Legal Updates CA Kapil Goel Sent Via Email Section 195 of the Income Tax Act – Select Propositions and Case Studies By CA.Kapil Goel Moblle: 91-11-9910272806 cakapilgoel@gmail.com

1. Basic Nature of TDS/Tax Withholding Provisions in Income Tax Law (Ch XVII-B) – SC views in Eli Lily 312 ITR 225

The purpose of TDS provisions in Chapter XVII B is to see that the sum which is chargeable under Section 4 for levy and collection of income-tax, the payer should deduct tax thereon at the rates in force, if the amount is to be paid to a non-resident. The said TDS provisions are meant for tentative deduction of income-tax subject to regular assessment. (see Transmission Corporation of A.P. Ltd. and Anr. v. CIT reported in [1999] 239 ITR 587 at p. 594). Similar views of Mum ITAT in IDBI Limited 104 TTJ 230 “17. In our humble understanding, conceptually, liability of TDS is in the nature of a vicarious or substitutionary liability which presupposes existence of a principal or primary liability. … Sec. 190 makes it clear that the scheme of TDS is one of the methods of recovering the tax due from a person and it is notwithstanding the fact that the tax liability may only arise in a later assessment year. The tax liability is obviously in the hands of the person who earns the income and TDS mechanism provides for method to recover tax under such liability. Therefore, this TDS liability is, as we begun by taking note of, a sort of substitutionary liability. Sec, 191 further makes this position clear when it lays down that in a situation TDS mechanism is not provided for a particular type of income or when the taxes have not been deducted at source in accordance with the provisions of Chapter XVII, income-tax shall be payable by the assessee directly. This provision thus shows that TDS liability is a vicarious liability and the principal liability is of the person who is taxable in respect of such income. Sec. 199 makes it even more clear by laying down that the credit for taxes deducted at source can only be given to the person from whose income the taxes are so deducted.”

2. Importance of Subject : Why section 195 of the Act needs to be studied as far consequences are concerned (for default on part of payer):

Tax Deductor treated as Assessee in Default u/s 201(1) and TDS (Tax Deduction At Source)/WHT (Withholding of tax) may be recovered thereunder

Interest u/s 201(1A) for default in TDS/WHT Penalty u/s 221 and/or section 271C - Prosecution u/s 276BB – for failure to pay TDS Disallowance of Expense u/s 40(a)(i)

The payer may be held as an agent of the non-resident and be liable to tax in the like manner and to the same extent as the non-resident u/s. 160 to 163.

Issues u/s 201 in light of latest amendment by Finance Act (no 2) of 2009: As per Memorandum Circular there is no time limit for initiating proceedings in case of payees being non resident “…However, no time-limits have been prescribed for order under sub-section(1) of section 201

where—

(a) the deductor has deducted but not deposited the tax deducted at source, as this would

be a case of defalcation of government dues,

(b) the employer has failed to pay the tax wholly or partly, under sub-section (1A) of section 192, as

the employee would not have paid tax on such perquisites,

(c) the deductee is a non-resident as it may not be administratively possible to recover the

tax from the non-resident..”

Whether can overrule court verdicts like Special Bench in Mahindra and Mahindra – till 6/4 years in commensuration with section 149, DHC NKH Japan Broadcasting 305 ITR 137 : Held where no time limit is provided reasonable time limit to be read into the law – order u/s 201 to be passed within four years from end of relevant financial year (underlying ITAT order at 101 TTJ 292), further refer: ITAT rulings in 83 ITD 11, 57 ITD 536, 2 SOT 389 etc- seems no because Circular/board understanding cannot be at variance with judicial precedents SC in R&B Falcon 301 ITR 309 and Rattan Melting etc. No Demand u/s 201(1) on payer in case payee assessed to tax/offered

the amount in its return of income as on date of proceedings u/s 201(1) : SC in Hindustan Coca Co la 163 Taxman 355 and Eli Lily (supra)

Both Penalties u/s 271C and 221 are not leviable for same default of TDS : ITAT in Titagarh Steels 79 ITD 532 and IDBI case 104 TTJ 230 has held that penalty u/s 221(1) is not leviable for failure to deduct tax/ shortfall in TDS as section 271C is specific and will prevail over section 221 which is general in nature

DHC in Adidas 288 ITR 379; Majestic Auto 293 ITR 185: date of tax

payment by payee – endpoint for interest computation u/s 201(1A) (approved impliedly by SC inEli Lily case)

3. Peculiar Features of Tax Withholding provision in section 195:

Omnibus Provision – Includes Any Payer (being responsible for making the payment) irrespective of legal status of payer (like Indl, HUF, whether carrying business or not etc)

Issues: • Whether includes Non resident Payer? (in case of payment being

made by one non resident to other non resident)

- Mum ITAT in STAR 99 ITD 91 - Mum ITAT in Srikomar Poddar 65 ITD 48 - SC Electronic Corporation 183 ITR 43 - Kanga/Palkivala Page 2105 9th edition - Impact of SC in Eli Lily (if any)?

• Whether includes an agent - liable to make deduction- while

making remittance to principal for collections in India for non resident?

Covers any payment (except salaries) to non resident No threshold limit – Once sum paid is “chargeable to tax” Since non resident may opt to be governed by treaty provisions/DTAA

entered by India- Deductor to be familiar with DTAA and Their Interpretation – Multi Dimensional

Situs of Payment apparently immaterial, if payee non resident ?

4. Payee – Non resident covers: a) Branch/PE of Non resident Assessee CBDT Circular No 20/3-1-1961 –

(foreign bank branch – practical way out – branches obtain 195(3) certificates)

b) Non Corporate Payees c) Payment to agent of non resident (SC Narsee 35 ITR 134) –

distinguished in Chd ITAT 33 DTR 469 – power of attorney holder of non resident selling property) – IF VENDOR OF PROPERTY NON RESIDENT – PURCHASER TO APPLY SECTION 195 113TTJ 863 (Bang)

d) Whether covers resident but not ordinarily resident as payee u/s 195? Seems No

e) Payment by branch to HO/another branch abroad whether payment by a “person” to a “payee” u/s 195? – 5 Member Special Bench ITAT Pending in Sumitomo Mitsui Banking Corp (others incl 97 ITD 89 Kol ITAT SB ABN Amro; Mum ITAT Dresdner Bank; British Bank at 108 ITD 375; 19 SOT 730)

f) Determination of residential status of PAYEE

• When year is far from over? Whether to go by status as on

transaction date or preceding year status? • Where payee is resident as per Act and non resident as per Treaty?

– So long as payee is resident as per Act- difficult to apply Treaty Tie Breaker rule for determining payee status under section 195….

• Residential Status of Firms/other entities- SC in 19 ITR 168; 40 ITR 1; 34 ITR 1 (partners of a firm resident – rebuttable presumption – firm’s control in India)

5. Payments Covered: Issues

Stated Interest should be chargeable to tax in India

Payment in Kind – APHC in 265 ITR 644 (hire charges paid in the form of

“fishes”) Remuneration to Non resident Partners (in case partners are carrying

activities outside India for firm’s business – could be argued that same is not chargeable to tax in India…)

Award amount under court rule: DHC 127 DLT (2006) 401 = Held not

applies ; same by BHC in 265 ITR 254 Income Tax Refund- Interest Thereon- Yes 195 applies (but

classification dispute whether covered u/art 12 Interest income or is covered under business income (max. rate)- Held by Del ITAT in Pride Foramer 116 TTJ 369 covered u/art 12 @ 10%

Payment of Advance : In NR Payee follows accrual system- possible

view- no chargeable income arises so as to attract TDS u/s 195 (However refer contra observations in AAR at 267 ITR 727)

Void Agreements Payment – Delhi ITAT in Ericsson 81 ITD 77 – no TDS

applies

Constructive Payment – eg payment to NR adjusted from other proceeds – Covered Mum ITAT in 86 ITD 791 – SC J.B.Boda applied 223 ITR 271

Some treaties creates chargeability at satisfaction of “payment” of

Royalty etc- Whether tds arises at the time of provision or at payment stage (where chargeability gets completed) divided views – AAR (adverse) in 267 ITR 727 ; Mum ITAT 96 TTJ 765 (fav)

Where regulatory approval required whether TDS liability arises before

approval stage? Adverse views in Kar HC in United Breweries Ltd 211 ITR 256 (fav views in BHC in 259 ITR 391 & 249 ITR 141)

Adhoc – Provision – Whether attracts TDS liability? Refer SC in 48 ITR 1 ;

55 ITR 699; - Kanga Palkivala etc- Possible view TDS liability is attracted when service provider etc can claim payment of amount credited)

6. Concessional TDS Certificate by Payer application u/s 195(2)- no format;

whether also can be made for NIL withholding ? Contrary decisions in

113 ITD 85 (YES) ; 81 ITR 162; 28 TTJ 425 (NO) – Better view : YES whether for all phases of work – separate certificate is required? Held

Yes in 113 ITD 85 Appeal against order u/s 195(2) – by payer/deductor- where tax to be

borne by it- U/section 248 (whether must that there is an order u/s 195(2)..?)

Whether revision u/s 263 possible for 195(2) order? Yes as per 97 TTJ 751

till remittance power u/s 263 can be exercised However, deductor de-hors section 248 can appeal against orders

passed on it u/s 201 as per section 246A(1)(ha)

7. Certificates on behest of Payee u/s 195(3) and/or 197 Classical Writ Rulings of Bombay High Court in McKinsey & L&T cases:

Held in Mc Kinsey cases: denial of certificate u/s 195(3) mechanichally is subject to correction in Writ jurisdiction (as also refer BHC Diamond

Services case – writ allowed on make available etc in India Singapore DTAA on adverse 197 certificate 304 ITR 201)

Held in Mc Kinsely : 197 determination constitutes order for making revision u/s 264 to CIT (also in L& T case) ; in case AO u/s 197 ignores earlier 264 favorable order – Writ possible & allowed (as not necessary that all remedies are exhausted)

Whether AO at 197 stage required to examine all facts including

whether or not PE exists? Yes as per DHC 200 CTR 262]

Incorrect 197 certificate unless cancelled/revoked- binding on revenue- Bang ITAT Bovis Lend case (applied 246 ITR 254; 155 ITR 476)

Bang ITAT intel 2/4/2009 order in ITA 71/2009: Held : deductor cannot

be supposed to deduct tds in respect of adjustment if any made by AO in respect of income tax assessment of deductee

Whether 264 FAVORABLE order over 197 application is binding on AO in assessment of deductee? Seems to be NO

8. CA Certificate etc Form 15CA/15CB etc Particulars of Payee incl Legal Status of the same (taxability and rates

depends upon same) check whether payee is a branch (country 1) belongs to parent (country 2)?

Nature of Payment – in Certificate refer those documents which has

been seen Obtain TRC (Tax Residency Certificate) of Payee so as to examine

treaty provisions (else obtain self declaration form (SDF) sufficiently detailed from payee as to tax residency of a country)- at appropriate places mention certificate based on declaration of payee eg declaration of payee on PE presence /income connection with PE may be required..)

On verification of PE : at what point of time? And whether

representation sufficient? ((SC in L&T whether applicable?)- Payer has limited information on PE…

Income taxable on net basis – Can CA compute? Refer Clause 13 (c) of Form No. 15CB

Immovable Property - Can CA rely on Computation of Income provided by the Non resident seller? Declaration of intension by the seller to invest long term capital gains u/s. 54EC?

Guarded caveat on “beneficary” is recipient of income … No appeal against CA Certificate (106 ITD 521 Mum ITAT M&M)-

STATUTORY RECOGNITION IMPACT? • Tax Treaty – whether applicable? Legal Status; Persons covered;

Taxes covered; _ Residential status • Tax treaty – check: Entry into force & Termination; LOB clause; MFN

clause Protocols and Memorandum of Understandings

Circular No. 9/2009 [f. no. 142/19/2007-tpl], dated 30-11-2009 while

remitting consular receipts abroad, diplomatic missions in India will be required to submit only a self-certified undertaking in Form No. 15CA

9. Reimbursement of Expenses: Whether TDS attracted u/s 195?

Documentation important; to

ensure same is on actual: Refer

• Guj High Court ruling in the case of SCARLET DESIGNS PVT LTD TAX APPEAL No. 1849 of 2008;

• Delhi ITAT Grand Prix 34 DTR (Del)(Trib) 248; Expeditors International 118 TTJ 652;

• Bang Bench in International Airport Ltd 116 ITD 446; • Krupp Udhe GMBH INCOME TAX APPEAL NO.2626 OF 2009 • CIT vs Siemens Aktiongesellschaft 310 ITR 320 (Bom) • Information Architechts BHC • Tekmark Global Solutions LLC Mum ITAT ITA No. 671/Mum/2007

February 23, 2010

10. Whether Assessee himself on basis of CA Certificate/ on basis of prevailing SC decision etc can suo motto determine chargeability of a sum paid to non resident i.e whether for determining chargeability also whether Application to AO u/s 195(2)/195(3) is must? – Divided Opinion – Rule of Ex Abundant Cautela etc- Adverse views in Karnataka High Court at Samsung case dissented by (favorable views) Delhi High Court in Van Oord case (later explained by DHC in Maharishi Housing) Fav Karnataka High Court ruling in 231 CTR 449 Illions Institute Chargeability must to attract TDS u/s 195 (where there is either no PE or Business Connection: NO tds liability is there)

11. Section 206AA: since Section 206AA is starting with Non Obstante clause overriding whole Income Tax Act (unlike charging section 4 which is expressly made subject to other provisions of the Act - refer SC in Azadi Bachao etc), it is apparently including within its ambit Non Resident Tax Withholding also, which further gets supported from the fact that section 206AA covers any sum which is subject to tax deduction u/ch XVII-B of the Income Tax Act (that is, to irrespective of character of payee). That is, If a sum is subject to tax withholding u/ch XVII-B (including section 195) then if NR Payee has no PAN, on plain and unambiguousus application of language in section 206AA, rate of 20% may get attracted (even when DTAA gives lesser rate of 15%). That Is, if tax is not deductible at all because of zero chargeability under Indian Tax Law (as pleaded), then section 206AA may not trigger.

12. Payment to foreign shipping company / its agent:

Income from shipping is governed by section 172. The section applies notwithstanding anything contained in any other provision of the income tax act. Section 172 is a self contained code. The non-resident shipping company has to pay tax at the prescribed rate within 30 days of the departure of the ship. The master of the vessel has to arrange for payment of tax. Only then does he get the clearance for departure. The payment by Indian residents can be made to the shipping company or the agent. CBDT has issued a circular No. 723, dated 19-9-1995 stating that tax has to be paid in terms of section 172. Section 195 has no application. Therefore no tax has to be deducted at source as the master of the ship has to make arrangements for the tax payment before the departure

13. Practical Case Studies: a) TDS u/s 195 on export commission (Orders procurement from abroad,

Investor Procurement; Hotel Reservation Procurement etc) : Spirit of Circular No 786/2000 still holds goods and same view may be taken based on un-amended Section 9(1)(i) of the Act …

b) Reimbursements to Group Co: An issue came up before the Hon'ble Delhi Bench of the Tribunal as to applicability of sec.195 to payments which are reimbursement of expenditure to a non-resident. Assessee-company reimbursed expenses to a non-resident-Hong Kong company (HK) towards service charges of consultancy agency incurred by HK company. This was done to bear expenses for bidding a contract for operating GSM based cellular services in India. It was argued by the assessee that the payment to non-resident did not include any element of income. Hence, provisions of sec.195 should not apply. HK company being one of the consortion partners took the lead of preparing pre-bid documents. However, it did not have necessary expertise to do the same. It engaged services of a consultancy firm in HK and got the job done. Assessee-company reimbursed its share of such consultancy part by HK. Revenue argued that the remittances are to be treated as payment of technical services fee. However, the transaction between assessee and HK is reimbursement of expenses simplicitor. Therefore, it was held by the Hon'ble Tribunal that sec.195 has no application. ACIT vs. Modicon Network (P) Ltd. (2007) 14 SOT 204 (Delhi).

(Applied by Bang ITAT in CGI INFORMATION SYSTEMS & MANAGEMENT CONSULTANTS PVT LTD on software cost reimbursement; for costs contributions refer E&Y Advance ruling; HMS Real Estate advance ruling; Case of M/s. Invensys Systems Inc. USA Applicant (no technical services involved etc) ; Advance Ruling in ABB Ltd; Held the reimbursement of research and development (“R&D”) expenses under Cost Contribution Agreement (“CCA”) is not liable to tax in India.)

c) Training Fees: ITAT ruling in Lloyds Register Industrial Services (India) Pvt. Ltd Mumbai Bench of ITAT … in the case before us surveyors were highly technically qualified but such persons may need to learn practical aspects of examining various electrical and other equipments Such training in our view is a continuous process because technology is changing very fast and one

needs to keep touch with such technology and therefore, expenses incurred towards training cannot be termed as "fee for technical services". In any case, the case before us major amount has been paid by way of reimbursement for boarding and lodging arrangements also for which no separate claims have been made. Therefore, according to us, the training fee cannot be termed as "fee for technical services..

d) Shares issued in discharge of revenue obligation? Whether TDS attracted? SC in EMICO. same is not expense at all (issuance of share capital in lieu of an obligation- Delhi ITAT Ranbaxy case)

e) X Ltd hiring A Gmbh to market its product on commission basis…A Gmbh sends balance receipts after deducting its commission – whether XLtd to deduct TDS on said commission retained by A GmBH?

f) Indian entity receiving newspaper (of foreign language) – remittance of charges to foreign co for payment to newspaper (aborad)

g) Translation Services being taken by a Indian Company h) Remittance i) Subsidiary Providing Outside India local support to customers of ICO –

Reimbursement plus charges to Sub CO. j) Spare Parts fit outside India by foreign vendor/job worker into Machine

sent to abroad for repairs- Whether charges thereof TDS u/s 195 is attracted?

k) Normal Machine Repair Repairs – remittance abroad- TDS attracted u/s 195? Refer Jaipur Bench in Jaipur Vidyut and Delhi ITAT in Parasrampuria Synthetics (in context of section 194J – 9(1)(vii) can be applied here also; also refer Delhi ITAT Lufthansa Cargo etc)

l) Connectivity/Internet/Bandwidth Charges: Mum ITAT Kotak Mahindra Primus; DHC in Bharti Cellular; Mad HC in Skycell; AAR in Cargo Community etc

m) Payment to Fashion Designer (NR) by Indian Export House for clothes designing etc..

n) Autobiography Publication Charges abroad by an INDIVIDUAL o) Animation by Foreign Entity of certain document/file/picture etc p) Advertisement in Foreign Media – Charges thereof (Al Nisr Publishing ,

UAE [1999] 239 ITR 879 (AAR) & Speciality Magazines Pvt Ltd. [2005] 274 ITR 310 (AAR))

q) Remittance of Indian Company Incorporation expenses to Foreign Co ? Whether Pure reimbursement?

r) Remittance of Gifts to person abroad? s) TDS u/s 195 on Subscription Charges ABC Ltd in. re.:(2006) 284 ITR 1

(AAR); Dun & Bradstreet Espara S.A. (2005) 272 ITR 99 (AAR); Wipro Ltd

vs ITO (2005) 278 ITR (AT) 57 (Bang) / 1 SOT 663 (Bang)/92; TTJ 796 (Bang); CIT vs HEG Ltd. (2003) ITR 230 (MP) and several other decisions.

14. Example of Certification language by CA: Since subject services being advertisement charges are classifiable as business profits under India- USA DTAA, in absence of payee’s PE under Article 5 of said DTAA, the subject remittance to payee is not taxable as business profits in India and hence it is concluded that no tax is deductible on the same” We place reliance upon following… Since subject export commission payable to non resident payee is classifiable as business profits under India USA DTAA, in absence of payee’s PE under article 5 of said DTAA, the subject remittance to payee is not taxable as business profits in India and hence it is concluded that no tax is deductible on the same”

15. Refund of sums deducted: CBDT Circular no 7 of 2007 23/10/2007- Contract cancellation (when no remittance to non resident, in case amount remitted to non resident- same is returned to payer); Subsequent exemption under law; deduction of tax twice; by mistake; higher tds rate applied when law provides lower rate, order is passed to deductor u/s 195 – giving relief in section 154;264 etc)

16. Rates in Force Defined in s.2(37A)(iii) for purposes of s.195 to mean rate or rates specified in the Finance Act of the relevant year or the rates of tax specified in the DTAA, whichever is applicable, by virtue of provisions of section 90 of the IT Act; Circular No.728 dated 30.11.1995 - DTAA rates to be applied for TDS under section 195, if more favourable to the assessee -No Surcharge/Education cess if treaty rates applied Other Interesting Aspects:

Section 40(a)(i) cannot be applied to disallow depreciation component on “cost” capitalized in section 43(1)- Delhi ITAT in SMS Demag & SC in Nectar Beverages

Section 40(a)(i) cannot be applied to disallow expense when assessee is governed by special regime of taxation u/s 42 Cairns Energy ITA No 208/2009 Madras High Court

Gist of Latest Delhi High Court Last 7 day’s Developments:

1.ZOOM COMMUNICATION PVT LTD: Concealment Penalty : Section 271(1)(c) Income Tax Act : Held after Considering SC in Reliance Petro case:

16. The proposition of law which emerges from this (Reliance Petro) case, when considered in the backdrop of the facts of the case before the Court, is that so long as the assessee has not concealed any material fact or the factual information given by him has not been found to be incorrect, he will not be liable to imposition of penalty under Section 271(1)(c) of the Act, even if the claim made by him is unsustainable in law, provided that he either substantiates the explanation offered by him or the explanation, even if not substantiated, is found to be bonafide. If the explanation is neither substantiated nor shown to be bonafide, Explanation 1 to Section 271(1)(c) would come in to play and the assessee will be liable to for the prescribed penalty….. 19. It is true that mere submitting a claim which is incorrect in law would not amount to giving inaccurate particulars of the income of the assessee, but it cannot be disputed that the claim made by the assessee needs to be bonafide. If the claim besides being incorrect in law is malafide, Explanation 1 to Section 271(1) would come into play and work to the disadvantage of the assessee. 20. The Court cannot overlook the fact that only a small percentage of the Income Tax Returns are picked up for scrutiny. If the assessee makes a claim which is not only incorrect in law but is also wholly without any basis and the explanation furnished by him for making such a claim is not

found to be bonafide, it would be difficult to say that he would still not be liable to penalty under Section 271(1)(c) of the Act. If we take the view that a claim which is wholly untenable in law and has absolutely no foundation on which it could be made, the assessee would not be liable to imposition of penalty, even if he was not acting bonafide while making a claim of this nature, that would give a licence to unscrupulous assessees to make wholly untenable and unsustainable claims without there being any basis for making them, in the hope that their return would not be picked up for scrutiny and they would be assessed on the basis of self Assessment under Section 143(1) of the Act and even if their case is selected for scrutiny, they can get away merely by paying the tax, which in any case, was payable by them. The consequence would be that the persons who make claims of this nature, actuated by a malafide intention to evade tax otherwise payable by them would get away without paying the tax legally payable by them, if their cases are not picked up for scrutiny. This would take away the deterrent effect, which these penalty provisions in the Act have. 21. We find that the assessee before us did not explain either to the Income Tax Authorities or to the Income Tax Appellate Tribunal as to in what circumstances and on account of whose mistake, the amounts claimed as deductions in this case were not added, while computing the income of the assessee company. We cannot lose sight of the fact that the assessee is a company which must be having professional assistance in computation of its income, and its accounts are compulsorily subjected to audit. In the absence of any details from the assessee, we fail to appreciate how such deductions could have been left out while computing the income of the assessee company and how it could also have escaped the attention of the auditors of the company. 2. Dhanesh Gupta: Section 142: Special Audit by CA: Remuneration Fixation: Held

“6. Admittedly, the special audit of respondent No.3 was directed under Section 142(2A) of the Act. Logically, the payable to the Special Auditor or at least the parameters on which such remuneration is to be determined need to be fixed before the audit is assigned to him. The auditor, to whom the work is assigned, is not under any obligation to accept the assignment and is very much at liberty, while making offer for appointing him as Special Auditor or while accepting the assignment, to insist upon payment of such fee as he may deem adequate for the work assigned to him. Therefore, necessarily he needs to know, what will be paid to him for the work proposed to be assigned to him. If the remuneration demanded by the person proposed to be appointed as Special Auditor is not acceptable to the Chief Commissioner or the Commissioner, as the case may be, he may not assign the work to him. But it would be difficult to accept that the special audit can be assigned to a person without fixing either the remuneration or the norms on which the remuneration is to be calculated after the work is completed and conveying the same to him. Taking such a view would amount to giving an arbitrary power to the Chief Commissioner or the Commissioner, as the case may be, to fix any fee which he may decide to fix irrespective of the quantum of the work and the scale on which the remuneration is to be determined taking the quantum of work into consideration. This, to our mind is not the scheme of Section 142(2D) of the Act” 3. SHARE APPLICATION MONEY ON 19 MAY 2010: JVD CASE: HELD We may also point out that the Commissioner of Income Tax (Appeals) had also taken into account the fact that the assessee company had complete details of the share applicants including their names, addresses, income tax particulars, bank particulars, ration cards, PAN cards, confirmations in respect of all the applicants and that all such information had been placed before the Assessing Officer. This fact had also not been disputed by the Assessing

Officer. In view of these findings, no substantial question of law arises for the consideration of this Court.

4. Kar High Court Section 195: Non resident Payee: Imparting Education by USA based institution through the assessee in India did not amount to BUSINESS/COMMERCE and the USA co having no PE in India, assessee is not liable to TDS u/s 195 while remitting Payment to USA (Illions Institute matter (case text can be sent on request as same are heavy PDF files)

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[ High Court of Judicature at Allahabad Lucknow Bench Lucknow ]

[ RESERVED ]

[ A.F.R. ] Court No. -27

1. Case :- INCOME TAX APPEAL No. - 19 of 2004

Petitioner :- Commissioner Of Income Tax-Ii LucknowRespondent :- Rajeev Sharma, LucknowPetitioner Counsel :-D.D. ChopraRespondent Counsel :- Rohit Nandan Shukla

AND

2. Case :- INCOME TAX APPEAL No. - 20 of 2004

Petitioner :- Commissioner Of Income Tax-Ii LucknowRespondent :- Rajeev Sharma, LucknowPetitioner Counsel :-D.D. ChopraRespondent Counsel :- Rohit Nandan Shukla

Hon'ble Devi Prasad Singh,J. Hon'ble S.C. Chaurasia,J.

[ Delivered by Hon'ble Mr. Justice Devi Prasad Singh]

1. In both these two income tax appeals, under Section 260-A of the Income Tax Act, 1961 (in short the 'Act') common question of law is involved. Hence both the appeals are decided by this common judgment.

2. The controversy in both the appeals, relates to the assessment year 1994-95 and 1995-96 with regard to escaped liability.

Brief facts of the case

1. The assessee respondent, filed original return dated 12.3.1996, declaring total income of Rs.3,04,200.00. During the course of assessment proceedings of the year 1996-97, it came to light that the assessee acquired gift for total amount of Rs.12,51,000.00, in the name of his minor son from one Shri Abdul Hasan Hanif of Lucknow through his NRE Account.

2. The case was reopened under Section 148 by issuing notice on 26.12.2000. The assessment completed under Section 147 (3) read with Section 148 of the Act for total income of

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Rs.16,10,400.00 whereas, in addition, Rs.12,51,000.00 was made with regard to unexplained gift on the ground that the donor was not available on the given address nor was produced before the Assessing Officer in spite of opportunity provided.

1. The addition of income was confirmed by the Commissioner Income Tax (A) with observation that Sri Hanif was not related to assessee though, confirmatory letter was filed and gift was made by cheque, it may not be held that the assessee has discharged his onus. More so, when the donor was not found at the given address nor was produced before the Assessing Officer for cross-examination.

2. The Commissioner of Income Tax (A) has rejected the contention of the assessee that no notice was issued under Section 143 (2) of the Act after filing of return in response to notice under Section 148 hence, no addition can be made. It has been noted by the Commissioner of Income Tax (A) that it shall be deemed to be the income under Section 69 of the Act and as such, the appeal is assessable in hands of assessee under Section 64 (1A) of the Act. The assessee submitted reply on 12.7.2002 along with the list of case laws but the Commissioner of Income Tax (A) has not considered those cases. It has also been noted by the Commissioner of Income Tax (A) that deposit in the NRE Account, has been diverted to the appellant's minor son except for small amount of Rs.8,990.00 which is the balance on the date on which the last debit of Rs.41,000.00 was debited to the NRE Account. The Commissioner of Income Tax (A) held that the assessee had filed return in response to

notice under Section 148 of the Act, hence even if no notice under Section 143 (2) of the Act was issued, therefore after filing return it shall not be fatal and the contention of the assessee was rejected on the ground of non-issuance of notice under Section 143 (2) of the Act.

3. The appellate Tribunal noted that the Assessing Officer issued

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notice under Section 148 of the Act on 29.3.2001 for the assessment year 1994-95 in response to which the assessee informed that he had already filed return of income on 29.3.1996. Hence notice under Section 148 be withdrawn. Thereafter Assessing Officer issued notice under Section 143

(2) and 142 (1) of the Act, received by the assessee on 3.1.2002 informing the assessee that notice under Section 148 was pending and has not been withdrawn as requested by the assessee, vide letter dated 7.5.2001. Thereafter the assessee sought adjournment on 21.1.2002 with assurance that return shall be filed by 29.1.2002. However, the return was filed on 7.2.2002 on an income of Rs.1,10,273.00 as per earlier return dated 29.3.1996. The Tribunal was of the view that after filing of return on 7.2.2002, a notice under Section 143 (2) should have been issued being mandatory in nature. It has been noted by the Tribunal that after lapse of almost 8 years, and keeping in view the fact that transaction was through Bank Account, confirmatory letter was filed along with the photocopy of NRE Account and Passport, the adverse inference could not have been drawn by the Assessing Authority.

8. It was vehemently argued by the Revenue that the letter dated 7.5.2001, sent by the Assessee in response to notice under Section 148 of the Act, should be deemed to be filing of return reiterating earlier one. The submission of the appellant's counsel does not seem to be correct. For convenience, letter dated 7.5.2001 is reproduced as under:

“May 7, 2001 The Dy. Commissioner of Income-Tax (O.S.D.) Salary Circle Lucknow.

Sub: Notice Under Section 148 of the Income-Tax Act, 1961 for the Assessment Year: 1994-95. * * * * * * * * * * * Madam,

I am in receipt of your Notice u/s 148 of the Income-Tax

[4 ]

Act, 1961 dated 29.03.2001 for the Assessment Year: 1995-96.

In this connection, have to informed you that, I have been filed the true & correct return of Income for the aforesaid assessment year in salary ward 2 (2), Lucknow vide receipt No.7138 dated 29.03.96. The photocopy of acknowledgement of return is enclosed for reference.

Therefore, I request you to may kindly withdraw the notice u/s 148 issued by you honour & oblige.

Thanking you,

Yours faithfullyillegible(Rajiv Sharma)R/O. B-29, Sector “K”Aliganj, LucknowEncl : As above”

9. In view of the above, submission of the learned counsel for the

appellant at the face of record, seems to be not correct that by

submitting letter dated 7.5.2001, the assessee shall be deemed

to have submitted his return and in consequence thereof, the

Revenue has rightly proceeded ahead in the matter.

10. The Revenue after receipt of the letter of the assessee dated

7.1.2001, sent its reply dated 18.12.2001 and given a last

opportunity to the assessee to file return. It shall be appropriate

to reproduce the letter of the Revenue dated 18.12.2001 as

under:

“ OFFICE OF THEADDL. COMMISSIONER OF INCOME TAXRANGE-VI, LUCKNOW

F.No.DCITR-VI/Asstt. Pro/LKO/2001-02 Dated: 18.12.2001

To

Shri Rajeev Sharma,B-29, Sector KAliganj,Lucknow.

Sub:Assessment proceedingsu/s 148 for Asstt. Year 94-95

Please refer to your letter dated May 7, 2001 received in the O/o

[5 ]

Dy. Commissioner of Income tax (OSD) Salary Circle, Lucknow on 28.05.2001 in response to notice u/s 148 for Asstt. year 94-95 (erroneously mentioned in your letter as 1995-96).

It is hereby informed that the 148 proceedings in the above mentioned year are still pending & are not withdrawn. You are required to file your return in compliance to notice u/s 148, which is already overdue. This is a final opportunity to make compliance, failing which assessment proceedings shall be completed ex-parte. It shall be presumed that you have nothing to say in this regard and your income shall be assessed on the basis of material/information available with this office. Date of compliance is fixed for 8.01.2002, Notice U/s 143 (2) & 142 (1) are also being enclosed.

Illegible ( DEEPALI CHANDRA ) Dy. Commissioner of Income tax Range-VI, Lucknow.

Seal”

11. After receipt of letter dated 18.12.2001, the assessee has rightly

filedreturn dated 7.2.2002 in response to notice dated

26.12.2000. In consequence thereof, notice under Section 143

(2) of the Act, should have been served.

12. The Tribunal allowed the appeal directing for deletion of

amount of Rs.12,51,000.00. Hence the present appeal.

Substantial Questions of Law:

13. These two appeals were admitted on the following substantial

question of law:

“(a)Whether notice u/s 143 (2) of the Act issued after the assessee Proclaimed his original return “as true and correct” is not a valid Notice just because it was not issued with reference to a pending return.

(c) Whether on the facts and in the circumstances of the case the learned I.T.A.T. was justified in holding that non-issuance of notice u/s 143/(2) of the Act has vitiated the assessment order and ignoring that issuance of such notice is a machinery provision and does not go to the root of the assessment, more so when the assessee was afforded and he availed full opportunity.

(d) Whether notice u/s 143 (2) of the Act is a

[6 ]

machinery provision and as per wording of section 148 (1) “so far as may be” provisions of section 143(2) with reference to reassessment proceedings u/s 148 need not be applied into but only to the extent possible.

(e).Whether the assessee has discharged his onus by furnishing the name, confirmation letter, copy of NRE bank account and passport of the NRI donor even though the identity of donor could not be established what to talk about proving his creditworthiness and genuineness of the transaction.”

1. On behalf of the appellant, learned counsel has relied upon the judgment reported in [2009] 308 ITR (AT) 49 (Delhi) (Income-Tax Officer. Vs. R.K. Gupta) and 1985 ITR Vol. 154, page 109 (Tiwari Kanhaiya Lal. Vs. Commissioner of Income-Tax.

2. Learned counsel for the respondent has relied upon the cases reported in (1978) ITR 113 ITR 22 (Guj) (P.V. Doshi. Vs. Commissioner of Income-Tax Gujarat); (1999) 236 ITR 480 (SC) (R. Dalmia. Vs. CIT); [2002] 255 ITR 220 (P & H) (Vipan Khanna. Vs. Commissioner of Income-Tax and others; (2002) 256 ITR 481 (P&H) (Mrs. Rama Singh. Vs. CIT); 2003 (179) CTR-0011-SC; 2003-(259)-ITR-0019-SC (KGN Driveshafts (India) Ltd. Vs. Income-Tax Officer; (2003) 264 ITR 646 (Alld.) (CIT. Vs. Sahara India Savings and Investment Corpn.); [2006] 281 ITR 444 (Mad) (Commissioner of Income-Tax. Vs. M. Chellappan and another); (2008) 217 CTR 531 (Bom.) (Commissioner of Wealth Tax. Vs. HUF of Shri J.M. Scindia); and (2010) 229 CTR 219 (SC) (ACIT & Anr. Vs. Hotel Blue Moon).

Discussion and Finding:

16. Section 148 of the Act relates to escaped assessment. It provides that before proceeding for assessment or reassessment or recomputation under Section 147, the Assessing Officer shall serve on the assessee a notice requiring him to furnish within [7 ]

such period as may be specified in notice, a return of his income or the income of any other person in respect of which he is assessable under the Act during the previous year corresponding to the relevant assessment year, in the prescribed form and verified in the prescribed manner and setting forth such other particulars as may be prescribed; and the provisions of this Act shall, so far as may be, apply accordingly as if such return were a return required to be furnished under Section 139.

1. Clause (b) of Section 148 (1) of the Act provides that subsequent notice served under Section 143 (2) of the Act after expiry of 12 months specified in the proviso to sub-section (2) of Section 143, as it stood, before the Finance Act, 2002, shall be deemed to be valid notice.

2. It shall be appropriate to take note that Explanation of Section 149 of the Act provides that in determining the income chargeable to tax which has escaped the assessment for the purpose of sub-section (1) of Section 149, the proviso of Explanation 2 of Section 147 shall also apply.

3. While computing escaped assessment, return filed in response to notice under Section 148, shall be deemed to be furnished under Section 139 of the Act. Meaning thereby, procedure of Section 139 of the Act shall be followed while dealing with the case of escaped assessment under Section 148 of the Act.

4. The plain reading of Section 148 of the Act further reveals that within the statutory period specified therein, it shall be incumbent to send a notice under Section 143 (2) of the Act.

5. Sub-section (2) of Section 143 provides that after receipt of return furnished under Section 139 of the Act in response to a notice under Section 142 (1) of the Act, in case Assessing Officer has reason to believe that any claim of loss, exemption, deduction, allowance or relief made in the return is

[8 ]

inadmissible, shall serve on the assessee a notice specifying

particulars of such claim. It shall be appropriate to reproduce

sub-section (2) of Section 143 of the Act:

“143 (2). Where a return has been furnished under section 139, or in response to a notice under sub-section (1) of section 142, the Assessing Officer shall--

(i) where he has reason to believe that any claim of loss, exemption, deduction, allowance or relief made in the return is inadmissible, serve on the assessee a notice specifying particulars of such claim of loss, exemption, deduction, allowance or relief and require him on a date to be specified therein to produce, or cause to be produced , any evidence or particulars specified therein, or on which the assessee may rely, in support of such claim: [Provided that no notice under this clause shall be served on the assessee on or after the 1st day of June, 2003;]

(ii) notwithstanding anything contained in clause (I), if he considers it necessary or expedient to ensure that the assessee has not understated the income or has not computed excessive loss or has not under-paid the tax in any manner, serve on the assessee a notice requiring him,on a date to be specified therein, either to attend his office or to produce, or cause to be produced, any evidence on which the assessee may rely in support of the return.

[Provided that no notice under this clause shall be served on the assessee after the expiry of six months from the end of the financial year in which the return is furnished.]]”

22. The provisions contained in sub-section (2) of Section 143 of

the Act, is mandatory and Legislature to their wisdom by using

the word, 'reason to believe', had cast a duty on the Assessing

Officer to apply mind to the material on record and after being

satisfied with regard to escaped liability, shall serve notice

specifying particulars of such claim.

23. In view of the above, after receipt of return in response to

[9 ]

notice under Section 148, it shall be mandatory for the

Assessing Officer to serve a notice under sub-section (2) of

Section 143 assigning reason therein.

24. While interpreting the word, 'reason to believe', Hon'ble

Supreme Court in the case of Calcutta Discount Company

1961 (41) ITR 191 vs. ITO while interpreting the word 'reason

to believe' observed that for existence of reasons for that belief,

the belief must be held in good faith and it cannot be merely a

pretence. The expression does not mean a purely subjective

satisfaction of the Income Tax Officer; the form of decision as

to the existence of reasons and the belief is not in the mind of

Income Tax Officer. If it be asserted that the Income Tax

Officer had reason to believe that income had been under

assessed by reason of failure to disclose fully and truly the facts

material for assessment, the existence of the belief and the

reasons for the belief, but not the sufficiency of the reasons,

will be justifiable. The relevant portion from the case of

Calcutta Discount Company (supra) is reproduced as under:

“14.The expression "reason to believe" postulates belief and the existence of reasons for that belief. The belief must be held in good faith: it cannot be merely a pretence. The expression does not mean a purely subjective satisfaction of the Income Tax Officer: the forum of decision as to the existence of reasons and the belief is not in the mind of the Income Tax Officer. If it be asserted that the Income Tax Officer had reason to believe that income had been under-assessed by reason of failure to disclose fully and truly the facts

material for assessment, the existence of the belief and the reasons for the belief, but not the sufficiency of the reasons, will be justiciable. The expression therefore predicates that the Income Tax Officer holds the belief induced by the existence of reasons for holding such belief. It contemplates existence of reasons on which the belief is founded, and not merely a belief in the existence of reasons inducing the belief; in other words, the Income Tax Officer must on information at his disposal believe that income has been under-assessed by reason of [ 10 ]

failure fully and truly to disclose all material facts necessary for assessment. Such a belief, be it said, may not be based on mere suspicion: it must be founded upon information”

25. In the case of Kesar Devi (Smt.) Vs. Union of India and

others reported in 2003 (7) SCC 427, Hon'ble Supreme Court

in a case reported in 2008 (3) CRI LJ 3621=2008 (14) SCC

186, Aslam Mohammad Merchant Vs. Competent

Authority had reiterated the aforesaid principle of law as

under:

Para 28..............."Both the statutory elements, namely, 'reason to believe' and 'recording of reasons' must be premised on the materials produced before him. Such materials must have been gathered during the investigation carried out in terms of Section 68-E or otherwise. Indisputably therefore, he must have some materials before him. If no such material had been placed before him, he cannot initiate a proceeding. He cannot issue a show cause notice on his own ipse dixit. A roving enquiry is not contemplated under the said Act as properties sought to be forfeited must have a direct nexus with the properties illegally acquired.

29. It is now a trite law that whenever a statute provides for "reason to believe", either the reasons should appear on the face of the notice or they must be available on the materials which has been placed before him............"

31. In Kesar Devi (Smt.) Vs. Union of India and others (2003) 7 SCC 427 wherein Fatima Mohd. Amin (supra) was distinguished by a Bench of this Court, inter alia, opining that no nexus or link between the money of the debt

and property sought to be forfeited is required to be established under the scheme of the Act, stating;

"10....The condition precedent for issuing a notice by the competent authority under Section 6(1) is that he should have reason to believe that all or any of such properties are illegally acquired properties and the reasons for such belief have to be recorded in writing. The language of the section does not show that there is any requirement of mentioning any link or nexus between the convict or detenu [ 11 ]

and the property ostensibly standing in the name of the person to whom the notice has been issued.”

26.In another case, reported in (2010) 2 SCC 723, Commissioner of Income Tax, Delhi Vs. Kelvinator of India Limited, Hon'ble Supreme Court held that change of opinion in view of the circular dated 30.10.1989, shall not be sufficient reason for reassessment. Reopening of assessment may be done provided the Assessing Officer has reason to believe that the income has escaped assessment based on tangible material.

27. In view of the above, in absence of any notice issued under sub-section (2) of Section 143 after receipt of fresh return, submitted by the assessee in response to notice under Section 148, the entire procedure adopted for escaped assessment, shall not be valid.

28. By catena of judgments, Hon'ble Supreme Court and this Court settled that a thing should be done in the manner provided by the Act and statutes and not otherwise. When the Statute provides for a particular procedure, the authority has to follow the same and cannot be permitted to act in contravention of the same. It has been hither to uncontroverted legal position that where a statute requires to do a certain thing in a certain way, the thing must be done in that way or not at all. Other methods or mode of performance are impliedly and

necessarily forbidden.(Vide Taylor Vs. Taylor, (1876) 1 Ch.D.426; Nazir Ahmed Vs. King Emperor ,AIR 1936 PC 253; Deep Chand Vs. State of

Rajasthan, AIR 1961 SC 1527; Patna Improvement Trust Vs. Smt. Lakshmi Devi & Ors., AIR 1963 SC 1077; State of Uttar Pradesh Vs. Singhara Singh &

Ors., AIR 1964 SC 358; Nika Ram Vs. State of Himachal Pradesh,

AIR 1972 SC 2077;Ramchandra Keshav Adke Vs. Govind Joti Chavare & Ors., AIR 1975 SC 915; Chettiam Veettil Ammad & Anr. Vs. Taluk Land Board & Ors., AIR 1979 SC 1573; State of Bihar & Ors. Vs. J.A.C. Saldanna & Ors.,

[ 12 ]

AIR 1980 SC 326, A.K. Roy & Anr. Vs. State of Punjab & Ors., AIR 1986 SC 2160; State of Mizoram Vs.

Biakchhawna, (1995) 1 SCC 156; J.N.Ganatra Vs. Morvi Municipality Morvi, AIR 1996 SC 2520; Babu Verghese & Ors. Vs. Bar Council of Kerala & Ors., AIR 1999 SC 1281; and Chandra Kishore Jha Vs. Mahavir Prasad, (1998) 8 SCC 266).

1. The aforesaid settled legal proposition is based on a legal maxim "Expressio unius est exclusio alterius", meaning thereby that if a statute provides for a thing to be done in a particular manner, then it has to be done in that manner and in no other manner and following other course is not permissible. This maxim has consistently been followed, as is evident from the cases referred to above. A similar view has been reiterated in Haresh Dayaram Thakur Vs. State of Maharashtra & ors., (2000) 6 SCC 179; Delhi Administration Vs. Gurdip Singh Uban & ors., (2000) 7 SCC 296; Dhanajaya Reddy Vs. State of Karnataka etc. etc., (2001) 4 SCC 9; Commissioner of Income Tax, Mumbai Vs. Anjum M.H. Ghaswala & ors., (2002) 1 SCC 633; Prabha Shankar Dubey Vs. State of Madhya Pradesh, AIR 2004 SC 486; and Ram Phal Kundu Vs. Kamal Sharma, AIR 2004 SC 1657.

2. Notice under Section 148 of the Act for assessment year 1994-1995 was issued on 29.3.2001 whereas for the assessment year 1995-96, it was issued on 26.12.2000. In response to the notice, the assessee sent letter dated 7.5.2001 to drop the proceeding. Therefore, vide letter dated 18.12.2001, the Deputy Commissioner informed that proceeding may not be dropped and given last opportunity to file return. Along with letter dated 18.12.2001, notices under Section 143 (2) and 142 (1) were also sent. In consequence thereof, the assessee filed return on 7.2.2002 for both the assessment years. After filing of return, the Assessing Officer should have applied mind and

[ 13 ]

after considering the material on record on “reason to believe”, notice under Section 143 (2) of the Act should have been issued afresh.

1. It has been vehemently argued by the appellant's counsel that the assessee himself has sent a letter dated 7.5.2001 informing with regard to filing of original return in the year 1996 and dropping of proceeding. It

should be deemed to be a return filed in response to notice under Section 148. Submission of appellant's counsel seems to be not correct in view of subsequent letter dated 18.12.2001 (supra), sent by the Assessing Officer informing the pendency of proceeding and in consequence thereof, filing of return by the assessee on 7.2.2002.

2. Since return was filed on 7.2.2002, in response to notice under Section 148 of the Act, earlier notice dated 29.03.2001 may not be treated as valid for the purpose of escaped assessment. The Legislature to their wisdom had categorically provided that after receipt of notice under Section 148 of the Act a fresh return may be filed and in consequence thereof, the Assessing Officer has to apply his mind to the contents of fresh return and then issue a notice under Section 143 (2) of the Act. The satisfaction under reason to believe, must be recorded by the Assessing Officer after applying mind to the contents of fresh return before issuing a notice under Section 143 (2) of the Act.

3. It is a settle law that taxing statute should be construed strictly without subtraction or addition of words, in the statutory provisions. Accordingly, the provisions contained in Section 148 of the Act with regard to escaped assessment, must be construed strictly with regard to procedure prescribed for escaped assessment.

4. In AIR 1976 SC 1503 (Diwan Bros. Enterprises Vs. Central Bank of India), Hon'ble Supreme Court held that the Court has

[ 14 ]

to interpret the fiscal statute strictly so as to give benefit of doubt to litigant or tax payer.

1. In (2000) 3 SC 485 (K.V. Shivakumar Kumar Vs. Appropriate Authority), Hon'ble Supreme Court has held that equity or hardship are not relevant consideration for interpretation for taxing law.

2. In 2004 (10) SCC 201, State of West Bengal Vs. Kesoram Industries Ltd., Hon'ble Supreme Court held that taxing statute should be construed strictly. If a person sought to be taxed comes within the letter of law, he must be taxed. However, in case, he does not fall in taxing category, tax cannot be imposed. There is no room for any intendment. There is no equity about tax. There is no presumption as to tax. Nothing is to be read and nothing is to be implied.

3. In 2006 (7) SCC 714, Sneh Enterprises Vs. Commissioner of Customs, Hon'ble Supreme Court held that in case of dispute or ambiguity, construction has to be made in favour of tax payer against the Revenue.

4. A Division Bench of Allahabad High Court in 2009 (27) LCD 161,Lipton India Ltd. Gaziabad Vs. State of U.P. and others, in which one of us (Hon'ble Devi Prasad Singh, J.) was a member, after considering various pronouncements of Hon'ble Supreme Court, held that while interpreting the statutory provisions, every section, every word, should be looked into in a reference to tax.

5. In AIR 1977 Supreme Court 113 Commissioner of Wealth Tax, A.P. vs. Officer Incharge, Paigah, Hon'ble Supreme court held that the correct rule is that the courts have to endeavour to find out the exact sense in which the words have been used in a particular context.

6. In 1994 ITR (2006) 688 Sc, H.H. Lakshmi Bai Vs.

[ 15 ]

Commissioner of Wealth-Tax, Hon'ble Supreme Court held that taxing statute in particular, have to be strictly construed and there is no equity in taxing provision.

1. In 1972 V 1972 Vol. 86 ITR SC, Commissioner of Income Tax Vs. Sakar Lal Balabhai, Hon'ble Supreme Court held that in interpreting the taxing provision, one has merely to look to the words of provision. It is not permissible to construe any provision of a statute, much less a taxing provision, by reading into it more word than it contains. If a section of a statute is considered as ambiguous it would not be in appropriate to find out the reason which persuaded the select committee to recommend the inclusion of that section.

2. In AIR 1997 SC 1165 Mohd. Ali KhanVs. CWT, Hon'ble Supreme Court held that taxing statute should be construed in their natural, popular and ordinary senses.

3. In 2007 (3) SCC 668: Mahim Patram (P) Ltd Vs. Union of India, Hon'ble Supreme Court held that taxing statute should be strictly interpreted.

4. In AIR 2000 SC 109: Mathuram Agarwal. Vs. State of U.P., Hon'ble Supreme Court held that taxing statute should be interpreted in the spirit of the statute.

5. In view of the above, the provision contained in Section 143 (2) of the Act is mandatory in nature and it shall be obligatory for the Assessing Officer to apply mind to the contents of the return filed in response to notice under Section 148 of the Act and record reasons and thereafter, issue notice under Section 143 (2) of the Act before proceeding to decide the controversy with regard to escaped assessment.

1. In the case of R.K. Gupta (supra), decided by the Income Tax Appellate Tribunal, the reassessment order has been held to be invalid due to want to notice under Section 143 (2) of the Act.

2. [ 16 ] 6. In the case of Kanhaiya Lal (supra) a Bench of Rajasthan High Court

held that in case the assessee informs that the original return should be treated as fresh return, then the information so communicated, should be treated as fresh return and amount to sufficient compliance of Section 148 of the Act to proceed further. However, in the present case, initially, the assessee prayed for dropping proceeding and later on, filed return. As discussed hereinabove, the judgment seems to be not applicable.

7. In the case of M. Chellappan (supra), Madras High Court held that original assessment under Section 147 and completion of fresh assessment with regard to escaped liability without issuing notice Section 143 (2) of the Act, shall not be valid. Punjab and Haryana High Court has also reiterated the same principle in the case of Vipan Khanna (supra).

8. In the case of R. Dalmia (supra), Hon'ble Supreme court held that for assessment or re-assessment under Section 147 of the Act, the procedure laid down in Section 139 including Section 144 B should be followed. To reproduce relevant portion from the judgment of R. Dalmia as under:

“As to the argument based upon sections 144A, 246 and 263, we do not doubt that assessments under section 143 and assessments and reassessments under Section 147 are different, but in making assessments and reassessments under section 147 the procedure laid down I n sections subsequent to section 139, including that laid down by section 144B, has to be followed”

1. In the case of Rama Singh, the High Court has reiterated the principle of law that while proceeding with the escaped assessment under Section 148, the procedure under Section 139 should be followed.

2. In the case of J.M. Scindia (supra) Hon'ble Supreme court has held that provisions contained in Section 143 (2) with regard to

[ 17 ]

undisclosed income applies. Hon'ble Supreme Court further

held that provisions contained under Section 143 (2) cannot be

dispensed with. Relevant portion of the judgment of J.M.

Scindia is reproduced as under:

“...However, if an assessment is to be completed

under s. 143 (3) r/w s. 158BC, notice under s. 143

(2) should be issued within one year from the date of filing of block return. Omission on the part of the assessing authority to issue notice under s. 143

(2) cannot be a procedural irregularity and the same is not curable and, therefore, the requirement of notice under s. 143 (2) cannot be dispensed with.”

1. Accordingly, the questions framed, are answered in favour of 2. assessee against the Revenue.

2. Both the appeals are dismissed. The judgments of the Tribunal

are upheld.

Order Date :-24.05.2010

Rajneesh)

[Justice S.C. Chaurasia, J.] [Justice Devi Prasad Singh, J.]

Reserved

Review Petition No. 296 of 2009 M/s Kohli Brothers Colour Lab (P) Ltd. …....................................................... Applicant Versus The Commissioner, Income Tax, Ayakar Bhawan, Lucknow …................Opposite-party in re: Income Tax Appeal No. 2 of 2007 The Commissioner, Income Tax, Ayakar Bhawan, Lucknow …...................... Appellant Versus M/s Kohli Brothers Color Lab (P) Ltd., Lucknow …...................................... Respondent

***

Hon’ble Rajiv Sharma, J.,Hon’ble Dr. Satish Chandra, J.

(Delivered by Hon'ble Dr. Satish Chandra, J.)

By this review petition, the petitioner has assailed the order passed by this Court in ITA No. 02 of 2007 dated 5.11.2009 whereby the impugned order passed by the Tribunal dated 4.8.2006 was set aside. The Assessing Officer was directed to take a fresh decision pertaining to bad debt after affording opportunity to the respondent-assessee on the record produced.

Sri Prashant Chandra, Senior Advocate, assisted by Sri Ashish Chandra, Advocate submits a preliminary argument that the said appeal was filed by the department before this Hon’ble Court. The tax effect in the appeal was less than Rs. 4,00,000/-. As per the instruction of CBDT dated 15.5.2008, the appeal should not have been filed by the department as the tax effect was less than prescribed monetary limit.

On the other hand, learned counsel for the department Sri D.D.Chopra submits that the CBDT has also issued Circulars from time to time where exceptions were provided. It was clearly mentioned in the Circular No. F.279 Misc. 64/5-IT that

“3. The Board has also decided that in cases involving substantial question of law of importance as well as in cases where the same question of law will repeatedly arise; either in the case concerned or in similar cases, should be separately considered on merits without being hindered by the monetary limits.”

After hearing learned counsel for both the parties, it appears that CBDT Circular dated 15.5.2008 specifically mentions that the Income Tax Department shall not be precluded from filing the appeal against the disputed issue even in the case of same assessee for any other assessment year. These instructions were issued under Section 268A(1) of the Income Tax Act. The said Section also provides the exception for filing the appeal where some disputed question is involved.

Moreover, in the instant case, the department has filed an appeal before Hon'ble High Court and the objection pertaining to the monetary limits was never taken by the assessee. It is belated to take such a plea in review and the same be dismissed being not maintainable. Moreover, as per the ratio laid down in the case of Satish Grain Co.

v. CIT (2005) 27 NTN 354 Allahabad, no new point can be raised in review petition.

On merit, learned Senior Advocate Sri Prashant Chandra submits that in the instant case, the assessee has written off the bad debt as per the proviso to Section 36(1) (vii) of the Income Tax Act. After the amendment w.e.f. 1.4.1989, the entire amount of bad debt which has been written off as not recoverable in the accounts of the assessee for the previous year will be deducted. Any inquiry into the bad debt becomes redundant as the bad debts are now being straightaway allowed in the year of written off. For this purpose, he relied on the ratio laid down in the following cases-

Income Tax v. General Insurance Corporation of India, (2002) 254 ITR 204 (Bom.), page 209 where it was observed that-

“However, so far as the exact requirement of the writing off is concerned, the language used in the Indian Income Tax Act, 1922 and the 1961 Act is identical. If the debit entries posted by the assessee indicate that bad debt has been written off as irrecoverable in the accounts of the assessee, then the statutory condition stands fully complied with. That, if the assessee has posted entries in the profit and loss account and the corresponding entries are posted in the bad debt reserve account, it would be sufficient compliance with the provisions of the statutory requirement for writing off as irrecoverable the concerned debt in the books of the assessee. These judgments squarely apply to the facts of our case. In the present matter, the assessee has posted entries in the profit and loss account and has made corresponding entries in the bad debt reserve account. Therefore, there is compliance with section 36(1) (vii). It may be noted that prior to April 1, 1989, this statutory requirement existed under section 36(2)(i). That entry has been shifted and brought to section 36(1)(vii). Therefore, to the extent of the exact requirement of writing off of the concerned debt as irrecoverable, the law remains the same even after April 1, 1989. Hence, there is compliance with section 36(1)(vii) Rule 5(a) of the First Schedule, inter alia, lays down that where any expenditure or allowance is debited to the profit and loss account by way of reserve which is not admissible under the provisions of section 36(1), then the amount shall be added back in computing the profits of the business.”

Similarly, in the case of CIT v. Girish Bhagwat Prasad (2002) 256 ITR 772 (Guj.), page 774, it was observed that “under the provisions of section 36(1)(vii) of the Act, deduction was to be allowed in computing the income referred to in section 28 of the Act of the amount of any bad debt or part thereof which is written off as irrecoverable in the accounts of the assessee for the previous year subject to the provisions of sub-section (2). Prior to the amendment from April 1, 1989, the allowance under this clause was confined to

the debts and loans which had become irrecoverable in the accounting year. Thus, under the provisions of section 36(1)

(vii) as in force from April 1, 1989, all that the assessee had to show was that the bad debt was written off as irrecoverable. The genuineness of such a claim made by the assessee was not in doubt. Therefore, all that the Tribunal has done is to uphold the first appellate authority’s decision, applying the provisions of the amended section 36(1)(vii) of the Act, and no question of law arises in the matter from such application of the provision to the facts of the case.

In the case of CIT v. Nai Dunia, (2006) CTR 70, page 73 (MP), it has been observed that-We do not find any error of law much less substantial error of law as contemplated in

s. 260A ibid for answering the question in favour of revenue. When the assessee has actually written off the debt in their books of account as being bad debt then unless the AO had rejected the entire books of account to be totally unreliable and finding extreme perversity in declaration of debt to be bad debt, there arose no occasion for AO for not accepting the stand of assessee on this issue, It is essentially for the assessee to decide as to whether they are able to recover the debt or that whether there are any viable chances to ensure its recovery or that all hopes have come to an end for recovery. This being in the nature of what is called commercial expediency depending upon the nature of transaction, capacity of debtor, etc., the stand of assessee cannot be ignored by Revenue unless there are very cogent reasons to reject.”

In case of Travancore Tea Estates Co. Ltd. v.

Commissioner of Income Tax, (1999) 151 CTR (SC) 231,

page 232, it was observed that-

“This case is about writing off of bad debts.

It is well settled that whether a debt has become bad or the point of time when it became bad are pure questions of fact.

There is no question of law involved in this appeal. We, therefore, decline to go into the controversy raised. The

appeal is dismissed. There will be no order as to costs.”

In addition, learned counsel for the petitioner relied on the following cases:

1. Commissioner of Income Tax, Meerut v. Sri Ram Gupta, (2005) 149 Taxman 237, page 241

2. Kamla Cotton Co. v. Commissioner of Income Tax, (1997) 226 ITR 605 (Guj.), page 611

3. Commissioner of Income Tax v. Morgan Securities and Credits (P) Ltd., (2007) 292 ITR 339 (Delhi), page 344/para 7 Lastly, Sri Prashant Chandra, Senior Advocate, learned counsel for the

applicant, made a request to recall the order passed by this Hon'ble Court on 5.11.2009.

On the other hand, learned counsel for the department, Sri D.D.Chopra submits that bad debt can be written off by the assessee provided if it is a trade debt which has become bad. In the instant case, the A.O. has observed that as per the proviso to Section 36(1) (vii) of the Income Tax Act, 1961, the amount of any bad debt or part thereof, which is written off as irrecoverable in the accounts of the assessee for the previous year, is to be allowed for the purpose of deduction. He further submits that the term 'Bad Debt' has been used in this section and not 'Debt'. As such it implies that it is the onus upon the assessee to prove that it was a trade debt and has become bad debt. The claim of the assessee is not acceptable by stating that the amount has been written off being bad debt. So blankly but in order to allow the claim the assessee has led evidence for the same. He also relied on the ratio laid down in the case of CIT v. Girish Bhagwat Prasad, (2002) 256 ITR 772 (Gujarat) where it was held that

“under the provisions of section 36(1) (vii) of the Act, deduction had to be allowed in computing the income referred to in section 28 of the Act of the amount of any bad debt or part thereof which is written off as irrecoverable in the accounts of the assessee for the previous year subject to the provisions of sub-section (2). Prior to the amendment from April 1, 1989, the allowance under this clause was confined to the debts and loans which had become irrecoverable in the accounting year. Thus, under the provisions of section 36(1)(vii) as in force from April 1, 1989, all that the assessee had to show was that the bad debt was written off as irrecoverable. The genuineness of such a claim made by the assessee was not in doubt. Therefore, no question of law arose for reference.”

Sri D.D.Chopra also read out the order passed by the CIT (A) dated 3.3.2006. The same is as under:

“In the written submission, the applicant has placed reliance on the case of CIT v. Girish Bhagwat Prasad, 256 ITR 772 and simply stated that the disallowance of the amount, which was old and irrecoverable, has wrongly been made. A perusal of the assessment order reveals that the AO has given proper opportunity to the appellant to prove the genuineness of the claim. If the appellant's version that the amount was not recoverable, is considered, details regarding efforts made or legal steps taken by the appellant to recover the bad debts, have not been filed either before the AO or in appeal. It is obvious that the appellant failed to substantiate its claim. On the other hand, the AO has rightly observed that it was not a bad debt. The addition is, therefore, upheld.”

Lastly, learned counsel for the opposite-party justifies the orders passed by the assessing authority as well as CIT appeal by submitting that it is the duty of the assessee to prove the debts being bad debt and a finding of fact has been recorded by the assessing authority and CIT appeal that the assessee fails to prove debts which have been claimed in profit and loss account are a trading debt and as such they have rightly disallowed the claim of the assessee.

We have heard learned counsel for both the parties and gone through the material available on record.

It may be mentioned that a distinction has to be kept in mind between a bad debt falling within the scope of its provision and a trading loss. It may be noted that while all bad debts may be said to be losses, not all losses are bad debts as per the ratio laid down in the case of CIT v. City Motor Services Ltd. (1966) 61 ITR 418 (Madras) and CIT v. Gillanders Arbuthnot & Co Ltd. (1982) 138 ITR 763 (Calcutta). In the present case, the A.O. asked the information from the assessee to prove that the debt was a “trade debt” and its details but the assessee has refused to do so. In these circumstances, CIT(A) upheld the order of the A.O. However, the Tribunal has deleted the addition merely by relying its earlier order and without explaining reasons. Therefore, this Hon'ble Court has set aside the order of the Tribunal and restored the matter to the A.O. for fresh adjudication. When it is so, then on merit the review petition is not maintainable.

Needless to mention that there are three elements in the concept of a bad or doubtful debt which qualifies for deduction under clause (vii) of sub-section (1) of section 36 read with sub-section (2) of the Income Tax Act thereof.

The first is that there should be a debt, which would have come into balance sheet as a trading debt to swell the profits of the business,

The second is that the debt should be established to have become bad in previous year. The expression earlier used in the statute and also in accountancy parlance was that the debts in question are “bad and doubtful” but the adjective “doubtful” does not qualify, add to or detract from the true meaning of the expression, viz, that there are no chances of recovery of the whole or concerned part of the debt as at the end of the previous year; it had become bad, inasmuch as it is doubtful of recovery. After the amendment w.e.f. 1.4.1989, it is the assessee to decide that debt has become bad debt.

The third element of the debt is that it should have been written off by the assessee in the relevant previous year in respect of which the claim for deduction is made by the assessee.

As far as the Review Petitions are concerned, under Order 47, Rule 1 CPC a judgment may be open to review inter alia if there is a mistake or an error apparent on the face of the record. An error, which is not self-evident and has to be detected by a process of reasoning, can hardly be said to be an error apparent on the face of record.

In Meera Bhanja (Smt.) v. Nirmala Kumari Choudhary (Smt.) [(1995) 1 SCC 170] the Hon'ble Supreme Court has held that the review petition has to be entertained only on the ground of error apparent on the face of record and not on any other ground.

The Hon. Supreme Court while reiterating the above view in Parsion Devi Vs. Sumitra Devi 1997(8) SCC 715 observed that under Order 47 Rule 1 CPC a judgment may be open to review if there is a mistake or error apparent on record. An error which is not self evident and has to be detected by process of reasoning can hardly be said to be an error apparent on face of record justifying the court to exercise its power of review under Order 47 Rule 1 CPC. Order 47 Rule 1 CPC is a rider on the power of the Court, which passed the order. In exercise of jurisdiction under Order 47 Rule 1 CPC it is not permissible for an erroneous decision to be re-heard and corrected. On the aforesaid acid test, it is settled position that a review petition has a limited purpose and cannot be allowed to be “an appeal in disguise”.

Counsel for the applicant has failed to point out any error apparent on the face of record and it appears that he wants re-hearing of the case under the garb of the application, which is not permissible.

Further, in the case of Commissioner of Income Tax v. West Coast Paper Mills Ltd. [2009] 319 ITR 390 (Bombay), it was observed that the power of the High

Court for substantive review has not been conferred under the Income Tax Act. The review, as filed, is not maintainable. The High Court has no power for substantive review of its judgment. The Hon’ble Bombay High Court has observed-

“The settled law is that the power of review must be

specifically conferred. The Supreme Court in Gindlays Bank Ltd. v.

Central Government Industrial Tribunal [1980] SCC (Suppl.) 420

had made a clear distinction between substantive review and

procedural review is inherent in every court or Tribunal. This is

what the court observed (page 425):

“The expression 'review' is used in the two distinct senses,

namely (1) a procedural review which is either inherent or implied

in a court or Tribunal to set aside a palpably erroneous order

passed under a misapprehension by it, and (2) a review on the

merits when the error sought to be corrected is one of law and is apparent on the face of the record. It is in the latter sense that the court in Patel Narshi Thakership v. Pradyumansinghji, AIR 1970 SC 1273; [1971] 3 SCC 844, held that no review lies on the merits unless a statute specifically provides for it. Obviously, when a review is sought due to a procedural defect, the inadvertent error committed by the Tribunal must be corrected ex debito justitiae to prevent the abuse of its process, and such power inheres in every court or Tribunal.”

Thereafter, that view has been reiterated in J.K.Synthetics v. Collector of Central Excise [1996] 86 ELT 472 (SC). This view has been reiterated by this Court in Chandrakant Butalal Shah v. Union of India in Writ Petition No. 1505 of 2007 decided on August 6, 2007.

Once, the substantive review is not maintainable, the question for considering

fresh cause does not arise.

In the light of above, the review petition filed by the assessee is dismissed.

Dated: 20th May, 2010 VB/

In the High Court of Judicature at Allahabad, LucknowBench, Lucknow

RESERVED

A.F.R.

Court No. -27

Case :-INCOME TAX APPEAL No. -127 of 2005

Petitioner :-The Commissioner Of Income Tax -1,Respondent :-M/S Goel Builders,Petitioner's Counsel :-D.D.Chopra

Respondent's counsel : Shri J.N. Mathur, Addl. Advocate General

Connected with

Income Tax Appeals No.128, 129, 130, 131 – all of the year 2005

Hon'ble Devi Prasad Singh,J.Hon'ble S.C. Chaurasia,J.

(Delivered by Hon'ble Devi Prasad Singh, J)

1. In these appeals, filed under Section 260-A of the Income Tax Act, in short, Act, common question of law and facts are involved. The appeals were admitted on common substantial question of law, hence are being decided by the present common judgment. Income Tax Appeal No.127 of 2005 is taken up as leading appeal.

1. Assessee is a firm engaged in the business of manufacture and sale of heavy pipes and coolers. It took on lease a plot of land from Lucknow Development Authority (in short L.D.A.), at Nishadganj, Lucknow for construction of a commercial complex with the name and title of “Goel Complex”. The assessee's registered office is also located there. The assessee let out the open space of its complex in assessment year 1986-1987 and the rental income so

2. earned was offered for taxation under the head, 'profits and gains of business or profession'.

3. Right from the assessment year 1986-87 to 1992-1993, the department accepted the claim of the asssessee to the effect that the rental income was taxable under the head, 'profits and gains of business or profession'.

1. However,in the assessment year 1990-91, order for assessment was passed under Section 143(3) of the Income Tax Act ( in short, Act). The order for other years was passed under Section 143(1)(a) of the Act treating the income from house property. In the assessment year 1993-94 and 1994-95, the assessing officer taxed the income under the head, “income from house property” without looking into the past assessments right from 1986-87. The assessee preferred an appeal and learned CIT (A) accepted the claim of the assessee and directed to assess the income as 'business income'. The above order of the learned CIT(A) of the year 1993-94 and 1994-95 was not challenged by the revenue before the tribunal. In the assessment year 1995-96, the A.O. himself passed an order under Section 143(3) and assessed the income as 'business income'.

2. However,for the assessment year 1996-97 to 2000-2001(under appeal), the revenue assessed the income under the head, “income from house property”. The order of the assessing officer was set aside by the CIT(Appeals). The appeal filed by the revenue was dismissed, hence the present appeals.

6. The appeals were admitted on the following substantial question of law :

“Whether, on the facts and circumstances of the case, the appellate tribunal was right in law in holding that the rental income derived out of the property was chargeable under the head, “profits and gains of business or profession” and not under the head, “income from house property ?”

1. We have heard learned counsel for the appellant and learned counsel for the respondent on the aforesaid substantial question of law and perused the record.

1. It has not been disputed that for certain years in past (supra), the assessing officer while passing order under Section 143(3) has taxed the income as 'business income' and for some years, the CIT(A) has directed to tax the income as “business income” (supra). The finding of CIT(A) was not challenged by revenue.

For the assessment years in question, the revenue had challenged the finding of learned CIT(A) which has been affirmed by the tribunal. The tribunal observed that the revenue has not brought any new facts as to why the departure from earlier stand of the department is warranted. The tribunal held that the principle of res judicata does not apply in tax matters but at the same time held that there should be consistency in decision making process and in absence of any substantial material placed on record, the earlier orders should be followed. Another issue before the tribunal was related to deletion of the disallowance of Rs.1,20,000/-on interest free advances given to a sister concern M/s. Goel Construction Company. The CIT had deleted the addition observing that the advance to sister concern was warranted by the business consideration. The tribunal recorded a finding that the advance was given as per agreement dated 17.8.2003 when

2. the land was taken on lease and since then, the advance to the sister concern is continuing and no fresh advance has been made. It has been held by the tribunal that since the advance was given to the sister concern as per agreement for more than 10 years back, it was warranted by the business considerations.

2. Other issue before the tribunal was with regard to deletion of trading addition of Rs.64,573/-. The CIT(A) deleted the addition made by the assessing officer and the tribunal has upheld the order of the CIT (Appeals). The tribunal further upheld depreciation on car with observation that the CIT (A) rightly deleted the allowance made by the assessing officer since the vehicle in question was a truck which cannot be used for personal purpose. However, all these questions do not call for adjudication since the substantial question of law heard and framed relates to rental income derived from letting out of the property.

3. The tribunal held that the rental income earned by the assessee is not an income from house property but is a business income and accordingly, disallowances have rightly been made. The tribunal reiterated the order of the earlier assessment years with the observation that no new fact has been brought on record and there is no justification to depart from earlier finding and observed that the rental income earned from the Goel Complex was taxable under the head 'profits and gains of business or profession'.

1. It has not been disputed at bar that the entire Goel Complex has been let out on rental basis in open market except the portion occupied by the assessee for its office. It has also been submitted

by the assessee's counsel that the plot itself was purchased for commercial use from the L.D.A. and after

2. constructing the building, it was let out on rent. Accordingly, the amount earned after letting the premises is wholly and exclusively for business purpose and hence, the submission of the respondent's counsel that the rental income so earned is business income carries weight.

4. The tribunal is the final authority with regard to finding of fact and it has recorded that the entire premises has been constructed and let out on rent to earn profit. However, on the insistence of the appellant's counsel, we have also perused the lease agreement entered into between Nagarpalika, Lucknow and M/s. Goel Construction Limited, Lucknow. The opening words of the agreement shows that it was entered into for the commercial purpose. Relevant portion of the agreement is reproduced as under :

“WHEREAS under the rules and orders relating to the disposal of building sites, for commercial purposes, in the said area, Administrator on behalf of the lessor has agreed to demise the land hereinafter described to the lessee in manner hereinafter appearing.”

Para 5 of the lease agreement is also relevant. To reproduce as under :

“5. That the lessee shall construct on the plot hereby demised a building for Commercial purposes in complete and workmanlike manner in accordance with a plan or plans to be submitted by then Lessee and duly approved by the Nagar Mahapalika and shall also confirm to all rules and byelaws that may be applicable.”

Thus, the registered lease agreement entered into between the appellant and the Nagar Mahapalika, Lucknow at the face of record shows that the appellant constructed the building in question exclusively for commercial purpose.

1. It has been vehemently argued by the learned counsel for the appellant that the appellant is not a colonizer and virtually he is indulged in manufacture and sale of Spun Pipes and Coolers, hence the rental income earned from the premises in question should be treated as “income from house property.”

2. On the other hand, learned counsel for the respondents stated that right from very beginning, i.e. from the time of execution of agreement as well as registered lease agreement and right from the purchase of land for construction of building, the assessee has taken the project to

construct a building for rental purpose as a mode of commercial activity. At no stage of time and also there is no evidence on record which may reveal that the land was purchased for dwelling or non-commercial purpose, hence the income may be assessed under the head, “income from commercial property”.

3. It has been stated by the respondents' counsel that there is no change of situation right from 1986 till date with regard to the use of premises in question for commercial purpose. The submission is that the income from exclusive commercial activity may not be treated as income from house property, hence the finding of the tribunal does not suffer from any impropriety or illegality. The question framed has already been dealt with by the tribunal lawfully.

4. It has also been stated by the assessee's counsel that the

principle of res judicata does not apply but consistency should be maintained and the taxing authority should not deviate from the earlier decision unless there is justifiable material on record calling to deviate from earlier decision.

1. Learned counsel for the appellant has referred to 207 ITR 1010(Guj) New India Industries Limited versus CIT, 201 ITR 208(Guj.) Commissioner of Income Tax versus New India Industries Limited, 237 ITR 454 Universal Plast Limited and another versus CIT, [1954] 26 ITR 765 Narain Swadeshi Weaving Mills versus CEPT., (2004) 266 ITR 685 (Madras) C.I.T. Versus Chennai Properties and Investments Limited, (1994) 205 ITR 314(Gujrat) Gurjat Ginning and Manufacturing Co. Limited versus CIT and (1985)154 ITR 532 (Delhi) CIT versus Super Fine Cables(P) Limited.

2. On the other hand, Mr. J.N. Mathur, learned Senior Counsel, assisted by Mr. Mudit Agrawal appearing for the respondent relied upon the cases reported in (1971)81 ITR 547 (SC) M/s Karnani Properties Limited versus Commissioner of Income Tax, 1972 CTR (SC)8 S.G. Mercantile Corporation

P. Limited versus CIT, (1992)105 CTR (Ori)441, 237 ITR 454 Universal Plast Limited and another versus CIT, 201 ITR 208 CIT versus New India Industries Limited, 225 ITR 471 Balaji Enterprises versus CIT., 2001(10)SCC 231 Union of India versus Kaumudini Narayan Dalal and another, 2002(1) SCC 605 Union of India versus Satish Pannalal Shah, 2005(12)SCC 241 C.C.E. Meerut versus Eureka Forbes Limited, 2005(12)SCC 242 Collector of Central Excise, and Custom versus P.M.T. Components Limited, 2005(12)SCC 419 Commissioner of Central Excise, and Custom versus Alsthom T & D Transformers Limited, 2005 (12)SCC 420 State of A.P. Versus Bhooratnam and Co., 2008(8)SCC 739

C.K. Gangadharan and others versus Commissioner of Income Tax, (2005)195 CTR Reports 528 Commissioner of Wealth Tax versus Allied Finance(P) Limited, 2004 Vol. 266 ITR 265 Director of Income-Tax versus Lovely Bal Shiksha Parishad, 1992 Vol. 193 ITR page 321 Radhasoami Satsang versus Commissioner of Income-Tax and (2007)8 SCC 688 Municipal Corporation of City of Thane versus Vidyut Metallics Limited and another.

19. Section 22 of the Act provides that the annual value of the property consisting of any building or lands appurtenant of which the assessee is the owner, other than such portions of such property as he may occupy for the purposes of any business or profession, generating profit may be chargeable to income tax under the head, “income from house property”.

Section 23 provides how the annual value should be

determined. It shall be appropriate to reproduce Sections 22 and

23 of the Act. To quote : “22. Income from house property. The annual value of property consisting of any buildings or lands appurtenant thereto of which the assessee is the owner, other than such portions of such property as he may occupy for the purposes of any business or profession carried on by him the profits of which are chargeable to income-tax, shall be chargeable to income-tax under the head “Income from house property” “23. Annual value how determined. [(1) For the purposes of section 22, the annual value of any property shall be deemed to be

(a) the sum for which the property might reasonably be expected to let from year to year; or

(b) where the property or any part of the property is let and the actual rent received or receivable by the owner in respect thereof is in excess of the sum referred to in clause (a), the amount so received or receivable; or

(c) where the property or any part of the property is let and was vacant during the whole or any part of the previous year and owing to such vacancy the actual rent received or receivable by the owner in respect thereof is less than the sum referred to in clause (a), the amount so received or receivable:

Provided that the taxes levied by any local authority in respect of the property shall be deducted (irrespective of the previous year in which the liability to pay

such taxes was incurred by the owner according to the method of accounting regularly employed by him) in determining the annual value of the property of that previous year in which such taxes are actually paid by him.

Explanation: For the purposes of clause (b) or clause (c) of this sub-section, the amount of actual rent received or receivable by the owner shall not include, subject to such rules as may be made in this behalf, the amount of rent which the owner cannot realise.

(2) Where the property consists of a house or part of a house which

(a) is in the occupation of the owner for the purposes of his own residence; or

(b) cannot actually be occupied by the owner by reason of the fact that owing to his employment, business or profession carried on at any other place, he has to reside at that other place in a building not belonging to him,

the annual value of such house or part of the house shall be taken to be nil.

(3) The provisions of sub-section (2) shall not apply if (a) the house or part of the house is actually let during the whole or any part of the previous year; or (b) any other benefit therefrom is derived by the owner.

(4) Where the property referred to in sub-section (2) consists of more than one house (a) the provisions of that sub-section shall apply only in respect of one of such houses, which the assessee may, at his option, specify in this behalf; (b) the annual value of the house or houses, other than the house in respect of which the assessee has exercised an option under clause (a), shall be determined under sub-section (1) as if such house or houses had been let.]”

Apart from Sections 22 and 23, Section 24 relates to deductions from income from house property which provides that a sum equivalent to thirty per cent of the annual value and interest paid on borrowed capital shall be deducted from the income of house property. Section 25 further provides that the interest chargeable under the Act may not be deducted on which tax has not been paid or deducted under Chapter XVII-B of the Act with regard to which there is no person in India.

1. While interpreting the provisions contained in Section 22 of the Act with regard to right of revenue to impose tax under the head, “income from house property”, the provisions contained in Sections 22, 23, 24, 25, 25-A, 25-B, 26 and 27 should be seen collectively.

2. Section 27 of the Act further provides that for the purpose of Sections 22 to 26, the word, “owner of house property'” and “annual charge” ought to be construed. It shall be appropriate to reproduce Section 27 of the Act, to quote:

“27. “Owner of house property”, “annual charge”, etc., defined

For the purposes of sections 22 to 26

(i) an individual who transfers otherwise than for adequate consideration any house property to his or her spouse, not being a transfer in connection with an agreement to live apart, or to a minor child not being a married daughter, shall be deemed to be the owner of the house property so transferred;

(ii) the holder of an impartible estate shall be deemed to be the individual owner of all the properties comprised in the estate;

(iii) a member of a co-operative society, company or other association of persons to whom a building or part thereof is allotted or leased under a house building scheme of the society, company or association, as the case may be, shall be deemed to be the owner of that building or part thereof;

(iiia) a person who is allowed to take or retain possession of any building or part thereof in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882 (4 of 1882), shall be deemed to be the owner of that building or part thereof;

(iiib) a person who acquires any rights (excluding any rights by way of a lease from month to month or for a period not exceeding one year) in or with respect to any building or part thereof, by virtue of any such transaction as is referred to in clause (f) of section 269UA , shall be deemed to be the owner of that building or part thereof;

(iv) [***];

(v) 2 [***];

(vi) taxes levied by a local authority in respect of any property shall be deemed to include service taxes levied by the local authority in respect of the property.”

1. A plain reading of Section 27 shows that the owner of house property means a house or building owned by an individual or person as impartible estate. It cumulatively shows the initial acquisition of an estate should be for dwelling or habitation or non-commercial purpose, used to generate

2. income. 2. A plain reading of Sections 22 to 27 shows that “the house property

means property constructed for dwelling or residential purpose, a portion of which or whole of the property or its appurtenant land is let out on rent to earn profit.” It does not include a property or building constructed or purchased under the planned business activity.

That is why, the legislature to their wisdom has included the house property with rental value and possession by way of transfer to spouse etc. Section 27 further provides that the cooperative society, company or association, from whom the property is allotted or leased out to a person shall be deemed to be the owner of the building or part thereof.

Accordingly, to assess the income under the head, “income from house property”, it shall be necessary to find out from the record the aim and object and purpose of the building owner while acquiring or constructing or purchasing the same and used for the rental purpose to earn income.

24. Section 28 deals with profits and gains of business or profession. It provides that the profit and gains of any business in possession which was carried on by the assessee at the time during the previous year may be taxed

under the said head. At the face of record, Section 28 postulates that the aim and object of acquiring the property should be commercial in nature.

Various conditions provided in Section 28 reveals that it deals with exclusive situations where the property acquired and used for business purpose. It shall be appropriate to reproduce Section 28 of the Act, to quote : “Section 28 -Profits and gains of business or profession

The following income shall be chargeable to income-tax under the head “Profits and gains of business or profession”, –

(i) the profits and gains of any business or profession which was carried on by the assessee at any time during the previous year; (ii) any compensation or other payment due to or received by, – (a) any person, by whatever name called, managing the whole or substantially the whole of the affairs of an Indian company, at or in connection with the termination of his management or the modification of the terms and conditions relating thereto; (b) any person, by whatever name called, managing the whole or substantially the whole of the affairs in India of any other company, at or in connection with the termination of his office or the modification of the terms and conditions relating thereto; (c) any person, by whatever name called, holding an agency in India for any part of the activities relating to the business of any other person, at or in connection with the termination of the agency or the modification of the terms and conditions relating thereto; (d) any person, for or in connection with the vesting in the Government, or in any corporation owned or controlled by the Government, under any law for the time being in force, of the management of any property or business;

(iii) income derived by a trade, professional or similar association from specific services performed for its members;

(iiia) profits on sale of a licence granted under the Imports (Control) Order, 1955, made under the Imports and Exports (Control) Act, 1947 (18 of 1947);

(iiib) cash assistance (by whatever name called) received or receivable by any person against exports under any scheme of the Government of India;

(iiic) any duty of customs or excise re-paid or re-payable as drawback to any person against exports under the Customs and Central Excise Duties Drawback Rules, 1971;

1 [(iiid) any profit on the transfer of the Duty Entitlement Pass Book Scheme being Duty Remission Scheme, under the export and import policy formulated and announced under section 5 of the Foreign Trade (Development and Regulation) Act, 1992 (22 of 1992);]

2 [(iiie) any profit on the transfer of the Duty Free Replenishment Certificate, being Duty Remission Scheme, under the export and import policy formulated and announced under section 5 of the Foreign Trade (Development and Regulation) Act, 1992 (22 of 1992);]

(iv) the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession;

(v) any interest, salary, bonus, commission or remuneration, by whatever name called, due to, or received by, a partner of a firm from such firm:

Provided that where any interest, salary, bonus, commission or remuneration, by whatever name called, or any part thereof has not been allowed to be deducted under clause (b) of section 40 , the income under this clause shall be adjusted to the extent of the amount not so allowed to be deducted;

[(va) any sum, whether received or receivable in cash or kind, under an agreement for

(a) not carrying out any activity in relation to any business; or

(b) not sharing any know-how, patent, copyright, trade-mark, licence, franchise or any other business or commercial right of similar nature or information or technique likely to assist in the manufacture or processing of goods or provision for services.

Provided that sub-clause (a) shall not apply to –

(i) any sum, whether received or receivable, in cash or kind, on account of transfer of the right to manufacture, produce or process any article or thing or right to carry on any business, which is chargeable under the head “Capital gains”;

(ii) any sum received as compensation, from the multilateral fund of the Montreal Protocol on Substances that Deplete the Ozone layer under the United Nations Environment Programme, in accordance with the terms of agreement entered into with the Government of India.

Explanation: For the purposes of this clause,–

(i) “agreement” includes any arrangement or understanding or action in concert, –

(A) whether or not such arrangement, understanding or action is formal or in writing; or

(B) whether or not such arrangement, understanding or action is intended to be enforceable by legal proceedings;

(ii) “service” means service of any description which is made available to potential users and includes the provision of services in connection with business of any industrial or commercial nature such as

accounting, banking, communication, conveying of news or information, advertising, entertainment, amusement, education, financing, insurance, chit funds, real estate, construction, transport, storage, processing, supply of electrical or other energy, boarding and lodging.]

(vi) any sum received under a Keyman insurance policy including the sum allocated by way of bonus on such policy.

Explanation: For the purposes of this clause, the expression “Keyman insurance policy” shall have the meaning assigned to it in clause (10D) of section 10 .

4 [(vii) any sum, whether received or receivable, in cash or kind, on account of any capital asset (other than land or goodwill or financial instrument) being demolished, destroyed, discarded or transferred, if the whole of the expenditure on such capital asset has been allowed as a deduction under section 35AD;”.

Explanation 1: [Omitted by the Direct Tax Laws (Amendment) Act, 1987, with effect from 1st April, 1989.]

Explanation 2: Where speculative transactions carried on by an assessee are of such a nature as to constitute a business, the business (hereinafter referred to as “speculation business”) shall be deemed to be distinct and separate from any other business.”

Apart from Section 28, the provisions contained in Sections 29, 30, 31 and 32 abundantly makes it clear that for the purpose of assessement under the head “profit and gains of business or profession”, it shall be necessary that the property acquired and used is for commercial purpose under business activity. The owner of the property must have acquired the property with intention to earn profit under commercial activity.

1. In case submission of the learned counsel for the appellant is accepted, then it shall amount to addition of word in the plain, meaning of Section 27 or 28 of the Act and also to negate the meaning and purpose of the provisions contained in Sections 22 to 27 of the Act.

2. It is no longer res integra that while interpreting statutory provisions, each and every word of the Act, every section and every chapter should be taken into account in reference to context. According to Maxwell any construction which may leave without affecting any part of the language of a statute should ordinarily be rejected. Relevant portion from Maxwell on the Interpretation of Statutes (12th edition page 36) is reproduced as under:

"A construction which would leave without

effect any part of the language of a statute will

normally be rejected. Thus, where an Act

plainly gave an appeal from one quarter

sessions to another, it was observed that such

a provision, through extraordinary and perhaps

an oversight, could not be eliminated."

1. In 2006 (2) SCC 670, Vemareddy Kumaraswami Reddy and another Vs. State of Andhra Pradesh, their Lordship of Hon'ble Supreme Court affirmed the principle of construction and held that when the language of the statute is clear and unambiguous court can not make any addition or subtraction of words.

2. In AIR 2007 SC 2742, M.C.D. Vs. Keemat Rai Gupta and AIR 2007 SC 2625, Mohan Vs. State of Maharashtra, their Lordship of Hon'ble Supreme Court ruled that Court should not add or delete the words of a statute. Casus Omisus should not be supplied when the language of the statute is clear and unambiguous.

1. In AIR 2008 SC 1797, Karnataka State Financial Corporation Vs. 2. N. Narasimahaiah and others, Hon'ble Supreme Court held that

while construing a statute it can not be extended to a situation not contemplated thereby. Entire statue must be first read as a whole then section by section, phrase by phrase and word by word. While discharging statutory obligation with regard to take action against a person in a particular manner that should be done in the same manner. Interpretation of statute should not depend upon contingency but it should be interpreted from its own word and language used.

3. It is also settled provision of law that the taxing statute should be construed strictly and in case two views are possible, then the one which favour the assessee should be adopted vide 2004 (10) SCC 201, State of West Bengal Vs. Kesoram Industries Ltd, AIR 2000 SC 109 Mathuram Agarwal versus State of M.P., (1999)7 SCC 106 Mysore Minerals Limited M.G. Road, Bangalore versus CIT, Karnataka, Bangalore.

4. In (2000) 3 SC 485 (K.V. Shivakumar Kumar Vs. Appropriate Authority), Hon'ble Supreme Court has held that equity or hardship are not relevant consideration for interpretation for taxing law.

5. In 2004 (10) SCC 201, State of West Bengal Vs. Kesoram Industries Ltd., Hon'ble Supreme Court held that taxing statute should be construed strictly. If a person sought to be taxed comes within the letter of law, he must be taxed. However, in case, he does not fall in taxing category, tax cannot be imposed. There is no room for any intendment. There is no equity about tax. There is no presumption as to tax. Nothing is to be read and nothing is to be implied.

1. In 2006 (7) SCC 714, Sneh Enterprises Vs. Commissioner of Customs, Hon'ble Supreme Court held that in case of dispute or ambiguity, construction has to be

2. made in favour of tax payer against the Revenue.

6. A Division Bench of Allahabad High Court in 2009 (27) LCD 161,Lipton India Ltd. Gaziabad Vs. State of U.P. and others, in which one of us (Hon'ble Devi Prasad Singh, J.) was a member, after considering various pronouncements of Hon'ble Supreme Court, held that while interpreting the statutory provisions, every section, every word, should be looked into in a reference to tax.

7. In AIR 1977 Supreme Court 113 Commissioner of Wealth Tax, A.P. vs. Officer Incharge, Paigah, Hon'ble Supreme court held that the correct rule is that the courts have to endeavour to find out the exact sense in which the words have been used in a particular context.

8. In 1994 ITR (2006) 688 Sc, H.H. Lakshmi Bai Vs. Commissioner of Wealth-Tax, Hon'ble Supreme Court held that taxing statute in particular, have to be strictly construed and there is no equity in taxing provision.

1. In 1972 V 1972 Vol. 86 ITR SC, Commissioner of Income Tax Vs. Sakar Lal Balabhai, Hon'ble Supreme Court held that in interpreting the taxing provision, one has merely to look to the words of provision. It is not permissible to construe any provision of a statute, much less a taxing

2. provision, by reading into it more word than it contains. If a section of a statute is considered as ambiguous it would not be in appropriate to find out the reason which persuaded the select committee to recommend the inclusion of that section.

9. In AIR 1997 SC 1165 Mohd. Ali KhanVs. CWT, Hon'ble Supreme Court held that taxing statute should be construed in their natural, popular and ordinary senses.

10. In 2007 (3) SCC 668: Mahim Patram (P) Ltd Vs. Union of India, Hon'ble Supreme Court held that taxing statute should be strictly interpreted.

11. In AIR 2000 SC 109: Mathuram Agarwal. Vs. State of U.P., Hon'ble Supreme Court held that taxing statute should be interpreted in the spirit of the statute.

In view of above, submission of the learned counsel for the appellant does not seem to be sustainable on combined reading of Sections 22 to 27 of the Income Tax Act. It shall be appropriate to consider the cases relied upon by the parties' counsel.

41. In the case of New India Industries Limited (supra), the Gujrat High Court held that where the manufacturer of silk cloth as a part of its business installed a plant for dyeing silk yarn and plant could not be used and idle for some time

and later on let out to a person on a monthly rent, the question as to whether the rent for five years realised by the assessee was chargeable to excess profits tax as profits of business or was income from other sources. It was held that no general principle could be laid down which may apply to cases and each case should be decided on its own merit and related facts and circumstances. It was further held that in case the assessee derives income from commercial asset which is capable of being used as a commercial asset, then it is income from his business – no matter whether the commercial asset is used by himself or somebody else. The asset would not cease to be a commercial asset simply because it was let out to others. The businessman has got right to exploit it as commercial asset to its best of advantage. It was noticed that if commercial asset is not capable of being used as such or as commercial asset, then its being let out to others does not result in accrual of business income. While holding so, the Gujarat High Court has relied upon 207 ITR 1010 (Guj.) New India Industries Limited versus CIT.

42. The aforesaid proposition of law has been followed in Narain Swadeshi Weaving Mills versus CEPT (supra) relied upon by the appellant. However, the case does not seem to be applicable under the facts and circumstances of the present case.

In the present case, from the very beginning, the plot purchased and building constructed by the assessee was for commercial use. That is why continuously since almost a decade, the rental income was assessed of his “business income” and not for “house property”. Nothing has been brought on record to show that the assessee constructed the building as house property for own use.

1. In (1970) 78 ITR 474(SC) CIT versus Indian Molasses Company Private Limited, the Hon'ble Supreme Court observed that in case the expenditure laid out or expanded wholly or exclusively for the purpose of business, then it shall be business expenditure. It has been further held that the question of law means the question arising on the basis of the finding recorded by the tribunal.

2. In (1998)233 ITR 468 (SC) CIT versus Madras Auto Service while considering the issue with regard to capital or revenue expenditure, the Hon'ble Supreme Court observed the expenditure as revenue expenditure where the assessee has taken a premises on lease for 39 years and demolished the premises constructed on new one on own expenses though lying in possession of lessee but on very low rent held to be business expenditure.

3. In 1972(86) ITR 11 (SC) Aluminium Corporation of India versus CIT while interpreting the business expenditure, the Hon'ble Supreme Court

held that the business expenditure means expenditure incurred must be for commercial expediency.

In the present case, the investment made by the assessee while constructing the commercial complex seems to be a business investment, hence the rental income earned from the building as a natural consequence shall be business income.

1. In the case of Chennai Properties and Investments Limited(supra), relied upon by the appellant's counsel, the Madras High Court though held that every building even if not constructed for dwelling house may be taxed under the head, “income from house property”. However, it has also been held that the commercial building is not regarded as house and may be taxed as house property.

2. In Gujrat Ginning and Manufacturing Company Limited (supra), the Gujrat High Court held that whether a property should be taxed under the head, “profit and gain of business or profession” or income from house property, it depends upon the intention of the parties while acquiring the property. It is pre dominantly a matter of intention which may be drawn from the relevant facts. The judgment of Gujrat High Court fortifies the views taken by us.

3. The Delhi High Court in the case of Super Fine Cables (supra) also ruled that it is the nature of arrangement and the reason for that is to be looked into to decide under which head income tax be imposed. The purpose of determining whether one has let out the property for business purpose or merely for enjoying the rent are relevant factor. The test applied by the Delhi High Court also shows that the building constructed exclusively for commercial use may be taxed under the head, “profit and gains of business or profession” and not under the head, “income from house property”.

1. In the case of Karnani Properties Limited(supra), Hon'ble 2. Supreme Court has treated the income as income from business

where the assessee had let out the building constructing flats and shops. Hon'ble Supreme Court held that the activities carried on in an organised and systematic manner to let out property, flats or shops to the tenants is assessable as business income.

4. In the case of S.G. Mercantile Corporation P. Limited(supra), Hon'ble Supreme Court held that letting out of premises as business activity authorised by memorandum of association shall be taxable as business income.

5. Orissa High Court in C.I.T. Versus M.P. Bazaz and others (supra) held that a building constructed and let out on rent to carry out business for profit should be assessed as business income.

6. In Universal Plast Limited and another (supra), Hon'ble Supreme Court has held that grant of lease of factory to exploit a commercial asset is assessable as business income though the lease was for temporary period with no intention to revive it.

7. Gujrat High Court in CIT versus New India Industries (supra) held that where the income from letting out an asset is business income or income from property, no general principle can be laid down. It shall be decided on the facts and circumstances of each case. The governing principle should be as to whether the asset is being accepted commercially by letting out or it is being let out for the purpose of enjoying rent.

8. In Balaji Enterprises (supra) where the firm was constituted for carrying on business of real estate, taking property on lease, building structure thereon and lease them out to tenants, Karnataka High Court held that the leasing out of commercial complex amounted to business activity.

9. In Union of India versus Kaumudini Narayan Dalal and another (supra), Hon'ble Supreme Court held that the decision adverse to government in tax matter left unchallenged may operate as res judicata against the government which has been followed in other cases. However, Hon'ble Supreme Court clarified that there may be variation on just cause.

10. In Union of India versus Satish Pannalal Shah (supra), Hon'ble supreme Court held that there the judgment of earlier year has not been challenged, it is not open for the revenue to challenge the correctness of other assessee without just cause.

The same view has been reiterated in C.C.E. Meerut versus Eureka Forbes Limited (supra), Collector of Central Excise, and Custom versus P.M.P. Components Limited and State of Andhra Pradesh versus Bhooratnam and Company (supra).

57. In C.K. Gangadharan and others (supra), their Lordships of Hon'ble supreme Court held that where the revenue has not assailed the correctness of the order in one case, it would normally not be permissible to do so in other case on the logic that the revenue cannot pick and choose. It is necessary to maintain certainty in law.

However, their Lordships of Hon'ble Supreme Court dealt with the exception also and held that where the revenue does not prefer an appeal for just cause or where the revenue involved is quite small amount may make out a case of

departure. It shall be appropriate to reproduce relevant portion from the judgment, to quote :

“12. If the assessee takes the stand that the revenue acted mala fide in not preferring appeal in one case and filing the appeal in other case, it has to establish mala fides. As a matter of fact, as rightly contended by the learned Counsel for the revenue, there may be certain cases where because of the small amount of revenue involved, no appeal is filed. Policy decisions have been taken not to prefer appeal where the revenue involved is below a certain amount. Similarly, where the effect of decision is revenue neutral there may not be any need for preferring the appeal. All these certainly provide the foundation for making a departure.”

“13. In answering the reference, we hold that merely because in some cases the revenue has not preferred appeal that does not operate as a bar for the revenue to prefer an appeal in another case where there is just cause for doing so or it is in public interest to do so or for a pronouncement by the higher Court when divergent views are expressed by the Tribunals or the High Courts.”

58. In the case of Commissioner of Wealth Tax versus Allied Finance Pvt. Limited (supra), the lack of consistency by revenue put their action to acid test. Hon'ble Supreme Court held that the principle of res judicata does not apply to the income tax proceedings since each assessment year is a unit by itself. But there is a fundamental aspect permeating through different years and the authorities have allowed that position to be sustained, it would not be appropriate to allow the position to be changed in subsequent year. For the sake of consistency, the same view should be continued to prevail in subsequent years unless there is some material change in the facts.

In Director of Income Tax versus Lovely Bal Shiksha Parishad(supra), the same view has been reiterated.

59. In the case of Radha Swami Satsang versus Commissioner of Income Tax (supra), their Lordships of Hon'ble Supreme Court while dealing with the principle of consistency and principle of res judicata observed that unless there is a material change justifying the revenue to take different view of the matter, it shall not be proper for the revenue to reopen and take contrary view. To reproduce relevant portion from the judgment of Radha Swami Satsang (supra), to quote :

“We are aware of the fact that strictly speaking res judicata does not apply to income-tax proceedings. Again, each assessment year being a unit, what is

decided in one year may not apply in the following year but where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year.

On these reasonings in the absence of any material change justifying the Revenue to take a different view of the matter-and if there was not change it was in support of the assesses-we do not think the question should have been reopened and contrary to what had been decided by the Commissioner of Income-Tax in the earlier proceedings, a different and contradictory stand should have been taken. We are, therefore, of the view that these appeals should be allowed and the question should be answered in the affirmative, namely, that the Tribunal was justified in holding that the income derived by the Radhasoami Satsang was entitled to exemption under Sections 11 and 12 of the Income Tax Act of 1961.

Their Lordships of Hon'ble Supreme Court held that the proposition of law and observation made therein is confined to the said case and may not be treated as authority on the aspects for general application.

60. However, in the case of Municipal Corporation of City of Thane (supra), Hon'ble Supreme Court while holding that the strict rule of res judicata as envisaged by Section 11

C.P.C. has no application, their Lordships further held that as a general rule, each year's assessment is final for that year and does not govern later years because it determines the tax for a particular year. To reproduce relevant portion, to quote :

14. So far as the proposition of law is concerned, it is well-settled and needs no further discussion. In taxation-matters, the strict rule of res judicata as envisaged by Section 11 of the Code of Civil Procedure, 1908 has no application. As a general rule, each year's assessment is final only for that year and does not govern later years, because it determines the tax for a particular period. It is,

therefore, open to the Revenue/Taxing Authority to consider the position of the assessee every year for the purpose of determining and computing the liability to pay tax or octroi on that basis in subsequent years. A decision taken by the authorities in the previous year would not estop or operate as res judicata for subsequent year. [vide Maharana Mills (P) Ltd. v. ITO, 1959 Supp (2) SCR

547 : AIR 1959 SC 881; Visheshwar Singh v. CIT, (1961) 3 SCR 287; Instalment Supp (P) Ltd. v. Union of India, (1962) 2 SCR 644; New Jehangir Vakil Mills v. CIT, (1964) 2 SCR 971; Amalgamated Coalfields Ltd. v. Janapada Sabha, 1963 Supp (1) SCR 172; Devilal v. STO, (1965) 1 SCR 686; Udayan Chinubhai v. CIT, (1967) 1 SCR 913; M.M. Ipoh v. CIT, (1968) 1 SCR 65; Kapur Chand v. Tax Recovery Officer, (1969) 1 SCR 691; CIT, W.B. v. Durga Prasad, AIR 1971 SC 2439; Radhasoami Satsang v. CIT, (1992) 1 SCC 659 : AIR 1992 SC 377; Society of Medical Officers v. Hope, 1960 AC 55; Broken Hill Proprietary Co. Ltd. v. Municipal Council, 1925 All ER 675 : 1926 AC 94 : 95 LJPC 33; Turner on Res Judicata, 2nd Edn., para 219, p. 193].

In the same judgment(supra), Hon'ble Supreme Court

further proceeded to observe that, to quote; “A decision reached in one year would be a cogent factor in the determination of a similar question in a following year, but ordinarily there is no bar against the investigation by the Income Tax Officer of the same facts on which a decision in respect of an earlier year was arrived at.”

Hon'ble Supreme Court further showed its agreement with the principle of law enunciated by Radha Swami Satsang(supra) (para 24).

1. Law emerges after considering various pronouncements of Hon'ble Supreme Court and other High Courts is that the principle of consistency is a rule in general but for cogent reasons or on justifiable ground, the revenue has got right to depart from its earlier practice and take a different view which shall be determined upon the facts and circumstances of each case. While departing from earlier practice, the revenue cannot act mechanically without applying its mind to earlier facts and circumstances under which a view was taken by the taxman and the facts and circumstances of the assessment year in question calling to depart from earlier view. Where there is a fundamental aspect permeating through different assessment years allowed by the authorities to sustain, it would not be appropriate to change the view in subsequent year except on justifiable ground like change of circumstances or non-consideration of relevant material or statutory provisions, or failure on the part of assessing or appellate authority to exercise jurisdiction for extraneous reason or small amount of revenue involved or other justifiable ground depending on facts of each case.

2. In view of above, apart from consistency factor, from the material on record, it may be safely inferred that the assessee constructed the 'Goel Complex' exclusively as the part of its commercial activity to earn

income by letting it on rent. Accordingly, the income so drawn shall be business income.

In view of above, we answer the question as under :

“The income drawn from the rent received from Goel Complex is assessable under the head, “profit and gains of business or profession”.

The trubunal's judgment is affirmed. The appeals are dismissed.”

(Justice S.C. Chaurasia) (Justice Devi Prasad Singh) kkb/ 24.5.2010

AFR RESERVED

Case :-INCOME TAX APPEAL No. -9 of 2005 Petitioner :-Commissioner Of Income Tax (Central), Kanpur Respondent :-Smt. Swapna Roy Petitioner Counsel :-Shri D.D. Chopra

Respondent's counsel : Shri J.N. Mathur, Shri Mudit Agarwal connected with

Income Tax Appeal No.8, 20, 21,22, 23 and 31 – all of the year 2005.

Hon'ble Devi Prasad Singh,J.Hon'ble S.C. Chaurasia,J.

(Delivered by Hon'ble Devi Prasad Singh, J)

1. Appeal under Section 260-A of the Income Tax Act was admitted on 14.2.2005. The Court has not framed substantial question of law itself while admitting the appeal keeping in view the question of law framed by the appellant enumerated in the memo of appeal. After hearing learned counsel for the parties on 18.3.2010, the following substantial question of law was framed by the Court :

1. Whetherthe first appellate court and the tribunal had committed substantial illegality by deleting the addition with regard to interest on the loan taken from a company of Sahara Group without recording any finding with regard to dominant purpose for which the loan was taken keeping in mandate of class-III of Section 57 of the Income Tax Act ?

2. Keeping in view the fact that the controversy with regard to assessment year 1994-95 and subsequent year 1997-98 has been settled upto appellate stage and question involve in the present assessment year is the

same as of those years now it is not open for this court to enter into illegality committed by the appellate authority or tribunal

and appeal is not maintainable ?

FACTS

1. The dispute relates to assessment year 1996-97. The assessee filed her return of income on 13.8.1996 disclosing net loss of Rs.17,38,311/-. Notice under Section 143(2) of the Income Tax Act, 1961, in short, Act was issued on 8.10.1996. Notice under Section 142(1) of the Act was issued on 31.10.1996. These notices were served upon the respondent assessee on 10.10.1996 and 11.10.1996 respectively.

2. After service of notice aforesaid, the assessee filed a revised return on 31.3.1998 reducing the loss to the tune of Rs.30,56,670/-In consequence thereof, notice under Section 143(1)(a) was sent for service on 23.9.1998, followed by a notice dated 26.9.1996 under Section 142(1) of the Act which was served on the assessee on 30.10.1998.

3. The respondent assessee claims to be employee of M/s Sahara India, a firm of which the assessee is working as Head of Department of personnel affairs. In form 16, the gross salary of the assessee has been disclosed as Rs.1,57,250/-per month.

1. The assessee has also shown herself as partner in M/s. Chhavi Advertising and M/s. Sahara India Marketing. The assessee claimed loss under the head of other sources being interest accrued on loan taken for the purpose of investments in share capital of companies belonging to the group of income accrued during the year. Though the assessee has claimed unabsorbed brought forward losses for earlier year but the

2. amount has not been specified in the return. The assessment immediately preceding year of 1995-96 was completed on a positive income by the time the assessing officer was considering the income and loss return of the assessee for the year 1996-97.

4. The income drawn by the assessee as salary is from Sahara India Limited where Shri Subroto Roy (husband) is one of the partners with 63% share. Keeping in view the relationship of the assessee with her husband having 63% interest, the assessing officer observed that in view of the provisions contained in Section 64(i)(ii), the income of the assessee is liable to be clubbed in the hands of her husband Shri Subroto Roy. The assessing officer has noted that the assessee does not possess any technical or professional qualification required for appointment as Head of Department in the firm M/s. Sahara India Limited. However, the

assessing officer keeping in view the fact that the respondent assessee has filed separate return of income, it was considered on a protective basis in her assessment without any prejudice to treatment in view of Section 64(i)(ii) of the Act.

5. The assessing officer has considered the question with regard to foreign tour of the assessee to Hongkong, Singapur, United Kingdom, France, Switzerland and disallowed the claim on the ground that the assessee has not adduced any evidence in support of her contention that the foreign travels were undertaken for the purpose of business of her employer. The assessing officer has considered the assessee’s income from other sources from Radio, doordarshan and GFDA Scheme which is Rs.2,060/-and Rs.20,000/-respectively.

6. However, the controversy involved in the present appeal relates to disallowing the interest claimed on the loan taken

from Sahara India Mutual Benefit Co. Limited(in short, SIMBCL).

The assessee has taken the following loan from SIMBCL :

01.4.95 Opening balance 20,712,923.47

09.08.95 Amount Paid 1,150,000.00

04.12.95 Amount Paid 3,520,000.00

09.12.95 Amount Paid499,000.00

22.12.95 Amount Paid 20,000,000.00

31.03.96 Interest8,446,885.00

54,328,808.47

The assessee invested the amount received aforesaid as under :

09.08.95 11,50,000Investment in Chhabi Advertising (Firm

04.12.95 35,20,000 Investment in Sahara India Marketing (Firm)

09.12.95 4,99,000 Investment in Shares of Sahara India Electrical Limited

1. 1,00,00,000Investment in shares of Sahara India Housing Limited 2. 1,00,00,000Investment in share of Sahara India International Corpn. Ltd.

9. Before the assessing officer, the assessee claimed interest on the aforesaid loan pertaining to respective year. The assessing officer has observed that the figure for the claim of loan substantially vary between original return filed and the revised return which according to the assessing officer is as under :

1. Claim as per original return 71,80,561/ 2. Claim as per revised return 31,98,921/

1. Claim as per statement filed on 2. 18.2.99 21,30,827/

3. Figure as per statement reproduced above 84,46,885/ 4. Figure as per letter dated 18.2.99 81,08,386/

1. The assessing officer noted that in similar way, the loan was taken by all the assessee belonging to Sahara Group namely shri Subroto Roy Sahara, Smt. Swapna Roy, Shri J.B. Roy, Shri O.P. Srivastava, Shri Istiaque Ahmad, Shri Sanjay Bahadur Mishra, Shri U.K. Bose and all of them claimed deduction of interest accrued on the loan under Section 57(iii) of the Act.

2. It has been noted by the assessing officer that the loan amount was advanced from time to time without any collateral security and only on the basis of personal security. The loan advanced to assessee without any collateral security by the companies of the Sahara Group has been taken as unusual act on the part of the companies by the assessing officer.

3. It has been noted by the assessing officer that the assessee is substantial share holder of companies and partnership firms belonging to Sahara India Groups (supra), hence occupies a privileged position vis-à-vis other ordinary persons who have approached M/s. Sahara India Mutual Benefit Co. Limited for loan. It has been further noted by the assessing officer that the Directors who hold substantial interest in M/s. SIMBCL are Ashok Roy Chaudhary, brother in law of Shri Subroto Roy Sahara, the Managing worker of the whole group and Smt. Vandana Bhargava.

1. The assessing officer observed that since the assessee does not hold shares having 10% voting power or more as stipulated in Section 2(22)(e) of the Act, the provision of deemed dividend are not directly attracted. The assessing

2. officer observed that the whole transaction has been made to circumvent the provision of law/statutory provision and the loan was obtained by the assessee by virtue of her privileged beneficial position in the group. While narrating the factual position, the assessing officer observed that there is no stipulation in the sanction letter for the loan with regard to manner in which the

principal or interest accrued thereon are to be repaid. Virtually, in absence of any terms and conditions entered into between parties or imposed by the company of the firm, the repayment of loan has been left at the sweet will of loanee, i.e. the assessee Smt. Swapna Roy. There appears to be no specific pinpointed stipulation in the terms and conditions of the loan requiring to pay the same in specified period. The sanction letter obtained in the case of Ishtiaq Ahmad , one of the recipients of such loan vaguely mentions that the loan shall be repayable in five years. Apart from above, it has been noted by the assessing officer that the total amount of debt of assessee at the face value much exceeds the value of assets. If the amount of interest accrued on the loan is included in the amount of debt, the total liability to repay the interest is not supported by any commensurate asset or income.

3. The assessing officer has noted that the companies in whose shares the loan has been invested are the companies belonging to the Sahara Group and they have never declared any dividend nor there is any possibility of their declaring any dividend in future. The assessing officer observed that many of the companies have already closed their activities and many like Sahara India Limited would have more liabilities than assets. The assessing officer remarked that the value of shares are not even worth the dust. It has also been noted by the assessing officer that the firm in which the loan money has been introduced and the capital are either closed or running in

4. huge loss like Sahara India Mass Communication. The assessing officer observed that virtually, the loan amount has been adjusted against the loss accumulated over the years.

4. Keeping in view the conflicting figure claimed by the assessee at different stages of assessment proceeding while submitting revised return or revised statement, the assessing officer observed that the amount of interest varied by wide margins which shows the lack of knowledge on the part of assessee with regard to her real liability.

5. In spite of repeated demand raised by the assessing officer, the assessee failed to produce the share certificates, in respect of the shares held by them. The assessing officer noted that only few certificates were produced but not the original shares as in the case of Subroto Roy Sahara, J.B. Roy,

O.P. Srivastava and Ishtiaq Ahmad. Before the assessing officer, the assessee failed to explain as to how they would repay the loan since the investments

made out of the loan was productive and many of the companies have either closed or their business are running on hot water. It has been noted by the assessing officer that in most of the cases though the cheques for loan amount were issued earlier but were presented for payment at the bank at the end of financial year like 13th February, 1996 or in some cases in March, 1996.

1. Keeping in view the facts and circumstances of the case and over-all evidence on record, the assessing officer observed that the liability to pay interest is not real but artificial and hypothetical. There is neither intention nor any possibility to repay the loan or interest by assessee in future and likely to remain on paper for years to come. Assessing officer further observed that the companies in which the loan has been invested are not listed in the stock exchange and as such are

2. not marketable and hence those are not likely to fetch any resale value and in near future, those companies are not likely to declare any dividend keeping in view past 20 years history of the group.

2. Keeping in view the fact that there is no possibility of income of any dividend in future and not even a penny has ever been earned by the assessee from the shares held in the past so far, the amount in question cannot be treated as expense towards interest on loan was allowed or expanded wholly and exclusively for the purpose of making or earning income for dividend in view of the provisions contained in Section 57(iii) of the Act. The assessing officer observed that the reference of making and earning income under Section 57(iii) of the Act should be construed as reference to real and feasible income. The assessing officer observed that the expenses incurred for the purpose of earning imaginary or hypothetical dividend in future is not substantiated by placing any material on record. Hence not allowable under Section 57(iii) of the Act. It has been observed that to attract Section 57(iii) of the Act, it is necessary that the possibility of income coming from investment. The possibility should be real and not hypothetical. The word, “expanded” wholly and exclusively for the purpose of making or earning such income used in Section 57(iii) should be construed in strict sense and not liberally to give a way to the assessee to abuse the provision.

1. It has also been observed by the assessing officer that the whole nature of loan transaction involved and the artificial interest liability created in order to set off the existing and future real income of the assessee and thereby to avoid the incidence of taxation, falls within the scope of mischief of activities. It has also been observed by the assessing officer that the income disclosed

by the assessee in the return of income is the income from salary which is accounted for by the assessee on each

2. basis and the deductions/rebates allowable on th same are also claimed on the same basis. In spite of lot transaction, the assessee has not maintained any book of accounts.

3. Accordingly, the assessing officer had declined to provide any deduction with regard to interest of Rs.31,98, 921/-under Section 57(iii) of the Act.

1. The finding recorded by the assessing officer dated 23.3.1999 under Section 143(iii) of the Act was the subject matter of appeal before the Commissioner, Appeal, Lucknow (CIT/Appeal). The first appellate authority had partly allowed the appeal and allowed their deduction under Section 57(iii) of the Act relying upon his earlier order dated 23.7.1998 for the assessment year 1995-96. While allowing the appeal, the C.I.T. Appeals with regard to foreign travel of assessee observed that the appellant is in a position to furnish necessary detail to prove that the expenditure with regard to foreign travel of Rs.2,18,820/-which was added to total income of the assessee could be expenditure and proved by the assessee. Hence the assessee should be given an opportunity to produce evidence and the matter was remitted for reconsideration by the assessing officer by providing fresh opportunity to prove that the foreign travels were undertaken for the employer's business. With regard to disallowing the appellant's claim of Rs.21,30,827/-in respect of interest paid on borrowed capital for the purpose of investment in share of companies, C.I.T. Appeals relied upon the earlier verdict of the year 1995-96 allowing such claim. The appellate authority has observed that only difference is the reliance placed by the assessing officer on the judgment of Madras High Court reported in 151 ITR 653 CIT versus Sujani Taxtile (P) Limited which does not apply. Disallowance of the appellant's claim amounting to Rs.21,30,827/-in respect of interest paid on borrowed capital

2. for the purposes of investment in the share of companies was set aside by the C.I.T. (Appeals) and allowed under Section 57(iii) of the Act.

4. The revenue as well as the assessee preferred an appeal before the tribunal. Before the tribunal, the revenue raised the plea that the C.I.T.(Appeals) was not justified in deleting addition of Rs.21,30,827/-. However, the tribunal also relying upon its order dated 12.3.2004 for assessment year 1994-95 had dismissed the appeal of revenue as well as the cross objections.

5. Feeling aggrieved, the revenue preferred the present appeal with submission that whole purpose of taking loans from a company of the Sahara Group and investing the same in the shares of the closely held companies of the same group was to create an artificial interest liability in the case of the assessee in order to set off the existing and future income of the assessee and thereby to avoid incidence of taxation through this colourable device. It has been stated that the assessee has only acted as a conduit in the aforesaid transfer of funds from one company of the group to other concerns of the same group. There has been no dominant intention of earning any income from the said transactions and the real purpose was to avoid incidence of taxation. For the questions framed above, the learned counsel for the appellant has relied upon the case in

Income Tax Appeal No.42 of 2003 Commissioner of Income Tax (Central) Kanpur versus Shri Deepak M. Kothari, Kanpur and the cases reported in (2006)13 SCC 252 State, CBI versus Sashi Balasubramanian and another, 154 ITR 148 (SC) McDowell and Co. Ltd. versus Commercial Tax Officer, 238 ITR 777 Commissioner of Income Tax versus Amritabeen R. Shah, 151 ITR 653 Commissioner of Income Tax versus Sujani Textiles (P.) limited, 131 ITR 659 Smt.

Virmati Ramkrishna versus Commissioner of Income Tax, Gujarat-III, 115 ITR 519 SC Commissioner of Income Tax, West Bengal-III versus Rajendra Prasad Moody and 201 ITR 464 Sarabhai Sons (P.) Limited versus Commissioner of Income Tax.

1. On the other hand, learned counsel for the respondent has relied upon the judgment reported in (2001)10 SCC 231 Union of India and others versus Kaumudini Narayan Dalal and another, , (2002)1 SCC 605 Union of India versus Satish Panalal Shah, (2005)12 SCC 241 CCE, Meerut versus Eureka Forbes Limited, (2005)12 SCC 242 Collector of Central Excise & Customs versus P.M.P. Components Limited, (2005)12 SCC 419 Commissioner of Central Excise and Customs, Cochin I versus Alsthom T&D Transformers Limited, (2005)12 SCC 420 State of A.P. Versus Bhooratnam & Co., (2008)8 SCC 739 C.K. Gangadharan and another versus Commissioner of Income Tax, Cochin, judgment and order dated 3.2.2005 passed in WT Appeal No.4 of 1999 Commissioner of Wealth Tax versus Allied Finance (P) Limited, (2004)266 ITR 349 Director of Income Tax versus Lovely Bal Shiksha Parishad, (1992)193 ITR 321 Radhasoami Satsang versus Commissioner of Income Tax.

2. During the course of hearing, it was vehemently argued by the appellant’s counsel that since the quantum of tax involved in previous years was not substantial, hence the department has not filed appeal against the earlier assessment years’ proceeds.

3. For adjudication of the question framed, it is necessary to look into the return filed, assessments made and the financial status of the companies. The information supplied has not been disputed by the learned counsel for the respondents in the

form of

chart which

is reproduced

as under

:

Name of the Company-

M/s Chabbi Advertising

A.Y. Returned Income Assessed Income

1992-93 1,780/ 20,930/

1993-94 5,980/ 1,71,947/

1994-95 5,274/ 2,83,220/

1995-96 6,280/ 3,87,660/

1996-97 6,670/ 20,41,090/

1997-98 4,75,380/ 4,75,380/

1998-99 2,46,637/ 3,76,261/

Name of the Company-M/s Sahara India Housing Corporation Ltd.

A.Y. Returned Income Assessed Income

1994-95 (-)9,89,630/ (-)9,89,630/

1995-96 (-) 1,46,181/ (-)99,930/

1996-97 (-)41,42,284/ (-)40,07,280/

1997-98 (-)67,99,970/-(Original) (-)83,10,164/-(Revised)

(-)71,83,640/

1998-99 (-)4,11,35,025/-(Original) (-)8,60,80,825/-(Revised)

(-) 2,81,10,450/

A.Y. Returned Income Assessed Income

1993-94 1,37,940/-(Original) 9,03,200 (Revised)

2,69,449/-(u/s 144) 10,34,710/-(u/s 143(3)/148)

1994-95 1,06,090/ 22,94,860/

1995-96 14,32,700/ 1,79,61,860/

1996-97 36,29,550/ 2,94,43,760/

1997-98 4,36,350/ 39,73,893/

1998-99 1,44,070/ 7,85,568/

Name of the Company – M/s Sahara India Electrical Ltd.

A.Y. Returned Income Assessed Income

2001-02 4,03,710/ 4,28,475/

2002-03 4,81,736/ 5,06,430/

2003-04 5,30,350/ 5,30,350/

2004-05 4,08,980/ 4,08,980/

2005-06 29,830/ 29,830/

2006-07 (-)13,206/ (-)13,206/

Since the case of M/s Sahara India Electrical Ltd. has been centralized in this circle from ward 7(2) New Delhi, therefore case records of A.Y. 2001-02, onward only are available with this circle.

1. Relying upon the aforesaid facts, learned counsel for the revenue stated that the whole purpose of raising loan of companies of Sahara Group and investing the same into shares of closely associated companies is to create an artificial interest liability in order to set off the existing and future income and thereby to avoid incidence of taxation which, according to the appellant’s counsel, is a colourable device. It has been stated that the assessee only acted as a conduit in transfer of fund from one company of the group to other concerns of the same group.

Dominant intention is not an earning from the said transaction but the real purpose is to avoid the incidence of taxation.

1. On the other hand, learned counsel for the respondent submits that the consistency in assessment should be maintained. Though the principle of res judicata is not applied but keeping in view the various pronouncements of the Hon’ble Supreme Court and other High Courts, it is not justifiable to depart from earlier practice. It has also been stated by the respondents’ counsel that the appeal filed against the assessment year 1997-98 has been dismissed by the Delhi High Court. The Hon’ble Supreme Court has also dismissed

2. the Special Leave Petition. 2. A perusal of the order dated 17.2.2009 shows that the Delhi High Court

has dismissed the appeal since the revenue has not provided necessary information with regard to assessment year 1996-97. Delhi High Court dismissed the appeal with regard to assessment year 1997-98 on the ground that the revenue had followed own order of the assessment year 1996-97. The appeal was dismissed by the Delhi High Court without framing any substantial question of law in limine. Hon’ble Supreme court dismissed the appeal without discussing the controversy involved.

3. It has also been stated that the observation of the assessing authority at least with regard to two companies, namely Sahara India Limited and Sahara India Mask Communication is based on unfounded facts as no investment was done by the assessee in these two firms.

CONSISTENCY

1. Learned counsel for the respondent has vehemently argued that the tribunal has rightly not interfered with the order of the appellate authority to maintain the consistency. It has not been disputed that every assessment year is independent and assessment can be made on the basis of the material on record. However, relying upon various pronouncements of the High Court and Hon’ble Supreme Court, it has been submitted that the consistency should be maintained and there is no material to depart from earlier practice. The tribunal’s judgment should be affirmed.

2. In 2008(8)SCC 739 C.K. Gangadharan and others versus Commissioner of Income Tax, their Lordships of

Hon'ble supreme Court held that where the revenue has not assailed the correctness of the order in one case, it would normally not be permissible to do

so in other case on the logic that the revenue cannot pick and choose. It is necessary to maintain certainty in law.

However, their Lordships of Hon'ble Supreme Court dealt with the exception also and held that where the revenue does not prefer an appeal for just cause or where the revenue involved is quite small amount may make out a case of departure. It shall be appropriate to reproduce relevant portion from the judgment, to quote :

“12. If the assessee takes the stand that the revenue acted mala fide in not preferring appeal in one case and filing the appeal in other case, it has to establish mala fides. As a matter of fact, as rightly contended by the learned Counsel for the revenue, there may be certain cases where because of the small amount of revenue involved, no appeal is filed. Policy decisions have been taken not to prefer appeal where the revenue involved is below a certain amount. Similarly, where the effect of decision is revenue neutral there may not be any need for preferring the appeal. All these certainly provide the foundation for making a departure.”

“13. In answering the reference, we hold that merely because in some cases the revenue has not preferred appeal that does not operate as a bar for the revenue to prefer an appeal in another case where there is just cause for doing so or it is in public interest to do so or for a pronouncement by the higher Court when divergent views are expressed by the Tribunals or the High Courts.”

1. In a case reported in (2005)195 CTR Reports 528 Commissioner of Wealth Tax versus Allied Finance(P) Limited, it has been held that the lack of consistency by revenue put their action to acid test. Hon'ble Supreme Court held that the principle of res judicata does not apply to the income tax proceedings since each assessment year is a unit by itself. If there is a fundamental aspect permeating through different years and the authorities have allowed that position to be sustained, it would not be appropriate to allow the position to be changed in subsequent year. For the sake of consistency, the same view should be continued to prevail in subsequent years unless there is some material change in the facts.

2. In 2004 Vol. 266 ITR 265 Director of Income-Tax versus Lovely Bal Shiksha Parishad, the same view has been reiterated.

3. In the case reported in 1992 Vol. 193 ITR page 321 Radhasoami Satsang versus Commissioner of Income-Tax, their Lordships of Hon'ble Supreme Court while dealing with the principle of consistency and principle of res judicata observed that unless there is a material change justifying the revenue to take different view of the matter, it shall not be

proper for the revenue to reopen and take contrary view. To reproduce relevant portion from the judgment of Radha Swami Satsang (supra), to quote :

“We are aware of the fact that strictly speaking res judicata does not apply to income-tax proceedings. Again, each assessment year being a unit, what is decided in one year may not apply in the following year but where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year.

On these reasonings in the absence of any material change justifying the Revenue to take a different view of the matter-and if there was not change it was in support of the assesses-we do not think the question should have been reopened and contrary to what had been decided by the Commissioner of Income-Tax in the earlier proceedings, a different and contradictory stand should have been taken. We are, therefore, of the view that these appeals should be allowed and the question should be answered in the affirmative, namely, that the Tribunal was justified in holding that the income derived by the Radhaswami Satsang was entitled to exemption under Sections 11 and 12 of the Income Tax Act of 1961.

Their Lordships of Hon'ble Supreme Court held that the proposition of law and observation made therein is confined to the said case and may not be treated as authority on the aspects for general application.

36. However, in the case reported in (2007)8 SCC 688 Municipal Corporation of City of Thane versus Vidyut Metallics Limited and another, Hon'ble Supreme Court while holding that the strict rule of res judicata as envisaged by Section 11 C.P.C. has no application, their Lordships further held that as a general rule, each year's assessment is final for that year and does not govern later years because it determines the tax for a particular year. To reproduce relevant portion, to quote :

14. So far as the proposition of law is concerned, it is well-settled and needs no further discussion. In taxation-matters, the strict rule of res judicata as envisaged by Section 11 of the Code of Civil Procedure, 1908 has no application. As a general rule, each year's assessment is final only for that year and does not govern later years, because it determines the tax for a particular period. It is, therefore, open to the Revenue/Taxing Authority to consider the position of the assessee every year for the purpose of determining and

computing the liability to pay tax or octroi on that basis in subsequent years. A decision taken by the authorities in the previous year would not estop or operate as res judicata for subsequent year. [vide Maharana Mills (P) Ltd. v. ITO, 1959 Supp

(2) SCR 547 : AIR 1959 SC 881; Visheshwar Singh v. CIT, (1961) 3 SCR 287; Instalment Supp

(P) Ltd. v. Union of India, (1962) 2 SCR 644; New Jehangir Vakil Mills v. CIT, (1964) 2 SCR 971; Amalgamated Coalfields Ltd. v. Janapada Sabha, 1963 Supp (1) SCR 172; Devilal v. STO, (1965) 1 SCR 686; Udayan Chinubhai v. CIT, (1967) 1 SCR 913; M.M. Ipoh v. CIT, (1968) 1 SCR 65; Kapur Chand v. Tax Recovery Officer, (1969) 1 SCR 691; CIT, W.B. v. Durga Prasad, AIR 1971 SC 2439; Radhasoami Satsang v. CIT, (1992) 1 SCC 659 : AIR 1992 SC 377; Society of Medical Officers v. Hope, 1960 AC 55; Broken Hill

Proprietary Co. Ltd. v. Municipal Council, 1925 All ER 675 : 1926 AC 94 : 95 LJPC 33; Turner on Res Judicata, 2nd Edn., para 219, p. 193].

In the same judgment(supra), Hon'ble Supreme Court

further proceeded to observe that, to quote; “A decision reached in one year would be a cogent factor in the determination of a similar question in a following year, but ordinarily there is no bar against the investigation by the Income Tax Officer of the same facts on which a decision in respect of an earlier year was arrived at.”

1. Hon'ble Supreme Court further showed its agreement with the principle of law enunciated by Radha Swami Satsang(supra) (para 24).

2. In Income Tax Appeal No.127 of 2005 The Commissioner of Income Tax-I versus M/s Goel Builders, a Division Bench of this court, of which one of us (Hon’ble Devi Prasad Singh) was a member after considering the various pronouncements of other High Courts and Supreme Court proceeded to observe as under :

“Law emerges after considering various pronouncements of Hon'ble Supreme Court and other High Courts is that the principle of consistency is a rule in general but for cogent reasons or on justifiable ground, the revenue has got right to depart from its earlier practice and take a different view which shall be determined upon the facts and circumstances of each case. While departing

from earlier practice, the revenue cannot act mechanically without applying its mind to earlier facts and circumstances under which a view was taken by the taxman and the facts and circumstances of the assessment year in question calling to depart from earlier view. Where there is a fundamental aspect permeating through different assessment years allowed by the authorities to sustain, it would not be appropriate to change the view in subsequent year except on justifiable ground like change of circumstances or non-consideration of relevant material or statutory provisions, or failure on the part of assessing or appellate authority to exercise jurisdiction for extraneous reason or small amount of revenue involved or other justifiable ground depending on facts of each case.”

1. In the present case, the tax affect or revenue involved is Rs.31,98,921/-which seems to be not a meager amount keeping in view the quantum of interest disallowed by the assessing officer. Present appeal may not be thrown out to maintain the consistency in public interest as well as keeping in view the fact reasons assigned by assessing officer has not been taken into account by the tribunal.

2. The judgment referred to herein above shows that it is always open for the assessing officer to depart from earlier practice on substantial justifiable ground.

1. Apart from tax affect, the order passed by the assessing officer shows that the interest claimed by the assessee on the

2. loan taken in the relevant year varies. The gap between the original return and the revised return coupled with the subsequent statement filed by the assessee is enormous (supra). This fact shows that the assessee has not acted bona fidely in submitting revised return. The revised statement filed by the assessee is an incident of changing of stand with regard to income.

3. In case an assessee changes his or her stand repeatedly and does not come with clean hand, then it shall be sufficient to depart from earlier practice and the principle of consistency shall not come in the way to assess the income on the basis of the material on record.

1. Substantial amount has been invested by the assessee as is evident from the chart(supra) in the sisters concerned whinch are running in loss. Nothing has been brought on record by the assessee as to why she has invested such a huge amount in the firm running in loss since years. Neither the appellate authority nor the tribunal has tried to discuss this issue keeping in view the reasoning of the assessing authority.

2. There is no stipulation in the sanction letter of loan with regard to manner of repayment of principal amount and interest and the total amount of debt exceeds the face value of assets.

3. Though the assessing officer has taken note of the fact with regard to change in stand while filing revised income and the assessment and also with regard to financial soundness of the company where the assessee has invested the borrowed money but while reversing the order of the assessing officer, neither the appellate authority nor the tribunal had taken into account these aspects of the matter. No finding has been recorded by the appellate authority or the tribunal with regard to

4. justification of investment made in the firms which are running in loss since several years. A man of common prudence shall not invest in a company which is running in loss. Since these factors have not been considered to justify the investment, the principle of consistency shall not come in way to depart from earlier practice.

4. Several issues decided by the assessing officer have not been dealt with by the tribunal and mechanically the appeal of revenue has been dismissed to maintain the consistency. The tribunal should have dealt with the issues adjudicated by the assessing officer by passing a speaking and reasoned order instead of dismissing the appeal of revenue relying upon the outcome of the earlier assessment year. Dismissal of an appeal without passing a speaking and reasoned order by the tribunal relying upon earlier finding seems to be no not justified. The order should be reasoned after discussing the facts and circumstances and material on record keeping in view the settled law that every assessment year is independent in itself. Even if for the purpose of consistency, earlier practice is followed, it shall be incumbent on the tribunal or the appellate authority to discuss the material facts and pleading on record while dissenting with the order of the assessing officer. The tribunal has been failed to exercise jurisdiction vested in it. On this score also, right of the assessee seems to be not protected by the principle of consistency.

REASONED ORDER

1. Their Lordships of Hon’ble Supreme Court in the case reported in JT 2010(4) SC 35 Assistant Commissioner, Commercial, Tax Department, Works, Contract and Leasing, Quota versus Shukla and Brothers has held that it shall be obligatory on the part of the judicial or quasi judicial

2. authority to pass a reasoned order while exercising statutory jurisdiction.

2. The aforesaid view to pass reasoned order by the authorities which includes quasi-judicial authorities is consistently reiterated by the Hon'ble Supreme Court in earlier judgments. It has been held by their Lordships that the authorities have to record reasons, otherwise it may become a tool for harassment vide K.R. Deb versus The Collector of Central Excise, Shillong, AIR 1971 SC 1447; State of Assam and another versus J.N. Roy Biswas, AIR 1975 SC 2277; State of Punjab versus Kashmir Singh, 1997 SCC (L&S) 88; Union of India and others versus P. Thayagarajan, AIR 1999 SC 449; and Union of India versus K.D. Pandey and another, (2002)10 SCC 471.

3. In view of above, the tribunal should have dealt with the facts and circumstances and question of law involved and raised by the authorities, may be in precise instead of dismissing the appeal merely on the ground of consistency. Non-consideration of grounds assigned by the assessing authority by the appellate authority or the tribunal renders the order passed by them unjust, illegal and violative of Article 14 of the Constitution of India.

4. Hon'ble Supreme Court in a case reported in AIR 1955 SC 633 U.J.S. Chopra versus State of Bombay held that the judgment is the expression of opinion of the Court arrived at after due consideration of evidence and the arguments which shall form judicial determination.

5. In a case reported in AIR 1957 SC 389 State of Bihar versus Ram Naresh Pandey and others, their Lordships of Hon'ble Supreme Court held that the judgment means a

decision which affect the merit of a question between the parties by determining some right or liability.

Thus, it shall always be obligatory on the part of the appellate court or the tribunal to determine the issue involved by passing a reasoned order after considering the grounds and material on record as well as the finding and observations made by the assessing authority/ appellate authority.

DUTY OF APPELLATE AUTHORITY/TRIBUNAL

1. It is also settled law that the appellate authority while dissenting with the order of the subordinate authority should meet out the finding recorded by the original authority by assigning reasons. In the present case, reason assigned by the tribunal while taking different view than of the assessing

authority is not based on due consideration of entire grounds relied upon by the assessing authority.

2. Hon'ble Supreme Court in a case reported in (2001)2 JT (SC) 407 Santosh Hazari versus Purushottam Tiwari(Dead) by L.Rs. held as under :

“”The appellate Court has jurisdiction to reverse or affirm the findings of the trial Court. First appeal is a valuable right of the parties and unless restricted by law, the whole case is therein open for hearing both on questions of fact and law. The judgment of the Appellate Court must, therefore, reflect its conscious application of mind, and record findings supported by reasons, on all the issues arising along with the contentions put forth, and pressed by the parties for decision of the Appellate Court.” …............. ….............

While reversing a finding of fact the Appellate Court must come into close quarters with the reasoning assigned by the trial Court and then assign its own reasons for arriving at a different finding. This would satisfy the Court hearing a further appeal that the First Appellate Court had discharged the duty expected of it.”

The aforesaid proposition of law has been reiterated in a case, reported in AIR 2001 SC 2171 Madhukar and others versus Sangram and others.

53. In an earlier judgment, reported in AIR 1998 SC 2713 Punjab National Bank and others versus Kunj Behari Misra, Hon'ble Supreme Court after considering catena of earlier judgments held that in case the disciplinary authority disagrees with the conclusion reached by the enquiry officer, then while recording his own finding, it shall be obligatory to deal with the reason given by the enquiry officer. On the same analogy, in case the appellate authority differs with the finding recorded by the assessing officer, then each and every issue, grounds and circumstances dealt with by the assessing officer must be considered and difference of opinion must be supported by reasoned order.

Hence also, the appeal cannot be thrown out merely on the ground to maintain consistency with previous years.

BINDING PRECEDENT

1. Reliance placed by the learned counsel for the assessee to the dismissal of the appeal in limine by the Delhi High Court or the Supreme Court seems to be not sustainable. A perusal of the order

passed by the Delhi High Court and Hon’ble Supreme Court shows that the appeal has been dismissed

2. without recording a finding with regard to argument advanced or dispute raised. It is settled law that a judgment shall be binding only in case the dispute is identical based on same set of facts. The judgment should be considered in reference to the context keeping in view the facts and circumstances of each case. It is not borne out from the judgment of the Delhi High Court that the question cropped up for adjudication in this Court was raised and adjudicated by the Delhi High Court.

2. The expression, “judgment” has been defined in Section 2(9) of the Code of Civil Procedure. The judgment means the statement given by a Judge on the grounds of a decree or order. Meaning thereby the Court has to state the ground on which it bases its decision. It must be intelligible and must have a meaning. It has a distinction from a word, order as the latter may not contain reasons. Unless, a judgment is based on reason, it would not be possible for an appellate/revisional Court to decide as to whether the judgment is in accordance with law vide AIR 1954 SC 194 Surendra Singh and others versus State of U.P.

3. Hon'ble Supreme Court in a case reported in AIR 1970 SC 1168 M/s Tarapore & Co. Madras versus Tractors Export Moscow held that the judgment means a final adjudication by the Court of rights of the parties.

4. In AIR 1964 SC 1099(C.B.) Vidyacharan Shukla versus Khubchand Baghel and others, their Lordships of Hon'ble Supreme Court held that the judgment is statement of reason given by a Judge.

1. So far as the argument of the respondent's counsel with regard to binding precedent is concerned, it has been held by Hon'ble Supreme Court by catena of judgments that the issue

2. which has not been considered by the Court while delivering a judgment cannot be said to be binding as a decision of the Court takes its colour from the questions involved in the case in which it is rendered and while applying decision to a later case, the court must carefully try to ascertain true principle laid down by the decision of the Court. The court should not place reliance upon the decision without discussing as to how the factual situation fits in with the fact, situation of the decision on which reliance is placed as it has to be ascertained by analyzing all the material facts and issue involved in the case and argued by both sides. The judgment has to be read with reference to and in context with a particular statutory provisions interpreted by the Court, as the Court has to examine as to what principle of law has been decided

and the decision cannot be relied upon in support of a proposition that it did not decide (vide AIR 1971 SC 530 H.H. Maharajadhiraja Madhav Rao Jivaji Rao Scindia Bahadur and others versus Union of India, AIR 1985 SC 218 M/s. Amar Nath Om Parkash and others versus State of Punjab and others, AIR 1980 SC 1707 Rajpur Ruda Meha and others versus State of Gujarat, (1992) 4 SCC 363 C.I.T. Versus Sun Engineering Works(P) Limited. (1993)2 SCC 386 Sarva Shramik Sangh, Bombay versus Indian Hume Pipe Co. Limited and another, AIR 2005 SC 2499 M/s. Makhija Construction and Enggr. Pvt. Limited versus Indore Development Authority and others.

5. In AIR 2002 SC 1187 Jawahar Lal Sazawal and others versus State of Jammu and Kashmir and others, their Lordships of Hon'ble Supreme Court held that a judgment may not be followed in a given case if it has some distinguishing features.

1. In AIR 2003 SC 511 Bhavnagar University versus Palitana Sugar Mill (P) Limited, Hon'ble Supreme Court held that a decision is an authority for which it is decided and not

2. what can logically be deduced therefrom. A little difference in facts or additional facts may make a lot of difference in the precedential value of a decision.

6. The aforesaid principle of law has been followed in other cases reported in AIR 2002 SC 3088 Delhi Administration versus Manohar Lal, AIR 2003 SC 2339 Union of India versus Chajju Ram, AIR 2003 SC 2661 Ashwani Kumar Singh versus

U.P. Public Service Commission and others.

62. In view of above, keeping in view the finding and the material discussed by the assessing authority and the submission made by the parties, the judgment of the Delhi High Court does not have binding precedent being not a reasoned order deciding the issue in question. It also lacks persuasive effect being not deciding the issue involved.

INCOME FROM OTHER SOURCES

(Section 57(iii) of the Income Tax Act)

1. The question cropped up as to whether the amount invested by the assessee in sisters concerned running in loss since several years may be treated as investment made exclusively for the purpose of

making or earning such income. Section 57(iii) of the Act is reproduced as under :

2. “any other expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income.”

3. Accordingly, the expenditure wholly and exclusively for the purpose of making or earning income may be deducted. It

4. shall be appropriate to consider some of the pronouncements of other High Courts and Hon’ble Supreme Court.

2. The Calcutta High Court in a case reported in [2005]273 ITR 353(Cal) Consolidated Fibres and Chemicals Limited versus Commissioner of Income Tax while interpreting Section 57(iii) of the Act held that taxability of income is not dependent upon its destination or the manner of its utilisation. It has to be seen at the point of accrual. It is not necessary that there should be a direct connection between the interest paid and the interest received for the purpose of claiming benefit under Section 57(iii). It should be seen whether the amount has been laid out or expended wholly and exclusively for the purpose of earning the income. Unless this test is satisfied the benefit under Section 57(iii) shall not be available.

1. Hon’ble Supreme Court in a leading case, reported in 2. [1978]115 ITR 516(SC) Commissioner of Income Tax, West

Bengal-III versus Rajendra Prasad Moody held that it is not necessary that any income should, in fact, have been earned as a result of expenditure. It is also not necessary to show that the expenditure was profitable one or that, in fact, any profit was earned.

3. Their Lordships held that merely because there is no profit the assessee’s right to claim benefit under Section 57(iii) of the Act may not be thrown out. However, a close reading of judgment of Rajendra Prasad Moody (supra) shows that the Hon’ble Supreme court observed that the expenditure should be proper and bona fide. It shall be appropriate to reproduce relevant portion of the judgment of Rajendra Prasad Moody(supra) :

“We fail to appreciate how expenditure which is otherwise a proper expenditure can cease to be such merely because there is no receipt of income. Whatever is a proper outgoing by way of expenditure must be debited irrespective whether there is receipt of income or not. That is the plain requirement of proper accounting and the interpretation of Section 57(iii) cannot be different. The deduction of the expenditure cannot, in the

circumstances, be held to be conditional upon the making or earning of the income.”

Hon’ble Supreme Court further observed (supra) :

“It is true that the language of Section 37(1) is a little wider than that of Section 57(iii), but we do not see how that can make any difference in the true interpretation of Section 57(iii). The language of Section 57(iii) is clear and unambiguous and it has to be construed according to its plain natural meaning and merely because a slightly wider phraseology is employed in another section which may take in something more, it does not mean that Section 57(iii) should be given a narrow and constricted meaning not warranted by the language of the section and in fact, contrary to such language.”

1. In view of above, the condition precedent to avail the benefit of Section 57(iii) of the Act is that the investment must be proper and justified. Proper investment means correct investment with intention to earn profit. In Oxford Learner’s Dictionary, the word, “proper” has been defined as right or

2. correct action in accordance with rules. Action should be real and good enough to avail the very object and purpose of investment acceptable socially and morally. (Oxford Advance Learner’s Dictionary page 1210(7th Edition).

2. In 1994 ITR 2006 Patna 350 CIT versus Bihar Limited, Calcutta High Court held that the expenditure is allowable as deduction from income from other sources only if it is found that, in fact, it has been expended wholly and exclusively for the purpose of making or earning such income and it is not in the nature of capital expenditure.

3. In a case reported in 151 ITR 653 Commissioner of Income Tax versus Sujani Textiles(P) Limited, it has been held by the Madras High Court that where there was no question for any receipt of income from that source against which the interest on the borrowed funds could be set off, the interest paid by the company on borrowed funds could not be allowed as a deduction either under Section 36(1)(iii) or under Section 57(iii). The view taken by Madras High Court seems to be correct and we are in agreement to it.

71 In a case reported in 154 ITR 148 Mcdowell and Co. Limited versus Commercial Tax Officer, Hon'ble Supreme Court took the note of the fact that the consequences of tax avoidance by an assessee is enormous. The black money flowing in the market discourage the honest taxpayers to file return and cause loss to exchequer.

72. It has been further observed that (supra), in a civilized society, the evasion of tax by dishonest taxpayers should be dealt with firmly and proper way to construe a taxing statute while considering a device to avoid tax is to be construed literally and strictly to preserve and check the tax avoidance. To reproduce relevant portion (supra) :

“We think that time has come for us to depart from the Westminster principle as emphatically as the British Courts have done and to dissociate ourselves from the observations of Shah, J. and similar observations made elsewhere. The evil consequences of tax avoidance are manifold. First there is substantial loss of much needed public revenue, particularly in a welfare State like ours. Next there is the serious" disturbance caused to the economy of the country by the piling up of mountains of black money, directly causing inflation. Then there is "the large hidden loss" to the community (as pointed out by Master Sheatcroft in 18 Modern Law Review 209) by some of the best brains in the country being involved in the perpetual war waged between the tax-avoider and his expert team of advisers, lawyers and accountants on one side and the tax-gatherer and his perhaps not so skillful advisers on the other side. Then again there is the 'sense of injustice and inequality which tax avoidance arouses in the breasts of those who are unwilling or unable to profit by it'. Last but not the least is the ethics (to be precise, the lack of it) of transferring the burden of tax liability to the shoulders of the guileless good citizens from those of the 'artful dodgers'. It may, indeed, be difficult for lesser mortals to attain the state of mind of Mr. Justice Holmes, who said, "Taxes are what we pay for civilized society. I like to pay taxes. With them I buy civilization." But, surely, it is high time for the judiciary in India too to part its ways from the principle of Westminster and the alluring logic of tax avoidance, we now live in a welfare State whose financial needs, if backed by the law, have to be respected and met. We must recognise that there is behind taxation laws as much moral sanction as behind any other welfare legislation and it is a pretence to say that avoidance of taxation is not unethical and that it stands on no less moral plane than honest payment of taxation. In our view, the proper way to construe a taxing statute, while considering a device to avoid tax, is not to ask whether the provisions should be construed literally or liberally, nor whether the transaction is not unreal and not prohibited by the statute, but whether the transaction is a device to avoid tax, and whether the transaction is such that the judicial process may accord its approval to it.”

73. The Delhi High Court in a case reported in 238 ITR 777 Commissioner of Income Tax versus Amritaben R. Shah, held that the expenditure must be with primary motive of earning income. In order that an expenditure may be

admissible under Section 57 of the Act, it is necessary that the primary motive of incurring it is directly to earn income falling under the head “Income from other sources”. It shall be appropriate to reproduce from the judgment of Amritaben R. Shah(supra) :

“The question which arises in this case is : whether the expenditure incurred for borrowing money for purchasing shares for acquiring controlling interest in a company can be held to be an expenditure incurred wholly or exclusively for earning income from dividend. There is no dispute in this case that the shares in question were purchased by the assessee for the purpose of acquiring controlling interest in the company and not for earning dividend. That being so, the expenditure incurred by way of interest on the loan taken by the assessee for the said purpose cannot be held to be an expenditure incurred wholly and exclusively for the purpose of earning income by way of dividends. From the nature of transaction, it is clear that the expenditure was not for the purpose of earning income by way of dividends but for the purpose of acquiring controlling interest in the company and, therefore, it would not be allowable as a deduction under Section 57(iii) of the Act.

1. In another case reported in 1964(33)ITR 140 Commissioner of Income Tax versus Amritaben R. Shah, Hon'ble Supreme Court held that the expression "for the purpose of business" is narrower than the expression "for the purpose of making or earning profit” and the same view has been followed in (1971)82 ITR 166 Commissioner of Income Tax, West Bengal I versus Birla Cotton Spinning and Weaving Mills Limited.

1. In 2001 ITR 464 Sarabhai Sons Private Limited,a Division Bench of Gujarat High Court held that income, in fact, should have been earned as a result of expenditure. However, the purpose of making or earning such income must be the sole purpose for which the expenditure must have been incurred. The distinction between purpose and motive must always be borne in mind for what is relevant is the manifest and immediate purpose and not the motive of personal consideration moving in the mind of the assessee for incurring

2. expenditure. 2. The legislature to their wisdom has used the word “laid out or expended

wholly and exclusively for the purpose of making or earning such income. By using the word “wholly and exclusively”, the legislature cast a duty on the assessee to establish that the expenditure made was to earn income and not for any other purpose. These words make it obligatory for the assessee to ensure that by making investment, he or she had

understood to earn income. For the purpose of earning income through the investment the assessee has to take into account the financial prospect of the company concerned. The principle applied to ascertain the intention of assessee to earn income shall be what a man of common prudence will think while expending in a company. In case there is no material on record to establish that the expenditure of the assessee is done bona fidely to earn income, the deduction under Section57(iii) of the Act shall not be available.

3. In the present context, the assessee has repeatedly submitted incorrect statement(supra) and borrowed the money for investment in her sister concerned managed by her close associate and relative which are running in loss without any expectation to gain profit. A man of common prudence shall never like to make investment in a company whose financial status is fragile and not liable to make profit.

1. The investment must be wholly and exclusively for the purpose of earning profit. At least dominant purpose of investment made must be to earn profit. The decision taken under the circumstances while making an investment should reveal that there was likelihood to earn profit. The investment or expenditure made in a company where there is no hope of earning profit shall not be covered by the Section 57(iii) of the Act (laid out or expended wholly and exclusively for the purpose

2. of making or earning such income). 4. After filing original return the petitioner has submitted revised return and

statements giving out different figures. This act on the part of the assessee reveals that she has not acted bona fidely and tried to avail the benefit of Section 57(iii) of the Act by changing her stand. Neither the appellate authority nor the tribunal has considered this aspect of the matter with regard to bona fide of the assessee.

5. Though it is not unfair to borrow money or take loan from one concern and invest the same in other concern for the purpose of profit or income but while doing so, the assessee must act bona fide with primary motive to earn profit. The amount taken on loan from one concern and investment in other concern running in loss having fragile financial status cannot be treated as bona fide act on the part of the assessee. The action of the assess suffers from lack of bona fide and seems to be a device to help sister concern.

6. Some of the companies where the assessee has made investments are not listed in the stock exchange and not likely to fetch any resale value. The assessing officer may exaggerate the factual position but things as stand reveals that no person shall make investment in the companies which

lacks financial soundness and where there is remote chance of profit or to earn income. The expenditure towards interest on loan does not seem to lay out or expend wholly and exclusively for the purpose of making or earning income from the shares under Section 57(iii) of the Act. The reasoning given by the assessing officer substantially seems to be correct while disallowing deduction.

7. There is one other aspect of the matter. While

interpreting the provisions contained in Section 57(iii) of the Act, the tribunal or the Court has got ample power to pierce the veil. The Court may find out from the material on record with regard to bona fide and intention of the assessee while claiming benefit of Section 57(iii) of the Act. Every word of Section 57(3) of the Act should be given meaning.

1. Hon'ble supreme Court consistently held that the taxing statute should be construed strictly vide 2004 (10) SCC 201, State of West Bengal Vs. Kesoram Industries Ltd, AIR 2000 SC 109 Mathuram Agarwal versus State of M.P., (1999)7 SCC 106 Mysore Minerals Limited M.G. Road, Bangalore versus CIT, Karnataka, Bangalore.

2. It is no longer res integra that while interpreting statutory provisions, each and every word of the Act, every section and every chapter should be taken into account in reference to context. According to Maxwell any construction which may leave without affecting any part of the language of a statute should ordinarily be rejected. Relevant portion from Maxwell on the Interpretation of Statutes (12th edition page 36) is reproduced as under:

"A construction which would leave without

effect any part of the language of a statute

will normally be rejected. Thus, where an Act

plainly gave an appeal from one quarter

sessions to another, it was observed that

such a provision, through extraordinary and

perhaps an oversight, could not be

eliminated."

1. In 2006 (2) SCC 670, Vemareddy Kumaraswami Reddy and another Vs. State of Andhra Pradesh, their Lordship of Hon'ble Supreme Court affirmed the principle of construction and held that when the language of the statute is clear and unambiguous court can not make any addition or subtraction of words.

2. In AIR 2007 SC 2742, M.C.D. Vs. Keemat Rai Gupta and AIR 2007 SC 2625, Mohan Vs. State of Maharashtra, their Lordship of Hon'ble Supreme Court ruled that Court should not add or delete the words of a statute. Casus Omisus should not be supplied when the language of the statute is clear and unambiguous.

3. In AIR 2008 SC 1797, Karnataka State Financial Corporation Vs. N. Narasimahaiah and others, Hon'ble Supreme Court held that while construing a statute it can not be extended to a situation not contemplated thereby. Entire statue must be first read as a whole then section by section, phrase by phrase and word by word. While discharging statutory obligation with regard to take action against a person in a particular manner that should be done in the same manner. Interpretation of statute should not depend upon contingency but it should be interpreted from its own word and language used.

4. In (2000) 3 SC 485 (K.V. Shivakumar Kumar Vs. Appropriate Authority), Hon'ble Supreme Court has held that

equity or hardship are not relevant consideration for interpretation for taxing law.

1. In 2004 (10) SCC 201, State of West Bengal Vs. Kesoram Industries Ltd., Hon'ble Supreme Court held that taxing statute should be construed strictly. If a person sought to be taxed comes within the letter of law, he must be taxed. However, in case, he does not fall in taxing category, tax cannot be imposed. There is no room for any intendment. There is no equity about tax. There is no presumption as to tax. Nothing is to be read and nothing is to be implied.

2. In 1994 ITR (2006) 688 Sc, H.H. Lakshmi Bai Vs. Commissioner of Wealth-Tax, Hon'ble Supreme Court held that taxing statute in particular, have to be strictly construed and there is no equity in taxing provision.

3. In 2007 (3) SCC 668: Mahim Patram (P) Ltd Vs. Union of India, Hon'ble Supreme Court held that taxing statute should be strictly interpreted.

LIFTING OF VEIL

1. Accordingly, while considering a case to extend the benefit under Section 57(iii) of the Act, the effect of words, “wholly and exclusively for the purpose” may not be diluted. By using three words, i.e. “wholly”, “exclusively” and “purpose”, the legislature had made it mandatory to find out the reason behind investment. In case, the dominant purpose is not for making or

2. earning such income, then deduction under Section 57(iii) shall not be available and to ascertain the purpose, the courts may lift the veil.

2. In corporate law, the Courts have ample power to lift theveil. It is the liability of the companies to be fair in dealing withtax matter. Being a separate juristic personality, it is expectedthat the companies shall not conceal their income or to escapethe liability with regard to payment of tax. Lifting the corporateveil is to find out who is real person, beneficiary or in controllingthe position of the company. The doctrine of “lifting the veil” hasmarked a change and it is adopted whenever and wherever asituation warranted.

3. Lord Denning M.R. in Littlewoods Stores Vs. I.R.C.,(1969) 1 W.L.R. 1241 said:"The doctrine laid down in Salomon's case has to be watchedvery carefully. It has often been supposed to cast a veil over thepersonality of a limited company through which the courtscannot see. But that is not true. The courts can, and often do,draw aside the veil. They can, and often do, pull off the mask.They look to see what really lies behind. The legislature hasshown the way with group accounts and the rest. And thecourts should follow suit...."

4. One of the most important circumstance in which the veilhas been lifted is the cases of fraud or improper conduct of thepromoters. Where dummy companies were incorporated by apromoter and his family members to conceal profits and avoidtax liability, the separate entity of the company has beenignored by looking through the veil and identifying thoseindividuals who have deviced such method for their ownbenefits.

5. In Juggilal Kamlapat Vs. Commissioner of Income Tax, AIR 1969 SC 932=1969(1) SCR 988 it was found that three brothers who were partners in the assessee firm were carrying on the managing agency in a dominant capacity in the guise of a limited company. The court held that the corporate entity has to be disregarded if it is used for tax evasion or to circumvent tax obligation or to perpetrate fraud.

6. In C.I.T. Vs. Associates Clothiers Ltd., AIR 1963 Cal. 629 there was a sale by a company to another having some shareholders and the former company owning all shares in the latter. It was held that it would not

escape the liability of tax under the Income Tax Act by taking recourse to the concept of separate legal entity.

In view of above, the assessing authority has rightly tried to find out the dominant purpose with regard to investment of borrowed money in the sister concern possessing fractured financial body and rightly held that the investment in the firm running in deficit since several years cannot be held exclusively for the purpose to earn income.

FINDING

98. Form the material on record, it appears that the assessee under the present appeal and the assessees of the connected appeals had taken loan from one associate concern and invested in other associate concern of Sahara group. Majority of the fund was invested in those associate firm which were running in loss since several years. Loan was sanctioned without guarantee or agreement, amount is huge, as evident from following facts:-

Assesse Swapana

Loan taken from

Amount invested

Roy, Employee of

one sister concern

Rs. 54328808.47/

Sahara India

substantially

Assessment Year

invested in those

1996-97 sister concern who are running in loss

Assesse Ishtiaq Ahmad, Employee of Sahara India Assessment Year 1995-96 [ITA No. 23 of 2005]

Loan taken from one sister concern substantially invested in those sister concern who are running in loss

Amount invested Rs. 256861896/-

Assesse Mr. U.K.Bose, Employee of Sahara India Airlines Assessment Year 1994-95 [ITA No. 8 of 2005]

Loan taken from one sister concern substantially invested in those sister concern who are running in loss

Amount invested Rs. 052837216

Assesse Ishtiaq Ahmad, Employee of Sahara India Firm Assessment Year 1994-95 [ITA No. 22 of 2005]

Loan taken from one sister concern substantially invested in those sister concern who are running in loss

Amount invested Rs. 046214621

Assesse U.K.Bose, Employee of Sahara India Airlines Assessment Year 1996-97 [ITA No. 21 of 2005]

Loan taken from one sister concern substantially invested in those sister concern who are running in loss

Amount invested Rs. 146220000/-

Assesse U.K.Bose, Employee of Sahara India Airlines Assessment Year 1995-96 [ITA No. 20 of 2005]

Loan taken from one sister concern substantially invested in those sister concern who are running in loss

Amount invested Rs. 248776396/-

Assesse Ishtiaq Ahmad, Employee of Sahara India Assessment Year 1996-97 [ITA No. 31 of 2005]

Loan taken from one sister concern substantially invested in those sister concern who are running in loss

Amount invested Rs. 14622000/

Total Rs. Rs. 819860937.47/

It is strange that salary of Ishtiaq Ahmad and U.K.Bose is of few lacs, loan sanctioned without any guarantee and chance of return is remote and the investment of substantial amount is made in such sister firms which lacks financial backbone with remote chance to earn income.

1. From the discussion hereinabove and keeping in view the fact that the assessee in question collectively along with other employees borrowed the fund from sister concern and invested in other sister concern majority of which lacks financial viability and running in loss since several years there appears to be no doubt that assessee and her associates (connected appeals) had not invested wholly and exclusively for the purpose of earning income. The material on record reveals that purpose was not to earn profit but it was a colourable device to utilise the fund of one firm in other sister concern for the purpose of trade or business.

1. In view of above, questions are answered as under: 1. Theappellate court and tribunal had committed substantial

illegality by deleting addition with regard to interest on loan taken from company of Sahara Group and investing it in a sister concern was not expended exclusively for the purpose of earning income.

2. Keeping in view the facts and circumstances of the case and material on record assessee is not entitled to be benefited by principle of consistency and assessing officer had rightly assessed the income on the basis of return filed keeping in view the facts and circumstances of material on record.

2. Appeal is allowed accordingly. No order as to costs.

[Justice S.C.Chaurasia] [Justice Devi Prasad Singh]

Order date:-24.5.2010 kkb/madhu

IN THE HIGH COURT OF PUNJAB AND HARYANA ATCHANDIGARH.

1. W.T.A.No.55 of 2009 2. W.T.A.No.56 of 2009

Commissioner of Wealth-Tax, Hisar....Appellant

Versus

S/Sh.Nand Lal, Mohan Lal etc. legal heirs of Chiranji Lal, rs/o Mohalla Sainia, Hisar.

...Respondents

3.W.T.A.No.2 of 2010

Commissioner of Wealth-Tax, Hisar....Appellant

Versus

S/Sh.Mohan Lal, Nand Lal, legal heirs of Chiranji Lal, rs/o Mohalla Sainia, Hisar.

...Respondents

Date of Decision:-19.5.2010

CORAM:HON'BLE MR.JUSTICE ASHUTOSH MOHUNTA HON'BLE MR.JUSTICE MEHINDER SINGH SULLAR

Present:-Mr.Sanjeev Kaushik, Sr.Standing counsel for the appellant. Mr.Rajiv Sharma, Advocate for the respondents.

Mehinder Singh Sullar, J.

As identical questions of law and facts are involved in the aforesaid appeals, pertaining to the assessment years 1990-91, 1991-92 and 1992-93, having arisen out of the same impugned order, therefore, we propose to dispose of the same, vide this common judgment, in order to avoid the repetition. However, for facilitation, the crux of the facts has been extracted from Wealth Tax Appeal No.55 of 2009.

1. The epitome of the facts, culminating in the commencement of, relevant for disposal of present appeals and emanating from the record, is that, in pursuance of notification dated 23.5.1983, the land of the respondent-assessees Nand Lal, Mohan Lal etc. (for brevity “the assessees”) was acquired under the provisions of Land Acquisition Act, 1894 (for short “the LA Act”). Having completed all the codal formalities, the Land Acquisition Collector (hereinafter to be referred as “the LAC”) passed award No.2 on 7.5.1986. Being dis-satisfied with the compensation awarded by the LAC, the assessees filed the reference petition under section 18 of the LA Act and the civil Court enhanced the compensation at the rate of Rs.100/-per square yard, alongwith all statutory benefits, vide order dated 22.9.1990.

2. In the wake of regular first appeals by the landowners/assessees as well as by the State of Haryana, this Court assessed the market price of the acquired land at the rate of Rs.120/-per square yard, alongwith all statutory benefits under the L.A.Act. The matter is stated to be pending in the Hon'ble Supreme Court.

1. The revenue claimed that although the final payment of the enhanced compensation was actually received, during the financial year 1995-96, but since the assessees acquired the right to receive the compensation/enhanced compensation, during the relevant period of assessment years 1990-91, 1991-92 and 1992-93, so, the amount of compensation was liable to be added in their wealth, during the indicated

2. previous years, under the provisions of Wealth Tax Act, 1957 (hereinafter to be referred as “the W.T.Act”), . Therefore, the notices were issued to the assessees, to show cause, as to why the right to receive the compensation/enhanced compensation plus interest accrued thereon, be not treated as assets and wealth tax be not imposed, in this regard.

3. In pursuance of the show cause notice, the assessees filed the reply, in which, it was explained that the right to receive the enhanced compensation and accrued interest cannot be treated as assets, for the purpose of wealth tax. It was also claimed that since the matter of enhancement has not been finally decided, so, in any case, it cannot be included in the wealth of the assessees. It will not be out of place to mention here that the assessees stoutly denied all other allegations contained in the show cause notice and prayed for its reversal.

4. The explanation put forth by the assessees did not find favour and the Assessing Authority held that the right to receive the compensation from the State is a valuable right and included the amount of compensation

and interest in their assets, for the previous period of relevant assessment years, vide order dated 26.3.2002 (Annexure A1).

5. Aggrieved by the order (Annexure A1), the assessees filed the appeals before the Commissioner of Wealth Tax (Appeals). The first Appellate Authority has held that since no compensation was received during the financial years 1989-90 and 1990-91, so, no amount of compensation is taxable on this account for the assessment years 1990-91 and 1991-92 and deleted the addition of the enhanced compensation for these years. Hence, partly allowed the appeals, vide order dated 7.2.2008 (Annexure A2).

6. Aggrieved by the order (Annexure A2), the revenue filed the appeals, which were dismissed by the Income Tax Appellate Tribunal, vide order dated 23.1.2009 (Annexure A3).

7. The revenue still did not feel satisfied with the impugned order (Annexure A3) and filed the present appeals, raising the following substantial question of law for determination by this Court:

“Whether on the facts and circumstances of the case and in law, the Tribunal was right in holding that right of the assessee to receive compensation and interest accrued thereon is not liable to wealth tax without adjudicating upon the specific ground of appeal taken by the revenue that in view of the judgment of Hon'ble Supreme Court in the case of CWT vs. Smt.Anjamli Khan (187 ITR 345) AND Pt. Lakshmi Kant Jha Vs. Commissioner of Wealth Tax, Bihar and Orissa (90 ITR 97) such a right was includible in net wealth.”

That is how, we are seized of the matter.

1. We heard the learned counsel for the parties and have gone through the record with their valuable help.

1. As is evident from the record, the land of the assessees was acquired in pursuance of notification dated 23.5.1983. Having completed all the codal formalities, the LAC passed the award No.2 on 7.5.1986. The assessees received the final payment of enhanced compensation, during the financial year 1995-96. It is not a matter of dispute that since the case pertains to the previous assessment years 1990-91, 1991-92 and 1992-93, so, the same has to be decided, keeping in view of old definition of assets under the provisions of section 2(e) and not amended provisions of section 2(ea) of the W.T.Act, which was made applicable after 1.4.1993. Thus, the

2. facts of this case are neither intricate nor much disputed.

2. The main arguments of the learned counsel for the revenue that even mere right to receive the enhanced compensation of acquired land of the assessees was liable to be treated as assets and includible in the wealth tax returns of previous years of the assessees and that as the Tribunal held that mere right to receive the compensation and interest accrued thereon, was not liable to be included in their wealth tax returns, that too, without adjudicating the matter, therefore, the impugned order is bad in law, are neither tenable nor the observations of the Hon'ble Apex Court in cases Commissioner of Wealth Tax v. Smt.Anjamli Khan 187 ITR 345 and Pandit Lakshmi Kant Jha v. CWT [1973] 90 ITR 97, are at all applicable to the present controversy.

3. In Smt.Anjamli Khan's case (supra), the relevant period of assessment years 1957-58, 1958-59 and 1959-60 was in dispute. Kumar Amarendra Lal Khan (since deceased)-assessee owned vast agricultural properties, which, by virtue of the provisions of the West Bengal Estates Acquisition Act, 1953, came to vest in the State of West Bengal, whereby the assessee was entitled to receive compensation in respect of the lands. The mode of determination and payment of compensation has been prescribed under sections 16 and 17 read with section 23 of the said Act. The Wealth Tax Officer required the assessee to furnish particulars of the compensation due from the Government, but he was unable to furnish the same, but stated that his agricultural income from the lands used to be assessed at Rs.1,00,000/-per annum. Taking the net agricultural income at Rs.80,000/-and applying the provisions of section 17(1) of that Act, the Wealth-tax Officer estimated the compensation payable to the assessee and

after deducting therefrom the interim compensation already received by the

assessee, the amount of compensation was added to his assets. Although the

appeals preferred by the assessee were dismissed by the Appellate Assistant

Commissioner, but the further appeals filed by the assessee were allowed by

the Wealth Tax Tribunal. The question of law raised in the reference

petition was also answered in favour of the assessee by the Calcutta High

Court.

14. Having interpreted the definition of assets under old section 2

(e) of the W.T. Act relatable to the assessment years of 1957-58, 1958-59

and 1959-60 and after considering law in the case of Pandit Lakshmi Kant

Jha's case (supra), it was ruled by the Hon'ble Supreme Court as under:

“For the above reasons, we allow these appeals, set aside the order of the High Court and answer the question referred to the High Court by the Tribunal in the following manner:-The Tribunal ought to have held that the value of the assessee's right to receive compensation under the provisions of the West Bengal Estates Acquisition Act as on the relevant valuation dates had to be included in the assessee's net wealth for the assessment years 1957-58, 1958-59 and 1959-60. However, for the reasons stated above, the amounts of compensation determined by the Wealth-tax Officer at Rs.3,25,000, Rs.3,00,000 and Rs.3,00,000, respectively, cannot be included in the net wealth; but only the value, as on the relevant valuation dates, of the assessee's right to receive compensation estimated in accordance with proper principles can be included in the net wealth of the assessee. What such estimated value should be will have to be decided by the Tribunal while disposing of the matter conformably to our judgment.

In doing so, the Tribunal should give both parties an opportunity to put forward their respective contentions. The appeals are disposed of accordingly. In the circumstances, however, we make no order as to costs. Appeals allowed.”

1. That means, the Hon'ble Apex Court in Smt.Anjamli Khan and Pandit Lakshmi Kant Jha's cases supra) decided the matter under the West Bengal Estate Acquisition Act, 1953 and Bihar Land Reforms Act, 1950 and observed that the provisions of both the enactment were identical and interpreted the law as per definition of assets under old section 2(e) of the W.T.Act.

2. Possibly, no one can dispute about the law laid down in the aforesaid judgments but the same are inapplicable to the facts of the present case, because both the learned counsel for the parties acknowledged that the provisions of Bengal and Bihar Acts are not at all comparable to the provisions of compulsory acquisition under L.A.Act (Central Act).

3. In the instant case, admittedly, the land of the assessees was acquired under section 4 of the L.A.Act and the compensation was paid, during the relevant period of assessment year 1995-96. The L.A.Act was passed at the time when India was not independent sovereign State and its provisions were designated to compulsory acquire the land by the State

exercising the power of eminent domain to serve the public purpose. In order to decide the real controversy between the parties, a glance of provisions of L.A.Act is essential.

4. According to section 3(a), the expression “land” includes benefits to arise out of land, and things attached to the earth or permanently

fastened to anything attached to the earth. Section 3(b) provides that the expression ”person interested” includes all persons claiming an interest in compensation to be made on account of the acquisition of land under this Act; and a person shall be deemed to be interested in land if he is interested in an easement affecting the land.

1. Sequelly, the State is enjoyed to comply with the statutory requirements contained in sections 4 and 6 of the L.A Act. Section 4 lays down the intention/declaration of the State to acquire the land, while under section 6, the public purpose gets crystalized and becomes compulsive. Thereafter, the State is entitled to authorize the Land Acquisition Officer to proceed with the acquisition of the land and to make the award.

2. Section 11-A of the L.A.Act prescribes limitation to make the award within two years from the last date of the publication envisaged under section 6. Not only that, in an appropriate case, where the Govt. needs possession of the land urgently, it would exercise the power under section 17(4) and dispense with the enquiry under section 5A. Thereon, the State is entitled to issue notice to the parties under Section 9 and on expiry of fifteen days, the State is entitled to take immediate possession even before the award could be made. Otherwise, it would take possession after the award under section 12 is made.

3. Likewise, section 16 of the L.A. Act posits that “when the Collector has made an award under section 11, he may take possession of the land, which shall thereupon vest absolutely in the Government, free from all encumbrances.

4. The LAC is required to assess the market value of the land not on the basis of actual value but he has to assess it within the constraint of

section 23 of the L.A.Act and not otherwise. The matters depicted in section 24 have to be neglected in determining the compensation. Although a person interested may approach the appropriate Court for the determination, with regard to the measurement of the land, amount of compensation, the person, to whom, it is payable or the apportionment of the compensation among the persons interested under sections 18 and 30 of the L.A.Act, but they are legally debarred to approach the regular Civil Court to redress their grievances under section 9 CPC, as has been held by the Hon'ble Apex Court in cases State of

Bihar v. Dhirendra Kumar and others AIR 1995 Supreme Court 1955; Laxmi Chand and others v. Gram Panchayat, Kararia and others AIR 1996 Supreme Court 523 and Commissioner, Bangalore Development Authority v. K.S.Narayan AIR 2006 Supreme Court 3379.

1. Therefore, the State has absolute sovereign power to compulsorily acquire the land and the landowners are deeply helpless in this respect. The LAC has to assess the market value within the constraint of sections 23 and 24 of the L.A.Act. Not only that, even in the matter of apportionment of the compensation, an interested person, who is not an absolute owner of the acquired land, such as tenant, lessee or otherwise interested in the land, can claim his share and the compensation of the acquired land can be apportioned amongst all the persons interested in the acquired land.

1. As per the scheme of the LA.Act, if landowner and person interested are not satisfied with the award of the LAC, they have the statutory right under sections 18 and 30 to file reference petition for enhancement/apportionment of compensation to be determined by the Civil Court. The determination of adequate compensation assessed by the civil

2. Court can further be challenged in appeal in the High Court and then to Supreme Court, either by the landowner, person interested or by the State. It is not always true that the market value assessed by the civil Court would be upheld by the High Court. The Hon'ble Supreme Court can still reverse the order of the High Court in this connection. Thus, the apportionment of compensation amount of landlords and person interested may vary from stage to stage, during the course of final determination of compensation by the Courts. Even if the appeal filed by the State was allowed in its entirety either by the High Court or by the Supreme Court, then the right to payment of enhanced compensation would have fallen altogether. In such a situation, if the entire amount of compensation, as determined by the civil Court or by the High Court, as the case may be, is added in the wealth of landowner in the assessment year, on the basis of mere right to receive (without actual payment), which may subsequently be reversed, in that eventuality, it will give rise to more complications. Meaning thereby, under these circumstances, it cannot possibly be saith that the mere right of the assessees to receive enhanced compensation is absolute, but this right is speculative and inchoate. Therefore, we are of the considered

view that since the provisions of L.A.Act are remarkably different than that of Bengal and Bihar Acts, so, the observations of Smt.Anjamli Khan and Pandit Lakshmi Kant Jha's cases (supra) would not come to the rescue of the revenue in this relevant behalf.

2. Not only that, an identical question arose before the Hon'ble Apex Court in case Commissioner of Income-Tax, West Bengal-II v. Hindustan Housing and Land Development Trust Ltd., [1986] 161 ITR 524, in which, certain lands belonging to the respondent company were

compulsorily acquired by the State Government. The arbitrator awarded the

compensation. Thereupon, the State Government preferred an appeal to the

High Court. Pending the appeal, the State Government deposited the

amount in the court being the additional amount payable under the award

and the company was permitted to withdraw that amount only on furnishing

a security bond for refunding the same in the event of the appeal being

allowed. The question raised was whether a mere right to receive

compensation could be taxed on the ground that it became payable pursuant

to the arbitrator's award. The Tribunal held that the amount did not accrue

to the respondent as its income during the relevant previous year ending on

March 31,1956, and was, therefore, not taxable in the assessment year

1956-57. On a reference, the High Court affirmed the decision of the

Tribunal. In the wake of appeal, the Hon'ble Supreme Court ruled as under:

“Held, affirming the decision of the High Court, that although the award was made by the arbitrator on July 29,1955, enhancing the amount of compensation payable to the respondent, the entire amount was in dispute in the appeal filed by the State Government. And the dispute was regarded by the court as real and substantial because the respondent was not permitted to withdraw the amount deposited by the State Government without furnishing a security bond for refunding the amount in the event of the appeal being allowed. There was

no absolute right to receive the amount at that stage. If the appeal was allowed in its entirety, the right to payment of enhanced compensation would have fallen altogether. The extra amount of compensation of Rs.7,24,914 was not income arising or accruing to the respondent during the previous year relevant to the assessment year 1956-57.”

1. Therefore, we are of the considered opinion that the law laid down in the aforesaid judgment is fully applicable in the instant case in this relevant connection.

2. Faced with this situation, an attempt has been made on behalf of the revenue to contend that since the Hon'ble Apex Court has distinguished the Hindustan Housing and Land Development Trust Ltd's case (supra) in subsequent case Commissioner of Income-Tax v. Ghanshyam (HUF) [2009] 315 ITR 1 (SC), so, the same is inapplicable in this case. The argument, at the first instance, appeared somewhat attractive, but when it was analyzed, in regard to inherent and remarkable difference in the relevant provisions of W.T.Act and Income Tax Act, then, we are of the considered opinion that this contention is again not tenable as well. The Hon'ble Supreme Court in Ghanshyam's case (supra) has considered the judgment in Hindustan Housing and Land Development Trust Ltd's case (supra) vis-a-vis the insertion of section 45(5) of the Income Tax Act w.e.f 1.4.1988, having an overriding effect and it was observed as under:

“The question is : whether the judgment of this Court in Hindustan Housing would apply to the present case which arises under the Income-tax Act, 1961? At the outset, it may be noted that the judgment of this Court in Hindustan Housing was delivered on July 29,1986. It was prior to April 1,1988, when Section 45(5) stood incorporated by the Finance Act, 1987, with effect from April 1,1988. Further, the judgment of this Court in Hindustan Housing has been given in respect of assessment year 1956-57 under the Indian Income-tax Act, 1922, whereas, in the present case, we are concerned with the 1961 Act, which defines the word "transfer" in much wider sense under Section 2(47). Lastly, for the reasons given hereinafter, particularly in the context of introduction of Section 45(5) of the 1961 Act with effect from April 1,1988, a totally new scheme stood introduced keeping in mind cases of compulsory acquisition under the 1894 Act under which compensation is payable at multiple stages and amounts stand withdrawn by the assessee-claimants and used by the assessee(s) for several years, during which litigation is pending. It is in the context of Section 45(5) that we need to decide the year of taxability. It is significant to note that Section 12B of the 1922 Act did not contain specific reference to compulsory acquisition as contained in Section 2(47) of the 1961

Act. Therefore, in our view, the judgment of this Court in Hindustan Housing is not applicable to the present case.”

28. Be that as it may, as the learned counsel for the revenue has

fairly acknowledged that there is no such parallel amendment in the

W.T.Act as compared to section 45(5) of the Income Tax Act, therefore, the

observations of Hindustan Housing and Land Development Trust Ltd's case

(supra) “mutatis mutandis” are applicable to the present controversy and

complete answer to the problem in hand under the W.T.Act. In this view of

the matter, it is held that simple right to receive compensation/enhanced

compensation cannot be treated as wealth of the assessees and not liable to

be includible in the previous assessment years. The same view was

reiterated by this Court in case Commissioner of Wealth Tax v.

Dr.M.R.Sapra WTA Nos.12 and 13 of 2004, decided on 5.5.2010.

29. There is another aspect of the matter, which can be viewed

from a different angle. The Tribunal has dismissed the appeals of the revenue, vide impugned order (Annexure A3), the operative part of which

is as under:

“2.1 In the assessment years at hand, the AO had included the right to receive enhanced compensation and interest accrued thereon notwithstanding the fact that no compensation was received and the matter was in dispute. The learned CIT (Appeals) concluded that the right of the assessee was inchoate, in as much as it was not certain whether such amount will be received or not. The whole matter depended upon the outcome of the appeal. Both the parties agreed that such an inchoate right did not represent any wealth in presenti and, therefore, nothing could be brought to tax as wealth on the mere expectation that some amount may be received in future. Accordingly, it is held that there was no error in the order of the learned CIT (Appeals), which required correction from our side.

3. In the result, both the appeals are dismissed.”

30. Meaning thereby, the Tribunal has decided the matter on the

agreement of both the parties. Once the Tribunal has decided the case with

the consent of the parties, then the very maintainability of the appeals by

the revenue is doubtful and the revenue cannot possibly be heard to say and

is estopped from claiming, that the impugned order (Annexure A3) is illegal

in this respect. No other illegality in the impugned order has been pointed

out by the learned counsel for the revenue.

1. No other point, worth consideration, has been urged or pressed 2. In the light of the aforesaid reasons, for all said and done and

by the learned counsel for the parties.

thus seen from any angle, the Tribunal has rightly held that mere right to receive enhanced compensation did not represent any wealth and legally directed its deletion. Therefore, we are also of the considered view that such right, which would depend upon the outcome of the appeal, is not absolute right. The mere right to receive compensation/enhanced compensation is variable, speculative and inchoate. Such right cannot be treated as wealth and includible in the previous returns of the assessees as such. Hence, the question of law posed in these appeals is answered against the revenue and in favour of the assessees.

33. For the reasons recorded above, as there is no merit, therefore, the instant appeals are hereby dismissed with no order as to costs.

(Mehinder Singh Sullar) Judge

(Ashutosh Mohunta) Judge

19.5.2010 AS

Whether to be referred to reporter? Yes/No