UNIT 20 LEADING CASES DECIDED BY Leading Cases

Decided by
SUPREME COURT Supreme Court

Structure
20.0 Objectives
20.1 Introduction
20.2 Leading Cases of Supreme Court
20.2.1 Analysis of Bharat V. Patel Judgment, 2018 (Income from Salaries)
20.2.2 Surya Roshni Ltd Vs. EPFO, 2019 LLR 339 (Provident Contribution on all
allowances)
20.2.3 CITVs. Podar Cement (P) Ltd (House Property)
20.2.4 Universal Plast Ltd. Vs. CIT (Income Earned by the Assessee by Leasing
out Assets of Business)
20.2.5 Shivakumar Kheny (HUF) v. ITOITA No. 792/Bang/2019 (Capital Gain)
20.2.6 CIT vs. O. K. Arumugham Chettiar & Anr (Income from other sources)
20.2.7 CIT v. M.R. Doshi 211 ITR 1 (Clubbing of Income)
20.2.8 Quoting Aadhaar Mandatory for Filing Income Tax Returns and PAN
Application
20.3 Let Us Sum Up
20.4 Key Words
20.5 Terminal Questions/Exercises

20.0 OBJECTIVES
After studying this unit, you should be able to:

• understand different cases of Supreme Court relating to different heads

of Income tax; and
• understand the provisions of Income tax on the basis of the judgement
given on such cases by the Supreme Court.

20.1 INTRODUCTION
The main purpose of this unit is to discuss the verdict given by Supreme
Court on various cases relating to Income Tax Act rules and regulations. It
provides the simplified understanding of cases so that the students can relate
them to practical questions and get theoretical understanding with practical
knowledge. Hence, this unit covers the Supreme Court verdict on the
provisions of the income tax under different heads of Incomes.

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Computation of
Total Income and
20.2 LEADING CASES OF SUPERME COURT
Tax Liability
20.2.1 Case: Analysis of Bharat V. Patel Judgment, 2018
(Income from Salaries)
Bharat V. Patel (Assessee) was the chairman and managing director of
Procter and Gamble (P&G) India, which was a subsidiary of P&G, USA. The
Assessee was working as an employee with P&G and was issued Stock
Appreciation Rights (SARs) without any consideration from 1991 to 1996.
Upon redemption of these SARs in 1997, the Assessee received an amount of
Rs 6, 80, 40,649 from P& G, USA. The Assessing Officer treated the said
amount as ‘Perquisite’ and taxed it as ‘Income from Salaries’. Subsequent
appeals were rejected by the Commissioner of Income Tax (Appeals) and the
Income Tax Appellate Tribunal (ITAT). However, the High Court allowed
the appeal, which was then challenged by the revenue department before the
Supreme Court. The revenue department argued that the amount received on
redemption of SARs should be taxed as salary, since; they were perquisites
under Section 17(2). They opposed that the amount was received by the
Assessee as an employee during the subsistence of an employer-employee
relationship and, hence, the amount so received must be treated as taxable
salaries. The tax authorities relied on the judgment of the ITAT Special
Bench, wherein, it was held that the amount received on redemption of SARs
was a revenue receipt liable to tax as ‘income from salaries’, since the nature
of the payment is primarily a deferred wage or bonus payment in cash or
otherwise. The Assessee, on the other hand, opposed that the amount
received from redemption of SARs can only be treated as ‘Capital Gains’.
The Supreme Court settled this issue, wherein it has been held that the
amount received on account of SARs redemption prior to amendment to
Section 17(2) would not be taxed as ‘Salaries’. The Supreme Court (SC)
while analyzing the applicability of Section 17(2) on redemption of SARs
replaced the fundamental principle that a receipt must be made ‘taxable’
before it can be treated as ‘income’. The SC held that the amount received
from the redemption of SARs can only be treated as ‘capital gains’ and not as
‘perquisite’ under Section 17(2) prior to 1999, since the IT Act did not then
cover a specific provision for taxing share-based rewards.
20.2.2 Case: Surya Roshni Ltd v. EPFO, 2019 LLR 339
(Provident Contribution on all Allowances)
The recent judgment passed on 28.02.2019 by the Hon’ble Supreme Court in
the matter of Regional Provident Fund Commissioner Vs. Vivekananda
Vidyamandir and other connected appeals considered the scope of ‘Basic
Wages’ and allowances liable for PF contributions. Till 28.02.2019, what
makes up basic wages was not very clear. Now, the only option which the
employers had was to approach Supreme Court. The issue emerged
particularly after the judgment given by Madras High Court in the case of
Management of Reynolds pen, Madhya Pradesh High Court in Surya Roshni
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Case and of course, Vivekananda Vidyamandir Case in Calcutta High Court. Leading Cases
Decided by
This judgment waited since 2011. Supreme Court

Based on the two definitions under Section 2 (b) and Section 6 of Employees
Provident Funds and Miscellaneous Provisions Act, 1952, which clearly says
that some allowances/components/amounts have been expressly excluded for
making payment of PF contributions. The list of expressly excluded
allowances are House-rent Allowance, Overtime Allowance, Bonus,
Commission or any other Similar Allowance payable to the employee, in
respect of his employment.

In order to restructure the ‘Wages’, the following criteria is to be ascertained

by all the HR Personnel. If any Wages/Allowance is paid universally,
necessarily and ordinarily paid to all across the board, such emoluments are
‘Basic Wages’. Whatever is not paid by all concerns or may not be earned by
all employees of a concern is excluded from the definition of basic wages,
where the payment is specially paid to those who avail of the opportunity, is
not ‘basic wages’ as defined under Section 2(b) of the Act, 1952. In other
words, a payment payable to an employee, only on the occasion of availing
an opportunity or undertaking a special task, would stand excluded from the
definition of basic wages.Any payment by way of a special incentive or work
is also not basic wages.
Basic wages encompasses all the payments except the specified exclusions.
All such allowances which are ordinarily, necessarily and uniformly paid to
the employees are to be treated as part of the basic wages.
The confusion in definition of wages primarily arises from the expression
“Commission or any other similar allowance payable to the employee” in
Section 2(b) (ii) of the Act as “Commission” and “Any other Similar
Allowance” are read as two separate expressions and hence “any other
allowance” is read as an collection exclusion, thereby, encouraging the
falsifying of splitting of wages to exclude the PF liabilities.

The expression “Commission or any other similar allowance payable to the

employee is one continuous term, meaning commission or any other
“Commission” like allowance by whatever nomenclature referred. Thus,
“Basic Wages” is subject to exclusions expressly referred to in the given
definition.
20.2.3 Case: Commissioner of Income Tax Vs. Podar Cement
(P) Ltd, 1997 (House Property)
The respondent (Podar Cement Pvt. Ltd.) is a company and an assessee under
the Act (hereinafter called the “assessee”). It owns four flats bearing Nos.
231, 232, 241 and 242 in a building called “Silver Arch” on Nepean Sea
Road, Bombay. The builders of the said building are Malabar Industries Pvt.
Ltd. Out of the four aforesaid flats, two were directly purchased by the
respondent-company from the builders and the other two were purchased by
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Computation of its sister concern and subsequently by the assessee. The possession of the
Total Income and
Tax Liability flats was taken after payment of consideration in full in August, 1973. All
these flats have been let out to various persons. The rental income from these
flats was included in the return for the assessment years, namely, 1975-76
and 1976-77.
It was the case of the assessee that the rental income from the flats was
assessable as “Income from other Sources” under Section 56 of the Act, as
the assessee-company was not the “Legal Owner” of the property in the flats.
Such a claim was put forward before the Assessing Officer mainly on the
ground that the title to the property (four flats) had not been conveyed to the
co-operative society which was formed by the purchasers of the flats and that
so long as the ownership was not transferred in the name of the assessee, the
rental income from the flats could not be assessed as “Income from House
Property” (under Section 22 of the Act).
The Supreme Court in this case ruled that for the purpose of taxation, the
term 'owner' could not be interpreted in the strictest sense by restricting its
meaning to only the 'legal owner' of a property. Giving a constructive
interpretation to the term ‘owner’, the court opined that the income would be
chargeable to tax in the hands of the person who received or was entitled to
receive income from the house property in his or her own right, and not on
behalf of the owner.
20.2.4 Case: Universal Plast ltd. Vs. CIT, 1999 (Income
earned by the Assessee by Leasing out Assets of
Business)
The assessee set up a factory styled as "UPL Factory" for carrying on the
business of manufacturing PVC sheets and allied products. It appears that
from the venture, the assessee suffered losses for two years. It then entered
into an agreement styled as `leave and license' agreement with M/s Leatherite
Industries Limited (hereinafter referred to as `the licensee') for a period of 7
years on March 13, 1977. The agreement contains renewal clause giving
option to the licensee to renew it for a further period of three years. The
licensee was to pay license fee of Rs 24 lakhs and 20% of the net profit of the
factory in question with effect from April 1, 1977. For the first three months
which fell in the accounting year relevant to the assessment year 1977-78, the
assessee received only license fee of Rs 6 lakhs as no profit was earned by
the licensee during the said period. That amount was shown by the assessee
as part of the business income. The Income Tax Officer did not accept that it
was business income and assessed the same as income from other sources.
However, the Commissioner of Income Tax (Appeal) accepted the plea of the
appellant-assessee that it was its business income and allowed the appeal on
April 27, 1985. The Revenue unsuccessfully appealed against the order of the
Appellate Authority before the Income Tax appellate Tribunal. On an
application filed by the Revenue under Section 256(2) of the Act, the High
320 Court directed the Tribunal to draw up statement of case and refer the
aforementioned question to it. On February 6, 1992, the High Court answered Leading Cases
Decided by
the question in the negative, in favor of the Revenue and against the assessee. Supreme Court

The court considered various precedents on this issue and laid down the law
as follows – '(1) no precise test can be laid down to ascertain whether income
received by an assessee from leasing or letting out of assets would fall under
the head `Profits and Gains of business or profession'; (2) it is a mixed
question of law and fact and has to be determined from the point of view of a
businessman in that business on the facts and in the circumstances of each
case including true interpretation of the agreement under which the assets are
let out; (3) where all the assets of the business are let out, the period for
which the assets are let out is a relevant factor to find out whether the
intention of the assessee is to go out of business altogether or to come back
and restart the same. (4) if only or a few of the business assets are let out
temporarily while the assessee is carrying out his other business activities
then it is a case of exploiting the business assets otherwise than employing
them for his own use for making profit for that business; but if the business
never started or has started but ceased with no intention to be resumed, the
assets also will cease to be business assets and the transaction will only be
exploitation of property by an owner thereof, but not exploitation of business
assets.' It was finally held that the amount earned by the assessee by leasing
out the assets of the business would not be income from business carried out
by it.

20.2.5 Case: Shivakumar Kheny (HUF) v. ITOITA No.

792/Bang/2019 (Capital Gain)
The Assessee took land on lease for a period of 20 years dated 14.3.2013 and
constructed a residential house on such land. The amount of capital gain to
the extent it was so utilized was claimed as deduction u/s.54 of the Act. As
per the lease dated 14.03.2013, the Assessee entitled to construct a building
after reimbursing a sum of Rs.4.9 Lakhs already spent by the lessor. As per
clause 10, the ownership and title to the residential building (except the land)
would vest in the Assessee for the period of lease and thereafter the title in
the building will vest with the lessor. Assessee sold certain property and
claimed exemption under Section 54 as regards capital gain utilized towards
construction of a residential on leasehold land.
The Assessing Officer (AO) denied exemption U/s 54 of the Act on the
ground that since the Assessee was not owner of the land, the condition laid
down in Section 54 of the Act for claiming deduction was not satisfied.
Taking the stand that such dichotomy in ownership is not acceptable.
According to the AO, the Assessee had only a leasehold interest over the land
on which building was constructed. He was of the view that the Assessee did
not have any right to alienate the superstructure. According to Section 54,
capital gain should be used in construction of residential house only.
Assessee, in the instant case was the owner of super-structure constructed by
utilizing capital gain and it was clear from the lease deed by which land over 321
Computation of which construction had been put up was given on lease to assessee, therefore,
Total Income and
Tax Liability deduction under Sections 54 could not be disallowed.
20.2.6 Case: CIT vs. O. K. Arumugham Chettiar & Anr,
1995 (Income from other sources)
Sri Arumugham Chettiar is a daily wage earner of Rs. 3 per day in a cycle
shop. He purchased a lottery ticket for Rs. 2 and agreed to share 25 per cent
of the prize with Sri O. K. Ramaswamy Chettiar as he was in need of
50 paise for his next meal. This agreement was reduced to writing. The ticket
earned a prize of Rs. 17,85,000. Both these persons offered the respective
shares for tax purposes. A question arose whether the prize earned by the
ticket is to be assessed in the status of Association of Persons (AOP). The
Court held that the lottery winning cannot be assessed in the status of AOP
because the agreement was reached between the two persons after the ticket
was purchased. According to the agreement, one person agreed to part with
25% of the prize. Therefore, the Court held that there is no joint venture in
earning the income from lottery. Accordingly, it was held that the lottery
winning cannot be assessed in the status of AOP. On facts, this decision is
also distinguishable. Thus, considering the facts arising in the present case, in
the light of the judicial pronouncements, it was held that the Tribunal was not
correct in coming to the conclusion that the winning of the lottery should not
be assessed under the head AOP.
The Tribunal pointed out that the scheme of the Act is to tax individuals and
not to club the incomes of different persons except under conditions
prescribed u/s 64 of the Act. According to the Tribunal in order that an
association or body of individuals is assessed, there should be such a separate
entity in existence. These two persons had not combined for other purposes
and at other times nor did they have any other common relationship. There
was, therefore, no basis for treating both of them together as a common
assessable entity. It was also found that the case for aggregation or otherwise
did not depend upon the validity or otherwise of the agreement.
20.2.7 Case: CIT v. M.R. Doshi 211 ITR 1, 1994 (Clubbing of
Income)
Generally speaking, the income of a minor child is to be clubbed with the
income of the father or the mother, whoever of the two has the higher
income. However, a very interesting decision was given by the Supreme
Court of India in the case of CIT v. M.R. Doshi 211 ITR 1.
The taxpayer, an individual, had executed two deeds of trust and a
supplementary deed, the effect of which was that the income from the trusts
was to be accumulated until the attainment of majority by his three sons. The
cumulative income was then to be divided into three equal shares and the
respective 1/3rd share of each son was to be paid to him. The question was
whether the income from the trusts could be included in the total income of
322 the assessee under the provisions of Section 64(1) (v) of the Income Tax Act.
The Gujarat High Court held that the income from the transfer of assets can Leading Cases
Decided by
be included in the income of the transferor provided that, under the transfer, Supreme Court
the benefit from such assets was immediately available or was deferred for
the spouse or minor children of the settlor. In other words, the tax evasion by
assessees by transfer of their assets, such as by settlement or by forming trust,
so as to make the income of such transferred assets available to their spouses
or minor children, without subjecting the same to tax in the hands of the
settlors, was sought to be avoided by providing that such income would be
includible in the hands of the settlors provided that the benefit from the
income of such assets was either immediately available to or was deferred for
the benefit of their spouses or minor children. If the child, for whom the
benefit was provided, was to receive it on attaining majority, the provision
contained in clause (v) was not attracted on the plain reading of clause (v)
itself, because, otherwise, the Legislature would not have expressed itself in
the manner in which it did.
The Hon’ble judges of the High Court held that the trusts in the present case
had this cumulative effect, hence; the income is to be accumulated until the
attainment of majority by the assessee’s three sons. The cumulative income is
then to be divided in three equal shares and one such share is to be paid to
each son. The payment, therefore, is to be made after each of the sons attains
majority. Section 64(1)(v) requires, in the computation of the total income of
an assessee, the inclusion of such income as arises to the assessee from assets
transferred, otherwise than for adequate consideration, to the extent to which
the income from such assets is for the immediate or deferred benefit of his
minor children. The Supreme Court also gave its verdict that the substantial
tax planning can be achieved by taxpayers who have minor children,
especially when a trust is created for the benefit of the minor child that
provides for accumulations until the minor children attain majority.
20.2.8 Verdict: Quoting Aadhaar Mandatory for Filing
Income Tax Returns and PAN Application: Supreme
Court
The Constitution bench of the Supreme Court has upheld the Constitutional
Validity of Section 139AA of the Income Tax Act, 1961, which
mandated quoting of Aadhaar or enrolment ID of Aadhaar application form
for filing of income tax returns and making Application for allotment of
Permanent Account Number (PAN).The Judgment was delivered by five
Judge Bench comprising of Chief Justice Dipak Misra, Justice Kurian Joseph,
Justice R F Nariman, Justice S K Kaul and Justice Indu Malhotra. A number
of petitions were filed before the Court challenging the above provision, the
petitioners, included Kerala Ex-Minister and CPI Leader Binoy Viswam. The
Majority Judgment affirmed that the provisions of Section 139AA of the
Income Tax Act, 1961 meet the triple test of right to privacy. Validity of this
provision was upheld in the case of Binoy Viswam by repelling the
contentions based on Articles 14 and 19 of the Constitution. The question of
323
Computation of privacy which, at that time, was traced to Article 21 was left open. The matter
Total Income and
Tax Liability was reexamined on the basis of the principles laid down in K.S. Puttaswamy
case. Even after judging the matter in the context of permissible limits for
invasion of privacy, namely: (i) the existence of a law; (ii) a ‘legitimate State
interest’; and; (iii) such law should pass the ‘test of proportionality’; bench
came to the conclusion that all these tests are satisfied. In fact, there is
specific discussion on these aspects in Binoy Viswam’s case as well.Later on
Justice D.Y Chandrachud struck down the Section 139AA of the Income Tax
Act, 1961.

20.3 LET US SUM UP

As per Section 14 of Income tax act, 1961, the purpose for charging of tax
and computation of total income, all incomes come under mainly, 5 heads
i.e. Salaries, House property, Profits and gains of business or Professions,
Capital gains and Other sources. The total income under these heads is added
and disclosed in income tax return. The tax on total income is then calculated
as per the income tax rate slab of the particular previous year. But, if any
dispute occurs on the part of the assessee or between the parties of any
transaction under any head, then such cases are moved to the high court, and
further to the Supreme Court, to give their verdict on the cases. Such verdicts
are binding on the assessee, in any case.

20.4 KEYWORDS
Supreme Court: It is the highest judicial court under the Constitution of
India.

Allowances: It is a fixed monetary amount paid by the employer to the

employee for meeting some particular expenses.
Capital Gain: Capital gain arises only when there is a transfer of capital
asset.

Perquisite: These are the benefits or amenities in cash or kind provided by

the employer to the employee whether free of cost or at concessional rate.

20.5 TERMINAL QUESTIONS/EXERCISES

1) Explain the features of ‘Bharat vs. Patel Judgment, 2018’.

2) Define the term ‘Basic Wages’ as per the verdict given by the Supreme
Court for Surya Roshni Ltd v. EPFO, 2019 LLR 339.

3) Explain the exemption u/s 54 of the Income Tax act, with the help of a
legal case.
4) Explain the provisions relating to the Clubbing of the Income of Minor
child with the help of a legal case.

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5) ‘Is it mandatory to Quote Aadhaar for Filing Income Tax Returns and Leading Cases
Decided by
PAN Application’, Explain with the help of the verdict given by the Supreme Court
court.

Note: These questions and illustrations are helpful to understand this

unit. Do efforts for writing answers to these questions but do not send
your answers to university. It is only for your practice.

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Computation of
Total Income and SOME USEFUL BOOKS – LATEST EDITION
Tax Liability
Jain, R.K. Income Tax Law and Accounts, SBPD Publications, Agra

Aggarwal, B.K and Agarwal, R,Income Tax Law and Accounts,Nirupam

Sahitya Sadan, Agra

Ahuja and Gupta, Simplified Approach to Income Tax,Flair publications (P)

Ltd, New Delhi

Gaur and Narang, Income Tax Law and Practice, Kalyani Publishers,
Ludhiana

Mehrotra, H.C. Income Tax Law and Accounts,Shitya Bhawan Publishers &
Distributors (P) Ltd, Agra.

Singhania, V.K. & Singhania, M., Income Tax including GST, Taxmann

326