Where the Special Bench had to consider whether s. 14A applied with respect to dividend earned by an assessee trading in shares and holding shares as stock-in-trade, HELD:

By the Bench:

(i) S. 14A has an overriding effect and applies to all expenditure in relation to exempt income even though such expenditure would have been allowable under other provisions such as 36 (1) (iii);

(ii) Sub-sections (2) and (3) of s. 14A, though inserted by the F. A. 2006 w.e.f. 1.4.2007, read with Rule 8D, are procedural and clarificatory in nature and apply to pending matters;

By the Majority:

(iii) The words “in relation to” in s. 14A encompass not only the direct expense but also the indirect expense which has any relation to the exempt income. The argument that the words contemplate a “direct and immediate connection” between the expenditure and the exempt income cannot be accepted. Accordingly, the argument that s. 14A cannot apply to shares held as stock-in-trade cannot be accepted. The fact that the dividend income is “incidental” to the purchase of shares is also irrelevant. The question as to whether the onus is on the assessee or the AO for bringing an item of expenditure within s. 14A is also irrelevant in view of Rule 8D;

By the VP, dissenting:

(iv) The words “in relation to” in s. 14A mean a “dominant and immediate connection” between the expenditure and the exempt income. To determine whether there is such a connection, one has to see the object with which the expenditure is incurred. If the expenditure is incurred mainly to earn taxable income and the tax-free income is incidental, there is no such connection and s. 14A does not apply. The onus is on the AO to establish that there is a “dominant and immediate connection” between the expenditure and the exempt income;

(v) In the case of a dealer in shares, the dominant object of acquiring shares is not to earn dividend and consequently s. 14A does not apply.

Where the assessee entered into an agreement for transfer of its industrial undertaking under which the buyer agreed to pay it interest on the unpaid consideration w.e.f 1.3.1977 and subsequently on 30.6.1978 the parties agreed to defer the date of commencement of interest to 1.7.1979 and the question arose whether the interest foregone by the assessee could be assessed for the AYs 1979-80 and 1980-81 under the accrual system of accounting, HELD:

(a) As regards AY 1979-80, the interest had already accrued and could not be wiped out by the subsequent agreement. The waiver could not have retrospective effect.

(b) As regards AY 1980-81, there was full scope to the assessee to defer the interest and as this was done before accrual, the interest was not chargeable to tax.

(c) Penalty u/s 273(2)(a) is not an automatic outcome of the addition of income. Though there was no valid justification for the waiver of the interest and it was an attempt to evade tax, still mens rea would have to be shown and as a definite conclusion could not be drawn that the assessee had reason to believe that the estimate of advance tax was untrue, penalty could not be levied.

Where the Tribunal did not pass an order on the appeal despite considerable delay and instead fixed the matter repeatedly for ‘clarifications’ and thereafter closed the matter for orders on the basis of written submissions and without hearing the assessee, HELD the procedure followed by the Tribunal was not in compliance with the principles of natural justice. The Tribunal should decide the matter within a reasonable time of the hearing and in case they are not in a position to pass the order within a reasonable period, they should fix the matter for rehearing and not only for calling for clarification on certain points.

See also: Pradeep Sangodkar vs. State (Bom-Goa): Delay in passing judicial orders deprecated.

Held by 3 Judge Bench in the context of Section 11AC of the Central Excise Act, 1944 {which corresponds to s. 271 (1) (c)} that:

(i) In Dilip Shroff vs. JCIT, the SC held that the order imposing penalty was quasi-criminal in nature and thus the burden lies on the department to establish that the assessee had consciously concealed his income. This view is not correct.

(ii) The object behind enactment of s. 271 (1) (c) read with Explanations indicate that the said section has been enacted to provide for a remedy for loss of revenue and they create the element of strict liability on the assessee for concealment or for giving inaccurate particulars while filing return. The penalty under that provision is a civil liability. Wilful concealment is not an essential ingredient for attracting civil liability unlike the matter of prosecution under Section 276C.

(iii) Dilp N. Shroff‘s case (supra) has not considered the effect and relevance of s. 276C.

(iv) It cannot be said that the absence of specific reference to mens rea is a case of casus omissus. The law on two principles of construction – one relating to casus omissus and the other in regard to reading the statute as a whole has been considered in detail.

Held by 5 Judge Bench, in the context of excise law:

(i) While circulars and instructions issued by the Board are binding on the authorities under the respective statutes, but when the Supreme Court or the High Court declares the law on the question arising for consideration, it would not be appropriate for the Court to direct that the circular should be given effect to and not the view expressed in a decision of the SC or the High Court.

(ii) The clarifications/circulars issued by the Central & State Government merely represent their understanding of the statutory provisions and are not binding upon the court. It is for the Court to declare what the particular provision of statute says and it is not for the Executive. Looked at from another angle, a circular which is contrary to the statutory provisions has really no existence in law.

(iii) To say that a revenue authority cannot question a circular would mean that the valuable right of challenge would be denied to him and there would be no scope for adjudication by the High Court or the Supreme Court. That would be against very concept of majesty of law declared by the Supreme Court and the binding effect in terms of Article 141 of the Constitution.

Where the assessee foreign company was a golf organizer and entered into arrangements with Indian parties for conducting golf events in India and earned income by way of sponsor fees, management fees etc and the question arose whether such income was taxable in India, HELD:

(i) In order to constitute a “permanent establishment” under Article 5.1 of the Treaty, there had to be a “fixed place” through which “the business was carried on”.

(ii) During the days when the golf tournament is conducted, the Golf Course can be regarded as a “place of business” because the center of income earning activities was at that particular place and the Golf Course was at the disposal of the applicant for the stipulated time frame and it could exercise some limited rights. The fact that the duration is short is not relevant.

(iii) However, the words ‘carried on’ conveys the ingredient of regularity, continuity and repetitiveness and as there was a solitary or isolated activity during the year, it was difficult to infer the existence of a PE.

Though the assessee was following the mercantile system and was entitled to royalty under an agreement, the royalty was not assessable in accordance with the principles of real income, in view of the dispute pending in arbitration.

Non-occupancy charges received by a commercial society from its members, even though in excess of 10% of the maintenance charges, are exempt on the principles of mutuality.

Note: The judgement of the Special Bench in Walkeshwar Triveni 88 ITD 159 was distinguished.

(1) For purposes of s. 145A, where an assessee follows the procedure laid down by the ICAI and the tax auditor reports in clause 12(b) of Form 3CD of the Tax Audit Report that no adjustment is required to be made on account of s. 145A, the unutilized modvat credit cannot be added to income.

(2) To give effect to s. 145A, the opening stock as of 1.4.1998 has to be increased by the amount of tax, duty, cess etc.

Note: Mahavir Aluminium 168 TM 27 (Del) followed.

See Also: Diamond Dyes (ITAT Bom).

(1) For purposes of s. 14A, only the expenditure which is proved to have a nexus with the exempt income can be disallowed and not on an ad-hoc basis.

(2) Sub-secs (2) and (3) of s. 14A inserted with effect from the AY 2007-2008 {and Rule 8D} (which sanction proportionate disallowance) are prospective and do not apply to earlier assessment years.

Note: The judgement of the Bombay ITAT in Citicorp Finance 108 ITD 457 was not followed.

See Also: New Rule 8D – A lesson in tight rope walking?