Despite concealment, no s. 271(1)(c) penalty if s. 115JB book profits assessed

For AY 2001-02, the assessee filed a ROI declaring loss of Rs.43.47 crores under the normal provisions of the Act and book profits of Rs.3.86 crores u/s 115JB. The AO assessed a loss at Rs.36.95 crores as per normal provisions and book profits at Rs.4.01 crores. As there was a reduction in the loss under the normal provisions owing to various additions and disallownaces, the AO levied penalty u/s 271(1)(c) in accordance with with Explanation 4 & Gold Coin 304 ITR 308 (SC). Before the High Court, the assessee argued that even if there was a concealment u/s 271(1)(c) with respect to the normal assessment, the same was not relevant because the assessee’s income was assessed u/s 115JB. The High Court accepted the plea and held that as the s. 115JB “book profits” were by a legal fiction deemed to be the “total income”, the furnishing of wrong particulars had no effect on “the amount of tax sought to be evaded” as defined in Explanation 4 to s. 271(1)(c). On appeal by the department to the Supreme Court, HELD:

Delay condoned. The special leave petition is dismissed.

S. 36(1)(iii): S. A. Builders 288 ITR 1 (SC) to be reconsidered

The assessee borrowed funds and used it to subscribe to the equity capital of its subsidiary company. The subsidiary company used the said funds for the purpose of acquiring the Centaur Hotel, Juhu Beach, Mumbai. The assessee paid interest on the borrowed money and claimed that a deduction u/s 36(1)(iii). The AO rejected the claim though the CIT (A), Tribunal & High Court (338 ITR 482) allowed it by relying on S. A. Builders Ltd vs. CIT 288 ITR 1 (SC). It was held that as the assessee, being a holding company had a deep interest in its subsidiary, and hence if the holding company advanced borrowed money to a subsidiary and the same is used by the subsidiary for some business purposes, the assessee would be entitled to deduction of interest on its borrowed loans. On appeal by the department, HELD by the Supreme Court:

Issue notice on the applications for condonation of delay as also on the special leave petitions. In our view, S.A. Builders Ltd. vs. Commissioner of Income-Tax (Appeals) and Another, reported in 288 ITR 1, needs reconsideration.

Verdict that ITAT President has no power to write ITAT Members’ ACR stayed

In Uttam Bir Singh Bedi vs. UOI, a Judicial Member of the Tribunal filed a Writ Petition to challenge his supersession to the post of Vice President by his junior. He claimed that the supersession was on account of adverse Annual Confidential Reports (“ACRs”) written by the President of the Tribunal which had misguided the high level Selection Committee without the Petitioner being giving an opportunity to represent against the ACR. He claimed that the President of the ITAT had no authority to record the ACRs of the Members. This plea was accepted by the High Court and it was held as the Tribunal is a judicial body, the President, though exercising administrative control over the Benches, had no power to write the ACRs of the Members. It was also held that the the Tribunal had judicial autonomy and the Government could not act like a reviewing authority on the ACRs. It was directed that as the ACRs were illegally recorded by the President and reviewed by the Government, the Selection Committee must reconsider the claim of the Petitioner on merits de hors the ACRs. This verdict was challenged by a Vice President of the Tribunal before the Supreme Court. HELD by the Supreme Court at the interim stage:

Put up for final disposal on October 03, 2012. During the pendency of the special leave petition, the direction of the High Court in paragraph 24 of the impugned judgment shall remain stayed.

Review Petition dismissed

Pursuant to the judgement in Vodafone International Holdings B.V. vs. UOI holding that Vodafone was not liable to pay capital gains on the transfer of shares, the Union of India filed a review petition in the Supreme Court seeking a review of the aforesaid judgement. HELD by the Supreme Court dismissing the review petition:

We have carefully gone through the review petition filed by the Union of India on 17th February, 2012. We find no merit in the review petition. The review petition is, accordingly, dismissed.

S. 129(6) of Customs Act barring ex-Members from practise before CESTAT is valid

The appellant was appointed Member (Technical) of CEGAT on 1.11.1990 and demitted office on 7.3.1993. He enrolled as an advocate with the Bar Council of India on 18.4.1993. S. 129 (6) of the Customs Act, 1962 introduced by FA 2003 debarred ex-Members from appearing, acting or pleading before the CEGAT/ CESTAT. S. 129(6) was challenged before the High Court on the ground that (i) it was ultra vires Article 19(6) of the Constitution of India & (ii) could not apply to persons who had demitted office before the insertion of the provision. The High Court (P.C. Jain vs. UOI) rejected the plea on the ground that the restriction was to remove a perceived bias and was not unreasonable. On appeal to the Supreme Court, HELD dismissing the appeal:

(i) As regards the constitutional challenge, while the right to practice as an advocate is not only a statutory right under the Advocates Act but is also a fundamental right under Article 19(1)(g) of the Constitution, it is subject to reasonable restrictions. The restriction imposed by s. 129(6) of the Customs Act is constitutional because (i) the restriction is partial to the extent of practice before CESTAT and does not bar practice before other judicial bodies & (ii) the restriction is intended to serve a larger public interest and to uplift the professional values and standards of advocacy in the country. It adds to public confidence in the administration of justice by the Tribunal;

(ii) The contention that the restriction is based on an illogical presumption of likelihood of bias is also not acceptable because when one has been a member of a Tribunal over a long period and other members have been his co-members, it is difficult to hold that there would be no possibility of bias or no real danger of bias. Even if this possibility was ruled out, it is still in the interest of the institution that restrictions are enforced. Then alone will the mind of the litigant be free from a lurking doubt of likelihood of bias and this would enhance the image of the Tribunal;

(iii) The contention that s. 129(6) cannot be given effect to retrospectively so as to adversely affect persons who were enrolled as advocates when the provision was not on the statute book is not acceptable because there is a distinction between a law being enforced retrospectively and a law that operates retroactively. The restriction in the present case is one where the right to practice before a limited forum is being taken away in presenti while leaving all other forums open for practice. Though the restriction has the effect of relating back to a date prior to the presenti, the law stricto sensu is not retrospective, but is retroactive. The restriction does not interfere with settled or vested rights.

Delay by Department in filing appeal cannot be mechanically condoned

The Government filed an appeal to challenge the judgement of the High Court. There was a delay of 427 days in filing the appeal which was caused due to the normal bureaucratic procedure. The department cited a number of judgements and argued that in matters relating to the Government, a lenient view had to be taken as there was no want of bona fides. HELD dismissing the appeal:

In the absence of plausible and acceptable explanation for the delay, the question to be posed is why the delay should be mechanically condoned merely because the Government is a party. Though in a matter of condonation of delay when there was no gross negligence or deliberate inaction or lack of bonafide, a liberal concession has to be adopted to advance substantial justice, in the facts and circumstances, the Department cannot take advantage of various earlier decisions. The claim on account of impersonal machinery and inherited bureaucratic methodology of making several notes cannot be accepted in view of the modern technologies being used and available. The law of limitation undoubtedly binds everybody including the Government. It is the right time to inform all the government bodies, their agencies and instrumentalities that unless they have reasonable and acceptable explanation for the delay and there was bonafide effort, there is no need to accept the usual explanation that the file was kept pending for several months/years due to considerable degree of procedural red-tape in the process. The government departments are under a special obligation to ensure that they perform their duties with diligence and commitment. Condonation of delay is an exception and should not be used as an anticipated benefit for government departments. The law shelters everyone under the same light and should not be swirled for the benefit of a few. As there was no proper explanation for the delay except mentioning of various dates and the Department has miserably failed to give any acceptable and cogent reasons sufficient to condone such a huge delay, the appeals have to be dismissed on the ground of delay.

Judge alleged to have “outsourced” judgements can be dismissed without opportunity of hearing or enquiry

The appellant was appointed sub-ordinate Judge in the Garhwa Civil Court. The Inspecting Judge inspected the records of the Civil Court and submitted a confidential report to the Chief Justice of the Jharkhand High Court that the appellant did not prepare judgments on his own but got it prepared by some body else before delivering the judgments. The Chief Justice referred the matter to the Full Court. The Full Court resolved that the appellant be recommended for removal from service without any enquiry as it was felt that it was not practicable in the interest of the institution to hold an inquiry since it may lead to the question of validity of several judgments rendered by him. Pursuant to that resolution, the Governor exercised power under proviso (b) to Article 311(2) of the Constitution and removed the appellant from service. This was unsuccessfully challenged before the High Court. In appeal before the Supreme Court, it was argued that an enquiry for the purpose of removal of a judicial officer could not be dispensed with. It was also claimed that there was no evidence to show that the appellant was guilty of any misconduct as alleged. HELD dismissing the appeal:

(i) Under the “doctrine of pleasure” recognized under Article 310, all civil posts under the Government are held at the pleasure of the Government and are terminable at its will. Under Articles 310 and 311, public servants are given protection from being dismissed, removed or reduced in rank without holding a proper inquiry or giving a hearing. Exceptions to Article 311 have been provided that the said Article shall not apply to such employees who have been punished for conviction in a criminal case, where inquiry is not practicable to be held for reasons to be recorded in writing or where the President or the Governor as the case may be is satisfied that such an inquiry is not to be held in the interest of the security of the State. The power to dispense with an enquiry is an absolute power of the disciplinary authority who after following the procedure laid down therein can resort to such extra ordinary power provided it follows the pre-conditions laid down therein meaningfully and effectively;

(ii) On facts, the allegation against the Judge was that he did not prepare judgments on his own but got it prepared through some body else. The view of the High Court that it is not possible to hold an enquiry and that holding of such enquiry should be dispensed with in view of the fact that if an enquiry is held the same may lead to the question of validity of several judgments rendered by the Judge is a legal and valid ground for not holding an enquiry. There was also no necessity for giving the Judge any opportunity of hearing before removal from service.

High Court to consider whether Low Tax Effect Circular has retrospective effect

The Department filed an appeal u/s 260A in 2006 where the tax effect was less than Rs. 10 lakhs. The High Court, relying on Instruction No. 3/2011 Dated 9-2-2011 (which had been held to apply to pending appeals in CIT vs. Delhi Race Club Ltd) dismissed the appeal as not maintainable. The Department challenged the decision on the ground that para 11 of Instruction No. 3/2011 Dated 9-2-2011 made it clear that it would apply only to appeals filed on or after 9.2.2011 and not to appeals filed earlier. HELD by the Supreme Court:

In view of Para 11 of CBDT Instruction No.3/2011 dated 9th February, 2011, liberty is granted to the Department to move the High Court by way of review within four weeks.

36(1)(vii)/36(1)(viia) Bad Debts: Banks are entitled to both deductions

The Supreme Court had to consider whether a bank was eligible to claim a deduction for bad debts u/s 36(1)(vii) in respect of its (rural & urban) advances and also claim a provision for bad and doubtful debts u/s 36(1)(viia) in respect of its rural advances in view of the Proviso to s. 36(1)(vii) which provides that only the excess over the credit balance in the provision for bad and doubtful debts account made u/s 36(1)(viia) can be claimed. The Special Bench of the Tribunal in DCIT vs. Catholic Syrian Bank 88 ITD 185 held that as s. 36(1)(viia) was confined to rural advances, a claim for bad debts of urban advances was not subject to the limitation of the Proviso to s. 36(1)(vii). However, the Full Bench of the Kerala High Court took a contrary view in CIT vs. South Indian Bank 233 CTR 214 (Ker) (FB) and held that a bank was entitled to claim deduction of bad debts u/s 36(1)(vii) only to extent it exceeded the provision allowed as deduction under s. 36(1) (viia). On appeal to the Supreme Court, HELD reversing the Full Bench of the High Court:

Per Court:

(i) The clear legislative intent of s. 36(1)(vii) & 36(1)(viia) together with the circulars issued by the CBDT demonstrate that the deduction on account of provision for bad and doubtful debts u/s 36(1)(viia) is distinct and independent of s. 36(1)(vii) relating to allowance of bad debts. The legislative intent was to encourage rural advances and the making of provisions for bad debts in relation to such rural branches. The functioning of such banks is such that the rural branches were practically treated as a distinct business, though ultimately these advances would form part of the books of accounts of the head office. An interpretation which serves the legislative object and intent is to be preferred rather than one which subverts the same. The deduction u/s 36(1)(vii) cannot be negated by reading into it the limitations of s. 36(1)(viia) as it would frustrate the object of granting such deductions. The Revenue’s argument that this would lead to double deduction is not correct in view of the Proviso to s. 36(1)(vii) which provides that in respect of rural advances, the deduction on account of the actual write off of bad debts would be limited to excess of the amount written off over the amount of the provision which had already been allowed u/s 36(1) (viia) (Southern Technologies 320 ITR 577 (SC) & Vijaya Bank 323 ITR 166 (SC) referred)

(ii) U/s 119, the CBDT is entitled to issue Circulars to explain or tone down the rigours of law and to ensure fair enforcement of its provisions. These circulars have the force of law and are binding on the income tax authorities, though they cannot be enforced adversely against the assessee. Normally, these circulars cannot be ignored. A circular may not override or detract from the provisions of the Act but it can seek to mitigate the rigour of a particular provision for the benefit of the assessee in certain specified circumstances. So long as the circular is in force, it aids the uniform and proper administration and application of the provisions of the Act (UCO Bank vs. CIT 237 ITR 889 (SC) followed)

Per S. H. KAPADIA, CJI (concurring)

(iii) S. 36(1)(vii) & 36(1)(viia) are distinct and independent items of deduction and operate in their respective fields. S. 36(1)(vii) allows a deduction for bad debts in respect of urban and rural debts. However, by virtue of the Proviso to s. 36(1)(vii), the deduction in respect of rural debts is limited to the extent of difference between the debt or part thereof written off in the previous year and the credit balance in the provision for bad and doubtful debts account made under s. 36(1) (viia). The proviso prevents benefit of double deduction with reference to rural loans. This is in consonance with the CBDT’s interpretation in the Circulars.

For Expl (baa) to s. 80HHC, netting of income from expenditure is allowed

The AO & CIT(A) computed s. 80HHC deduction by deducting 90% of the gross interest received from the profits of business. However, the Tribunal, relying on Lalsons Enterprises 89 ITD 25 (Del) (SB) & Shri Ram Honda Power Equip 289 ITR 475 (Del), held that only the net interest could be deducted (subject to nexus between the expenditure and income being proved). On appeal by the department, the High Court (CIT vs. Asian Star Co Ltd 326 ITR 56 (Bom)) reversed the Tribunal and held that the gross receipts had to be excluded. On appeal by the assessee, HELD reversing the High Court:

Under Clause (1) of Explanation (baa) to s. 80HHC, 90% of any receipts by way of brokerage, commission, etc “included in any such profits” have to be deducted from the profits & gains of business. The expression “included any such profits” means such receipts by way of brokerage, commission, etc included in the profits & gains. Therefore, if any quantum of receipts by way of brokerage, commission, etc is allowed as expenses u/s 30 to 44D and is not included in the profits of business, 90% of such quantum of receipts cannot be reduced under clause (1) of Explanation (baa) to s. 80HHC. In other words, only 90% of the net amount of any receipt of the nature mentioned in clause (1) which is actually included in the profits of the assessee is to be deducted from the profits of the assessee for determining “profits of the business”. The High Court wrongly relied on CIT vs. K. Ravindranathan Nair 295 ITR 228 (SC) & circular dated 19.12.1991 explaining the clauses of the Finance Bill, 1991 (Principle in Distributors (Baroda) 155 ITR 120 (SC) followed; Shri Ram Honda Power Equip 289 ITR 475 (Del) approved)