(215.5 KiB, 451 DLs)

U/s 260A, High Court has no power to condone delay

S. 260A permits the filing of an appeal to the High Court within 120 days. In CIT vs. Velingkar Brothers 289 ITR 382 (Bom) (FB), The Full Bench held that the Court had power to condone delay u/s 260A. However, in Hongo India 236 E.L.T. 417 and Chaudharana Steels 238 E.L.T. 705, the Supreme Court held in the context of sections 35H & 35G of the Excise Act, that in the absence of specific powers, the High Court has no power to condone delay. On the question whether the said judgement of the Supreme Court would apply to s. 260A as well, HELD:

(1) The Income-tax Act is a complete Code in itself. While the Commissioner, Commissioner (Appeals) and Tribunal have been given power to condone delay, no such power has been conferred upon the High Court u/s 260A. In the absence of a provision in s. 260A conferring jurisdiction to condone delay in filing the appeal, the Limitation Act would not apply and the delay cannot be condoned;

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(386.3 KiB, 418 DLs)

Settlement Commission’s “formal” orders struck down

S. 254D (4A) was amended by the Finance Act 2007 to provide that if in respect of an application filed before 1.6.2007, the Settlement Commission did not pass a final order before 31.3.2008, the proceedings would abate. S. 245HA (3) provided that the consequence of such abatement was that the income-tax authorities could, in making the assessment, use all the confidential material furnished by the assessee before the Settlement Commission. On writ petitions filed earlier by the applicants (about 350 in number), the High Court directed the Settlement Commission to dispose of the applications by 31.3.2008 so as to avoid the abatement.

To formally comply with the orders of the High Court, the Settlement Commission passed orders u/s 245D (4) on or before 31.3.2008 making a “settlement” though it made it clear in the order that in view of the number of cases and paucity of time, it was not practicable for the Commission to examine the records and investigate the case for proper settlement or to give adequate opportunity to the parties.

The Department challenged the said orders of the Commission on the ground that the Settlement Commission ought to have let the proceedings abate and remit the matter to the AO. The assessees challenged the orders on the ground that it ought to have been passed after proper hearing.

HELD, upholding the challenge:

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(15.9 KiB, 1,251 DLs)

Judgement holding s. 43B (f) (leave encashment) as unconstitutional stayed

S. 43B (f) was inserted by the Finance Act, 2001 w.e.f. 1.4.2002 to provide that any sum payable by the assessee as an employer in lieu of any leave at the credit of his employee shall be allowed as a deduction only in the year of actual payment.

The said amendment was enacted to supersede the judgement of the Supreme Court in Bharat Earth Movers vs. CIT 245 ITR 428 where it was held that even a provision for leave encashment was deductible on accrual basis.

In Exide Industries Ltd vs. UOI 292 ITR 470, the Calcutta High Courts struck down 43B (f) as being arbitrary, unconscionable and de hors the apex Court decision in the case of BEML on the ground that the objects and reasons were silent as to why the amendment was effected and that the amendment was not consistent with s. 43B which was originally inserted to plug evasion of statutory liability.

The said judgement of the Calcutta High Court has now been stayed by the Supreme Court and it has been clarified that the assessee must pay tax as if s. 43B (f) is on the statute though it is entitled to make a claim in its return.

(16.1 KiB, 627 DLs)

Share broker is eligible to claim “bad debts” u/s 36 (1) (vii) / 36 (2)

The assessee, a broker, purchased shares of the value of Rs.1,06,10,247 on behalf of its sub-broker. The sub-broker made payment of Rs.64 lakhs. As the remaining amount of Rs.41,37,881 was not paid, the assessee did not deliver those shares to the client though it offered the brokerage to tax. Since the balance payment was not made even in the next year, the assessee claimed deduction of Rs. 41,37,881 as a “bad debt” u/s 36 (1) (vii). The Tribunal allowed the claim. On appeal by the Revenue to the High Court HELD:

(i) The contention of the Revenue that the said amount was not a “debt” u/s 36 (2) and, therefore, could not be treated as a “bad debt” was not acceptable because there was a valid transaction between the assessee and the sub-broker. The brokerage was offered to tax and assessed. The assessee had to make payment on behalf of the sub-broker and as he could not recover to the extent of Rs.41,37,881/-, that sum had to be treated as a “debt”.

(ii) However, as the assessee had retained the shares, the “bad debt” would have to be reduced by the sale proceeds of the said shares. The balance was allowable.

(334.1 KiB, 667 DLs)

Resigned Members & Members who retired before 3.6.2009 can practice before the ITAT

Vide Notification dated 3rd June 2009, Rule 13E was inserted in the Income Tax Appellate Tribunal Members (Recruitment and Conditions of Service) Rules, 1963 to provide that “The President, the Senior Vice-President, the Vice-President and the Members of the Tribunal shall not practice before the Tribunal after retirement from the service of the Tribunal”. The Special Bench had to consider whether the said Notification applied to Members who resigned / retired before the date of issue of the said Notification and allied issues. HELD:

(i) The argument of the Ministry of Law & Justice that the ITAT could not go into interpretation of Rule 13E is not acceptable because in accordance with the duty of the Tribunal to give a proper hearing to the parties, the Tribunal has inherent jurisdiction to consider whether the parties who are appearing before it are properly entitled under the law to make appearance;

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(254.8 KiB, 636 DLs)

Cashless ESOP benefits are not taxable

The assessee, an employee of Johnson & Johnson (“J&J”) India, received from J&J, USA, on 12.7.1989 a “cashless” option to buy 2500 shares at the then prevailing market price of $ 57.88 per share. The options were exercisable in installments over 10 years starting 11.7.1991. On 13.8.1992 (AY 1993-94), the assessee ‘sold’ the options and made a gain of Rs. 5,44,925. The AO held that the said gain was assessable in AY 1993-94 as either salary, short-term capital gain or speculation profit. On appeal, the CIT (A) held that the ‘shares’ obtained under the ESOP were a capital asset and as they were held for less than 3 years, the gain was assessable as a STCG. He rejected the argument that as there was no ‘cost of acquisition’, the capital gains were not assessable. On further appeal, HELD, allowing the appeal:

(i) As the CIT (A) had held that the shares acquired under ESOP amounted to acquisition of a capital asset, one had to proceed on that premise;

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(226.8 KiB, 1,134 DLs)

Stock Exchange card is NOT an intangible asset eligible for depreciation

S. 32 (1), as amended w.e.f. 1.4.1998 allows depreciation on “intangible assets” being, inter alia, “licenses … or any other business or commercial rights of similar nature”. The Tribunal took the view that a BSE card was an “intangible asset” eligible for depreciation. On appeal by the Revenue, HELD, reversing the Tribunal:

(1) Though the term ‘licences’ is a very wide term and includes permission to carry on any trade, business, profession, etc, it is used in s. 32(1)(ii) in a restricted sense. S. 32 restricts depreciation to a class of tangible & intangible assets specifically enumerated therein. All intangible assets enumerated in s. 32(1)(ii) (except the term ‘licences’) belong to the class of intellectual properties. As the expression ‘licences’ in s. 32(1)(ii) is preceded by the expressions know-how, patents, copyrights, trade marks and succeeded by the expression ‘franchises’ which are all relatable to intellectual property rights, the term ‘licences’ in s. 32(1)(ii) is, applying the principle of Noscitur a sociis, intended to be used restrictively and as applying only to licences relating to acquisition / user of intellectual property rights;

(2) A BSE card is also not a “business or commercial right” because what s. 32(1)(ii) contemplates is “business or commercial rights” relating to intellectual properties and not all categories of business or commercial rights. Since a BSE card is not a business or commercial right relating to intellectual property rights depreciation cannot be allowed on it;

(3) The fact that a BSE card is a capital asset and liable for capital gains tax is irrelevant because s. 32 does not allow depreciation on all capital assets but only on capital assets which fall in the enumerated categories.

(500.8 KiB, 544 DLs)

Non / belated issue of s. 143 (2) notice renders block assmt order void

S. 158BC provides that in determining the undisclosed income, the provisions of s. 143 (2) shall apply “so far as may be”. S. 143 (2) provides that a notice shall not be issued after the expiry of 12 months from the end of the month in which the return is furnished. The question arose whether the non-issue or belated issue of s. 143 (2) notice renders the block assessment order ab initio void. In Mudra Nanavati, the Tribunal held that the issue of the s. 143 (2) notice within the stipulated period was mandatory and that failure to do so renders the block assessment order void. This decision has been approved by the High Court following Scindia HUF where it was held that non-issue of s. 16 (2) notice of the W. T. Act rendered the s. 17 order invalid.

(165.5 KiB, 511 DLs)

For s. 47(v), share capital of the subsidiary need not be “held” in the name of the holding company

S. 47 (v) provides that a transfer of a capital asset by a subsidiary company to its holding company shall not be regarded as a “transfer” if the whole of the share capital of the subsidiary company is held by the holding company. The assessee transferred shares to its holding co and claimed exemption from capital gains u/s 47 (v). The AO denied exemption on the ground that as two shares of the said subsidiary were held by a director of the assessee and not by the assessee itself, the shares were not “wholly held” by the holding company and s. 47 (v) did not apply. The Tribunal upheld the plea of the assessee. On appeal by the Revenue, the High Court upheld the order of the Tribunal and upheld the following findings:

(a) Though s. 47 (v) refers to shares being “wholly held”, a strict or mechanical interpretation should not be adopted. A construction must be adopted which makes the statute effective rather than redundant. It must be construed having regard to the object and purpose which the legislature had in view in enacting the provision. K.P. Varghese 131 ITR 597 (SC) and Teja Singh 35 ITR 408 (SC) followed.

(b) Under the Companies Act it is not possible for a company to have less than two shareholders. The requirement of s. 47(v) that the whole of the share capital of the subsidiary company should be held by the holding company is certainly not the same thing as the whole of the share capital being held in the name of the holding company. If one proceeds on the basis that the entire share capital of the subsidiary company should be held in the name of the holding company, there cannot be any situation in which s. 47(v) can apply. That interpretation makes the statutory provision redundant. If the holding company has a beneficial ownership over the entire share capital, s. 47 (v) applies.

(1.1 MiB, 435 DLs)

Asset declarations by Supreme Court judges is within purview of RTI

Pursuant to a Full Court resolution of the Supreme Court of India made in 1997, the judges make a confidential declaration of their personal assets to the Chief Justice of India (“CJI”). The Applicant asked for information relating to this declaration under the Right to Information Act (“RTI”). When that information was denied, the Applicant appealed to the Central Information Commission which upheld the challenge and directed the PIO of the Supreme Court to provide the information. The Supreme Court filed a writ petition to challenge the said order of the CIC. HELD, upholding the right of the Applicant:

(1) The RTI Act is an important legislation to effectuate democracy. It is a powerful beacon which illuminates unlit corners of state activity, and those of public authorities which impact citizens’ daily lives, to which they previously had no access. It mandates disclosure of all manner of information. No justification for seeking the information is necessary. Parliamentary intention in enacting this law was to arm citizens with the mechanism to scrutinize government and public processes, and ensure transparency subject to limits;

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