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1985 (1) TMI 104
Issues Involved:
1. Extent of the assessee's interest in the income from the property at 23A/418, Diamond Harbour Road, Calcutta.
2. Quantum of income to be included in the hands of the assessee.
Summary:
Issue 1: Extent of the assessee's interest in the income from the property at 23A/418, Diamond Harbour Road, Calcutta.
The assessee contended that he had no interest in the income from the property, while the ITO held that the assessee had a one-third interest. The Commissioner (Appeals) held that the assessee's interest extended only to one-third of the income attributable to the cost of the land vis-a-vis the cost of construction. The Tribunal concluded that the assessee did become one-third owner of the land due to several registered deeds of conveyance and mortgage. However, there was no evidence to hold that the assessee acquired any interest in the superstructure built on the land. The Tribunal noted that the assessee gave a loan for the construction of the house but did not acquire any right in the income resulting from the house.
Issue 2: Quantum of income to be included in the hands of the assessee.
The Tribunal directed that the net income from the house property should be multiplied by a fraction, the numerator of which is the cost of the land and the denominator of which is the total cost of land and construction of the house. The amount so arrived at should be divided into three parts, and only one part thereof should be included in the assessee's income, as he is the owner of only one-third portion of the land and no part of the house. The assessments for all the years were to be modified accordingly.
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1985 (1) TMI 103
Issues Involved:
1. Validity of the gift of Rs. 3 lakhs by the Karta of the HUF.
2. Whether the transaction can be regarded as a family arrangement.
3. Obligation of the HUF to maintain and educate unmarried daughters.
4. Applicability of exemption under Section 5(1)(xii) of the GT Act.
5. Misapplication of Section 6A of the GT Act.
Issue-wise Detailed Analysis:
1. Validity of the Gift of Rs. 3 Lakhs by the Karta of the HUF:
The assessee, an HUF, claimed that the transaction of Rs. 3 lakhs to the three daughters was not a gift but a family arrangement. The GTO subjected the entire amount to taxation as a gift. The CGT(A) upheld this view, stating that the Karta, being the sole surviving coparcener, had the absolute right to dispose of the joint family properties. The Tribunal examined whether the gift was void ab initio. It was held that a sole surviving coparcener has the absolute power to alienate the family property, including making gifts. The contention that the gift was void because it involved ancestral property was rejected, as the sole surviving coparcener has an absolute right to dispose of it.
2. Whether the Transaction Can Be Regarded as a Family Arrangement:
The assessee argued that the transaction was a family arrangement and not a gift. The CGT(A) rejected this, stating that the declaration was unilateral and did not involve other family members. The Tribunal, however, held that the Karta, as the father and sole surviving coparcener, could unilaterally effect a partial partition through a family arrangement. The Tribunal cited various judgments, including Apporva Shantilal Shah vs. CIT, supporting the view that a father can bring about a complete or partial partition even unilaterally.
3. Obligation of the HUF to Maintain and Educate Unmarried Daughters:
The Tribunal examined whether the HUF had a legal obligation to maintain and educate unmarried daughters. It was held that under Hindu Law, an unmarried daughter has a right to be maintained out of the joint family property. The Tribunal cited several judgments, including CGT vs. Basant Kumar Aditya Vikram Birla, which supported the view that the HUF has a legal obligation to incur expenses for the maintenance and education of unmarried daughters.
4. Applicability of Exemption under Section 5(1)(xii) of the GT Act:
The assessee claimed that even if the transaction was considered a gift, it should be exempt under Section 5(1)(xii) of the GT Act. However, since the Tribunal held that the transaction was a family arrangement and not a gift, this point did not arise for consideration.
5. Misapplication of Section 6A of the GT Act:
The assessee raised a ground regarding the misapplication of Section 6A of the GT Act. However, this ground did not arise out of the order of the CGT(A), and the Tribunal rejected it as it was not substantiated with evidence that it was raised before the CGT(A).
Conclusion:
The Tribunal annulled the assessment, holding that the transaction was a family arrangement and not a gift, thereby not liable to gift-tax. The appeal was allowed in favor of the assessee.
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1985 (1) TMI 102
Issues Involved:
1. Validity of the gift made by the Karta of the HUF.
2. Whether the transaction was a family arrangement or a gift.
3. Obligation to maintain and educate daughters out of HUF property.
4. Applicability of exemption under section 5(1)(xii) of the Gift-tax Act.
5. Misapplication of section 6A of the Gift-tax Act.
Detailed Analysis:
1. Validity of the Gift Made by the Karta of the HUF:
The primary issue was whether the gift of Rs. 3 lakhs made by the Karta (Shri S.N. Malhotra) to his three daughters was valid. The assessee contended that the gift was void ab initio as the Karta had no right to alienate the HUF property. The Tribunal noted that under the Mitakshara law, a sole surviving coparcener has the absolute right to dispose of the joint family properties as if they were his separate properties. The Tribunal cited the Supreme Court's decision in Guramma Bhratar Chanbasappa Deshmukh v. Mallappa Chanbasappa, which held that a sole surviving coparcener could alienate the family property, including by way of gift. Therefore, the Tribunal concluded that the gift was not void.
2. Whether the Transaction was a Family Arrangement or a Gift:
The assessee argued that the transaction was a family arrangement and not a gift. The Tribunal examined the declaration made by the Karta and noted that the Karta had the right to effect a partial partition through a family arrangement. The Tribunal relied on the Supreme Court's decision in Apoorva Shantilal Shah v. CIT, which held that a father could unilaterally effect a partial partition of joint family properties. The Tribunal also referred to the decision in CIT v. Narain Dass Wadhwa, which supported the view that a sole surviving coparcener could validly effect a partial partition through a family arrangement. The Tribunal concluded that the transaction was indeed a family arrangement and not a gift.
3. Obligation to Maintain and Educate Daughters out of HUF Property:
The Tribunal considered whether the Karta was obliged to maintain and educate his daughters out of the HUF property. The Tribunal referred to the Hindu Adoptions and Maintenance Act, which includes education as part of maintenance. The Tribunal also cited the decisions in CGT v. Basant Kumar Aditya Vikram Birla and M. Radhakrishna Gade Rao v. CGT, which held that a HUF has a legal obligation to incur expenses for the education and maintenance of unmarried daughters. The Tribunal concluded that the Karta was within his legal rights to set apart Rs. 3 lakhs for the education of his daughters, and this did not constitute a gift.
4. Applicability of Exemption under Section 5(1)(xii) of the Gift-tax Act:
The assessee claimed that even if the transaction amounted to a gift, it was exempt under section 5(1)(xii) of the Gift-tax Act. However, since the Tribunal held that the transaction was a family arrangement and not a gift, this issue did not arise for consideration.
5. Misapplication of Section 6A of the Gift-tax Act:
The assessee raised a ground that the Commissioner (Appeals) erred in not adjudicating on the misapplication of section 6A of the Gift-tax Act. The Tribunal noted that this ground did not arise out of the order of the Commissioner (Appeals) and rejected it.
Conclusion:
The Tribunal annulled the assessment and allowed the appeal, holding that the transaction was a family arrangement and not a gift, and thus not liable to gift-tax.
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1985 (1) TMI 101
Issues:
1. Interpretation of Section 23(2) regarding the limitation on income from multiple dwelling houses.
2. Assessment of fair rental income for a property in Bombay.
Analysis:
Issue 1: Interpretation of Section 23(2)
The case involved the interpretation of Section 23(2) of the Income Tax Act regarding the limitation on income from multiple dwelling houses. The assessee argued that the income from all dwelling houses should be limited to 10% of other income, citing the decision in CIT vs. Vegetable Produced Ltd. The Revenue authorities, on the other hand, contended that only one house should be chosen for the purpose of Section 23(2)(i), and the proviso does not extend to all dwelling houses. The ITAT held that the introduction of sub-section (2A) to Section 23 clarified that the benefit of the 10% ceiling under the proviso to Section 23(2)(ii) is not applicable to other dwelling houses not chosen by the assessee. Therefore, the income from the second dwelling house should be determined under Section 23(1) without limiting it to 10% of other income. The ITAT upheld the decision of the Revenue authorities on this point, dismissing the appeal.
Issue 2: Assessment of fair rental income for property in Bombay
Regarding the assessment of fair rental income for a property in Bombay, the ITAT considered the location and size of the flat in Khar, which had not been let out. The ITAT found the estimate of Rs. 750 per month for the property reasonable, considering the covered area of 853 sq. yds. in a good locality like Khar. The ITAT concluded that the estimate made by the Revenue authorities was fair and upheld their decision. Consequently, the ITAT dismissed the appeals filed by the assessee.
In conclusion, the ITAT clarified the interpretation of Section 23(2) and affirmed the Revenue authorities' decision regarding the limitation on income from multiple dwelling houses and the assessment of fair rental income for the property in Bombay.
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1985 (1) TMI 100
Issues:
1. Deductibility of expenses incurred on foreign trip for business purposes, including expenses for accompanying spouse.
2. Allowance of triple shift depreciation for multiple units.
Analysis:
Issue 1:
The main issue in this case was whether the expenses incurred on a foreign trip for business purposes, which included expenses for the chairman's spouse, were deductible under section 37(1) of the Income-tax Act, 1961. The assessee, a company engaged in the manufacture and sale of tin containers, claimed the expenses as admissible under section 37(1). However, the Income Tax Officer (ITO) disallowed the claim, stating that the expenses for the spouse were not necessary or incidental to the business of the company. The Commissioner (Appeals) upheld the disallowance, noting the lack of evidence supporting the business purpose of the spouse's inclusion in the trip. The Appellate Tribunal agreed with the Commissioner, emphasizing that the expenses should have been incurred wholly and exclusively for business to qualify for deduction. It was observed that the spouse did not render any business assistance, and the mere permission from the board of directors was insufficient to establish the business nature of the expenses. Citing precedents, the Tribunal concluded that the expenses on the spouse were not allowable as business expenses.
Issue 2:
The second issue pertained to the assessee's claim for triple shift allowance for multiple units located at different places. The assessee argued that since one unit worked in triple shift for the whole year, the triple shift allowance should be granted for all units. However, the ITO allowed depreciation allowance separately for each unit based on their individual working shifts. The Commissioner (Appeals) upheld the ITO's decision, leading to the assessee appealing against the disallowance. The relevant provision in the Income-tax Rules allowed for extra shift depreciation allowance based on the number of days each unit worked in double or triple shifts. The Tribunal rejected the assessee's contention that triple shift allowance should apply to all units if one unit worked in triple shift, stating that the interpretation was unsupported. The Tribunal found the ITO's allowance to be in line with the provision, ultimately dismissing the appeal.
In conclusion, the Appellate Tribunal upheld the disallowance of expenses related to the chairman's spouse on the foreign trip, emphasizing the necessity for expenses to be wholly and exclusively for business purposes. Additionally, the Tribunal rejected the assessee's claim for triple shift allowance for all units based on the working pattern of a single unit, affirming the separate allowance for each unit as per the Income-tax Rules.
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1985 (1) TMI 99
Issues:
1. Conversion of income earned in dollars into rupees at different exchange rates.
2. Accrual of income in a non-resident company.
3. Interpretation of the Supreme Court ruling in CIT v. Ashokbhai Chimanbhai [1965] 56 ITR 42.
4. Application of exchange rates for income conversion in the context of devaluation.
Analysis:
1. The case involved the question of whether income earned by a non-resident company in dollars should be converted into rupees at different exchange rates based on the timing of earnings. The company filed accounts in dollars until a certain assessment year, after which it switched to rupees for its Bombay branch and continued using dollars for its USA office. The Income Tax Officer (ITO) converted the entire income into rupees at the post-devaluation rate, leading to a dispute.
2. The issue of income accrual in a non-resident company was raised, with the department arguing that income is realized only at the end of the accounting period, necessitating conversion at the year-end rate. The company contended that income accrues before actual receipt, especially for sales completed before the devaluation date. The Commissioner (Appeals) sided with the company, considering income accrued before the devaluation date and allowing the appeal based on this interpretation.
3. The interpretation of the Supreme Court ruling in CIT v. Ashokbhai Chimanbhai [1965] 56 ITR 42 was crucial in determining the timing of income accrual and conversion. The ITO relied on this ruling to convert the entire income at the post-devaluation rate, while the Commissioner (Appeals) favored the company's argument based on income accrual preceding actual receipt, aligning with the principles established in the Supreme Court case.
4. The application of exchange rates for income conversion in the context of devaluation was a significant aspect of the judgment. The Tribunal deliberated on whether income should be converted partially at pre-devaluation and post-devaluation rates based on the timing of earnings. Ultimately, the Tribunal held that the entire income should be converted into rupees at the prevailing rate on the last day of the accounting period, rejecting the partial conversion proposed by the company and upholding the department's appeal.
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1985 (1) TMI 98
Issues:
1. Computation of income from house property.
Analysis:
The judgment revolves around the computation of income from house property by the Department. The assessee, an individual, had initially claimed a loss of Rs. 5,732 under the head "house property". However, the Income Tax Officer (ITO) disagreed and calculated the annual letting value after deductions, resulting in a balance of Rs. 641 to be taxed. The assessee then appealed to the Appellate Assistant Commissioner (AAC), arguing for a further deduction under a specific provision.
The AAC accepted the assessee's claim and directed the ITO to allow the additional deduction. Subsequently, the Department filed an appeal challenging this decision. The Department's argument was based on a provision that stated the income from a residential unit should not result in a loss. The Department contended that allowing the additional deduction would lead to a loss being computed, contrary to statutory provisions.
The judgment analyzed the relevant clauses and provisions, emphasizing the use of the term 'income' in the context of determining annual letting value and deductions. The presiding member opined that the Department's argument was valid, highlighting the significance of interpreting the term 'income' in a manner consistent with the statutory framework. The judgment clarified that provisions leading to a loss under the head 'house property' should be disregarded, and the Department's stance was upheld.
Conclusively, the judgment partially allowed the appeal filed by the Department, modifying the AAC's order to eliminate the income of Rs. 641 that was initially brought to assessment by the ITO.
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1985 (1) TMI 97
Issues:
1. Jurisdiction of CIT under section 263 of the IT Act, 1961.
2. Entitlement to investment allowance on machinery and plant used in business activities.
3. Merger of assessment order in the order of the appellate authority.
Analysis:
Issue 1: Jurisdiction of CIT under section 263 of the IT Act, 1961
The appeal involved a dispute regarding the jurisdiction of the Commissioner of Income Tax (CIT) under section 263 of the IT Act, 1961. The CIT set aside the assessment order, directing a fresh assessment. The assessee contended that the CIT had no jurisdiction under section 263 as the assessment order was under appeal before the CIT(A). The CIT's jurisdiction was challenged as being void ab initio. However, the Departmental Representative argued that the CIT's order was justified as the appeal was pending before the CIT(A) at the time of the CIT's exercise of powers under section 263.
Issue 2: Entitlement to investment allowance on machinery and plant
The dispute also revolved around the entitlement of the assessee to investment allowance on machinery and plant used in the business activities. The assessee claimed that their business activities, involving the conversion of milk into a branded product, amounted to the production or manufacture of an article or thing, making them eligible for investment allowance. Various decisions were cited to support this claim, emphasizing similar cases where investment allowance was allowed. However, the Departmental Representative argued that the end product remained milk, and the activities did not amount to manufacturing or production of a new article, thus challenging the eligibility for investment allowance.
Issue 3: Merger of assessment order in the order of the appellate authority
The question of whether the assessment order had merged in the order of the appellate authority was raised. The CIT's order under section 263 was challenged on the grounds that the assessment order had already merged in the order of the CIT(A). However, it was clarified that on the date of the CIT's order under section 263, the CIT(A) had not yet decided on the appeal against the assessment order. The Tribunal concluded that the CIT's order under section 263 was justified, as the assessment order allowing the investment allowance was deemed erroneous and prejudicial to the revenue's interests.
In conclusion, the Tribunal upheld the CIT's order under section 263, dismissing the appeal. The decision was based on the finding that the assessee's activities did not amount to the manufacture or production of a new article, thus not entitling them to investment allowance on machinery and plant used in the business. The issue of jurisdiction under section 263 and the merger of the assessment order were also addressed and resolved in favor of the CIT's actions.
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1985 (1) TMI 96
Issues Involved:
1. Deductibility of Sales Tax Penalty under Section 36(2)(c) and Section 36(3) of the Bombay Sales Tax Act.
2. Deductibility of Damages and Interest under the Employees' Provident Fund Act and the Employees' State Insurance Act.
Detailed Analysis:
1. Deductibility of Sales Tax Penalty under Section 36(2)(c) and Section 36(3) of the Bombay Sales Tax Act:
Ground of Appeal:
The primary ground of appeal by the department was that the Commissioner (Appeals) erred in holding that the sales tax penalty of Rs. 62,284 constituted an admissible deduction in the computation of the assessee's total income.
Arguments by the Department:
- The penalty under Section 36(2)(c) is akin to a penalty under Section 271(1)(c) of the Income-tax Act, 1961, which is for concealment of income and thus not deductible.
- The penalty under Section 36(3) is also not merely interest but a penalty for breach of law.
- Various judicial precedents were cited, including the Supreme Court's decision in Premier Automobiles Ltd. and the Gujarat High Court's decision in Addl. CIT v. I.M. Patel & Co., to support the contention that penalties for infraction of law are not allowable as deductions.
Arguments by the Assessee:
- The penalties were suffered in the normal course of business and should be allowable as deductions.
- The penalty under Section 36(3) should be considered as interest for delayed payment rather than a penalty for infraction of law.
- Reliance was placed on several Tribunal decisions and High Court rulings, including the Madhya Pradesh High Court's decision in Simplex Structural Works v. CIT, which allowed such penalties as deductions.
Tribunal's Findings:
- The Tribunal noted that the penalty under Section 36(2)(c) was for concealment and thus not deductible.
- However, the penalty under Section 36(3) was considered more akin to interest for delayed payment rather than a punitive measure, and thus allowable as a deduction.
- The Tribunal emphasized that the nature of the levy and the circumstances under which it was imposed are crucial in determining its deductibility.
2. Deductibility of Damages and Interest under the Employees' Provident Fund Act and the Employees' State Insurance Act:
Arguments by the Department:
- Damages under Section 14B of the Provident Fund Act and interest under the Insurance Act should be treated as penalties for non-compliance and thus not deductible.
- The department cited various judicial precedents, including the Supreme Court's decision in Mahalakshmi Sugar Mills Co. v. CIT, to argue that such payments are penalties for infraction of law.
Arguments by the Assessee:
- The damages and interest were incurred due to financial difficulties and not due to any intentional breach of law.
- The Tribunal and High Courts have, in several cases, allowed such payments as deductions, treating them as compensatory rather than punitive.
- Reliance was placed on the Bombay High Court's decision in CIT v. Pannalal Narottamdas & Co., which allowed deductions for penalties incurred without the assessee's fault.
Tribunal's Findings:
- The Tribunal held that interest paid for non-payment of Provident Fund contributions and contributions under the Insurance Act are allowable as deductions, aligning with the Supreme Court's decision in Mahalakshmi Sugar Mills Co.
- Damages under Section 14B of the Provident Fund Act were also considered allowable as deductions, as they were more in the nature of interest for delayed payment rather than penalties for infraction of law.
Conclusion:
- Penalty under Section 36(2)(c): Disallowed as it pertains to concealment of income.
- Penalty under Section 36(3): Allowed as it is considered akin to interest for delayed payment.
- Damages and Interest under Provident Fund and Insurance Acts: Allowed as deductions, being compensatory rather than punitive.
Final Decision:
The appeal was partly allowed, with the Tribunal providing a nuanced view on the nature of penalties and interest, emphasizing the importance of the assessee's conduct and the nature of the levy in determining deductibility.
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1985 (1) TMI 95
Issues:
1. Extra shift allowance calculation for a new manufacturing unit.
2. Deduction claim under section 35D of the Income-tax Act, 1961.
Issue 1: Extra shift allowance calculation for a new manufacturing unit
The case involved the assessment of an assessee, a company, for the assessment year 1979-80 regarding the claim of extra shift allowance for a new manufacturing unit. The company took over a business and expanded its manufacturing activity by setting up a new unit. The dispute arose on whether the extra shift allowance should be based on the actual days the new unit worked double or triple shift or if it should be allowed for the full year. The Commissioner (Appeals) set aside the assessment for reconsideration. The tribunal analyzed the provisions of extra shift allowance and concluded that the allowance should be computed based on the days the new unit worked double or triple shift as per the word 'concern' referring to a particular unit. Referring to a relevant case law, the tribunal held that the assessee was entitled to the extra shift allowance based on the new unit's working shifts, overturning the Commissioner (Appeals) decision.
Issue 2: Deduction claim under section 35D of the Income-tax Act, 1961
The second issue pertained to the deduction claim under section 35D of the Income-tax Act, 1961, on the investment made by the assessee. The dispute arose as the ITO allowed the deduction based on the capital employed in the new unit, while the Commissioner (Appeals) set aside the assessment for lack of necessary details. The tribunal examined the provisions of section 35D and the capital employed by the assessee. It was determined that the deduction should be calculated based on the share capital, debentures, and long-term borrowings issued or obtained in connection with the extension of the industrial undertaking or the setting up of the new industrial unit. The tribunal held that the relief computed by the ITO was correct, and the Commissioner (Appeals) was not justified in setting aside the order, ultimately allowing the appeal in favor of the assessee.
In conclusion, the tribunal resolved both issues in favor of the assessee, determining the correct calculation method for extra shift allowance and upholding the deduction claim under section 35D of the Income-tax Act, 1961.
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1985 (1) TMI 94
Issues:
1. Deduction of interest payable on loans taken for property construction.
Analysis:
The appeal before the Appellate Tribunal concerned the deduction of Rs. 6,498, representing interest payable on loans taken for the construction of a property. The assessee, an individual and member of a co-operative housing society, had paid off this amount after completion of the apartment construction. The Income Tax Officer (ITO) disallowed the deduction, stating that arrears of interest from prior years would not be allowable. However, the Assessee Commissioner (AAC) allowed the claim based on a decision of the Madras High Court. The issue revolved around the interpretation of section 24(1)(vi) of the Income-tax Act, 1961, which allows for the deduction of interest payable on borrowed capital for property acquisition or construction.
The department contended that the Finance Act, 1983, inserted an Explanation stating that interest for periods before the previous year of property acquisition would be deductible in equal installments over subsequent years. The department argued that prior to this provision, interest from earlier years was not deductible. However, the tribunal disagreed, emphasizing that the plain reading of the section allows for the deduction of interest payable during the accounting year in which the liability arises. The tribunal noted that the housing society demanded payment only in the relevant accounting year, indicating the liability arose then. The tribunal held that the claim for deduction should be accepted based on the timing of the liability.
Further, the tribunal explained that the Explanation introduced in 1984 would apply to different scenarios where interest accrues before property construction completion. In such cases, where there is no income from the property yet, the liability to pay interest cannot be claimed until completion. The tribunal highlighted that the Explanation aimed to provide a benefit by allowing deductions in the years following property completion and possession. Ultimately, the tribunal dismissed the department's appeal, upholding the allowance of the deduction for the interest payable on loans taken for property construction.
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1985 (1) TMI 93
Issues:
1. Deduction under sections 80HH and 80J denied due to non-submission of auditors' report.
2. Interpretation of rules 18B and 18C of the Income-tax Rules, 1962.
3. Compliance with conditions for claiming deductions under sections 80HH and 80J.
4. Applicability of precedents in similar cases.
5. Dismissal of the appeal by the Appellate Tribunal ITAT BOMBAY-C.
Detailed Analysis:
1. The appeal pertains to the denial of a deduction under sections 80HH and 80J of the Income-tax Act, 1961, due to the non-submission of the auditors' report in the prescribed forms under rules 18B and 18C of the Income-tax Rules, 1962. The Income Tax Officer (ITO) and the Appellate Assistant Commissioner (AAC) both upheld the denial, leading to the appeal before the Appellate Tribunal ITAT BOMBAY-C.
2. The assessee argued that the failure to submit the auditors' report was a technical default as the accounts were duly audited, and the report could have been furnished subsequently. The counsel referred to precedents where such reports were accepted even if submitted after the return filing but before the assessment completion. However, the departmental representative emphasized the mandatory nature of submitting the report along with the return, highlighting that it was not an idle formality but a necessary condition for claiming deductions.
3. The Tribunal noted that the auditors' report was not filed before the completion of the assessment or even before the AAC, unlike the cases cited by the assessee's counsel. Drawing parallels to a Supreme Court decision, the Tribunal emphasized that the prescribed conditions for deductions under sections 80HH and 80J, including the submission of auditors' reports, were not mere formalities but essential requirements. Therefore, the failure to comply with these conditions justified the revenue authorities' decision to not entertain the deduction claims.
4. The Tribunal rejected the argument that the auditors' report could have been submitted later in the assessment proceedings, as the rules clearly required its submission along with the return. Citing the precedent, the Tribunal affirmed that the failure to meet the prescribed conditions for deductions precluded the assessee from claiming the concessions under sections 80HH and 80J. The Tribunal concluded that the appeal filed by the assessee was without merit and dismissed it accordingly.
5. The Appellate Tribunal ITAT BOMBAY-C, consisting of Members A. V. Balasubramanyam and I. S. Nigam, delivered the order dismissing the appeal against the denial of deductions under sections 80HH and 80J due to the non-submission of the auditors' report as required by rules 18B and 18C of the Income-tax Rules, 1962.
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1985 (1) TMI 92
Issues:
- Jurisdiction of the Commissioner under section 263
- Entitlement to investment allowance on machinery and plant used in the business
- Merger of the assessment order in the order of the appellate authority
Analysis:
Jurisdiction of the Commissioner under section 263:
The appeal involved a dispute regarding the jurisdiction of the Commissioner under section 263 of the Income-tax Act, 1961. The Commissioner set aside the assessment order, directing the ITO to withdraw the investment allowance and conduct a fresh assessment. The appellant contended that the Commissioner had no jurisdiction under section 263 as the assessment order was under appeal before the Commissioner (Appeals). The appellant relied on the decision of the Special Bench of the Tribunal in Dwarkadas & Co. (P.) Ltd. v. ITO [1982] 1 SOT 495 (Bom.) to support this argument. However, the respondent argued that the order of the Commissioner (Appeals) had not been decided when the Commissioner exercised powers under section 263, thus the assessment order had not merged at that point. The Tribunal found that the Commissioner's order under section 263 was justified, upholding the Commissioner's jurisdiction in this matter.
Entitlement to investment allowance on machinery and plant used in the business:
The core issue revolved around the entitlement of the appellant, a registered firm engaged in the business of processing and selling milk under the brand name 'Doodh Amrut,' to claim investment allowance on machinery and plant used in the business. The appellant contended that their business activity amounted to the production or manufacture of an article or thing, making them eligible for the investment allowance. The Tribunal examined various decisions cited by both parties, emphasizing the distinction between processing and manufacturing as per legal precedents. Ultimately, the Tribunal concluded that the appellant's activity of processing milk did not meet the criteria for manufacturing or production of an article or thing, thereby rejecting the appellant's claim for investment allowance.
Merger of the assessment order in the order of the appellate authority:
The issue of the merger of the assessment order in the order of the appellate authority was raised during the proceedings. The appellant argued that since the assessment order had merged with the order of the Commissioner (Appeals), the Commissioner had no jurisdiction under section 263. However, the Tribunal clarified that the assessment order had not merged with the order of the Commissioner (Appeals) at the time the Commissioner passed the order under section 263. The Tribunal highlighted that the ITO could have requested for enhancement during the pending appeal, but the choice of remedy did not render the Commissioner's actions under section 263 illegal. Consequently, the Tribunal dismissed the appeal, affirming the validity of the Commissioner's order under section 263.
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1985 (1) TMI 91
Issues:
1. Disallowance of payments made to a film director under section 40(c) of the Income Tax Act, 1961.
2. Disallowance of expenditure on advertisement under sections 37(3A) and 37(3D) of the Income Tax Act.
Analysis:
Issue 1: Disallowance of payments made to a film director under section 40(c) of the Income Tax Act, 1961
The case involved payments made to a film director for directing motion pictures by an assessee company. The Income Tax Officer (ITO) disallowed a portion of the payments under section 40(c) of the Act, limiting the deduction to Rs. 72,000. The CIT(A) held that the payments should not be considered for disallowance under section 40(c) but should be examined under section 40A(2) to determine if they were excessive or unreasonable. The Department appealed, arguing that the overall limit of Rs. 72,000 under section 40(c) applied. However, the Tribunal referred to a Karnataka High Court decision which concluded that payments to independent entrepreneurs should not fall under section 40(c) but should be scrutinized under section 40A(2)(a). As the film director provided services independently, not as a director of the company, the payments were not subject to disallowance under section 40(c). The Tribunal upheld the CIT(A)'s decision, emphasizing the need to assess the expenditure's reasonableness under section 40A(2)(a).
Issue 2: Disallowance of expenditure on advertisement under sections 37(3A) and 37(3D) of the Income Tax Act
The second issue pertained to the disallowance of expenditure on advertisement under sections 37(3A) and 37(3D) of the Income Tax Act. The assessee debited sums under "publicity" in the production cost of a film, which the ITO disallowed partially under section 37(3A). The assessee contended that section 37(3D) applied, exempting the disallowance for industrial undertakings producing new articles. The CIT(A) agreed with the assessee, but the Department appealed. The Tribunal analyzed section 37(3D) and concluded that the exemption applied only if the industrial undertaking began manufacturing new articles in the relevant year. Since the undertaking had been producing films for years and did not start manufacturing new articles in the years in question, section 37(3D) did not apply. The Tribunal set aside the CIT(A)'s decision and upheld the ITO's disallowance under section 37(3A).
In conclusion, the appeals were partly allowed based on the above analysis of the issues involved in the judgment.
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1985 (1) TMI 90
Issues:
- Whether the principle of mutuality applies to the income of a trust formed for mutual help.
- Whether there is a complete identity between the contributors to the trust fund and the recipients.
- Whether the trust's income is exempt from tax.
Analysis:
1. The appeals before the Appellate Tribunal ITAT Bombay-B involved two assessment years for a trust established for mutual help. The Revenue challenged the order of the AAC of IT, I-Range, Bombay, regarding the tax liability of the trust's income.
2. The trust's primary objective was to provide financial assistance to its members and their legal heirs. The trust operated on the principle of mutuality, where contributions from members were refunded upon retirement, termination of service, or death, along with a share of the surplus. The Revenue contended that there was no complete identity between contributors and recipients, citing clauses in the trust deed allowing for alternative uses of the trust's corpus.
3. The Departmental Representative argued that the trust did not meet the criteria of mutuality as established by legal precedents. Referring to specific clauses in the trust deed and relevant court rulings, the Revenue contended that the trust's income should not be exempt from tax.
4. In response, the trust's counsel argued that the clauses in the trust deed regarding gifts and forfeited amounts were precautionary measures for rare situations and did not affect the mutual nature of the trust. Citing court decisions supporting the exemption of income for mutual associations, the counsel emphasized the complete identity between contributors and beneficiaries.
5. The Tribunal analyzed the submissions and found merit in the trust's argument. It noted the direct correlation between contributions and refunds to members upon specific events, affirming the mutual nature of the trust. The Tribunal also highlighted a similar case where the AAC had allowed exemption for a trust with comparable circumstances, indicating consistency in decisions.
6. Ultimately, the Tribunal dismissed the Revenue's appeals, upholding the AAC's decision to exempt the trust's income from taxation. The Tribunal concluded that the trust's claim of exemption based on the principle of mutuality was valid and correctly accepted by the AAC.
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1985 (1) TMI 89
Issues Involved:
1. Whether the disputed amount of Rs. 27,70,943 should be included in the total sales for the assessment year 1975-76.
2. Whether the sale of marine products amounting to Rs. 20,25,562.74 had been completed.
3. Whether the difference in exchange rates amounting to Rs. 7,45,380 should be considered as part of the total sales.
4. Proper valuation of closing stock as on 30-6-1974.
Detailed Analysis:
1. Inclusion of Rs. 27,70,943 in Total Sales:
The assessee, a firm dealing in marine products, disclosed a turnover of Rs. 1,49,358 and a net profit of Rs. 26,32,406 in its books for the relevant accounting year. However, it reported a loss in its tax return, attributing this to a disputed amount of Rs. 27,70,943 with ITC Ltd. The ITO included this amount in the total sales, arguing that the sale had been completed and profits accrued. The Commissioner (Appeals) disagreed, stating that the disputed amount should be deducted from the net profits, as the sale had not been completed according to the firm's regular practice and the terms of the agreement with ITC Ltd.
2. Completion of Sale for Rs. 20,25,562.74:
The agreement between the assessee and ITC Ltd. dated 1-12-1971 specified that the sale was completed only when the marine products were shipped and documents handed over to ITC Ltd. The ITO contended that the sale was completed when the products were packed and certified by the Export Inspection Agency. However, the Commissioner (Appeals) and the Tribunal found that the sale was not completed as the products had not been shipped nor documents handed over. The property in the goods continued to vest in the assessee, and thus, the amount of Rs. 20,25,562.74 did not represent a completed sale.
3. Difference in Exchange Rates of Rs. 7,45,380:
This amount represented the difference in exchange rates for shipments made between 21-9-1973 and 29-3-1974. The assessee claimed this amount based on past practice, but ITC Ltd. repudiated the claim. The Tribunal held that this amount should be excluded from the total sales as it was a disputed claim and had not been received by the assessee. The mere entry in the books did not infer that this amount was receivable.
4. Valuation of Closing Stock as on 30-6-1974:
The Commissioner (Appeals) directed the ITO to value the closing stock represented by the disputed marine products based on the sale proceeds deposited with the court receiver. The Tribunal modified this direction, stating that the ITO should determine the value of the closing stock according to the method of accounting regularly followed by the assessee, considering all surrounding circumstances, including the condition of the products and subsequent events like handing over to the receiver.
Conclusion:
The Tribunal partly allowed the appeal, confirming that the disputed amount of Rs. 27,70,943 should be excluded from the total sales for computing profits. The sale of marine products amounting to Rs. 20,25,562.74 was not completed, and the difference in exchange rates of Rs. 7,45,380 was a disputed claim. The ITO was directed to properly value the closing stock as on 30-6-1974 based on the regular accounting method and surrounding circumstances.
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1985 (1) TMI 88
Issues Involved:
1. Taxability of income in the hands of a non-resident company for business carried on in India.
2. Assessment of profits from sales made by the non-resident company to its Indian subsidiary and other Indian parties.
3. Applicability of the CBDT Circular No. 23 dated 23-7-1969.
4. Taxability of dividend income under the Foreign Exchange Regulation Act (FERA) and the Income-tax Act.
Issue-wise Detailed Analysis:
1. Taxability of Income in the Hands of a Non-Resident Company for Business Carried on in India:
The main ground of the department's appeals pertains to the finding of the Commissioner (Appeals) that no income is assessable in the hands of the assessee, a non-resident company, for the business carried on in India. The assessee-company was doing business in India through its branch, which was converted into an Indian company with effect from 1-1-1975 under a scheme of amalgamation with May & Baker (India) Ltd. The High Court approved the scheme of amalgamation with effect from 1-1-1975, and the entire business and undertaking in India of the transferor-company, i.e., the assessee, vested in the Indian company. The Tribunal upheld the Commissioner (Appeals)'s order, concluding that from the appointed date, the business was carried on by the assessee on behalf of the Indian company, and therefore, the income was taxable in the hands of the Indian company and not the assessee.
2. Assessment of Profits from Sales Made by the Non-Resident Company to Its Indian Subsidiary and Other Indian Parties:
The ITO brought to tax the income of the assessee from the sales made to the Indian subsidiary and other Indian parties. For the assessment years 1976-77, 1977-78, and 1978-79, the ITO estimated the profit mark-up and attributed a portion of the profits to operations in India. The Commissioner (Appeals) concluded that the transactions were on a principal-to-principal basis and at arm's length, and thus no tax liability arose in respect of the sales made to the Indian subsidiary and other parties. The Tribunal upheld this finding, noting that the transactions were at prices normally chargeable to other customers, and therefore, no income was assessable in the hands of the assessee.
3. Applicability of the CBDT Circular No. 23 dated 23-7-1969:
The Commissioner (Appeals) relied on the CBDT Circular No. 23, dated 23-7-1969, which clarified that no tax liability arises for sales made on a principal-to-principal basis between a parent company and its subsidiary. The Tribunal agreed with the Commissioner (Appeals) that the transactions were at arm's length and followed the circular's guidelines, thus exempting the assessee from tax liability on these transactions.
4. Taxability of Dividend Income under the Foreign Exchange Regulation Act (FERA) and the Income-tax Act:
The assessee contended that dividend income could not be taxed in the hands of the assessee because the dividends were not remitted to the assessee-company in England due to FERA restrictions. The Tribunal examined the provisions of section 8 of the Income-tax Act, which deems dividend income to be taxable in the year it is declared. The Tribunal found that the FERA restrictions were temporary and did not create a moratorium on the liability to pay dividends. The right to dividends accrued on the date of declaration, and the FERA did not override section 8 of the Income-tax Act. Consequently, the Tribunal dismissed the cross-objections filed by the assessee and upheld the taxability of the dividend income in the years it was declared.
Conclusion:
The Tribunal dismissed the department's appeals and the assessee's cross-objections, affirming the Commissioner (Appeals)'s orders that no income was assessable in the hands of the non-resident company for the business carried on in India and that the dividend income was taxable in the years it was declared.
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1985 (1) TMI 87
Issues Involved:
1. Assessment of property income for Gajria Electrical Industries Co. (P.) Ltd.
2. Validity of transactions between Gajria Electrical Industries Co. (P.) Ltd. and Neelam Traders.
3. Determination of income received by Gajria Electrical Industries Co. (P.) Ltd. from Neelam Traders.
4. Application of Section 23 of the Income-tax Act, 1961.
5. Consideration of Neelam Traders as a benami entity.
6. Reliance on precedent cases and tribunal orders.
Issue-wise Detailed Analysis:
1. Assessment of Property Income for Gajria Electrical Industries Co. (P.) Ltd.:
The primary issue was whether the income from the property 'Mistry Bhavan' should be based on the rent received directly by the assessee from Neelam Traders (Rs. 27,832) or on the higher amount received by Neelam Traders from sub-letting to International Computers Ltd. (ICL) (Rs. 1,07,385). The Income Tax Officer (ITO) computed the property income based on the higher amount, while the Commissioner (Appeals) directed the ITO to base it on the actual rent received by the assessee from Neelam Traders.
2. Validity of Transactions Between Gajria Electrical Industries Co. (P.) Ltd. and Neelam Traders:
The Tribunal examined the transactions and agreements between the assessee and Neelam Traders. The Commissioner (Appeals) had accepted the transactions as genuine, citing no evidence of financing by the appellant and the absence of benamidari. However, the Tribunal found discrepancies and lack of evidence supporting the genuineness of these transactions, highlighting that Neelam Traders was interposed between the assessee and ICL without a substantial reason.
3. Determination of Income Received by Gajria Electrical Industries Co. (P.) Ltd. from Neelam Traders:
The Tribunal concluded that the entire amount of Rs. 1,07,385 received by Neelam Traders from ICL should be considered as the property income of the assessee. It was emphasized that the real tenant was ICL, and the rent paid by ICL should be deemed receivable by the assessee, despite any interposition of Neelam Traders.
4. Application of Section 23 of the Income-tax Act, 1961:
The Tribunal applied Section 23(1)(b) of the Act, which pertains to the annual rent received or receivable by the owner. It was determined that the expression 'receivable' includes the actual rent paid by the tenant, ICL, to Neelam Traders, which should be considered as income of the assessee.
5. Consideration of Neelam Traders as a Benami Entity:
The Tribunal noted that the ITO did not explicitly state that Neelam Traders was a benami entity of the assessee. However, it was inferred that Neelam Traders was used to divert income and avoid taxation. The Tribunal dismissed the Commissioner (Appeals)'s focus on benami requirements, emphasizing that the interposition of Neelam Traders was a tax evasion tactic.
6. Reliance on Precedent Cases and Tribunal Orders:
The Tribunal addressed the reliance on precedent cases and tribunal orders, particularly those involving Chandra Trading Co. and Latesh Kumar & Co. It was clarified that these cases did not negate the Tribunal's conclusions and did not support the assessee's claim. The Tribunal upheld the ITO's assessment method and reversed the Commissioner (Appeals)'s order, restoring the ITO's computation of property income.
Conclusion:
The Tribunal concluded that the property income of Gajria Electrical Industries Co. (P.) Ltd. should be based on the higher amount received by Neelam Traders from ICL, amounting to Rs. 1,07,385. The interposition of Neelam Traders was deemed a strategy for income diversion and tax evasion, and the Tribunal emphasized the correct application of Section 23(1)(b) of the Income-tax Act, 1961. The Commissioner (Appeals)'s order was reversed, and the ITO's assessment was restored.
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1985 (1) TMI 86
Issues:
- Appeal against revisional orders passed by CIT, Karnataka
- Computation of chargeable profits and deduction under 80G relief
- Application of r. 4 of the Second Schedule to the Companies (Profits) Surtax Act
- Jurisdiction of CIT under s. 16(1) of the Companies (Profits) Surtax Act
Analysis:
The appeal was filed by the assessee against the revisional orders passed by the CIT, Karnataka, regarding the computation of chargeable profits and the deduction under 80G relief. The Surtax Officer had deducted a certain amount as a donation under r. 1(vii) of the First Schedule to the Companies (Profits) Surtax Act, which was excluded from the total income of the assessee. The CIT believed that the capital should be reduced proportionately according to r. 4 of the Second Schedule, but the Surtax Officer did not apply this rule and computed the capital differently. The CIT found the assessment erroneous and prejudicial to revenue, leading to the revision of the order. The assessee challenged this revision before the Tribunal.
During the proceedings, the counsel for the assessee referred to a decision of the Karnataka High Court, stating that deductions under the IT Act, such as 80G relief, should not be considered while applying r. 4 of the Second Schedule. The departmental representative argued that administrative directions allowed the department to continue assessing despite adverse High Court decisions, but collection should be stayed until the Supreme Court decides on the matter. The Tribunal held that the CIT's assumption of jurisdiction was incorrect based on the High Court's decision and overturned the revisional orders. The specific direction by the CBDT was not presented, leading to the rejection of the department's argument. Consequently, the Tribunal allowed the appeal and restored the Surtax Officer's order.
In conclusion, the Tribunal ruled in favor of the assessee, setting aside the CIT's revisional orders and restoring the original assessment made by the Surtax Officer. The decision was based on the interpretation of relevant rules and the lack of specific administrative directions supporting the CIT's actions.
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1985 (1) TMI 85
Issues Involved:
1. Registration of the partnership firm.
2. Classification of income as "business income" or "income from other sources."
3. Legality of the money-lending business without a licence under the Karnataka Money Lenders Act, 1961.
4. Status of the assessee as an 'AOP' (Association of Persons).
Detailed Analysis:
1. Registration of the Partnership Firm:
The assessee filed Form No. 11A on 23-6-1980 along with a fresh partnership deed dated 21-10-1979, claiming continuous operation since 1973. The Income Tax Officer (ITO) questioned the registration, arguing the firm did not carry on any business and the income was merely interest on deposits. The assessee countered, stating the business involved banking activities and lending money, which qualifies as carrying on business.
The Tribunal concluded that the assessee should be regarded as having carried on business for the assessment year 1981-82, and thus, should have been granted registration under section 185(1)(a) of the Income-tax Act, 1961. The Tribunal emphasized that the intention of the parties and all circumstances should be considered to determine whether the transactions were deposits or loans.
2. Classification of Income:
The ITO classified the income as "income from other sources," arguing that the firm did not carry on any business. The assessee contended that the amounts advanced to the debtor firm were loans, not mere deposits, and thus, the interest earned should be classified as business income.
The Tribunal held that the assessee carried on the business of money-lending, noting that the amounts advanced were loans repayable on demand with interest. The Tribunal referenced legal definitions distinguishing loans from deposits, concluding that lending money constituted carrying on business.
3. Legality of the Money-Lending Business:
The ITO argued that without a money-lending licence under the Karnataka Money Lenders Act, 1961, the business was illegal. The assessee countered, citing section 11 of the Karnataka Money Lenders Act, which allows a money-lender to institute a suit for money recovery even without a licence, provided the court grants time to obtain one.
The Tribunal agreed with the assessee, stating that lending money without a licence is not illegal. The Tribunal concluded that the business carried on by the assessee was legal, and the absence of a licence did not justify refusing registration.
4. Status of the Assessee as an 'AOP':
The ITO intended to treat the assessee as an 'AOP' rather than a partnership firm. Given the Tribunal's finding that the assessee carried on a legal business and was entitled to registration, the classification as an 'AOP' was deemed unsustainable.
The Tribunal set aside the orders of the lower authorities, directing the ITO to grant registration to the assessee-firm and re-determine the taxable income for the assessment year 1981-82 after providing due opportunity to the assessee.
Conclusion:
The Tribunal allowed IT Appeal No. 481 (Bang.) of 1982, granting the registration of the partnership firm, and allowed IT Appeal No. 165 (Bang.) of 1983 for statistical purposes, directing a reassessment of the taxable income. The Tribunal concluded that the assessee carried on a legal money-lending business, and the income should be classified as business income, not income from other sources.
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