Friday, March 22, 2013

Imp case Laws from Oct 2012 to Dec 2012-CA Final Exam May 2013

Case Laws Part # 2 [Most of these are announced during Jan 2012 to Sep 2012]
Basics of the IT Act
Case Law on Basics of the Income Tax Act:
Compensation for fraud occurring in India is taxable in India as ‘Other Income’.
‘Right of action’ is different from ‘Cause of Action.’ Even though the plaintiffs had a right of action in the US, yet their cause of action arose or accrued in India by reason of the alleged tort practiced by the company and its auditors in India; Therefore, compensation accrued or arose in India within the meaning of Sec 5(2), as right of compensation arose in India. Therefore, the same is taxable as Income from Other Sources in India. [In IC, in re (2012) 24 317]
Residential Status & Incidence of tax
Case Law on Residential Status
The general understanding in determining the residential status is to take into account the date of arrival and the date of departure. In a recent decision, the Mumbai Tribunal held that “Date of arrival has to be excluded if it is an incomplete day” while determining the residential status of the assessee. [ITO Vs Fausta C.Cordeiro] [2012] [24 193] [Mumbai-Tribunal]

Case Law on Fees for Technical Services
Incidence of tax [Meaning of Fees for Technical Services]
It may be noted that “Fees for technical services” U/S 9(1)(vii) does not include “Consideration for any construction, assembly, mining or like project undertaken by the recipient----------.” The words used are like project undertaken by the recipient. Thus, where the recipient had not undertaken the project then the benefit of exclusion cannot be taken. Hence, in such cases it would be taxable U/S 9.
Thus in a case where A had undertaken a contract in relation to mining and where certain services are availed by the said ‘A’ from ‘B’, then any service rendered by ‘C’ to ‘B’ will be treated as ‘Fees For Technical Services.’ On the other hand, if ‘C’ rendered services directly to ‘A’, then it won’t be construed as ‘Fees For Technical Services’ as the definition clearly excludes such an activity from its purview. [M-1 Overseas Ltd., In re] [2012] [24 73] [AAR-New Delhi]

Capital Gains

Case Law on indexation on HUF property on partition
Where a member receives the property from the HUF upon its partition, the indexation benefit will start from the year in which the HUF acquired the property but not the year in which the partition took place.
Thus, where the HUF acquired the property prior to 1st April 1981 and transferred the asset to its members on 2nd April 2007, it was held that indexation is to be calculated w.e.f 1st April 1981 but not from 2nd April 2007. [Smt.Shakuntala Somani Vs ITO] [2012] [20 78] [Indore-Trib]
Case Law on Indexation on UTI units: Whether indexation benefit is available on units of UTI?
No indexation for units issued by UTI as the units are in the nature of bonds. [Dy CIT Vs Areez.P.Khambhatta] [2012] [17 51] [Ahmadabad – Tribunal]
Case Law on Indexation when the plot of land acquired by paying in installments
Where the plot of land is acquired by paying sums in installments, then the HC held that indexation benefit is to be counted from the date of each installment. Readers may note that this method of computation is not applicable when the person takes a loan from bank as in such a case, the seller of the property is paid consideration in full. The purchaser pays to banker in installments.   On the other hand, where the purchaser directly pays in installments to the landowner and acquires the property, then indexation is to be calculated w.r.t each installment. [Nirmal Kumar Seth Vs CIT] [2012] [17 127] [Mag-HC]

Set off & Carry forward of Losses
Case Law on Loss of firm cannot be set off against income of the successor partner:
The assessee, an individual, took over the running business of a partnership firm, in which he was a partner, including fixed assets, current assets and liabilities. In his individual return, he claimed that he was entitled to set off loss suffered by erstwhile partnership firm against his individual income. The High Court held that as per the provisions of Sec 78(2), it is only person who incurs or suffers loss who will be entitled to carry forward same and set it off,  and no other person except in the case of succession by inheritance. Thus, the loss incurred by the firm cannot be allowed in the individual’s hands as it is not a case of succession by inheritance. [Pramod Mittal Vs CIT] [2012] [19 24] [Delhi HC]

Case Law: Ownership of land is not mandatory for deduction U/S 80-IB (10):

In CIT Vs Radhe Developers [2012] [17 156] [Guj-HC], the court held that to claim deduction U/S 80-IB(10), it is not necessary for the developer of property to buy land before developing the same. It is enough if he undertakes development of property. So long as he had taken full responsibilities for execution of development project and profit or loss which might result from such execution belongs to him in entirety, deduction U/S 80-IB is allowable. 

Company Assessment
Case Law on assessment
Instance where the Tribunal Held that AO can go behind the accounts, not prepared in accordance with prescribed AS and Schedule VI:
The assessee earned profit on sale of shares. It did not credit the same to profit and loss account but directly credited to capital reserve Account in the Balance Sheet. AO formed an opinion that as per Sec 115JB(2), assessee was required to prepare P&L Account in accordance with Parts II and III of Schedule VI of the Companies Act, 1956 and profit on sale of shares should have been part of the profit and loss account. Consequently, he recomputed the profit and brought profit on sale of shares to taxation under MAT provisions U/S 115JB. The Tribunal upheld the action of the AO. [Sumer Builders (P) Ltd Vs DCIT] [2012] [19 43]

Case Law on book profit
Amalgamation Reserve created on revaluation of asset not to be included in book profit for MAT:
Two 100% Subsidiary Companies were amalgamated with the assessee company. The assessee company debited existing market value of WIP which had been taken over. [WIP is taken over at Market Value]. The difference that arose due to revaluation had been routed in balance sheet without bringing the same to profit and loss account. AO recomputed the profit. The Tribunal held that the action of the AO is wrong since the amount debited in profit and loss account did not consist of any portion of reserve, the same cannot be added for the purposes of book profit. Therefore, amount which was never routed through profit and loss account could not be considered for the purposes of determination of book profits U/S 115JB. [ITO Vs United Estate (P) Ltd] [2012][20 588][Mumbai – Tribunal]

Case Law on dilution of partnership: Amount received for dilution of partnership share in favour of new partner is not taxable at all:
Four partners were admitted to a firm and they introduced Rs 3.50 Crores as their capital contribution and the same was withdrawn as drawings equally among the existing three partners whose shares were reduced as a result of admission of new partners. The HC held that there is no provision in the Act for levying capital gains in such situations. Hence, the same is not liable to capital gains tax. [CIT Vs P.N.Panjwani] [2012] [21 458] [Karnataka – HC]

Case Law on Remuneration to partners
Remuneration to partners – Whether Quantification is required? [Contrary Rulings]
Payment of remuneration to partners cannot be allowed, if it has been left to be determined by the partners at the end of the accounting period. [Sood Bhandari & Co Vs CBDT] [2012] [17 99] [P&H-HC]

Contrary ruling on the same subject:
Quantification of salary (as stipulated by partners), according to determination of profit at the end of accounting year, cannot bar them from claiming deduction within the parameter of law. Therefore, partners are entitled to remuneration. [Eqbal Ahmed & Co VS CIT](2005)278 ITR 255.
Case Law on deed of partnership
Status of firm cannot be denied when notarized copy of deed is furnished.
In “CIT Vs Shakti Electrical Industries” [2012] [20 635] [MP][HC]”, the assessee filed its return in the status of firm. However, he could not produce certified copy of the deed. AO denied the status of the PFAS and assessed the same as PFAOP.
It was on record that partnership deed duly authenticated by notary along with typed copy of deed duly signed by all partners was submitted before the Assessing Officer during the course of assessment proceedings.
The HC held that since assessee had filed the deed duly authenticated by notary which was duly signed by all partners, status of firm could not be denied.
Sums received by coparcener on partition cannot be brought to tax:
The Tribunal held that the money received by the assessee in her capacity as coparcener and towards her share of the properties of HUF, on partition of HUF, could not be said to be sum of money or property received without consideration. The Right, Title and Interest of the coparcener in the assets of the HUF would itself be a consideration. Therefore, the sum received by the assessee towards her share as a coparcener of the HUF from the HUF on partition of the HUF cannot be brought to tax. [Smt Sudha V.Iyer Vs ITO] [2011] [15 234] [Mumbai-Tribunal]
Charitable Trusts

Case Law on Trusts
In the case of a trust, deficiency in one year can be met with surplus in another year.
In view of Sec 11(1)(a), expenditure incurred in earlier year can be met out of income of subsequent year and utilization of such income for meeting expenditure of earlier year would amount to such income being applied for charitable / religious purposes. In view of the above definition, if a trust receives Rs 100/- year 1 and applied Rs 150/- in Year 1, then the excess amount spent in Year 1 can be carried forward for Year 2. [CIT Vs Shri Gujrati Samaj] [2012] [17 164] [MP High Court]

Case Law on Corpus Fund of Trust
Corpus Fund is not taxable even if misused by the trust:
In “CIT Vs Sri Durga Nimishambha Trust [2012][18 173][Karnataka-HC]”, the assessee received certain amount as contribution towards corpus fund which was kept in fixed deposit. Revenue treated said contribution towards corpus fund as income and levied tax. The HC held that even if corpus fund was misused, it could not be levied thereon. In such a situation, the proper course of action for the revenue would be to seek the cancellation of registration granted U/S 12A.

Case Law on Trusts
A Trust received more than the cut off limit of Rs 10 lakhs / Rs 25 lakhs – Whether exemption denied?
A charitable trust registered U/S 12AA and having business income can continue to enjoy tax exemption if the aggregate receipt from business does not exceed Rs 25 lakhs. The business may be unrelated to the charitable objects but the income from such business, if meant for pursuing the charitable objects, is eligible for tax exemption.

To qualify under Sec 10(23C)(vi) exemption, holding of classes is not mandatory.
The High Court held that holding of classes is not mandatory for an institution to qualify and to be treated as an educational institution. If activity undertaken and engaged is educational, it is sufficient.
Thus, where the assessee conducted examinations for ICSE and ISC, awarded certificates to those who passed such examination and conducted other incidental activities and where the assessee’s income came from sources such as registration and affiliation fees, examination fees, re-check and miscellaneous fees, the HC held that it is eligible for getting registration U/S 12A. “[Council for the Indian School Certificate Examination Vs DGIT] [2012] [20 505] [Delhi][HC]”.

Coaching classes for distance education are not charitable activities, thus, exemption is not allowed:
The Tribunal held that the student who is appearing for open university / distance education can prepare himself instead of going to a coaching classes. So a mere coaching class for preparing the students to attend the examination conducted by the open university / other university / distance education cannot be considered to be a regular and systematic schooling within the meaning of Sec 2(15). Therefore, it cannot be treated as charitable.
[DDIT Vs Kuttukaran Foundation] [2012] [19 331] [Cochin – Tribunal]
Similarly, education per se will not be a charitable activity unless it is carried out as a charitable endeavour and dedication. Therefore, where an assessee carries on education on commercial lines, it cannot claim status of charitable institution only for reason that it is engaged in an educational activity.
Thus, where the assessee trust was running an educational institution called “Preston International College” approved by MS university. The assessee was also engaged in other educational activities. The department found that conducting courses and programs of distance and continuing education and running study centre for and on behalf of the university and sharing the fees collected from the students were in the nature of commercial activities.

[Professional Education and Research Foundation Vs DIT(E)][2012][20 471] [Chennai-Trib]
Case Law on Corpus Donations – Essential ingredients:
The Tribunal held that a donation in order to obtain the character of voluntary contribution towards corpus fund must satisfy two basic conditions:
ª      Establish the identity of the donors; and
ª      The fact of the contribution towards corpus fund being voluntary and not for anything in return to the donor. (i.e Donor should not expect anything in return)
[ITO Vs Smt.Vidyawanti Labhuram Foundation for Science Research and Social Welfare] [2012] [20 793] [Jodhpur – Trib]

Thus, the tax treatment of various donations can be summed up as below:
ª      Voluntary Contributions – Chargeable to tax based on the application of income by trust. [i.e If 85% if applied, then the trust’s income is exempted]

ª      Corpus Donations – Not chargeable to tax regardless of its application if it passes the twin tests (a) Establish the identity of the donors; and (b) Donor should not expect anything in return.

ª      Anonymous Donations - Chargeable to tax at flat rate ignoring the aspect of application towards the objects of the trust. However, allowance is given U/S 115BBC for amounts prescribed under that section.
Case Law on Trusts
It is to be noted that the trust won’t  get the exemption status merely because part of its income is diverted to prohibited category of person. [ACIT Vs Idicula Trust Society] [2012] [21 144] [Delhi – Trib]

Case Law on Registration of Trusts
Registration of trust is not cancelled automatically when the receipts exceed the threshold limit specified U/S 2(15). [Rajasthan Housing Board Vs CIT] [2012] [21 77] [Jaipur – Trib]

Case Law on Registration of Trusts
Similarly, registration is not denied merely because settler is one of the beneficiaries but not the only one.
It was held that where the dominant object of the trust was to help the poor “parsis” and to donate to educational institutions, registration U/S 12A was not deniable merely because preference is given to poor relatives of the settler so long as it did not make the poor relatives of the settler the only beneficiaries. [Manockjee Cowasjee Petit Charities Vs DIT(E)][2012] [21 456] [Mumbai – Trib]
Case Law on Registration of Trusts
Aspect of application of income is not to be seen at the time of granting of registration.
The twin conditions to be satisfied at the time of granting of registration is (a) objectives of the trust should be charitable and (b) the objectives should be genuine. Thus, where the above two conditions are satisfied, the commissioner needs to grant registration. 
[Tishir Shiksha Prasar Samiti Vs CIT] [2012] [21 525] [Agra-Trib]
Case Law on Exemption for  Trusts
Holding of conference in a luxury hotel cannot snatch away the exempted granted U/S 12A:
Merely because that the donors were pharmaceutical companies and they deducted tax from the donations to the impugned trust, would not convert the donations into a commercial receipt on the basis of presumptive inferences.
Also, the benefit of Sec 12A is not denied merely because, the conferences were held in 5 Star Hotels by the trust.[Heart Care Management Vs DIT(E)] [2012] [22 Taxmann.Com 105] [Delhi – Trib]
Case Law on filing return of income
A non-resident derived some taxable income in India. But his income is exempt from tax by virtue of the specific provisions in the DTAA. Whether he is required to file return of income?

It may be noted that once a non-resident derives any taxable income, he is liable to file return in India unless there is any other provision exempting the non-resident from filing return of income say the cases covered U/S 115A. Thus, if a non-resident derived any income in India which is taxable as per the provisions of the Act but which is exempt by virtue of specific provisions of the DTAA, he is required to file the return of income. [Of course, in this case he will file nil return of income.] [VNU International B.V.] [2011] [198 Taxman 454] [AAR – New Delhi]
Case Law on Res-Judicata
Where deduction was allowed U/S 10A to the assessee undertaking by the AO without specifically dealing with the eligibility of the assessee to the said claim, the AO can re-open the assessment U/S 147 on the basis of subsequent information which arose in a later year. [Siemens Information Systems Ltd Vs ACIT] [2012]20 666] [Mumbai-HC]

Assessment Procedures
Case Law on Proceedings U/S 147

Whether sanction of the CIT can be taken where it is required that sanction of the JCIT is needed to initiate proceedings U/S 147? Where sanction has been obtained from the CIT, instead of JC as required under 151(2) before issuing notice U/S 148, notice issued shall be bad in law [R.P.Gupta & Sons (HUF) Vs. ITO]. It is so because when a particular authority has been designated to record his / her satisfaction on any particular issue, then it is that authority alone who should apply his / her independent mind to record his / her satisfaction. And the satisfaction so recorded should be independent and not “borrowed” / “dictated satisfaction”. [CIT Vs SPL’s Siddhartha Ltd][2012][17 138]
[However, the department may take shelter U/S 292BB in such cases. Hence, the assessee needs to challenge the same during the course of assessment proceedings itself such that the department cannot take shelter U/S 292BB.]
Similarly, where the AO wants to invoke powers U/S 148 based on the recordings found by another AO, the invocation of powers U/S 148 would be bad in law. [In this case, AO of a jurisdiction was dealing with a case relating the assessee and later he came to know that he does not have any jurisdiction and hence transferred the case to the AO having jurisdiction. Now the AO to whom the case was transferred wanted to act based on the belief formed by the other AO. Held, proceedings in such a case would be bad in law.] [ACIT Vs Resham Petrotech Ltd] [2012] [21 161][Ahd-Trib] 
Case Law on Reassement Proceedings
Reassessment proceedings are bad in law if time limit for issue of notice U/S 143(2) has not expired. [Jora Singh Vs ITO] [2011] [16 Taxmann.com12] [Luck-Tribunal]

Search and seizure, IT Authorities
Case Law on Powers of the Appellate Authorities

Interest received which was compensatory in nature should not be taxed. The CIT(A) should allow such claim the reduce the assessed income as his powers include power to  “Confirm / Reduce / Enhance / Annul” the assessment.
The assessee, a retired teacher, received a sum of Rs 10.92 lakhs with interest of Rs 3.29 lakhs, awarded by the Calcutta High Court in a writ petition. The assessee was of the impression that the amount received towards “Interest” was taxable and hence filed the return offering the same to taxation.
Later on based on a ruling by the Punjab and Haryana High Court in “CIT Vs Charanjit Jawa” [2004] [270 ITR 173] prayed that interest received as a result of order of the HC was a non-statutory interest and was in the nature of damages / compensation amounting to capital receipt and, hence, the same was not part of the taxable income. The CIT(A) declined to accept such claim in the appeal proceedings on the ground that once income which is offered in the return of income by the assessee himself cannot be reduced at appellate stage. The ITAT held that the contention of the CIT(A) is wrong as the CIT(A) has the powers to “Confirm / Reduce / Enhance / Annul” the assessment. [Sec 251]. Also, the Tribunal noted that no tax can be collected except by authority of law as per Article 265 of the Constitution.
Case Law on IT-Authorities

Cash seized during search can be adjusted towards "Existing Liability” [Sec 132B]. In this context, whether advance tax amounts to “Existing Liability”.
The tribunal held that it is yes. [Nikka Mal Babu Ram Vs ACIT] [2010] 41 SOT 407(Chd)]
As per Sec 4, an assessee is chargeable to tax in respect of his total income. Subsection (2) of Sec 4 prescribes that the income tax so chargeable shall be deducted at source or payable under any provisions of the Act.  Advance tax liability is governed by Sec 208 to Sec 210 of the Act. The relevant provisions also prescribe the dates and the amount of tax required to be paid by the assessee. Therefore, the expression ‘Existing Liability’ in Sec 132B(1)(i) cannot be read to exclude a particular tax liability, if it can be shown to have existed on a particular date. If the liability to pay advance tax had arisen, it would certainly constitute a part of the “Existing Liability” used in Sec 132B.  Hence, the department can adjust the same towards existing liability as well as advance tax. Similar ruling was given in [CIT Vs Ashok Kumar] [2012] [19 93] [Punj & Har][HC]

The HC held that “Continuous interrogation / recording of reasons of statement till late night on second day of search is violation of human rights.” [CCIT Vs State of Bihar][2012][205 Taxman 232]
Also, in another case the Gujarat High Court held that “Statement recorded U/S 132(4) at midnight during search operation is not voluntary statement, and may not be given weightage at the time of assessment after search. [Kailashben Manharlal Choksi Vs CIT] [2008] [174 Taxman 466].

Case Law on Search and seizure
AO can retain not only towards the tax, interest amount but also towards “Penalty amount” determined U/S 153A before release of the assets seized U/S 132. [Sree Balaji Refinery Vs DCIT] [2012] [20 183] [Kerala HC]

Case Law on principles of natural justice:
The HC held that “Continuous interrogation / recording of reasons of statement till late night on second day of search is violation of human rights.” [CCIT Vs State of Bihar][2012][205 Taxman 232]
Also, in another case the Gujarat High Court held that “Statement recorded U/S 132(4) at midnight during search operation is not voluntary statement, and may not be given weightage at the time of assessment after search. [Kailashben Manharlal Choksi Vs CIT] [2008] [174 Taxman 466].
Appeals and Revisions
Case Law on Matters before High Court:
Assessee did not challenge the original block assessment order passed even though the same was passed after the allowable time limit. He did not raise this ground before the CIT(A) and ITAT. He wants to raise this additional ground for the first time before the H.C. The Court held that a cross objection is not permitted in an appeal U/S 260A. [Smt. Jyothi Kumari Vs ACIT] [2012] [20 236] [Karnataka – HC]

Case Law on  Revisionary Order U/S 263:
CIT cannot direct AO to determine whether the order passed was erroneous or not:
Where the CIT had doubts about valuation and sale consideration received but he had not examined the said aspects himself but directed the AO to conduct further enquiry to verify and find out whether order passed was erroneous, held that such direction is not valid. Thus, U/S 263, the CIT himself has to determine whether an order was erroneous and prejudicial to the interest of the revenue but he cannot direct the AO to determine the same. [ITO Vs D.G.Housing Projects Ltd] [2012] [20 587] [Delhi – HC]
Case Law on Jurisdiction U/S 263:
In order to invoke provisions of Sec 263, what is to be seen is legal position prevailing as on point of time when revisionary order is passed and it is wholly immaterial as to what was legal position as at point of time when assessment was framed, particularly when there is significant difference in legal position between point of time when assessment is framed and when it is revised. [Star India Ltd Vs ADIT] [2011] [16 277] [Mum-Trib]

Adv Tax, Recovery, Int &  refunds
Case Law on Recovery proceedings:
Income Tax Dues Vs Securitization and Reconstruction of Financial Assets: Priority – Reg:
It may be noted that there is no provision in statute which gives preferential rights to dues of State under the IT Act. Therefore, where a banker initiated proceedings U/S 13(2) of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, the Income Tax Department cannot claim preferential rights over the bankers dues under the said Act. [Axis Bank Ltd Vs CIT] [2012] [17 139] [Punj & Har] [HC]

Case Law on Sec 245: Set off of refunds against tax remaining payable:
The Assessing Officer, Deputy Commissioner (Appeals), Commissioner (Appeals), Chief Commissioner or Commissioner may set off the amount to be refunded against the sum remaining payable by the assessee to whom refund is due.

Intimation in writing shall be sent to assessee stating the action proposed to be taken under section.
On the other hand, where refund of one year is adjusted with tax dues of other assessment year without giving an opportunity to the assessee and intimating him of the action proposed by the AO, such adjustment is bad in law. [Genpact India Vs ACIT] [2012] [17 145] [Delhi HC] [Maruth Suzuki India Ltd Vs DCIT] [2012] [204 Taxman 48] [Delhi-HC]
Goodwill arising on amalgamation is eligible for depreciation. [CIT Vs Smifs Securities Ltd] [2012] [24 222] [SC]
Failure to get accounts audited, no penalty in re-assessment proceedings if not imposed while processing of return.
In “Jasbir Singh Vs CIT” [2012] [20 Taxmann.com202] [Punjab & Haryana], the HC held that where original return was processed U/S 143(1)(a) and the AO had not initiated any penalty proceedings U/S 271B for failure on the part of the assessee to file audit report along with that return, penalty U/S 271B could not be levied while finalizing assessment in response to notice U/S 148, particularly when assessee had filed audit report during re-assessment proceedings.
TP Provisions
Case Law on Transfer pricing – Determination of ALP
Transaction with AE (Associated Enterprise) can be never be a comparable even if found to be at ALP: [Tecnimont ICB (P) Ltd Vs Addl CIT] [2012] [24 28][Mum-Trib]

End of Important Case Laws – Part # 2
If comparables are selected to make positive adjustments only, such selection is unjustified. Thus, the AO should take into consideration both types of differences, i.e positive and negative on sale to AE and purchases from AE. [Mainetti India P Ltd Vs ACIT] [2012] [22 236] [Chennai-Trib]

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