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Law on `borrowed words'
September, 22nd 2007

Write what you know

In a recent taxation case, the apex court had to also consider a complaint of plagiarism. The issue was about a land deal - with the assessee saying that the sale consideration was Rs 4.10 lakh, as in the documents, and the taxman arguing that the amount was Rs 34.85 lakh, as found in some loose papers captured during a raid operation.

The High Court had relied heavily on the order of the Commissioner of Income Tax (Appeals) and that of the Income Tax Appellate Tribunal (ITAT), and held that no substantial questions of law had been raised. Accordingly, it dismissed the appeal. Which, therefore, resulted in the Department bringing up the case before the Supreme Court.

"Mr G. N. Vahanvati, the learned Solicitor General has at the very outset raised serious objection to the order of the High Court pointing out that Division Bench had merely plagiarised substantial portions from the order of the Commissioner and Tribunal in arriving at its conclusion and no independent assessment on the questions of law that arose for consideration, had been made," reads the text of the apex court verdict dated September 14.

"It is true that the Division Bench of the High Court has borrowed extensively from the orders of the Tribunal and the Commissioner and passed them off as if they were themselves the author's," noted the apex court. "We feel that quoting from an order of some authority particularly a specialised one cannot per se be faulted as this procedure can often help in making for brevity and precision, but we agree with Mr Vahanavati to the extent that any `borrowed words' used in a judgment must be acknowledged as such in any appropriate manner as a courtesy to the true author(s)."

Yet, the apex court had to ultimately dismiss the taxman's appeal, with there being no infirmity in the order of the High Court.

* * *


The case of Vidyut Metallics Ltd, a manufacturer of `safety razor blades' from imported stainless steel strips, was sharp enough for the Municipal Corporation of City of Thane to take right up to the Supreme Court. The revenue implication was 0.5 per cent octroi.

According to the company, steel strips came under the heading `iron and steel - hoops and strips', item No. 71 in the schedule to the Octroi Rules, liable to levy at 0.5 per cent. In contrast, the Thane corporation contended that the applicable heading was item No. 77, which was about "non-ferrous metals, that is to say brass, copper, tin, aluminium, lead zinc, German Silver, stainless steel their alloys, wires, wares, sheets ingots and circles," and which attracted 1 per cent octroi.

In fact, between 1968 and 1974, the company was paying octroi at 1 per cent. "In the year 1974, a sudden turn was taken by the company. It obtained a copy of the Rules and found that it was paying octroi at an enhanced rate of 1 per cent though it was liable to pay such octroi at the rate of 0.5 per cent only." reads a snatch from the apex court judgment dated September 14.

Moral: Read the rules before doing business.

* * *


There are two methods of `cash flow reporting', direct and indirect, observed the Supreme Court when deciding Reliance Energy Ltd (REL) vs Maharashtra State Road Development Corporation Ltd (MSRDC) on September 11. While both the methods give identical results in the matter of the final total, they differ only in presentation of the data contained in the cash flows from operational activities, added the court.

In this case, REL's chartered accountants KPMG had prepared the cash flow using the indirect method (a.k.a. reconciliation method), but MSRDC's consultants had rejected the same without giving any reasons. "In the evaluation process, the consultants were entitled to take into account future cash impact but in order to do so they had to say why the indirect method of `cash flow reporting' should not be accepted and if at all the impact of the provisioning was to be seen then there was no reason for not examining the audited accounts of 2004," said the court.

"There is a mix-up of two concepts here: the concept of non-compliance of financial criteria and the impact in future years on cash flow."

The very purpose of `cash flow reporting' is to find out the ability of the company to generate cash flow in future and if an important method of cash flow reporting were kept out, without any reason, then the decision to exclude REL would be `arbitrary, whimsical and unreasonable', ruled the court. "In our view, for non-consideration of the reconciliation method, under cash flow reporting system, the impugned decisionmaking process stood vitiated."

Instructive verdict.

* * *


Not long ago, the Patna Bench of the ITAT had to decide on a stack of appeals filed by the taxman and the assessees, where the main issue involved was fraudulent withdrawals from Animal Husbandry Department (AMD), Government of Bihar, in the fodder scam.

From the brief history of the case, narrated in the text of the order, you can know `the criminal conspiracy of systematic fraudulent withdrawals of funds from the State Exchequer in connivance with the officials of AHD, Government of Bihar, and others', which happened between 1987 and 1996.

The modus operandi was "that purchase orders were placed by AHD on the assessee for supply of feed to the Department. The assessee in turn would raise bogus bills of supply of feed on the Department without actually making them. In support of these supplies, the assessee would raise fictitious purchase vouchers as if purchases have actually been made from the farmers and reflect transportation of the same to the various stores/depots of AHD in Bihar without any actual transportation being done.

The fraudulent amount so withdrawn used to be drawn from bank account and thereafter divided among the various conspirators, whereas in the books of account it would be reflected as if the payment has been made to the farmer-suppliers and the transporters."

Based on the statement made by the assessee before the designated court of CBI, the assessing officer initiated proceeding under the Income-Tax Act and added the AHD payments of about Rs 7 crore to the income of the assessee.

However, the CIT (A) or the Commissioner of Income Tax (Appeals) quashed the addition, saying that the assessee had no right to the sum so fraudulently withdrawn and as such it could not be treated as income in his hands since it was not in the nature of profit of any trade or business.

"The act of raising fake bills was in the nature of a fraud perpetrated on the State Exchequer and not in the nature of trade or adventure in the nature of trade," he said. Aggrieved, the taxman took the issue to the High Court.

At the court, the assessee's counsel submitted that due to the truthfulness of the statement given by the assessee, the trial was successful and out of 36, 32 accused were found guilty. "In a case like this, where an assessee is not left with any money unto himself, he has already surrendered the sum fraudulently realised, given full account of the money lying with the other persons who are parties with him to such fraudulent act and is not left with anything to suffer tax - by bringing this amount to tax in his hand, what benefit will accrue to the State, except raising a hypothetical, unreal and useless demand?" asked the counsel.

He also presented an account of the money, thus: "Out of the total fraudulent receipts, 80 per cent was distributed directly to Dr S. B. Sinha and on his instructions to various other AHD officials named in the statement. Further, out of assessee's own share of booty of 20 per cent, 4 per cent was paid to the lower grade office staff of AHD.

Further, 4- 5 per cent was spent on various statutory taxes, office maintenance and settling of bills, etc. In addition to the above, further substantial amount has been spent on gratification to several high officials of AHD, such as, on their tours, travels, lodging and boarding, shopping, etc., over a period of ten years. After incurring all such expenses out of assessee's own share of 20 per cent, the assessee was left with a sum approx. of Rs 1.34 crores in cash, which was ultimately seized by the CBI on the basis of revelation made by him. Therefore, nothing remains left with the assessee out of his booty of 20 per cent."

A must-read verdict.


"I have an archaeologist-friend who found."

"Oh, et tu, sethu!"

"Not that. No evidence of tax in very ancient times, he says."

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