1. Conversion of proprietary business into partnership business – Stock need not be valued at market price

CIT vs. M. Kathiresan [2006) 285 ITR 206 (Mad.)

The assessee before the Hon’ble High Court was a partnership firm. The proprietary concern was converted into a partnership firm during the previous year relevant to the assessment year 1983-84. The Assessee filed the returns including the loss suffered by the proprietary concern as the business was continued by the assessee firm. The returns were accepted by the Assessing Officer. However, the same were set aside with a direction to revalue the stock in trade on the date of conversion at market value applying the ratio laid down by the Hon’ble Madras High Court in the case of G. R. Ramchandani & Co. vs. CIT (1961) 41 ITR 142 (Mad.) and A. L. A. Firm vs. CIT (1961) 102 ITR 622 (Mad.). The assessee challenged the order of the CIT before the Appellate Tribunal. The assessees appeal was allowed by the Appellate Tribunal. The Department preferred a reference to the High Court u/s. 256(1) of the Act.

The Hon’ble Court upheld the order of Appellate Tribunal with the observation that it is an established rule of commercial practice and accountancy that where there was no discontinuance of business, the closing stock is to be valued at cost or market price, whichever is lower by conversion. Though the conversion of a proprietary business into partnership is undoubtedly a transfer, it could not be said that the nominal value credited to capital account in the hands of the firm is the consideration for the transfer. It is only when the business is closed forever, that the question of valuing the stock at the market price might arise.

2. Penalty – Section 271d – Amounts received by private limited Company Director is neither deposit nor loan – No violation of provisions of section 269SS

CIT vs. Idhayam Publications Ltd. (2006) 285 ITR 221 (Mad.)

One of the directors of the assessee company had a current account with the assessee. Certain amounts were received by the assessee which more than the statutory limit provided u/s. 269SS. Thus, the assessing officer levied penalty u/s. 271D for the violation the provisions of section 269SS. On an appeal before CIT(A) the penalty order was confirmed. The Appellate Tribunal deleted the penalty holding that the amounts credited to the current of account of the director are not deposits or loans.

The Department preferred an appeal before the High Court. The Hon’ble High Court held that the transaction between the assessee and the director-cum-shareholder was not a loan or deposit and it was only a current account in nature and no interest was being charged for the above transaction. The deletion of penalty was justified.

3. Adjustment of refund against outstanding demand cannot be done without giving notice in terms of Section 245

Japson Estates P. Ltd. vs. DCIT [2006] 285 ITR 40 (AP)

For the assessment year 2003-04, the assessing officer determined the net tax payable by the assessee at Rs. 45,14,870 and issued a notice of demand to the assessee under section 156. The assessee filed an appeal with was pending before the Commissioner (Appeals). For the subsequent assessment year 2005-06, the assessee paid excess tax because tax was deducted at source from portion of income received by the assessee during the relevant accounting year. The assessee was entitled to refund of Rs. 32,58,795 including interest of Rs. 1,55,180. Instead of refunding the money, the assessing officer adjusted this amount against the demand pertaining to the assessment year 2003-04. The Assessee filed a Writ Petition challenging the action of the assessing officer.

The Writ Petition was allowed with an observation that section 245 of the Income-tax Act, 1961, provides that the assessing officer, in lieu of payment of refund, set off the amount to be refunded or any part of that amount against the sum, if any, remaining payable under the Act by the person to whom the refund is due. The only condition for exercise of such power is that it can be done after giving intimation to such person of the action proposed to be taken under this section.

4. Heart monitoring machine and tread mill – Entitled to investment allowance

CIT vs. Nathubhai H. Patel [2006] 285 ITR 67 (Guj.)

The assessee was a leading cardiologist. He was running a heart hospital in which there was a special intensive coronary care unit with sophisticated machines. During the accounting years relevant to the assessment years 1982-83 and 1983-84 the assessee had installed a heart monitoring machine and tread mill in the hospital. The assessee claimed investment allowance under section 32A of the Income-tax Act, 1961. The assessee also claimed additional depreciation on air-conditioners and fans. The assessing officer rejected the claim but the Tribunal allowed it.

The Department preferred a reference. The Hon’ble Court upheld the order of Appellate Tribunal with the observations that when a patient is subjected to graded exercise on the tread mill machine and the functional data of the heart operation is recorded on the heart monitoring machine the functional status is recorded on the ECG paper which is produced by the combined functioning of the aforesaid machines. The printing of the functional status on the ECG paper can be said to be the production of an article or thing falling within the ambit of section 32A. The assessee was entitled to investment allowance on the heart monitoring machine and tread mill.

5. Investment Deposit Account – Income from interest, rent, dividend was includible in the eligible profits for working out deduction under section 32AB

CIT vs. Parle Biscuits Ltd. [2006] 203 CTR (Bombay) 237

The Hon’ble High Court followed the ratio laid down by the Apex Court in the case of Apollo Tyres Ltd. vs. CIT [2002] 255 ITR 273 (SC). The Hon’ble Court observed that the term ‘eligible business’ is defined under sub-s. (2) of s. 32Ab. As per that definition, all business of an assessee company will be an eligible business unless it falls under the type of business enumerated in sub-cls. (a) and (b) of s. 32AB(2). It is nobody’s case that this business of the assessee-company is one of those business which fall under business enumerated in sub-cls. (a) and (b) of sub-s. (2) of s. 32AB. Therefore, there is no doubt that the business of the assessee-company is an eligible business. The fact that it is shown under a different head of income would not deprive the company of its benefit under s. 32AB so long as it is held that the investment in the units of the UTI by the assessee-company is in the course of its eligible business. Therefore, in our opinion, the dividend income earned by the assessee-company from its investment in the UTI should be included in computing the profits of eligible business under s. 32AB of the Act.

6. Depreciation – Temporary Erections are eligible to 100% depreciation

CIT vs. Print Systems & Products [2006] 203 CTR (Mad.) 247

The assessee had incurred expenditure towards petition, false ceiling etc. and claimed the depreciation allowable at 100%. The Appellate Tribunal accepted the claim of the Assessee. However, the Department carried the issue to the High Court.

The Hon’ble High Court observed that the assessee had made temporary petitions, false ceiling and given the walls a coat of paint. The only objection of the Revenue was that since the property was acquired by the assessee and not taken on lease, the temporary erection would have to be treated as revenue expenditure. The Revenue is not in a position to point out any rule or section to substantiate its claim that, the assessee is not entitled to 100 per cent depreciation on temporary erection. The ownership or taking the property on lease is of no consequence so far as construction of a temporary partition is concerned. So, the Tribunal, considering the relevant material and evidence, came to the conclusion that the assessee was entitled to 100 per cent depreciation in respect of the addition on temporary erection.

7. Appeal dismissed as not maintainable – Condition of section 2649(4)(C) is not violated

Mansarovar Investments Ltd. vs. CIT [2006] 203 CTR (Del.) 545

The assessee company was fastened with huge demand under Gift Tax Act, 1958 consisting of tax and interest. Against levy of interest appeal was preferred the same was rejected as not maintainable. The assessee preferred an application u/s. 24(1) of Gift Tax Act for revision before the CIT. The application was rejected as not maintainable. The assessee preferred a Writ Petition against the rejection of application filed u/s. 24(1).

The Hon’ble Court allowed the Writ Petition with the observation that the CBDT has by reference to s. 264(4)(c) of the IT Act clarified that cases where an appeal is withdrawn by an assessee and is dismissed as such in case where the appeal was dismissed on the ground of limitation, the order under appeal cannot be said to have been made the subject matter of an appeal within the meaning of s. 264(4)(c). That clarification sets at rest the controversy whether an appeal dismissed as not maintainable can prevent the filing of a revision petition against the order that was challenged in such appeal. The clarifications issued by the CBDT in regard to the provisions of the IT Act are applicable even to proceedings under the GT Act mutatis mutandis. In that view, therefore, the CIT was in error in holding that the revision petition filed by the petitioner before him was not maintainable as the order under challenge in the same had been the subject of an appeal.

8. Substituted service under section 282 can be resorted only after recording satisfaction by the assessing officer
   
   Kiran Machines vs. ITO [2006] 203 CTR (Mad.) 574

The assessing officer had issued several notices to assessee giving an opportunity present its case. However, none of the notices could be served on the assessee. Thus, the assessing officer issued notice as per the provisions of section 144 and served the same through affixture on the last known address of the assessee as the assessment was getting time barred. The Assessment Order was passed fastening the assessee with huge demand. The assessee approached the High Court under Article 226 of the constitution challenging the Assessment Order passed in breach of principles of natural justice.

The Hon’ble High Court held that it is no doubt true that the first respondent under s. 282 can invoke the provisions of CPC and order 5, r. 20 of CPC provides for ‘substituted services’. As per the said provision, before resorting to substituted service, under order 5, r.20 the Court should be satisfied that there is reason to believe that the defendant is keeping out of the way for the purpose of avoiding service, or that for any other reason the summons cannot be served in the ordinary way, and then only the Court shall order the summons to be served by affixing a copy thereof in some conspicuous place in the Court-house, and also upon some conspicuous part of the house (if any) in which the defendant is known to have last resided or carried on business or personally worked for gain, or in such other manner as the Court thinks fit. Admittedly, the assessing officer has not recorded such satisfaction in his order before causing service of notice by affixture. It is also pertinent to point out that as per order 5, r. 20(1A), the assessing officer could have ordered paper publication if the address of the petitioner was not laid down or same could not be furnished by his representative. But, that too has not been done in this case. When an order of assessment levying tax is being passed, it is incumbent upon the first respondent to serve the notice in accordance with the above said provisions. But, that has also not been done. Thus, the principles of natural justice have been violated and on this ground, the impugned order is liable to be set aside.

9. Commencement of business – Business of promoting time share units commences with the establishment of operating offices

CIT vs. Club Resorts (P) Ltd. [2006] 203 CTR (Mad.) 587

The assessee company was incorporated on 1st March, 1991. The assessee was carrying on the business of promoting time share units at places of tourist interest and marketing such time share units. The assessee-company was following a system of accounting in which all receipts were accumulated towards sale of time share of accounting in which all receipts were accumulated towards sale of time share cottages under current liabilities. All expenditure on capital construction was taken as cost to the debit of the P&L A/c, and the sale price therefore as sales, to the credit of P&L A/c. That part of the cottages retained by the assessee for use as in the hotel industry, was shown as an asset to the company and depreciation was claimed thereon. During the assessment years, the assessee claimed loss. While computing the assessment, the AO took a view that the assessee had not carried on any business activity and relied on Note No. 9 to the statement of account wherein it had been mentioned that no amount had been accounted for sales, since the project was still under way. Hence he rejected the claim of loss.

The assessee’s appeal was allowed by the CIT(A) and the first Appellate Order was confirmed by the Appellate Tribunal. On a appeal by the Department the High Court held that assessee-company engaged in the business of promoting time share units having already set up operating offices and launched publicity campaign and started construction work, it cannot be said that the assessee’s business had not commenced till the construction was complete; expenditure incurred by assessee to maintain regular staff for the development of the construction projects was revenue in nature and allowable as deduction.