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1991 (3) TMI 80
The High Court of Bombay delivered a judgment regarding direct assessment on beneficiaries under section 21(2) of the Wealth-tax Act, 1957. Questions 1-4 related to direct assessment, while questions 7-11 pertained to the valuation of the assessee's share in jointly owned property. The court held that direct assessment on beneficiaries is allowed under section 21(2) and directed the Tribunal to reframe the valuation question for further examination. The Tribunal was instructed to refer the question of law to the court within six months. No costs were awarded.
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1991 (3) TMI 79
Issues Involved: 1. Whether the amount credited as the price of medicine supplied to Government represents accrued income or income received. 2. Whether entries made in accounts represent mere claims.
Summary:
Issue 1: Accrued Income or Income Received The respondent-assessee, a public sector undertaking, supplied pharmaceutical products to the Health Services Department of the Kerala Government. The Government sanctioned ad hoc advances, adjusted later against supplies, based on tentative prices. The assessee claimed Rs. 41,86,349 as excess amount receivable, which the Government rejected. The Income-tax Officer (ITO) refused to exclude this amount from total receipts, citing the mercantile system of accounting. However, the Commissioner of Income-tax (Appeals) and the Tribunal held that the claim was unilateral and did not constitute accrued income. The Tribunal relied on Supreme Court decisions in Shoorji Vallabhdas and Co. [1962] 46 ITR 144 and Gujarat High Court in Western India Engineering Co. [1971] 81 ITR 712, concluding that the price initially charged did not represent the correct price and a mere claim cannot be equated with income.
Issue 2: Entries in Accounts as Mere Claims The Tribunal observed that the entries made in the accounts represented mere claims and not accrued income. The Supreme Court in CIT v. A. Krishnaswami Mudaliar [1964] 53 ITR 122 distinguished between the mercantile and cash systems of accounting, emphasizing that only real income is chargeable to tax. The Supreme Court in Shoorji Vallabhdas and Co. [1962] 46 ITR 144 held that hypothetical income not materializing cannot be taxed. The Tribunal, agreeing with the Commissioner of Income-tax (Appeals), noted that the price of drugs supplied was tentative and not fixed by contract, and the entries made were mere claims, not accrued income.
Conclusion: The Tribunal was correct in excluding the amount of Rs. 41,86,349 from the total receipts, as it represented a mere claim and not real income. The question referred was answered in the affirmative, in favor of the assessee and against the Revenue.
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1991 (3) TMI 78
Issues involved: Challenge to order of Commissioner of Income-tax u/s 264 dismissing revision petition regarding assessment year 1984-85 based on discrepancy in sale consideration of house property.
Summary: The High Court of Allahabad heard the writ petition challenging the order of the Commissioner of Income-tax u/s 264 regarding the assessment year 1984-85. The petitioner-assessee had purchased a house property where the market value for stamp duty was Rs. 2,07,500, but the actual consideration was stated as Rs. 1,50,000. The Income-tax Officer added only fifty per cent of the difference to the income of the assessee, as the house was purchased in two portions. The Appellate Assistant Commissioner dismissed the appeal, noting the stamp duty value and lack of documentary evidence. The assessee then filed a revision u/s 264 before the Commissioner, who emphasized that stamp duty was paid according to circle rates. The High Court held that the actual consideration passing between parties may differ from stamp duty value, and the facts of each case must be considered. The petitioner's explanation about the property being under tenancy was crucial. Consequently, the orders of all three authorities were quashed, and the matter was remitted to the Income-tax Officer for redetermination of the actual consideration paid by the assessee. The assessment was to be finalized accordingly, and the writ petition was allowed without costs.
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1991 (3) TMI 77
The Revenue asked the court to direct the Tribunal to consider a question regarding the penalty under section 271(1)(c) for alleged gift amount of Rs. 23,000. The Tribunal found no proof of wilful or fraudulent concealment, rejecting the application.
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1991 (3) TMI 76
The High Court of Madhya Pradesh rejected an application under section 256(2) of the Income-tax Act, 1961, by the Commissioner of Income-tax, Bhopal, regarding the deductibility of capital subsidy from the actual cost of assets for depreciation. The Tribunal's decision was based on a previous ruling of the High Court, and the application was rejected in line with this precedent. No referable question was found to survive, and the application was dismissed with no order as to costs.
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1991 (3) TMI 75
The High Court of Allahabad directed the Tribunal to refer a question of law regarding income tax exemption under sections 11 and 12A of the Income-tax Act for assessment year 1985-86. The court allowed the application in part, with no costs. (Case citation: 1991 (3) TMI 75 - Allahabad High Court)
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1991 (3) TMI 74
Issues involved: Interpretation of provisions of Income-tax Act, 1961 regarding admission of assessment order as evidence and examination on merits.
Summary: The High Court of Karnataka considered a case involving the refusal of the Tribunal to admit an assessment order by the Commercial Tax Officer as evidence for examination on merits under the Income-tax Act, 1961. The assessee, engaged in sugar production, contested that the assessment based on turnover figures from the Commercial Tax Department did not accurately reflect their taxable income, as sugar sales were not taxed under the Sales Tax Act. The Income-tax Officer estimated the taxable income at 25% of the turnover, without considering the specific turnover related to sugar sales. The Commissioner and Appellate Tribunal upheld the decision to not admit the assessment order under the Sales Tax Act. The court analyzed the principles of best judgment assessment, emphasizing the need for a fair and proper estimate of income based on available material and local knowledge. The court highlighted that guesswork in assessment should be rational and have a reasonable nexus to the available material.
The court noted that the assessment should have considered the turnover specifically related to sugar sales, as the income of the assessee solely derived from sugar sales. It was emphasized that a fair estimate of income should exclude irrelevant turnover figures to avoid wild guesswork. The Commercial Tax Officer's final turnover figures were crucial, indicating the need for the Income-tax Officer to seek the assessment order for accurate data. The court stressed the importance of fairness in the assessment process, suggesting that the Income-tax Officer should have requested the sales tax assessment order to obtain precise turnover figures for sugar sales.
Regarding the belated production of the assessment order, the court opined that the material should have been accepted as clarificatory to ensure a fair assessment. The court rejected the argument that the best judgment assessment should penalize defaulting assessees, emphasizing the need for a liberal approach in applying procedural provisions to levy tax on real income. Ultimately, the court ruled in favor of the assessee, stating that the appellate authority should have considered the assessment order to ensure a rational and fair assessment.
In conclusion, the court answered the referred question in the negative, favoring the assessee and highlighting the importance of fairness and proper estimation in best judgment assessments under the Income-tax Act, 1961.
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1991 (3) TMI 73
Issues: Interpretation of section 40A(3) of the Income-tax Act, 1961 regarding the treatment of amounts spent by the assessee in purchasing goods for the purpose of resale as expenditure.
Analysis: The High Court was tasked with interpreting the application of section 40A(3) of the Income-tax Act, 1961, specifically regarding whether the amounts spent by the assessee in purchasing goods for resale should be considered as expenditure. The court referred to a previous judgment by a Bench of the court and decisions from other High Courts to establish a precedent. The court highlighted that the term "expenditure" in section 40A(3) is not limited to overhead expenses but has a broader scope, encompassing expenses relevant to determining gross profit, including payments made for purchasing stock-in-trade. The court emphasized that the objective of the provision is to prevent the use of unaccounted money in business transactions and ensure transparency. The court rejected the argument that the provision only applies to deductions under specific sections, asserting that the rule applies to all expenditure claimed, including amounts spent on purchasing goods for resale. The court concluded that restricting the meaning of "expenditure" would go against the legislative intent and the purpose of promoting transparency in business transactions. Therefore, the court upheld the previous judgment and ruled in favor of the Revenue, stating that the amounts spent on purchasing goods for resale should be considered as expenditure under section 40A(3) of the Income-tax Act, 1961.
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1991 (3) TMI 72
Issues involved: Interpretation of the term "plant" for investment allowance under section 32A of the Income-tax Act.
The judgment addressed the issue of whether a storage tank could be considered as "plant" for the purpose of claiming investment allowance under section 32A of the Income-tax Act. The assessee, engaged in the manufacture of non-edible oil, constructed a storage tank for the storage of hexane and manufactured oil. The Income-tax Officer disallowed the claim, stating that a storage tank cannot be treated as "plant" or "machinery." However, the Appellate Tribunal accepted the contention that the tank is an apparatus used in the manufacturing process and constitutes "plant," leading to a reference at the instance of the Revenue.
The court analyzed the definition of "plant" under section 32A and section 43(3) of the Act. While section 43(3) defines "plant" to include various items like ships, vehicles, books, and scientific apparatus, the court rejected the argument that a storage tank cannot be considered "plant" based on the principle of ejusdem generis. The court emphasized that the definition of "plant" should encompass items necessary or facilitating the business or profession of an assessee, irrespective of fitting into specific categories mentioned in the statute.
The judgment referred to precedents such as Indian Aluminium Co. Ltd. v. CIT and CIT v. Taj Mahal Hotel to support the broad interpretation of the term "plant." These cases established that items essential for business operations, like storage tanks and sanitary fittings, could be considered as "plant." The court also cited decisions from the Calcutta and Andhra Pradesh High Courts where tube-wells and wells were treated as "plant" due to their importance in industrial production.
In conclusion, the court held that the storage tank in question was essential for the assessee's oil production business and therefore qualified as "plant" for claiming investment allowance under section 32A. The judgment favored the assessee, affirming the Appellate Tribunal's decision and ruling against the Revenue's contention.
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1991 (3) TMI 71
The High Court of Allahabad declined to answer the questions referred in the case due to the decision in Bar Council of Uttar Pradesh v. CIT [1983] 143 ITR 584, which established the Bar Council as a charitable institution. The case will be dealt with under sections 11 to 13 of the Income-tax Act, and the Tribunal is instructed to pass final orders accordingly.
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1991 (3) TMI 70
Issues Involved: The liability to pay surtax as a deduction in computing total income. Whether expenditure on physicians' samples falls within advertisement expenditure under section 37(3A) of the Income-tax Act, 1961.
Liability to Pay Surtax: The court ruled that the liability to pay surtax is not an admissible deduction in computing total income, aligning with a previous decision in CIT v. International Instruments (P.) Ltd. [1983] 144 ITR 936.
Expenditure on Physicians' Samples: The case involved whether the expenditure on physicians' samples should be considered as falling within advertisement expenditure under section 37(3A) of the Income-tax Act, 1961. The Appellate Tribunal held that the cost of free samples supplied to physicians was indeed for sales promotion, as the samples were used to publicize the drugs manufactured by the assessee.
The assessee argued that the samples were provided to gather feedback from medical practitioners and the public to improve the quality of the drugs, not for advertisement or sales promotion. The court considered the interpretation of "advertisement, publicity, and sales promotion," emphasizing that these terms should not be narrowly defined to only include media propaganda but should be understood in the context of the product being promoted.
The court highlighted that for drugs, creating confidence among medical practitioners is crucial, and free samples play a role in confirming the drug's reputation before wider circulation. The timing of providing free samples was also discussed, noting that the continuous supply of samples indicated a promotional aspect rather than mere research and development.
Additionally, the Revenue pointed out that the assessee initially categorized the expenditure under "Advertisement publicity and sales promotion" in the income return, supporting the view that the samples were indeed for promotional purposes. The court concluded that the three terms - advertisement, publicity, and sales promotion - can overlap in certain aspects and should not be narrowly interpreted, ultimately ruling in favor of the Revenue.
Therefore, the court answered the second question in the affirmative, determining that the expenditure on physicians' samples should be considered as falling within advertisement expenditure under section 37(3A) of the Income-tax Act, 1961.
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1991 (3) TMI 69
Issues involved: Interpretation of Income-tax Act, 1961 - Treatment of enhanced price as income and deduction of interest on loans.
Interpretation of enhanced price: The Tribunal had to determine if the extra amount of Rs. 2,07,943 realized as enhanced price due to a court decision should be considered as accrued income for the year. The court relied on the precedent set in Dhampur Sugar Mills Ltd. v. CIT [1991] 188 ITR 787, where it was held that such amounts should not be considered as part of the income for the year. The court, following this judgment, ruled in favor of the assessee and against the Revenue.
Deduction of interest on loans: The issue revolved around the deduction claimed by the assessee for the interest paid on loans borrowed during the relevant accounting year. The Income-tax Officer disallowed a portion of the interest as the borrowed funds were lent to directors and a related firm interest-free. Citing the decision in CIT v. H. R. Sugar Factory P. Ltd. [1991] 187 ITR 363, the court upheld the disallowance of interest, stating that the borrowed funds were not utilized for the purpose of the company due to substantial interest-free loans given to directors and their related firm. The court ruled against the assessee and in favor of the Revenue based on this interpretation.
Conclusion: The court answered the first question in favor of the assessee, following the precedent in Dhampur Sugar Mills Ltd. case, and the second question against the assessee, in line with the decision in CIT v. H. R. Sugar Factory P. Ltd. The judgment was delivered by B. P. JEEVAN REDDY C. J., with no order as to costs.
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1991 (3) TMI 68
Issues: 1. Whether the conversion of an individual's proprietary business into a partnership amounts to a transfer of assets within the Income-tax Act, 1961? 2. Whether the development rebate on plant and machinery of a proprietary business transferred to a partnership can be withdrawn under section 155(5) of the Income-tax Act, 1961?
Analysis: The case involved the conversion of an individual's proprietary business into a partnership and the subsequent treatment of the development rebate on the plant and machinery of the business. The individual, an assessee, had claimed development rebate during the relevant assessment years while operating the business as a proprietary concern. Upon converting the business into a partnership, the Income-tax Officer held that there was a transfer of assets, leading to the disentitlement of the rebate. The matter was taken to the Tribunal, which upheld the Income-tax Officer's decision, resulting in the appeal to the High Court.
The primary legal issue revolved around the interpretation of Section 34(3)(b) of the Income-tax Act, which deals with the treatment of development rebate in case of transfer of assets. The section specifies that if machinery or plant is transferred before the expiry of eight years, any allowance made under Section 33 shall be deemed wrongly made. The court had to determine whether the conversion of the proprietary business into a partnership constituted such a transfer under the provisions of the Act.
The High Court referred to precedents, including decisions of the Supreme Court, to analyze the concept of transfer in the context of partnership conversions. The court noted that the Supreme Court had previously held that bringing personal assets into a partnership amounts to a transfer of interest, attracting the relevant provisions of the Income-tax Act. The court also highlighted the evolution of judicial opinions on this matter, with several High Courts aligning their views with the Supreme Court's interpretation.
Moreover, the court distinguished the case from a previous Supreme Court judgment concerning the dissolution of a partnership firm, emphasizing that the transfer of assets to a partnership stands differently from asset distribution post-dissolution. The court ultimately relied on the Supreme Court's approval of previous decisions to uphold that the conversion of the proprietary business into a partnership constituted a transfer under the Income-tax Act, leading to the disentitlement of the development rebate.
In conclusion, the High Court answered the referred question in favor of the Revenue and against the assessee, upholding the disentitlement of the development rebate following the conversion of the proprietary business into a partnership. Additionally, the court certified the case as fit for appeal to the Supreme Court under Section 261 of the Act, considering its significance and the ongoing legal discourse on the matter.
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1991 (3) TMI 67
Issues Involved: 1. Investment allowance on enhanced cost due to foreign currency fluctuations. 2. Depreciation and investment allowance on capitalised amount under deferred payment scheme. 3. Treatment of excess available surplus under Payment of Bonus Act for deduction eligibility.
For the first issue, the court referred to a previous decision and answered in the affirmative in favor of the assessee. The third issue was also resolved in favor of the assessee based on a previous court decision. The second issue raised interesting aspects of sections 32 and 32A of the Income-tax Act.
Regarding the second issue, the Appellate Tribunal provided details of a transaction where the assessee claimed depreciation and investment allowance on an amount paid in instalments for machinery purchased under a deferred payment scheme. The Revenue contended that these amounts were interest payable for instalments and should not be considered in the capitalization value for depreciation and investment allowance. However, the Tribunal found that the full amount payable in instalments constituted the actual cost of the machinery, rejecting the Revenue's contention. The court noted that ownership vested with the purchaser immediately upon delivery of the machinery, and the transaction was completed upon delivery and handing over of negotiable instruments. The court emphasized the distinction between interest payable on belated payments and concessions in lump sum payments. It referred to a Supreme Court decision on capitalizing interest before production commencement on borrowed money for fixed assets.
The court analyzed the definition of "actual cost" under section 43(1) and discussed the Revenue's reliance on Explanation 8 to contend that future interest should not be included in computing actual cost. However, the court determined that the difference between gross sum and discounted sum did not represent interest payable by the assessee, as it arose due to the seller's choice to encash negotiable instruments. The court concluded that the amount in question cannot be considered interest, as there was no term for interest payment in the contract. Therefore, the court answered the second question in the affirmative and against the Revenue, allowing the claim of the assessee for depreciation and investment allowance on the capitalised amount paid in instalments for machinery.
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1991 (3) TMI 66
Issues involved: The judgment involves the question of whether an appeal by the assessee to the Appellate Assistant Commissioner of Income-tax against the non-allowance of interest by the Income-tax Officer under section 214/244 of the Income-tax Act, 1961, in the order giving effect to the appellate order is competent.
Summary: The assessee paid advance tax and upon regular assessment, a demand was raised by the Income-tax Officer, which included interest. The Appellate Assistant Commissioner partially allowed the appeal, leading to a refund to the assessee without interest under section 214. The Appellate Assistant Commissioner held that the appeal against non-payment of interest was competent, but the Tribunal disagreed, stating that the appeal was not competent solely against non-payment of interest under section 214.
The assessee argued that the levy of interest is part of the assessment process and disputed the non-payment of interest under section 214. The Revenue contended that the expression "denying liability" in the Act does not equate to the denial of interest payment by the Revenue. The Tribunal did not address whether the assessee was entitled to interest under section 214.
The Court held that the appeal by the assessee could be competent under section 246(1)(f) of the Act, as the Income-tax Officer's action to give effect to appellate orders can be considered an order under section 154. The Court relied on precedent and the principle of liberal construction of appeal provisions. The Court did not delve into the competence of the appeal under other sections, as the appeal under section 246(1)(f) was deemed sufficient.
In conclusion, the Court found in favor of the assessee regarding the competence of the appeal under section 246(1)(f) and did not award costs in the matter.
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1991 (3) TMI 65
Issues: 1. Timeliness of the application under section 256(1) of the Income-tax Act, 1961.
Detailed Analysis: The High Court of Delhi considered the timeliness of an application under section 256(1) of the Income-tax Act, 1961. The case involved appeals filed by the Department against orders of the Commissioner of Income-tax (Appeals) related to the deletion of a penalty. The order in question was served on the Chief Commissioner of Income-tax, New Delhi, on April 28, 1989, and subsequently on the Commissioner of Income-tax, Delhi (Central I), on August 14, 1989. The Commissioner filed the application under section 256(1) on October 12, 1989, within the 60-day period for filing the reference application.
The Tribunal, in an order dated December 5, 1989, concluded that the limitation period began from August 14, 1989, when service was effected on the Commissioner of Income-tax (Central 1). The petitioner challenged this decision, arguing that the date of service on the Chief Commissioner should be considered for calculating the limitation period. The petitioner's counsel contended that the amendment to section 254(3) aimed to facilitate valid service by allowing orders to be served on either the Commissioner or the Chief Commissioner.
However, the Court emphasized that the focus should be on section 256(1) for determining the timeliness of the reference application. Unlike section 254(3), there was no amendment in section 256(1) regarding service on the Chief Commissioner. The Court held that the absence of the term "Chief Commissioner" in section 256(1) precluded reading it into the provision. The legislative intent was clear that only service on the assessee or the Commissioner triggered the period for filing a reference application under section 256(1).
In a similar case, the Court had previously ruled that service on the Commissioner of Income-tax was crucial for computing the limitation period under section 256(1) or section 256(2). The Court reiterated that the Commissioner of Income-tax had the jurisdiction to file such applications, emphasizing the importance of serving the Commissioner for determining the timeliness of the application.
Ultimately, the Court dismissed the writ petition, finding no merit in the petitioner's argument. The judgment highlighted the significance of serving the Commissioner of Income-tax for initiating reference applications under the Income-tax Act, emphasizing the clear legislative framework governing the timeliness of such applications.
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1991 (3) TMI 64
Issues Involved: The judgment involves the following Issues: 1. Whether the genuineness of Indian Wool Traders as a concern is established. 2. Whether the payments made to Indian Wool Traders are genuine and can be explained. 3. Whether the provisions of section 40A(3) of the Income-tax Act are attracted to the payments made.
Issue 1: Genuineness of Indian Wool Traders: The petitioner sought to establish the genuineness of Indian Wool Traders, presenting evidence such as a settlement application and a bank certificate confirming a transaction. However, the Income-tax Officer, Appellate Assistant Commissioner, and Tribunal found the concern to be a "facade" based on various circumstances and evidence. The Tribunal concluded that the identity of Indian Wool Traders was not established, leading to the disallowance of payments made to the entity.
Issue 2: Explanation of Payments to Indian Wool Traders: The petitioner argued that making payments by crossed cheques should prove the genuineness of the recipient. However, the authorities held that the genuineness of a concern is a factual determination and cannot be solely based on the mode of payment. The Tribunal's finding that Indian Wool Traders was not genuine was upheld, and the petitioner's additional evidence request was denied.
Issue 3: Application of Section 40A(3) of the Act: Regarding the applicability of section 40A(3) to the payments made, the Tribunal found it unnecessary to address this issue due to the established lack of genuineness of Indian Wool Traders. The Tribunal's decision under section 256(1) of the Act aligned with this view, rendering the consideration of section 40A(3) academic.
The judgment dismisses the application filed by the petitioner-assessee under section 256(2) of the Income-tax Act, 1961, as the genuineness of Indian Wool Traders was not established, leading to the disallowance of payments and the rejection of additional evidence.
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1991 (3) TMI 63
The High Court of Bombay ruled on a departmental reference regarding the assessment of an assessee for the years 1969-70, 1970-71, and 1971-72. The court answered the first question in favor of the assessee based on a previous judgment. The second question, regarding weighted deduction for expenditure on insurance and interest paid in London, was also answered in favor of the assessee as the expenditure was for maintaining a branch office in London for promoting sales outside India. The Tribunal's decision was upheld.
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1991 (3) TMI 62
The High Court of Allahabad ruled that loans taken should not be excluded from the assessee's capital for calculating deduction under section 80J of the Income-tax Act, 1961. The case involved M/s. Lohia Machines Pvt. Ltd. and followed a previous Supreme Court decision in Lohia Machines Ltd. v. CIT [1985] 152 ITR 308. The judgment favored the Revenue and went against the assessee.
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1991 (3) TMI 61
Issues Involved: 1. Taxability of dividend income received by the assessee-company. 2. Legal implications of the amalgamation order on the taxability of the dividend.
Summary:
Issue 1: Taxability of Dividend Income Received by the Assessee-Company
The primary issue was whether the sum of Rs. 2,14,250 declared as dividend by Gagalbhai Jute Mills Pvt. Ltd. on September 2, 1968, was liable to be taxed as income in the hands of the assessee-company. The Tribunal held that the dividend was assessable as the assessee's income since it was received when the assessee was a recorded shareholder, referencing section 8(a) of the Income-tax Act, 1961, and the Supreme Court decision in Kishinchand Chellaram v. CIT [1962] 46 ITR 640.
Issue 2: Legal Implications of the Amalgamation Order on the Taxability of the Dividend
The court considered the legal effect of the amalgamation order dated January 6, 1969, which was to take effect from April 1, 1968. The amalgamation order implied that from April 1, 1968, the jute company was deemed non-existent, and the assessee-company ceased to be a shareholder of the jute company. Consequently, the dividend received was essentially the assessee's own money, and not income. The court noted that a company cannot hold shares of its own company or receive dividends from itself.
The court referred to section 394(1) of the Companies Act, 1956, and section 8(a) of the Income-tax Act, 1961, emphasizing that the dividend income accrues in the previous year it is declared. However, if the declaration becomes illegal or invalid within the same previous year, it cannot be considered as income. The court distinguished this case from Kishinchand Chellaram v. CIT, where the invalidation of dividend occurred after the end of the previous year.
Conclusion:
The court concluded that the amount of Rs. 2,14,250 could not be taxed as dividend income in the hands of the assessee-company, as it was the assessee's own money received due to the legal effect of the amalgamation order. The question was answered in the affirmative and in favor of the assessee, with no order as to costs.
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