1. Introduction

1.1 Any Authority under the direct tax laws who is entrusted with the task of implementing and enforcing the law has to interpret the relevant provision involved. There is administrative and judicial hierarchy under the tax laws, therefore the interpretation placed upon a provision by a higher authority will be binding on the lower authority. Thus an interpretation placed by higher authority becomes a ‘precedent’ for the lower authority, until it is reversed or modified by a higher authority, or amendment of law by the legislature. The statement of law contained in the order is a declaration of law by the Supreme Court within the meaning of Article 141 of the Constitution. The Appellant of the Constitution of India reads as under:

“141. Law declared by Supreme court to be binding on all courts – The law declared by the Supreme Court shall be binding on all courts within the territory of India.”

Special leave to appeal are filed before the Supreme Court under Article 136 of the Constitution. The Supreme Court may accept or reject the same. The consequences of rejection are of far reaching effect. The Apex Court may reject the petition seeking grant of special leave to appeal, for several reasons. When such special leave petition (SLP) is rejected or allowed what are its consequences? Can it be said that the Supreme Court has declared its view on the legal aspects involved and hence by virtue of Article 141 of the constitution, all lower Courts, Tribunals, etc. are bound by the view of the Apex Court? We have tried to explain the legal implication of rejection of Special Leave Application by the Apex Court.

Income-tax Act, 1961 (hereinafter referred to as ‘The Act’) is the only legislation of our country which refers 92 Central Acts and various State Legislations. To understand the various taxation issues relating to Real Estate Transactions, it is very essential to know the provisions of general law with special reference to Transfer of Property Act, Registration Act, Stamp Act, Development Control Regulations, etc. In this paper, we have made an attempt to discuss some of the very important taxation issues relating to Real Estate Transactions.

2. Development Rights

2.1 Capital Assets.

Section 2(14) of the Act defines “capital asset” mean “property of any kind”, held by the assessee whether or not connected with his business or profession, but specifically excludes ‘stock in trade’. In CIT vs. Tata Services Ltd. (1980) 122 ITR 594 (Bom.) and CIT vs. Vijay Flexible Containers (1990) 186 ITR 693 (Bom.), the court has held that the right to obtain conveyance of immoveable property is a capital asset on the same principle the Development rights are capital assets.

Friends,

I am deeply honoured to be invited here in this National Tax Conference being held at Varanasi. I am particularly very happy that it is under the Presidentship of Shri Bharat Ji Agrawal, Senior Advocate of Allahabad High Court, who was my senior in the legal profession when I was a lawyer in the Allahabad High Court.

The topic which we are discussing today is extremely important.

A terrible worldwide recession is sweeping all over the globe, playing havoc with the lives of millions of people. Everyday news comes of job cuts, decline in consumer spending and the downward trend of the stock market. All sorts of explanations and cures are being given for this catastrophe, most of them superficial.

Some say that the recession is due to greed. Some blame the sub prime mortgages, others blame the monetary policy, or the interest rates, etc. To my mind these are superficial explanations, and one has to go deeper to find the real cause.

Tax Planning

Tax planning as a concept had at a point of time suffered degradation and for a while seemed to be a euphemism for tax evasion. This was the fall­out of some observations in McDowell’s case, [154 ITR 148 (SC)] especially in the separate opinion of Justice Chinnappa Reddy. But the libel did not stay too long. Sabyasachi Mukherjee, Justice of the Supreme Court salvaged its respectability by observing tax avoidance by genuine transactions is not evil. It is any subterfuge or simulation of a transaction or rather a hoax of a make-believe transaction which is despicable and cannot be countenanced. In Playworld Electronics, he observed [184 ITR 308 (SC)] : “It is true that tax planning may be legitimate provided it is within the framework of the law. Colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by dubious methods. It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges. It is also true that, in order to create an atmosphere of tax compliance, taxes must be reasonably collected and when collected, should be utilised for proper expenditure and not wasted. (See the observations in CWT vs. Arvind Narottam (1988) 173 ITR 479 (SC), it is not necessary, in the facts of this case, to notice the change in the trend of judicial approach in English (Sherdeley vs. Sherdeley (1987) 2 All ER 54 (HL). While it is true, as observed by Chinnappa Reddy J., in McDowell and Co. Ltd. vs. CTO (1985) 154 ITR 148 (SC) that it would be too much to expect the Legislature to intervene and take care of every device and scheme to avoid taxation and it is up to the court sometimes to take stock to determine the nature of the new and sophisticated legal devices to avoid tax and to expose the device for what they really are and to refuse to give judicial benediction, it is necessary to remember, as observed by Lord Reid in Greenberg vs. IRC (1971) 47 TC 240 (HL), that one must find out the true nature of the transaction, it is unsafe to make bad laws out of hard facts and one should avoid subverting the rule of law”.

1. After the judgment of the Supreme Court in the case of ACIT vs. Rajesh Jhaveri Stock Brokers (P) Ltd. delivered on 23-5-2007 and reported at (2007) 291 ITR 500 (SC), a large number of actions are being initiated u/s. 147/ 148 of the Income-tax Act, 1961 (‘the Act’ for short) and often high-pitched Income tax assessments are being made at several places.

2. What is further disquieting is that the stay of recovery of tax demand is not being granted pending disposal of the appeal by the CIT (Appeal) and at least 50% of the tax demand including interest u/s. 234B, is being pressed for payment for which coercive action like attachment of bank accounts, levy of penalty u/s. 221(1) etc. are also being taken.

3. Board’s Instruction No. 1914 dated 2-9-1993 for stay of demand is often relied upon to reject the stay applications and to insist on payment of at least 50% of the demand till the decision of the CIT(A). This is causing great hardship to the concerned assessees and often brings about helplessness and frustration among certain tax practitioners.

1.1 The scrutiny of returns had been a regular measure to check tax evasion since long. The collection of information for the purpose of making enquiries in the course of such scrutiny assessments is as much important as the assessment proceedings itself. There are various provisions in the Income-tax Act, 1961 for the purpose of collecting information directly from the assessees as also from the others for the purposes of making such enquiries at various stages of assessment proceedings. The findings of such enquiries are utilized for the purposes of completing the assessment proceedings in the case of a particular assessee.

1.2 In recent years, the manner of collecting information for the purpose of making an enquiry prior to the commencement as also during the assessment proceedings has undergone a paradigm shift. Now the legislature is empowering the Department with various provisions so as to enable it to collect information, which are neither specific to a particular assessee nor have any direct link to a particular income at the initial stage. In the past, the Courts have taken unanimous views that there must be an application of mind to the information collected and its relevance in assessment of income of an assessee.

The increasing participation of multinational groups in economic activities in the country has given rise to new and complex issues emerging from transactions entered into between two or more enterprises belonging to the same multinational group. The profits derived by such enterprises carrying on business in India can be controlled by the multinational groups by manipulating the prices charged and paid in such intra-group; transactions, thereby, leading to erosion of tax revenues. With a view to provide a statutory framework which can lead to computation of reasonable, fair and equitable profits and tax in India, in the case of such multinational enterprises, the Legislature has enacted transfer pricing provisions in the Income-tax Act. These provisions provide a comprehensive code relating to computation of income from international transactions having regard to arm’s length price, meaning of associated enterprise, meaning of international transaction, determination of arm’s length price, keeping and maintaining of information and documents by persons entering into international transactions, furnishing of a report from an accountant by persons entering into such transactions and definitions of certain expressions occurring in the said sections.

1. INTRODUCTION

1.1. Finality to assessment facilitates the assessee to plan his affairs and to decide the business planning for long term strategies. However tax authorities feel that there is no finality to any assessment as the principle of Res Judicata is not applicable to tax proceedings. In this paper, an attempt has been made to understand the rule of Res Judicata as applicable to tax proceedings.

2. MEANING

2.1 The word ‘Res Judicata’ is derived from the Latin language. It means a case or suit already decided. The principles of Res Judicata, in the eye of law, is that if on any facts and/or law, a particular decision is made than subsequently if any lis on similar facts and/or law is to be decided between the same parties, it should be same as made earlier.

As per The Law Lexicon “Res adjudicata” means “A matter adjudged; a thing judicially acted upon or decided; a thing or matter settled by judgment; a thing definitely settled by judicial decision, the thing adjudged”.

In a globalised world, the transfer and sharing of intellectual property rights is crucial to the survival of modern industries and service sector in a highly competitive world. The present era is one in which capital is denoted by less of tangible assets like money and raw materials and more of intellectual property rights. In this context, it would only be in the self-interest of developing countries like India to create an atmosphere which is conducive to and promotes transfer of intellectual property and technology by foreigners.1 The taxation in India of such transfer is one aspect of creating that atmosphere. An ideal tax system would be one which keeps abreast of technological developments having effect on it, all the while keeping a delicate balance between providing maximum financial means to the Government and avoiding bleeding taxes on assessees. At this juncture, the pertinent questions would be has our tax system been mature enough to categorise and classify incomes arising by way of intellectual property and technology in accordance with time honoured principles of taxation or has it been befuddled by the intangible nature of the subject; and whether there is an effort by our taxation system to soften the rigours of taxation of cross-border journey of intellectual property.

1. This article is not an emotional response to Mumbai terror attack. Otherwise, its ink would also fade just like human memory which wanes with efflux of time. We have seen a lot of defiance to the terror attack in form of gatherings, media coverage and so on. The real test is whether these will survive the onslaught of time. Already media which was once exceptionally devoted to coverage of the terror attacks and security concerns is tiring and what is now being covered are state election results. Gone is the coverage of the candles lit outside Taj and what is being shown is some very jubilant dancing. No, the dancing is not because we have won the war with Pakistan. We are dancing because our political party has won the state elections.