Reepal Tralshawala,
Chartered Accountant

REPORTED DECISIONS

1. Deductions – Sec. 80-IA – Manufacture or production – Activity of annealing and straightening of steel rods and annealing of steel rod coils as per order of customer – Is a manufacture - Eligible for deduction u/s. 80-IA – A.Ys. 1995-96 to 1997-98

Anil Steel Traders vs. DCIT (2007) 111 TTJ 747 (Ahd); Order dated 3-3-2005

Activity of annealing of steel rods is an activity of manufacturing and therefore deduction under section 80-IA is allowable.

2. Exemption – S. 10(33) – Deemed Dividend u/s.2(22)(e) – Not exempted u/s. 10(33) – A. Y. 1995-96 & 1996-97
   
   ITO vs. Kalyan M. Gupta (2007) 111 TTJ 1005 (Mum); Order dated 24-7-2006

There is no ambiguity in provisions of section 10(33), which clearly stipulate that dividends referred to in section 115-O shall be exempt from the charge of tax. Section 115-O is part of Chapter XII-D, which is headed “Special provisions relating to tax on distributed profits of domestic companies”. The Explanation at the end of Chapter XII-D opens with the words "for the purpose of this Chapter" and thus applies to the whole of the Chapter. By virtue of the Explanation, deemed dividend referred to in section 2(22)(e) has been excluded from the ambit of Chapter XII-D. Tax is not levied on the company with regard to deemed dividend and consequently, the exemption provided under section 10(33) is not applicable to “deemed dividend” referred to in s. 2(22)(e).

3. Income from House Property – Ss. 22, 23(1)(a) & 23(1)(b) – Property let out for one day does not have character of ‘let out property’ – Annual value to be determined on the basis of Municipal Valuation – A.Ys. 2000-01 & 2001-02

Ajay Jain vs. ACIT (2007) 111 TTJ 994 (Hyd); Order dated 21-6-2006

A combined reading of s. 23(1)(b) and Expln. 1 thereunder, indicates that they deal with the determination of annual value of properties which are not under self-occupation, but let out. When the property, by way of a device is let out only for one day in a year, it cannot be said that the character of the property is that of a ‘let out property’, ignoring the predominant character of vacancy of the property of 364 days. Assessee, by letting out his property for one day in a year on a rent of Rs. 1,000/- cannot determine the annual rent at Rs. 3,65,000/- by invoking Expln. 1 to s.23(1)(b) and in such a case municipal valuation of Rs. 2,068/- shall be taken as annual value.

4. Income from House Property – Ss. 22, 23(1)(a) & 23(1)(b) – Annual value – Element of notional income by calculating interest on interest free deposit could not be considered – A.Y. 1998-99

Midland International Ltd. vs. DCIT (2007) 109 ITD 198 (Del); Order dated 12-1-2007

The revenue under the provisions of the Act can tax the rental income of the property under the head ‘Income from house property’ but the same cannot be done by AO by considering the element of notional income by way of interest on interest free security deposit received by the owner of the property. This certainly cannot be a relevant factor to evaluate the fair rent of the property because a notional income for such purposes was never contemplated under this section.

5. Penalty – S. 271(1)(c) – Mere mentioning at footnote of assessment order for initiation of penalty proceedings – Not sufficient – Recording of satisfaction necessary in the body of the assessment order – A.Y. 1998-99

Narita Investments (P.) Ltd. vs. CIT (2007) 17 SOT 428 (Mum); Order dated 26-6-2007

Recording of satisfaction for initiating penalty proceedings under section 271(1)(c) of the Act should be properly worded in the assessment order. If in the entire body of the assessment order, no satisfaction regarding any condition which attracted penalty under section 271(1)(c) was recorded, and the AO had simply added a footnote in the assessment order with a direction to issue penalty notice under section 271(1)(c), that narration did not mean to be a satisfaction of the AO about the existence of any of the conditions which attracted penalty under section 271(1)(c). Thus, the penalty levied was deleted for want of satisfaction.

6. Search & Seizure – Block assessment – Sec. 158BD – Validity – Notice u/s. 143(2) not served upon assessee within prescribed period of one year – Assessment is null and void, liable to be quashed – Block period ending on 2-11-1999

ACIT vs. R.P. Singh (2007) 111 TTJ 880 (Delhi); Order dated 7-9-2007 [Also refer – ACIT vs. Aurangabad Holiday Resorts (P) Ltd. (2007) 111 TTJ 741 (Pune); Order dated 26-9-2007]

Notice under section 143(2) not having been served upon the assessee within the prescribed period of one year, block assessment order was null and void and liable to be quashed.

7. Search & Seizure – Block assessment – Sec. 158BD – Recording of satisfaction – Not merely subjective satisfaction but based on material seized in search action – Further recording of satisfaction before passing order in case of person searched – Block period ending on 14-9-1999

ACIT vs. Kishore Lal Balwant Rai (2007) 17 SOT 380 (Chd); Order dated 29-6-2007 [Also refer – ACIT vs. R.P. Singh (2007) 111 TTJ 880 (Delhi); Order dated 7-9-2007]

The satisfaction contemplated under section 158BD to the effect that any undisclosed income belongs to any person other than the person with respect to whom search was made under section 132 or requisition made under section 132A, is to be recorded in writing by the Assessing Officer of the person with respect to whom search under section 132 or a requisition under section 132A is made. Further, this satisfaction is required to be recorded not later than the finalization of assessment of undisclosed income of the person put to search or requisition. The satisfaction contemplated u/s. 158BD is not merely subjective satisfaction but is required to be based on the material seized u/s. 132 or requisitioned u/s. 132A. The Assessing Officer is required to sift, examine, analyse and investigate the material before him and only on the basis of the result thereon, a satisfaction has to be recorded that any undisclosed income belongs to any person other than the person with respect to whom search u/s.132 or requisition u/s. 132A has been made. The nature of the satisfaction contemplated u/s. 158BD is of a level much higher than what an Assessing Officer acquires in order to invoke section 147/148.

8. Re-assessment – Sec. 148 – Validity – Notice u/s.148 issued to individual however assessment made of HUF – AO had no jurisdiction to assess HUF – Defect of jurisdiction could not be cured by consent of assessee – Reassessment not valid – AY 1996-97

Suraj Mal HUF vs. ITO (2007) 109 ITD 327 (Delhi) (TM); order dated 11-7-2007

The Act recognizes status of an HUF different from individual status of karta of the HUF. Two are treated as different legal entities. Therefore, it is necessary that notice under section 148 should be sent in a correct status because jurisdiction to make assessment is assumed by issuing valid notice. Thus, after having issued notice u/s.148 to the individual, the AO had no jurisdiction to assess HUF of the assessee. That defect of jurisdiction could not be cured by obtaining consent from the assessee to assess him in the status of HUF. The reassessment was therefore liable to be cancelled.

9. Remission or cessation of trading liability – Sec. 41(1) r.w.s. 28(iv) – Machinery sold on behalf of foreign company – Sale proceeds shown as outstanding liability to the foreign company in the books of account – No deduction claimed in the books of account in respect of the outstanding liability carried forward from year to year – Not income of assessee either u/s.41(1) or 28(iv) – AY 1997-98

ITO vs. Ahuja Graphic Machinery (P.) Ltd. (2007) 109 ITD 71 (Mum) (TM); order dated 31-5-2007

The transaction was between the principal and the agent and the asset belonged to the principal and deduction claimed in the profit and loss account for the transaction entered into in this respect. The transaction was to be accounted to the credit of the supplier of the machinery, who was the original owner of the property. If the original owner did not claim the amount due to him, it might be anything but not a cessation of liability of the type which could be assessed u/s.41(1). Section 28(iv) does not apply to the receipts in cash. The amount received on sale of machinery did not represent the income not credited to the profit and loss account in the earlier years. It was a case of sale of somebody’s asset and not even a part of its regular business receipts. Thus, provision of section 28(iv) could not be applied when the assessee had been acknowledging the outstanding amount as liabilities to its principal from year to year in its balance sheet.

10. Wealth Tax – Sec. 2(ea) – Assets – For claiming exemption under clause (5) to s.2(ea)(i), nature & purpose of use of property alone is material, irrespective of whether it is used by assessee himself or anybody else for purpose of any business or profession carried on by them – Any property in clause (5) would include all or some of them or one of them and not only one property – A.Y. 1999-2000 to 2002-03

Satvinder Singh vs. DCIT (2007) 109 ITD 241 (Pune); order dated 29-9-2006

Clause (5) to section 2(ea)(i) of W.T. Act covers any property in the nature of commercial establishments or complexes and therefore it is not necessary that such property should be occupied by the assessee himself. The nature and purpose of use of the property is material, irrespective of the fact whether it is used or occupied either by the assessee himself or anybody else for the purpose of any business or profession carried on by them. For the purposes of clause (5), a property must be of commercial complex or establishment in nature where business or trade is being carried on and the property must also be used for the purpose of any business or trade as well. If the assessee owns more than one property in the nature of commercial establishment or complexes, the exemption shall be available to all such properties and cannot be restricted to any one of them.