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Showing 81 to 92 of 92 Records
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1980 (6) TMI 12
Issues Involved:
1. Whether the receipt of money by the assessee from the firm as a retiring partner involves the transfer of a capital asset.
2. Whether the profit arising to the retiring partner from the receipt of such money is chargeable to capital gains tax.
Summary:
Issue 1: Transfer of Capital Asset
The primary issue was whether the receipt of money by the assessee from the firm as a retiring partner involved the transfer of a capital asset. The Tribunal held that no element of transfer of a capital asset was involved. The assessee and his brothers retired from the firm, and the reconstituted firm paid them Rs. 5 lakhs towards their shares in the net assets. The ITO, however, treated the amount received by the assessee as arising from the transfer of valuable assets, including goodwill, and included it under capital gains. The AAC reversed this decision, stating that no transfer of capital assets occurred. The Tribunal upheld the AAC's view, following the Gujarat High Court's principles in CIT v. Mohanbhai Pamabhai [1973] 91 ITR 393.
Issue 2: Chargeability to Capital Gains Tax
The Tribunal's decision was based on the interpretation of sections 45 and 47(ii) of the I.T. Act, 1961. Section 45 provides that profits or gains arising from the transfer of a capital asset are chargeable to income-tax under the head "Capital gains." Section 47(ii) exempts certain transactions, including the distribution of capital assets on the dissolution of a firm, from being regarded as transfers. The Tribunal concluded that the retirement of a partner, where the partner receives money in lieu of his share in the partnership assets, does not constitute a transfer of a capital asset. This view was supported by the Supreme Court's decisions in Narayanappa v. Bhaskara Krishnappa, CIT v. Dewas Cine Corporation, and Malabar Fisheries Co. v. CIT, which clarified that a partner's share in a firm represents a joint interest in the partnership assets, and receiving money upon retirement is an adjustment of rights rather than a transfer.
The High Court agreed with the Tribunal and the Gujarat High Court's view that the receipt of money by a retiring partner does not involve the transfer of a capital asset and is not chargeable to capital gains tax. The Court also noted that the Bombay High Court's decision in CIT v. Tribhuvandas G. Patel recognized that if accounts are taken and a partner receives his share, there may not be any transfer.
Conclusion:
The High Court answered the question in the affirmative, in favor of the assessee, holding that no capital gains tax was chargeable on the profit arising to the retiring partner from the receipt of such money. Each party was ordered to bear its own costs.
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1980 (6) TMI 11
Issues:
Assessment of income as an association of persons, Double taxation concern, Validity of assessment made on the assessee as an association of persons.
Analysis:
The case involved a reference at the instance of the Commissioner of Income-tax, West Bengal-II, regarding the assessment year 1964-65. The firm, M/s. C. Ratan & Co., had a contract with Sri S. N. Agarwalla for import/export business, which was initially treated as a joint venture. However, the Income Tax Officer (ITO) later considered it an association of persons and assessed the income accordingly. The Assessing Officer (AO) made assessments for the years 1963-64 and 1964-65 on the association of persons, leading to a dispute (para 1).
The Appellate Assistant Commissioner (AAC) reversed the ITO's decision, citing that the income had already been assessed in the hands of the partners individually, and thus, the assessment on the association of persons would result in double taxation. The AAC relied on the principle established by the Supreme Court in the case of CIT v. Murlidhar Jhawar and Purna Ginning Pressing Factory [1966] 60 ITR 95 (para 2).
The Income Tax Department appealed to the Tribunal, arguing that the share of profit from the association of persons had not been assessed earlier. The Tribunal, however, noted that the assessment on M/s. C. Ratan & Co. had been made under section 143(3) of the Income Tax Act, which constituted a regular assessment. The Tribunal upheld the AAC's decision, emphasizing that the inclusion of the share in the firm's assessment amounted to a regular assessment (para 3).
The Tribunal's decision was challenged, and the High Court considered the argument raised by the revenue regarding the assessment of the share from the association of persons in the firm's assessment. The Court examined relevant case law, including CIT v. N. M. Raiji [1949] 17 ITR 180 and CIT v. Scindia Steam Navigation Co. Ltd. [1961] 42 ITR 589 (SC), to assess the validity of the assessment made on the association of persons. The Court concluded that the assessment on the assessee as an association of persons was invalid, as the income had already been assessed in the hands of the partners, aligning with the principle against double taxation (para 4).
In conclusion, the High Court upheld the Tribunal's decision, ruling in favor of the assessee and emphasizing that the assessment on the association of persons was invalid due to the income already being taxed in the hands of the partners. The Court clarified that the inclusion of the share in the firm's assessment constituted a regular assessment, thereby preventing double taxation (para 5).
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1980 (6) TMI 10
Issues Involved:
1. Assessment of capital gains based on the cost of shares.
2. Whether the benefit of the reduction in the price of shares was passed on to the assessee.
Summary:
Issue 1: Assessment of Capital Gains Based on the Cost of Shares
The primary question was whether the capital gains for the assessment year 1968-69 should be calculated based on the cost of shares being Rs. 80 or Rs. 50 per share. Initially, the Tribunal held that the capital gains should be assessed at Rs. 80 per share, resulting in a short-term capital gain of Rs. 9,600. The Income Tax Officer (ITO) later recalculated the capital gains based on the supplementary award, which reduced the share price to Rs. 50 per share, leading to a higher capital gain assessment of Rs. 45,600. The Appellate Assistant Commissioner (AAC) upheld the original assessment of Rs. 80 per share for the relevant year, and the Tribunal agreed, leaving the question open for further consideration.
Issue 2: Benefit of Reduction in Share Price
The second issue was whether the benefit of the reduction in the price of shares from Rs. 80 to Rs. 50 per share had been passed on to the assessee. The Tribunal initially left this question open, and the High Court reframed it to ascertain whether the benefit had indeed been passed on. Upon further examination, the Tribunal concluded that the benefit of Rs. 36,000 (at Rs. 30 per share for 1,200 shares) had reached the representative assessee of the minor, Amitbhai, through his guardian, Gunvantbhai. However, the High Court found that there was no material evidence to support this conclusion. The entries in the books of Gunvantbhai Mangaldas (HUF) were not challenged by the department, and there was no evidence to suggest that the money was received by Gunvantbhai in his capacity as the guardian of Amitbhai.
Conclusion:
The High Court concluded that the Tribunal's inference that the amount reached the representative assessee in his capacity as guardian of Amitbhai was not supported by any material evidence. Therefore, question No. 1 in Income-tax Reference No. 2 of 1979 was answered in the negative, in favor of the assessee. Consequently, question No. 2 was not required to be answered. As it was not established that the amount of Rs. 36,000 reached the assessee, question No. 2 in Income-tax Reference No. 104 of 1974 was decided in the negative, in favor of the assessee. Question No. 1 in the same reference became academic and was not addressed. The revenue was ordered to pay the costs of both references to the assessee.
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1980 (6) TMI 9
Issues Involved:
1. Validity of sub-section (4) of section 139 of the Income-tax Act, 1961 regarding interest payment by registered firms.
2. Discrimination under Article 14 of the Constitution.
3. Applicability of the Supreme Court decision in Jain Brothers v. Union of India.
4. Nature of interest levied under section 139 as compensatory or penal.
Issue-wise Detailed Analysis:
1. Validity of sub-section (4) of section 139 of the Income-tax Act, 1961 regarding interest payment by registered firms:
The primary issue was whether sub-section (4) of section 139 of the Income-tax Act, 1961, which required registered firms to pay interest on the notional tax amount as if they were unregistered firms, was valid. The respondents, who were registered firms, argued that this provision was void as it violated Article 14 of the Constitution by being discriminatory. The court observed that while all taxpayers were required to pay interest on the actual tax withheld, registered firms were uniquely burdened with interest on a notional amount, which was not due to the revenue. The court held that this provision was discriminatory against registered firms and thus violative of Article 14.
2. Discrimination under Article 14 of the Constitution:
Article 14 guarantees equality before the law. The court applied the principles of reasonable classification and rational nexus to determine if the differential treatment of registered firms was justified. The court found that while registered firms enjoyed certain tax benefits, the differential treatment in the matter of interest levy under section 139 was not justified. The court noted that the interest under section 139 was compensatory, meant to compensate for the delay in tax payment, and not penal. Therefore, requiring registered firms to pay interest on a notional amount was arbitrary and lacked a rational nexus to the object of compensating the revenue.
3. Applicability of the Supreme Court decision in Jain Brothers v. Union of India:
The department relied on the Supreme Court decision in Jain Brothers v. Union of India, which upheld the validity of section 271(2) of the Act, imposing penalties on registered firms on the basis of tax payable if they were unregistered. The court distinguished this case, noting that section 271 dealt with penalties, which are penal in nature, whereas section 139 dealt with interest, which is compensatory. The court highlighted several differences, such as the exemption of registered firms from penalty under certain conditions, which did not apply to interest under section 139. Therefore, the court held that the ratio in Jain Brothers was inapplicable to the validity of section 139.
4. Nature of interest levied under section 139 as compensatory or penal:
The court emphasized that the interest under section 139 was compensatory, meant to compensate the revenue for the delay in receiving tax payments. The court cited various judgments supporting this view. The court explained that interest is typically payable for the use of another sum of money and should be proportional to the amount and duration of non-payment. The court found that the impugned provision required registered firms to pay interest on a notional amount, which was not due to the revenue, thus making it arbitrary and unjust. The court concluded that the provision was discriminatory and violative of Article 14.
Conclusion and Order:
The court dismissed the appeals, struck down the words "a registered firm or" in sub-clause (a) of clause (iii) of the proviso to sub-section (1) of section 139 of the Income-tax Act, 1961, and affirmed the consequential orders made in the writ petitions. The court held that the impugned provision was violative of Article 14 of the Constitution and declared it void.
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1980 (6) TMI 8
Issues Involved:
1. Whether the right to acquire foreign exchange by entering into forward contracts is a capital asset under section 2(14) of the Income-tax Act, 1961.
2. Whether the relinquishment or extinguishment of such a right amounts to a transfer under section 2(47) and if any capital gains arise chargeable under section 45 of the Income-tax Act, 1961.
Issue-wise Detailed Analysis:
1. Capital Asset Definition under Section 2(14)
The primary issue was whether the right to acquire foreign exchange through forward contracts with the State Bank of India constituted a capital asset under section 2(14) of the Income-tax Act, 1961. The Tribunal initially held that the right was not a capital asset. The assessee had entered into forward contracts to safeguard the financial deal for importing machinery. Due to the devaluation of the Indian rupee, the cost of machinery increased, and the State Bank of India eventually canceled the contracts and credited the assessee's account with the difference in exchange rate. The Income Tax Officer (ITO) treated this amount as a revenue receipt, but the Appellate Assistant Commissioner (AAC) held it as a capital asset, characterizing it as an intangible asset or an actionable claim. The Tribunal, however, concluded that the receipt of the surplus was a capital receipt, not liable to be taxed as business income, and confirmed the AAC's order on this aspect.
2. Transfer under Section 2(47) and Capital Gains under Section 45
The second issue was whether the relinquishment or extinguishment of the right to acquire foreign exchange amounted to a transfer under section 2(47) and if it resulted in capital gains chargeable under section 45. The AAC held that the cancellation of the forward contract and the surrender of the import licence amounted to a transfer, resulting in capital gains. The Tribunal, however, disagreed, relying on the Calcutta High Court's decision in CIT v. Chunilal Prabhudas & Co., concluding that no capital gains arose in this case. The Tribunal observed that the realization of the sum of Rs. 3,13,651 was not a transfer or relinquishment of an asset but a transformation of a contractual right into a monetary right.
Tribunal's Findings:
The Tribunal found that the AAC had not exceeded his jurisdiction in directing the ITO to tax the amount as capital gains. It was held that the right to acquire foreign exchange was not a capital asset and that the realization of the sum did not constitute a transfer under section 2(47). The Tribunal also noted that the assessee had not spent anything to acquire the right, and thus, no capital gains could arise as there was no profit or gain as contemplated under section 45.
High Court's Conclusion:
The High Court reframed the question to determine whether the receipt of Rs. 3,13,651 was taxable under section 45. It concluded that the receipt did not result in capital gains as there was no transfer or relinquishment of a capital asset. The court emphasized that for a transaction to result in capital gains, there must be a profit or gain arising from the transfer, which was not the case here. The court held that the amount received was not taxable under section 45 and answered the reframed question in favor of the assessee, with no order as to costs.
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1980 (6) TMI 7
Issues involved: Interpretation of section 54 of the Income-tax Act, 1961 regarding exemption on capital gains for construction of a new house property within a specified period after the transfer of a capital asset.
Summary:
The assessee owned an immovable property in Bombay, divided into a larger plot and a smaller plot. The larger plot was sold to a housing society, and the smaller plot had a new building constructed by a contractor. The assessee claimed exemption u/s 54 for the cost of construction of the new building. However, the Income Tax Officer (ITO) disallowed the claim as the conditions of s. 54 were not met.
On appeal, the Appellate Tribunal found that while the first condition of s. 54 was satisfied, the second condition regarding the construction of a house property within a specified period was not met. The Tribunal held that the new building was constructed before the transfer of the larger plot, thus the exemption under s. 54 was not applicable.
The High Court upheld the Tribunal's decision, stating that the new house property must be constructed within the specified period after the transfer of the capital asset. The Court rejected the argument that possession of the property was not handed over to the assessee immediately, emphasizing that the completion of construction was the determining factor. The Court also dismissed the contention that various transactional features indicated construction within the specified period.
The Court concluded that the provisions of s. 54 were not attracted in this case as the new house property was not constructed within the required timeframe. The question was answered in favor of the revenue, and the assessee was directed to pay the costs of the reference.
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1980 (6) TMI 6
Issues Involved:
1. Timeliness and validity of notices under Section 148 of the Income Tax Act and Section 17 of the Wealth Tax Act.
2. Legality of the service of notices by affixation.
3. Jurisdiction of the Income Tax Officer (ITO) and Wealth Tax Officer (WTO) to reopen assessments.
4. Requirement for the ITO/WTO to disclose grounds for reopening assessments.
5. Validity of addressing notices to the firm rather than individual partners.
Detailed Analysis:
1. Timeliness and Validity of Notices:
The petitioners contended that the notices under Section 148 of the Income Tax Act and Section 17 of the Wealth Tax Act were barred by time as they were served after the eight-year limitation period. The respondents argued that the notices were served by affixation on 31st March 1976, within the limitation period. The court found that the notices were indeed served by affixation within the prescribed time, thus the proceedings were not barred by time.
2. Legality of the Service of Notices by Affixation:
The petitioners claimed that the service of notices by affixation was not in accordance with the law. The court examined the process and found that the process-server and inspector had made diligent efforts to serve the notices personally. When these efforts failed, the notices were affixed at the business premises in the presence of witnesses, and a statement on oath was submitted. The court held that the service by affixation complied with the provisions of the Code of Civil Procedure (CPC), specifically Order V, Rules 17 and 19.
3. Jurisdiction of the ITO and WTO to Reopen Assessments:
The petitioners argued that there was no material basis for the ITO and WTO to believe that their income or wealth had escaped assessment for the year 1967-68. The court reviewed the records and found sufficient material, such as the affidavit from Jitendra Narottam Das Shah and discrepancies in the firm's balance sheet, to justify the belief that income had escaped assessment. Similarly, for Sheo Mohan Lal and Brij Mohan Lal, the court found that the search operations and seized books provided adequate grounds for the WTO to believe that wealth had escaped assessment.
4. Requirement for the ITO/WTO to Disclose Grounds for Reopening Assessments:
The court noted that there was some controversy over whether the ITO/WTO was required to disclose the grounds for reopening the assessments. However, the court found that the respondents had produced the files indicating the reasons for their belief that income/wealth had escaped assessment. This was deemed sufficient to uphold the validity of the notices and subsequent proceedings.
5. Validity of Addressing Notices to the Firm:
The petitioners contended that notices should have been addressed to individual partners rather than the firm itself, especially since the firm had been dissolved. The court held that Section 282(2) of the Income Tax Act, which allows notices to be addressed to any member of the firm, is permissive and not mandatory. Therefore, addressing the notices to the firm, M/s. Ganeshi Lal & Sons, was valid.
Conclusion:
The court concluded that the notices were validly served within the limitation period, the service by affixation was lawful, and there was sufficient material for the ITO and WTO to believe that income/wealth had escaped assessment. The petitions were dismissed with costs, as none of the submissions made on behalf of the petitioners were found to have merit.
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1980 (6) TMI 5
Issues Involved:
1. Accrual of underwriting commission.
2. Taxability of underwriting commission on shares subscribed by the public.
3. Treatment of underwriting commission on shares held by the assessee.
Summary:
Issue 1: Accrual of Underwriting Commission
The Tribunal found that the underwriting commission accrues during the period in which the subscription list remains open. The right to receive the underwriting commission accrues when the company makes an offer for the sale of shares to the public and continues to accrue until the offer remains open. The court agreed with the Tribunal that the underwriting commission accrued with the opening of banking hours and ceased to accrue on the close of banking hours during the period when the subscription list was open.
Issue 2: Taxability of Underwriting Commission on Shares Subscribed by the Public
The Tribunal held that the underwriting commission charged by the assessee on the shares subscribed by the public alone was taxable as the income of the assessee. The commission referable to the shares underwritten by the assessee and purchased by it did not represent the assessee's taxable income. The court confirmed that the underwriting commission earned by the corporation on the shares subscribed by the public is taxable.
Issue 3: Treatment of Underwriting Commission on Shares Held by the Assessee
The Tribunal opined that the underwriting commission referable to the underwritten shares purchased by the assessee went to reduce the cost of those shares in the hands of the assessee and was not separately taxable as the assessee's income of that year. The court upheld this view, stating that the underwriting commission in the case of shares held by the assessee itself and not actually subscribed by others went to reduce the cost of the shares in the hands of the assessee and was not separately taxable as the assessee's income of that year.
Conclusion:
1. The underwriting commission accrued with the opening of banking hours and ceased to accrue on the close of banking hours during the period when the subscription list was open.
2. The underwriting commission earned by the corporation on the shares subscribed by the public is taxable.
3. The underwriting commission in the case of shares held by the assessee itself and not actually subscribed by others went to reduce the cost of the shares in the hands of the assessee and was not separately taxable as the assessee's income of that year.
In view of the divided success of the parties, they were directed to bear their own costs.
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1980 (6) TMI 4
Issues:
Interpretation of provisions under the Finance Act, 1966 for the levy of additional tax on a company distributing dividends.
Detailed Analysis:
The judgment by the High Court of Kerala involved a reference made by the Income-tax Appellate Tribunal regarding the correctness of the levy of additional tax under the Finance Act, 1966 on a public limited company in liquidation. The company distributed a dividend of 5% of the paid-up capital during the relevant accounting years. The Tribunal held that the levy of additional tax under Paragraph F(1)(B) of the Finance Act, 1966 was not warranted as the distributed dividend was not in excess of 10% of the paid-up capital. The department contended that the limit of 10% applied only to dividends declared during the previous year relevant to the assessment year 1966-67. The Tribunal rejected the department's argument, stating that the levy of additional tax would only be attracted if the company had earned taxable income during the relevant period and a rebate had been allowed, which was not the case for the assessment year 1965-66.
The Finance Act, 1966 introduced changes in the levy of income tax on companies, simplifying the rate schedule and eliminating the provisions for rebates. The scheme of Paragraph F of the First Schedule to the Finance Act, 1966 outlined the levy of tax at specific rates based on the total income of the company and additional tax on distributed dividends. The Court analyzed the provisions and concluded that the levy of additional tax was only warranted when a company had earned taxable income during the relevant period, which was not the case for the assessee-company. The Court emphasized that the additional tax could only be imposed on the total income that does not exceed the relevant amount of distributed dividends, and in cases of loss, it was not applicable.
The Court further examined the definitions and provisions under the Finance Acts of 1964 and 1965 to determine the applicability of the additional tax on distributed dividends. It clarified that the levy of additional tax was restricted to companies that had earned taxable income during specific assessment years and distributed dividends subject to certain conditions. Based on the interpretation of relevant provisions, the Court upheld the Tribunal's decision that the assessee-company was not liable for the levy of additional tax for the year 1966-67. The judgment favored the assessee and dismissed the department's claim, with no direction regarding costs.
In conclusion, the High Court's judgment provided a detailed analysis of the provisions under the Finance Act, 1966 and clarified the conditions under which the levy of additional tax on distributed dividends is applicable. The Court's interpretation emphasized the requirement of taxable income for the imposition of additional tax, ultimately ruling in favor of the assessee-company in this case.
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1980 (6) TMI 3
Issues Involved:
1. Applicability of Section 35 of the Indian Income Tax Act, 1922, versus Section 147(b) of the Income Tax Act, 1961.
2. Allegation of discrimination under Article 14 of the Constitution of India.
3. Right of appeal against orders under Section 35.
4. Period of limitation for rectification under Section 35 versus reassessment under Section 147(b).
Issue-Wise Detailed Analysis:
1. Applicability of Section 35 of the Indian Income Tax Act, 1922, versus Section 147(b) of the Income Tax Act, 1961:
The court examined whether the Income Tax Officer (ITO) was correct in taking action under Section 35 of the Indian Income Tax Act, 1922, rather than Section 147(b) of the Income Tax Act, 1961. The ITO had issued a notice dated January 23, 1968, proposing to rectify an error of excess depreciation allowed in the assessment made on January 16, 1965. The notice was initially issued under Section 154 of the Income Tax Act, 1961, but it was later clarified that action should be taken under Section 35 of the Indian Income Tax Act, 1922. The court found that Section 35 and Section 147(b) operate in different fields, with Section 35 dealing with rectification of errors apparent on the record and Section 147(b) dealing with reassessment when income has escaped assessment.
2. Allegation of Discrimination under Article 14 of the Constitution of India:
The respondent argued that Section 35 of the Indian Income Tax Act, 1922, was unconstitutional as it was violative of Article 14 of the Constitution. The argument was based on the premise that Section 35 allowed an extended period of limitation compared to Section 147(b) of the Income Tax Act, 1961, and provided no right of appeal. The court referred to the Supreme Court decisions in Suraj Mall Mohta and Co. v. Visvanatha Sastri and Anandji Haridas and Co. (P.) Ltd. v. S. P. Kushare, STO, which held that when two provisions are applicable and one is more onerous, it could be struck down as violative of Article 14. However, the court found that the two sections operate in different fields and thus do not lead to discrimination. The court also noted that the plea of violation of Article 14 was farfetched and not justified by the facts of the case.
3. Right of Appeal Against Orders Under Section 35:
The respondent contended that if action had been taken under Section 147(b), there would have been a right of appeal, whereas an order under Section 35 was not appealable. The court observed that Section 35 is intended for rectification of errors apparent on the record and does not inherently prejudice the assessee. It was noted that while there is no specific appeal against the dismissal of an application under Section 35, the original order can still be appealed. The court also highlighted that an amended assessment order under Section 35 could be appealed as a fresh assessment order, thus negating the argument of lack of appeal rights.
4. Period of Limitation for Rectification Under Section 35 Versus Reassessment Under Section 147(b):
The respondent argued that the period within which action could be taken under Section 147(b) is shorter than that under Section 35, leading to discrimination. The court explained that the commencement of the limitation period is different for the two sections due to their distinct purposes. Section 147(b) deals with reassessment of escaped income for a particular assessment year, while Section 35 deals with rectification of an order, starting from the date of the order. The court concluded that the different time limits are not discriminatory as they serve different objectives and apply equally to all assessees.
Conclusion:
The court upheld the contentions of the appellant, finding that the provisions of Section 35 and Section 147(b) operate in distinct fields and do not lead to discrimination. The plea of violation of Article 14 was deemed farfetched, and the right of appeal under Section 35 was found to be adequately addressed. The appeal was allowed, and the judgment of the learned single judge was reversed, resulting in the dismissal of the writ petition.
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1980 (6) TMI 2
Issues Involved:
1. Validity of the information under section 147(b) for reopening assessment concerning royalty payments.
2. Validity of the action under section 147(b) concerning the deduction of London office management expenses.
Detailed Analysis:
Issue 1: Validity of the Information under Section 147(b) for Reopening Assessment Concerning Royalty Payments
The primary controversy revolves around whether there was any valid information to justify reopening the assessment under section 147(b) of the Income Tax Act, 1961. The court examined the scheme of reopening as embodied in sections 148 and 147, noting that a completed assessment can be reopened by serving a notice under section 148, provided conditions in clause (a) or clause (b) of section 147 are fulfilled. Clause (b) requires that there must be information in the possession of the Income Tax Officer (ITO) leading to a belief that the income has escaped assessment or has been under-assessed.
The Tribunal had observed that the ITO became aware of the Rajasthan High Court's decision in CIT v. Gotan Lime Syndicate [1964] 51 ITR 533, which held that royalty payments for obtaining mining rights were capital in nature and not deductible as revenue expenditure. The ITO, based on this decision, believed that the royalty payments on crude oil and gas were wrongly allowed as revenue expenditure in the original assessment.
The court noted that the Rajasthan High Court's decision, when delivered, constituted valid information. However, the Supreme Court later reversed this decision in Gotan Lime Syndicate v. CIT [1966] 59 ITR 718, holding that the payment of royalty was a revenue expenditure. The court emphasized that the law declared by the Supreme Court is deemed to be the law from its inception, and thus, the Rajasthan High Court's decision, when it was delivered, constituted valid information for reopening the assessment.
The court held that the ITO had jurisdiction to issue the notice based on the Rajasthan High Court's decision, which was valid information at the time. Therefore, the Tribunal was right in holding that the decision constituted information under section 147(b), making the proceedings validly taken.
Issue 2: Validity of the Action under Section 147(b) Concerning the Deduction of London Office Management Expenses
The Tribunal held that the action under section 147(b) related to the London office management expenses was not validly taken as there was no information in the possession of the ITO leading to a reasonable belief that the income chargeable to tax had escaped assessment due to the allowance of these expenses.
The court examined whether the entire assessment was at large upon reopening. It was observed that once an assessment is reopened, the entire assessment is set aside, and the income which has escaped assessment, even if not initially considered, should be examined. The court noted that the ITO could reassess all items, including deductions not warranted, as part of the escaped income.
The court concluded that the Tribunal was in error in its finding on this aspect. Therefore, the action under section 147(b) concerning the London office management expenses was validly taken, and the Tribunal's decision was overturned.
Conclusion:
1. The court answered the first question in the affirmative, holding that the Rajasthan High Court's decision constituted valid information under section 147(b), making the reopening of the assessment concerning royalty payments valid.
2. The court answered the second question in the negative, holding that the action under section 147(b) concerning the London office management expenses was validly taken, and the Tribunal's decision was incorrect.
In the facts and circumstances of the case, each party was ordered to bear its own costs.
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1980 (6) TMI 1
Issues involved: Challenge to the legality of notice issued u/s 148 of the Income Tax Act, 1961 for assessment year 1968-69.
Summary:
The High Court of Karnataka, in the case presented by an income-tax assessee, addressed the legality of a notice issued u/s 148 of the Income Tax Act, 1961, for the assessment year 1968-69. The notice was issued on the grounds that certain income had escaped assessment. The respondent argued that the notice was based on the allowance of certain expenditure incurred before the commencement of the business. However, the petitioner contended that the initiation of action u/s 147(a) was not valid as the business commenced only on January 26, 1968, and the expenditure was allowed even prior to that date. The petitioner relied on the decision of the Supreme Court in Gemini Leather Stores v. ITO [1975] 100 ITR 1 to support their argument. Additionally, referencing the case of C. T. Desai v. CIT [1979] 120 ITR 240, it was highlighted that business expenditure incurred before the commencement of the business, but attributable to the business, was considered allowable. Consequently, the High Court ruled in favor of the petitioner, quashing the impugned notice dated July 24, 1975, as it was not valid even on merits. The court made the order that the rule be made absolute, the notice be quashed, and no costs be awarded.
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9911796707
