Direct Taxes

High Court
 

1. Business expenditure – Overtime wages for extra work paid as incentive to increase production – Such bonus is not covered by Payment of Bonus Act : Does not attract provisions of section 36(1)(ii) – Same is allowable expenditure u/s. 37(1)

CIT vs. Raza Textiles Ltd. [2005] 199 CTR 694 [All.]

The assessee had claimed deduction of the incentive bonus paid by it, over and above, the bonus paid to the workers under the Payment of Bonus Act. The assessee, on a query from the Assessing Officer, explained that the incentive bonus is an expenditure which it has incurred right from the inception. During the previous year relevant to the impugned assessment year the assessee’s workers had gone on strike. The labour unrest continued for a long time. But some of the workers had demonstrated their loyalty towards the management and risked their lives to carry on the manufacturing activity at the assessee’s mills. Therefore, the incentive bonus paid by the assessee is justified and the same should be allowed as deduction u/s. 37(1). The Assessing Officer rejected the claim on the ground that firstly the payments made to the employees as loan cannot be allowed as deduction. Secondly, if the incentive bonus is taken to be bonus, it is not allowable in view of first proviso to s. 36(1)(ii). Lastly, presuming (without accepting) that the payment is covered by second proviso to s. 36(1)(ii) I hold that with reference to the circumstances mentioned therein the payment does not qualify for deduction. The CIT(A) also rejected the claim of the assessee. The Appellate Tribunal accepted the contention of the assessee and allowed the claim of deduction.

The matter was taken to the High Court through a Reference Application by the Department. The Hon’ble High Court confirmed the order of the Appellate Tribunal observing that sec. 36(1)(ii) covers only bonus paid under the Payment of Bonus Act. Under the Payment of Bonus Act only approved bonus is payable and customary festival attendance or incentive bonus is not covered. Tribunal has come to the conclusion that workers were allowed to put in extra time and increase the production by their labour, good attendance and efficiency. For this extra time or overtime extra single wages was paid. It was this payment, which was treated as incentive bonus by the assessee. Such incentive bonus does not fall within the purview of Payment of Bonus Act and, thus, it is not covered under s. 36(1)(ii). Since the payment was wholly and exclusively for the purpose of business, it was liable for deduction under s. 37(1).

2. Capital Gains – Sale of property inherited does not attract the provisions of section 45 as their is cost of acquisition

CIT vs. Manoharsinhji P. Jadeja [2006] 281 ITR 19 (Guj)

The assessee, an individual, inherited certain property which was placed under attachment for recovery of outstanding taxes. The property was auctioned and capital gains were computed in the hands of the assessee. The assessee contended before the Assessing Officer that the inherited property does not have cost of acquisition. Thus, the machinery section fails and gains are not eligible to tax under the provision Income-tax Act, 1961. The assessee’s claim was rejected by the Assessing Officer and CIT(A). The Appellate Tribunal accepted the contention of the assessee and allowed the appeal. The Department contended before the Hon’ble High Court that the provisions of section 49(1)(iii)(a) and the Explanation under the said section it was submitted that in a case where the capital asset became the property of the assessee by the mode specified in clause (iii)(a) of sub-section (1) of section 49 the cost of acquisition was to be deemed to be the cost for which the previous owner of the property acquired it, and as per the Explanation the expression "previous owner" meant the last previous owner of the capital asset who acquired the property by a mode of acquisition other than that referred to in any of the clauses mentioned in sub-section (1) of section 49 of the Act. That under section 55(2)(ii) of the Act an assessee was required to exercise option by adopting the cost of acquisition as specified in any one of the modes under section 49(1) of the Act or adopt the fair market value of the asset on the 1st day of January, 1964. That when sub-section (3) of section 55 of the Act was read together with these provisions, it would point out to the scheme as operating so as to arrive at the chargeable capital gains by adopting either the fair market value of the capital asset on the specified date or the fair market value to be adopted under section 55(3) of the Act. Thus, according to Mr. Vyas, the assessee having failed to exercise the option the cost had to be adopted under 55(3) of the Act as the fair market value which term was defined in section 2(22A) of the Act. That accordingly the Assessing Officer had estimated the fair market value at Rs. 3,000/- and worked out the chargeable capital gains.

The Hon’ble Court confirmed the Appellate Order and observed that through section 45 of the Income-tax Act, 1961, is a charging section the Legislature has enacted detailed provisions in order to compute the profits or gains under that head and no provision at variance with such computation provisions can be applied for determining the chargeable profits and gains. The asset referred to in section 45 of the Act has to be one; (ii) in the acquisition whereof the assessee had incurred a cost, and the onus of showing that the assessee had cost is on the Revenue. If the Revenue fails to show that the assessee had incurred a cost, it would be impossible to compute the income chargeable to tax under the head "Capital gains". By the Finance Act, 1987, with effect from April 1, 1988, the amendment to section 55 of the Act only ropes in taxability of goodwill on transfer of the same even if there is no cost of acquisition. Similarly, section 55 has been amended from time to time to enable the taxation of other assets wherein no cost of acquisition is envisaged. Therefore, even if the amendment is taken into consideration section 55 can be invoked in cases of nil cost of acquisition for the purpose of bringing to tax the entire sale consideration only in relation to the specified assets. The importance of the date of acquisition cannot be lost sight of taking into consideration the scheme of the Act. Under the Act both short-term capital gains and long-term capital gains are chargeable to tax but the treatment thereof is different. In the present case, admittedly, the assets had been acquired by a mode of acquisition specified in section 49(1)(iii)(a) of the Act and thus the asset in question was a long-term capital asset but neither the cost nor the date of acquisition were ascertainable. The income-tax authorities were not right in working out the capital gains.

3. Concealment Penalty – Revised Returns – Sections 271(1)(c) and 139(5) – In the absence of any concealment in the revised returns no penalty can be levied

CIT vs. Shiv Oil and Dal Mill (2006) 281 ITR 221 (All.)

The assessee filed its return for the assessment year 1978-79 which were accepted u/s. 143(1). The Assessing Officer issued notice for scrutiny assessment and initiated the assessment proceedings. The Assessing Officer, during the course of the assessment, through order sheet entries called for details of purchases and sales of cycles. The assessee filed revised return of income and stated that there was a mistake in the valuation of the closing stock. The correction of mistake enhanced value of the closing stock and consequently the income also. The Assessing Officer levied concealment penalty u/s. 271(1)(c). The assessee preferred an appeal before the first appellate authority and succeeded.

The Department preferred further appeal before the Appellate Tribunal. The Appellate Tribunal reversed the order of the first Appellate authority.

The Hon’ble Court, while disposing of the assessee’s reference, observed that the assessee having filed the original return within the statutory period as provided under section 139(1) of the Act, it was entitled to file a revised return under the provisions of section 139(5) of the Act. Thus, the revised return filed under section 139(5) of the Act was a valid return and was to be taken into consideration. No concealment having been found in the revised return, the penalty proceedings in respect of the income declared in the return originally filed could not have been taken as the concealment had not yet been detected by the Assessing Officer up till the time the revised return was filed. Penalty could not be imposed under section 271(1)(c).

4. Deduction of Tax at Source – Salary – Section 192 – Obligation of deduction of tax contemplates existence of both conditions; i.e., accrual of salary and actual act of payment – Salary accrued but not paid – No obligation to deduct tax at source

CIT vs. Tej Quebecor Printing Ltd. [2006] 281 ITR 170 (Del.)

The assessee employed a Canadian national, at a fixed remuneration with perquisites of rent free accommodation, car with driver and a servant. The employee filed his individual return and paid taxes under section 140A. It was noticed by the Assessing Officer that no salary had been paid to the employee nor any deduction under section 192 made by the assessee. The Assessing Officer held the assessee to be in default under sections 201(1) and (1A). Liability arising on account of interest at 15 per cent, per annum for different periods for the assessment years 1995-96 to 1999-2000 was determined. The Commissioner (Appeals) held that both the assessee and its employee were trying to benefit from the defaults committed by them, inasmuch as the assessee was arguing that it did not deduct the taxes because no salary was paid, while the employee was arguing that interest relating to deferment of advance tax was not payable as the salary was not liable to deduction of tax at source. The Assessing Officer was directed to give credit to the extent of taxes paid by the employee and recover the remaining amount including interest from the assessee. On a difference of opinion between the members of the Tribunal the matter was referred to the Third Member. The majority opinion of the Tribunal was that if the Assessing Officer could obtain the account of the employee from the bank, he could also make enquiries as to who paid the amount in the account of the employee but the assessee placed evidence that the Canadian company paid the amount to the employee for discharging his income-tax liability in India. The Tribunal held that the Revenue had not discharged its onus to prove that any payment of salary was made by the assessee to the employee during the year under appeal and hence the obligation to deduct tax at source did not arise in the assessee’s case as the salary payable to the employee had not been actually paid to him.

The Department being aggrieved by the order of the Appellate Tribunal carried the matter to the High Court. The Hon’ble Court observed that the person making the payment can or is required to make a deduction towards tax at source only at the time of making such payment. The accrual of the payment and the actual making of the payment must both exist in order that a deduction at source may be made. No deduction at source is contemplated under section 192 of the Income tax Act, 1961, in cases where a payment towards salary has accrued but is not made. This petition is clear from similar provisions of sections 194B, 194BB, 194EE, 194F and 194L under which also a deduction at source is envisaged only if actual payment of the amount is made to the payee. In contradistinction to that requirement, there are provisions in the Act which authorize deduction at source even in cases where the payment is either made to the payee or credited to his account. The provisions of sections 193, 194A, 194C, 194D, 194E, 194G, 194H, 194-I, 194J, 194K, 195, 196A, 196B, 196C and 196D are relevant in this regard. Wherever the Legislature intended deductions to be made at source only at the time of making the payment, it provided so and wherever deductions were intended to be made even if the payment is credited to the account of the payee, it made a specific provision to that effect.

5. Deemed dividend – Section 2(22)(e) – No addition can be made in the hands of the firm when shares are held by the partners

CIT vs. Rajkumar Sing & Co. [2005] 199 CTR 88 (All.)

The assessee firm was a sub-contractor to a company. The partners held shares of the company in such manner that they satisfied the conditions laid down in section 2(22)(e). The firm enjoyed interest free advances from the company. The issue before the Hon’ble Allahabad High Court was with respect to entity in whose hands the advance can be treated as deemed dividend.

The Hon’ble Court held that clause (e) of s. 2(22) clearly provided that if the loan is received by the shareholder, it is only then the said loan can be deemed to be dividend in his hand. Admittedly, the assessee-firm was not the shareholder of the company and the partners of the firm were the shareholders in the books of the company, therefore, the loan advanced by the company to the firm cannot be deemed to be dividend inasmuch as loan was not to the shareholder but to the partnership firm which was not the shareholder in the books of the company. It is settled principle of law that the deeming provision has to be construed strictly.

6. Manufacture or production of article or thing – Section 80hh & Section 80i – Refining of oil purchased in local market amounts to production and eligible activity to claim deduction

CIT vs. Shiv Oil and Dal Mill [2006] 281 ITR 221 (All.)

The assessee-firm derived income from the business of extraction of oil from oil seeds and partly of refining oil purchased from the local market. The assessee filed its return of income for the assessment year 1987-88 and claimed deduction under sections 80HH and 80-I. The Assessing Officer limited the deduction under sections 80HH and 80-I of the Act to the activities of extraction of oil from oil seeds, but disallowed the claim relating to the activities of refining the oil from oil purchased from the market on the ground that the said activity did not amount to manufacture or processing of goods. The assessee got relief from the Appellate Tribunal. The Department carried the matter to High Court.

The Hon’ble High Court analyzed the relevant provisions in the light of various authorities and observed that under sections 80HH and 80-I of the Income-tax Act, 1961, deduction is available to an industrial undertaking which is involved in manufacture or production of articles or things. The word "production" has a wider connotation than the word "manufacture". While every manufacture can be characterized as production, every production need not amount to manufacture. The word "production" or "produce" when used in juxtaposition with the word manufacture takes in bringing into existence new goods by a process which may or may not amount to manufacture.

7. Plant & machinery – Investment Allowance – Section 32A – Electric installations, transformer and air-conditioning plant are plant & machinery and eligible to investment allowance

CIT vs. Starlight Silk Mills (P) Ltd. [2005] 199 CTR 718 (Guj.)

The assessee claimed investment allowance for the Assessment Year 1982-83 on the electric installations, air-conditioning, plant and transformer along with crimping machines, platform scale, pump set etc. treating the same as plant & machinery. The claim of the assessee on the above mentioned three items was disallowed by the Assessing Officer. The assessee preferred as appeal and got relief. The Appellate Tribunal also confirmed the relief granted by the first Appellate authority with an observation that for being eligible for grant of investment allowance under s. 32A of the Act it was not necessary for the assessee to establish that each item of plant and machinery should be directly used in the process of manufacturing. That once plant and machinery was used for the purpose of the assessee’s business of manufacturing art silk cloth, it would become eligible for grant of investment allowance provided other conditions stand fulfilled.

The Hon’ble Court while deciding the departmental reference held that there is no dispute as to the fact that the three items, on which investment allowance was not granted, are plant and machinery. On the positive side there is a concurrent finding recorded by the CIT(A) and the Tribunal that these items constituted an integrated plant and are not items which can be operated independent of each other for the purpose of the business of the assessee. On the negative side it is not the case of the Revenue that any of the prohibition specified by proviso to sub-s. (1) of s. 32A operates. Nor is it the Revenue’s case that the necessary reserve was not created. In the light of this position the finding recorded by the CIT(A) and the Tribunal concurrently holding that the three items form part of a consolidated manufacturing plant remains undisturbed and there is no material brought on record to dislodge the said finding. The Tribunal was justified in confirming the order of CIT(A) allowing investment allowance on electrical installations, transformer and air-conditions plant.