1.      Introduction

A country levies taxes, both direct and indirect for promoting its own economic development. For economic development not only domestic capital is necessary but also the contribution of foreign capital in the domestic market is required. Prior to 1970, world trade grew at a greater pace than that of the FDI, but in the following decades since then the flow of FDI has grown at twice the pace of the growth of worldwide exports.1 Hence the sovereign authorities felt the need to relax the taxation statutes in order to seek contribution from foreign capitalists, with an ultimate motive of economic development.
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Section 37 of the Income Tax Act, 1961 (the “Act”) has been a source of numerous disputes between the department and the taxpayer.  For the sake of convenience, the sub-section with explanation thereto is quoted below:

37 (1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head “Profits and gains of business or profession”.

Explanation—For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure.

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The nature and scope of assessment/ reassessment and nature & scope of additions/disallowances in assessments to be made u/s 153A of the Act have been contentious issue. Contradictory views have been expressed by different benches of Income Tax Appellate Tribunal on the issue as to whether those assessments which have already been passed u/s 143(3) or u/s 143(1) on the date of search would abate or not and whether addition can be made during assessment/ reassessment u/s 153A relating to the matters for which no incriminating material was found during the course of search.

1. Capital Gains exemption u\s 54 – Mumbai Tribunal decision – Jatinder Kumar Madan vs. ITO – [2012] 26 SOT 583 {Mum}{Trib} – Surrender of  a residential flat in an existing  building by assessee to a developer under a development agreement in lieu of another flat to be allotted to him in the new building to be developed. Held – Agreement amounts to construction of new flat by assessee and not purchase.

Under the provisions of section 54, an assessee is entitled to exemption in respect of long term capital gains resultant from transfer of residential premises, if he either purchases another residential premises within a period of two years or constructs a residential premises within three years from the date of the transfer. In the case before the Mumbai Tribunal cited above, the assessee had entered in to a development agreement with a developer under which he had agreed to surrender his residential flat in an existing building in lieu of a another flat agreed to be allotted by the developer in the building proposed to be  re-developed. Before the Assessing Officer, the assessee had canvassed his claim for exemption u\s 54 on a proposition that the development agreement amounted to an agreement for construction of a new flat by the developer on his behalf and this being so, he ought to be entitled to the exemption as the construction of the flat had been completed within a period of three years from the date of surrender of his old flat. In assessment, this claim of the assessee had been turned down by the Assessing Officer. The assessee’s appeal to the Appellate Commissioner was also dismissed

Narayana Murthy, the billionaire founder of Infosys and doyen of the Indian I. T. Industry has expressed deep disappointment that India has faltered in its growth pace owing to the abject indifference of the Government and the flawed policies of the Income-tax department.

In an interview, Narayana Murthy took off from where entrepreneurial whiz kid Jaitirth Rao had left it (Dear Income-tax Department, ‘Thank You’ For Ruining Indian Economy) and agonized that while the entire World had great expectations from India, we had “fallen very, very short”.

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The scope of Assessment u/s 153A of the Income Tax Act, 1961 has been a controversial aspect since long. Though recently it has been settled courtesy to the announcement of the Finance Act 2012, which has lead to certain legal development and judicial clarification; nevertheless the verdict of Apex Court on the same is yet awaited.

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The nature and scope of assessment / re-assessment of total income u/s 153A in the case of a person who has been searched u/s 132 or in whose case requisition has been made u/s 132A has been an issue of debate and controversy. The issue as to what kind of additions can be made during assessment and re-assessment proceedings undertaken u/s 153A in the case of searched person has been put to judicial test  at different occasions and there have been contradictory judgments delivered by different benches of Income Tax Appellate Tribunal.
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The scope and effect of a reopening of assessment is still shrouded in mystery even after various judgments of the Supreme Court and High courts. Reassessment is one of the distinguishing weapons in the armoury of the Department, empowers the Assessing Officer to assess, reassess or recompute income, turnover etc, which has escaped assessment. A number of intricate issues crop up during the reassessment proceedings. Some of the issues are been dealt with here under:

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Chetan Bhagat, in his article in the Times of India, draws on his rich experience as a merchant banker to explain that foreign investors are drawn to invest in a country for two reasons: first, its growth prospects and second, the stability of its economic and fiscal policy. The problem with India, he says, is that its fiscal policies are highly unstable. No one can say with any certainty whether a certain fiscal policy introduced today will be continued tomorrow or not. In this, Bhagat is echoing the timeless wisdom of Nani Palkhiwala who, as early as in 1993, sounded the warning that the Mandarins of North Block were making a big blunder by mistaking change for progress and mindlessly churning out ill-thought out amendments to the Income-tax Act year after year. Even in contemporary times, eminent senior advocate Harish Salve explained that the reason why China was miles ahead of India in terms of foreign investment and progress was because, though it was a totalitarian regime, it was a model for stability in its fiscal policies. The law was not amended frequently to suit the whims and fancies of the people who are in power.

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Payment received as non-compete fee was treated as a capital receipt till the assessment year 2003-04. Through the Finance Act, 2002, the said receipt were made taxable under section 28(va) of the Income Tax Act, 1961 with an exception is found under proviso clause (i) to section 28(va)(a), which provides that any sum, whether received or receivable, in cash or kind, on account of transfer of the right to manufacture, produce or process any article or thing or right to carry on any business, which is chargeable under the head ‘Capital gains’ would not be taxed under section 28(va). Further the Finance Act, 2002 also amended section 55(2)(a) to provide for ‘cost of acquisition’ in case of transfer of ‘right to manufacture, produce or process any article or thing’ or ‘right to carry on any business’. These amendments have brought about a dichotomy in the taxability of non-compete fees, with regards to taxability as ‘Business income’ under section 28(va), or as ‘Capital gains’ covered by the proviso (i) to Section 28(va)(a). From the decisions of the Income Tax Appellate Tribunal (‘ITAT’) and the High Courts it can be seen that the taxability of non-compete fee would depend on the factors such as the position of the recipient of the non-compete fee with regards to the business before and after the non-compete covenant coming to operation, his relation with the payer of non-compete fee, the type of asset transfer taking place, and the terms of the non-compete covenant. Some of these factors influencing the taxability of non-compete fee have been discussed below: