1. Appeal – Memorandum of appeal signed by the assessee’s advocate – Curable Defect

CIT vs. Hope Textiles Ltd. [2006] 287 ITR 321 (M. P.)

The assessee was served with an Assessment Order which was adverse to it. Thus, an appeal was filed before the CIT(A). The Memorandum of Appeal was signed by the assessee’s advocate. The CIT(A) found the appeal to be defective and dismissed the same as not maintainable. The assessee challenged the CIT(A) order before the Appellate Tribunal. The Appellate Tribunal allowed the assessee's appeal and held that the CIT(A) should have given an opportunity to the assessee to cure the defect. The Department being aggrieved by the Appellate Tribunal’s Order preferred an appeal before Hon’ble High Court under section 260A of the Act.

The Hon’ble Court upheld the Appellate Tribunal’s Order and observed that it should always be the endeavour of the courts/ Tribunals who are invested with the power to decide the rights of the parties to do substantial justice between the parties and not to penalize them for their faults while prosecuting their lis. The requirements of Rule 45 read with section 140 of the Income-tax Act, 1961, are not mandatory but they are directory in nature.

2. Loss on purchase and sale of securities – Provisions of section 94(7) are not retrospective

CIT vs. Vikram Aditya & Associates P. Ltd. [2006] 287 ITR 268 (Del.)

The assessee purchased units of mutual funds on February 9, 2001, and sold them on February 11, 2001. Although it received the declared dividend of Rs. 43,54,838 it suffered an overall loss. The assessee adjusted its short-term capital loss against long-term capital gain and the return was accepted by the Assessing Officer under section 143(3) of the Income-tax Act, 1961. The Commissioner sought to revise the order. He described the transaction of the assessee as “dividend stripping”. The transaction in which an investor buys stocks or units of mutual funds which is before the record date of dividend and these units are held only long enough to receive the dividend and to sell them subsequently is detrimental to the interest of revenue and is intended to evade tax. The Tribunal set aside the order of revision.

The Department challenged the order of the Appellate Tribunal by filing an appeal under section 260A of the Act. The Hon’ble High Court dismissing the appeal and held that disallowance of a loss under section 94(7) of the Act in respect of such a transaction was effective only from the assessment year 2002-03, while the year in question was assessment year 2001-02. There was, therefore, a gap in the law which had been exploited by the assessee. The Legislature had recognized the lacuna and taken steps to rectify it. But that did not mean that the decision of the Assessing Officer based on the law as it was could be said to be erroneous. The order of revision was not valid.

3. Service of notice under section 143(2) within the statutory period is mandatory – Notice issued after expiry of period of limitation – Assessment void ab initio

DCIT vs. Mahi Valley Hotels & Resorts [2006] 287 ITR 360 (Guj.)

In this case, the notice under section 143(2) for the A. Y. 1997-98 was issued on 20-8-1998 whereas the returns were filed on 30-3-1997. Thus, the notice was issued beyond the period of one year from the end of the month in which returns were filed. Admittedly the notice was issued beyond the period prescribed in the proviso to section 143(2). The Assessment Order was quashed by the CIT(A) and the same was confirmed by the Appellate Tribunal. The Department filed an appeal before the Hon’ble High Court and contended that the assessee has not challenged the jurisdiction before the Assessing Officer and by participating in the assessment proceedings there was acquiescence and waiver on the part of the assessee which would result in the assessment being valid in law.

The Hon’ble Court rejected the first contention with the observations that the challenge was raised for the first time before the Commissioner (Appeals) and not before the Assessing Officer and hence could not have been entertained does not merit acceptance. The position in law is well settled that the Commissioner (Appeals) has the same powers that of an Assessing Officer has and his powers are co-extensive with those of the Assessing Officer while determining the correct income liable to tax in accordance with the provisions of the Act. Even otherwise, the issue raised is purely a legal issue based on the provisions of the Act and the assessee can raise the same at any stage.

The Hon’ble Court rejected the second contention also and held that on a plain reading of the language in which the proviso is couched it is apparent that the limitation prescribed therein is mandatory, the format of the provision being in negative terms. The position in law is well-settled that if the requirements of a statute which prescribes the manner in which something is to be done are expressed in negative language, that is to say, if the statute enacts that it shall be done in such a manner and no other manner, such requirements are, in all cases absolute and neglect to attend to such requirement will invalidate the whole proceeding.

4. Date of dispatch cannot be the deemed date of service of the notice under section 143(2)

CIT vs. Vardhman Estate Pvt. Ltd. [2006] 287 ITR 368 (Delhi)

The notice under section 143(2) was to be served on or before 31-10-2002 to initiate the assessment proceedings. The notice was served through the speed post on 1-11-2002. The Assessment Order was quashed as bad-in-law by the CIT(A) and the action of the CIT(A) was upheld by the Appellate Tribunal. The Department carried the matter before the High Court. One of the contentions of the Department was that the date of dispatch may be treated as the deemed date of service. The Hon’ble Court rejected the contention of the Department.

5. Date of issuance is not the date of service of the notice under section 43(2)

CIT vs. Bhan Textiles Pvt. Ltd. [2006] 287 ITR 370 (Delhi)

The assessee had filed the return on November 20, 1996, and the time stipulated under the proviso to section 143(2)(ii) of the Income-tax Act, 1961, for service of notice expired on November 30, 1997.

Notice under section 143(2) though issued on November 27, 1997 and dispatched on November 28, 1997, was actually received by the assessee only on December 1, 1997. Accordingly to the provision, the notice must be served on the assessee. Therefore, the assessment was not valid. The Hon’ble Court observed that there is a clear distinction between “issuance of notice” and “service of notice”.

6. Interest under section 201(1A) cannot be levied for failure to deduct tax when in the hands of the payee the assessment has resulted into refund due to tds

CIT vs. Rajasthan Rajya Vidyut Prasaran Nigam Ltd. [2006] 287 ITR 354 (All.)

The Assessing Officer levied interest under section 201(1A) for short deduction of tax at source. However, the levy of interest was deleted by the CIT(A) on the ground that in all the cases, the recipient of the income had claimed refund, which had arisen due to tax deducted at source. The CIT(A)’s order was confirmed by the Appellate Tribunal. On an appeal by the Department the Hon’ble Court held that where the Tribunal had found that in all the cases, the recipient of the income had claimed refund, which had arisen due to tax deducted at source. Thus, the Hon’ble concurred with the authorities below:

That interest could not be charged under section 201(1A) of the Income-tax Act, 1961.

7. Depreciation – Assets eligible for 100% depreciation – Used for less than 182 days – Eligible to 100% depreciation

CIT vs. Dhall Enterprises & Engineers Pvt. Ltd. [2006] 287 ITR 435 (Guj.)

The assessee, in the assessment year 1995-96, purchased crates, the cost of the single unit of crates was less than Rs. 5,000/-. The crates were used for less than 182 days. The assessee claimed the deduction at 100% as per the provisions of first proviso to section 32(1)(ii). The assessing officer restricted the claim to 50% on the ground that the depreciation allowable under first proviso has to be calculated as per the provision third proviso. The assessee succeeded before Appellate Tribunal.

The Hon’ble High Court confirmed the order of the Appellate Tribunal with the observation that the legislative intent in introducing the first proviso to section 32(1) of the Income-tax Act, 1961, was to ensure that a tax-payer is not put to the hassle of detailed calculation and accounting of depreciation allowance in respect of machinery or plant having small cost. As against that the legislative intent in introducing the third proviso was to obviate the practice adopted by the tax-payers of claiming full depreciation on an asset even if the asset is acquired towards the end of the year and used for only one day during the previous year resulting in excessive allowance of depreciation in the year in which the asset is first put to use, thereby depleting the taxable profits of that year by an amount which bears no relationship to the user of that asset for earning that income. The scheme therefore is that in cases of assets whose value does not exceed the prescribed monetary ceiling, neither the tax-payer nor the assessing authority must be called upon to undertake an elaborate exercise to compute the depreciation allowance by entering into detailed calculation followed by accounting entries from year to year. Therefore, to project the third proviso is normally used as a legislative tool to carve out an exception from the main provision which precedes the proviso. The first proviso makes it clear that in the case of the machinery or plant whose actual cost does not exceed the specific monetary ceiling, such asset would not enter the block of assets and hence there would be no occasion to work out such percentage of the written down value/actual cost. The third proviso itself requires to restrict the depreciation allowance at 50 per cent. of the amount calculated at the percentage prescribed under clause (ii) of sub-section(1) of section 32 of the Income-tax Act, 1961. The asset does not enter the block of assets and hence, there is no question of working out the prescribed percentage. Therefore, on this count also the third proviso cannot be invoked and applied because it does not talk of restricting the value at 50 per cent. of the actual cost. In the case of plant and machinery whose cost does not exceed Rs. 5,000. the third proviso to section 32(1)(ii) of the Act would not be applicable since such assets are covered specifically under the first proviso to the said section and the entire actual cost has to be allowed as a deduction, subject to the assessee fulfilling all over requisite conditions.

8. Extraction and processing of mineral ore amounts to production of article or thing for the purpose of section 32A

General Contracts Co. vs. CIT [2006] 287 ITR 416 (Guj.)

The assessee was a firm carrying on work for Gujarat Mineral Development Corporation. The assessee was engaged in the work of mining and excavation of lignite, including removal of overburden. The assessee claimed investment allowance in the assessment years 1986-87 and 1987-88 on the total cost of plant and machinery installed or put to use in the respective accounting years. The assessing officer held that the assessee was not entitled to investment allowance and this was upheld by the Tribunal.

The assessee preferred a reference to Hon’ble High Court under section 25(1). The Hon’ble Court held that it was never in dispute that the plant and machinery owned by the assessee were wholly used in mining and excavation and the said activity was the active business of the assessee. The precondition of section 32A that the plant and machinery specified in sub-section (2) is owned by the assessee and is wholly used for the purpose of business, was fully satisfied. The assessee was entitled to investment allowance.

CIT vs. Sesa Goa Ltd. [2004] ITR 331 (SC); [2004] 3 RC 645 (SC) was applied.