paid every month was not in any sense a payment for acquisition of the right from month to month. It is obvious that the monthly payments of ₹ 1,666-10-8 did not represent the lease amount for a month. It was really the entire sum chopped into small payments for his convenience. Nor can the amount be described as a business expense, because the outgoings every month were not to be taken as spent over purchase of stones but in discharge of the entire liability of the jagir. In this case the assessee acquired by his long, term lease a right to win stones, and the leases conveyed to him a part of land. The stones in situ were not his stock-in-trade in a business sense but a capital asset from which after extraction he converted the stones into his stock-in-trade. The payment, though periodic in fact, was neither rent nor royalty but a lump payment in instalments for acquiring a capital asset of enduring benefit to his trade. In this view of the matter, the High Court was right in treating the outgoings as on capital account. Expenditure incurred in acquisition of mines for quarrying stones is not an allowable revenue expenditure even if the consideration is paid in instalments.
Pingle Industries Ltd. v. CIT (1960) 40 ITR 67 (SC)
Business income — Computation [Section 28(i)]
Shares held as investments converted into stock-in-trade and sold in pursuance of trading activity. Profit is the difference between actual sale proceeds and market value on the date of conversion
Per S. K. Das, J. (Majority View)
The basis must be the ordinary commercial principles on which actual profits are computed. Normally the commercial profits out of the transaction of sale of an article must be the difference between what the article cost the business and what it fetched on sale. So far as the business or trading activity was concerned, the market value of the shares as on 1st April, 1945, was what it cost the business. There is no question of a notional sale here. The High Court did not create any legal fiction of a sale when it took the market value as on 1st April, 1945, as the proper figure for determining the actual profits made by the assessee. That the assessee later sold the shares in pursuance of a trading activity was not in dispute; that sale was an actual sale and not a notional sale; that actual sale resulted in some profits. The only fair measure of assessing trading profits in such circumstances is to take the market value at one end and the actual sale proceeds at the other, the difference between the two being the profit or loss, as the case may be. In a trading or commercial sense this seems to accord more with reality than with fiction.
The difference between the original cost and the market value as on the date of conversion of asset into stock-in-trade was not taxable as capital gain either.
CIT v. Bai Shirinbai K. Kooka (1962) 46 ITR 86 (SC)
Business expenditure — Capital or revenue expenditure — Mining lease of limestone quarries — Payment of royalty [Sections 37, 37(1)]
Under the arrangement, read with the Rajasthan Minor Mineral Concession Rules, 1955, the assessee was certainly entitled to go upon the land, win the raw material and had some rights to build premises for the purpose of winning the lime. But it is also clear that the assessee could not carry away any other mineral which might be found in the mine, and further he was obliged to allow other lessees of other minerals to go on the land and win their minerals. Thus there is no doubt that the assessee did derive an advantage by having entered into this arrangement. There is no payment once for all; it is a yearly payment of dead-rent and royalty. It is true if a capital sum is arrived at and payment is made every year by chalking out the capital amount in various instalments, the payment does not lose its character as a capital payment if the sum determined was capital in nature. But it is an important fact in this case that it is a case of an annual payment of royalty or dead-rent. No lump sum payment was ever settled or paid.
The reason why royalty has to be allowed as revenue expenditure must be the relation which the royalty has to the raw material which is going to be excavated or extracted. The more you take the more royalty you pay, and the minimum payment or the dead-rent also had the same characteristic, i.e., it is an advance payment in respect of certain amount of raw material to be excavated.
It is not the law that, in every case, if an enduring advantage is obtained, the expenditure for securing it must be treated as capital expenditure.
The royalty payment is not a direct payment for securing an enduring advantage; it has relation to the raw material to be obtained. Ordinarily, a mining lease provides for a capital sum payment; but the fact that there is no lump sum payment here cannot by itself lead to the conclusion that yearly payments to be made under the mining lease have relation to the acquisition of the advantage. No material has been placed on the record to show that any part of the royalty must, in view of the circumstances of the case, be treated as premium and be referable to the acquisition of the mining lease.
The royalty payment, including the dead-rent, have relation only to the lime deposits to be got. Therefore, the yearly payment should be treated as revenue expenditure.
Yearly amount paid as royalty for mine had relation to the raw material to be obtained and was not referable to the acquisition of the mining lease and hence allowable expenditure.
Gotan Lime Syndicate v. CIT (1966) 59 ITR 718 (SC)
Accounts — Method of accounting — Assessee an advocate following cash method [Sections 4, 5, 14, 28(i), 56]
Business income must be received, while the business is carried on.
Assessee who was practising as an advocate appointed as High Court judge—Past outstandings in discontinued profession, received at the time when he was the judge—Taxability under s.10(1) of IT Act, 1922—Receipts squarely falling under the head‘’ Profits or gains from business or profession’’ – As assessee was not carrying profession in the year of receipt of old outstandings, such receipts not taxable under s. 10(1)— Such receipts not to be brought under the residuary head ‘’Income from other sources’’ and subject to tax under s.12, merely because the receipts escaped being taxed under s. 10.
Nalinikant Ambalal Mody v. CIT (1966) 61 ITR 428 (SC)
Business expenditure—Bonus—Liability stated in profit and loss account [Sections 10(2), 207, 208, 209, 210, 211]
Business expenditure could be claimed on estimate basis, if the liability has accrued – Liability for bonus, could be reasonably estimated.
Provisions are charges against profits for anticipated losses and contingencies and, therefore, to be taken into account against gross receipts in P & L a/c and the balance sheet—Reserves are appropriation of profits, the assets by which they are represented being retained to form part of the capital employed in the business.
Metal Box Company of India Ltd. v. Their Workmen (1969) 73 ITR 53 (SC)
Deduction under s. 15C of 1922 Act (s. 80J of 1961 Act) [Section 80J(1)]
Reconstructions of business – Expansion of business
“Reconstruction of business already in existence” — New unit established by assessee for manufacturing articles used as intermediate products in the old division, which the assessee was buying from the market earlier, is not reconstruction of business already in existence—To constitute reconstruction, there must be transfer of assets of the existing business to the new industrial undertaking—Further the new units are independent as the business of old can be carried on without them—Assessee manufacturing boilers, machinery parts, wagons etc., establishing steel foundry division and jute mill division—Goods manufactured in both these divisions used as intermediate products in the existing divisions—Assessee entitled to relief under s. 15C.
Textile Machinery Corporation Ltd. v. Commissioner of Income Tax (1977) 107 ITR 195 (SC)
Capital gains—Applicability of s. 52(2) [Sections 45, 52(2)]
Unless there is some evidence to show, that the assessee has received more than the document price, the market value concept u/s. 52(2) cannot be invoked.
The burden of proving understatement of consideration lies on Revenue—But extent of understatement need not be shown—Once understatement is proved Revenue may adopt fair market value as actual consideration received—CBDT Circulars—Aid in construction of statute—Circulars are in the nature of contemporanea expositio—Furnish legitimate aid in construction of statutory provision—Also bind the course of action of Revenue
K.P. Varghese v. Income Tax Officer & Anr. (1981) 131 ITR 597 (SC)
Editorial Note — Shri Nani A. Palkhivala has appeared in more than 400 landmark cases which are reported in various journals. Shri Ajay R. Singh and Shri Paras S. Savla, Advocates have summarised 20 landmark cases, under the guidance of Shri V. H. Patil, Advocate.
Source: 3rd Nani Palkhivala National Tax Moot Court competition 28th-30th September 2006
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