FIVE SUPREME COURT’S CASES

compiled by

Dr. Vinod K. Singhania

CIT v. General Insurance Corpn. [2006] 156 Taxman 96

In this decision, the Court has said that the issue of bonus shares by capitalization of reserves is
merely a reallocation of company’s funds. There is no inflow of fresh funds or increase in the
capital employed, which remains the same. If that be so, then it cannot be held that the company
has acquired a benefit or advantage of enduring nature. The total funds available with the
company will remain the same and the issue of bonus shares will not result in any change in the
capital structure of the company. Issue of bonus shares does not result in the expansion of capital
base of the company. Thus, the expenditure on issuance of bonus shares is revenue expenditure.

Polyfex India (p.) Ltd. v. CIT [2002] 124 Taxman 373 (SC)

Section 41(1) is applicable if the following conditions are satisfied—

Condition one - In any of the earlier years a deduction was allowed to the taxpayer in respect of
loss, expenditure (revenue or capital expenditure) or trading liability incurred by the assessee.
Condition two - During the current previous year, the taxpayer—
a. has obtained a refund of such trading liability (it may be in cash or any other manner); or
b. has obtained some benefit in respect of such trading liability by way of remission or cessation
thereof (“remission or cessation” for this purpose includes unilateral act of the assessee by
way of writing off of such liability in his books of account).
If the above two conditions are satisfied, the amount obtained by such person (or the value of
benefit accruing to him) shall be deemed to be profits and gains of business or profession and
accordingly chargeable to tax as the income of that previous year.
Getting refund when the case is still pending - For the purpose of Condition two (a) (supra), there
may (or may not) be any remission or cessation of trading liability. Examine the case given below
—
An assessee pays excise duty and claims the same as deduction in 1999-2000. Later on in 2005-
06, he gets a refund from the department by obtaining a favourable verdict from the High Court.
The department files an appeal in the Supreme Court and the matter is still pending.


Dr. Vinod K. Singhania
In this case as the above conditions are satisfied, the amount refunded to the assessee is taxable in
the previous year 2005-06. It may be noted that the aforesaid Condition two is applicable in any
of the following two situations—
Situation (a) - If the assessee (after claiming deduction in any of the earlier years) has obtained
any amount in respect of such expenditure. In this case there may (or may not be) any remission
or cessation of trading liability.
Situation (b) - If the assessee (after claiming deduction in any of the earlier years) has obtained
some benefit in respect of such trading liability by way of remission or cessation thereof.
In other words, where the expenditure is actually incurred and the deduction has been given in the
assessment for earlier period, the assessee is liable to disgorge that benefit as and when he obtains
refund of the amount so paid. Once the assessee gets back the amount (which was claimed and
allowed as business expenditure during the earlier year), the deeming provision in section 41(1)
comes into play and the amount of refund will be chargeable to tax under section 41(1) as
business income even if the person giving refund has not given any remission or cessation of his
liability.

CIT v. Raja Benoy Kumar Sahas Roy [1957] 32 ITR 466 (SC)

Bhagwati, J. laid down the following principles to serve as a guide in the determination of the
scope of the terms “agriculture” and “agricultural purposes”:
Basic operations - Prior to germination, some basic operations are essential to constitute
agriculture. The basic operations would involve expenditure of human skill and labour upon the
land itself and not merely on the growth from the land. Some illustrative instances of basic
operations are tilling of land, sowing of the seeds, planting, and similar kind of operations on the
land.
Subsequent operations - Besides the basic operations, there are certain subsequent operations,
which are performed after the produce sprouts from the land. Illustrative instances of subsequent
operations are weeding, digging the soil around the growth, removal of undesirable undergrowths
and all operations which foster the growth and preserve the same, not only from insects and pests
but also from degradation from outside, tending, pruning, cutting, harvesting and rendering the
produce fit for the market. Mere performance of these subsequent operations on the products of
the land (where such products have not been raised on the land by the performance of the basic
operations described above) would not be enough to characterise them as agricultural operations.
Where, however, the subsequent operations are performed in conjunction with and in
continuation of the basic operations, the subsequent operations would also constitute part of the
integrated activity of agriculture.
Agriculture not merely includes food and grains - Agriculture does not merely imply raising of
food and grains for the consumption of men and animals; it also includes all products from the
performance of basic as well as subsequent operations on land. These products, for instance, may
be grain or vegetable or fruits including plantation and groves or grass or pasture for consumption
of beasts or articles of luxury such as betel, coffee, tea, spices, tobacco, etc., or commercial crops
like cotton, flax, jute, hemp, indigo, etc. All these are products raised from the land and the term
“agriculture” cannot be confined merely to the production of food and grains products for human
beings but must be understood as comprising all the products of the land which have some utility
either for consumption or for trade and commercial asset would also include forest products such
as timber, sal and piyasal trees, casuarina plantation, tendu leaves, horra nuts, etc.
Some connection with land not sufficient - The mere fact that an activity has some connection
with or is in some way dependent on land is not sufficient to bring it within the scope of the term
“agriculture”. For instance, breeding and rearing of livestock, dairy farming, cheese and butter-
making and poultry farming would not by themselves be agricultural purposes.

CIT v. B.C. Srinivasa Setty [1981] 5 Taxman 1 (SC)

The assessee transferred a self-generated goodwill for a consideration. The Assessing Officer
included the sale consideration in the income of the firm on account of capital gain. The Tribunal,
on appeal, held that the impugned sale of the goodwill did not attract tax on capital gain under
section 45. The High Court, on reference under section 256(1), sustained the Tribunal's order.
On further appeal, the Supreme Court held –
1. Goodwill denotes the benefit arising from connection and reputation. No business commenced
for the first time possesses goodwill from the start. It is generated as the business is carried on
and may be augmented with the passage of time. The value of goodwill may, therefore, fluctuate
from one moment to another depending on changes in the reputation of the business. It is affected
by everything related to the business. There can be no account in value of the factors producing
goodwill. It is also impossible to predicate the moment of its birth. It comes silently into the
world, unheralded and unproclaimed and its impact may not be visibly felt for an undefined
period. Imperceptible at birth, it exists enwrapped in a concept, growing or fluctuating with the
numerous imponderables pouring into, and affecting, the business. Undoubtedly, it is an asset of
the business, but what is to be determined is whether it is an asset contemplated by section 45,
which charges the profits or gains arising from the transfer of capital asset to tax.
2. The asset must be one which falls within the contemplation of section 45. It must bear that
quality which brings section 45 into play. All transactions encompassed by section 45 must fall
under the governance of its computation provisions. A transaction to which those provisions
cannot be applied must be regarded as never intended by section 45 to be the subject of the
charge. Thus, inference flows from the general arrangement of the provisions in the Act in which
the charging section and the computation provisions together constitute an integrated code.
Ordinarily, the operation of the charging provision cannot be affected by the construction of a
particular computation provision. But the question here is whether it is possible to apply the
computation provision at all if a certain interpretation is pressed on the charging provision.
3. The mode of computation and deductions set forth in section 48 provide the principal basis for
quantifying the income chargeable under the head "Capital gains". What is contemplated under
section 48 is an asset in the acquisition of which it is possible to envisage a cost. The intent goes
to the nature and character of the asset, that it is an asset which possesses the inherent quality of
being available on the expenditure of money to a person seeking to acquire it. None of the
provisions pertaining to the head "Capital gains" suggests that they include an asset in the
acquisition of which no cost at all can be conceived. Yet there are assets which are acquired by
way of production in which no cost element can be identified or envisaged. It is apparent that the
goodwill generated in a new business has been so regarded. In such a case, when the asset is sold
and the consideration is brought to tax, what is charged is the capital value of the asset and not
any profit or gain.
4. Therefore, the goodwill generated in a newly commenced business cannot be described as an
"asset" within the term of section 45, and, therefore, its transfer is not subject to income-tax under
the head "Capital gains".
Note - It may, however, be noted that the aforesaid ruling of the Supreme Court has been
superceded by the Finance Act, 1994. The amended law is applicable in the case of transfer
of following self-generated assets –
Category one - Self generated asset: Goodwill of business, right to manufacture any article,
right to carry on a business.
Category two - Self generated asset: Tenancy rights, route permits, loom hours, trade marks,
brand names, associated with a business.
In these two cases, cost of acquisition will be zero and capital gain will be chargeable to tax.
In the case of transfer of any other self-generated capital asset, the above Supreme Court
ruling is still applicable and on transfer of such other asset, capital gain is not chargeable to
tax.

Shiela Kaushish v. CIT [1981] 7 Taxman 1 (SC)

Standard rent is the maximum rent which a person can legally recover from his tenant under a
Rent Control Act. The Supreme Court has observed in this case that a landlord cannot reasonably
expect to receive from a hypothetical tenant anything more than the standard rent under the Rent
Control Act. This rule is applicable even if a tenant has lost his right to apply for fixation of the
standard rent. This rule is also applicable to the owner himself. These judgments make it clear
that if a property is covered under the Rent Control Act, its reasonable expected rent cannot
exceed the standard rent (fixed or determinable) under the Rent Control Act.