Recent Judgments under Income-tax Act

1. CIT V. Sabari Enterprises (213 CTR 269) (Kar)

Whether payments made towards PF and ESI before due date of filing
return of income in respect of assessment year prior to A.Y. 2004-05
could be allowed as deduction?

In this case, it has been held that PF and ESI on account of employer’s
contribution and employees’ contribution is allowable as deduction if they are
paid before due date of filing the return of income even if they are not paid
within due date of the provisions of Provident Fund Act. The case related to
assessment yea prior to amendment to section 43B of the Act which has been
introduced by the Finance Act 2003 w.e.f. 1/4/2004. By way of the
amendment, second proviso was deleted so as to include all types of
payments, including statutory dues of PF and EST, covered u/s 43B, for
deduction if they are paid before due date of filing return of income. It was
pleaded on behalf of assessee that as the proviso was deleted and not
repealed, it should be considered as deleted retrospectively on basis of
decision of Supreme Court in case of General Finance Co. v. CIT (257 ITR
338). It was also argued that even otherwise, the amendment should be
considered as clarificatory in the light of the decision by Apex Court in Allied
Motors P. Ltd. V. CIT (224 ITR 677). These contentions were accepted by
Honourable High Court. It was held that amendment in section 43B will be
applicable both for employer’s contribution and employee’s contribution.

Before delivery of the above decision, the Chennai Special Bench in case of
Kwality Biscuits held in favour of assessee holding that amendment made in
section 43B by Finance Act, 2003 is retrospective in operation. However
immediately after decision of Special Bench, The Madras High Court in CIT v.
Synergy Financial Exchange Ltd. [2007] 288 ITR 366 distinguished Allied
Motors P. Ltd.’s case (supra) on the ground, that it related to an amendment
intended to remove hardship in cases where payment for the last instalment
of sales tax had necessarily to be made in the succeeding year. Thereafter,
above decision came. Thereafter Bombay High Court in the case of Godavari
Sahakari Sakhar Karnataka Ltd dissented from the above decision. However,
the Supreme Court in the case of CIT v. Vijay Cement Ltd. 213 CTR 268 has
rejected SLP against the Guahati High court decision in case of CIT v. George
Willamson (Assam) Ltd. 284 ITR 619 observing that contribution made to
provident fund before filing of the return could not be disallowed under section
43B as stood prior to the amendment w.e.f. 1/4/2004.

2. CIT Vs. Cholamandalam Inv. and Fin. Co. Ltd. (294 ITR 438) (Mad)

Whether interest u/s 244A could be allowed on excess payment of self

assessment tax?

Even though the short title to section 140A of the Income-tax Act, 1961, reads
“self-assessment”, the charging phrase employed in section 140A, namely,
“where any tax is payable on the basis of any return required to be furnished
under section 115WD or 115WH or section 139 or section 142 or section 148
or section 153A, as the case may be, the assessee shall be liable to pay such
tax together with interest payable under any provision of this Act for any delay
in furnishing the return”, makes it clear that there is no difference between : (i)
the tax paid under section 115WJ, which deals with advance tax in respect of
fringe benefits ; or (ii) the tax collected at source under section 206C ; or (iii)
any tax paid by way of advance tax or any tax treated as paid under section
199, which deals with credit for tax deducted, which are provided under
section 244A(1)(a).

The proviso to section 244A(1)(a) makes it clear that no interest shall be

payable if the amount of refund is less than 10 per cent. on regular
assessment with regard to the refund of advance tax paid under section
115WJ in respect of fringe benefits ; (ii) the tax collected at source under
section 206C ; and (iii) advance tax or any tax treated as paid under section
199, but with respect to other tax under section 244A(1)(b), the interest shall
be payable even if the amount is less than 10 per cent of the tax as
determined under section 143(1) or on regular assessment, because there is
no proviso to section 244A(1)(b) as provided under section 244A(1)(a) of the
Act.
Even for refund of the tax paid under section 140A on self-assessment, the
assessee is entitled to interest.

CIT v. Ashok Leyland Ltd. [2002] 254 ITR 641 (Mad) relied on.

It is trite law that wherever the assessee is entitled to refund, there is a

statutory liability on the Revenue to pay interest on general principles on sums
wrongfully retained.

3. Inductotherm (India) P. Ltd. Vs. Asst. CIT (294 ITR 341) (Guj)

Whether parallel proceeding could be taken u/s 148 and u/s 263?

There is no bar under the provisions of the Income-tax Act, 1961, for parallel
proceedings in consequence of notice under section 148 and notice under
section 263. After issuance of notice under section 148, the Assessing Officer
himself can pass a fresh assessment order and under section 263 if the
original assessment order of the Assessing Officer is erroneous and
prejudicial to the interests of the Revenue, the Commissioner of Income-tax
can revise that order. Both the authorities are empowered under different
provisions of the Act, though both have to see that the income escaped in the
original assessment should be taxed.

Held, (i) that the Assessing Officer had found that there were errors in the
computation of allowances. The reassessment proceedings were valid.

(ii) That notice under section 263 had been issued, and those proceedings
were stayed, but the proceedings initiated after the issuance of notice under
section 148 were not stayed. Therefore, the Assessing Officer was at liberty to
proceed with the proceedings and make final assessment

4. CIT Vs. Star Builders (294 ITR 338) (Guj)

Whether enhancement of cost of construction by valuation officer is

allowable as deduction in case of builder?
The assessee was engaged in construction business. On a reference of the
question whether there could be any addition on account of the Valuation
Officer’s report that the assessee had invested unexplained income :

Held, that if the unexplained income in the investment was added, that would
give rise to the cost of the construction and the result would remain the same,
i. e. “zero”. This addition was made on the basis of the Valuation Officer’s
report. Reference could be made to the Valuation Officer for the purpose of
sections 55(A), 131, 133(6) and 142(2) of the Income-tax Act, 1961, and not
for the purpose of finding out the cost.

5. CIT v. Eicher Ltd. (294 ITR 310) (Del)

Whether reassessment is permissible on mere change of opinion?

The assessee took term loans from banks and financial institutions but being
unable to pay interest on these loans and having not paid any interest to the
banks and financial institutions, it did not claim any expenditure or any
deduction on this account. Subsequently, as a result of negotiations between
the assessee and the banks and financial institutions the outstanding interest
against the loans was converted into a “funded interest term loan”. This was in
addition to the earlier amounts that were taken by the assessee as loans from
the banks and financial institutions. In respect of the assessment years 1988-
89 to 1991-92, the interest outstanding was treated as discharged and
replaced by an equivalent amount of loan. The amount was treated as a
deduction under section 43B of the Act and necessary book entries were
made in this regard. The assessee filed its return of income for the
assessment year 1993-94, declaring a loss and claiming that the waiver of the
funded interest credited to the profit and loss account was not liable to tax
under section 41(1) of the Act as it was a capital receipt. The Assessing
Officer completed the assessment under the provisions of section 143(3) of
the Income-tax Act, 1961. Subsequently, he issued a notice under section 148
of the Act to tax the waiver of interest allegedly not offered to tax by the
assessee. The assessee raised an objection but the Assessing Officer
rejected the contention of the assessee that this case was merely one of
change of opinion on the same facts. The assessee preferred an appeal
before the Commissioner (Appeals) who allowed the appeal. The Revenue
preferred an appeal before the Tribunal, which dismissed it holding that in the
letter sent by the assessee on November 8, 1995, in reply to a questionnaire
of the Assessing Officer, the assessee had disclosed all the relevant material
facts at the time when the original order of assessment was made and in it
explained its stand regarding non-taxability of the amount, that since there
was a full and true disclosure by the assessee, there was no reason for the
Assessing Officer to come to the conclusion that income chargeable to tax
had escaped assessment. On further appeal :

Held, dismissing the appeal, that the assessee had placed all the material
before the Assessing Officer and where there was a doubt, even that was
clarified by the assessee in its letter dated November 8, 1995. Since the facts
were before the Assessing Officer at the time of framing the original
assessment, and later a different view was taken by him or his successor on
the same facts, it clearly amounted to a change of opinion. This could not
form the basis for permitting the Assessing Officer or his successor to reopen
the assessment of the assessee. If the Assessing Officer, while passing the
original assessment order, chose not to give any finding in this regard, that
could not give him or his successor in office a reason to reopen the
assessment of the assessee or to contend that because the facts were not
considered in the assessment order, a full and true disclosure was not made.

If the entire material had been placed by the assessee before the Assessing
Officer at the time when the original assessment was made and the
Assessing Officer applied his mind to that material and accepted the view
canvassed by the assessee, then merely because he did not express this in
the assessment order, that by itself would not give him a ground to conclude
that income has escaped assessment and, therefore, the assessment needed
to be reopened.

An assessee has no control over the way an assessment order is drafted.

Generally, issues which are accepted by the Assessing Officer do not find
mention in the assessment order and only such points are taken note of on
which the assessee’s explanations are rejected and additions/disallowances
are made.

Hari Iron Trading Co. v. CIT [2003] 263 ITR 437 (P & H) followed.

Held also, that it would not be correct on the court’s part to overlook the
decision of the Full Bench in CIT v. Kelvinator of India Ltd. [2002] 256 ITR 1
(Delhi) and rely upon the decision of the Division Bench in Consolidated
Photo and Finvest Ltd. v. Asst. CIT [2006] 281 ITR 394 (Delhi). That would be
subversive of judicial discipline.

6. CIT Vs. Raj Kumar Sharma (294 ITR 131) (Raj)

Whether penalty u/s 269SS is sustainable when assessee was under

bona fide belief that the limit of Rs. 20,000 is applicable for each
transaction of receipt of loan when transactions of loan were
considered as genuine?

The assessee accepted a loan of Rs. 90,000 in cash from April 1, 2000, to
March 31, 2001, on different dates from his brother. In response to the notice,
the assessee explained that the loan was taken from his brother for
immediate business needs and that he was under the bona fide belief that
acceptance of cash deposit below Rs. 20,000 did not contravene section
269SS of the Income-tax Act, 1961. The Assessing Officer imposed penalty of
Rs. 90,000 under section 271D. The Commissioner (Appeals) maintained the
order of the Assessing Officer. However, the Tribunal set aside the penalty.
On appeal :

Held, dismissing the appeal, that the genuineness of the deposit made by the
assessee’s brother was not disputed and none of the transactions exceeded
Rs. 20,000. The Tribunal accepted that the assessee bona fide believed that
cash transactions below Rs. 20,000 were permissible and the cause shown
by him constituted reasonable cause. The finding of the Tribunal could not be
said to be grossly perverse or unsustainable in law.

7. DI (Exemption) Vs. Raunaq Edu. Foundation (294 ITR 76) (Del)

Whether the deemed income added u/s 68 in case of educational
institution is allowable as deduction u/s 10(22)?

The words “derived from” (or some other similar words) do not occur in
section 10(22) of the Income-tax Act, 1961, and, therefore, the word “income”
as occurring in section 10(22) cannot be given a restrictive meaning and must
be given its natural meaning or the meaning ascribed to it in section 2(24).
Hence, an assessee who is entitled to exemption under section 10(22) can
claim the benefit thereof for the purpose of income deemed to be chargeable
to tax under section 68.

8. CIT Vs. P. V. Kalyanasundaram (294 ITR 49) (SC)

Whether addition on money could be sustained on basis of vague

noting in loose sheet recovered in search and contradictory statement
of vendor?

Certain land was sold for a sum of Rs. 4.10 lakhs. In the course of a search
and seizure, contradictory statements of the vendor were recorded and loose
sheets allegedly in the hands of the purchaser were found. The Assessing
Officer concluded that the sale consideration was actually Rs. 34.85 lakhs and
not Rs. 4.10 lakhs as recited in the deed of sale and made an addition of Rs.
30,75,005 as undisclosed income for the block period April 1, 1988, to
December 8, 1998, in the hands of the respondent (assessee). The
Commissioner (Appeals), after examining the entire matter, held that the
statements of the vendor could not be relied upon particularly as the floor
price fixed by the authorities for such property was much lower than the value
which would result if the sale deed had been registered at Rs. 34.85 lakhs
and deleted the addition. The Appellate Tribunal affirmed the decision of the
Commissioner (Appeals) holding, inter alia, that the notings on the loose
sheets were vague and could not be relied upon. On appeal under section
260A of the Income-tax Act, 1961, the High Court, borrowing extensively from
the orders of the Commissioner (Appeals) and the Appellate Tribunal, held
that no substantial question of law arose out of the order of the Appellate
Tribunal. On appeal by the Department before the Supreme Court :
Held, affirming the decision of the High Court, that the implication of
contradictory statements made by the vendor or whether reliance could be
placed on the loose sheets recovered in the course of the raid were all
questions of fact, and no question of law arose out of the order of the
Appellate Tribunal.

Decision of the Madras High Court in CIT v. P. V. Kalyanasundaram [2006]

282 ITR 259 affirmed.

By the court : Quoting from an order of some authority, particularly a

specialized one, cannot per se be faulted as this procedure can often help in
making for brevity and precision. But to the extent that any borrowed words
are used in a judgment, they must be acknowledged as such in an
appropriate manner as a courtesy to the true author(s).

9. CIT v. Ravi Kumar 294 ITR 78 (P & H)

Whether section 69A regarding unexplained money etc. could be

applied on the basis of loose slips found during the search when in fact
assessee was not found to be owner of money or things?

The provisions of section 69A of the Income-tax Act, 1961, can be applied if
(i) the assessee is found to be owner of any money, bullion, jewellery or other
valuable article, and (ii) the same had not been recorded in the books of
account, if any, maintained by him.

During the search carried out at the premises of the jewellery shop owned by
the assessee, the assessee was found in possession of 1470 grams of gold
and Rs. 50,750 in cash and some loose slips containing some calculations
written. The assessee surrendered a sum of Rs. 5 lakhs for tax on account of
the unexplained cash and jewellery and the return was filed declaring an
income of Rs. 4,79,800. The Assessing Officer included the amounts written
on the loose slips. The Commissioner (Appeals) upheld the additions made by
the Assessing Officer observing that the assessee failed to explain the
contents of the documents. The Tribunal allowed the appeal filed by the
assessee. On a reference :
Held, that the assessee was found to be in possession of loose slips and not
of any valuable articles or things. Neither the possession nor the ownership of
any jewellery mentioned in the slips was proved. Therefore, the Tribunal had
rightly held that the provisions of section 69A of the Act were not applicable.
The Tribunal also held that if the assessee failed to explain the contents of the
slips, it was for the Revenue to prove on the basis of material on record that
they represented transactions of sales or stock-in-hand before making any
addition on this score. The assessee had duly explained that these were
rough calculations and the assessee’s explanation had not been rebutted by
any material evidence. Therefore, the order of the Tribunal could not be said
to be perverse.

10. Sandeep Kumar v. CIT (293 ITR 294) (Del)

Whether mere identification of donor and showing that foreign gift was
received through proper banking channel was sufficient for proving
genuineness of foreign gift?

Mere identification of the donor and showing movement of the gift amount
through banking channels is not sufficient to prove the genuineness of the gift.
Since the claim of the gift is made by the assessee, the onus lies on him to
establish not only the identity of the person making the gift but also his
capacity to make such a gift.

The Assessing Officer added the gifts received by the assessee from the
donor as income of the assessee from undisclosed sources as he was unable
to establish the financial capacity of the donor and the genuineness of the
gifts. The Tribunal while considering the genuineness of the gift transactions
held that the donors were not even distantly related to the assessee and were
residents of foreign countries. The return of the donor filed by the assessee
had not been accompanied by the balance-sheet and was simply a copy not
bearing any authentication from the Revenue Department of that country. On
appeal :

Held, dismissing the appeal, that there was nothing on record to show the
financial capacity of the donor, the creditworthiness of the donor, relationship
of the donor with the assessee, what were the sources of funds gifted to the
assessee and whether they had the capacity of giving large amounts of gift to
the assessee. Therefore the gifts received by the assessee from the donor
could not be held to be genuine gifts and the authorities below were fully
justified in treating the amount received as gifts as representing the concealed
income of the assessee and adding it to the income of the assessee as being
the assessee’s income from undisclosed sources.

11. Bajaj Ashok Chunila v. Dy. CIT (293 ITR 48) (AT) (Banglore)

Whether computation of minor’s income has to be done independently

while clubbing minor’s income with income of parent?

Section 64 of the Income-tax Act, 1961, enacts a deeming provision for

inclusion of others’ income in the income of assessee. Though under section
64(1A), the income of a minor child is to be included in the total income of his
parents, the minor child is basically an assessee. If a particular income does
not fall within the gamut of section 5 of the Act, it cannot be made taxable by
invoking the provisions of section 64. To club the income under section 64 it
should primarily be part of income of the minor child under section 5.

Unless and until the income of the minor child is computed, the clubbing
provision will not apply. The income of the minor child has to be computed
considering the provisions of section 145. Thus unless and until income is
said to be received by the minor child on the basis of the method of
accounting regularly employed by him, section 64 cannot be invoked to club
the income which otherwise would have accrued to the minor child. This is not
a case of an assessee following a different method of accounting for
expenses and income but of two different assessees whose computation is to
be made based on the method of accounting employed by each of them
individually.

In the profit and loss account of his business for the assessment year 1997-
98, the assessee had debited Rs. 92,217 being interest paid to his minor son
and shown it as interest payable in the balance-sheet. During the year, a sum
of Rs. 13,800 was paid as interest to the minor son and this sum was clubbed
with the income of the assessee in accordance with the provisions of section
64. The Assessing Officer however treated the entire interest payable by the
assessee as income accruing to the minor son on the ground that the
assessee could not follow a different system of accounting in his own case.
He accordingly treated the difference between Rs. 92,217 claimed as interest
paid to the minor son and the sum of Rs. 13,800 actually received as interest
by the minor son as income of the assessee under section 64(1A). The
Commissioner (Appeals) affirmed this. On appeal :

Held,accordingly, that undoubtedly, the minor son was not following the
mercantile system of accounting. The interest had not been received by the
minor child. Thus by invoking the provisions of section 64(1A), the interest
payable by the assessee could not be considered to have been received by
the minor son. The addition of Rs. 78,417 being the interest having not been
received by the minor child could not be clubbed in the hands of the assessee
and was to be deleted.

12. CIT v. Alagendran Fianance Ltd. (293 ITR 1) (SC)

When item sough to be revised is not subject matter of reassessment,

whether time limit for revision should be reckoned from the date of
original assessment or reassessment?

Assessments for the assessment years 1994-95, 1995-96 and 1996-97 on the
assessee were completed in 1997 and 1998. In the orders of assessment, the
assessee’s claim relating to “Lease Equalisation Fund” was accepted.
Thereafter orders of reassessment were initiated in respect of three other
items but not the item relating to “Lease Equalisation Fund” and
reassessments were made. Thereafter, the Commissioner, by an order dated
March 29, 2004, initiated revision proceedings only in relation to the item
“Lease Equalisation Fund”. The Appellate Tribunal held that the revision
proceedings were barred by limitation as they were initiated more than four
years after the original assessments ; and the High Court dismissed the
appeal therefrom. The Department appealed to the Supreme Court :
Held, affirming the decision of the High Court, that the Commissioner had
sought to revise only that part of the order of assessment which related to
Lease Equalisation Fund ; but the proceedings for reassessment had nothing
to do with that item of income. The doctrine of merger did not apply in a case
of this nature : the period of limitation commenced from the dates of the
original assessments and not from the reassessments since the latter had not
had anything to do with the Lease Equalisation Fund. This was not a case
where the subject-matter of reassessment and the subject-matter of the
assessment were the same.

CIT v. Shri Arbuda Mills Ltd. [1998] 231 ITR 50 (SC) relied on.

CWT v. A. K. Thanga Pillai [2001] 252 ITR 260 (Mad) approved.

There may not be any doubt or dispute that once an order of assessment is
reopened, the previous under-assessment will be held to be set aside and the
whole proceedings would start afresh, but that would not mean that even
when the subject-matter of reassessment is distinct and different, the entire
proceeding would be deemed to have been reopened.

Explanation (c) appended to sub-section (1) of section 263 of the Income-tax

Act, 1961, which deals with the power of the Commissioner in revision, is
clear and unambiguous, as in terms thereof the doctrine of merger applies
only in respect of such items which were the subject-matter of appeal and not
in respect of those which were not.

Decision of the Madras High Court affirmed.

13. CIT v. S. M. Aggarwal (293 IT 43)

Whether addition based on dump document recovered in search could

be sustained without giving the assessee the opportunity to controvert
the statement of assesee’s daughter or give further evidence?

During the course of search, certain documents containing details of monetary

transactions such as advancement of loan of Rs. 22.50 lakhs by the assessee
and also income by way of interest thereon at Rs. 3.55 lakhs were found. The
explanation given by the assessee that the account belonged to his daughter
was denied by her. The Assessing Officer concluded in his assessment order
that the assessee had earned income from undisclosed sources which was
circulated by way of loan for the purpose of earning interest. Thus, the amount
of Rs. 22.5 lakhs and interest of Rs. 3.5 lakhs were added to the income of
the assessee for the assessment year 1998-99. The addition was deleted by
the Commissioner (Appeals) and his order was upheld by the Tribunal. On
appeal to the High Court :

Held, dismissing the appeal, that the statement made by the assessee’s
daughter could not be said to be relevant or admissible evidence against the
assessee, since the assessee was not given any opportunity to cross-
examine her and even from the statement, no conclusion could be drawn that
the entries made on the relevant page belonged to the assessee and
represented his undisclosed income. It was also an admitted fact that the
statement of the assessee was not recorded at any stage during the
assessment proceedings. The only person competent to give evidence on the
truthfulness of the contents of the document is the writer thereof. So, unless
and until the contents of the documents are proved against a person, the
possession of the document or handwriting of that person on such document
by itself could not prove the contents of the document. The findings of fact
had been recorded by both the Commissioner (Appeals) and the Tribunal.
The documents recovered during the course of search from the assessee
were dumb documents. The deletion of the addition was justified.

14. CIT v. Caplin Point Laboratories Ltd. (293 ITR 524) (Mad)

Whether penalty for concealment can be imposed on disallowance of

claim of deduction u/s 80HHC on interest income?

The assessee-company, engaged in the manufacture and sale of

pharmaceutical products, filed its return of income declaring a total income of
Rs. 2,57,270 claiming deduction under sections 80HHC and 80-I of the
Income-tax Act, 1961, of Rs. 1,76,116 and Rs. 1,44,463, respectively. The
return was processed under section 143(1)(a) of the Act. In response to the
notice issued under section 148 of the Act, for reopening the assessment, the
assessee filed a letter dated March 29, 2000, confirming that there was no
change in the income returned and also requested to treat the original return
filed as correct and filed in response to the notice. After the assessment was
completed under section 147 of the Act, the Assessing Officer disallowed the
deduction claimed by the assessee under sections 80HHC and 80-I of the
Act. The Assessing Officer also initiated penalty proceedings on the ground
that the assessee had concealed particulars of income and furnished
inaccurate particulars of income, and levied penalty of Rs. 30,00,000 under
section 271(1)(c) of the Act. On appeal, the Commissioner (Appeals) held that
the Assessing Officer was not able to prove that the claim of the assessee for
deduction under sections 80HHC and 80-I of the Act was not bona fide and
allowed the appeal and deleted the penalty. The Tribunal confirmed the order
of the Commissioner (Appeals). On appeal by the Revenue :

Held, dismissing the appeal, that it was found by the Tribunal that when
disallowances were made on the basis of different interpretations, it could not
be said that particulars of income had been concealed. In this case, the
assessee had adopted a particular view on the basis of certain case law or
some bona fide belief and a mere rejection of the claim of the assessee by
relying on different interpretations did not amount to concealment of
particulars of income or furnishing inaccurate particulars of income by the
assessee. The Tribunal held that it was not a fit case for levying penalty. The
concurrent findings given by both the authorities below that there was no
concealment of particulars of income or furnishing inaccurate particulars of
income by the assessee were based on valid materials and evidence which
did not warrant interference.

15. Dinbandhu Pal v. ITO (293 ITR 199) (AT)

Whether penalty for concealment could be imposed when details of

loans were furnished with confirmation from creditors?

The satisfaction of the Assessing Officer during the course of assessment

proceedings is a pre-condition for initiating penalty proceedings under section
271(1)(c) of the Income-tax Act, 1961. However, whether the Assessing
Officer was prima facie satisfied or not during the course of assessment
proceedings would depend upon the facts of each case.

If at the foot of the assessment order the Assessing Officer has recorded the
finding that penalty proceedings under section 271(1)(c) are separately
initiated, it would be sufficient to hold that the Assessing Officer was satisfied
during the course of assessment proceedings for initiation of penalty
proceedings.

Where in the body of the assessment order while making the addition the
Assessing Officer had mentioned “the addition clearly attracts the penalty
provision under section 271(1)(c)” and at the end of the order, i.e., after the
determining of total income and the computation of tax again he had
mentioned “penalty proceedings under section 274/271(1)(c) initiated
separately” :

Held, that the Assessing Officer must be held to have been satisfied during
the course of assessment proceedings that the assessee had concealed his
income.

CIT v. S. V. Angidi Chettiar [1962] 44 ITR 739 (SC) applied.

The Explanation to section 271(1)(c) is part of section 271 and when a notice
is issued under section 271 the burden is upon the assessee to prove that his
case does not fall within the circumstances stated in the Explanation.

Whether a particular case falls within the ambit of the Explanation or not
would depend upon the facts of each case. Part A of the Explanation would
be applicable in circumstances (i) where a person fails to offer an explanation
; (ii) where a person offers an explanation which is found by the Assessing
Officer or by the Commissioner (Appeals) to be false. Part B of the
Explanation would be applicable (i) where a person offers an explanation but
he is unable to substantiate it ; and (ii) he also fails to prove that such
explanation is bona fide and that all the facts relating to the same which are
material to the computation of the total income have been disclosed by him.
Part B of the Explanation would be applicable only if both the above
conditions are satisfied. If the assessee is able to prove that the explanation is
bona fide and all the facts relating to the same have been disclosed, the
assessee's case would not fall within Part B of the Explanation even if he is
unable to substantiate the explanation.

There was a credit of Rs. 8,70,000 in the assessee's books of account being
unsecured loans. The assessee furnished the loan confirmation of the
creditors before the Assessing Officer and later filed details of loans taken.
The Assessing Officer asked the assessee to produce the loan creditors in
person immediately. The assessee appeared before the Assessing Officer
and stated that no loan creditor was ready to depose before the Assessing
Officer and therefore, he was forced to offer the whole amount for taxation.
The Assessing Officer also found that the assessee had shown the closing
stock in the trading account and balance-sheet at different figures. Since the
assessee was unable to explain the discrepancy, he offered the income of Rs.
87,500 in this regard. The Assessing Officer completed the assessment
making additions of Rs. 8,70,000 and Rs. 87,500 and levied penalty under
section 271(1)(c) which was upheld by the Commissioner (Appeals). On
appeal to the Tribunal :

Held, (i) that the assessee had offered an explanation relating to cash credit
by furnishing necessary details and also substantiated it by producing the
confirmation of the creditors. The explanation of the assessee was not found
to be false by the Revenue. The Assessing Officer had asked the assessee to
produce the creditors which the assessee was unable to do and, therefore, he
offered the income. Thus it was clear that no material was found by the
Department to hold that the confirmation of the creditors produced by the
assessee was false. The assessee’s case did not fall within the ambit of Part
A of the Explanation. Since the assessee offered an explanation and
substantiated it by producing the confirmation of creditors, Part B was also not
applicable. Merely because the assessee accepted the credit as his income
because he was unable to produce the creditors, it could not be said that the
assessee had concealed the particulars of income or furnished inaccurate
particulars of such income. The assessee was not liable for penalty under
section 271(1)(c) in respect of the addition of Rs. 8,70,000 for unexplained
cash credit.

(ii) That admittedly, the assessee had no explanation for the discrepancy in
recording the closing stock at different figures in the trading account and
balance sheet. In view of this, Part A of the Explanation, i.e., “the assessee
fails to offer explanation” would be satisfied. Therefore, the assessee would
be deemed to have concealed the particulars of income of Rs. 87,500. The
levy of penalty on this count was justified.

16. Dilip N. Shroff Vs. Jt. CIT (291 ITR 519) (SC)

Whether penalty for concealment could be imposed when capital gain

was computed on basis of registered valuer report but assessment was
made on basis of DVO report?

Clause (c) of section 271(1) of the Income-tax Act, 1961, categorically states
that penalty would be leviable if the assessee conceals particulars of his
income or furnishes inaccurate particulars thereof. But by reason of such
concealment or furnishing of inaccurate particulars alone, the assessee does
not ipso facto become liable for penalty. Imposition of penalty is not
automatic. Not only is the levy of penalty discretionary in nature but the
discretion is also required to be exercised on the part of the Assessing Officer
keeping the relevant factors in mind. Some of those factors, apart from being
inherent in the nature of penalty proceedings, inhere on the face of the
statutory provisions. Penalty proceedings are not to be initiated merely to
harass the assessee. The approach of the Assessing Officer in this behalf
must be fair and objective.

“Concealment of income” and “furnishing inaccurate particulars” are different.

Both concealment and furnishing of inaccurate particulars refer to deliberate
acts on the part of the assessee. A mere omission or negligence would not
constitute a deliberate act of suppressio veri or suggestio falsi.
A duty may be enjoined on the assessee to make a correct disclosure of
income but if such disclosure is based on the opinion of an expert, who is
otherwise also a registered valuer having been appointed in terms of a
statutory scheme, merely because his opinion is not accepted or some other
expert gives another opinion, the same by itself may not be sufficient for
arriving at a conclusion that the assessee has furnished inaccurate
particulars.

Clause (iii) of section 271(1) again provides for a discretionary jurisdiction

upon the assessing authority inasmuch as the amount of penalty may not be
less than the amount of tax sought to be evaded by reason of such
concealment of particulars of income but it may not exceed three times
thereof. The factors which are material for the purpose of the computation of
total income as sought to be explained in Explanation 1 refer to computation
of income on the part of the assessee which is directly relatable to (a) failure
to offer an explanation and/or offering an explanation which is false ; and (b)
which he is not able to substantiate and fails to prove that such explanation is
bona fide. Only in the event both factors enumerated in clauses (A) and (B) of
Explanation 1 are satisfied and a finding in this behalf is arrived at by the
Assessing Officer, the legal fiction created thereunder would be attracted. For
the purpose of invoking clause (iii) of section 271(1) the expression “amount
of tax sought to be evaded” is set out in Explanation 4. This clause would be
attracted when a finding is arrived at that some amount of tax was sought to
be evaded by the assessee as envisaged by clause (a) thereof.

The Explanation appended to section 271(1)(c) is an exception to the general

rule. It raises a legal fiction by reason whereof the burden of proof shifts from
the Department to the assessee. Legal fiction, however, as is well known,
must be given full effect when the conditions precedent thereof are satisfied
and not otherwise.

The object of an Explanation to a statutory provision is : (a) to explain the

meaning and intendment of the Act itself ; (b) where there is any obscurity or
vagueness in the main enactment, to clarify the same so as to make it
consistent with the dominant object which it seems to subserve ; (c) to provide
additional support to the dominant object of the Act in order to make it
meaningful and purposeful ; (d) an Explanation cannot in any way interfere
with or change the enactment or any part thereof, but where some gap is left
which is relevant for the purpose of the Explanation, in order to suppress the
mischief and advance the object of the Act, it can help or assist the court in
interpreting the true purport or intendment of the enactment ; (e) it cannot,
however, take away a statutory right with which any person under a statute
has been clothed or set at naught the working of an Act by becoming a
hindrance in the interpretation of the same.

S. Sundaram Pillai v. V. R. Pattabiraman [1985] AIR 1985 SC 582 and

Swedish Match AB v. Securities and Exchange Board of India [2004] 122
Comp Cas 83 (SC) ; [2004] 11 SCC 641 followed.

The word “inaccurate” signifies a deliberate act or omission on the part of the
assessee. Such deliberate act must be either for the purpose of concealment
of income or furnishing inaccurate particulars. The term “inaccurate
particulars” is not defined. Furnishing of an assessment of the value of
property may not by itself be furnishing inaccurate particulars. Even if the
Explanations are taken recourse to, a finding has to be arrived at—having
regard to clause (A) of Explanation 1—that the Assessing Officer is required
to arrive at a finding that the explanation offered by the assessee, in the event
he offers one, was false. He must be found to have failed to prove that such
explanation is not only not bona fide but all the facts relating to the same and
material to the income were not disclosed by him. Thus, apart from his
explanation being not bona fide, it should have been found as a fact that he
has not disclosed all the facts which were material to the computation of his
income. The explanation must be preceded by a finding as to how and in what
manner he furnished the particulars of his income. It is beyond any doubt or
dispute that for the said purpose the Assessing Officer must arrive at a
satisfaction in this behalf.

CIT v. Ram Commercial Enterprises Ltd. [2000] 246 ITR 568 (Delhi) and
Diwan Enterprises v. CIT [2000] 246 ITR 571 (Delhi) followed.
The primary burden of proof is on the Revenue. The statute requires a
satisfaction on the part of the Assessing Officer : he is required to arrive at a
satisfaction so as to show that there is primary evidence to establish that the
assessee had concealed the amount or furnished inaccurate particulars and
this onus is to be discharged by the Department.

D. M. Manasvi v. CIT [1972] 86 ITR 557 (SC) ; [1973] 3 SCC 207 relied on.

While considering whether the assessee has been able to discharge his
burden the Assessing Officer should not begin with the presumption that he is
guilty.

The order imposing penalty is quasi-criminal in nature and the burden lies
upon the Department to establish that the assessee had concealed his
income. Since burden of proof in penalty proceedings varies from that in the
assessment proceedings, a finding in the assessment proceedings that a
particular receipt is income cannot automatically be adopted, though a finding
in the assessment proceedings constitutes good evidence in the penalty
proceedings. In the penalty proceedings the authorities must consider the
matter afresh as the question has to be considered from a different angle.

Anantharam Veerasinghaiah and Co. v. CIT [1980] 123 ITR 457 (SC) ; [1980]
Supp SCC 131 followed.

It is one thing to say that the valuation based on a newspaper is totally

unacceptable, it is another thing to say that, by reason of the return, the
assessee furnished inaccurate particulars. The questions which are, inter alia,
required to be posed are : (i) whether the method adopted by the registered
valuer was wholly unknown to law or was contrary to all modes of valuation ;
(ii) whether the particulars said to have been concealed were necessary for
the purpose of arriving at a correct valuation or otherwise misleading ; (iii)
whether the method of valuation adopted by the registered valuer resulted in
grossly unfair valuation which could not have been done by any reasonable
person ; (iv) whether the methodology adopted was totally wrong.
A registered valuer is supposed to know as to which method or mode should
be adopted for the purpose of valuing a particular land or a building having
regard to a large number of factors involved therein. The tax on capital gains
does not envisage that the valuation given must be the true and exact market
value. Even the market value of the property may be found to be different
having regard to the locale thereof.

The assessee (HUF) had an undivided ¼th share in certain land and building,
which was sold during the previous year relevant to the assessment year
1998-99. To value the property for the purpose of capital gains the assessee
appointed a registered valuer. In the report the registered valuer gave all the
requisite particulars as required in the prescribed form, and had stated (i) that
he had based the valuation on the sale prices given in a newspaper and
worked out the value of the assessee’s share in the property as on April 1,
1981, as Rs. two crores fifty lakhs ; (ii) that on his inspection he had found
that the building was in a dilapidated condition and had collapsed and,
therefore, he had taken the scrap value of the building. For the assessment
year 1998-99 the assessee had disclosed an income of Rs. 30,80,030
showing a long-term capital loss of Rs. 34,12,000 on account of the sale of
the property and had filed the registered valuer’s report along with the return.
The Joint Commissioner referred under section 55A of the Income-tax Act,
1961, the matter for valuation of the undivided ¼th share of the appellant’s
property as on April 1, 1981, to the District Valuation Officer who submitted a
report determining the share of the assessee at Rs. 1,14,92,907 and on that
basis the Joint Commissioner determined the capital gain of the assessee at
Rs. 3,09,78,478. After a show-cause notice under section 274 read with
section 271 the Joint Commissioner imposed a minimum penalty of Rs.
68,78,095 under section 271(1)(c) on the basis that the assessee had
furnished inaccurate particulars of its income. The Commissioner (Appeals)
as well as the Appellate Tribunal affirmed the imposition of penalty. The High
Court dismissed the assessee’s appeal in limine. On appeal to the Supreme
Court :
Held,accordingly, reversing the decision of the High Court, (i) that in a case of
this nature, the question would be whether this was a fit case where the
discretionary jurisdiction was properly exercised or not ;

(ii) that the methods of valuation might be different. A registered valuer was
supposed to know which method or mode should be adopted for the purpose
of valuing a particular land or a building having regard to the large number of
factors involved therein. The tax on capital gains did not envisage that the
valuation must be the true and exact market value. Even the market value of a
property might be found to be different having regard to the locale thereof.
The authorities did not arrive at a finding that the consideration amount fixed
for the sale of the property was wholly inadequate. The authori-ties also did
not indicate what were the particulars furnished by the assessee. Nor did they
state what should have been the accepted principles of valuation.

(iii) That a reference under section 55A to the Valuation Officer was optional
and was for the purpose of making an estimate. Such reference would be
made, if in the opinion of the Assessing Officer the value of the assets as
claimed by the assessee in accordance with the estimate made by the
registered valuer was less than its fair market value. Clause (b) also indicated
that the assessee had two options : to get the value prepared through the
index value or to take any other known mode of valuation. The registered
valuer had arrived at his opinion on a certain basis and while making the
valuation report disclosed all the particulars. He disclosed that he had chosen
the index value method. He did not rely upon any sale instance. He might
have referred to the valuation of property as mentioned in a local newspaper.
But he did not furnish the particulars. Nor had he enclosed the sheet showing
sale instances, but nothing turned upon it as he had not relied upon any sales
instances. There could be a genuine difference of opinion between two
experts. A duty might be enjoined on the assessee to make a correct
disclosure of income but if such disclosure is based on the opinion of an
expert, who was otherwise also a registered valuer having been appointed in
terms of a statutory scheme, only because his opinion was not accepted or
some other expert gave another opinion, that would not by itself be sufficient
for arriving at the conclusion that the assessee had furnished inaccurate
particulars.

(iv) That, therefore, the penalty was not exigible.

Decision of the Bombay High Court in Dilip N. Shroff v. Joint CIT [2007] 291
ITR 513 reversed.

17. Dr. T. A. Quereshi Vs. CIT (287 ITR 547) (SC)

Whether value of heroine seized from medical practitioner was

allowable as trading loss?

The assessee, a medical practitioner, claimed deduction of the value of heroin

seized from his gross income. The Department denied the deduction. On
appeal the Appellate Tribunal held as a fact that heroin was a part of his
stock-in-trade and allowed deduction of the estimated value of the heroin
seized from the gross income as a business loss. On appeal the High Court
held that the rigour of the Explanation to section 37 of the Income-tax Act,
1961, was fully satisfied, that possession of heroin was an offence, that it was
disgraceful for a doctor to indulge in activities against humanity, and that
hence the question of claiming deduction of the value of the seized article did
not arise. On appeal to the Supreme Court :

Held, reversing the decision of the High Court, (i) that the Explanation to
section 37 had no relevance as this was not a case of business expenditure
but was one of business loss. Business loss was allowable on ordinary
commercial principles in computing the profits. Once it was found that the
heroin seized formed part of the stock-in-trade of the assessee, it followed
that the seizure and confiscation of such stock-in-trade had to be allowed as a
business loss.

CIT v. Piara Singh [1980] 124 ITR 40 (SC) followed.

(ii) That even though the assessee was committing a highly immoral act in
illegally manufacturing and selling heroin, the case had to be decided on legal
principles and not on one’s own moral views.
Loss of stock-in-trade has to be considered as a trading loss.

CIT v. S. N. A. S. A. Annamalai Chettiar [1972] 86 ITR 607 (SC) ; [1973] AIR

1973 SC 1032 followed.

By the court : “Law is different from morality, as the positivist jurists Bentham
and Austin pointed out”.

Decision of the Madhya Pradesh High Court in CIT v. Dr. T. A. Qureshi [2005]
275 ITR 352 reversed.

18. CIT v. Bharat Aluminium Co. Ltd (163 Taxman 430) (Del)

Whether revision u/s 263 is justified on the ground that the claim was
not made by filing revised return u/s 139(5) and AO allowed deduction
on the basis of revised computation furnished by assessee through
letter filed in course of assessment proceeding?

The assessee claimed 1/5th as differed revenue expenditure. However, in

course of assessment proceeding, assessee enhanced the claim and
expenditure was claimed in full by way of filing revised computation through
letter. The claim of assessee was accepted. Thereafter, the assessment was
revised by commissioner acting u/s 263 and enhanced claim was disallowed.
The tribunal allowed assessee’s claim. The High Court confirmed the order of
Tribunal by holding that assessee’s claim was not new one but he only
enhanced the original claim of deduction of expenditure and so it is not
necessary to file revised return of income.

19. Hero Exports v. CIT (213 CTR 291) (SC)

Whether indirect cost is to be reduced by 10% of incentives and other

income while determining export profit of trading goods as defined in
80HHC(1)(b) )or 80HHC(1)(c)(ii).?

Honourable Supreme Court allowed the claim of assessee by holding that

only indirect cost attributable to export is required to be deducted and so
indirect cost relating to incentive received by assessee is not required to be
deducted. On the basis of rationality of provision of Explanation (baa) of
section 80HHC, the claim of assessee of deduction at 10% was allowed to be
reduced from indirect cost.

20. Radhe Developers v. ITO (Ahmedabad Bench)

Whether ownership of land is the essential condition to be eligible for

claiming deduction of income from construction and development of
residential housing project u/s 80IB(10) ?

The assessee had developed and built a housing project on a land not
belonging to it. It had entered into development agreement with land owner
where the landowners agreed to get the land developed through assessee.
The permission of municipality was also not in the name of assessee. The
revenue rejected the claim of deduction u/s 80IB on the ground that as per
provision, the approval by local authority is required and as the approval was
in the name of land owner, the deduction could not be allowed. The CIT(A)
confirmed the finding of assessing officer. The Tribunal allowed the claim by
noting that approval of project was taken by assessee on behalf of owner and
all expenses of approval was borne by assessee. The tribunal held that it is
the person who develop and build the housing project is eligible to deduction
irrespective of ownership of land.