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Apex court decisions of import
December, 23rd 2006

In 2006, the Supreme Court delivered significant rulings on tax issues. What follows is a sample of some of them in the realm of income-tax.

Interest not leviable under Sections 234B and 234C where tax is payable on the basis of book profits: In the case of companies, if the tax on income computed as per the regular provisions of the Income-tax Act is less than the tax on income computed under Section 115 JB, the assessee has to pay tax as per Section 115 JB.

This is commonly known as `book profits tax'. This book profit could be ascertained only after the end of the financial year. Whether interest under Sections 234 B and 234C is leviable on such book profit tax was hotly debated. The apex court, in CIT vs Kwality Biscuits (2006 284 ITR 434 SC), has affirmed the Karnataka High Court decision by stating that the determination of tax on book profits is possible only after the end of the previous year. Accordingly, interest leviable under Sections 234B and 234C for non-payment of advance tax is not applicable where the final tax liability is computed on the book profits of the assessee. This decision has set at rest the controversy vis--vis interest for non-payment of advance tax in the case of assessees who pay tax on book profits.

Claim of deduction not possible otherwise than by way of revised return: An assessee having filed a return may notice an omission or error subsequently. The omission or error may result in denial of deduction, allowance or incentive allowable under the Act. Whether the assessee may merely intimate such omission to the assessing officer (AO) for correction before assessment or he has to file a revised return for rectifying the error or omission was the issue in Goetze (India) Ltd vs CIT (2006 284 ITR 323 SC).

The apex court held that the assessee having filed a return cannot claim a deduction by way of a letter to the AO. There is no statutory provision for allowing an amendment in the return by means of a letter. The assessee cannot claim a deduction in respect of the return filed without filing a revised return. However, the apex court held that its decision is limited to the power of assessing authority and does not impinge on the power of the appellate tribunal under Section 254 of the I-T Act. This decision makes clear that the assessees have to file revised returns for claiming deduction or exemption if the return was filed earlier without such claims.

Retrospective amendment must be indicated specifically: In CIT vs Varas International (P) Ltd (2006 283 ITR 484 SC), the apex court held that an amendment of a statutory provision is to be taken as retrospective in operation only if the amendment is specific or, by implication, it is meant to operate retrospectively.

For example, Section 43 B was inserted by the Finance Act, 1984 but the first proviso to Section 43 B was inserted by the Finance Act, 1987 which extended the time limit for remittance up to the due date for filing the return prescribed in Section 139(1).

The apex court, in Allied Motors (P) Ltd vs CIT (1997 224 ITR 677), held that the first proviso, though inserted later, has retrospective operation, that is, from the date of insertion of Section 43 B. Similarly, the omission of second proviso to Section 43B by the Finance Act, 2003 was interpreted as retrospective in operation and were not in existence or never existed (CIT vs George Williamson (Assam) Ltd 2006 284 ITR 619 Gau.)

Stamp duty and registration for issue of bonus shares is a revenue expenditure: In Brooke Bond India Ltd (225 ITR 798) it was held that expenditure towards issue of fresh shares as capital expenditure. However, the apex court, in CIT vs General Insurance Corporation (2006 286 ITR 232 SC), held that in the case of issue of bonus shares there is no fresh inflow of funds or increase in the capital employed.

The reserves of the entity get converted into share capital. The total funds with the entity remain the same, both before and after the issue of bonus shares. Accordingly, the expenditure towards stamp duty and registration for issue of bonus shares was held as revenue expenditure.

This decision overrules the decision rendered in Ahmedabad Manufacturing & Calico (P) Ltd vs CIT (1986 162 ITR 800 Gujarat) and Vazir Sultan Tobacco Co Ltd vs CIT (1990 184 ITR 70 AP). It applied the rationale of the decision rendered in Empire Jute Co Ltd vs CIT (1980 124 ITR 1 SC).

(The author is an Erode-based chartered accountant.)

Vendors liability taken over is not an asset eligible for depreciation: In CIT vs Hoogly Mills Co Ltd (2006 287 ITR 333 SC), the assessee purchased an undertaking along with accrued and future gratuity liability of the vendor. The amount of such liability taken over by the assessee was treated as an asset and depreciation was claimed. This was allowed by the Calcutta High Court (266 ITR 257).

The apex court held that the liability or the expenditure taken over by the assessee is not an asset, eligible for depreciation. The apex court held depreciation is allowable as per Section 32 in respect of tangible and intangible assets. A liability taken over or the future expenditure is not an asset eligible for depreciation allowance.

Explanation to Section 37 does not cover business loss: Explanation to Section 37 says that any expenditure incurred by the assessee which is an offence or prohibited by law is not eligible for deduction. The apex court, in Dr T. A. Quereshi vs CIT (2006 287 ITR 547 SC), dealt with a case of a doctor whose claim of deduction to the extent of the stocks seized was disallowed by the Madhya Pradesh High Court (275 ITR 352).

The apex court held that once it is found that the assessee is engaged in the manufacture and sale of any substance (including prohibited articles) the stocks seized is a business loss. It applied the precedent in CIT vs Piara Singh (1980 124 ITR 40 SC). It was held that Section 37 is applicable only to business expenditure and not business losses. Business losses are allowable on ordinary commercial principles for computing profits. The loss of stock-in-trade being a trading loss is allowable in computing the profits of illegal business.

Direction for special audit under Section 142(2A) is quasi judicial in nature: Section 142(2A) empowers the AO to direct the assessee to get the accounts audited afresh. However, before exercising such power the previous approval of the Chief Commissioner or Commissioner, as the case may be, must be obtained.

In Rajesh Kumar vs Deputy CIT (2006 287 ITR 91 SC), the apex court laid down that the factors such as (a) the nature of accounts; (b) complexity of accounts; and (c) the interest of the Revenue are the pre-requisites to be satisfied for giving direction for audit under Section 142(2A).

It was held that the assessee must be given an opportunity of being heard and before issuing a direction for audit, the principles of natural justice have to be satisfied. This decision approved the decisions rendered in Peerless General Finance & Investment Co Ltd vs Deputy CIT (1999 236 ITR 671 Calcutta) and Muthoottu Mini Kuries vs Deputy CIT (2001 250 ITR 455 Kerala) and disapproved the decision rendered in Atlas Copco (India) Ltd vs Asst. CIT (2006 283 ITR 56 Bombay) and Gurunanak Enterprises vs CIT (2003 259 ITR 637 Delhi).

V. K. Subramani

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