Direct Taxes

High Court
 

1. Depreciation – Scaffolding material used in construction activity – Eligible to hundred per cent depreciation

Express Newspapers Ltd. vs. DCIT [2005] 280 ITR 452 [Mad]

The assessee was engaged in the property, finance and leasing business. It claimed depreciation on scaffolding material given on lease at the rate of hundred per cent on the ground that each of the scaffolding material costs less than Rs.5,000 and hence the entire value should be allowed as depreciation on the ground that each of the scaffolding material constituted "plant" used for the purpose of business. The Assessing Officer allowed depreciation only at the rate 331/3 per cent holding that the scaffolding materials were an integrated unit and hence could not be bifurcated into several pieces of Rs.5,000 each in value. The Commissioner (Appeals) confirmed the restriction of the claim of depreciation to 331/3 per cent. The Tribunal treated the transaction as a sale and directed the Assessing Officer to verify the transactions. The assessee preferred an appeal before the Hon’ble High Court u/s 260A and contended that the Tribunal has raised an issue which was not before it.

The Hon’ble Court held that the Tribunal erroneously took into account irrelevant and extraneous factors while passing the order. The Tribunal held that the facts need to be verified by the Assessing Officer as to whether the scaffolding materials had been really leased out or had been sold. It was nobody’s case before any of the authorities that there was any disguised sale of scaffolding materials. The only dispute before the authorities was the rate of depreciation that is as to whether it was 331/3 per cent or hundred per cent. The Tribunal had not even put the assessee on notice about the above observation at the time of hearing and no opportunity was given to the assessee about the point raised suo motu by the Tribunal. Each of the scaffolding materials would constitute "plant" as defined in section 43(3). The definition of the word "plant" in section 43(3) is inclusive and not exhaustive and it has to be given a wider meaning. Thus, by treating the transactions as a lease the scaffolding materials were entitled to hundred per cent depreciation.

2. Duty of Tribunal – File of Commissioner (Appeals) not produced before Tribunal which was called for on an earlier occasion – Tribunal not justified in taking adverse view against appellant

Ram Vilas Mani vs. CIT [2006] 280 ITR 494 [All.]

The assessee sought adjournment before the Appellate Tribunal. The application was rejected and the appeal was decided against the assessee. The assessee filed appeal before the High Court u/s 260A and contended that the adverse view against the appellant has been taken on the ground that the appeal was filed by a different person and signature was forged on the memo of appeal. As the file of the Commissioner of Income-tax (Appeals) was not before the Tribunal, the Tribunal had no material whatsoever, to arrive at such a conclusion.

The Hon’ble Court invoked the provision of Article 227 of the Constitution and observed that even though the income-tax appeal does not raise any substantial question of law which may be said to have arisen out of the order of the Income-tax Appellate Tribunal, Allahabad, dated July 28, 2003, we are of the considered opinion that by the impugned order, miscarriage of justice has resulted.

3. Business expenditure – Expenditure incurred on organising conferences and sales promotion – Not entertainment expenditure – Expenditure is deductible

Ravi Marketing P. Ltd. vs. CIT [2005] 280 ITR 519 [Cal.]

The assessee for the A.Y. 1988-89, claimed deduction of the expenditure incurred on account of sales promotion. The A.O. disallowed the same on holding it entertainment expenditure. The assessee succeeded before the CIT(A). The department preferred Second Appeal. The Appellate Tribunal restricted the disallowance to Rs. 3,00,000/-. The assessee being aggrieved by the order of the Appellate Tribunal carried the matter before the High Court.

The Hon’ble Court observed that the authorities under the Income-tax Act can examine the genuineness of the expenditure and the purpose for which it was expended. Once it is established that the amount was genuinely expended and it was expended for a particular purpose, the only discretion that is left to the authority under the Act is to apply the law on the basis of such established fact or finding. If the purpose for which it is expended is eligible for deduction under a particular head, no discretion is left to the authority either to surmise the quantum that ought to have been spent or to surmise or presume the purpose differently and convert the same to some other head. Holding conferences or seminars of distributors or agents is one of the accepted methods or manners of sales promotions. How and to what extent it would be expedient for the business can be decided by the assessee in its wisdom. Whether by reason thereof he gains or fails is immaterial. It is definitely an expenditure for the purpose of his business.

The Hon’ble Court held that the expenditure was not in the nature of entertainment expenditure but an expenditure incurred for the purpose of the assessee’s business. As such it was eligible for deduction under section 37(1) of the Act.

4. Return by whom to be signed – Section 140 – Authorisation to sign return can be oral or can be inferred

CIT vs. Rudra Bilas Kisan Sahkari Chini Mills [2005] 280 ITR 249 [P & H]

The assessee a co-operative society, assessed to income-tax in the status of association of persons, filed its return showing loss of Rs. 1,33,10,000 on June, 30, 1979, which was within the stipulated period under section 139(1) and (3). The assessment was completed under section 144 for non-compliance with notices under sections 142(1) and 143(2) but was cancelled under section 146. After cancellation of the assessment under section 146 and before completion of a fresh assessment a revised return was filed on October 14, 1985 showing a loss of Rs. 1,34,99,76. The fresh assessment was completed on March 24, 1986, and in that assessment the Income Tax Officer computed the loss at Rs. 34,97,856 and he refused to direct carry forward of loss holding that the return originally filed on June 30, 1979, was not a valid return as it was not signed by an appropriate person as provided under section 140. The return which was filed on June 30, 1979, was signed by accounts executive, of the assessee-society. When asked to give proof that the principal officer (general manager) was not in a position to sign the return and power had been given to him to sign the return in the absence of the principal officer, it was submitted that the general manager had been transferred. The principal officer was under transfer on the last day of June, 1979 when he was busy on outdoor duty. There was no written authority given by the principal officer; i.e., general manager, to accounts executive signing the return on his behalf. The Tribunal held that the return was valid.

The Hon’ble Court examined the issue while dealing with the reference at the instance of the department. The Hon’ble Court observed that section 140 of the Income-tax Act, 1961, specifies the persons who can sign the return. In the case of an association it has been provided in clause (e) that the return can be signed by a member of the association or the principal officer thereof. The principal officer has been defined under section 2(35). From a reading of the provision it is clear that the return can be signed by the agent also. Any person can appoint an agent orally or in writing or agency can be inferred by implication. The order of the Appellate Tribunal was upheld.

Andaman and Nicobar Islands Forest and Plantation Development Corporation Ltd. vs. CIT [2005] 280 ITR 118 (Cal.)

The assessee was denied the deduction u/ss. 80HH and 80J and further it was denied investment allowance on the ground that conversion of trees into logs does not change the nature and character of the tree and when it is converted into logs, it retains the same characteristics of wood and as such it does not amount to production, particularly, when no new commodity emerges out of such activity. The assessee contended that the trees after they are felled immediately not ready for sale. The process carried out by it makes it a commercially saleable article. The Hon’ble Court reversed the order of the Appellate Tribunal and held that de-embarking and seasoning tree trunks and converting them into logs would amount to production of a new commercial article or things within the meaning of sections 32AB, 80HH and 80J. The assessee was entitled to the benefit of deductions.

6. Addition u/s 69 on account of cost of construction – Assessing Officer has no power to call for report from Departmental Valuation Officer – Assessing Officer calling for report from Departmental Valuation Officer regarding construction of factory building of assessee and adding difference as unexplained investment – Excluding report no material warranting addition – Order not sustainable

CIT vs. Ganesh Rice Mills [2005] 280 ITR 409 (P&H)

In this case the Assessing Officer made addition merely relying on the valuation report submitted by the DVO. The Hon’ble Court held that the Supreme Court in Amiya Bala Paul (Smt) vs. CIT [2003] 262 ITR 407 held that the Departmental Valuation Officer cannot be called upon to give a report to the Assessing Officer under the Income-tax Act except when a reference under section 55A or 269L is made. Therefore, the Assessing Officer could not have obtained the report of the Departmental Valuation Officer for the purpose of determining the cost of construction and the report was invalid. If the said report was excluded from consideration there was no material warranting any addition on account of unexplained investment.