1. When two views of law are possible, the Commissioner cannot exercise his jurisdiction under section 263 of the Income-tax Act, 1961

Commissioner of Income-tax vs. Max India Ltd. [2007] 295 ITR 282 (SC)

The Assessing Officer passed an order under section 80HHC computing profits at a particular figure. There were two views about computation of profit under section 80HHC, one adopted by the assessing officer and another by the Commissioner. The Commissioner purported to exercise his power under section 263 of the Income-tax Act holding that the order passed by the assessing officer was erroneous and prejudicial to the interests of the revenue. The Supreme Court, while agreeing with the assessee, decided that such an order cannot be passed by the Commissioner. It observed as under :

“ ….. Every loss of revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interests of the Revenue. For example, when an Income-tax Officer adopted one of the courses permissible in law and it has resulted in loss of revenue; or where two views are possible and the Income-tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the Revenue, unless the view taken by the Income-tax Officer is unsustainable in law. ….. “

2. The words ‘business’ and ‘profession’ interpreted

G.K. Choksi & Co. vs. CIT [2007] 295 ITR 376 (SC)]

The appellant firm of chartered accountants claimed depreciation for A.Y. 1984-85 under section 32(1)(iv) of the Income-tax Act, 1961 in relation to a building constructed by it for the purpose of residence of its low paid employees.

Disallowing the claim of the appellant, the Supreme Court observed as under :

“ ….. Section 32(1) of the Act does not help the appellant in any way to construe the word “business” appearing in sub-section 32(1)(iv) to include “profession” as well. The Legislature intended to have different scope for business and profession in section 32(1). If the Legislature had intended to include “profession” in the word “business”, then there was no need to mention the two different words, i.e., “business” or “profession” in section 32(1) of the Act.”

“Part D consists of sections 28 to 43 of the Act which deals with “Profits and gains of business or profession”. Though the phrase has been used in certain sections as “business or profession”, nowhere has the phrase been used as “business and profession”. In fact, wherever the Legislature intended that the benefit of a particular provision should be for both business or profession, it has used the words “business or profession” and wherever it intended to restrict the benefit to either business or profession, then the Legislature has used the word either “business” or “profession”, meaning thereby that it intended to extend the benefit to either “business” or “profession”, i.e., the one would not include the other.”

3. Distinction between loans/advances and investments/securities under the Interest-tax Act, 1974

Commissioner of Income-tax vs. Corporation Bank. [2007] 295 ITR 193 (SC)

Their Lordships of the Supreme Court held as under:

“The short point which arises in this batch of civil appeals is whether interest earned by the assessee-banks on dated Government securities was liable to be assessed under section 2(7) read with section 4 of the Interest-tax Act, 1974. In our view, there is a basic difference between loans and advances on the one hand and investments/securities on the other. This difference is indicated in the provisions of the Income-tax Act, the Companies Act as well as the Banking Regulation Act. These aspects have been discussed in detail in two decisions of the Bombay High Court, namely, Discount and Finance House of India Ltd. vs. S.K. Bhardwaj, CIT reported in [2003] 259 ITR 295, as also in another decision of the Bombay High Court reported in [2003] 259 ITR 312 in the case of CIT vs. United Western Bank Ltd. It is not in dispute that the Revenue has accepted the aforestated two judgments of the Bombay High Court. We are in agreement with the view expressed by the Bombay High Court.”

4. Whether mens rea is an essential ingredient while imposing penalty under section 271(1)(c) of the Income-tax Act, 1961 and under the provisions of Excise Acts

Union of India & Ors. vs. Dharamendra Textile Processors & Ors. [2007] 295 ITR 244(SC)

1. The question which arose for determination before the Supreme Court was whether section 11AC of the Central Excise Act, inserted by Finance Act, 1996 with the intention of imposing mandatory penalty on persons who evade payment of tax, should be read to contain mens rea as an essential requirement.

2. The contention of the revenue as extracted in the judgment was that the said section should be read as penalty for statutory offences; that the executing authority has no discretion in the matter of penalty and that the adjudicating authority in such cases is duty bound to impose penalty equal to the duty so determined. On the other hand, it is the case of the assessee that mens rea is an essential requirement of the said section particularly when the section refers to intention in the matter of evading payment of duty.

3. The Supreme Court referred to the various sections of the Central Excise Act and the provisions of section 271(1)(c) of the Income-tax Act, 1961 which relate to levy of penalty for concealment of income.

4. The Supreme Court referred to two decisions of the Supreme Court which were conflicting with each other and referred the matter to a larger bench by making the following observation :

“8. We are of the view that there is a conflict of opinions between the judgments of the Division Bench of this Court in the case of Dilip N. Shroff (291 ITR 519 (SC) on one hand and on the other hand we have another judgment of this Court in the case of Shriram Mutual Fund (93 AIR 2287(SC)). Secondly, it may be pointed out that the object behind enactment of section 271(1)(c) read with the Explanations quoted above indicates that the said section has been enacted to provide for a remedy for loss of revenue. The penalty under the said section is a civil liability. Wilful concealment is not an essential ingredient for attracting the civil liability, as is the case in the matter of prosecution under section 276C of the Act. While considering an appeal against an order made under section 271(1)(c) what is required to be examined is the record which the officer imposing the penalty had before him and if that record can sustain the finding there had been concealment, that would be sufficient to sustain the penalty. Keeping in mind these two circumstances we are of the view that the judgment of the Division Bench in the case of Dilip N. Shroff (supra) needs consideration. The Explanations added to section 271(1)(c) in that entirety also indicate the element of strict liability on the assessee for concealment or for giving inaccurate particulars while filing returns. The judgment in Dilip N. Shroff’s case (supra) has also not considered the provisions of section 276C of the Income-tax Act. Therefore, in our view, the judgment in the case of Dilip N. Shroff (supra) needs consideration by the larger Bench of this Court particularly when it has ramifications not only regarding provisions of the Income-tax Act but also with regard to the provisions of sections 3A and 11AC of the Central Excise Act and rule 96ZQ(5) of the Central Excise Rules.”

5. Gujarat Maritime Board held entitled to be registered u/s. 12A of the Income-tax Act, 1961

Commissioner of Income-tax vs. Gujarat Maritime Board [2007] 295 ITR 561 (SC)

1. The question before the Supreme Court was whether the assessee the Gujarat Maritime Board constituted under the Gujarat Maritime Board Act, 1981 was entitled to exemption under section 11 as charitable institution in respect of income derived from property and business.

2. The case of the revenue was that the Maritime Board was not entitled to the benefit of section 11 of the 1961 Act as the said Board is not a trust under Public Trust Act but it is a statutory authority. Its business is not held under a trust. Its property is not held under trust. Therefore, the Board was not entitled to be registered as a Charitable Institution under section 12A of the 1961 Act.

3. The Supreme Court held that the Maritime Board was entitled to be registered u/s. 12A of the Act and observed as under :

“ ….. Advancement of any object of benefit to the public or a section of the public as distinguished from benefit to an individual or a group of individuals would be a charitable purpose. ….. “

“ ….. If the primary purpose and the predominant object are to promote the welfare of the general public the purpose would be charitable purpose. ….. “

4. The Supreme Court further observed as under :

“15. The present case in our view is squarely covered by the judgment of this Court in the case of CIT vs. Andhra Pradesh State Road Transport Corpn. [1986] 159 ITR 1 in which it has been held that since the Corporation was established for the purpose of providing efficient transport system, having no profit motive, though it earns income in the process, it is not liable to income-tax.”

“17. Before concluding we may mention that under the scheme of section 11(1) of the 1961 Act, the source of income must be held under trust or under other legal obligation. Applying the said test it is clear, that Gujarat Maritime Board is under legal obligation to apply the income which arises directly and substantially from the business held under trust for the development of minor port in the State of Gujarat. Therefore, they are entitled to be registered as ‘Charitable Trust’ under section 12A of the 1961 Act.”

6. Shares allotted under Employees Stock Option Scheme which were not transferable are not perquisites in the year of allotment of the Stock Option

Commissioner of Income-tax, Bangalore vs Infosys Technologies Ltd. [2008] 297 ITR 167 (SC)

1. To implement Employees Stock Option Scheme (ESOP), the assessee-company created a trust and allotted 7,50,000 warrants at Re. 1 each to the said trust. Each warrant entitled the holder thereof to apply for and be allotted one equity share of the face value of Rs. 10 each for total consideration of Rs. 100. The trust was to hold the warrant and transfer the same to the employees of the company. During the relevant assessment years, warrants were offered to the eligible employees at Re. 1 each by the trust. Every warrant had to be retained for a minimum period of 1 year. At the end of that period, the employee was entitled to elect and obtain shares allotted to him on payment of the balance, Rs. 99. The option could be exercised at any time after 12 months but before expiry of the period of 5 years. The allotted shares were subject to lock-in period and an employee had to continue to be in service for 5 years. If he would resign or his service be terminated for any reason, he would lose his right under the scheme and the shares were to be re-transferred to the trust for Rs. 100 per share. Till 13-9-1999 all the shares were stamped with the remark ‘non-transferable’. The Assessing Officer held that the ‘perquisite value’ was the difference between the market value and the price paid by the employees for exercise of the option. He further held that on ‘perquisite value’, TDS was to be charged at 30 per cent. The assessee was treated as a defaulter for not deducting TDS under section 192 on the above perquisite value computed by him.

2. The Supreme Court held as under :

“Warrant is a right without obligation to buy. Therefore, ‘perquisite’ could not be said to accrue at the time when warrants were granted in the instant case. Same would be the position when options vested in the employees after lapse of 12 months. It was important to note that in this case options were exercisable only after the cooling period of 12 months. Further, it was open to the employees not to avail of the benefit of option. It was open to the employees to resign. There was no certainty that the option would be exercised. Further, the shares were not transferable for 5 years (lock-in period). If an employee resigned during the lock-in period, the shares had to be re-transferred. During the lock-in period, the possession of the shares, which is an important ingredient of shares, remained with the trust. The Stock Exchange was duly notified about non-transferability of the shares during the lock-in period. The shares were stamped with the remark ‘non-transferable’ during the lock-in period. It was not open to the employees to hypothecate or pledge the said shares during the lock-in period. During the said period, the shares had no realisable value. Hence, there was no cash inflow to the employees on account of mere exercise of options. On the date when the options were exercised, it was not possible for the employees to foresee the future market value of the shares. Therefore, the benefit, if any which arose on the date when the option stood exercised was only a notional benefit whose value was unascertainable and, the department had erred in treating the amount being the difference in the market value of shares on the date of exercise of option and the total amount ‘paid’ by the employees consequent upon exercise of the said options as perquisite value.

“Proceeding on the basis that there was ‘benefit’, the question is whether every benefit received by the person is taxable as income ? It is not so. Unless the benefit is made taxable, it cannot be regarded as income. During the relevant assessment years, there was no provision in law which made such benefit taxable as income. Further, as stated, the benefit was prospective. Unless a benefit is in the nature of income or specifically included by the Legislature as part of income, the same is not taxable. In this case, the shares could not be obtained by the employees till the lock-in period was over. In the absence of legislative mandate, a potential benefit could not be considered as ‘income’ of the employee(s) chargeable under the head ‘Salaries’. The stock was non-transferable and the stock exchange was also, accordingly, notified. This was where the weightage ought to have been given by the Assessing Officer to an important factor, namely, lock-in period, which had not been done. If the shares allotted to an employee had no realizable sale value on the day when he would exercise his option, there was no cash inflow to him and it was not possible for the employee to know the future value of the shares allotted to him on the day he would exercise his option.”

7. Constitutional validity of service tax upheld by the Supreme Court

All India Federation of Tax Practitioners & Ors. vs. Union of India & Ors. [293 ITR 406 (SC)]

The Supreme Court was concerned with the constitutional status of the levy of service tax and the legislative competence of Parliament to impose service tax under Article 246(1) read with entry 97 of List I of the Seventh Schedule to the Constitution. The issue arising in this appeal questions the competence of Parliament to levy service tax on practising chartered accountants and architects having regard to entry 60, List II of the Seventh Schedule to the Constitution and Article 276 of the Constitution.

The Supreme Court observed that what was the economic concept, namely, that there is no distinction between consumption of goods and consumption of services is translated into a legal principle of taxation by the aforestated Finance Acts of l994 and 1998.

The contention of the appellant was to the effect that the word “profession” in entry 60, List II was synonymous with the word service and, therefore, tax on profession would include tax on service, which tax could be levied only by the State Legislature. It was submitted that there cannot be a profession without service.”

The Supreme Court rejected the contention of the appellants by observing as under :

“Firstly, applying the principle of equivalence, there is no difference between production or manufacture of saleable goods and production of marketable/saleable services in the form of an activity undertaken by the service-provider for consideration, which correspondingly stands consumed by the service receiver. It is this principle of equivalence which is in-built into the concept of service tax, which has received legal support in the form of the Finance Act, 1994. ….. “

“This situation is very similar to a situation where goods are manufactured or produced with the intention of being cleared for home consumption under the Central Excise Act, 1944. This is how the principle of equivalence equates consumption of goods with consumption of services as both satisfy human needs. In the case of internet service providers, service tax is leviable for on-line information and database provided by web sites. But no service tax is leviable on e-commerce as there is no database access.”

“On the basis of the above discussion, it is clear that service tax is VAT which in turn is both a general tax as well as a destination based consumption tax leviable on services provided within the country.”

The Supreme Court further observed as under :

“As stated above, entry 60 List II refers to taxes on professions etc. It is a tax on the individual person/firm or company. It is a tax on the status. A chartered accountant or a cost accountant obtains a licence or a privilege from the competent body to practise. On that privilege as such the State is competent to levy a tax under entry 60. However, as stated above, entry 60 is not a general entry. It cannot be read to include every activity undertaken by a chartered accountant/cost accountant/architect for consideration. Service tax is a tax on each activity undertaken by a chartered accountant/cost accountant or an architect. The cost accountant/chartered accountant/ architect charges his client for advice or for auditing of accounts Similarly, a cost accountant charges his client for advice as well as doing the work of costing. For each transaction or contract, the chartered accountant/cost accountant renders professional based services. The activity undertaken by the chartered accountant or the cost accountant or an architect has two aspects. From the point of view of the chartered accountant/cost accountant it is an activity undertaken by him based on his performance and skill. But from the point of view of his client, the chartered accountant/cost accountant is his service-provider. It is a tax on “services”. The activity undertaken by the chartered accountant or cost accountant is similar to saleable or marketable commodities produced by the assessee and cleared by the assessee for home consumption under the Central Excise Act. For each contract, tax is levied under the Finance Acts, 1994 and 1998. Tax cannot be levied under that Act without service being provided whereas a professional tax under entry 60 is a tax on his status. It is the tax on the status of a cost accountant or a chartered accountant. As long as a person/firm remains in the profession, he/it has to pay professional tax. That tax has nothing to do with the commercial activities which he undertakes for his client. Even if the chartered accountant has no work throughout the accounting year, still he has to pay professional tax. He has to pay the tax till he remains in the profession. This is the ambit and scope of entry 60, List II which is a taxing entry”

The Supreme Court further observed as under :

“ ….. We hold that Parliament has legislative competence to levy service tax by way of the impugned Finance Acts of 1994 and 1998 under entry 97 of List I on chartered accountants, cost accountants and architects. We further hold that the above position now stands fortified by the Constitution (Eighty-eighth Amendment) Act, 2003 which has inserted Article 268A and entry 92C which clearly indicates that entry 60 of List II and entry 92C of List I operate in different spheres.”