1. Block Assessment – Undisclosed Income vis-a-vis asset disclosed in the Regular Returns

CIT vs. Prem Nath Nagpal [2008] 214 CTR (Del) 51

The assessee’s residential premises were subject to search and seizure action under section 132 of the Income-tax Act, 1961. During the course of search various documents were found and seized. In pursuance to the notice under section 158BC, the assessee had filed return of income for the block period 1-4-1989 to 17-12-1999 declaring total undisclosed income of Rs. 1,64,667/-. It was noticed by the Assessing Officer that during the search, certain papers relating to property situated at 3, Club Road, Gadaipur, Mehrauli were found. However, the said property was disclosed in the regular return of income. The Assessing Officer, during block assessment proceedings came to the conclusion that the assessee has received sum of Rs. 1.25. crores as security and thus the value as declared by the assessee in regular return of income appeared to be grossly understated. Hence, he referred the matter for valuation of the property to DVO. As per valuation report the value of this property was determined at Rs. 3,04,62,000 and the assessee was confronted with this valuation report to which he raised objections stating that the property was given on rent with effect from 1st Feb., 2001 and Rs. 18 lakhs was spent on repairs and improvement. Thus, based upon the valuation report, the AO made an addition of Rs. 1,87,53,000 in respect of understatement of the cost of acquisition and another addition of Rs. 51,44,838 was made in respect of understatement of expenditure on its development etc. On appeal, the Learned CIT(A) deleted the additions made by the Learned Assessing Officer by observing that the AO was not justified in making the reference to DVO as the same could be legally made only during the regular assessment proceedings under s. 143(3) and not under s. 158BC as the property was not an undisclosed asset on the date of search and no paper was found during search which suggested concealment of any consideration or undisclosed investment in the property.

Being aggrieved by the above order of CIT(A), the revenue preferred and appeal before the Tribunal. Hon’ble Tribunal confirmed the order of Hon’ble CIT(A).

Being aggrieved by the order of Tribunal the revenue filed an appeal before the Hon’ble Delhi High Court under section 260A of the Act. Hon’ble High Court upheld the order of the Appellate Tribunal with the observations that in the absence of recovery of any incriminating document showing any understatement of purchase consideration or the cost of improvement of the property in question, no addition of undisclosed income in respect of said property could be made by resorting to the provisions of Chapter XIV-B.

2. Valuation of stock – To give effect to section 145A, if there is a change in the closing stock corresponding change in opening stock also to be made CIT vs. Mahavir Aluminium Ltd. [2008] 297 ITR 77 (Del)

The assessee before the Hon’ble Delhi High Court was a limited company. While finalizing the accounts for the previous year ending on 31st March, 1999, the assessee had charged modvat credit on certain inputs in its closing stock. While doing so the assessee made an adjustment, in the opening stock as on 1st April, 1998. The assessing officer rejected the claim of the assessee and observed that section 145A of the Act did not permit the assessee to make a change in the valuation of the opening stock although it permitted a change in the closing stock. On appeal the first appellate authority partially allowed the appeal of the assessee but did not admit the claim of the assessee.

Being aggrieved by the above order of the CIT(A), the assessee preferred an appeal to the Income-tax Appellate Tribunal. Hon’ble Tribunal allowed the appeal of the assessee by observing that the adjustment on account of modvat credit and excise duty can be made in the opening stock also.

Being aggrieved by the Order of the Appellate Tribunal, the revenue filed an appeal before the Hon’ble Delhi High Court under section 260A of the Act. Hon’ble High Court upheld the order of the Appellate Tribunal and held that if any adjustment was required to be made by a statute, effect should be given to it irrespective of any consequences on the computation of income for tax purposes. Section 145A begins with a non obstante clause and therefore to give effect to section 145A, if there is a change in the closing stock as on 31-3-1999 there must necessarily be a corresponding adjustment made in the opening stock as on 1-4-1998.

3. Investment of amount in fdr only to secure bank guarantee to acquire contract work – Interest accrued on deposit is business income

CIT and Another vs. Chinna Nachimuthu Constructions [2008] 297 ITR 70 (Karn)

The issue before the Hon’ble Karnataka High Court in this case was whether the interest accrued on the deposit made by the assessee to avail of the bank guarantee has to be treated as income from the business or from other sources. Learned Assessing Officer while completing the assessment has treated the interest accrued on the fixed deposits as Income from Other Sources as against Business Income treated by the assessee. The matter was carried over up to the Appellate Tribunal. Tribunal has confirmed the order passed by the Assessing Officer. Hon’ble High Court ruled in favour of the assessee and held that the assessee, being a contractor in order to secure a contract work, was required to offer a bank guarantee to the KPTCL. In order to avail of the bank guarantee, certain amounts were invested in fixed deposits on which interest accrued. The investment of amount in fixed deposits by the assessee was only to secure a bank guarantee to be offered to KPTCL in order to acquire a contract work. Therefore, the interest accrued on the deposit made by the assessee to avail of the bank guarantee had to be treated as income from business and not income from other sources.

4. Depreciation can be claimed on leased vehicles

CIT. vs. Ashok Leyland Ltd. [2008] 297 ITR 107 (Mad)

The assessee before the Hon’ble Madras High Court was a Limited Company engaged in the business of manufacture and sale of chassis for medium and heavy duty commercial vehicles, engines, etc. The assessment was completed u/s 143(2); and again after giving effect to the order in appeal. Subsequently, it was taken up for rectification under section 154 on the question of depreciation, as regards the lease of buses to MSRTC and PMTC which according to the Revenue was a sale transaction. The Assessing Officer construed that the lease agreement was a simple sale and held that the assessee was not entitled to depreciation on the vehicles. On appeal the first Appellate Authority confirmed the order passed by the Learned Assessing Officer.

Being aggrieved by the Order of the CIT(A), the assessee preferred an appeal to the Appellate Tribunal. The Appellate Tribunal allowed the appeal of the assessee and observed that leasing of vehicles was the predominant business activity carried on by the assessee. Further, the written lease agreement executed between the parties and the assessee-company had collected deposit. The lease rentals were adjusted against the deposits made by the lessee company. The Tribunal further observed that the assessee-company was assessed to Maharashtra Sales Tax on these lease transactions which clearly show the exact nature of the transactions between the assessee and MSRTC as of pure lease and not of sale.

Being aggrieved by the Order of the Appellate Tribunal, the revenue filed an appeal before the Hon’ble Madras High Court under section 260A of the Act. Hon’ble High Court upheld the order of the Appellate Tribunal and held that a reading of the lease agreement showed that the parties were clear as to what they intended to do. The fact that the lessee had paid more than 90 per cent of the cost of lease rental by way of meeting the expenditure, 90 per cent of the security deposit going in for adjustment towards lease rentals did not by itself convert the lease transaction into a sale. Consequently, the direction given by the Tribunal to grant the depreciation allowance on the leased out vehicles at the rates applicable as per the rules was correct.

5. Exemption under section 54f – Sale of residential house and investment in new house – Even though registration is not complete assessee is entitled to exemption u/s. 54F

CIT. vs. Ajitsingh Khajanchi [2008] 297 ITR 95 (MP)

The issue before the Hon’ble Madhya Pradesh High Court was whether the benefit of section 54F can be allowed even if the transfer is not evidenced by a registered deed. In this case the assessee had sold his plot of land and claimed exemption under section 54F of the Act in respect of purchase of residential flat. While completing the assessment the Learned Assessing Officer had denied the claim of the assessee by observing that the title was not vested in the assessee because the flat was not registered in his name. On appeal, the first appellate authority allowed the appeal of the assessee.

Being aggrieved by the Order of the CIT(A), the revenue preferred an appeal to the Income-tax Appellate Tribunal. The Hon’ble Tribunal dismissed the appeal of the revenue and observed that there was effective transfer of the flat in favour of the assessee, the same having been actually possessed by him. Therefore, merely on account of the absence of registered sale deed, the assessee was not disentitled to exemption under section 54F of the Act.

Being aggrieved by the Order of the Appellate Tribunal, the revenue filed an appeal before the Hon’ble Madhya Pradesh High Court under section 260A of the Act. Hon’ble High Court upheld the order of the Appellate Tribunal and held that in order to attract the application of section 54F, it is not necessary that the new house should be registered in the name of the assessee. Section 54F speaks of purchase and registration is not imperative.

6. Reassessment based on change of opinion – Not valid

M.J. Pharmaceuticals Ltd. vs. DCIT [2008] 297 ITR 119 (Bom.)

The assessee before Hon’ble Bombay High Court was a public limited company. In the profit and loss account the assessee had made provision for deferred taxation. During the course of assessment proceeding, the Learned Assessing Officer called upon the assessee to show cause as to why the provisions for deferred taxation made in the profit and loss account were not taken into account for calculating the book profit under section 115JB. In reply the assessee submitted that the provisions for deferred taxation was made in accordance of with Accounting Standard 22 and it could not be taken into account for determining the book profit as it was not covered by any of the clauses (a) to (f) set out in the Explanation to section 115JB. Thereafter the Learned Assessing Officer completed the assessment u/s. 143(3) without making any addition to the book profit on account of provisions for deferred taxation. Subsequently, notice u/s. 148 was issued on the ground that that the book profits of the assessee had been under assessed. The assessee objected to the re-opening, however the same has been rejected by the Learned Assessing Officer.

Being aggrieved by the above order the assessee preferred Writ Petition before Hon’ble Bombay High Court. Hon’ble High Court allowed the writ petition and held that the reasons recorded by the Assessing Officer for reopening the assessment showed that neither the explanation given by the assessee and accepted by the Assessing Officer was found to be erroneous nor was there any other material/information on the basis of which a prima facie opinion was formed to the effect that by not increasing the book profit with the amount of the provision for deferred taxation, income chargeable to tax had escaped assessment. Thus, the reopening of the assessment was not based on any material but merely on change of opinion without any basis. The notice under section 148 was not valid and was liable to be quashed.