Direct Taxes

High Court
 

1. Ex-parte order – Service of notice – Notice returned with a note ‘left’ – Not proper service of notice – ex parte order not justified

I.T.O. vs. P.V. Kumar [2005] 279 ITR 9 (Delhi)

The Department preferred an appeal before the Appellate Tribunal. The notice of hearing sent by the registry of the Appellate Tribunal was returned by the postal authorities with a remark ‘left’. The Appellate Tribunal disposed of the appeal ex parte.

The Hon’ble Delhi High Court observed that the Tribunal rendered the decision in the absence of the assessee without effective service. The notice which was sent has been received with the postal remark "left". This indicates that the assessee was not served with the notice. A matter can be decided in the absence of the party, provided, the party has been served and, thereafter, the party does not remain present before the court or the Tribunal. But when the notice notifying the date of hearing has not been served on the assessee, there is no question of deciding the matter ex parte. The Tribunal ought to have waited for proper service and after the proper service on the party, it ought to have decided the matter.

2. Business expenditure – Expenditure on transit house for employees – Deductible under section 37(1) – Income-tax Act, 1961, s. 37(1) (4)

Greaves Cotton and Co. Ltd. vs. CIT (Bom) (2005) 279 ITR 42 (Bom)

The assessee had taken a premises on rent at Rs. 24,000 per annum. The premises were not used as holiday home for the employees. The place for providing shelter to its employees from outside Mumbai visiting Mumbai for the purpose of business. The company had several branches outside Mumbai. The Assessing Officer disallowed the claim but the Commissioner (Appeals) allowed it. The Tribunal ruled that the expenditure was not allowable on a plain reading of section 37(4) of the Act. On reference the Hon’ble Bombay High Court observed for its employees but as shelter for the purpose of accommodating its employees working in its branches outside Bombay while visiting Bombay. The Tribunal had inadvertently mentioned section 37(4) instead of section 37(1) as the relevant section. The claim for allowance of expenditure under section 37(1) was required to be allowed.

3. Reassessment – Notice u/s 148(1) – Objections raised by the assessee not considered – Reassessment notice and the consequent proceedings are bad-in-law

K.S. Suresh vs. DCIT [2005] 279 ITR 61 [Mad]

The assessee after receipt of the notice u/s 148(1) filed its objections. The Assessing Officer proceeded with assessment proceedings without considering the objections. The assessee filed a writ petition challenging the validity of the notices. The Hon’ble Court held that the objections of the petitioners made on December 27, 2004, February 10, 2005 and February, 18, 2005 were not considered by the Income-tax authorities. It was also admitted that the Income tax authorities had committed an error apparent on the face of the record by pre-determining the issue, holding that it was a fit case for levy of penalty under section 271(10)(c) of the Income-tax Act, 1961, even while giving opportunity to the petitioners in proceedings dated February 10, 2005, to submit their objections on or before February 18, 2005, with regard to reopening of the assessment for the assessment year 2000-01 and before deciding the matter on the merits. The notices of reassessment as well as consequential proceedings of provisional attachment dated November 25, 2004, issued under section 281-B were not valid and were liable to be quashed.

4. Penalty – Assessed income is loss – Concealment penalty not leviable under section 271(1)(c) Explanation 4

CIT vs. Zam Zam Tanners [2005] 279 ITR 197[All]

The assessee before the Hon’ble High Court was having an income of Rs. 5,01,579 which was determined at Nil after allowing deduction u/s 80HHC. The Assessing Officer initiated penalty proceedings, on the difference of income shown in the original return and in the subsequent revised return, the explanation of the assessee that there was no positive income even after the revised income and, thus, no penalty provisions were attracted, was not accepted and a penalty under section 271(1)(c) was imposed. Against the penalty order, the assessee filed appeal before the Commissioner (Appeals) which was allowed, and the penalty was deleted. The Revenue filed appeal before the Tribunal which was rejected.

The Department preferred a reference application before High Court and contended that in view of the Explanation 4 to section 271(1)(c), it is the concealed income which is relevant for the purpose of levy of penalty and merely because, returned income was loss or nil and the assessee was subjected to assessment at nil income, the assessee is not absolved from penalty.

The Hon’ble High Court observed that "Penalty for concealment would be governed by the law as it stood at the time when the original return was filed. An amendment is applicable prospectively unless it is specifically made with retrospective effect. After the amendment in sub-clause (iii) and Explanation 4 to section 271(1)(c) of the Income-tax Act, 1961, by the Finance Act, 2002, there is no manner of doubt that the penalty is leviable even in cases where no tax is payable and if income is assessed at a loss in respect of the concealed income. The amendment is prospective in nature.

5. Business expenditure – Expenditure on foreign trips of wife of company’s president was wholly and exclusively for purposes of business of company and was allowable as deduction in computing profits and gains of business

CIT vs. Alfa Laval (I) Ltd. [2005] 149 Taxman 29 [Bom]

The assessee incurred expenditure on the foreign trips of the wife of the company’s president and claimed it as a deduction in computing the profits and gains of the business.

On appeal, the Commissioner (Appeals) held that the expenses were incurred for the purposes of the business of the assessee. On further appeal, the Tribunal affirmed the order of the Commissioner (Appeals).

The Department preferred a reference before the Hon’ble Bombay High Court. The Hon’ble Court observed that it was not in dispute that the expenses as a fact were incurred. The amount of expenses incurred was not in doubt. The expenses must stand the test of commercial expediency. The test of commercial expediency could not be reduced to the shape of a ritualistic formula, nor could it be put in a water tight compartment so as to be confined in a straitjacket formula. All that the law requires is that the expenditure should not be in the nature of capital expenditure or personal expenditure of the assessee and it should be wholly and exclusively laid out for the purposes of the business. It is well settled that the items of expenditure are to be considered from the point of view of a normal prudent businessman. Applying normal, prudent businessman’s approach, the expenses incurred by the assessee on the foreign trips of the wife of the company’s president could be said to be for the purposes of the business of the assessee-company.

6. Search and Seizure – Section 132(4a) – Loose paper found during the course of search – Not in the handwriting of the partner’s or employees – No addition can be made in the hands of the assessee

CIT vs. Raj Pal Singh Ram Avtar [2005] 149 Taxman 32[All]

The assessee was a registered firm and was engaged in the money lending business on pawn broking and pledges. During the search, a paper containing several entries was found and seized from the shop premises of the assessee. The Assessing Officer was of the view that the entries in the paper denoted a certain principal sum as advance to some person during the financial year 1982-83 on which certain interest was earned.

Accordingly, both those amounts were added in the income of assessee under section 69. The Commissioner (Appeals) confirmed the order of the Assessing Officer. The Tribunal deleted the additions accepting the assessee’s case that the paper did not belong to him; the entries recorded therein did not relate to him and the same was not in the hand writing of any of the partners or employees or any connected person; that paper was written in English and none of the partners or employees of the firm knew English.

The Department carried the matter before the Hon’ble High Court. The Hon’ble High Court concurred with the findings of the Tribunal and observed that the Tribunal had taken note of the presumption deemed under section 132(4A) and held that the assessee had rebutted the presumption by giving plausible explanation that neither the partners nor their employees knew English and further the said paper was found from the debris in the shop premises and might have been left by someone and it did not belong to it. The Tribunal had further found that when the partners and the employees had made a statement that they did not know English, no attempt was made by Assessing Officer to cross-examine partners or their employees to extract truth, and therefore, the explanation offered by the assessee was to be believed. The Tribunal further held that the principal amount could not have been earned during the assessment year in question and if it was assessed, the investment had been made in earlier assessment year because the interest for one full year appeared to have been calculated on the seized paper. Said findings also did not suffer from any legal infirmity.

7. Stay of recovery proceedings – Appellate Tribunal – Appellate Authority has power to grant stay of proceedings

Agricultural Produce Market Committee vs. CIT [2005] 279 ITR 371 [Patna]

The assessee filed a Writ Petition before the Patna High Court seeking stay of the recovery proceedings. It was contended by the assessee that it had approached the Appellate Tribunal to stay the recovery proceedings as Assessee’s appeal was pending before it. However, the Appellate Tribunal declined to interfere with recovery proceedings in the absence of any statutory provisions to do so. The Hon’ble High Court was of the view that the opinion expressed by the Appellate Tribunal is not correct. The Hon’ble Court observed that once the appeal is pending, every court has power to pass an order of stay to do justice in some cases. The matter is settled that the appellate authority even in the absence of a specific provision has power vested in it by virtue of being an authority to grant stay in appropriate cases. It is one thing to say whether stay is to be granted or not but to say that the appellate authority has no power to grant stay, in our view, does not appear to be correct one.

The Hon’ble Court further observed that if a proper application is filed before the appellate authority, the appellate authority will exercise its discretion and pass a speaking order in accordance with law.

8. Appellate Tribunal – Powers of the President of Appellate Tribunal to transfer the Sr. Vice President, Vice-President and other members of the Tribunal – No Government order or Central Administrative Tribunal can override the President’s order to transfer

President, ITAT vs. A. Kalyanasundaram [2005] 279 itr 305 [Mad]

The Senior Vice President was transferred by an order of the President. The same was challenged before Central Administrative Tribunal. The Central Administrative Tribunal interfered with the Transfer order on the ground that the headquarters of the Senior Vice President were declared to be at New Delhi by a Government Order and the status of the Senior Vice-President is the same as the President.

The President of Appellate Tribunal being aggrieved by the order of the Central Administrative Tribunal filed a Writ Petition before Hon’ble Madras High Court. The Hon’ble Madras High Court referred to the provisions of sections 252(5) and 255(1) and the Apex Court decision in the case of Ajay Gandhi vs. B. Singh (2004) 265 ITR 451 (SC) and observed that on a plain reading of section 252(5) of the Income-tax Act, 1961 it is evident that the Vice-President of the Tribunal can only exercise such powers of the President which were delegated to him in writing by the President. The Senior Vice President or Vice President cannot perform any duty or function, which is not delegated to him by the President. The constitution of Benches has to be decided by the President. It is entirely for the President of the Income tax Appellate Tribunal to decide which Senior Vice President, Vice President or Member should sit at which place and at which Bench. The constitution of Benches, place of sitting, etc., are hence all matters for the President of the Income tax Appellate Tribunal to decide, and no Senior Vice President, Vice President or Member can insist that he will sit in any particular city or Bench. Neither the Income-tax Act nor the rules mention any specific place of functioning of the Senior Vice President. It is evident from section 255(1) of the Act that it is for the President of the Income tax Appellate Tribunal to decide which member of the Income tax Appellate Tribunal (which includes Senior Vice President and Vice President) will sit on which Bench. Since there are Benches of the Income tax Appellate Tribunal in several cities in India, the President of the Income tax Appellate Tribunal can transfer members (including Senior Vice Presidents and Vice Presidents) to a Bench in another city.

The Hon’ble High Court set aside the Central Administrative Tribunal Order and held that the power to the President to decide the place of sitting of the Members including the Senior Vice President and Vice President of the Tribunal. No Government order or administrative order could override the statutory provision or statutory rule.

9. Business expenses – Section 43b – Statutory liability towards sales tax, esi contributions and p.f. contributions discharged after close of previous year but before due date for filing return

CIT vs. Alembic Glass Industries Ltd. [2005] 279 ITR 331 [Guj]

The Hon’ble High Court was dealing with question of law referred to it by the Appellate Tribunal whether the amount of statutory liability of sales tax, ESI contribution, P.F. contribution, etc., paid after the close of the previous year but before the due date for filing of return of income under section 139(1) of the Act was an allowable deduction.

The Hon’ble Court applied the ratio of the decision in the case of Allied Motors (P.) Ltd. [1997] 224 ITR 677 rendered by the apex court and held that the Tribunal was right in law in holding that various statutory liabilities discharged after the close of the previous year, but before the due date for filing return of income under section 139(1) of the Act, were allowable deductions.

10. Deemed Gift – Gift Tax Act, 1958 – Sale of property – Value of property for stamp duty purposes more than sale consideration in sale deed – Difference in value – Not deemed gift – Rules framed under Stamp Act not conclusive of determination of market value of property

CIT vs. Smt. Rajkumari Vimla Devi. [2005] 279 ITR 360 [All]

From the Income tax records of the assessee the Assessing Officer found that the assessee executed certain sale deeds in respect of some immovable properties and the sale consideration as disclosed in the sale deeds was less than the value which the registration authorities took for stamp duty purposes. The difference was subjected to gift tax by the Assessing Officer as deemed gift. The Assessment order was upheld in appeal by the Appellate Assistant Commissioner. Being aggrieved, an appeal was preferred before the Tribunal. The Tribunal allowed the appeal.

The Hon’ble High Court disposed of the Departmental Reference Application upholding the observations of the Appellate Tribunal that the provisions contained in the Stamp Act and the Rules framed thereunder have the limited object of providing guidelines. They are not conclusive of the determination of the market value. The market value by its nature is such which keeps on varying and changing. The market value of the property worked out in accordance with the Stamp Act rules is neither binding on the person who produces the instrument for registration nor on the State Government. In the absence of any evidence to prove that the sale consideration mentioned in the sale deeds has been understated the gift tax authorities were wrong in holding that there had been a deemed gift.

11. Reassessment – Wealth Tax Act, 1957 – Failure to disclose material facts necessary for assessment – High Court decision in prior years against the assessee – Assessee under no obligation to draw Wealth Tax Officer’s attention to High Court decision – No failure to disclose material facts – Reassessment proceedings not valid

CIT vs. C.M. Ghosh Trust [2005] 279 ITR 346 [All]

The assessee was a trust created under a registered deed. In the said deed provision for the descendants and other relatives of the settler, for charity and for due performance of the worship of the family deity was made. The deed of trust set out the names of different beneficiaries and the extent of the benefits conferred on them. The issue of assessability of the 15% reserve and 15% sewa puja under 21(4) of the Wealth Tax Act, had travelled up to High Court for the A.Ys. 1957-58 to 1959-60. The Court held that 15% reserve and 15% sewa puja were to be assessed under section 21(4) of the Wealth Tax Act and the allowance called "A" and "B" were to be assessed under section 21(4) of the Act and the remaining part under section 21(4) of the Act for the assessment year under consideration. The assessee filed the return giving complete details of the allocation of the income of the trust deed for the assessment years 1970-71 to 1976-77. The assessing authority initiated proceedings under section 17(1)(a) of the Act on the ground that the aforesaid items had not been disclosed by the assessee in the original return as wealth inasmuch as at the time of original assessment, the assessee did not bring the decision of the court to the notice of the Assessing Officer. The Tribunal held that the proceedings were not valid.

The Hon’ble Court upheld the Appellate Tribunal decision and observed that section 17(1)(a) of the Wealth Tax Act, 1957, is in pari materia with section 147(1)(a) of the Income-tax Act, 1961. Once the assessee has disclosed all the primary facts, that is the end of his duty. It is then for the assessing authority to draw the proper conclusion from those facts. If the conclusions drawn by the assessing authority are erroneous, the assessing authority cannot reopen the assessment merely on the basis of a change of opinion.