A compilation of some of the significant income-tax decisions of appellate tribunals during 2006.
Appellate tribunal is the final fact-finding authority. In respect of facts, no further appeal can be made by the assessee or the Revenue. Decisions of appellate tribunals are educative, as the reasons leading to the conclusions are elaborated. The following are some of the noteworthy decisions of appellate tribunal on income-tax matters during 2006.
Determination of accumulated profits is a prerequisite for taxing a loan or advance to the shareholder as deemed dividend in the case of closely-held companies. If a company has only losses, then advancing money to shareholders cannot be taxed as deemed dividend. Also, advancing money in the regular course of business is not chargeable to tax as deemed dividend. In Deputy CIT vs Oscar Investments Ltd (2006 98 ITD 339 Mumbai) it was held that for computing the deemed dividend which is taxable as income under Section 2(22)(e), the debit balance of profit and loss account (being loss) appearing in the assets side of the balance-sheet must be considered.
In this case, Rs 23,000 appeared under the head `reserves and surplus' in the liability side of the balance-sheet and Rs 2 lakh, being loss, in the assets side. The accumulated profit was accordingly determined as Rs 1.77 lakh (loss) and it was held that the provisions of deemed dividend could not be applied.
Time limit for appeal
The time limit for appeals before the CIT (Appeals) is 30 days and for appeals before appellate tribunal, 60 days. It is to be counted from the date of receipt of order or communication to the appellant. Section 249(3) empowers the Commissioner (Appeals) to condone the delay in preferring an appeal by the assessee if the appellant satisfies that he had sufficient cause for not presenting the appeal within time.
In Sri Venkatesa Paper & Boards Ltd vs Deputy CIT (2006 98 ITD 200 Chennai-Trib) the assessee did not contest the assessment order which disallowed Rs 1.57 crore towards capital expenditure. The assessee deliberately avoided appeal on the reasoning that it could claim depreciation in future in respect of the capital expenditure disallowed in assessment. Subsequently, the assessee preferred appeal before the CIT (Appeals) with a petition for condoning the delay in preferring the appeal. The tribunal held that the assessee had taken a conscious decision not to appeal earlier and thereafter preferred an appeal beyond the prescribed time limit.
The tribunal observed a change in the legal position owing to Supreme Court and High Court decisions interpretation or understanding of law could constitute sufficient cause for condoning the delay. In respect of the expenditure claim, the assessee had the apex court decision in Mahalakshmi Textile Mills Ltd (66 ITR 710) to bank upon, but did not prefer an appeal earlier. Accordingly, the CIT (Appeals) refusal to condone the delay in filing appeal was upheld by the tribunal.
An assessee having filed a return may discover an omission or wrong statement subsequently. Section 139(5) provides for filing a revised return by rectifying the omission or wrong statement in the original return. The time limit is also prescribed, that is, before the completion of assessment or within one year from the end of the relevant assessment year, whichever is earlier.
In Deputy CIT vs Grey Cast Foundry Works (2006 99 ITD 515 Ahd. Trib) the assessee filed a return and, at the time of assessment on the repeated questioning by the assessing officer relating to closing stock, offered Rs 8.71 lakh as additional income in the revised return. The tribunal held that a revised return under Section 139(5) must be a return, to set right a bona fide omission and discovery of the same by the assessee himself. It was held that if the omission or wrong statement is discovered by the Department and consequent to enquiry the revised return was filed, then such revised return cannot save the consequence of penalty for concealment contained in Section 271(1)(c).
Status following appeal
In first appeal, the Commissioner (Appeals) may confirm, reduce, enhance or annul the assessment. The power of setting aside has been omitted w.e.f. June 1, 2001. Whereas for the appellate tribunal the law says that the tribunal may, after giving both the parties to the appeal an opportunity of being heard, pass such order as it thinks fit. The power of enhancing the assessment is not explicitly conferred on the appellate tribunal.
In Deputy CIT vs Maruti Udyog Ltd (2006 99 ITD 666 Del-Trib) it was held that on comparative study of Section 254 (1) of Income-tax Act and Section 24(5) of the Wealth Tax Act, the assessee cannot be put to a disadvantageous position compared to his standing during the original assessment proceedings. Any additional ground raised by the Revenue which does not directly arise from the order of CIT (Appeals) could not be accepted by the tribunal. However, in respect of wealth tax matters the tribunal may pass an order enhancing the assessment or penalty as per Section 24(5). In the case of income-tax, as per Section 254(1) no such power is given to the tribunal. Hence, an assessee cannot be worse off than what he was in the original assessment by preferring an appeal before tribunal.
When a sum receivable in law or as per contract could not be realised, the assessee may resort to writing off such amount. Bad debt could arise only where the assessee follows mercantile system of accounting. Any sum recovered subsequent to such write off is chargeable to tax as income of the assessee. In Deputy CIT vs Oman International Bank SAOG (2006 100 ITD 285 Mumbai SB) it was held that the amendment to Sections 36(1)(vii) and 36(2) explained by Circular No. 551 dated January 23, 1990, is to do away with the complications involved in the deductibility of bad debts. It was held that the amendment has removed the requirement of the assessee proving that the debt has become bad for allowance of deduction. It was held that it is not obligatory for the assessee to prove that the debt written off by him is bad for the purpose of allowance under Section 36(1)(vii).
Certain expenditures are deductible only on actual-payment basis. The method of accounting regularly adopted by the assessee cannot be applied for allowing or rejecting such expenditures. In Kwality Milk Foods Ltd vs Assistant CIT (2006 100 ITD 199 Chennai SB) the amendment in proviso to Section 43 B brought in by the Finance Act, 2003 was held as curative in nature and accordingly retrospective in operation. Hence, payment to provident fund or superannuation fund by the employer before the due date for filing the return was held as eligible for deduction under Section 43B. Taking the help of this decision, taxpayers can seek relief by means of rectification petition even for the assessment years preceding the assessment year 2004-05.
Scope of assessment
In Choice Aquaculture (P) Ltd vs ITO (2006 100 ITD 143 Ahd-Trib), the assessee, after the return was processed under Section 143(1), filed a petition under Section 154 seeking allowance of enhanced depreciation claim. The assessing officer declined to pass an order of rectification under Section 154 on the reasoning that the allowance of claim would result in income assessed at a figure less than what was declared in the return filed. Accordingly, the plea was rejected.
The tribunal held that an assessment contemplated in Section 143(1) is without any powers for modification of income admitted by the assessee. It was held that the assessee could have claimed the benefit by means of filing revised return and could not succeed by means of a petition under Section 154.
Scope of Section 148
In Videocon Leasing & Industrial Ind. Fin Ltd vs JCIT (2006 103 ITD 109 (Ahd-Trib), the assessee filed a return beyond the time prescribed under Section 139. The assessee requested for issue of notice under Section 148 and replied that the return filed may be treated as filed in response to the said notice. Subsequently a notice under Section 142(1) was issued and assessment was completed determining loss of Rs 18.42 lakh. It was held that the income for the purpose of assessment under Section 147 cannot be a negative figure. The proceedings under Sections 147 and 148 are for the benefit of the Revenue and not the assessee. If the income assessed is a negative figure the assessing officer is entitled to close the proceedings and cannot complete the assessment by determining loss.
Working partner salary
In the case of partnership firms, working partner salary is allowed subject to authorisation in the deed and the monetary limits prescribed in Section 40(b). In ITO vs J. M. P. Enterprises (2006 101 ITD 324 Asr-Trib) the firm claimed working partner salary as deduction under Section 40(b). The partnership deed provided remuneration to working partners at Rs 1.20 lakh each per annum subject to the maximum admissible under the Act. The claim of paying remuneration only to four of the five partners was held as `not in accordance with the terms of the deed'. It was held that though no payment was made to one of the partners that would not disentitle the firm from claiming deduction under Section 40(b).
The tribunal observed that if some of the working partners do no take remuneration based on mutual agreement and the firm does not claim deduction for the same, the Revenue cannot object to the same, as Section 40(b) is operative only when the deduction is claimed and not otherwise.
In Assistant CIT vs Jagdish C. Sheth (2006 101 ITD 360 Mum-Trib) it was held that even in the block asset concept if an asset entered into a block and depreciation was allowed on that block, the asset, when not eligible for depreciation, has to be excluded from the block. The argument that once an asset enters into the block it is eligible for depreciation, as it loses its individual identity, was rejected by the tribunal.
V. K. Subramani (The author is an Erode-based chartered accountant.)