Direct Taxes

High Court
 

1. Appeal to Appellate Tribunal – Office of the Appellate Tribunal is required to notify the objections – Procedural requirement for payment of fees should not come in the way of deciding the appeal on merits

BDA Ltd. vs. I. T. O. [2006] 201 CTR (Bom) 413

The assessee had preferred one composite appeal against the combined CIT(A) order for two years. The Appellate Tribunal considered only one year appeal as filed and disposed of the same. The assessee being aggrieved by the treatment given by the Appellate Tribunal carried the matter to the High Court.

The Hon’ble Court observed that since the composite appeal was filed before the Tribunal, it was necessary for its Registry to point out to the appellant the requirement of payment of separate Court fees for the appeal pertaining to the financial year 1996-97. A remedy of appeal is a statutory remedy, and it could not be defeated on account of procedural deficiencies unless the litigant is negligent or adamant in not removing such deficiencies. Such deficiencies could be removed even after the appeal is decided and within the period specified. The procedural requirement for payment of Court fees should not come in the way of deciding the appeal on the merits, once such appeals have been admitted. It was, therefore, necessary for the Tribunal to decide the appeal for the financial year 1996-97 on its own merits.

2. Deduction – Sections 80HH & 80-I – Refining of oil purchased from local market amounts to manufacturing or processing of goods

CIT vs. Shiv Oil & Dal Mill [2006] 153 Taxman 27 (All.)

The assessee, in this case, was engaged in the business of extraction of oil from oil seeds and refining the oil purchased in the local market. The assessee in the impugned assessment year, had stopped the oil extraction activity. It carried out the refining of the oil and claim deduction u/ss. 80HH and 80-I on the profits earned from such activity. The A.O. and CIT(A) rejected assessee’s claim. On an appeal to the Appellate Tribunal, it held that after purchasing the oil, the same was subjected to the process or treatment and what was sold by the assessee was not the same thing as was originally purchased.

The matter was further carried to the High Court by the Department. The Hon’ble Court held that there was no error in the order of the Tribunal allowing the benefit of sections 80HH and 80-I to the assessee in respect of refining of the oil from the oil purchased from local market inasmuch as process of refining amounted to production as contemplated under the said sections.

3. Scope of order giving effect to order u/s. 263 – Assessing Officer is entitled to consider only such items which had been considered by Commissioner, and he cannot consider any other item afresh for making additions

CIT vs. D. N. Dosani [2006] 153 Taxman 13 (Guj.)

The Assessee was carrying on the proprietary business of exhibition of 16mm films on non-commercial basis and also business of manufacturing and sale of the projector spare parts. He filed return of income for the assessment years 1979-80 to 1983-84. The A. O. completed the assessment of the assessee. Thereafter, the Commissioner issued a show cause notice under section 263 on the ground that the total investment in the films including cost of extra prints was not considered properly by the A. O. and that the write off of the cost of the films was wrongly allowed in the assessments. The A. O. was directed to look into the above mentioned aspects and to redo the assessments as per law. The A. O. framed fresh assessment and made additions and disallowances beyond the aforesaid two issues which were taken up revisional proceedings by the Commissioner. On appeal, the Commissioner (Appeals) confirmed the assessment orders. On second appeal, the Tribunal held that in the fresh assessment order passed in pursuance of the order of the Commissioner under section 263, the A. O. was entitled to consider only those two issues which were considered by the Commissioner and was not entitled to consider afresh any other item for making addition.

The Department carried the matter to the High Court. The Hon’ble Court observed that the Section 263 provides that before the Commissioner can pass any order, he has to give the assessee an opportunity of being heard and thereafter record, at least prima facie, that the order made by the Assessing Officer is erroneous insofar as it is prejudicial to the interest of the revenue. The requirement of giving the assessee an opportunity of hearing is for the simple reason that the assessee may be able to refute the belief of the Commissioner which might have been formed on examination of the record of any proceeding under the Act, that is to say, the assessee may be in a position to point out that the assessment order is neither erroneous nor prejudicial to the interests of the revenue or even if it is erroneous, it is not prejudicial to the interest of the revenue, or it may not be erroneous, even if it is prejudicial to the interest of the revenue. Therefore, the moment the revenue’s contention is accepted that in the fresh assessment, the Assessing Officer is entitled to examine items which did not form part of section 263 proceedings, the statutory requirement of framing an order under section 263 after giving an opportunity of being heard, stands obliterated or is made redundant. This interpretation goes against the clear unambiguous language in which the section is couched.

4. Revision u/s. 263 – Reasons for revision of the assessment that order was passed in a hurry, to save period of limitation, without examination of seized documents and without application of mind are not justified

CIT vs. Associated Ford Products (P.) Ltd. (2006) 153 Taxman 3 (MP)

The Assessee, engaged in the business of manufacture and sale of bread etc., was subjected to search action. Block assessment order was framed. The Commissioner set aside the same exercising jurisdiction u/s. 263. The assessee successfully challenged the order u/s. 263 before the Appellate Tribunal.

The High Court upheld the Appellate Tribunal’s Order on the ground that on a scanning of the anatomy of the provisions of section 263 it is demonstrable that certain statutory satisfactions are to be arrived at on acceptable parameters before exercise of the said jurisdiction. As the provision stipulates, the order passed by the Assessing Officer should appear to be grossly erroneous and at the same time prejudicial to the interests of the revenue, both the things exist together and they should not be considered in an isolated manner; and that the time gap between the act and invocation of jurisdiction and passing of the order has to be taken into consideration. The said provision has been considered on many occasions.

Taking into consideration the language employed under section 263, it is clear as crystal that before exercise of powers two requisites are impermissible. It should not be presumed that initiation of power under suo motu revision is merely an administrative act. It is an act of a quasi-judicial authority and based on formation of an opinion with regard to existence of adequate material to satisfy that the decision taken by the Assessing Officer is erroneous as well as prejudicial to the interests of the revenue.

5. Penalty – Section 271B – In the absence of contumacious conduct – No Penalty should be levied for technical or venial breach

Staywell Hotels P. Ltd. vs. CIT [2006] 283 ITR 92 (M.P.)

The assessee failed in filing the tax audit report in time. There was a delay of two months and the assessee was asked to pay penalty u/s. 271B. The assessee failed in appeal before Appellate Tribunal also. On an appeal to the High Court it was observed that compliance with section 44AB of the Income-tax Act, 1961, is mandatory and non-compliance within time attracts the rigour of section 271B, i.e., penalty. However, on sufficient cause being shown, the Assessing Officer is vested with the discretion to condone the delay and relieve the assessee from payment of penalty. There was no deliberate intention on the part of the assessee, nor its conduct be regarded as contumacious or with a view to evade payment of tax. If at all, there was any breach it was technical or venial in nature.

6. Addition u/s. 69 – Burden of Proof – Presumption u/s. 132 (4A) not available to an addition u/s. 69

Ushakant M. Patel vs. CIT [2006] 201 CTR (Guj.) 501.

The assessee was subjected to action

u/s. 132(1) and on the basis of note books and loose papers certain amount was treated as unexplained investment u/s. 69. The CIT(A) deleted the additions. However, the Appellate Tribunal confirmed the addition on the ground that burden was on the assessee in view of provisions of section 132 (4A) of the Act to lead evidence to rebut presumptions raised by the said section.

The Assessee preferred a reference application to the High Court. The Hon’ble Court observed that even if the contention in of Revenue that provisions of section 132(4A) are available to Revenue during course of regular assessment proceedings is accepted for the sake of argument, yet nonetheless, the prerequisite conditions of section 69 cannot be given a go-by and have to be met with. Therefore, even if the presumption available under section 132(4A) can be raised against the assessee the ingredients, by way of prerequisite condition of Section 69 have to be satisfied and cannot be presumed to have been established on the basis of section 132(4A) simpliciter.

7. Business Expenditure – Retrenchment compensation – Allowable as deduction even if the manufacturing activity is temporarily closed when the trading activity is continued

CIT vs. Margarine & Refined Oils Co. Ltd. [2006] 282 ITR 576 (Karn.)

The assessee was engaged in the manufacture of refined oil and trading in various commodities. From the assessment year 1981-82 the assessee ceased its manufacturing activity but continued the trading activity in various commodities. The assessee paid retrenchment compensation to the employees who were employed in the manufacturing unit on their termination of service. The assessee claimed deduction of the amount incurred by way of retrenchment compensation. The A. O. disallowed the claim on the ground that the business had been stopped. The first appellate authority accepted the contention of the assessee that only the manufacturing activity had been discontinued and the business of trading activity in various commodities continued. Therefore he allowed the deductions sought by the assessee. This was upheld by the Tribunal.

The Hon’ble High Court upheld the Appellate Tribunal’s decision with the observations that the expenditure should be laid down or expended wholly and exclusively for the purpose of business or profession. The expenditure incurred by the management in paying retrenchment compensation for termination of service is a business expenditure, provided the employer continues to carry on the business after such retrenchment. However, if the retrenchment is done consequent to closure of business, then the amount paid towards retrenchment compensation cannot be claimed as business expenditure, as on the date the retrenchment compensation is paid the assessee is not carrying on any business. But, if the assessee continues to carry on business and if one line of business is stopped resulting in retrenchment of workmen necessitating payment of compensation to them, the said amount paid towards compensation constitutes business expenditure.

8. Appellate Orders – Order giving effect to Appellate Order is appealable – Order refusing interest on refund is appealable

CIT vs. Industrial Machinery Manufacturing P. Ltd. [2006] 282 ITR 595 (Guj)

An order giving effect to the appellate order bears the same characteristic as the original order against which appeal was filed. An appeal is nothing but continuation of the original proceedings and hence, an order passed to give effect to the findings of the appellate authority cannot be different in nature.

The appeal was filed from the order giving effect to the order passed on appeal from an assessment order. The appeal was maintainable. The order refusing to grant interest under section 214 of the Income-tax Act, 1961, was an appealable order and the Commissioner (Appeals) was not justified in not entertaining the appeal.

9. Disallowance of expenditure for not deducting Tax – Section 40(a)(i) – Interest on delayed payment to suppliers do not attract provisions of TDS – Disallowance not justified

CIT vs. India Pistons Ltd. [2006] 282 ITR 632 (Mad.)

The Assessee, engaged in the business of manufacture of pistons for automobiles and other stationary engines, claimed deduction of interest paid to suppliers. The Assessing Officer disallowed the interest on foreign bill under section 40(a)(i) as no tax was deducted at source.

The assessee’s appeal was accepted by the CIT(A). The Department lost before the Appellate Tribunal and approached High Court. The Hon’ble Court upheld the Appellate Tribunal order with observations that even in the assessment order, the Assessing Officer mentioned that the interest pertained to foreign bills. If that be so, since the amount was not a loan and the amount was not a loan and the amount of interest paid was not interest on loan, deduction of tax at source was not attracted. Interest on foreign bills was deductible expenditure.

10. Powers of Appellate Tribunal to Rectify – Rectification application can not be rejected without giving an opportunity of being heard

Jain Trading Co. vs. UOI [2006] 282 ITR 640 (Bom)

The Appellate Tribunal passed an order for the assessment year 1999-2000 disposing off the appeal. The assessee found certain apparent mistakes in the aforesaid order. Therefore, the Aassessee filed a miscellaneous application under section 254(2) of the Income-tax Act, 1961, for rectification of those mistakes. The assessee stated that it had given details of each and every transaction of purchase and sale and GP thereon, which had not been looked into by any of the authorities at any stage. The application was rejected without giving the assessee an opportunity of being heard.

The Assessee preferred a writ petition. The Hon’ble Court observed that the Tribunal ought to have heard the assessee and also ought to have dealt with the specific contentions regarding factual errors, by giving proper findings. The order rejecting the application was not valid and was liable to be quashed.