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Direct Taxes
Supreme Court
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Exporting goods through an exports house was
eligible for deduction u/s. 80HHC (IA)
Commissioner of Income-tax,
Thiruvananthapuram vs. Baby Marine Exports [290 ITR 323, (SC)]
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The assessee in the instant case had
entered into contracts with the export houses, whereby, as and when the
assessee sold the goods or merchandise to an exports house, as consideration
for the sale, it received the entire F.O.B. value of the exports plus the
exports house premium of 2.25 per cent of the F.O.B. value. The assessee had
shown the export premium as part of sale consideration having an element of
turnover and not commission or service charges.
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The Assessing Officer rejected the claim
of the assessee by holding that it was clearly a "commission or service
charges” for routing the exports through the export houses who receive
import licences required by them.
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The assessee succeeded in his claim up
to the High Court. The revenue took the matter to the Supreme Court. The
Supreme Court decided the matter in favour of the assessee observing that on
a plain construction of section 80HC(1A), the assessee was clearly entitled
to claim deduction of the premium amount received from the export house in
computing the total income. The export house premium can be included in the
business profit because it was an integral part of business operation of the
assessee which consisted of sale of goods by the assessee to the export
house.
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Prosecution against a company or its
directors in default of Deduction of Tax at Source
Madhumilan Syntex Ltd. and Others vs.
Union of India (290 ITR 199, SC)
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1. For the assessment year 1989-90,
returns were submitted by the company on December 29, 1989. On verification
of the returns, it was found that though an amount of Rs. 1,29,348 was
deducted by the company as tax deducted at source (“TDS” for short), it was
not credited by the company in the account of the Central Government as
required by sections 194C and 200 of the Income-tax Act, 1961 read with rule
30 of the Income-tax rules, 1962. It was, however, not in dispute that the
amount of TDS was credited by the company with interest later on. But there
was delay on the part of the company in depositing such amount.
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The case of the assessee was that it was
not a case of “no payment” of TDS. The amount of tax along with interest had
been paid and the statutory provision had been complied with. There was some
delay in receiving the loan from the Industrial Development Bank of India
(“the IDBI”) due to which TDS could not be paid in time.
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The assessee was unsuccessful in his
attempt get the proceedings against the company and its principal officers
quashed and ultimately took the matter to the Supreme Court and raised the
various legal contentions.
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The Supreme Court held that it cannot be
said that by ordering charges to be framed, any illegality had been
committed by the trial court.
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After considering the provision of
section 278B which deal with offences by the companies, the Supreme Court
held it was clear that wherever a company was required to deduct tax at
source and to pay it to the account of the Central Government, failure on
the part of the company in deducting or in paying such amount was an offence
under the Act and has been made punishable. It, therefore, cannot be said
that the prosecution against a company or its directors in default of
deducting or paying tax was not envisaged by the Act.
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It further held that it cannot be
successfully contended that prosecution could not have been ordered against
the company and no charge could have been framed.
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It further held from the statutory
provisions, it was clear that to hold a person responsible under the Act, it
must be shown that he/she is a “principal officer” under section 2(35) of
the Act or is “in charge of” and “responsible for” the business of the
company or firm. It was also clear to that where necessary averments have
been made in the complaint, initiation of criminal proceedings, issuance of
summons or framing of charge, cannot be held to be illegal and the court
would not inquire into or decide the correctness or otherwise of the
allegations levelled or averments made by the complainant. It is a matter of
evidence and an appropriate order can be passed at the trial.
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The Supreme Court observed
"it was stated that the appellants were
considered as principal officers. In the above view of the matter, in our
opinion, the contention of learned counsel for the appellants cannot be
accepted that the complaint filed against the appellants, particularly
against appellants Nos.2-4 is ill-founded or not maintainable.” … Once the
statute requires payment of tax and stipulates the period within which such
payment is to be made, the payment must be made within that period. If the
payment is not made within that period there is default and appropriate
action can be taken under the Act.”
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Seizure of a diary leading to assessment of
deemed dividend under section 2(22)(e)
Commissioner of Income-tax vs. Mukundray K.
Shah 290 ITR 433 (SC)
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On a search being conducted a diary was
seized. The diary contained details of investments of the assessee of Rs.
26.35 crores However on the basis of the said diary and the cash flow chart,
the Assessing Officer concluded that Rs. 5.99 crores was paid by MKSEPL
(including SCPL) and Rs. 94 lakhs by MKTPL in the accounting year 1999-2000
to MKF respectively for the purchase of 9 per cent RBI Relief Bonds by the
assessee. In the circumstances, by the assessment order, the Departmental
assessed the said sum as deemed dividend in the hands of the assessee under
section 2(22)(e) of the Act.
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In the assessment proceedings before the
Assessing Officer it was held that the said company deliberately refused to
distribute the said accumulated profits as dividends to its shareholders and
instead adopted the device of advancing the said accumulated profits as loan
to the assessee who was the shareholder of the said company. According to
the Assessing Officer, it was a device to evade payment of tax on
accumulated profits.
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The Assessing Officer held that the
alleged repayments by MKSEPL (which had accumulated profits) were adopted as
a device of advancing the said accumulated profits as loan to the assessee
who was a shareholder of the company.
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The Appellate Tribunal, on appeal by the
Department, held that section 2(22)(e) was attracted : SCPL had no
independent existence in law in January/February 2000 when the payments were
made by the firms since it had merged with effect from May 18, 1998; that
all payments should be taken to have originated from MKSEPL; that the
assessee had more than 10 per cent of the total voting power in MKSEPL; the
accumulated reserves of MKSEL were Rs. 55 crores; that MKSEPL made the
payment to the two firms for the benefit of the assessee who thereafter
bought the Bonds; that it was MKSEPL which made the disbursement through the
two firms. On appeal, the High Court reversed the decision of the Appellate
Tribunal.
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The revenue preferred an appeal to the
Supreme Court. Allowing the appeal of the revenue the Supreme Court held,
“we find merit in this civil appeal. The companies having accumulated
profits and the companies in which substantial voting power lies in the
hands of the person other than the public (controlled companies) are
required to distribute accumulated profits as dividends to the shareholders.
In such companies, the controlling group can do what it likes with the
management of the company, its affairs and its profits. It is for this group
to decide whether the profits should be distributed as dividends or not. The
declaration of dividend is entirely within the discretion of this group.
Therefore, the Legislature realised that though funds were available with
the company in the form of profits, the controlling group refused to
distribute accumulated profits as dividends to the shareholders but adopted
the device of advancing the said profits by way of loan to one of its
shareholders so as to avoid payment of tax on accumulated profits. This was
the main reason for enacting 2(22)(e) of the Act.”
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It further held "In the present case,
the most important aspect, which has not been considered by the High Court,
was that withdrawal of money by the assessee from his capital account, in
the books of MKI, during the financial year 1999-2000 led to debit balance
of Rs.8.18 crores as on March 31, 2000. To this extent, the finding given by
the Assessing Officer and by the Tribunal remains unchallenged. …The
impugned assessment order was passed under section 158BC. That assessment
originated on account of a search conducted under section 132(1) of the Act.
In that search the diary "ML-20” was identified. That identification was the
starting point of connected enquiries resulting in the detection of
undisclosed income of Rs. 5.99 crores. In other words, undisclosed income,
in the nature of deemed dividend, did not arise from any scrutiny
proceedings, tax evasion petitions, surveys, information received from
external agency, etc. The undisclosed income was detected by the Assessing
Officer wholly and exclusively as a result of a search and therefore, the
Department was right in invoking the provisions of Chapter XIV-B”
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Whether the additional amount paid to
Excise authorities unmatured arrack was deductible as a business expenditure
Commissioner of Income-tax and Another vs. Distillers Co. Ltd. [2007] 290 ITR
419 (SC)
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The
assessee carried on the business of arrack bottling, manufacture of
industrial alcohol and their marketing obtaining a licence from the State of
Karnataka. Under the Karnataka Excise Rules it was provided that “arrack
after blending, shall be matured in such manner and for such period as may
be specified by the Commissioner from time to time”. Under this rule the
Commissioner of Excise issued a circular stating that “the arrack shall be
matured in wooden vats for a minimum period of 15 days before bottling”. The
rule also provided that, in case the bottling unit for any reason beyond its
control was not able to mature the arrack, the unmatured arrack might be
bottled with the prior permission of the officer-in-charge and that the
penalty for supplying unmatured arrack would be 29 paise per bulk litre. The
assessee obtained permission in terms of the circular as it was not in a
position to comply with the first part thereof and paid certain additional
amounts and claimed deduction thereof from the gross income.
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The
assessing authority denied allowance of those amounts on the ground that
they were in the nature of penalty.
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When the
matter was ultimately taken by the revenue to the Supreme Court, the Supreme
Court relied upon its earlier decision which had considered as to whether a
particular amount paid by the assessee is in the nature of penalty or not.
After considering the ratio of its decision in CIT vs. Ahmedabad Cotton Mfg.
Co.Ltd. (205 ITR 163) and CIT vs. Mandya Paper Mills Ltd. (150 ITR 26), the
Supreme Court held the contention “ that the amount paid by the assessee
towards shortfall of maturity period should be treated as penalty and as
such not allowable as expenditure has no merit and accordingly the said
contention is hereby rejected.”
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It
further held that the amount paid by the assessee to the Excise Commissioner
for not affixing the labels to the bottles was not towards the cost of the
labels. It held, “Therefore, in the absence of labels not being available,
if the assessee was made liable to pay the amount to the Department towards
the cost of the labels for getting the bottled arrack released, it is not
possible to take the view that such payment was made by way of fees as
contended by Sri Seshachala. The language employed in the rule makes it
explicit that the amount required to be paid to get the bottled arrack
released for sale without labels is by way of cost of labels to the
Government. When the language in the rule in explicit terms provides that
the amount required to be paid is towards the cost of labels and the rule
also imposes an obligation on the licensee to get the labels affixed at his
cost in the presence of the Warehouse Officer, it will not be correct to
consider that the amount paid is not as a cost towards the value of labels,
but as a fee.”
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