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DIRECT TAXES
1.Will an incorrect interpretation of accounts by theAssessing Officer be taken as a valid ground to re-open assessment after the expiry of four years fromthe end of the relevant Assessment year?
Amiya Sales and Industries and Another v. Assistant Commissioner of Income Tax and others (2005) 274 ITR 25 (Cal.-HC) Decision:
Once the assessee discloses all the material facts at the time of assessment, the failure on the part of the Assessing officer to correctly interpret the accountsleading to excessive relief will not enable him to re-openthe assessment.
Due to incorrect interpretation of accounts by theAssessing Officer the assessee got a benefit of carry for-ward loss of approximately Rs. 34 Lakhs, which wasadjusted in the subsequent years. The above-mentionedassessment was made under section 143(3). After theexpiry of four years from the end of the relevant assess-ment year such assessment was sought to be re-openedunder clause (c) of Explanation 2 to section 147 whichstates that where an assessment has been made but incomechargeable to tax has been under assessed, such incomeshall be deemed to be income-escaping assessment.Proviso to section 147 states that where the assessment isdone under section 143(3) no action can be taken under section 147 after the expiry of four years from the end of relevant assessment year, unless income has escapedassessment by the reason of failure on the part of theassessee to disclose fully and truly the material facts nec-essary for his assessment for that assessment year.Explanation 2 to section 147 of the Act, which containsthe words “for the purpose of this section”, should beread in conjunction with section 147. This reveals thatthe conditions precedent for reopening assessment aslaid down in section 147 have to be complied with. Thismeans that even if the income of the assessee is under assessed it will not be considered as income escapingassessment unless one of the conditions under proviso tosection 147 (for example, failure on the part of theassessee to disclose fully and truly all material facts nec-essary for Assessment) is satisfied.It was held that there was no failure on the part of theassessee to disclose fully and truly the material facts. Thefailure on the part of the Assessing Officer to correctlyinterpret the accounts of the assessee leading to exces-sive relief cannot be a ground for re-opening the assess-ment. The Assessing Officer who sought to re-open suchassessment was not permissible under section 147 of theAct to assume jurisdiction. The order under section 147was quashed.
Note:
This case establishes the principle that once theassessee discloses all the material facts at the time of assessment, the responsibility to scrutinize the books of account and other material in a proper manner shifts tothe Assessing Officer. If due to his failure to verify theaccounts properly, even if excessive relief is given to theassessee the assessment cannot be re-opened.
2.Whether the gratuity liability of the transferor of thebusiness related to the period of service under trans-feror, discharged by the transferee be considered as acapital expenditure in the hands of the transferee?
Sree Akilandeswari Mills Private Limited v. DeputyCommissioner of Income-Tax [2005] 274 ITR 1 (Mad.- HC) Decision:
Discharge of the gratuity liability, transferred to the purchaser of the business, as part of the consider-ation is a capital expenditure.
The appellant hereinafter referred to, as an “assessee”entered into an agreement with its holding company. As per the agreement a textile unit of the holding companywas transferred to the assessee. The services of theemployees working in the textile unit were continued andthe agreement also protected the conditions of service of workmen taken over by the assessee. The possession of the unit was given on November 22, 1982. During theAssessment year 1988-89 the assessee company claimeda deduction of the gratuity payment made to the workerswho had retired during the previous year.The Assessing Officer held that the liability towards the payment of gratuity to the employees, related to the period of service rendered by the employees to the trans-feror could not be claimed as business expenditure in the
LEGAL DECISIONS
—
Mukta Kathuria
and
Smita Mishra
THE CHARTERED ACCOUNTANT
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JUNE 2005
The authors are Executive Officers in the Institute
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hands of the assessee company and that the assesseecompany is entitled to claim deduction of part of the sum.The Tribunal upheld the disallowances. The matter wentin an appeal to the High Court.The appeal was dismissed by the High Court. It was heldthat the transferor had transferred the then gratuity liabil-ity of the employees of the textile unit to the assessee.The sale consideration of such unit was calculated after taking into account such liability, as ascertained by theActuarial valuation. Thus the said gratuity liability was a part of the sale consideration, which was discharged later by actual payment by the assessee to the employees insubsequent years. Hence, it was a capital expenditure.
Note:
Payment of gratuity due to the employees consti-tutes part of the expenses towards remuneration of employees and hence constitutes revenue expenses in thehands of the employer. However, if the liability towards such gratuity is transferred to another person as a part of sale consideration, the payment of such liability by the purchaser will be capital expenditure.
3.Whether the compensation received by the bottlingcompany for destruction of Coca Cola bottles conse-quent upon bar by the Government be taxable as cap-ital receipt or revenue receipt?
CIT v. Srikrishna Bottlers P. Ltd.[2005] 274 ITR 11(A.P.-HC) Decision
: Bottles constitute plant in the hands of bottling companies and are entitled to depreciation. The com- pensation received on their destruction will constituterevenue receipt.
The Coca-Cola concentrate, which is used in the manu-facture of the soft drinks, was imported by the assessee.For this purpose the assessee procured bottles, which bore the trademark embossed on them. In a particular year the Government prohibited the use of concentratesmanufactured by the Coca Cola concentrates. Due to thisall the embossed bottles lying in stock with the assessee became useless. In the meantime, the Coca ColaCorporation made an offer to these bottling companies.According to this offer compensation was to be givenonly in respect of those bottles lying with the bottlers,which were destroyed, under supervision of the CocaCola Corporation after counting the bottles in the fac-tory. Compensation was to be paid on pro-rata basis onthe sales reported during the last full year of operation inIndia. The assessee claimed that such amount i.e Rs.5,46,000 was a capital receipt and thus not taxable. Theassessee also claimed depreciation under the then section32 (1) (ii) of the Income tax Act, 1961.The Assessing Officer rejected the claim of assesseeregarding depreciation but the Tribunal allowed it. TheIncome tax Officer accepted the contention of the assesseethat the compensation received was a capital receipt.However, the Commissioner (Appeals) was of the opinionthat the compensation received was directly related to the bottles, which were destroyed by the Coca ColaCorporation and thus the deduction of depreciation under section 32 (1)(ii) should be set off against such compensa-tion and the balance should be allowed as a deduction. TheTribunal held that the compensation received did not con-stitute a revenue receipt and thus not taxable.On Appeal to High Court it was held that the bottles andshells constituted plant and thus depreciation was admis-sible under section 32 (1)(ii) of the Income Tax Act for the Assessment year 1979-80. It was further held that theassessee was doing business on behalf of the AmericanCompany in India and therefore the compensationreceived by it was chargeable to income tax and was to betreated as revenue receipt
. Note:
This case establishes a principle that where anassessee purchases bottles and embosses the trademark of the soft drink company on the bottles they constitute plant and they cannot be utilized for any other purpose. Depreciation is allowable on the same and any compen- sation received on their destruction is chargeable under section 28.
4.Whether the notice for assessment served at the reg-istered office and not at the principal place of busi-ness is a valid notice?
India Glycols Ltd. And another v. Commissioner of Income Tax and others [2005] 274 ITR 137 (Cal.-HC) Decision:
The principal place of business to whichnotice is to be sent under section 124 may or may not bethe registered place of business.
As per section 124 of the Income Tax Act, 1961 anassessee cannot be compelled to file its return of incomewith the assessing Officer within whose jurisdiction theassessee does not have its principle place of business.The place from where all the business activities are con-trolled is treated as Principal place of business, whichmay or may not be the registered place of business.The assessee had its principal place of business atCalcutta. The factory and the registered office of theassessee were at Moradabad. Since inception assesseefiled its income tax return at Calcutta. The assesseereceived a notice at Moradabad office to file a return inMoradabad as it has registered office in Moradabad. Theassessee filed a writ petition in Allahabad High Courtagainst this notice. The Allahabad High Court passed anorder by which the Commissioner of Lucknow wasdirected to decide the question of jurisdiction with regardto filing of returns. The Commissioner of Lucknow held
THE CHARTERED ACCOUNTANT
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JUNE 2005
that the Assessing Officer at Moradabad had jurisdictionto assess the assessee. Even after such order the officialsat Moradabad did not take any follow up action to get thereturn filed by the assessee. No action was taken up totwo years until a writ petition was filed in the CalcuttaHigh court.The Calcutta High Court held that the assessee stated thatthe Income tax returns were filed in Calcutta, which is its principal place of business. The assessee had further statedthat it had a registered office in Moradabad and also had branch offices at various places. The permanent Accountnumber (PAN) was allotted to the assessee in Calcutta.The Court held that the findings of the Commissioner of Lucknow were not legally tenable, as it had not taken intoaccount the facts stated by the assessee. The assessee hadits place of business within the meaning of section 124 inCalcutta. The notice and order were not valid
. Note:
The words “ the principal place of business” havemany connotations. Even the word “address” given inclause 17 of Form no. 3CD has to be construed appro- priately. This concept assumes importance in the context of jurisdiction of Assessing Officers to make assessment.
5.Whether the part of the excess money (received by thebank from the Insurance Company on devaluation of rupee) paid to the assessee by the bank, be consideredas business income or casual and non-recurringreceipt?
CIT v. Swastika Metal Works [2005] 274 ITR 280(Punj. & Har. -HC) Decision:
The portion of currency fluctuation gainreceived by the assessee as a result of settlement betweenthe parties is a casual receipt and not a trading receipt if the value of such lost goods is neither claimed by theassessee nor allowed in any assessment year.
The Assessee, being a registered firm was engaged in the business of manufacturing and sale of brass, zinc and cop- per sheets. The assessee placed an order for the purchaseof copper ingots with M/s Ore and Chemical Corporation, New York through an agent in Bombay. The paymentwas to be made in dollars. For the purpose of making pay-ment in New York the assessee opened a letter of creditwith a Mercantile Bank Ltd. in Delhi. The goods were dis- patched and the payment was made by the MercantileBank against the delivery of documents of title along withthe bill of exchange, which was drawn upon the assesseeand endorsed in favour of the bank in the terms of the let-ter of credit. The bank presented the bill of exchange,which was payable after two months. In the meantime,hostilities broke between India and Pakistan. The cargo of the steamer travelling from New York to India viaKarachi was confiscated by the Pakistan Government.After the due date, the Bank presented the bill of exchange through notary public and the assessee paid aminimal amount of Rs. 30,000. The cargo was also cov-ered by an insurance policy. The Bank filed a claim for payment of insurance money. The claim of the bank wasaccepted by the Insurance Company and the amountspecified in the Insurance policy was paid to the bank.Due to devaluation of the rupee the Bank received Rs.8,60,217.88 as against the amount of Rs.4, 99,063.00 paid by the Bank to the supplier. When assessee came to knowabout this, he demanded the excess amount received bythe Bank. After the bank refused the demand the assesseefiled a suit against the bank in Delhi High Court. As per the order of the High Court the assessee received a sum of Rs. 1,35,000 from the Bank.The amount received by the assessee from the bank wastreated as business income under section 41(1) by theAssessing Officer. The decision was confirmed by theAppellate Assistant Commissioner but the Tribunaldeleted it.On a reference to the High Court it was held that the valueof goods lost was not claimed by the assessee and theAssessing Officer also did not make any allowance inrespect of lost goods in any assessment year. Theamount, which represents the cost of goods, was paid bythe bank, which was reimbursed by the InsuranceCompany. The benefit of devaluation of rupee belongedto the bank and not to the assessee as the relationship of the assessee with the bank was only that of creditor anddebtor. The amount received by the assessee as result of settlement between the parties was nothing more than acasual receipt and not a trading receipt.
Note:
In CIT v. Tata Locomotive and Engineering Company Ltd. (1966) 60 ITR 405 (SC) the Apex Court laid down the principle that for bringing currency gainsto tax, the intention with which the currency balance isheld by the assessee is the guiding factor.
Indirect Taxes
1.Can an appeal relating to demand of duty be sus-tained when department did not file appeal againstan earlier order of the Tribunal which decided thesame issue qua the parties for the same period?
Supdt. of Central Excise v D.C.I. Pharmaceuticals Pvt. Ltd. 2005 (181) E.L.T. 189 (S.C.) Decision:
An appellant cannot agitate an issue collater-ally when he has not preferred an appeal from the deci- sion of the Tribunal in the related matter for the same period.
In the instant case a demand was raised by the departmentdenying the assessee the exemption under Notification
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