CIT vs. East Cost Construction & Ind. Ltd. [2006] 283 ITR 297 (Mad.)

The assessee, a company engaged in the business of construction at various places, filed its return of income without including 10 per cent of the contract amount retained by the parties as retention money to be paid after completion of the contract in the gross receipts. The Assessing Officer included the retention money for the purpose of computing the total income, on the ground that since the assessee followed the mercantile system of accounting, it ought to have offered the retention money for assessment for the years 1997-98 and 1998-99. The Tribunal held that the retained money accrued to the assessee only after completion of the contract and therefore could not be include in the total income for the assessment years under consideration, since the contract was not yet completed.

The Department carried the matter to High Court u/s. 3260A of the Act. The Hon’ble Court observed that the assessee was entitled to receive the retention money after completion of the contract. On the date of the bills, no enforceable liability had accrued or arisen. When the assessee had no right to receive the money by virtue of the contract between the parties and the assessee also had no right to enforce payment, it could not be said that the right to receive payment of the remaining 10 per cent of the value of job had accrued.

2. Depreciation – eligible to 100% depreciation – Used for less than 180 days – Eligible to 100% depreciation

CIT vs. Soundararaja Finance Ltd. [2006] 283 ITR 559 (Mad.)

The assessee purchase two years cleaners for the purpose of its business of hire purchase costing Rs.13,61,704/-. The assessee claimed 100% depreciation on the same as the asset qualified for the same. According to the Assessing Officer, as these assets were used for less than 180 days, the assessee is entitled for the depreciation of 50 per cent only. Being aggrieved by the order of the Assessing Officer, the assessee filed an appeal before the Commissioner of Income Tax (Appeals). The Commissioner of Income-tax (Appeals) dismissed the case of the assessee and confirmed the order of the Assessing Officer. Aggrieved by the same, the assessee filed an appeal to the Income-tax Appellate Tribunal. The income tax Appellate Tribunal allowed the appeal and given a direction to the Assessing Officer to allow the full depreciation in the year under consideration.

The Department further carried the matter before the Hon’ble High Court. The Hon’ble Court upheld Appellate Tribunal’s Order and observed that the restriction put on the basis of user is not made applicable to the items eligible to 100% depreciation. This issue is clarified by the Central Board of Direct Taxes Circular No. 591 dated January 30, 1991 reported in (1991) 188 ITR ST.1. Circulars are binding on the Department and it is not open to the Department to raise a contention which is contrary to the circulars and instructions validly issued by the Board.

3. Charitable purposes – Society allowed to charge normal fees – Society granted registration under section 2aa – income of society entitled to exemption under
   section 11

CIT vs. Sengunth AR Thirumana Mandapam [2006] 283 ITR 355 (Mad.)

The assessee was a society registered under the Tamil Nadu Societies Registration Act. The Society was allotted land by the Collector of Salem District with the specific condition that the land should be used for a kalyana mandapam. As per the guidelines given by the Collector, the assessee should build a Kalyan Mandpam and it should function for the benefit of local people, mainly weavers and agriculturists. Any infringement of the above condition would enable the Collector to take over the land along with the building. The grant also provided for a nominal rent for the building to meet maintenance, repairs and renovation expenses. Accordingly, the assessee was running a kalyana mandapam and collecting minimum nominal charges from the users. The society claimed exemption under section 11 of the Income-tax Act, 1961, for the assessment years 1990-91, 1991-92, 1992-93, 1999-94 and 1999-2000. The Assessing Officer denied the exemption but the Commissioner (Appeals) and the Tribunal held that the assessee was entitled to the exemption.

On an appeal the Hon’ble High Court observed that the very activity of constructing the kalyana mandapam and letting it to the local people, mainly weavers and agriculturists, satisfied the charitable object. The failure or non-diversion of accumulated funds for other charitable purposes like education, etc., would not divest the assessee of the right to claim exemption under sections 11 and 12AA of the Act, for the simple reason that the activity of constructing a kalyana mandapam and letting it after collecting nominal rent to meet maintenance, repairs and renovation expenses, sufficiently satisfied the object, viz., the benefit of local people mainly weavers and agriculturists, which was a condition under the grant given by the Collector and failure to comply with the said condition would enable the Collector to take over the building along with the land. That apart, the assessee had applied for registration as required under section 12AA on December 31, 1999, and the registration was given with retrospective effect from April 1, 1990, by the competent authority by order dated August 2, 2002, placing reliance on the Central Board of Direct Taxes Circular No. 762 dated February 18, 1998 (see [1998] 230 ITR (St.) 12), which came into effect from April 1, 1997, inserted by the Finance (No. 2) Act of 1996, enabling the Chief Commissioner or Commissioner to satisfy himself about the genuineness of the trust or institution and to grant registration. The mere fact that the assessee submitted returns for the assessment years 1998-99 and 1999-2000 admitting the income as business income will not take away the rights of the assessee to claim the benefit of exemption, as there could not be any estoppel against section 11. The assessee was entitled to exemption under section 11 for the assessment years 1990-91, 1991-92, 1992-93, 1993-94 and 1999-2000.

4. Reassessment – Notice of Reassessment – No disclosure of reasons for notice – Writ petitions against notice – Maintainable

Tanna Builders P. Ltd. vs. Smt. Neela Krishnan And Another [2006] 283 ITR 448 (Bom.)

The original assessment of the assessee was completed u/s. 143(3). The notice was issued u/s. 148(1) beyond the period of 20 years prescribed under the proviso to section 147. The assessee responded to the notice and sought the reasons recorded to issue notice
u/s. 148(1). The assessee challenged the notice issued u/s. 148(1) before the Hon’ble High Court in a Writ Petition filed under Article 226 of the constitution.

The Hon’ble Court held that in the absence of communication of the reasons the assessee could not have resorted to alternate remedy. In the facts and circumstances of the case it was open for the petitioner to invoke the writ jurisdiction of the court.

That since the reopening was beyond the period of four years, in the absence of any material to show that there was failure on the part of the assessee to disclose fully and truly all material facts the reopening of the assessment could not be sustained. The reasons recorded for reopening the assessment did not state that there was any failure on the part of the assessee to disclose fully and truly any material facts. The mere fact that a protective assessment had been made in the case of some other assessee and the income of that assessee was assessable in the hands of the assessee herein could not be a ground to reopen the concluded assessment of the assessee. The notice was not valid and was liable to be quashed.

5. Business expenditure – liability for earlier years accruing for the first time during the previous year – Deductible in the impuged assessment year

CIT vs. Appollo Textiles Agency [2006] 283 ITR 591 (All.)

The assessee dealt in staple and yarn. For the assessment year 1978-78, it claimed representing additional demand for sales tax liability on it for the earlier years as deduction. The A. O disallowed the claim but the Tribunal held that the demand of sales tax was the additional demand created by the sales tax authorities during the previous year, therefore the additional demand created in the relevant assessment year ought to have been allowed as deduction.

On a reference at the instance of the Department. The Hon’ble court upheld the Appellate Tribunal order and observed that the assessee had realized sales tax from its customers and whatever amount had been realized had been paid over the sales tax authorities. The demand of sales tax was over and above the admitted amount of tax liability which had been created pursuant to the assessment order passed during the previous year relevant to the impugned assessment year. Therefore, the liability to pay the tax came into existence and accrued for the first time during the year. Thus, the claim representing sales tax liability and penal interest on it for the earlier years was allowable as deduction for the assessment year 1978-79.

6. Wealth-tax – Exemption – residential building – Two contiguous buildings in the same compound used for residential purposes – Buildings constitute a “house” within the meaning of section 7(4)

CWT vs. S. D. Jadeja [2006] 283 ITR 45 (Guj)

The expression "exclusively used by him for residential purposes" in section 7(4) of the Wealth-tax Act, 1957, mean that the property should not be put to any non-residential use. In other words, the property should not be exploited to generate income therefrom.

The assessee belonged to the pricely family of erstwhile rules of the state of Jamnagar, claimed exemption under section 7(4) in respect of two buildings situated in the same campus as self occupied residential House. The Assessing Officer did not grant exemption. But the Tribunal took cognizance of the fact that the assessee came from the princely family of the erstwhile rule of the State of Jamnagar and hence, use of several residential units existing in a common compound and extending over vast area of land by such families as their residence could not be viewed as an unusual mode of living. It found that both the buildings were constructed at the same time and were self occupied properties of the owner. It was further found by the Tribunal that the two buildings comprised the garages and servant quarters and while one was used by the assessee for his residence servant was used for office purpose. On these facts, the Tribunal upheld the claim of the assessee that the two properties were required to be valued under section 7(4) of the Act as the said properties comprised on self-occupied house of the assessee.

On a reference to the High Court it was observed that once the Tribunal had found on the facts, and there was no challenge to the finding, that the two building were contiguous, existed in one compound and within common boundaries, in the absence of any finding that either of the buildings was used for non-residential purposes; i.e., commercial purposes, no infirmity could be found in the order of the Tribunal, when it held that both the buildings constituted a house belonging to the assessee exclusively used by him for residential purposes within the meaning of section 7(4). The assessee was entitled to exemption in respect of both the buildings.

7. Capital Gains – Nil cost of acquisition – Sale of palace allotted by Government to ex-ruler – No cost of acquisition – Capital gains not chargeable