The deletion of the second proviso to s. 43B by the Finance Act 2003 wef 1.4.2004 cannot be treated as a retrospective amendment and contributions towards PF beyond the period stipulated in s 36(1)(va) are not allowable deductions.

Note: The judgement in CIT vs. M/s Godavari Sahakari was followed. The decision of the Supreme Court in CIT vs. Vinay Cement Ltd was not followed on the ground that in dismissing the Special Leave petition therein, albeit by a speaking order, the Court had not decided the law on the subject and it was not a binding precedent.

(i) The judgement of the SC in Mariappa Gounder vs. CIT 232 ITR 2 does not decide whether mesne profits received against wrongful possession of property is in the nature of revenue receipt or capital receipt. It merely decides the year of taxability of such profits on the assumption that such profits are taxable;

(ii) An amount received against wrongful possession of property amounts to mesne profits whether determined by the court or under a consent decree in view of the definition of that term in s. 2(12) of the CPC;

(iii) In view of the conflict of judicial opinion amongst the High Courts on the taxability of mesne profits, the legal position that where two views are possible, the view favourable to the assessee should be followed applies. Accordingly, mesne profits are a capital receipt and are not chargeable to tax.

(iv) As the mesne profits are capital in nature, the interest thereon upto the date of determination of the mesne profits is also capital in nature.

Note: The judgement in Sushil Kumar 88 ITD 35 (Kol) (SB) on this point is overruled.

(i) The question whether expenditure is on capital or revenue account should be decided from the practical and business view point and in accordance with sound accountancy principles. The three tests applied to decide the nature of expenditure are the tests of enduring benefit, ownership test and the functional test.

(ii) In view of Tata Consultancy Services vs. State of AP 271 ITR 401 (SC), computer software put in the medium of disk are “goods” and its purchase constitutes the “purchase” of a tangible asset and the assessee becomes the “owner” thereof.

(iii) The fact that the computer software is obtained by way of “ownership” or on “license” is not determinative. The functional test is more important and the issue has to be seen from the point of its utility to the businessman and to see how important an economic or functional role it plays in his business.

(iv) The duration of time for which the assessee acquires right to use the software is relevant. Having regard to the fact that software becomes obsolete with technological innovation and advancement within a short span of time, if can be said that that where the life of the computer software is shorter (say less than 2 years), it should be treated as revenue expenditure. Expenditure having utility beyond 2 years confers ‘enduring benefit’ though it may still be revenue on application of the ‘functional test’.

(v) If the tests of ownership and enduring benefit are satisfied, the question whether expenditure incurred on computer software is capital or revenue has to be seen from the point of view of its utility to a businessman and how important an economic or functional role it plays in his business.

(vi) In each case the AO will have to consider the nature of the software and its functional use to the assessee and decide whether the expenditure is capital or revenue in nature.

(i) A firm seeking to claim deduction of interest paid on capital from its partners has to first satisfy the requirements of s. 36(1)(iii) and thereafter the limits imposed by s. 40(b)(iv). The fact that the said capital is not “loans” or “advances” is irrelevant.

(ii) Where loans given in an earlier year were accepted as having been given for business purposes, the interest thereon could not be disallowed in a subsequent year.

(iii) Where the assessee had sufficient profits and own funds, the submission that loans to sister concerns were out of those funds had to be accepted.

Where all the material facts were placed before the AO and he raised questions thereon, Explanation 1 to s. 147 has no application. Further, the argument that because there was no discussion in the assessment order, the AO had not applied his mind or expressed an opinion is not acceptable.

Where the CIT (A) decided the ground of reopening against the assessee but decided the ground of merits in favour of the assessee, the assessee is entitled, in an appeal by the Revenue before the Tribunal, to urge, under Rule 27 of the I. T. Rules, that the CIT (A) was wrong in deciding the ground of reopening against the assessee.

In the context of s. 35 of the Excise Act, held (1) Where the statute confers on the authority concerned a limited power of condonation of delay or does not provide any such power, the authority has no power to condone delay beyond the prescribed period;

(2) unless a new statute expressly or by necessary implication says so, it will not be presumed that it deprives a person of an accrued right. On the other hand, a law which is procedural in nature, and does not affect the rights, is retrospectively applicable;

(3) a new law of limitation providing for a shorter period cannot extinguish a vested right of action;

(4) An amendment to the period of limitation for commencing a legal proceeding will apply to existing rights subject to the exceptions that (i) if under the amending Act the remedy suddenly stands barred as a result of a shorter period of limitation, the same cannot be held to govern the case as otherwise the result will be to deprive the suitor of an accrued right and (ii) where the amendment leaves the claimant with such a short period for commencing the legal proceeding so as to make it unpractical for him to avail of the remedy.

Note: s. 35 is pari materia to ss. 256 & 260A of the I. T. Act.

Where the assessee purchased shares at a price below the market price and the question was whether the difference between the market price and the purchase price can be assessed as unexplained investment u/s 69 or as a benefit u/s 28(iv) of the Act, held:

(1) Where there was no material to show that the assessee had paid more than the stated consideration and the purchases were recorded in the books of account, s. 69 could not be applied;

(2) The purchase of shares at a price lower than their market value does not constitute “income” as generally understood. In order to attract s. 28(iv), there must be a nexus between the business of the assessee and the benefit derived by him. Further, the benefit arising from a purchase of shares at a price lower than the market price does not accrue till the transfer of the shares;

Held also (1) The taxing authorities are not entitled to ignore the legal charecter of the transaction and go by the so-called “substance of the transaction”. They have to determine the true legal relationship resulting from the transaction;

(2) The contention of the assessee that the sales of shares by certain companies are not transfers as they are part of a family arrangement cannot be accepted as the company’s assets are different from the family assets. It is a distinct juristic entity and its assets cannot be mixed up with the assets of a shareholder. The corporate veil cannot be lifted and it cannot be assumed that the assets of the controlled companies are the assets of the family members;

(3) The mere fact that the transferor has received less than the market value of the asset does not mean that he can be assessed on the basis of the FMV In the absense of evidence to show that he has received more than the stated consideration.

(1) Tax administration is a complex subject. It consists of several aspects. The Government needs to strike a balance in the imposition of tax between
collection of revenue on one hand and business-friendly approach on the other hand.

(2) Exemption is a matter of policy. If the Government, acting through the Central Board of Revenue has conferred an administrative exemption, it is not open to the Revenue to challenge the same.

(3) Circulars issued by the Board are binding on the officers though not on the assessees or on the courts. An argument that the circulars are not binding on the revenue is unsustainable in law. If such a contention was to be accepted, it would lead to chaos and indiscipline in the administration of tax laws.

(4) Whenever such binding circulars are issued by the Board granting administrative relief (s) business arranges its affairs relying on such circulars. Therefore, as long as the circular remains in force, it is not open to the subordinate officers to contend that the circular is erroneous and not binding on them.

Note: The judgement in Azadi Bachao Andolan 263 ITR 706 (SC) was followed.

(i) Interest paid in respect of borrowings on capital assets not put to use in the concerned financial year are deductible under Section 36(1)(iii) of the Act;

(ii) Interest on all moneys borrowed for the purposes of business are deductible irrespective of whether the moneys are used for a revenue purpose or a capital purpose;

(iii) Explanation 8 to s. 43(1) has no application to s. 36(1)(iii);

(iv) The proviso to s. 36(1)(iii) operates prospectively;

(v) Challapalli Sugars 98 ITR 167 (SC) applies to a case where the business had not yet commenced.

Note: The judgement of the Full Bench in CIT vs. Vardhaman Polytex (P & H High Court) is impliedly overruled.