Auto Centre vs. State of Uttar Pradesh & Others (2005) 278 ITR 291 (All)

The assessee before the Hon’ble Allahabad High Court was a partnership firm. The Appellate Tribunal had rejected assessee’s application for condonation of delay of 160 days in filing the appeal before it. The assessee carried the matter to the High Court in an appeal.

The Hon’ble Court directed the Appellate Tribunal to condone the delay and observed that, "In matters of condonation of delay a pragmatic view should be taken and there should be a liberal approach. The law of limitation is enshrined in the maxim interest reipublicae ut sit finis litium (it is for the general welfare that a period be put to litigation). Rules of limitation are not meant to destroy the rights of the parties, rather the idea is that every legal remedy must be kept alive for a legislatively fixed period of time.

2. Deductions allowable while computing capital gains – Section 48(1) – Expenditure incurred to discharge liability towards the bank is allowable as deduction

Gopee Nath Paul & Sons & Anr. vs. Deputy Commissioner of Income-tax (2005) 278 ITR 240 (Cal.)

The assessee, a partnership firm, before the Hon’ble Calcutta High Court had tried to transfer it’s business as a going concern. However, the same could not be done as several assets of the assessee firm were hypothecated to the bank and it was facing several suits for recovery. On 27th April, 1989, the Hon’ble High Court directed the assessee to deposit a sum to transfer the assets unhindered. The sale took place and the purchaser paid the amount determined by the Court directly to the bankers. The amount paid to the bank was claimed as deduction under section 48(1). The same was rejected. The matter travelled to the Hon’ble High Court.

The Hon’ble Court observed that, section 48(1) of the Income-tax Act, 1961 while providing for computation of capital gains permits in clause (i) deduction of the "expenditure incurred wholly and exclusively in connection with such transfer." The expression "in connection with such transfer" is wider than the expression "for the transfer". Any amount, the payment of which is absolutely necessary to effect the transfer will be an expenditure covered by clause (i) of section 48(1). In other words, if without removing any encumbrance, sale or transfer could not be effected, the amount paid for
removing that encumbrance will fall under clause (i).

The Hon’ble Court held that the sale consideration receivable by the assessee was less than the liability to the bank. Thus meeting this liability of one of the firms, when the entire assets were being sold, was an absolute necessity to effect the transfer. In other words, it was an encumbrance without removing which the sale or transfer could not be effected and the amount spent for removing this encumbrance would definitely attract clause (i) of section 48(1).

3. Alternative remedy – Writ Petition – Article 226 of the Constitution – Revision not an efficacious remedy – Waiver of interest – Rule 40(1) of Income Tax Rules, 1962 – Delay in assessment due to accounts being complicated and earlier years assessment not being completed – Delay not due to any default on the part of the assessee – Eligible for waiver of interest

Pieco Electronics & Electricals Ltd. vs. DCIT (2005) 278 ITR 319 (Cal.)

The assessee by way of Writ Petition challenged the order rejecting its application for waiver of interest levied under sections 215, 216 and 217. The Hon’ble Court while dealing with the preliminary objection of the Department observed that revisional jurisdiction would not be an efficacious and alternative remedy to discourage the writ court to entertain the writ petition. An efficacious and alternative remedy would be such effective machinery that the litigant can agitate all points both on fact and law. The right of appeal is one such alternative remedy as in appellate jurisdiction one can raise all points regarding facts, unlike revisional jurisdiction. Even an appeal cannot be said to be an alternative effective remedy in all situations.

On the merits, the Hon’ble High Court interpreted the provisions of Rule 40(1) and observed that for exercise of jurisdiction under rule 40(1) of the Income-tax Rules, 1962, the only criterion to waive or reduce interest chargeable under section 215 or 217 of the Income-tax Act, 1961, as the case may be, is delay in assessment not being attributable to the assessee. On a comparative reading of sub-rule (1) and sub-rule (5) of rule 40, it is clear that in the case of sub-rule (5) unlike sub-rule (1) the appropriate official is required to exercise discretion, whereas under sub-rule (1) no discretion is left. The only pre-condition is ascertainment of no fault or failure on the part of assessee, and once it is done exercise of power under rule 40, sub-rule (1), is a matter of course. It is also a duty cast upon the officials to see whether any fault lies with the assessee in the matter of assessment.

4. Remuneration to the Director – Business expenditure – Section 37 and section 40A(5) – Sanction given after completion of assessment – Remuneration is allowable deduction as sanction relates backs to date of application

Mahindra & Mahindra Ltd. vs. CIT [2005] 278 ITR 138 (Bom)

An amount of Rs. 1,46,027/- paid to the director of the assessee-company was disallowed for the assessment year 1984-85 because sanction for the payment had not been obtained from the Central Government. The application for sanction was kept pending since on a challenge to the guidelines framed by the Central Government under the provisions of the Companies Act were struck down by the Delhi High Court. Against the Delhi High Court’s decision special leave to appeal was granted to the Union of India. By the time the matter came for decision before the Supreme Court, fresh guidelines were issued. All applications pending for grant of approval were deemed to have been approved in which the quantum of remuneration paid or payable did not exceed the 1969 guidelines. The Government of India by letter dated July 29, 1994, communicated its approval to the pending proposal of the assessee for a period of five years with effect from November 1, 1980, to October 31, 1985.

The Hon’ble High Court held that the approval would relate to the date of application made for that purpose. In view of this subsequent event, the disallowance was not justified.

5. Charitable Trust – Section 11 – Loans given to economically weaker persons for housing – Some written off subsequently – Writing off is application of income for charitable purposes

CIT vs. Sacred Heart Church (2005) 278 ITR 180 (Guj)

The assessee, a public charitable trust, filed its return of income declaring a deficit of
Rs. 1,40,760. The trust had claimed deduction on account of loans written off amounting to
Rs. 1,65,201/- against the current year’s income and accordingly, had arrived at the said deficit. As per the assessee the said amount had been advanced as loan to members of the weaker section of the public in the earlier years, under a self housing scheme formulated by the assessee-trust. In the year under consideration it was found that the chances of recovery of the said lean amount were remote, hence, the said amount was transferred to the expenditure account and claimed as deduction.

The assessee claimed that the said amount had been applied towards the objects of the assessee trust. The Assessing Officer held that the said amount had not been utilized for the purposes of the objects or against the current year’s income. Accordingly, he disallowed the amount of Rs.1,65,201/- as an item of expenditure.

The first Appellate authority rejected assessee’s contention. The Appellate Tribunal held that the write off of the loans is application of income towards the object of the trust.

The Hon’ble High Court while disposing of the Reference Application preferred by the Department u/s 256(1) observed that the adjustment of the expenses incurred by a trust for charitable and religious purposes in an earlier year against the income earned by the trust in the subsequent year would amount to applying the income of the trust for charitable trust and religious purposes in the subsequent year in which such adjustment had been made and would have to be excluded from the income of the trust under section 119(1)(a) of the Income-tax Act, 1961.

UNREPORTED CASES

6. Auction for recovery of tax – Proclamation of Sale – Time limit provided under rule 68B – While computing the time limit the period when the Miscellaneous Application was pending is not to be excluded

Shri M.U. Joshi, Mumbai vs. The Tax Recovery Officer & Anr. (Bom), W.P. No. 1406 of 2004, dated 20th September, 2005

Appeals filed by the firm against the said assessment orders were dismissed by CIT(A) and further appeals filed by the firm were also dismissed by the ITAT by a common order dated 15-6-1994. The order passed by the ITAT on
15-6-1994 had attained finality. Pursuant to the order the Department started recovery proceedings.

On several occasions, the Revenue attempted to auction the attached flat but the same did not materialize. Ultimately, by a proclamation of sale dated 23rd February, 2004, the tax recovery officer fixed the auction of the attached flat on 30th March, 2004 for recovery of Rs. 5,11,73,470/- including costs and interest. The assessee objected to the said auction on the ground that the limitation prescribed under Rule 68B of the Second Schedule to the Income-tax Act for sale of the attached immovable property has already expired and, therefore, the property of the assessee cannot be auctioned and that the attachment levied is liable to be lifted forthwith. Rejecting the objection of the assessee, the tax recovery officer on 30-3-2004 confirmed the sale of the attached flat for Rs. 10,00,000/- in favour of the Government of India under Rule 63(1) of the Second Schedule to the Income-tax Act. Challenging the aforesaid confirmation of sale, assessee filed Writ Petition under Article 226 of the Constitution of India before Bombay High Court.

The Hon’ble Court allowed the petition and observed that, the period of limitation under Rule 68B(1) for sale of the attached property commences from the date on which the demand of any tax interest, fine, penalty or any other sum for the recovery of which the immovable property has been attached has become conclusive under the provisions of section 245 I or under the provisions of Chapter XX of the Income-tax Act.

In the present case, the ITAT by its order dated 15-6-1994 confirmed the demand raised against the firm. It is not in dispute that the firm has not initiated any further proceedings and thus the demands raised against the firm have attained finality on 15-6-1994. Therefore, 15-6-1994 would be the starting point for computing the limitation prescribed under Rule 68B.

7. Business expenditure – Special provision toward termination of employees – Assessee in the year in which notice for termination was issued

The Commissioner of Income Tax, Mumbai
vs. Mahindra & Mahindra Ltd. (Bom) I.T. Reference No. 179 of 1988 dated 30th September, 2005

On 20th September, 1975 the company issued notice terminating the services of certain officers effective from 1st January, 1976. In effect the services of 75 officers were terminated from this date which falls in the accounting year relevant to the assessment year 1977-78. The company had claimed that the actuarially quantified liability of Rs. 30,57,740/- in respect of special pension should be allowed in the assessment year 1976-77. The I.T.O. disallowed this claim on the ground that the liability would have to be considered in the year in which retirement took place. In view of this decision, of the I.T.O. and having regard to the uncertainty regarding the outcome of appeal for that year, the Appellant had staked the claim for the same amount in the year 1977-78 the year in which the retirement has taken place. During the year ended 31st October, 1976, the company paid Rs. 5,44,140/- which was actual amount paid.

The Appellate Tribunal allowed the claim of the assessee following the decision of the Calcutta High Court in the case of CIT vs. National Insurance Co. (1981) 127 ITR 54. On reference at the instance of the Department the Hon’ble Bombay High Court observed that a prudent businessman is always bound to make a fair estimate of his liability under the Act from year to year and is entitled to make provision for such liability. While considering the liability arising on account of payment of gratuity the High Court ruled that such liability is always in the form of deferred payment of wages of the employees concerned as such the said deduction can be allowed on the actuarial valuation.

8. Pre-emptive purchase – Appropriate authority – Sections 269UD & 269UG – Payment of purchase consideration by the appropriate authority within the statutory period is mandatory – Breach of the same shall abrogate the order passed under section 269GD(1)

M/s. Parasrampuria Estate Developers Pvt. Ltd. & Ors., Mumbai vs. S.C. Prasad & Anr. (Bom), W.P. No. 2178 of 1993; dated 26-9-2005.

The Petitioner before the Hon’ble High Court was a builder. The builder had proposed to sell a flat at a particular consideration. The same was not found appropriate by the Appropriate Authority in spite of proper objections raised by the Petitioners. The Order under section 269UD was passed for acquisition. However, the purchase consideration was not paid by the Authority as the flat was under construction. The Petitioner challenged the validity of the order.

The Hon’ble High Court held that "Apart from the above, in the present case admittedly the apparent consideration determined under the impugned order has not been tendered to the Petitioners and the same has been deposited in the account of the appropriate authority. The only reason given by the Respondents for not tendering the amount is that, on the date of purchase the building was incomplete and therefore, the amount has not been tendered to the Petitioners. As held by the Apex Court in the case of Dr. A. K. Garg (supra) it was mandatory on the part of the appropriate authority to tender the amount of apparent consideration within the period of limitation prescribed under the Act. Having purchased the flat under construction, it is not open to the appropriate authority to contend that there is no obligation to tender the apparent consideration till the flat is fully constructed. Counsel for the Revenue could not point out any provision of law which permits the appropriate authority not to tender the apparent consideration within the period prescribed under section 269UG of the Income-tax Act on the ground that the flat purchased under section 269UD (1) is under construction. Therefore, in the present case, even if it is accepted that the order passed under section 269UD (1) is proper, in view of the failure on the part of the appropriate authority to tender the apparent consideration within the period set out in section 269UG of the Act, it has to be held that the order passed under section 269UD(1) of the Act stood abrogated and the property has re-vested in the Petitioners. Thus, viewed from any angle, the impugned order passed under section 269UD (1) cannot be sustained.