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1983 (11) TMI 56
Issues Involved:
1. Whether the mortgage obtained by the petitioner to secure the loan of Rs. 75,000 is a mortgage of immovable property or movable property.
2. Whether the refusal to grant approval as and from August 28, 1970, by the respondents was reasonable.
3. Whether the petitioner complied with all the requirements of Rule 3 of Part C of the 4th Schedule to the I.T. Act.
4. Whether Rule 101 of the I.T. Rules had any statutory or legal force prior to April 1, 1971.
5. The effect of the violation of Rule 101 on the approval of the gratuity fund.
6. Whether the fresh deed of trust dated January 2, 1975, infringes Rule 101.
Detailed Analysis:
1. Mortgage of Immovable Property or Movable Property:
The core issue was whether the mortgage obtained by the petitioner to secure the loan of Rs. 75,000 was of immovable property or movable property. The court examined precedents and definitions from various statutes. It was determined that the printing machineries embedded in the earth at Swadesamitran Press constituted immovable property. The court referenced several cases, including Mohammed Ibrahim v. Northern Circars Fibre Trading Co., which established that machinery fixed to a cement platform and attached to iron pillars embedded in the ground is considered immovable property. Similarly, J. Kuppanna Chetty, A. Ramayya Chetty and Co. v. Collector of Anantapur and Perumal Naicker v. Ramaswami Kone reinforced that machinery embedded for the beneficial enjoyment of the property is immovable property. The court concluded that the mortgage in question was indeed of immovable property, thus not violating Rule 101 of the I.T. Rules.
2. Reasonableness of Refusal to Grant Approval from August 28, 1970:
The petitioner argued that the refusal to grant approval from August 28, 1970, imposed a financial liability of Rs. 15 lakhs, indicating an unreasonable exercise of power. The court acknowledged that the power to grant approval under Rule 2 of Part C of the 4th Schedule to the I.T. Act is coupled with a duty to exercise it reasonably. Since the mortgage was determined to be of immovable property, the refusal based on the alleged violation of Rule 101 was unfounded, making the refusal unreasonable.
3. Compliance with Requirements of Rule 3:
The petitioner contended that they had complied with all the requirements of Rule 3 and that approval should have been granted without reference to Rule 101. The court did not find any non-compliance with Rule 3 and noted that the refusal was primarily based on an incorrect interpretation of the mortgage's nature.
4. Statutory or Legal Force of Rule 101 Prior to April 1, 1971:
The petitioner argued that Rule 101 did not have statutory or legal force before April 1, 1971, when Section 9(1)(bb) was inserted in Part C of the 4th Schedule to the I.T. Act by the T.L. (Amend.) Act, 1970. The court did not delve into this issue in detail, as it had already determined that the mortgage was of immovable property, thus not violating Rule 101.
5. Effect of Violation of Rule 101:
The petitioner argued that neither the I.T. Act nor the I.T. Rules specified the effect of violating Rule 101, which references Section 20(3) of the Trusts Act. The court noted that a violation of Section 20 would constitute a breach of trust, making the trustee liable to make good any loss. However, since the mortgage was of immovable property, there was no violation of Rule 101, rendering this issue moot.
6. Fresh Deed of Trust Dated January 2, 1975:
The petitioner claimed that the fresh deed of trust dated January 2, 1975, provided that the gratuity scheme came into force from December 1, 1970, and thus did not infringe Rule 101. The court did not find any infringement of Rule 101, as the mortgage was of immovable property, and therefore, the fresh deed of trust was valid.
Conclusion:
The court allowed the writ petition, holding that the mortgage was of immovable property and thus did not violate Rule 101. Consequently, the refusal to grant approval from August 28, 1970, was unreasonable. A mandamus was issued directing the respondents to accord approval for the gratuity fund in accordance with the application dated October 27, 1975. There was no order as to costs.
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1983 (11) TMI 55
Issues Involved:
1. Admissibility of interest payment as a deduction under Section 36(1)(iii) of the Income Tax Act, 1961.
2. Allowance of depreciation on capital assets used for scientific research under Section 35(2) of the Income Tax Act, 1961.
Detailed Analysis:
1. Admissibility of Interest Payment as a Deduction:
The primary issue was whether the interest payment made by the assessee for the period from August 10, 1971, till the date of repayment of Rs. 5.94 lakhs should be allowed as a deduction for the year 1972-73.
- Contentions of the Revenue: The Revenue argued that the assessee did not borrow capital for business purposes but received Rs. 5.94 lakhs as consideration for the intended sale of shares. Therefore, the payment of interest on the amounts returned cannot be allowed as a deduction in computing business income. The Revenue cited several precedents, including Metro Theatre Bombay Ltd. v. CIT, V. Ramaswami Ayyangar v. CIT, Bombay Steam Navigation Co. (1953) Private Ltd. v. CIT, and Madhav Prasad Jatia v. CIT, to support their argument.
- Contentions of the Assessee: The assessee argued that the disposal of shares was intended to augment internal resources for business expansion. The consideration received was used for business purposes, and thus, the interest paid should be allowable as a deduction.
- Court's Analysis:
- Section 36(1)(iii) Requirements: The court noted that for a deduction under Section 36(1)(iii), the following conditions must be satisfied: (1) there should be a borrowing of money, (2) the borrowing should be for business purposes, and (3) interest must be paid on the borrowing.
- Nature of Transaction: The court found that the transaction was not a borrowing but a sale of shares. The amounts received were consideration for the sale, not borrowed capital. Therefore, the relationship of borrower and lender did not exist.
- Utilization of Amounts: The court emphasized that the deposit of sale consideration into the overdraft account did not convert the transaction into a borrowing for business purposes. The nature of the transaction remained a sale, and the subsequent use of the amount for business purposes did not justify the deduction of interest paid.
- Tribunal's Error: The court disagreed with the Tribunal's view that the interest payment for the period after August 9, 1971, was for business purposes and should be allowed as a deduction. The court concluded that the transaction never partook the character of a borrowing, and the interest payment was a self-imposed obligation unrelated to the business.
- Conclusion: The court held that the interest payment was not allowable as a deduction under Section 36(1)(iii) and answered the first question in the negative, against the assessee.
2. Allowance of Depreciation on Capital Assets Used for Scientific Research:
The second issue was whether the assessee was entitled to depreciation on the full value of assets used for scientific research, even though the full value of the assets was allowed as a deduction under Section 35(2) in the earlier year.
- Background: In the assessment year 1971-72, depreciation was allowed on assets used for scientific research. The assessee sought to write off the balance in the assessment year 1972-73. The ITO and the AAC disallowed the claim, stating that the provisions of the Act do not permit the outright deduction of the original cost of capital assets in a year other than the one in which it was incurred.
- Tribunal's View: The Tribunal directed the ITO to recompute the allowance for depreciation if the assessee succeeded in treating the full amount as a deduction under Section 35(2) for the assessment year 1971-72.
- Court's Analysis:
- Retrospective Amendment: The court referred to the amendment of Section 35(2)(iv) by the Finance (No. 2) Act of 1980, with retrospective effect from April 1, 1962. The amendment states that where a deduction is allowed under Section 35, no deduction shall be allowed under Section 32 for the same or other previous years in respect of that asset.
- Impact of Amendment: The court held that the Tribunal's reasoning that the assessee is entitled to depreciation despite the deduction under Section 35(2) cannot hold good due to the retrospective amendment.
- Conclusion: The court answered the second question in the negative, against the assessee, and held that the assessee was not entitled to the allowance of depreciation on the capital assets used for scientific research if the full value of the assets was allowed as a deduction under Section 35(2) in the earlier year.
Final Decision:
Both issues were decided against the assessee, with the court holding that neither the interest payment nor the depreciation claim was allowable under the relevant sections of the Income Tax Act, 1961. There was no order as to costs.
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1983 (11) TMI 54
Issues Involved
1. Constitution of the Trust.
2. Determination of Charitable and Religious Nature.
3. Continuation of Trust Post-Dissolution.
4. Charitable Nature of Specific Activities.
5. Entitlement to Exemption under Income Tax Acts.
Summary
Issue 1: Constitution of the Trust
The court examined whether the assessee trust was constituted by the deed dated November 28, 1941, or by the deed dated July 1, 1944. The Tribunal held that the trust was constituted by the 1941 deed. The court noted that the Supreme Court had previously considered the trust constituted by the 1944 deed. The court ruled that it cannot go behind the Supreme Court's decision, which had taken the 1944 deed as constituting the trust.
Issue 2: Determination of Charitable and Religious Nature
The Tribunal held that the question of whether the assessee was a trust with wholly charitable and religious objects should be determined solely with reference to the 1941 deed. The court, however, noted that the Supreme Court had already determined the nature of the trust with reference to the 1944 deed, which included non-charitable objects. Thus, the court held that it was bound by the Supreme Court's decision and could not re-evaluate the nature of the trust.
Issue 3: Continuation of Trust Post-Dissolution
The Tribunal held that the trust created by the partnership deed dated November 28, 1941, continued even after the dissolution of the partnership. The court did not specifically address this issue separately but implied that the Supreme Court's decision, which considered the trust's nature based on the 1944 deed, was binding.
Issue 4: Charitable Nature of Specific Activities
The Tribunal held that giving cash grants for the needy and deserving persons to meet marriage expenses is a charitable object. The court did not specifically address this issue separately, as it concluded that the Supreme Court's decision, which found non-charitable objects in the 1944 deed, was binding.
Issue 5: Entitlement to Exemption under Income Tax Acts
The court examined whether the assessee trust was entitled to exemption u/s 4(3) of the Indian I.T. Act, 1922, and u/s 11 of the I.T. Act, 1961. The Tribunal had upheld the exemption. The court, however, noted that the Supreme Court had previously ruled that the trust included non-charitable objects and thus was not entitled to exemption. Consequently, the court held that the trust was not entitled to exemption under either the 1922 or 1961 Acts.
Conclusion
The court concluded that it was bound by the Supreme Court's decision, which had determined that the trust included non-charitable objects based on the 1944 deed. Therefore, the trust was not entitled to exemption under the relevant sections of the Income Tax Acts. The common question in T.Cs. Nos. 1610 to 1613 of 1977 and 64 to 76 of 1978 and T.C. No. 592 of 1978 was answered in the negative and against the assessee. The other questions in T.Cs. Nos. 1610 to 1613 of 1977 were returned unanswered as they had become unnecessary. The Revenue was awarded costs from the assessee.
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1983 (11) TMI 53
Issues:
1. Whether the Tribunal was justified in disturbing the estimate made by the AAC regarding the amount available at the end of October 12, 1962, out of the intangible additions made in the assessee firm's assessment for the assessment year 1961-62?
Detailed Analysis:
The judgment pertains to a reference under section 256(1) of the Income Tax Act, 1961, where the Tribunal questioned the estimate made by the AAC concerning the amount available from intangible additions made in the firm's assessment for the year 1961-62. The assessee, a wholesale dealer in paper, introduced amounts in the books of the Calcutta branch for the assessment year 1965-66, which were claimed as genuine loans but rejected by the ITO. The AAC accepted the alternative plea that the deposits should be covered by intangible additions made in 1961-62. The Tribunal, however, set aside the AAC's order and restored the addition of the uncovered balance of Rs. 26,000 as the assessee's income from undisclosed sources.
The Tribunal found that the intangible additions available to the assessee at the end of October 12, 1962, were significantly lower than estimated by the AAC. The Tribunal considered various amounts and determined that only Rs. 5,774 could have legitimately remained with the assessee, contrary to the AAC's calculation of Rs. 58,202. The Tribunal further assessed that a total of Rs. 19,000 may have been available, leading to the restoration of Rs. 26,000 as undisclosed income.
The Tribunal's decision was based on the premise that the intangible additions made during assessment proceedings represent undisclosed income of the assessee. The Tribunal highlighted the need for the assessee to provide a clear explanation regarding the source of cash credits and failed to demonstrate that the amounts were derived from previous intangible additions.
The Tribunal's detailed analysis of the available cash balance and its conclusion that only a portion of the amount could be attributed to intangible additions formed the basis for the decision against the assessee. The judgment emphasizes the Tribunal's authority to determine factual matters, with the court upholding the decision in favor of the Revenue, indicating no order as to costs.
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1983 (11) TMI 52
Issues Involved:
1. Applicability of concession under Section 22 of the Direct Taxes (Amendment) Act, 1974.
2. Treatment of the assessee as one who filed an appeal to the Supreme Court for the assessment year 1962-63 regarding penalty under Section 271(1)(a).
Analysis:
Issue 1: Applicability of Concession under Section 22 of the Direct Taxes (Amendment) Act, 1974
The primary issue was whether the concession provided by Section 22 of the Direct Taxes (Amendment) Act, 1974, was available to the assessee. The assessee contended that the penalty should be computed based on the unamended provisions of Section 271(1)(a) since it was an intervener in the Supreme Court case of CIT v. Vegetable Products Ltd. [1973] 88 ITR 192. The Tribunal initially agreed with the assessee, holding that the benefit of Section 22 should apply, thus computing the penalty based on the pre-amendment provisions.
However, the High Court analyzed the scope and object of Section 22. It noted that the amendment to Section 271(1)(a) replaced the term "the tax" with "assessed tax" and introduced an explanation. The purpose of Section 22 was to respect Supreme Court decisions rendered before the introduction of the Direct Taxes (Amendment) Bill, 1973. The High Court emphasized that Section 22 was meant only for cases where the Supreme Court had given a ruling adverse to the Revenue before September 3, 1973, and was specific to the particular assessment year involved in such Supreme Court decisions.
The High Court concluded that the assessee, being merely an intervener and not a party to the appeal, did not fall within the scope of Section 22. Therefore, the assessee could not claim the concession provided by Section 22 of the Amending Act.
Issue 2: Treatment of the Assessee as One Who Filed an Appeal to the Supreme Court
The second issue was whether the assessee should be treated as one who filed an appeal to the Supreme Court for the assessment year 1962-63 concerning the penalty under Section 271(1)(a). The Tribunal had construed the term "appeal" broadly, including the assessee as an intervener in the Supreme Court case, thus entitling it to the benefits of Section 22.
The High Court disagreed with the Tribunal's interpretation. It referred to the Supreme Court's explanation of an intervener's role, noting that an intervener is not an appellant and cannot seek relief beyond making submissions on general questions. The High Court cited the Supreme Court's observations in M. H. Quareshi v. State of Bihar, AIR 1958 SC 731, and Khyerbari Tea Co. Ltd. v. State of Assam, AIR 1964 SC 925, which clarified that an intervener does not have the same standing as an appellant.
Given that the assessee's case was not directly before the Supreme Court and was not the subject of any decision by the Supreme Court, the High Court held that the assessee could not be treated as having filed an appeal to the Supreme Court. Consequently, the assessee was not entitled to the benefits of Section 22 of the Amending Act.
Conclusion
The High Court answered both questions in the negative, ruling against the assessee. The court held that the assessee was not entitled to the concession under Section 22 of the Direct Taxes (Amendment) Act, 1974, and could not be treated as one who filed an appeal to the Supreme Court for the assessment year 1962-63. The assessee was ordered to pay the costs of the Revenue, with counsel's fee set at Rs. 500.
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1983 (11) TMI 51
Issues:
1. Whether an appeal to the Appellate Assistant Commissioner (AAC) is competent in a case involving the waiver or reduction of interest under section 139 of the Income Tax Act, 1961.
2. Interpretation of section 246 of the Income Tax Act regarding appealable orders.
3. Application of rule 117A for waiver or reduction of interest.
4. Assessment of the ITO's failure to consider the waiver or reduction of interest before the appeal.
5. Determining the proper course of action when the ITO has not passed an order regarding the waiver or reduction of interest.
Analysis:
1. The judgment pertains to three references concerning assessment years 1966-67, 1967-68, and 1968-69, where the assessee, a former Minister, filed returns late, leading to interest charges. The AAC accepted the appeal for interest waiver, prompting an appeal to the Income-tax Appellate Tribunal. The Tribunal upheld the waiver, citing sufficient cause for delay due to the assessee's health issues. The Department questioned the Tribunal's decision on appeal competency (para 2-4).
2. The primary issue raised is whether an appeal to the AAC is legally permissible in cases involving interest charges under section 139 of the Income Tax Act. The court considered various judgments and conflicting views on this matter, noting the absence of representation from the assessee. The court highlighted the differing interpretations by High Courts on the appealability of interest charges alone (para 5-8).
3. Rule 117A provides for the waiver or reduction of interest under specified conditions, such as the assessee proving sufficient cause for the delay in filing returns. The court emphasized the necessity for the ITO to allow the assessee to present evidence before deciding on interest waiver. The failure of the ITO to consider this provision was a crucial aspect of the analysis (para 13-15).
4. The judgment highlighted the ITO's oversight in not addressing the waiver or reduction of interest before the appeal process, raising concerns about the competency of the appeal. The court emphasized the importance of the ITO's consideration before assessing appeal validity (para 16-18).
5. The court concluded that the proper course of action was for the ITO to pass an order regarding the interest waiver or reduction. Without such an order, the question of appeal or revision could not be determined. The judgment underscored the necessity for the ITO to make a decision before addressing the appeal's competency (para 19-21).
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1983 (11) TMI 50
Issues Involved:
1. Jurisdiction of the Inspecting Assistant Commissioner (IAC) to levy penalty under section 271(1)(c) of the Income Tax Act, 1961.
2. Applicability of amended Section 274(2) of the Income Tax Act, 1961.
3. Determination of jurisdiction based on the date of reference by the Income Tax Officer (ITO).
Issue-wise Detailed Analysis:
1. Jurisdiction of the Inspecting Assistant Commissioner (IAC) to levy penalty under section 271(1)(c) of the Income Tax Act, 1961:
The Tribunal held that the IAC had no jurisdiction to impose any penalty under the amended Section 274(2) of the Act. The Tribunal observed that Section 274 was amended by the Taxation Laws (Amendment) Act, 1970, with effect from April 1, 1971. Under the amended Section 274(2), the IAC could impose a penalty only in a case where the amount of income (as determined by the ITO on assessment) in respect of which the particulars had been concealed or inaccurate particulars had been furnished, exceeds Rs. 25,000. In this case, the alleged concealed income was only Rs. 4,675. Therefore, the IAC had no jurisdiction in the case as the reference of the penalty proceedings was made by the ITO to the IAC on February 8, 1973, after the amended provisions of Section 274(2) came into force.
2. Applicability of amended Section 274(2) of the Income Tax Act, 1961:
The amended Section 274(2) came into effect from April 1, 1971, and it stipulated that the IAC could impose a penalty only if the concealed income exceeded Rs. 25,000. It is settled law that penalty is imposed on account of the commission of a wrongful act, and it is the law operating on the date on which the wrongful act is committed that determines the penalty. In this case, the wrongful act of concealment took place when the return was filed by the assessee on November 6, 1968. However, the jurisdiction to impose the penalty is determined by the law in force at the time the reference is made by the ITO to the IAC. Since the reference was made on February 8, 1973, the amended law applied, and the IAC had no jurisdiction as the concealed income was less than Rs. 25,000.
3. Determination of jurisdiction based on the date of reference by the Income Tax Officer (ITO):
The ITO initiated penalty proceedings by issuing a notice under Section 271(1)(c) on December 7, 1970. However, the ITO made the reference to the IAC on February 8, 1973. The IAC derives jurisdiction to impose a penalty on the assessee only on a valid reference being made by the ITO. The law that determines the jurisdiction of the ITO or the IAC is the law prevalent on the date of conferring power, as suggested by the words "shall refer the case." Since the reference was made on February 8, 1973, the ITO could make a valid reference to the IAC only if the concealed income exceeded Rs. 25,000. As this was not the case, no valid reference could be made, and the IAC did not acquire any jurisdiction to impose the penalty.
Conclusion:
The court concluded that the IAC could not assume jurisdiction without a valid reference by the ITO. The source of the IAC's jurisdiction is a valid reference made by the ITO. An invalid reference means the IAC does not acquire jurisdiction to impose the penalty. The court thus answered the question against the Department and in favor of the assessee, stating that the Tribunal was justified in holding that the IAC had no jurisdiction to levy the penalty under Section 271(1)(c) and thereby canceling the penalty of Rs. 5,000. The court made no order as to costs.
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1983 (11) TMI 49
Issues:
1. Determination of the cost of acquisition of property in the hands of the assessee-Hindu undivided family.
2. Assessment of capital gains based on the cost of acquisition of the property.
Analysis:
The case involved a reference under section 256(1) of the Income Tax Act, 1961, regarding the determination of the cost of acquisition of a property in the hands of the assessee, which was a Hindu undivided family (HUF). The primary issue was whether the market value on the date when the property was impressed with the character of HUF property should be considered as the cost of acquisition. The Tribunal had rejected the assessee's claim that the market value should be taken as the cost of acquisition. The HUF had purchased a plot of land and constructed a building on it, later transferring the property to the HUF by throwing their shares into the common hotchpot. The Income Tax Officer (ITO) treated the cost of acquisition as nil since no cash consideration was paid at the time of acquisition, resulting in the entire sale proceeds being assessed as capital gains. On appeal, the Appellate Tribunal upheld the decision that the cost of acquisition was nil.
In a similar case, the court referred to a previous judgment where it was established that a profit or gain can only accrue when there is a cost of acquisition. The court interpreted sections 45 and 48 of the Income Tax Act and clarified that the cost of acquisition could be in someone else's hands, not necessarily the assessee's, as long as it was spent by the karta of the HUF. In this case, the cost of land and construction incurred by the transferors of the property to the HUF was considered as the cost of acquisition for the purpose of computing capital gains.
Furthermore, the court cited cases from other High Courts where the concept of cost of acquisition in the context of assets transferred to an HUF was discussed. The court highlighted that the cost of acquisition should be the amount spent by the transferors of the property to the HUF. Therefore, the court concluded that the cost of acquisition in this case should be the expenses incurred by the transferors, which were calculated at Rs. 76,748. Consequently, the court ruled in favor of the assessee, holding that the cost of acquisition should be considered as the amount spent by the transferors, and not nil as determined by the lower authorities.
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1983 (11) TMI 48
Issues Involved:
1. Taxability of the amount of Rs. 98,000 received by the assessee.
2. Classification of the amount as salary, compensation, or revenue receipt.
3. Determination of the assessment year for the taxable amount.
Summary:
1. Taxability of the amount of Rs. 98,000 received by the assessee:
The primary issue was whether the entire amount of Rs. 98,000 accrued to the assessee on December 18, 1958, the date on which the suit was compromised, and was taxable in the assessment year 1959-60. The Tribunal concluded that the sum of Rs. 98,000 constituted an income receipt and addressed the alternative argument that the entire sum was not taxable in the assessment year under appeal. The Tribunal directed the ITO to determine the number of plots sold by the assessee, the price for which they were sold, and the remuneration accrued to the assessee in respect of such sales to include the remuneration relatable to the plots sold during the previous year only in the assessment for the year under appeal.
2. Classification of the amount as salary, compensation, or revenue receipt:
The ITO initially held that the balance of Rs. 98,000 was liable to tax either as salary or as compensation. The AAC concluded that the amount received by the assessee was towards his remuneration and was received in the course of carrying on his professional activity. The Tribunal, however, determined that the remuneration received by the assessee could not be taxed under the head "Salary" by virtue of clause (1) of Explanation II to s. 7 of the 1922 Act because the assessee could not be described as an employee of the company. The Tribunal also concluded that s. 10(5A)(c) had no application in the present case. The Tribunal held that the compensation was paid as surrogatum for profits likely to arise to the assessee if the contract had run its normal course, thus classifying it as a revenue receipt liable to tax.
3. Determination of the assessment year for the taxable amount:
The Tribunal addressed the alternative argument that the entire sum of Rs. 98,000 was not taxable in the assessment year under appeal. It was argued that the compensation was paid partly in respect of the sales already effected and partly in respect of the loss of future profit. The Tribunal restored the case to the ITO with a direction to determine the number of plots actually sold by the assessee, the price for which they were sold, and the remuneration accrued to the assessee in respect of such sales to determine the period when such remuneration accrued. The Tribunal directed that whatever amount out of Rs. 98,000 is not relatable to the plots actually sold shall be included as income of the year under appeal.
Conclusion:
The reference was answered against the Department and in favour of the assessee, with no order as to costs. The Tribunal's directions were upheld, emphasizing the need to determine the specific assessment year for the taxable amount based on the sales and remuneration details.
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1983 (11) TMI 47
Issues Involved:
1. Whether the income of the trust is exempt from tax under section 4(3)(i) of the Indian Income-tax Act, 1922.
2. Whether the income of the trust is exempt from tax under sections 11 and 12 of the Income-tax Act, 1961.
Issue-wise Detailed Analysis:
Issue 1: Exemption under Section 4(3)(i) of the Indian Income-tax Act, 1922
The assessee, M/s. Yogiraj Charity Trust, claimed that its income was exempt from tax under section 4(3)(i) of the Indian Income-tax Act, 1922, for the assessment years 1959-60 to 1961-62. The Income Tax Officer (ITO) rejected this claim, observing that the trust's main activity was to act as a tool for concerns controlled by Seth Ram Krishna Dalmia, the founder of the trust. The funds were blocked in various concerns controlled by Seth Dalmia, and the trust was used as a conduit for transferring shares between companies at his instance. The ITO also noted that the trust's objects were both charitable and non-charitable, and the trustees had unfettered discretion to apply funds to any of the objects, thus disqualifying the trust from exemption under the said provisions. The Appellate Assistant Commissioner (AAC) reversed the ITO's decision, but the Tribunal, following the Delhi High Court's judgment in CIT v. Jaipur Charitable Trust [1971] 81 ITR 1, and the Supreme Court's affirmation in Yogiraj Charity Trust v. CIT [1976] 103 ITR 777 (SC), held that the income was not entitled to exemption.
Issue 2: Exemption under Sections 11 and 12 of the Income-tax Act, 1961
For the assessment years 1962-63 to 1965-66, the assessee claimed exemption under sections 11 and 12 of the Income-tax Act, 1961. The ITO rejected this claim for the same reasons as mentioned above. The AAC reversed the ITO's decision, but the Tribunal, following the same judicial precedents, held that the income was not entitled to exemption.
Subsequent Events and Rectification of Trust Deed
The assessee argued that subsequent to the Delhi High Court's judgment on May 26, 1970, the trust deed was rectified and amended by a civil court decree on March 24, 1972, and a deed of declaration was executed on June 2, 1972. These changes were intended to remove the objectionable clauses, making the trust a public charitable trust entitled to exemption. The assessee cited the case of Jagdamba Charity Trust v. CIT and Yogiraj Charity Trust v. CIT [1981] 128 ITR 377 (Delhi), where the court held that the trust was entitled to exemption after the rectification. The assessee requested the court to remand the cases to the Tribunal to allow for the introduction of this new evidence.
Court's Analysis and Conclusion
The court rejected the assessee's request to remand the cases to the Tribunal for considering the rectified trust deed, stating that the Tribunal had considered all material available at the time of its decision. The court emphasized that the rectification occurred after the Tribunal's decision and that there is no provision in the Income-tax Act or the Income-tax Appellate Tribunal Rules allowing for the introduction of evidence of events occurring after the Tribunal's decision. The court cited the Supreme Court's decision in Keshav Mills Co. Ltd. v. CIT [1965] 56 ITR 365 (SC), which held that additional evidence cannot be introduced at the High Court stage. The court also distinguished the cases cited by the assessee, noting that they involved specific circumstances or agreements between parties that warranted additional evidence, which was not applicable here.
Final Judgment
The court answered both questions in the negative, ruling against the assessee and in favor of the Revenue. The court held that the income of the trust was not entitled to exemption under the relevant provisions of the Indian Income-tax Act, 1922, and the Income-tax Act, 1961. The parties were directed to bear their own costs.
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1983 (11) TMI 46
The High Court of Karnataka ruled that the interest deducted by the bank on prematurely surrendered fixed deposits could not be claimed as a deduction against interest earned during the year. The court upheld the Tribunal's decision to disallow the deduction of Rs. 47,683 in the assessment for the year 1975-76.
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1983 (11) TMI 45
Issues Involved:
1. Whether it is correct and legal to exclude a part of the sale proceeds as relating to goodwill.
2. Determination of the existence and valuation of goodwill.
3. Taxability of goodwill as capital gains.
Detailed Analysis:
1. Whether it is correct and legal to exclude a part of the sale proceeds as relating to goodwill:
The court examined if a portion of the sale proceeds from the sale of Shanmugar Mills, which was under liquidation, could be attributed to goodwill. The sale was conducted by the official liquidator and approved by the High Court. The Income Tax Officer (ITO) did not accept the allocation of Rs. 1,00,000 towards goodwill, arguing that the company had no goodwill due to its financial troubles before liquidation, the lack of a specified amount for goodwill by the parties or the court, and that any goodwill would have lost its value by the time of sale. The Appellate Assistant Commissioner (AAC) and the Tribunal, however, upheld the allocation, with the Tribunal determining the value of goodwill at Rs. 75,000 based on the purchaser's subsequent profits.
2. Determination of the existence and valuation of goodwill:
The ITO argued that Shanmugar Mills could not have goodwill due to its financial difficulties and liquidation. The AAC and Tribunal did not thoroughly examine whether the company had goodwill before liquidation. The Tribunal assumed goodwill existed based on the purchaser's profits post-sale, which the court found erroneous. The court emphasized that goodwill is an intangible asset reflecting the business's reputation and customer connections, which must be assessed based on the company's performance and circumstances before liquidation. The Tribunal failed to consider relevant factors like the company's historical performance, reputation, and market impact, leading to an incorrect presumption of goodwill.
3. Taxability of goodwill as capital gains:
The AAC and Tribunal held that goodwill is not taxable as capital gains, relying on precedents like CIT v. Rathnam Nadar and CIT v. Srinivasa Setty. The Supreme Court in CIT v. Srinivasa Setty described goodwill as a self-generating asset, whose transfer does not result in capital gains. The court reiterated that goodwill's value is derived from business reputation and customer connections, and varies across businesses. The Tribunal's assumption that every business has goodwill and its valuation based on post-sale profits was flawed.
Conclusion:
The court remanded the case to the Tribunal to determine if Shanmugar Mills had goodwill before liquidation and if it retained any value despite being leased out. The Tribunal must reassess based on the company's historical performance and other relevant factors. The court returned the question unanswered due to insufficient material on record and ordered no costs.
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1983 (11) TMI 44
Issues:
Whether the amount returned from an annuity deposit to the estate of a deceased individual is includible in the income of the estate.
Analysis:
The High Court of Gujarat considered the assessment year 1971-72, where an amount of Rs. 6,636 was returned from an annuity deposit to the estate of a deceased individual. The legal representative of the deceased contended that this amount should not be included in the estate's income but in the hands of the executor. Initially, the Income Tax Officer (ITO) included the amount in the estate's income. However, the Appellate Assistant Commissioner (AAC) disagreed and directed the deletion of the amount. The Revenue appealed to the Tribunal, which held that the amount was indeed part of the estate's income based on a previous court decision. Consequently, the Tribunal reversed the AAC's order. The Tribunal then framed a question for the High Court to determine the inclusion of the Rs. 6,636 in the deceased's estate income.
The High Court referred to a previous case, CIT v. Narottamdas K. Nawab, where it was established that annuity deposits received by the legal representative or nominee of a deceased depositor are considered income and not a return of capital. The Division Bench in the previous case concluded that under the Income Tax Act, the annuity payments are to be assessed as income in the hands of the nominee or legal representative. Therefore, the High Court in the current case aligned with the precedent set in the Narottamdas K. Nawab case and held that the amount in question should be included in the income of the deceased's estate.
Following the judgment, the assessee's representative made an oral application for a certificate to appeal to the Supreme Court, citing a substantial question of law and referencing a Supreme Court decision. The High Court agreed that the matter involved a substantial question of law due to the conflicting decisions and granted the certificate for appeal to the Supreme Court. The oral application was allowed with no costs imposed.
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1983 (11) TMI 43
Issues involved:
The issue involves whether the interest on borrowings for the purchase of shares constitutes part of the cost of the shares for the purpose of working out the capital gains on the sale of shares.
Summary:
The High Court of Karnataka addressed a reference under section 256(1) regarding the treatment of interest on borrowings for the purchase of shares in the computation of capital gains. The assessee sold shares during the relevant year and claimed deduction of interest paid for the purchase of shares. The Income Tax Officer (ITO) disallowed the claim citing provisions of section 55, stating that the expenditure had already been allowed in computing income from dividends. However, the Appellate Tribunal and the Assistant Commissioner of Income Tax (AAC) allowed the claim.
The main contention was whether the interest on borrowings for the purchase of shares should be considered part of the cost of shares for computing capital gains. The court noted that interest paid on money borrowed for purchasing shares is included in the cost of the asset for computing capital gains as per section 48. The Revenue argued that allowing the deduction would result in double deduction, contrary to the Income Tax Act scheme. The Tribunal, following precedent, held that the interest paid constitutes part of the actual cost of acquisition deductible under section 48.
The court emphasized that if an amount is already allowed under a different section, such as section 57, it cannot be allowed as a deduction for computing capital gains under section 48. As there was no finding by the Tribunal on the potential double deduction issue raised by the Revenue, the court declined to answer the question and remitted the matter back to the Tribunal for fresh disposal.
In conclusion, the court highlighted the importance of avoiding double deductions and the need for a clear finding on such matters before determining the treatment of expenses in the computation of capital gains.
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1983 (11) TMI 42
Issues: Challenge to legality of transfer order under section 127(1) of the Income Tax Act, 1961 without providing a reasonable opportunity of being heard to the petitioners.
The judgment delivered by Justice Pendse of the Bombay High Court addressed three petitions challenging the legality of an order transferring cases from the Income Tax Officer in Bombay to the Income Tax Officer in New Delhi. The impugned order was issued by the Under Secretary, Central Board of Direct Taxes under section 127(1) of the Income Tax Act, 1961, for proper investigation. The petitioners argued through their counsel that the Commissioner cannot exercise powers under section 127(1) without providing the assessee a reasonable opportunity of being heard, which they were denied in this case. The respondents claimed that notices were served through the Commissioner of Income-tax, Delhi-1, giving an opportunity of hearing, which the petitioners disputed by stating that they were not served any notices and had not authorized anyone to represent them. The court noted the absence of evidence of notices served or authorization for representation, leading to the conclusion that the petitioners were indeed denied a reasonable opportunity of being heard. Consequently, the impugned order was set aside for the petitioners in all three petitions, with the option for the Central Board of Direct Taxes to issue fresh orders after proper notice. The court ruled in favor of the petitioners, making the rule absolute in each petition without any order as to costs.
This judgment primarily dealt with the interpretation and application of section 127(1) of the Income Tax Act, 1961, regarding the transfer of cases between Income Tax Officers. The key issue revolved around whether the Commissioner had the authority to transfer cases without providing the assessee a reasonable opportunity of being heard. The petitioners contended that they were not served with any notices and were not given a chance to present their case before the transfer order was passed. On the other hand, the respondents argued that notices were indeed served through the Commissioner of Income-tax, Delhi-1, providing an opportunity for hearing. The court carefully examined the arguments and evidence presented, ultimately siding with the petitioners due to the lack of proof of proper notice and authorization for representation. This decision underscores the importance of procedural fairness and the right to be heard in matters concerning administrative actions like case transfers under the Income Tax Act.
The judgment highlighted the significance of adherence to procedural requirements, especially when exercising statutory powers like those under section 127(1) of the Income Tax Act, 1961. The court emphasized that the Commissioner must provide the assessee a reasonable opportunity of being heard before transferring cases between Income Tax Officers. In this case, the absence of evidence of proper notice and authorization to represent the petitioners led to the conclusion that their right to be heard was violated. By setting aside the impugned order and allowing for the possibility of fresh orders with proper notice, the court reaffirmed the principle of natural justice and procedural fairness in administrative actions. This decision serves as a reminder of the importance of upholding due process and respecting the rights of individuals affected by such decisions, even in matters of tax administration and investigation.
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1983 (11) TMI 41
Issues:
1. Challenge of deduction at source from jackpot winnings.
2. Interpretation of income tax laws regarding winnings from races and gambling.
3. Applicability of relevant provisions of the Finance Act, 1972.
4. Legal obligations of the second respondent under sections 194BB and 203.
5. Conversion of writ petition from mandamus to certiorarified mandamus.
Analysis:
The petitioner won a jackpot at the Madras Race Course and challenged the deduction of income tax by the second respondent. The petitioner argued that income earned from hobbies or habits should not be taxed, citing a previous court decision. However, the respondents pointed out amendments introduced by the Finance Act, 1972, which expanded the definition of income to include winnings from races and gambling. This change eliminated the exemption previously available for casual and non-recurring receipts, rendering the petitioner's reliance on the old court decision ineffective.
The Finance Act, 1972, introduced amendments that specifically included income from horse races under the head "Income from other sources" for taxation purposes. The judgment clarified that the petitioner's contention against the deduction at source was not valid in light of these legislative changes. Sections 194BB and 203 were highlighted to emphasize the statutory obligations of the second respondent regarding income tax deduction and proper procedures for addressing any excess deductions.
Originally seeking a mandamus to prevent income tax deduction, the petitioner was allowed to convert the petition into one for certiorarified mandamus due to the deduction already being made. The court held that, based on the current legal provisions and amendments, relief could not be granted to the petitioner. Despite relying on a past court judgment that was no longer applicable, the petitioner's contentions were deemed invalid, leading to the dismissal of the writ petition without costs.
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1983 (11) TMI 40
Issues involved: Interpretation of the provisions of section 144B of the Income Tax Act regarding the consequences of non-compliance with the prescribed procedure on the validity of assessment.
Summary:
The High Court of Karnataka addressed a reference from the Income-tax Appellate Tribunal regarding the interpretation of section 144B of the Income Tax Act in the context of an assessment for the year 1977-78. The assessee had declared a loss in the return, but the assessing officer made adjustments resulting in a significant difference. The Assessing Officer did not follow the procedure under section 144B, leading to the cancellation of the assessment by the Appellate Authority. The Tribunal held that non-compliance with section 144B does not invalidate the assessment but constitutes a procedural infirmity, directing the Assessing Officer to redo the assessment following the prescribed procedure. The key question was whether non-compliance with section 144B renders the assessment void ab initio. Section 144B outlines a procedure for cases where the assessing officer proposes adverse variations exceeding a specified amount, requiring notice to the assessee and consideration of objections. The Court emphasized that section 144B is a safeguard for the assessee during assessment objections, with the Inspecting Assistant Commissioner providing guidance to the Assessing Officer. The Court concluded that non-compliance with section 144B(4) does not invalidate the assessment but necessitates a reassessment following the prescribed procedure. Therefore, the Tribunal's decision to direct a fresh assessment was deemed appropriate, and the question was answered in favor of the Revenue.
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1983 (11) TMI 39
The High Court of Karnataka held that the Income-tax Appellate Tribunal was right in granting registration to a partnership for the assessment years 1973-74 and 1974-75. The Tribunal considered multiple documents to establish the existence of the partnership and the allocation of shares. The Court concluded that the deficiency in stamp duty was rectified and the partners were deemed to have equal shares. The Court ruled in favor of the assessee.
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1983 (11) TMI 38
Issues Involved:
1. Eligibility for development rebate under Section 34(3)(a) of the Income Tax Act, 1961.
2. Requirement of creating a reserve in the relevant previous year.
3. Interpretation of Section 34(3)(a) concerning the timing of reserve creation.
Issue-wise Detailed Analysis:
1. Eligibility for Development Rebate under Section 34(3)(a):
The core issue revolves around whether the assessee firm complied with Section 34(3)(a) of the Income Tax Act, 1961, which stipulates conditions for claiming a development rebate. The firm claimed a development rebate of Rs. 99,802 for new machinery purchased in the year ending August 16, 1969, relevant to the assessment year 1970-71. However, the Income Tax Officer (ITO) rejected this claim because the machinery was neither installed nor used during the relevant accounting year. This rejection was upheld by the Tribunal, and the decision attained finality.
2. Requirement of Creating a Reserve in the Relevant Previous Year:
For the assessment year 1971-72, the assessee did not initially claim the development rebate, believing it was only allowable in the previous year 1970-71. Upon the rejection of the claim for 1970-71, the assessee requested the ITO to allow the rebate for 1971-72. The ITO rejected this request on the grounds that the necessary reserve was not created during the previous year relevant to the assessment year, as mandated by Section 34(3)(a). The creation of a reserve in an earlier previous year was deemed insufficient for claiming the rebate in a subsequent year.
3. Interpretation of Section 34(3)(a) Concerning the Timing of Reserve Creation:
The Tribunal ruled in favor of the assessee, stating that creating a reserve in the earlier previous year sufficed for compliance with Section 34(3)(a). However, this interpretation was challenged by the Revenue, leading to a reference to the High Court. The High Court emphasized that Section 34(3)(a) explicitly requires the reserve to be created in the "relevant previous year" when the machinery is installed or used. The court noted that the provision is in a negative form, asserting that "no deduction under section 33 towards development rebate shall be allowed" unless the specified conditions are met. The court referred to precedents, including the Supreme Court's decision in Indian Overseas Bank Ltd. v. CIT, which affirmed that the creation of a reserve fund in an earlier year does not satisfy the statutory requirement.
The High Court also cited CIT v. Aruna Sugars Ltd., where a similar issue was adjudicated, concluding that the reserve must be created out of profits of the relevant previous year. The court rejected the Tribunal's interpretation, stating that it would be a misreading of the provision to consider the creation of a reserve in an earlier previous year as compliance with Section 34(3)(a).
Conclusion:
The High Court concluded that the assessee did not comply with the requirements of Section 34(3)(a) for the assessment year 1971-72, as the necessary reserve was not created in the relevant previous year. The Tribunal's decision was overturned, and the question was answered in the negative, against the assessee. The Revenue was awarded costs from the assessee, with counsel's fee set at Rs. 500.
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1983 (11) TMI 37
Issues Involved:
1. Whether the fixed deposit blocked account in a Ceylonese bank should be valued under section 7(1) of the Wealth-tax Act, 1957.
2. Whether the fixed deposit in the blocked account qualifies as "cash" for wealth-tax purposes.
Issue-wise Detailed Analysis:
1. Valuation under Section 7(1) of the Wealth-tax Act, 1957:
The core issue was whether the fixed deposit blocked account of the assessee in a Ceylonese bank should be valued under section 7(1) of the Wealth-tax Act, 1957. The Tribunal held that the fixed deposit, due to its restrictive nature, was not equivalent to cash and thus required proper valuation under section 7(1). The Tribunal's decision was based on the premise that the fixed deposit in a blocked account, subject to certain restrictions, could not be treated as cash, even though it was a taxable asset. The Tribunal concluded that the fixed deposit should be evaluated considering the restrictions imposed by the Ceylonese exchange control authorities.
2. Qualification as "Cash":
The next question was whether the fixed deposit in the blocked account could be considered "cash" for wealth-tax purposes. The Wealth-tax Officer (WTO) included the entire value of the fixed deposit in the assessee's net wealth, treating it as cash. However, the Tribunal disagreed, asserting that the fixed deposit, due to its restrictive conditions, was not readily available for use and thus could not be treated as cash. The Tribunal's view was that the term "cash" should be interpreted in a restricted sense, meaning ready money available without any formalities.
The court examined the legislative intent behind section 7, emphasizing that the valuation should reflect the market value of assets, i.e., the price a willing seller would realize from a willing buyer. The court noted that an exception clause, such as the one for cash assets, should be strictly construed. The court found that the WTO's interpretation of "cash" was too broad and did not align with the legislative intent of section 7.
The court also referred to various legal principles and precedents to support its conclusion. It highlighted that assets subject to encumbrances or restrictive covenants should not be valued at face value but should be evaluated by deducting the estimated value of the disadvantages or restrictions attached to them. The court cited decisions indicating that the term "cash" should be interpreted contextually, considering the legislative intent and the specific circumstances of each case.
The court concluded that the fixed deposit in the blocked account could not be considered "cash" because it was not readily available for the assessee's use and was subject to restrictive covenants under the foreign exchange regulations of Ceylon. Therefore, the court held that the amount in the fixed deposit should not be included in the net assessable wealth of the assessee at its face value but should be evaluated considering the restrictions.
Conclusion:
The court affirmed the Tribunal's decision that the fixed deposit in the blocked account should be valued under section 7(1) of the Wealth-tax Act, 1957, and should not be treated as cash for wealth-tax purposes. The court emphasized that the valuation should reflect the market value of the asset, considering any restrictive covenants or disadvantages attached to it. The court's decision was based on a strict interpretation of the exception clause for cash assets and the legislative intent behind section 7. The court concluded that the fixed deposit in the blocked account did not qualify as cash because it was not readily available for use and was subject to restrictive conditions. The court answered the question in favor of the assessee and against the Revenue.
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