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CA. Saket Ghiria CA Final Direct Tax Case Law Book May 23
Saket Ghiria Classes Visit: saketghiria.com P.N. 1

Hello Dear CA Final Students,

Hoping all of you are doing great. The ICAI in its CA Final Exam of Direct
Tax gives huge emphasis on the case laws & the weightage of case laws
could be anywhere between 25 to 30 marks in the exams. Considering
this, we have brought to you the Case Laws Book. This is the first
edition of 100 Most Important Case Laws Book for CA Final Direct Tax
Laws & IT (Paper 7) which is designed exclusively for May 2023
attempt. In this Book, the case laws have been selected as follows:
• All Relevant case laws issued by ICAI through ‘Judicial Updates’
till May 23 Attempt.
• Other Important & Landmark case laws which are being
frequently asked by the ICAI in adjustment form.
In this Book, we have structed the case laws, as far as
possible, in the format asked by the ICAI in the exams.
We have also included Author’s Note in certain places
for the better understanding of the context. Hoping
this Book will help you in your preparations. Also, this
book is equally applicable for CMA Final Exams.
Share with your CA Final Friends & Join our Telegram
Channel for regular updates.
Wising You Great Success in Exams
CA. Saket Ghiria
Note: This Book is designed for Mobile Devices.

However if you want to take a print-out of the book,
take two pages per sheet in the landscape mode.

Chapter Index
S.N. Chapter Name No. of Cases P.N.
01 Intro & Basic Concepts 1 7 to 7
02 PGBP, MAT, AOP 18 8 to 17
03 Capital Gain 13 18 to 25
04 Other Sources, Dividend 7 26 to 30
05 Clubbing & Set-off, House Property 3 31 to 32
06 Chapter VI-A Deductions, Section 10 7 33 to 36
07 Charitable Trusts, Institutions 3 37 to 40
08 Assessment Procedure, ITA 8 41 to 45
09 TDS, TCS, Advance Tax, Refund 15 46 to 56
10 Appeals & Revision 11 57 to 64
11 Penalty, Offences, Miscellaneous 9 65 to 70
12 NR Taxation, Transfer Pricing 8 71 to 76

Case Law Index
S.N. Case Law Name P.N.
01 CIT v. Saurashtra Cement Ltd. (2010) SC 7
02 Chennai Properties and Investments Ltd. v. CIT (2015) SC 8
03 CIT v. Smt. A. Sivakami (2010) Madras HC 8
CIT v. Podar Cement P Ltd. (1997) SC
04 I.C.D.S. Ltd. v. CIT (2013) SC 8
05 CIT v. Mother India Refrigeration (P) Ltd. [1985] SC 9
06 Sakthi Metal Depot v. CIT (2021) SC 10
07 CIT v. Ceebros Hotels Pvt. Ltd. (2018) Madras HC 10
08 Berger Paints India Ltd. v. CIT (2017) SC 11
09 Expenditure on issue of Bonus Shares and Right Shares 11
10 Apex Laboratories Pvt. Ltd. v. DCIT (2022) SC 12
11 CIT v. Priya Village Roadshows Ltd. (2011) Delhi HC 12
12 National Co-operative Dev. Corporation v. CIT (2020) SC 13
13 Kedarnath Jute Manuf. Company Ltd. v. CIT (1971) SC 13
14 CIT v. Maruti Suzuki India Ltd. (2018) Delhi HC 14
15 Palam Gas Service v. CIT (2017) SC 15
16 CIT v. Great City Manufacturing Co. (2013) All. HC 15
17 A.S. Glittre v CIT (1997) SC 16
18 JCIT v. Rolta India Ltd. (2011) SC 16
19 CIT v. Govindbhai Mamaiya (2014) SC 17
20 G.M. Omer Khan v. CIT (1992) SC 18
21 Balakrishnan v. UOI & Others (2017) SC 18
22 PCIT v. Dr. D Ramamurthy (2019) SC 19
23 RM. Arunachalam v. CIT (1997) SC 19
24 CIT v. Aditya Kumar Jajodia (2018) Calcutta HC 19
25 CIT v. Manjula J. Shah (2013) Bom HC 20
26 PCIT v. Ravjibhai Nagjibhai Thesia (2016) Gujarat HC 21
27 CIT v. V.S. Dempo Company Ltd. (2016) SC 21
28 Hindustan Unilever Ltd. v. DCIT (2010) Bombay HC 22
29 CIT v. Kamal Wahal (2013) Delhi HC 22
30 CIT v. Ravinder Kumar Arora (2012) Delhi HC 23
31 CIT v. Sambandam Udaykumar (2012) Karnataka HC 24
32 Fibre Boards (P) Ltd v. CIT (2015) SC 24
33 CIT v. Vir Vikram Vaid (2014) Bombay HC 26
34 Pradip Kumar Malhotra v. CIT (2011) Calcutta HC 26

35 CIT v. Parle Plastics Ltd. (2011) Bombay HC 27
36 CIT v. Ambassador Travels (P) Ltd. (2009) Delhi HC 28
37 PCIT v. Dr. Ranjan Pai (2021) Karnataka HC 28
38 CIT v. Manjoo and Co. (2011) Kerala HC 29
39 CIT v. Sree Rama Multi Tech Ltd. (2018) SC 29
40 Pramod Mittal v. CIT (2013) Delhi HC 31
41 CIT v. Keshavji Morarji (1967) SC 31
42 CIT v. Hariprasad Bhojnagarwala (2012) Guj HC 32
43 CIT v. Swarnagiri Wire Insulations (2012) Karnataka HC 33
44 CIT v. Reliance Energy Ltd. (2022) SC 33
45 CIT v. Chetak Enterprises Pvt. Ltd. (2020) SC 34
46 CIT v. Orchev Pharma (2013) SC, Liberty India (2009) SC 34
47 CIT v. Meghalaya Steels Ltd. (2016) SC 35
48 CIT v. Sunil Vishwambharnath Tiwari (2016) Bombay HC 35
49 Sidwal Refrigerations Ind Ltd. v. DCIT (2010) Delhi HC 36
50 New Noble Educational Society v. CCIT (2022) SC? 37
51 CIT v. St. Peter’s Educational Society (2016) SC 38
52 ACIT (E) v. Ahmedabad Urban Dev. Authority (2022) SC 39
53 Goetze (India) Ltd v. CIT (2006) SC 41
54 Orissa Rural Housing v. ACIT (2012) Orissa HC 41
55 CIT v. Govind Nagar Sugar Ltd. (2011) Delhi HC 41
56 CIT v. SV Gopala Rao and Others (2017) SC 42
57 Regen Powertech Pvt. Ltd. (2019) Madras HC 42
58 Sahara Hospitality Ltd. v. CIT (2013) Bombay HC 43
59 Hemant Kumar Sindhi (2014) Allahabad HC 44
60 Kathiroor Service Co-op. Bank Ltd. v. CIT (2014) SC 45
61 ITC Ltd. vs. CIT (2016) SC 46
62 CIT v. Eli Lilly & Co. (India) P. Ltd. (2009) SC 46
63 UCO Bank v. Dy. CIT (2014) Delhi HC 47
64 Shree Choudhary Transport Co. v ITO (2020) SC 48
65 Director, Prasar Bharati v. CIT (2018) SC 48
66 CIT v. Ahmedabad Stamp Vendors Assoc. (2012) SC 49
67 CIT v. Qatar Airways (2011) Bombay HC 50
68 CIT & another v. Corporation Bank [2021] Karnataka HC 51
69 Japan Airlines Co. Ltd. /Singapore Airlines Ltd. (2015) SC 51
70 Indus Towers Ltd v. CIT (2014) Delhi HC 52
71 CIT v. Kotak Securities Ltd. (2016) SC 53
72 Sun Outsourcing Solutions v. CIT (A) [2018] T&AP HC 53

73 CIT v. Priya Blue Industries (P) Ltd (2016) Gujarat HC 54
74 CIT v. Senior Manager, SBI (2012) Allahabad HC 55
75 Pioneer Overseas Corp. USA (India Branch) v. CIT (IT) 55
(2022) SC
76 DCIT v. Pepsi Foods Ltd (2021) SC 57
77 Smt. Ritha Sabapathy v. DCIT (2019) Madras HC 57
78 CIT v. Earnest Exports Ltd. (2010) Bombay HC 58
79 Lachman Dass Bhatia (P) Ltd. v. ACIT (2011) Delhi HC 58
80 Reliance Telecom Ltd./Reliance Com. Ltd. (2022) SC 59
81 CIT v. A. A. Estate Pvt. Ltd. (2019) SC 59
82 CIT v. Meghalaya Steels Ltd. (2015) SC 60
83 Sunil Vasudeva & Others (2019) SC 61
84 Spinacom India (P.) Ltd. v. CIT (2018) SC 62
85 Wipro Finance Ltd. v. CIT (2022) SC 62
86 CIT v. Fortaleza Developers (2015) Bombay HC 63
87 CIT (TDS) v. Eurotech Maritime Academy Pvt. Ltd. (2019) 65
Kerala HC
88 CIT v. Muthoot Financiers (2015) Delhi HC 65
89 CIT v. Triumph Int. Finance (I.) Ltd. (2012) Bombay HC 66
90 UOI v. Bhavecha Machinery and Others (2010) MP HC 67
91 D. K. Shivakumar (2021) Karnataka HC 68
92 Sunil Babu v. Steel Processors (2006) Karnataka HC 68
93 CIT v. Laxman Das Khandelwal (2019) SC 69
94 PCIT v. Maruti Suzuki India Ltd. (2019) SC 69
95 Dr. Manoj Kabra v. ITO (2014) Allahabad HC 70
96 SI Group India Ltd v. DCIT (2016) Mumbai Tribunal 71
97 IHHI v DIT (2007) SC 71
98 Engineering Analysis Centre of Excellence (2021) SC 71
99 Indcom v. CIT (2011) Calcutta HC 74
100 DIT (IT) v. Wizcraft Int. Ent. (P) Ltd. (2014) Bombay HC 75
101 CIT v. V.S. Dempo & Co P. Ltd (2016) Bombay HC 75
102 CIT v. P.V.A.L. Kulandagan Chettiar (2004) SC 75
103 GE Energy Parts Inc. (2019) Delhi HC 76

CA.Chapter 01 CA Final Direct Tax Case
Saket Ghiria Intro
Law&Book
BasicMay
Concepts
23
Liquidated damages received by a company from supplier for failure to supply

01 machinery to the company within the stipulated time, a capital receipt or a
revenue receipt? CIT v. Saurashtra Cement Ltd. (2010) SC
Facts of the case & Issue: The assessee, a manufacturing company, has received
compensation charges called as liquidation damage from the supplier of the
machinery on account of failure to supply the machine on time. Assessee claims
such receipt as capital receipt thus not taxable while Assessing Officer treats such
receipt as revenue receipt hence taxable. Issue is whether such receipt is a
capital receipt or a revenue receipt?
Supreme Court’s Observations & Decision: Such liquidation damages are

directly linked with the procurement of a capital asset which the supplier failed
to supply to the assessee company, which lead to delay in coming into existence
of the profit-making activity for the assessee company. Such receipts are not in
the ordinary course of business; hence it is a capital receipt in the hands of the
assessee, thus not taxable.
Author’s Note - Under the Income Tax Act 1961, only the specified capital
receipts are taxable. For a receipt which is non-recurring in nature, the emphasis
of the assessee is to treat it as capital receipt. However the revenue on the other
hand tries to prove it as a revenue receipt so to tax it. For example whether the
profit from the sale of import entitlement licenses is a revenue receipt or capital
receipt was a long standing matter of contention between the assessee and the
department until the Supreme Court held it to be a capital receipt thus not
taxable. However later on, the Act was amended to treat it as revenue receipt.

CA.Chapter 02 CA Final Direct Tax Case PGBP,
Saket Ghiria MAT,
Law Book May AOP
23
Whether rental income from the business of leasing out properties be taxable
02 under the head “Income from house property” or “PGBP”?
Chennai Properties and Investments Ltd. v. CIT (2015) SC
Facts of the case & Issue: The assessee, engaged in the business of letting out of
the properties, received rental income from such letting out and treated such
income as business income while Assessing Officer charged such income under
the head ‘Income from House Property’. Issue is whether such rental income is
taxable under the head ‘PGBP’ or House Property?
Supreme Court’s Observations & Decision: As the earning of income by letting

out of the properties is the main objective of the company which can be
established through the objects clause of the memorandum or through other
means, the entire income of the company from letting out of such properties
shall be taxable as business income.
Is the beneficial ownership sufficient to claim depreciation or assessee shall be

03 the registered owner? CIT v. Smt. A. Sivakami (2010) Madras HC
Facts of the case & Issue: The assessee claimed depreciation on three buses,
even though she was not the registered owner of the same. However she was
the beneficial owner of such buses. Issue is whether the assessee is eligible to
claim the depreciation on such asset being the beneficial owner and not the
registered owner of such asset?
Court’s Observation & Decision: Supreme Court, in CIT v. Podar Cement P Ltd.
(1997) held that the owner need not necessarily be the legal owner to claim
depreciation. What is the prime requirement to claim depreciation is the
beneficial ownership of the asset and use of such asset in the business
operations. If these two conditions are satisfied, assessee cannot be denied
depreciation. Since the assessee proves that she is the beneficial owner, she was
entitled to claim depreciation even though she was not the legal owner of the
buses on account of non-registration of buses in her name.
Can depreciation on leased vehicles be denied to the lessor on the ground that
04 the vehicles are registered in the lessee’s name and that the lessor is not the
actual user of the vehicles? I.C.D.S. Ltd. v. CIT (2013) SC

Facts of the case & Issue: The assessee is a NBFC engaged in the business of
leasing etc. It purchased vehicles and leased them to its customers. These
vehicles are registered in the name of lessee in the certificate of registration
issued under the Motor Vehicles Act, 1988. However the lease agreement
provides that the NBFC being the lessor is the exclusive owner of the vehicle at
all points of time. The lessor NBFC claimed depreciation on such vehicles which
was denied by the Assessing Officer stating that the assessee was merely
financer and was neither the owner nor the user of these assets. Issue is whether
I.C.D.S. Ltd. can claim depreciation on such leased vehicles?
Supreme Court’s Observations & Decision: Section 32 of the Income Tax, Act
imposes a twin requirement of “ownership” and “usage for business” as
conditions to claim depreciation. Section 32 requires that the asset must be used
in the course of business or profession. In this case, the assessee did use the
vehicles in the course of its leasing business. Hence, this requirement is fulfilled.
The lease agreement between lessor and lessee provides that the assessee-lessor
is the exclusive owner of the vehicle at all points of time. The registration of the
vehicle in the name of lessee is just to fulfil the requirement under the Motor
Vehicles Act, 1988. Hence the second condition of the ownership of the asset by
lessor is also fulfilled. Hence the assessee-lessor was, entitled to claim
depreciation in respect of vehicles leased out.
What would be order of the set-off in case of unabsorbed depreciation &

05 brought forward losses? CIT v. Mother India Refrigeration (P) Ltd. [1985] SC
Facts of the case & Issue: The assessee has brought forward business losses as
well as brought forward unabsorbed depreciation of the earlier years. Issue is
what shall be the order of set-off of such brought forward losses and unabsorbed
depreciation from current year income.
Court’s Observation & Decision: Current year depreciation must be deducted

first before deducting unabsorbed carried forward business losses of the earlier
years in giving set off while computing the total income of any particular year.
For set-off, following order is to be followed:
(i) Current year depreciation (including current year capital expenditure

incurred on scientific research & capital expenditure on family planning.
(ii) Brought forward business loss.

(iii) Brought forward unabsorbed depreciation.
(iv) Brought forward unabsorbed capital expenditure on scientific research.
(v) Brought forward capital expenditure on family planning.
Would the depreciable asset forming part of block of assets on which

depreciation is allowed since its acquisition change its character if it is not used
06 for business purpose for last few years, to the effect that gain arising from its
transfer be considered as LTCG instead of STCG?
Sakthi Metal Depot v. CIT (2021) SC
Facts of Case & Issue: In this case, building forming part of block of assets on
which assessee claimed depreciation at the prescribed rates, some of them have
not used for the business purposes in the last couple of years. Issue is whether
such assets will remain as short term or can be considered as long term capital
asset based on the period of holding criteria?
Supreme Court’s Observations & Decision: The depreciable asset forming a part
of block of assets within the meaning section 2(11) would not cease to be a part
of that block so long as the assessee continued its business. In this case, the
building forming part of the block of assets would retain its character as such,
even if some of the assets in the block were not used for the business purposes
in the last couple of years. Consequently, the profits arising on sale of such asset
would be short-term capital gains.
Author’s Note - As per Section 50, the capital gain arising from transfer of any
depreciable asset shall always be short term capital gain in nature irrespective
of the period for which assessee has hold such assets.
Can an assessee setting up a hotel claim deduction under section 35AD for the
relevant previous year, on the basis that it had commenced its operations &
made an application for three-star category classification in beginning of the
07
said previous year, even though it was granted by the authority only in the next
year due to the requirement of completion of inspection?
CIT v. Ceebros Hotels Pvt. Ltd. (2018) Madras HC
Facts of Case & Issue: Assessee, Ceebros Hotels Pvt. Ltd., has built a hotel and
commenced the operations of such hotel same year and to claim the deduction
under section 35AD, made an application to classify it as three-star category.
However the authority certified the hotel as three-star category only on next
previous year after completing the inspection. Issue is from when assessee can
claim deduction under section 35AD, from the previous year in which the hotel
is commenced or the previous year from which authority certified such hotel?
High Court’s Observations & Decision: The assessee had made an application for
classification as early as in the month of April of the relevant previous year.
Thereafter, an inspection was required to be conducted for such purpose. The
manner in which the inspection was conducted and the time frame taken by the
competent authority were factors beyond the control of the assessee. The
Department had not disputed the operation of the new hotel from the relevant
previous year as it had accepted the income, which was offered to tax.
Under section 35AD, deduction is available from the previous year in which
assessee commences operation of the specified business i.e., hotel business, in
this case. Section 35AD does not mandate that the date of the certificate has to
be with effect from a particular date. Thus the assessee is entitled to claim the
deduction under section 35AD for the relevant previous year.
Can Securities Premium be considered the part of the Capital Employed for the
08 purpose of Section 35D? Berger Paints India Ltd. v. CIT (2017) SC
Facts of the case & Issue: The assessee has incurred certain preliminary
expenses and claimed deduction under section 35D of a sum representing share
premium as being a part of the capital employed. Issue is whether the securities
premium can be considered to be the part of capital employed so to allow higher
deduction of preliminary expenses under section 35D?
Court’s Observations & Decision: Premium collected by a company on

subscribed share capital is not “capital employed in the business of the
Company" within the meaning of Section 35D. Hence assessee cannot consider
the securities premium received as the part of the capital employed to claim
deduction prescribed under section 35D.
Author’s Note - As per Section 35D, the assessee can claim deduction of certain
specified preliminary expenses. However the deduction shall be capped at 5% of
the cost of the project. However in case of an Indian Company, 5% of the capital
employed or cost of the project at the option of the company.
09 Expenditure on the issue of Bonus Shares and Right Shares

Facts of the case & Issue: The assessee has incurred certain expenditure on the
issue of bonus share and right shares. Issue is whether such expenses shall be
allowed as deduction from the business income?
Bonus Shares - As no new fund is raised on the issue of bonus shares, expenditure
on issue of bonus shares is a revenue expenditure which can be claimed as
deduction by the assessee [CIT v. General Insurance Corporation (2006) SC].
Right Shares - Expenditure on the issue of right shares is a capital expenditure

not allowable as deduction. However if right shares have been issued in
connection with extension of business or setting up new unit, deduction can be
claimed under section 35D [Brooke Bond India Ltd. v. CIT (1997) SC].
Are expenses incurred by pharmaceutical companies in providing incentives to

medical practitioners, which are in violation of the provisions of the Indian
10 Medical Council (Professional Conduct, Etiquette and Ethics) Regulations,
2002, allowable as deduction under section 37 in the hands of the Pharma
companies? Apex Laboratories Pvt. Ltd. v. DCIT (2022) SC
Facts of the case & Issue: Assessee provided freebees and other incentives to
the doctors and other medical practitioners and claimed it as deduction from
business income while Assessing Officer denies its allowability. Issue is whether
the assessee can claim such deduction?
Court’s Observations & Decision: Expenses incurred in providing freebies to

medical practitioner by pharma and allied health sector industry are in violation
of the provisions of Indian Medical Council (Professional Conduct, Etiquette and
Ethics) Regulations. Hence, such expenditure is considered to be expenses
prohibited by the law and not allowed in the hands of the companies which has
provided aforesaid freebies.
Would expenditure incurred on feasibility study conducted for examining

proposals relating to the existing business be classified as a revenue
11 expenditure, where the project was abandoned without creating a new asset?
CIT v. Priya Village Roadshows Ltd. (2011) Delhi HC
Facts of the case & Issue: The assessee, engaged in the business of running
cinemas, incurred expenditure towards architect fee for examining the technical
viability of the proposal for takeover of cinema theatre for conversion into a
multiplex. The project was, however, dropped later on without creating new
asset. Issue is whether such expenses be treated as revenue in nature and
claimed as deduction.
High Court’s Decision: Since the feasibility studies were conducted by the
assessee for the existing business and it was abandoned without creating a new
asset, the expenses was of the revenue nature and allowable as deduction under
the head PGBP.
Author’s Note - Summary of allowability of expenditure incurred on new

project, activity or business but later on abandoned without creating a new
asset or coming into existence:
• New project, activity or business related to existing business of assessee -
Allowed as deduction [CIT v. Priya Village Roadshows Ltd. (2011) Delhi HC].
• New project, activity or business not related to existing business of
assessee - Not allowed as deduction [Mc Gaw Ravindra Laboratories (India)
Ltd. vs CIT (1993) Gujarat HC].
Is source of funds from which expenditure is incurred for the purpose of

12 business relevant for the purpose of allowability of deduction under section
37(1)? National Co-operative Development Corporation v. CIT (2020) SC
Facts of the case & Issue: The assessee has incurred certain expenses of revenue
nature but the source of the fund from which such expenditure incurred, was of
the capital nature. Issue is whether the assessee would be allowed deduction of
such expenditure as the source of the fund was of a non-revenue nature?
Court’s Observations & Decision: In case of an assessee carrying on business, it

is relevant to see whether an outlay constitutes an expenditure “for the purpose
of business” as used in section 37(1), for the purpose of claiming deduction
under section 37. The source of funds from which the expenditure is made is not
relevant. Every application of income towards the business objective of the
assessee is a business expenditure. There can be an amount treated as a capital
receipt while the same amount expended may be a revenue expenditure.
Allowability of the expenditure on purchases etc. omitted to be recorded in the

13 books. Kedarnath Jute Manufacturing Company Ltd. v. CIT (1971) SC
Facts of the case & Issue: The assessee, following mercantile system of
accounting, has made certain purchases eligible for deduction from business
income. However it forgot to claim deduction of such expense in the previous
year in which such purchases made but claimed such deduction in later previous
year. Issue is in which previous year the deduction of such expense for tax
purposes would be allowed?
Court’s Observations & Decision: Assessee can claim the deduction of

expenditure incurred in the previous year in which the liability belongs if the
assessee follows the mercantile system of accounting. If the assessee has made
the purchases in a previous year as evidenced by the purchase bill, but omits to
record such purchases in that previous year, it can claim the deduction in respect
of such purchases in that previous year itself even if the payment is made in the
subsequent previous year.
Author’s Note - For the purpose of Income from PGBP or Other Sources, assessee
can either follow the cash or mercantile system of accounting. If assessee follows
the mercantile system of accounting, it can claim deduction on due basis but if
assessee follows cash system, the deductions would be claimed by it on actual
payment basis only.
Can the payments made to a NR agent who does not have any income
assessable in India be disallowed under section 40(a)(i) for non-deduction of
14 tax at source on the ground that no application was made by the assessee
under section 195(2) for making deduction of tax at source at nil rate?
CIT v. Maruti Suzuki India Ltd. (2018) Delhi HC
Facts of the Case & Issue: Payments made by the assessee to its agents based
and operating abroad. The agent had no assessable income in India. The
Assessing Officer disallowed the payment invoking section 40(a)(i) on the ground
that no application was made by the assessee under section 195(2) for making
deduction of tax at source at nil rate or lower rate. Issue is whether Assessing
Officer can deny the allowability of such payment?
High Court’s Observations & Decision: The non-resident agent who operated
outside India did not have any income arising in India. Accordingly the
commission earned by a non- resident agent who was in the business of selling
Indian goods abroad, did not accrue or arise in India, and hence no tax was
deductible on such commission payment to a non-resident agent. Since the
assessee has made payment to a NR agent and such income is not chargeable to
tax in India, section 40(a)(i) could not be invoked to disallow deduction of such

payment for non-deduction of tax at source, while computing the business
income of the assessee.
Whether section 40(a)(ia) is attracted when amount is not ‘payable’ but has
15 been actually paid? Palam Gas Service v. CIT (2017) SC
Facts of the case & Issue: Assessee, engaged in LPG cylinders business, had
arranged for transportation to be done through three sub-contractors. During
the relevant assessment year, when the assessee made freight payments to the
sub-contractors, it did not deduct tax at source. The Assessing Officer disallowed
the freight expenses as per section 40(a)(ia) on account of failure to deduct tax.
The assessee contended that section 40(a)(ia) did not apply as the amount was
not ‘payable’ but had been actually paid. Issue is whether the assessee would be
allowed such deduction even on failure to make TDS?
Court’s Observation & Decision: For the purpose of section 40(a)(ia), the term
"payable" would include not only the amounts which are payable as on 31st
March of a previous year but also amounts which are paid during the previous
year. Hence, section 40(a)(ia) would be attracted for failure to deduct tax in both
cases i.e., when the amount is payable or when the amount is paid. If assessee
follows the mercantile system of accounting, then, the moment amount was
credited to the account of the payee on accrual of liability, tax was required to
be deducted at source. If the assessee follows cash system of accounting, then,
tax is required to be deducted at source at the time of making payment. Section
40(a)(ia) would be attracted for failure to deduct tax in both cases i.e., when the
amount is payable or when the amount is paid, depending on the system of
accounting followed by the assessee.
Can remuneration paid to working partners as per the partnership deed be

considered as unreasonable and excessive for disallowance under section
16 40A(2) even though the same is within the statutory limit prescribed under
section 40(b)? CIT v. Great City Manufacturing Co. (2013) Allahabad HC
Facts of the case & Issue: Assessing Officer contended that the remuneration
paid by firm to its working partners was highly excessive and unreasonable,
compared to the total salary paid to other employees. Therefore, he disallowed
the excessive portion of the remuneration to partners by invoking section 40A(2).
Issue is whether the assessee firm would be disallowed the remuneration paid
to the partners as the Assessing Officer claims it to be excessive?
High Court’s Observations & Decision: Section 40(b) prescribes the limit of
remuneration to working partners, and deduction is allowable up to such limit
while computing the business income. If the remuneration paid is within such
ceiling limit, then section 40A(2) cannot be invoked for the same. The Assessing
Officer is only required to ensure that the remuneration is paid to the working
partners mentioned in the partnership deed, the terms and conditions of the
partnership deed provide for payment of remuneration and the remuneration is
within the limits prescribed under section 40(b). If these conditions are complied
with, then AO cannot disallow any part of the remuneration by invoking section
40A(2) on the ground that it is excessive.
Whether assessment under Section 172 is final assessment or if assessee opts

17 for regular provisions of the Act then the validity of assessment under Section
172? A.S. Glittre v CIT (1997) SC
Facts of the case & Issue: Assessee, engaged in ship operation business, got
assessed under section 172 but later on it wanted to opt for and get assessed as
per the regular provisions of the Act. Issue is whether assessee can opt for the
regular provisions if it already got assessed under section 172?
Court’s Observations & Decision: The assessment made under section 172(4)
shall be an ‘ad hoc’ assessment and it will be superseded if a regular assessment
is opted by the assessee and if regular assessment has been made, the tax paid
under section 172 will be treated as advance tax for all purpose and all the
provisions in the Act in respect of the payment of advance tax shall apply. On
effecting the regular assessment, if there is any excess payment made by the
assessee then he would be entitled to get the refund along with interest.
Is Advance Tax payable by the Company which is subject to MAT under Section
18 115JB? JCIT v. Rolta India Ltd. (2011) SC
Facts of the case & Issue: Assessee company, has to pay tax as per the provisions
of section 115JB i.e. MAT. Issue is whether the advance tax provisions would be
applicable and assessee shall be liable to pay advance tax on the book profit?
Court’s Observations & Decision: There is a specific provision, section 115JB(5)

providing that all other provisions of Income Tax Act, 1961 shall apply to a
company subject to section 115JB. Hence, the liability for payment of advance
tax would be attracted and company shall pay the advance tax on such book

profits as per the provisions of income tax act. Therefore, if a company defaults
in payment of advance tax in respect of tax payable under section 115JB, it would
be liable to pay interest under sections 234B and 234C.
Land inherited by three brothers is compulsorily acquired, whether the

19 resultant capital gain assessable in the status of “Association of Persons” (AOP)
or in their individual status? CIT v. Govindbhai Mamaiya (2014) SC
Facts of the case: Three brothers inherited a property consequent to demise of

their father. A part of this land was acquired by the State Government and
compensation was paid for it. On appeal, compensation was enhanced, and the
enhanced compensation was paid with interest. The issue is regarding the status
in which capital gain arising on transfer of property would be assessed. The
assessee’s offered income in their status as “individual” but the Revenue sought
to tax the same in their status as AOP.
Supreme Court’s Observations & Decision: Income from the asset inherited by
a son from his father has to be assessed as income of the son individually.
“Association of Persons” means an association in which two or more persons join
in a common purpose or common action. Thus, an association of persons could
be formed only when two or more persons voluntarily combine together for
certain purposes. Hence income from asset inherited by the legal heirs is taxable
in their individual hands and not in the status of AOP.

CA.Chapter 03 CA Final Direct Tax Case LawCapital
Saket Ghiria Gain
Book May 23
To determine the nature of the agricultural land, whether the population of

20 the concerned municipality or the area in which such land is situated, shall be
considered? G.M. Omer Khan v. CIT (1992) SC
Facts of the case & Issue: Assessee has an agricultural land in an area which is
near to a municipality. Issue is in determining the nature of such land, whether
agricultural or not, the population of such municipality or the population of the
area in which such land is situated shall be considered?
Supreme Court’s Observations & Decision: It is the population of the

municipality that has to be taken into account for the purpose of identifying the
nature of the agricultural land under section 2(14) and not the population of any
area within the municipality in which such land is situated.
Whether receipt of higher compensation after notification of compulsory

21 acquisition would change the character of transaction into a voluntary sale so
to deny exemption u/s 10(37)? Balakrishnan v. UOI & Others (2017) SC
Facts of the case & Issue: The assessee has agricultural land in urban area which
is compulsory acquired by the State Government. The assessee was awarded
compensation of ₹15 lakhs. Aggrieved by the amount, he initiated negotiations
with Govt. authorities as a result of which, the amount of compensation was
increased to ₹38 lakhs. Assessee claimed exemption from capital gains under
section 10(37) stating that the transfer of agricultural land was on account of
compulsory acquisition. The Revenue contended that the exemption should be
denied as it was not a compulsory acquisition but a voluntary sale. Issue is
whether receipt of higher compensation on account of negotiations transforms
the character of compulsory acquisition into a voluntary sale, so as to deny
exemption under section 10(37)?
Supreme Court’s Observations & Decision: Acquisition process was initiated

under the Land Acquisition Act, 1894. Assessee entered into negotiations only
for securing the market value of land without having to go to the Court. Merely
because the compensation amount is agreed upon and fixed during negotiations,
the character of acquisition will not change from compulsory acquisition to a
voluntary sale. It would continue to remain as compulsory acquisition. Hence
assessee can claim exemption under section 10(37).

Whether Section 45(3) is subject to or overridden by Section 50C or Section
22 50CA? PCIT v. Dr. D Ramamurthy (2019) SC
Facts of the case & Issue: Assessee has transferred to a partnership firm an asset
(e.g. immovable property) as capital contribution for becoming a partner of such
firm. The firm has recorded that asset in its books at a value different from its
fair market value. Issue is at what value such asset shall be considered for income
tax purposes, the value at which the credit was given in the books of the firm or
the fair market value of such asset?
Supreme Court’s Observations & Decision: For the purpose of computing capital
gains under section 45(3), value of asset recorded in the books of the Firm or AOP
or BOI on the date of transfer would be deemed to be full value of consideration
received or accrued as a result of transfer. Hence, it can be said that section 45(3)
is not been overridden by section 50C or section 50CA.
What would be the tax treatment of sum paid for discharge of mortgage of the
23 property created by previous owner? RM. Arunachalam v. CIT (1997) SC
Facts of the case & Issue: Assessee inherited the property from the previous
owner which was subject to the mortgage created by the previous owner. After
inheriting the property, he paid certain amount to discharge the mortgage debt.
Issue is whether the assessee claim such amount as cost of acquisition?
Supreme Court’s Observations & Decision: Payment of mortgage debt to clear

the title of the property will be treated as cost of acquisition under section 48
read with section 55(2) in the hands of the assessee as the property acquired by
the assessee was subject to the mortgage created by the previous owner.
Author’s Note - In case the assessee himself creates a mortgage, he cannot claim
it to be the cost of acquisition or improvement when he discharges such
mortgage [Jagdish Chandran v CIT (1997) SC].
Can the amount incurred by the assessee towards perfecting title of property
24 acquired through will, for making further sale, be included in the cost of
acquisition for computing capital gains?
CIT v. Aditya Kumar Jajodia (2018) Calcutta HC
Facts of the Case & Issue: The assessee obtained a leasehold property under a
will which gave some interest to a trust. The trust had also entered into an
agreement to sell its interest in the property with a third party. The assessee had
to perfect the ownership title before he can transfer the property. For this, he
made payment to the Delhi Development Authority (DDA) for conversion of
leasehold rights to freehold rights. He also made payments to the trust and to
the third party to give up his right under the agreement. Issue is whether the
amount incurred by the assessee towards perfecting title of property for making
further sale, by the way of the payments made to the trust, the third party and
the DDA can be included in the cost of acquisition for computing capital gains.
High Court’s Observations and Decision: In this case, the encumbrances were
got rid of by the assessee by making certain payment, consequent to which a
better title to the property was acquired by him. The cost of getting rid of such
encumbrances in any immovable property had to be treated as a part of the cost
of acquisition of the property. The same principle was held by Supreme Court in
the case of RM. Arunachalam v. CIT (1997).
Hence the assessee is entitled to deduction of amount incurred towards

perfecting title of property acquired under will and the amount incurred towards
making payments to the trust and the third party in whose favour rights were
created, as cost of acquisition under section 55.
Would indexation benefit in respect of the gifted asset apply from the year in
25 which the asset was first held by assessee or from the year in which it was first
acquired by the previous owner? CIT v. Manjula J. Shah (2013) Bom HC
Facts of the case & Issue: The assessee acquired a capital asset by way of gift
from the previous owner. Such asset when transferred was a long-term capital
asset considering the period of holding by the assessee as well as the previous
owner. The assessee computed long-term capital gain considering the CII of the
year in which the asset was first held by the previous owner. Assessing Officer
raised an objection mentioning that as per meaning assigned to the indexed cost
of acquisition, the CII of the year in which the asset is first held by the assessee
need to be considered and not the CII of the year in which the asset was first
held by previous owner. Issue is from which year the indexation benefit will be
considered for indexation benefit purposes?
High Court’s Observations & Decision: The assessee is deemed to have held the
capital asset from the year the asset was held by the previous owner &
accordingly the asset is a long term capital asset in the hands of assessee.
Therefore, for determining the indexed cost of acquisition under Section 48, the
assessee must be treated to have held the asset from the year the asset was first
held by the previous owner and accordingly the CII for the year the asset was
first held by the previous owner would be considered for determining the
indexed cost of acquisition. Hence, the indexed cost of acquisition in case of
gifted asset has to be computed with reference to the year in which the previous
owner first held the asset and not the year in which the assessee became the
owner of the asset.
Whether the Assessing Officer is bound to consider the report of Departmental

26 Valuation Officer (DVO) when it is available on record?
PCIT v. Ravjibhai Nagjibhai Thesia (2016) Gujarat HC
Facts of the case & Issue: The assessee sold his property for ₹16 lakhs. The State
stamp valuation authority valued the property at ₹233 lakhs. During the course
of assessment proceedings, at the request of the assessee, the Assessing Officer
referred the matter of valuation to the Valuation Officer who valued the
property at ₹24 lakhs. The Assessing Officer passed the order without
considering the report of the Valuation Officer. Issue is whether the Assessing
Officer having made reference to the Valuation Officer must consider the report
of the Valuation Officer for the purpose of assessment?
High Court’s Observations and Decision: When the Assessing Officer has
referred the matter to Valuation Officer, the assessment has to be completed in
conformity with the estimate given by the Valuation Officer. Hence, the capital
gains has to be computed in conformity with the value so determined by
Valuation Officer.
In a case where a depreciable asset being building held for more than 24
27 months is transferred, can benefit of exemption under section 54EC be
claimed? CIT v. V.S. Dempo Company Ltd. (2016) SC
Facts of the case & Issue: The assessee had transferred a building, being a
depreciable asset, held be him for more than 24 months and earned some capital
gain. As per section 50, capital gain arising from the transfer of a depreciable
capital asset shall be of short term in nature and section 54EC provides for
deduction on investment in certain specified assets from capital gain arising from
long term capital asset. Issue is whether assessee can claim section 54EC
deduction from such capital gain?
Supreme Court’s Observations and Decision: Section 50 is a special provision for
computation of capital gains in the case of depreciable asset, and has limited
application in the context of computation of capital gains to the extent that the
provisions of sections 48 and 49 would apply. It does not deal with exemption
which is provided in a totally different provision i.e. section 54EC.
Section 54EC does not make any distinction between depreciable and non-
depreciable asset for the purpose of re-investment of capital gains in long term
specified assets for availing the exemption thereunder. Since the depreciable
asset being building is held for more than 24 months and the capital gains are
reinvested in long-term specified assets within the specified period, exemption
under section 54EC cannot be denied.
Can exemption under section 54EC be denied on account of the bonds being
28 issued after six months of the date of transfer even though the payment for
the bonds was made by the assessee within the six months period?
Hindustan Unilever Ltd. v. DCIT (2010) Bombay HC
Facts of the case & Issue: The assessee had made investments in the specified
bonds within six months from the date of transfer of the capital asset to claim
section 54EC deduction but such bonds has been issued to it after six months of
date of transfer. Issue is whether assessee can claim section 54EC deduction?
High Court’s Observations and Decision: In order to avail the exemption under
section 54EC, the capital gains have to be invested in a long-term specified asset
within a period of six months from the date of transfer. Where the assessee has
made the payment within the six month period, and it is reflected in the bank
account and a receipt has been issued as on that date, the exemption under
section 54EC cannot be denied merely because the bond was issued after the
expiry of the six month period or the date of allotment specified therein was after
the expiry of the six month period. For the purpose of the provisions of section
54EC, the date of investment by the assessee must be regarded as the date on
which payment is made. Hence if the payment is within a period of six months
from the date of transfer, the assessee would be eligible to claim exemption
under section 54EC.
Can exemption under section 54F be denied solely on the ground that the new
29 residential house is purchased by the assessee exclusively in the name of his
wife? CIT v. Kamal Wahal (2013) Delhi HC
Facts of the case & Issue: The assessee had certain capital gains and in order to
claim deduction under section 54F, it made investment in some residential house
property but such property is registered by him in the name of him wife. Issue is
whether the assessee shall be allowed deduction under section 54F as property
is not registered in his name?
High Court’s Observations and Decision: Section 54F is a beneficial provision

enacted for encouraging investment in residential houses. For the purpose of
section 54F, a new house need not necessarily be purchased by the assessee in
his own name or exclusively in his name. The property, however, should not be
purchased in the name of a stranger or somebody who is unconnected with the
assessee. In this case, the assessee had purchased the property in the name of
his wife. Hence the assessee is entitled to claim exemption under section 54F.
In case the house property registered in joint names, whether the exemption
30 under section 54F can be allowed fully to the co-owner who has paid whole of
the purchase consideration of the house property or will it be restricted to his
share in the house property? CIT v. Ravinder Kumar Arora (2012) Delhi HC
Facts of the case & Issue: The assessee has certain long-term capital gain. He
claimed exemption under section 54F from such gain on account of purchase of
new residential house property on the whole of purchase price of the house
property. However the Assessing Officer found that the said house property was
purchased in joint names of assessee and his wife. Therefore, the Assessing
Officer allowed 50% of the exemption claimed under section 54F, being the share
of the assessee in the property purchased in joint names. Issue is whether
assessee shall be allowed 100% deduction or such deduction shall be restricted
to 50% of the allowable amount?
High Court’s Observation and Decision: The inclusion of his wife’s name in the
sale deed was just to avoid any litigation after his death. All the funds invested
in the said house were provided by the assessee, including the stamp duty and
corporation tax paid at the time of the registration of the sale deed of the said
house. This fact was also clearly evident from the bank statement of the
assessee. Section 54F mandates that the house should be purchased by the
assessee but it does not stipulate that the house should be purchased only in the
name of the assessee. In this case, the house was purchased by the assessee in
his name and his wife's name was also included additionally.

Therefore, the conditions stipulated in section 54F stand fulfilled and the entire
exemption claimed in respect of the purchase price of the house property shall be
allowed to the assessee.
Can exemption under section 54/54F be denied to an assessee in respect of

investment made in construction of a residential house, on the ground that the
31 construction was not completed within 3 years after the date on which transfer
took place, on account of pendency of certain finishing work like flooring,
electrical fittings etc.? CIT v. Sambandam Udaykumar (2012) Karnataka HC
Facts of the case & Issue: The assessee has claimed exemption under section
54F by investing the amount of long term capital gain in construction of a house
property. However, the Assessing Officer denied such exemption on the ground
that, as the construction of a residential house was not completed on account of
pendency of certain work like flooring, electrical fittings, fittings of doors etc.,
within the stipulated period. Issue is whether assessee shall be allowed such
deduction despite the construction not completed?
High Court’s Observations and Decision: The assessee has invested the money
in the construction of a residential house and the construction was not
completed due to some minor work remining pending. The assessee has taken
possession of the building and is living in that premises despite the pendency of
those work. Therefore, he is entitled to exemption under section 54/54F in
respect of the amount invested in construction within the prescribed period.
Can advance given for purchase of land, building, plant and machinery
32 tantamount to utilization of capital gain for claim of exemption under section
54G? Fibre Boards (P) Ltd v. CIT (2015) SC
Facts of the case & Issue: The assessee, in order to shift its industrial undertaking
from an urban area to a non-urban area, sold its land, building and plant and
machinery situated at urban area and out of the capital gains so earned, paid
advances for purchase of land, plant and machinery, construction of factory and
building. The assessee claimed exemption under section 54G on such advances
made. The Assessing Officer refused to grant exemption to the assessee under
section 54G as giving advances did not amount to utilisation of capital gains for
acquiring the assets. Issue is whether the payment of such advances would
amount to utilisation of capital gains for acquiring the assets so to claim
deduction under section 54G?
Supreme Court’s Observations and Decision: For the purpose of availing
deduction under section 54G, all that was required for the assessee is to “utilise”
the amount of capital gain for purchase and acquisition of new machinery or
plant and building or land. Since the entire amount of capital gain, in this case,
was utilized by the assessee by way of advance for acquisition of land, building
etc., the assessee is entitled to avail deduction under section 54G.

CA.Chapter 04 CA Final Direct Tax Case
Saket Ghiria Other
LawSources,
Book MayDividend
23
Can repair & renovation expenses incurred by company in respect of premises

33 leased out by a shareholder having substantial interest in the company, be
treated as deemed dividend? CIT v. Vir Vikram Vaid (2014) Bombay HC
Facts of the case & Issue: The assessee holds more than 75% of equity shares in
a company and is the executive director of the company. He owns certain
premises which he let out to the company. The company incurred ₹2.5 crores
towards construction and improvement of such premises. The Assessing Officer
held that the amounts spent by the company towards repair and renovation is
taxable as deemed dividend. Issue is whether it would amount to deemed
divided hence taxable?
High Court’s Observations and Decision: No money had been paid by way of
advance or loan to the shareholder who has substantial interest in the company.
Further, the amount spent was towards repairs and renovation of the premises
owned by the assessee but occupied by the company as lessee. The expenditure
incurred by virtue of repairs and renovation on the premises cannot be brought
within the definition of advance or loan given to the shareholder having
substantial interest in the company. It cannot be treated as payment by the
company on behalf of the shareholder or for the individual benefit of such
shareholder. Hence the repair and renovation expenses in respect of premises
owned by the assessee and occupied by the company cannot be treated as
deemed dividend.
Can the loan or advance given to a shareholder by the company, in return for
34 an advantage conferred on company by the shareholder, be deemed as
dividend u/s 2(22)(e)? Pradip Kumar Malhotra v. CIT (2011) Calcutta HC
Facts of the case & Issue: The assessee, a shareholder holding substantial voting
power in the company, permitted his property to be mortgaged to the bank for
a loan obtained by the company. The shareholder requested the company to
release the property from the mortgage. On failing to do so and for retaining the
benefit of loan availed from bank, the company gave some advance to the
assessee. Issue is whether the advance given by the company to the assessee for
keeping his property as mortgage on behalf of company so that the company can
continue to avail the benefit of loan, can be treated as deemed dividend within
the meaning of section 2(22)(e)?

High Court’s Observations and Decision: The phrase "by way of advance or loan"
appearing in section 2(22)(e) must be interpreted to mean those advances or
loans which a shareholder enjoys simply on account of being a person who is the
beneficial owner of shares holding not less than 10% of the voting power. In case
such loan or advance is given to such shareholder as a consequence of any
further consideration which is beneficial to the company received from such a
shareholder, such advance or loan cannot be said to a deemed dividend within
the meaning of the Act. Thus, gratuitous (unnecessary) loan or advance given by
a company to a shareholder, who is the beneficial owner of shares holding not
less than 10% of the voting power, would come within the purview of section
2(22)(e) but not to the cases where the loan or advance is given in return to an
advantage conferred upon the company by such shareholder. In the present
case, the advance given to the assessee by the company was not in the nature
of a gratuitous advance; instead it was given to protect the interest of the
company. Therefore, the said advance cannot be treated as deemed dividend
under section 2(22)(e).
What are the tests for determining “substantial part of business” of lending
35 company for the purpose of application of exclusion provision under section
2(22)? CIT v. Parle Plastics Ltd. (2011) Bombay HC
Facts of the case & Issue: For the non-applicability of the provisions of deemed
dividend under section 2(22)(e), when the money lending can be considered as
the substantial part of the business of the assessee?
High Court’s Observations and Decision: Some of the tests when a portion of
the business can be considered as the substantial part of business:
• A portion which generates a substantial part of the turnover, though it

contributes a relatively small portion of the profits of the total business
organisation.
• A portion which generates small share of total turnover, but earns a large
portion, say, more than 50% of the total profit.
• Percentage of manpower used for a particular part of the business in
relation to the total manpower or work force of the company.
• The capital employed for a specific division of a company in comparison to
total capital employed.
• The assets used for a particular portion in comparison to the total assets of
the company.
Author’s Note - Any advance or loan made by a company
• in the ordinary course of its business,
• where the lending of money is a substantial part of the business of the
company
shall not be deemed as dividend for the purpose of section 2(22)(e).
Would section 2(22)(e) be attracted in respect of financial transactions entered

36 into in the normal course of business?
CIT v. Ambassador Travels (P) Ltd. (2009) Delhi HC
Facts of the case & Issue: The assessee, a travel agency, has regular business
dealings with two concerns in the tourism industry dealing with holiday resorts.
During the course of its business, it gave some advances to those concerns. Issue
is whether such advances fall within the purview of section 2(22)(e)?
High Court’s Observations & Decision: The assessee was involved in booking of
resorts for the customers of these companies and entered into normal business
transactions as a part of its day-to-day business activities. Such advances are
more of the nature of trade advances in the normal course of the business. Hence
such advances cannot be treated as loans or advances received by the assessee
from these concerns for the purpose of application of section 2(22)(e).
Author’s Note - As per CBDT’s Circular No. 19/2017, dated 12.06.2017, trade
advances, which are in the nature of commercial transactions would not fall
within the ambit of the word 'advance' in section 2(22)(e) and therefore,
would not to be treated as deemed dividend.
Can bonus shares received by shareholders be taxable under the head ‘Income
37 from other sources’ as per the provisions of section 56(2)(x), as they are
received without consideration? PCIT v. Dr. Ranjan Pai (2021) Karnataka HC
Facts of the case & Issue: The assessee received some bonus shares free of cost
from the company. Issue is whether such shares received without consideration
would be considered as gift and taxable under section 56(2)(x)?
High Court’s Observations & Decision: Issue of bonus shares by capitalization of

reserves is merely a reallocation of the company's funds from reserves and
surplus to the share capital account. There is no addition or alteration of the total
funds of the company. Also, when a shareholder gets bonus shares, the value of
the original shares held by him goes down and the combined market value as
well as intrinsic value of the two shares put together will be the same or nearly
the same as the value of original share before the issue of bonus shares.
Hence, the provisions of section 56(2)(x) would not be attracted in the hands of
the recipient shareholders on receipt of bonus shares.
Can winnings of prize money on unsold lottery tickets held by the distributor
38 of lottery tickets be assessed as business income and be subject to normal rates
of tax or covered u/s 115BB? CIT v. Manjoo and Co. (2011) Kerala HC
Facts of the case & Issue: The assessee, a lottery distributor, won prize money
on some unsold lottery tickets. Issue is whether such prize money would be
taxable at the special rate specified under section 115BB or taxable as the normal
business income as per the normal provisions of the Act?
High Court’s Observation and Decision: Even if the prize money is won by the
lottery distributor on the unsold lottery tickets, such prize money is not in his
capacity as a lottery distributor but as a holder of the lottery ticket which won
the prize. The Lottery Department does not treat it as business income of the
recipient but considers it as prize money paid to the recipient. Also, the winnings
from lotteries are assessable under the special provisions of section 115BB,
irrespective of the purpose for which such lotteries have been kept by the winner.
Hence such income shall be taxed as per section 115BB.
Author’s Note - As per Section 115BB, any income of assessee by way of

winnings from any lottery etc. shall be taxable at the rate of 30% flat rate. As
per section 56, such income is taxable under the head ‘IFOS’ and as per section
57. Further as per section 58, no deduction for any expenditure would be
allowed in computing such income.
Is interest income from share application money deposited in bank eligible for
39 set-off against public issue expenses or taxed under the head ‘Other Sources’?
CIT v. Sree Rama Multi Tech Ltd. (2018) SC
Facts of the case & Issue: The assessee came out with an IPO during the relevant
assessment years and deposited the share application money received in banks
and earned interest on such deposit. Issue is whether the interest income from
share application money is taxable under the head ‘Income from Other Sources’,
or can the same be set-off against public issue expenses?

Supreme Court’s Observations & Decision: The assessee is statutorily required
to keep share application money in a separate account till the allotment of
shares was completed. Any surplus money deposited in the bank for the purpose
of earning interest is liable to be taxed as “Income from Other Sources”.
Here, the share application money was deposited with the bank not to make
additional income but to comply with the law. The interest accrued on such
deposit is merely incidental. Accordingly, the accrued interest is not liable to be
taxed as “Income from Other Sources” and it is eligible to be set-off against
public issue expenses. Hence the interest accrued on deposit of share application
money with bank is eligible for set off against the public issue expenses and such
interest is not taxable as “Income from Other Sources”.

CA.Chapter 05 CA Final Direct
Saket Ghiria Clubbing & Set-off,
Tax Case Law BookHouse
May 23Property
Can the loss suffered by an erstwhile partnership firm, which was dissolved, be
40 carried forward for set-off by the individual partner who took over the business
of the firm as a sole proprietor, considering the succession as a succession by
inheritance? Pramod Mittal v. CIT (2013) Delhi HC
Facts of the case & Issue: A partnership firm suffered losses and then dissolved.
The business of such partnership firm was took over by the individual partner
and carried on as sole proprietor. Issue is whether such sole proprietor can set-
off the losses incurred by such erstwhile partnership firm?
Court’s Observations & Decision: The partnership firm was dissolved & the take-
over of running business of the firm by the erstwhile partner as a sole proprietor
was not a case of succession by inheritance. Hence, the carry forward of losses
of the firm by the sole proprietor for set-off against his income is not allowed.
Author’s Note - As per section 72, only the person who incurs any business loss
can carry forward and set-off such loss. However where a person succeeds in the
business of his predecessor by inheritance (i.e. on the death of the predecessor),
the successor is entitled to carry forward the loss incurred by the predecessor.
However, the total period of carry forward cannot exceed 8 assessment years
immediately succeeding the A.Y. for which such loss was first computed.
In the case of CIT v. Madhukant M. Mehta (2001), Supreme Court held that if the
business which was being carried as sole-proprietor is succeeded by inheritance,
the legal heirs are entitled to the benefit of carry forward of the loss of the
predecessor even if the legal heirs constitute themselves as a partnership firm,
the benefit of carry forward and set off of the loss of the predecessor would be
available to that firm.
Can the cross transfer of assets to each other’s spouses would attract the
41 clubbing provisions? CIT v. Keshavji Morarji (1967) SC
Facts of the case & Issue: Mr. A has transferred some income generating assets
to the spouse of Mr. B and Mr. B transferred some assets of similar value to the
spouse of Mr. A. Issue is whether the clubbing provisions would be attracted in
this case as assets are not transferred to own spouse?

Court’s Observations & Decision: If two transactions are interconnected and are
parts of the same transaction in such a way that it can be said that it is used as a
method to evade tax, the clubbing provisions would be attracted. Accordingly,
the income arising to Mrs. B from the property transferred to her by Mr. A should
be included in the total income of Mr. B and the income arising to Mrs. A from
the asset transferred by Mr. B should be included in the total income of Mr. A.
Author’s Note - As per section 64(1)(iv), where there is a transfer of an asset

directly or indirectly, from one spouse to the other, otherwise than
• for adequate consideration or

• in connection with an agreement to live apart,
any income arising to transferee-spouse from the transferred asset, shall be
included in the total income of the transferor-spouse.
Can benefit of self-occupation of house property under section 23(2) be denied

42 to a HUF on the ground that it, being a fictional entity, cannot occupy a house
property? CIT v. Hariprasad Bhojnagarwala (2012) Guj HC
Facts of the case & Issue: An HUF owns a house property and uses it for
residence purposes. By applying the provisions of section 23(2), it considers the
annual value of such property to be nil. Issue is whether the HUF can claim the
benefit under the provisions of section 23(2)?
Court’s Observations & Decision: HUF is a group of individuals related to each

other i.e., a family comprising of a group of natural persons. The said family can
reside in the house, which belongs to the HUF. Since a HUF cannot consist of
artificial persons, it cannot be said to be a fictional entity. Thus, HUF is entitled
to claim benefit of self-occupation of house property under section 23(2).

CA.Chapter 06 CA Final Direct
Saket Ghiria Chapter VI-A
Tax Case Deduction,
Law Section 10
Book May 23
Can unabsorbed depreciation of a business of an industrial undertaking eligible

43 for deduction under section 80-IA be set off against income of another non-
eligible business of the assessee?
CIT v. Swarnagiri Wire Insulations Pvt. Ltd. (2012) Karnataka HC
Facts of the case & Issue: The assessee was in the business of manufacture of
wires. It installed a windmill for power generation and claimed depreciation on
windmill against income from power generation, which was eligible for
deduction under section 80-IA. The balance depreciation was set off against the
profits from manufacturing of wires, being a non-eligible business which was
disallowed by Assessing Officer. Issue is whether assessee can claim such set-off?
High Court’s Observations & Decision: The deeming provision contained in

section 80-IA(5) cannot override the provisions of section 70(1). The assessee
had incurred loss in eligible business after claiming depreciation. Hence, section
80-IA becomes insignificant, since there is no profit from which this deduction can
be claimed. It is thereafter that section 70(1) comes into play, whereby the
assessee is entitled to set off the losses from one source against income from
another source under the same head of income. Hence the assessee was entitled
to the benefit of set off of loss of eligible business against the profits of non-
eligible business. However, once set-off is allowed under section 70(1) against
income from another source under the same head, a deduction to such extent is
not possible in any subsequent assessment.
Does profit-linked deduction under Chapter VI-A have to be restricted to

44 income computed under the head “Profits and gains of business or
profession”? CIT v. Reliance Energy Ltd. (2022) SC
Facts of the case & Issue - Assessee has profit from eligible business (from
generation of power) and loss from non-eligible business. The loss from non-
eligible business is set-off against the profit from eligible business. Issue is how
the deduction under section 80-IA shall be available to it?
Supreme Court’s Observations & Decision: The net profit earned by assessee
from the “eligible business” covered under section 80-IA(4) represented income
from the “eligible business” under section 80-IA and was the only source of
income for the purposes of computing deduction under section 80-IA. The
deduction admissible under section 80-IA could not be limited to income under
the head “Profits and gains of business or profession”, arrived by setting-off the
losses from non-eligible business against profits from eligible business and it may
go beyond the income from the “Profits and gains of business or profession” but
shall not, in any case, exceed the profits of such eligible business [Section 80-
IA(1)/(5)] and the gross total income of the assessee [Section 80A(2)].
Can an agreement entered into by a firm with a State Government and work
45 done in pursuance thereof survive upon its conversion into a company and be
considered compliant with sub-clauses (a) and (b) of section 80-IA(4)(i), to
qualify for deduction thereunder? CIT v. Chetak Enterprises Pvt. Ltd. (2020) SC
Facts of the case & Issue: An erstwhile partnership firm entered into an
agreement with a State Government for construction of road and collection of
toll tax. The construction was completed by it on March 27, and the firm was
converted into a private limited company on March 28 under the Companies Act.
Upon conversion, intimation was given to the state government authorities who
cancelled the registration of the firm and granted a fresh registration code to the
assessee-company. The road was inaugurated on 1st April. However the
Assessing Officer declined the claim of the assessee-company under section 80-
IA for that year. Issue is whether the assessee can claim section 80-IA deduction
for that year?
Supreme Court’s Observations & Decision: Condition in clause (a) is fulfilled as

the assessee-company’s memorandum of association states that its main object
was to acquire as a going concern, and continue the business carried on by the
firm. As the construction of the road was completed on March 27, and the same
was inaugurated on April 1, after which toll tax was being collected by the
assessee company, it can be inferred that the assessee is an enterprise carrying
on business of (i) developing, (ii) maintaining and operating or (iii) developing,
maintaining and operating any infrastructure facility. Also, the agreement
executed with the State Government to which the assessee has succeeded in law
after conversion of the partnership firm into a company. Therefore, the assessee
is qualified for the deduction under section 80-IA from that year itself.
Can Duty Drawback be treated as profit derived from the business of industrial
46 undertaking thus eligible for deduction under section 80-IB?
CIT v. Orchev Pharma P. Ltd. (2013) SC, Liberty India v. CIT (2009) SC

Facts of the case & Issue: Assessee, eligible for deduction under section 80-IB,
earned some duty drawback on exports from the Government. Issue is whether
such duty drawback income is also eligible for deduction under section 80-IB?
Supreme Court’s Observation and Decision: DEPB / Duty drawback are

incentives which flow from the Government’s schemes or from the Customs Act,
1962. Section 80-IB provides for the allowing of deduction in respect of profits
and gains derived from eligible business. However, incentive profits are not
profits derived from eligible business under section 80-IB. They belong to the
category of ancillary profits of such undertaking. Hence, Duty drawback receipts
and DEPB benefits do not form part of the profits derived from the eligible
business for the purpose of the deduction under section 80-IB.
Can transport subsidy, interest subsidy and power subsidy received from the
47 Government be treated as profits “derived from” business or undertaking to
qualify for deduction u/s 80-IB? CIT v. Meghalaya Steels Ltd. (2016) SC
Facts of the case & Issue: The assessee-company, engaged in the business of
manufacture of steel and ferro silicon, claimed deduction under section 80-IB on
the profits and gains of the business/undertaking which included transport
subsidy, interest subsidy and power subsidy received from Government. Issue is
whether transport, interest or subsidies eligible for section 80-IB deduction?
Supreme Court’s Observations and Decision: An important test to determine

whether the profits and gains are “derived from” business or an undertaking is
that there should be a direct linkage between such profits and gains and the
undertaking or business. The transport subsidy, interest subsidy and power
subsidy are basically the costs which the assessee would have recovered from
the customers thus increasing his profits, but in this case these costs are
reimbursed by the Government to the assessee. Hence, these subsidies are the
profits and gains “derived from” the business of the assessee. Thus these
subsidies qualify for deduction under section 80-IB.
Is the increase in gross total income consequent to disallowance under section

48 40(a)(ia) eligible for profit linked deduction under Chapter VI-A?
CIT v. Sunil Vishwambharnath Tiwari (2016) Bombay HC
Facts of the case & Issue: The assessee engaged in some eligible business filed
his return of income for the relevant assessment year after claiming deduction

of ₹16.82 lakhs under section 80-IB. On scrutiny, it was found that assessee paid
around ₹92 lakhs for different expenditure without making TDS. Such
expenditures were disallowed under section 40(a)(ia) and total income of the
assessee was accordingly enhanced but Revenue limited the deduction under
section 80-IB to the original amount claimed by the assessee. Issue is whether
the assessee can claim section 80-IB deduction on such enhanced income also?
High Court’s Observations & Decision: On account of such non-deduction of

TDS, expenses had been disallowed under section 40(a)(ia) which would increase
the income chargeable under the head ‘Profits and gains of business or
profession’. As deduction under section 80-IB is with reference to the assessee’s
total income from the eligible business, such enhanced income becomes eligible
for deduction under section 80-IB. The assessee is entitled to claim deduction
under section 80-IB in respect of the enhanced gross total income as a
consequence of disallowance of expenditure under section 40(a)(ia).
Does the period of exemption under section 80-IB commence from the year of
49 trial production or year of commercial production? Would it make a difference
if sale was effected from out of the trial production?
Sidwal Refrigerations Ind Ltd. v. DCIT (2010) Delhi HC
Facts of the case & Issue: The assessee eligible for deduction under section 80-
IB, has commenced the trail production and the products so produced sold to
the final customers. Issue is whether the period of trail production would also be
included in the total no. of exempted period?
High Court’s Observations & Decision: The period of exemption under section
80-IB would commence from the year the commercial production and not from
the year of trial production. If in the year of trial production, assessee has sold
the products produced thereof to the final customers as a final product, it will
amount to commercial production and such period will be counted in the total
no. of permissible exempted period.
Author’s Note - Same provision will apply for all the production linked deduction
schemes. So assessee should sell the products as scrap which are produced in
the trial runs of the machines.

CA.Chapter 07 CA Final DirectCharitable
Saket Ghiria Tax Case LawTrusts, Institutions
Book May 23
Does the requirement under section 10(23C)(vi) to solely engage itself in

education mean that such institution cannot have objects not related to
50 education? Also, is it necessary that the profits of business referred to in the
seventh proviso to section 10(23C) be the profits of such business incidental to
educational activity and not any other activity?
New Noble Educational Society v. CCIT (2022) SC?
Facts of the case & Issue: Assessee engaged in educational activities wants to
know that whether the requirement under section 10(23)(vi) to solely engage
itself in education mean that such institution cannot have objects not related to
education. Also, is it necessary that profits of business referred to in the seventh
proviso to section 10(23C) be the profits of such business incidental to
educational activity and not any other activity.
Supreme Court’s Observations & Decision: The following observations are

made:
(i) The requirement of the charitable institution, society or trust, etc., to

"solely" engage itself in education or educational activities, and not engage
in any activity of profit, means that such institutions cannot have objects
which are unrelated to education. In other words, all objects of such
entities must relate to imparting education or be in relation to educational
activities. The term "solely" is not the same as "predominant/mainly". The
term "solely" means to the exclusion of all others.
(ii) Where the objective of the institution appears to be profit-oriented, such
institutions would not be entitled to approval under section 10(23C).
However, where surplus accrues, it is not a bar, provided such surplus is
generated in the course of providing education or educational activities.
(iii) The seventh proviso to section 10(23C), as well as section 11(4A) refer to
profits which may be "incidentally" generated or earned by such institution.
(iv) The reference to "business" and "profits" in the seventh proviso to section
10(23C) and section 11(4A) merely means that the profits of business which
is "incidental" to educational activity i.e., relating to education such as sale
of text books, providing school bus facilities, hostel facilities, etc. However,
if institutions provide their premises or infrastructure to other entities,
trusts, societies, etc., for the purposes of conducting workshops, seminars
or even educational courses (which the concerned trust is not actually
imparting) and outsiders are permitted to enroll in such seminars, etc., then
the income derived from such activity can’t be treated as part of education
or "incidental" to imparting education.
Author’s Note - Under section 10(23C)(vi), income of a university or

educational institution existing solely for educational purposes and not for the
purposes of profit, approved by the Principal Commissioner or Commissioner
would be exempt. As per the seventh proviso to section 10(23C), the
exemption provisions under section 10(23C)(vi) would not apply in relation to
income of the educational institution, being profits and gains of business,
unless the business is incidental to the attainment of its objectives and
separate books of account are maintained by it in respect of such business.
The Supreme Court in its earlier judgement in Queen’s Educational Society v.
CIT (2015), permitted the predominant objective test for interpreting the
meaning of ‘solely’. In the above case, SC observed that none of the previous
decisions including Queens Education Society explored the true meaning of
the expression "solely" as they all followed predominant objective test.
However in the above judgement, SC overruled its earlier judgements in
defining the meaning of the term ‘solely’
According to ICAI, the Queens Education Society decision of the SC shall be
ignored for the exam purposes by the students and New Noble Educational
Society v. CCIT (2022) judgement of SC shall be considered.
Would imparting education/training in specialized field like communication,

51 advertising etc. and awarding diplomas/certificates constitute an “educational
purpose” for grant of exemption under section 10(23C)(vi)?
CIT v. St. Peter’s Educational Society (2016) SC
Facts of the case & Issue: The assessee was engaged in imparting higher and
specialized education relating to the field of communication, advertising and its
related subjects. CIT refused to grant exemption under section 10(23C)(vi)
stating that it is engaged in conducting coaching / training courses for and on
behalf of industry, trade and commercial organizations and it was not conducting
educational courses as charitable activity but for the purpose of making profit.
Issue is whether the assessee can claim exemption under section 10(23C)?
Supreme Court’s Observations and Decision: Institutions engaged in providing

specialized training in certain fields and awarding diplomas and certificates are

also eligible for exemption in terms of section 10(23C)(vi). It is not mandatory for
such institutions to impart education in formalized manner or conduct only
recognized educational courses. Making of profit incidentally will not make the
institution as existing for making profit.
When can an activity be considered as trade, commerce or business for

52 attracting the provisions of the proviso to section 2(15)?
ACIT (Exemptions) v. Ahmedabad Urban Development Authority (2022) SC
Facts of the case & Issue: Assessee is a statutory body established to perform
tasks of general good. During the course of its activities, it charges fees etc. for
its services. Such fees are those as mentioned in the relevant Act as well as other
nominal charges for providing the services. Issue is when an activity can be
considered as trade, commerce or business for attracting the provisions of the
proviso to section 2(15) and thereby disallowing the exemption provided under
section 11? Also, is there any inconsistence between the provisions of section
11(4A) and proviso to section 2(15)?
Supreme Court’s Observations & Decision: The first consideration would be

whether the activity concerned is in any manner covered by the objects clause.
Then, if the accounts disclose that the amounts paid are nominal mark-up over
and above the cost incurred towards performing such activities, such activity can
be treated as one advancing the general public utility. However if there is a
significant mark-up over the actual cost of activity, then it is to be seen whether
the quantitative limit in proviso to section 2(15) is adhered to. Also, the recovery
of charges or fees as per the rates specified by the Act itself, cannot be regarded
as “fee, cess, or other consideration” and such activities can’t be classified as
commercial activities.
Section 11(4A) must be interpreted harmoniously with section 2(15). Carrying

out activity in the nature of trade, commerce or business, or service in relation
to such activities, should be conducted in the course of achieving the object of
general public utility, and the income or profits must therefore, be incidental to
the attainment of the objects of the trust or institution. The requirement in
section 11(4A) of maintaining separate books of account is also in line to ensure
that quantitative limit prescribed in proviso to section 2(15), is not been violated.
The assessing authorities must on a yearly basis, scrutinize the record to

determine whether the nature of the assessee's activities amount to "trade,
commerce or business" based on its receipts and income (i.e., whether the
amounts charged are on cost-basis, or significantly higher). If it is found that they
are in the nature of "trade, commerce or business", then it must be examined
whether the quantified limit in proviso to section 2(15), has been breached, thus
disentitling them to exemption.

CA.Chapter 08 CA Final Direct Tax
Saket Ghiria Assessment Procedure,
Case Law Book May 23 ITA
Can an assessee make an additional/new claim before the Assessing Officer or

53 an appellate authority, which was not claimed by him in the return of income
(though he was legally entitled to), otherwise than by way of filing a revised
return of income? Goetze (India) Ltd v. CIT (2006) SC
Facts of the case & Issue: Assessee has forgot to make a claim in its return of
income for which he is legally entitled to. Issue is to make such claim, assessee
is required to file a revised return of income or it can make such claim directly
before the Assessing Officer or an appellate authority?
Court’s Observations & Decision: The assessee can make an additional claim
before the Assessing Officer only by way of filing revised return of income and no
additional claim can be made by it directly before the Assessing Officer without
filing a revised return of income.
Can an assessee revise the particulars filed in the original return of income by
54 filing a revised statement of income?
Orissa Rural Housing Development Corporation Ltd. v. ACIT (2012) Orissa HC
Facts of the case & Issue: Assessee has filed its return of income and want to
revise certain particulars filed in such return. Issue is whether it can do so by
filing a revised statement of income or has to file a revised income tax return?
Court’s Observations & Decision: Relying on the judgement of the Supreme

Court in Goetze (India) Ltd. v. CIT (2006), the assessee can make a fresh claim
before the Assessing Officer or make a change in the originally filed return of
income only by filing revised return of income under section 139(5). There is no
provision under the Income-tax Act, 1961 to enable an assessee to revise his
income by filling a revised statement of income.
Therefore, filling of revised statement of income is of no value and will not be

considered by the Assessing Officer for assessment purposes. The Assessing
Officer has no power to entertain a fresh claim made by the assessee after filing
of the original return except by way of filing a revised return.
Can unabsorbed depreciation be allowed to be carried forward in case return

55 of income is not filed within the due date?
CIT v. Govind Nagar Sugar Ltd. (2011) Delhi HC

Facts of the case & Issue: Assessee has unabsorbed depreciation however it has
not filed the return of income. Issue is whether such unabsorbed depreciation
be carried forward and set-off in the succeeding years?
Court’s Observations & Decision: The provisions of section 80 and section

139(3), requiring the return of income claiming loss to be filed within the due
date, applies to carry forward of business loss and not for carrying forward of
unabsorbed depreciation. As per the provisions of section 32(2), the unabsorbed
depreciation becomes part of next year’s depreciation allowance and is allowed
to be set-off as per the provisions of the Income Tax Act, 1961, irrespective of
whether the return of earlier year was filed within due date or not.
Does the CBDT have the power to amend legislative provisions through a
56 Circular? CIT v. SV Gopala Rao and Others (2017) SC
Facts of the Case & Issue: CBDT had issued a Circular invoking the powers under
Section 119 to amend the provisions contained in the Income-tax Act, 1961
relating to time limit for sale of attached immovable property. Issue is Whether
CBDT has power to amend legislative provisions through a Circular.
Supreme Court’s Observations & Decision: The CBDT does not have the power
to amend legislative provisions in exercise of its powers under section 119 by
issuing a Circular. Hence such circulars are invalid for being ultra vires.
Author’s Note - As per section 119, CBDT may, from time to time, issue such
orders, instructions and directions to other income-tax authorities as it may
deem fit for the proper administration of this Act, and such authorities and all
other persons employed in the execution of this Act shall observe and follow
such orders, instructions and directions of the CBDT.
Can CBDT refuse to condone delay in filing the tax return, where such delay
57 was caused by circumstances beyond the control of the assessee?
Regen Powertech Pvt. Ltd. v. CBDT and Another (2019) Madras HC
Facts of the Case & Issue: The assessee was engaged in the manufacture of wind
energy generators. It filed its return with a delay of 37 days. The assessee
contended that the delay was on account of obtaining the audit report required
under section 44AB. The appointed CA firm had some reservations regarding the
valuation of the assessee business and assessee appointed another CA Firm and
took NOC from erstwhile auditor. In this entire process, the delay was occurred.
The assessee contends that the delay in filing the return was beyond its control.
The assessee’s application for condonation of 37 days delay before the CBDT
under section 119(2) had been pending for a long time. The issue is whether the
CBDT can refuse to condone delay in filing the return of income, where such
delay was caused by circumstances beyond the control of the assessee.
High Court’s Decision: The application for condonation of delay of the assessee
should be allowed the CBDT as the circumstances causing delay were beyond the
control of the assessee.
Author’s Note - As per section 119(2), CBDT may, if it considers it desirable or

expedient so to do for avoiding genuine hardship, by general or special order,
relax any requirement contained in any of the provisions of Chapter IV or
Chapter VI-A, where the assessee has failed to comply with any requirement
specified in such provision for claiming deduction thereunder, subject to the
following conditions:
(i) the default in complying with such requirement was due to circumstances
beyond the control of the assessee; and.
(ii) the assessee has complied with such requirement before the completion
of assessment in relation to the previous year in which such deduction is
claimed.
Is the requirement to grant a reasonable opportunity of being heard, stipulated

58 under section 127(1), mandatory in nature?
Sahara Hospitality Ltd. v. CIT (2013) Bombay HC
Facts of the Case: The case of the assessee is transferred from one Assessing
Officer to another Assessing Officer without giving the opportunity of being
heard to the assessee. Issue is whether such opportunity of being heard shall
mandatorily be given to the assessee?
High Court’s Observations & Decision: The provisions of section 127(1) stipulate
that the income tax authority mentioned therein may give an opportunity of
being heard to the assessee, wherever it is possible to do so, and after recording
his reasons for doing so, transfer any case from one Assessing Office to another.
The word “may” used in this section should be read as “shall” and such income-
tax authority has to mandatorily give a reasonable opportunity of being heard to
the assessee, wherever possible to do so. “Reasonable opportunity” can only be
dispensed with in a case where it is not possible to provide such opportunity. The

authority cannot deny a reasonable opportunity of being heard to the assessee,
wherever it is possible to do so.
Author’s Note - As per section 127(1), the Principal Director General or

Director General or Principal Chief Commissioner or Chief Commissioner or
Principal Commissioner or Commissioner may, after giving the assessee a
reasonable opportunity of being heard, wherever it is possible to do so, and
after recording his reasons for doing so, transfer any case from one or more
Assessing Officers subordinate to him to any other Assessing Officer or
Assessing Officers also subordinate to him.
Can the assessee’s application, for adjustment of tax liability on income

59 surrendered during search by sale of seized gold bars, be entertained where
assessment has not been completed?
Hemant Kumar Sindhi & Another v. CIT (2014) Allahabad HC
Facts of the case: Consequent to a search in the premises of the assessee, some
gold bars were seized. The assessee voluntarily disclosed some income during
the course of search. The assessee filed an application for sale of the gold bars
and adjustment of tax liability on undisclosed income out of the sale proceeds.
This would obviate his liability to pay interest under sections 234B and 234C. The
Assessing Officer dismissed the application on the reasoning that only when the
assessment is completed and tax demand is crystallized, can recovery be
initiated by the sale of gold bars. The assessee filed a writ contesting the
dismissal of application by the Assessing Officer.
High Court’s Observations: Section 132B(1)(i) uses the expression “the amount
of any existing liability” and “the amount of the liability determined”. The words
“existing liability” implies a liability that is crystallized by adjudication; Likewise,
“a liability is determined” only on completion of the assessment. Until the
assessment is complete, it cannot be postulated that a liability has been
crystallized. As per the first proviso to section 132B(1)(i), the assessee may make
an application to the Assessing Officer for release of the assets seized. However,
he has to explain the nature and source of acquisition of the asset to the
satisfaction of the Assessing Officer. It is not the ipse dixit of the assessee but the
satisfaction of the Assessing Officer on the basis of the explanation tendered by
the assessee which is material.

High Court’s Decision: The Assessing Officer was justified in his conclusion that
it is only when the liability is determined on the completion of assessment that
it would stand crystallized and in pursuance of which a demand can be raised
and recovery can be initiated. Therefore, in the present case, the first proviso to
section 132B(1)(i) would not be attracted. The High Court, thus, dismissed the
writ petition.
Where no proceeding is pending against a person, can Assessing Officer call for
60 information under section 133(6), which is useful to any enquiry?
Kathiroor Service Co-operative Bank Ltd. v. CIT (2014) SC
Facts of the case & Issue: The Assessing Officer, with the necessary prior
approval, issued notice under section 133(6) to the assessee, a co-operative
society engaged in banking business, calling for information regarding details of
all persons who had made certain specified deposits or transactions. The
assessee objected to the said notice stating that such notice seeking for
information which is unrelated to any existing or pending proceeding against the
assessee could not be issued under the provisions of the Act.
Supreme Court’s Observations and Decision: The Assessing Officer has been
empowered to requisition information which will be useful for or relevant to any
enquiry or proceeding under the Income-tax Act, 1961 in the case of any person.
However, an income-tax authority below certain rank can exercise this power in
respect of an enquiry in a case where no proceeding is pending, only with the
prior approval of the Principal Director or Director or Principal Commissioner or
Commissioner. In this case, since notices have been issued after obtaining the
required approval, the assessing authority had not erred in issuing the notices to
assessees. Hence such notices are valid.

Another random document with
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determination or excite their fears. The attempts to storm their
fortifications were repulsed with heroic courage. Their decimated
ranks were recruited from the sturdy mountaineers of Leon and the
Asturias. It is in vain that the modern historian searches for the
motives that inspired and sustained this sentiment of independence,
this habitual defiance of authority. The ancient Gothic spirit was not
sufficient to account for such an anomalous condition of affairs,
although the Christians greatly outnumbered the members of all
other sects. There existed no unity of religious feeling which might
actuate zealots to deeds of self-sacrifice and martyrdom. The
population of Toledo is represented by all writers as a remarkably
heterogeneous one. The Christians mention it freely with contempt.
The Moslems, without exception, allude to it as a faithless and
turbulent rabble. The reason for the suicidal policy that neglected to
demolish the fortifications of this centre of sedition, and did not resort
to the drastic measure of wholesale expatriation when milder means
had repeatedly failed, also remains a mystery. It required no great
degree of statesmanship to perceive the inevitable consequences of
the irrepressible spirit of rebellion encouraged, as it was, by the ill-
timed clemency and indulgence of the sovereign. At length,
emboldened by their alliance with the Christians of the North, and
taking advantage of the embarrassments of their antagonist,
harassed by enemies at home and abroad, they extorted from the
Emir a treaty which virtually conceded their independence. It allowed
them to select their own magistrates, including the governor, and to
regulate without interference their municipal and ecclesiastical
affairs. Toledo, by the payment of an annual tribute, was thus placed
upon the same political footing as that of a province recently
subjected to the arms of Islam, and must henceforth, for many years,
cease to be regarded as an integral part of the Moorish empire.
In the meantime, the example of Toledo had been followed by
other cities, whose inhabitants, exasperated by their grievances and
instigated by the ambition of daring chieftains, kept the country in
continued disorder and exercised to the utmost the energy and
abilities of Mohammed. The evil consequences of that pernicious
system, peculiar to the Arabs, of entrusting important commands to
renegades without previous satisfactory tests of their fidelity, were
once more demonstrated. Musa-Ibn-Zeyad, who traced his descent
from the branch of the Visigothic nobility known to the Arabs as the
Beni-Kasi, and whom we have seen defeated at Albeyda, was soon
afterwards, through the intrigues of fanatical courtiers who accused
him of treason, removed from his post of wali of Saragossa and
disgraced. This officer, whose military talents and political capacity
were far above the average, seeing all avenues for promotion under
the emirate closed, and keenly feeling the injustice of the treatment
he had received, proceeded at once to organize an insurrection, an
easy matter among the adventurers of the frontier naturally prone to
inconstancy and insubordination. Popular among his subjects,
almost the entire province of which Saragossa was the capital
declared for his cause. Tudela, Huesca, Toledo, solicited his alliance.
Having baffled the efforts of the Emir to crush him, he transmitted his
authority to his son Musa. The latter, securing the friendship and
support of the Navarrese, crossed the Pyrenees, and carried fire and
sword into Southern France. His success was so remarkable, and
the resources of the French monarchy were so inadequate to resist
the progress of this enterprising partisan, that Charles the Bald not
only condescended to treat with him on equal terms, but purchased
immunity from future inroads by the payment of a large sum of
money and the bestowal of magnificent gifts. The distinction
acquired by Musa from the results of this expedition indirectly
produced great accessions to his power. His son Lope became one
of the magistrates of Toledo. The restless population of the border
flocked to his standard by thousands. His army was further
augmented by numbers of Christians,—Mozarabes as well as
Gascons and Navarrese,—whose former habits and experience
made them valuable soldiers. The martial spirit of Musa was
displayed indiscriminately against Christian and Moslem; his
prowess was respected and his independence reluctantly
acknowledged alike by the courts of Cordova, Aix-la-Chapelle, and
Oviedo. With a pardonable vanity, justified by actual power and the
possession of territory, he assumed the title of Third King of Spain.
His death in 862 was followed by a partial dismemberment of his
dominions, which enabled Mohammed to recover Saragossa,
Tudela, and a few other places of minor importance; but only a few
years elapsed before the family of Musa, endeared to the people by
the exploits of its founders, regained its former ascendency, and
once more expelled the forces of the emirate. Although nothing is
said of the religious belief of the Beni-Kasi, it may be inferred that
they had returned to the Christian communion, as Alfonso III., their
close ally, entrusted to these distinguished princes the education of
his son Ordoño, heir to the crown of the Asturias and Leon.
The Norman pirates, familiar to the reader of Arab chronicles as
Magioges,—a name derived from the fabulous Gog and Magog,
whose descendants they were, according to the doubtful authority of
mediæval tradition,—seven years after Mohammed ascended the
throne made a second descent upon the shores of the Peninsula.
The spoil which they had collected in their first excursion and the
facility with which they had penetrated into the heart of France and
Spain excited their insatiable cupidity, and inspired them with the
hope of even more profitable adventures. But these expectations
were defeated by the valor of the Galicians and by the prudence of
Abd-al-Rahman II., who, as already related, had established a coast-
guard, and disposed the naval forces of the emirate to intercept the
landing and chastise the audacity of these intrepid and mysterious
rovers of the seas. The fame of their former success had increased
their numbers, and, after an ineffectual and disastrous attempt to
plunder the seaport towns of Galicia, seventy well-manned vessels
of their fleet appeared off the coast of Andalusia. Disembarking at
various points, the Normans effected considerable damage, but, not
venturing inland, their booty bore no comparison in quantity or value
to that obtained by their former visitation, and meeting with a
resistance entirely unexpected, they retired to try their fortunes on
the coast of Africa. In that country many settlements suffered the
dreadful evils consequent upon such attacks, and, after destroying
whatever they could not carry away, they ravaged the Balearic Isles,
and, steering eastward, swept along the shores of the Mediterranean
as far as Sicily and Malta. The unprotected regions of Italy and
Greece again experienced the dire effects of barbarian malevolence,
this time unmitigated by the sympathy of a common religious belief;
the instinctive antipathy of the savages of the North to all that bore
the stamp of civilization was gratified without restraint; and, laden
with plunder of incalculable value and for once satiated with blood
and havoc, the pirates directed their course homeward through the
Strait of Gibraltar.
The incessant hostilities maintained by Ordoño with the kingdom
of Cordova were, in general, favorable to the Christian arms.
Encouraged by the victory he had obtained at Albeyda, the Asturian
monarch extended his operations far to the south of the Douro. The
knowledge of the growing weakness of their enemies, and the
consciousness of their own valor and resources, impelled the
mountaineers to still greater exertions. The expeditions which had
been at first but mere predatory incursions, now assumed the
character of enterprises looking towards a permanent occupation of
the country. Every advantageous post beyond the border which it
was thought possible to retain was thoroughly fortified and
garrisoned immediately after its capture. The walls of dismantled
Moorish fortresses were repaired. In those towns where the Arab
inhabitants preponderated, the latter were replaced by Galician and
Asturian colonists. In all cases where a place was taken by storm,
the male population was exterminated, and the women and children
led into slavery. Many important cities, including, among others,
Coria and Salamanca, fell into the hands of the Christians. The
effects of this vigorous policy began to be felt so seriously at
Cordova that the government summoned all its energies in an
endeavor to counteract it, and a powerful army was assembled
under the orders of Al-Mondhir, heir presumptive to the crown. That
warlike and experienced prince met the forces of the enemy on the
banks of the Douro; the Christians sustained a disastrous defeat; the
larger part of the lost territory was recovered; and Al-Mondhir,
relieved of further care in this quarter, turned his attention to Alava
and Navarre. The victorious banners of the Moslems were next
displayed before Pampeluna. The environs of that city were
devastated; some castles throughout the province which had
sheltered formidable bands of marauders were taken and
dismantled; and Al-Mondhir, after a campaign unattended by a single
disaster, returned in triumph to Cordova.
These reverses, while not sufficient to deter the indomitable
mountaineers from repeating their forays, had at least the effect of
changing their direction and limiting their extent. Lusitania, formerly
invaded with impunity, was again selected as the object of their
attack. The fields and vineyards of Lisbon were trampled down by
the Christian squadrons; the town of Cintra was burned, and every
hamlet accessible to the fury of a pitiless enemy was depopulated
and destroyed. But the salutary lesson the Asturians had been
recently taught was not lost upon them, and, without waiting for the
army that Mohammed despatched in all haste to intercept their
retreat, they retired with the same celerity which had marked their
appearance.
Unable to arrest these inroads by ordinary means, Mohammed
determined to have recourse to his navy, and disembark a force in
the centre of the enemy’s country. The fleet reached the western
coast in safety, but before a landing could be effected was destroyed
by a hurricane. The more rigid Moslems, whose strict ideas had
been shocked by the braving of an element of which the Prophet had
stood in wholesome dread, regarded this catastrophe as a well-
merited chastisement from heaven for disobedience to the Koran.
The revolt of Toledo had, from time to time, been followed by the
defection of other cities, whose disorders, while important in the
aggregate, were singly of little moment in their effects upon the
affairs of the Peninsula. One, however, in some respects greatly
resembling that by which the old capital of the Visigoths had secured
its independence, deserves to be related, as it demonstrates, more
thoroughly than an entire chronicle could do, the deplorable
helplessness into which the empire founded by Abd-al-Rahman had
fallen. Ibn-Merwan, a renegade prominent in former rebellions, and
whom the foolish policy of the Moslems has again entrusted with a
position of responsibility, aggrieved by some petty insult, deserted,
and, accompanied by a few of his retainers, seized the castle of
Alanje, near Merida. Besieged before he had time to collect supplies,
he nevertheless held out for three months, when he surrendered on
condition of his retirement to Bagdad. No sooner was he free,
however, than he proclaimed himself the apostle of a new religion,
whose doctrines were borrowed from those of both Christianity and
Islamism; increased his following by the enlistment of bandits and
outlaws; and, imitating the example of the Toledans, strengthened
his cause by an alliance with the King of the Asturias. His
depredations became so annoying that an army under Haschim,
Mohammed’s favorite vizier, was despatched against him. The wily
partisan found little trouble in decoying the vizier into an ambuscade;
his command was annihilated; and he himself was sent as a trophy
to the court of Alfonso. When the Emir made proposals for the
ransom of Haschim, the Christian king demanded the immense sum
of a hundred thousand pieces of gold. Much as he desired the
release of his minister, the parsimony of Mohammed, which had
increased with years, deterred him from so profuse an expenditure.
For many months Haschim remained in captivity, but at length the
entreaties of his family overcame the reluctance of the Emir, and he
consented to send a portion of the ransom. The balance was
secured by the delivery of hostages, and the vizier was finally
liberated.
On his return to Cordova, Haschim found that his ancient enemy,
with whom even Mohammed himself was unable to cope, had,
during his absence, attained to the dignity of an independent prince.
The Emir, intimidated by the menaces of Ibn-Merwan, had been
compelled to conclude a peace with that chieftain; to cede to him the
strong city of Badajoz; to release him from the payment of tribute;
and to accede to such conditions as virtually dispensed with the
duties of the subject, as well as abrogated the authority of the
sovereign.
The effect of this pusillanimous conduct upon the malcontents and
fanatics who infested every community of the emirate—a society the
amalgamation of whose elements seemed utterly impracticable;
destitute of religious unity; without the slightest idea of political virtue
or patriotism; and acknowledging no incentive to subordination but
that suggested by the employment of military force—may readily be
imagined. Few cities preserved even the appearance of order. Every
lawless passion raged without control. Feuds were prosecuted
without interference. The functions of the magistrate, the obligations
of the people, were suspended. The empire, shattered in every part,
seemed on the verge of dissolution. Neither proximity to the seat of
government, the prospect of royal favor, nor fear of the
consequences of treason sufficed to retain the states in their
allegiance. Andalusia alone sustained with apparent fidelity the
cause of Islam and the dignity and fortunes of the monarch; but even
this province was now destined to be the seat of an insurrection
whose consequences threatened to involve the civilization of the
West and the dynasty of the Ommeyades in sudden and irretrievable
ruin.
From the time of the Cæsars, that picturesque chain of mountains
now known as the Serrania de Ronda, which traverses the southern
part of the Peninsula, has been the scene of insurrection and of
lawless deeds which no government has ever been able to
thoroughly suppress. The proverbial reluctance of the mountaineer
to conform to established laws was, in this region especially,
encouraged by the savage character of the country, which, to all
unacquainted with its intricate paths and gloomy fastnesses, offered
an aspect as forbidding as it was pregnant with danger. The
population of these mountains, in love of freedom, in strength of
body, in military prowess, was the counterpart of that of the Asturias,
while in graceful bearing, in beauty of form and feature, and, above
all, in intelligence, it far excelled the uncouth barbarians of the North.
It united the various qualities of Roman courage, Punic shrewdness,
and Arab temperance and agility. The difficulty of enforcing
obedience to the constituted authority was vastly increased by the
close relations maintained by even the most remote settlements,
leagued together in a confederacy which was, in all but name and
acknowledged leadership, an independent republic. The brigand who
swooped down upon the flocks of the Roman shepherd, or pillaged
the hut of the Visigothic peasant, has his worthy counterparts to-day
in the smuggler and highwayman. It has not been many decades
since the robber chieftain of the Serrania de Ronda levied blackmail
on the posts and convoys of the Spanish government; and the
contraband traffic of that region at present exceeds in importance the
legitimate trade of any other district of equal area and wealth in the
Peninsula.
On the slope of this mountain range, not far from Malaga, lived in
the reign of Mohammed a youth of fiery temper and dissolute habits,
named Omar-Ibn-Hafsun. His father, descended from a distinguished
Gothic family, like many others, had renounced his faith rather with a
view to future advantage than from belief in the doctrines of Islam.
His son, concerned in frequent broils with the hot-headed peasantry
of the neighborhood, had, while but a child, obtained a most
unenviable reputation for cruelty and violence. At length, in an
encounter with one of his most redoubtable antagonists, the latter
paid the penalty of his rashness with his life. Ibn-Hafsun fled to the
sierra and joined a gang of banditti, but was eventually seized by the
authorities and scourged into insensibility. Escaping from the
clutches of the law, he sought the presence of his father, who
disowned him and drove him from his home. Knowing that he could
not for a great while longer elude the search of the officers who were
scouring the country in all directions, he embarked for Tahort in
Africa, where he found refuge in the house of a tailor who knew of
his family but was ignorant of his recent history, and who willingly
accepted him as an apprentice. Here he was soon after recognized
by an acquaintance, and, apprehensive of being denounced as a
fugitive from justice and surrendered for execution, he left his
benefactor and secretly returned to Andalusia. Impelled, perforce, to
the profession of an outlaw, he assembled a number of adventurous
spirits, repaired an old Roman fort on the summit of Mount Bobastro,
and entered upon a life of rapine. The great plain stretching from the
foot of the sierra to the capital was soon at his mercy. His band
increased with the fame of his exploits; the cities of Andalusia
trembled at his name; the governor of the province, who had
ventured to attack him with a strong body of regular troops, was
reduced to the humiliation of seeing his soldiers routed and his camp
pillaged by a handful of daring marauders. This official, whose
incompetency was presumed to be the cause of his misfortune, was
removed, but his successor, an experienced veteran, fared no better.
After a time, the rebel was surrounded by a strong force under the
vizier Haschim, and compelled to surrender. His bravery and talents
had so excited admiration of the latter that he induced the Emir to
offer him an important command in the army. Between the
acceptance of this unexpected favor and confinement in a dungeon
there could be no hesitation in making a choice, and the former
brigand was duly commissioned an officer of the emirate. In many
engagements with the insurgents and mountaineers of the North, he
bore himself with a self-respecting dignity little to be expected from
his former lawless behavior. Admired by his general, respected by
his comrades, and feared by his enemies, there seemed to unfold
before him the flattering prospect of speedy promotion and all the
honors and wealth incident to a distinguished military career. But the
petty jealousies of rival courtiers could not brook the sudden
elevation and rising prosperity of this new favorite of Haschim. The
party opposed to the vizier employed every means to annoy and
humiliate the haughty renegade. The governor of the city, under
various pretexts, compelled him to constantly move his quarters. The
purveyors of the army, instigated by the enemies of his patron,
regularly furnished him with rations unfit for consumption. His
complaints were ineffectual; even his patron told him that he must
avenge his own wrongs. Exasperated by such treatment, above all
as it was in no wise deserved, and unwilling to longer submit to the
insults that every day became less endurable, Ibn-Hafsun deserted,
and again sought the protecting solitudes of the Serrania de Ronda.
His band was soon reassembled; the fortress of Bobastro, which the
prudence of Mohammed had greatly strengthened, was surprised;
and the daring partisan, in the space of a few weeks, became once
more the idol of the mountaineers and the terror of the peasantry of
Andalusia. But his service in the army of the Emir had wrought a
remarkable change in the sentiments and conduct of the outlaw. He
proclaimed himself the champion of freedom, the avenger of all who
had suffered from the extortions and injustice of the reigning family.
In this capacity he was recognized as the representative of the
renegades, the Christians, and the Berbers, who thus formed an
incongruous, but, for a time, an effective alliance against the
dominant Arab aristocracy. By assuming the character of a defender
of the oppressed, he invested his cause with a national importance,
and relieved it, to a great extent, from the disgraceful imputation of
brigandage. The members of his band were subjected to the most
severe restraint. Robbery and insubordination were punished with
instant death. The entire mountain district was gradually included
within his jurisdiction, and security of property and life, such as that
region never knew before, existed. It became a common saying
among the Andalusians that a woman loaded with silver might cross
any portion of the Serrania de Ronda without the least danger of
molestation. Such a demonstration of security would have been
elsewhere impracticable, even in the populous districts of the
emirate patrolled by a vigilant police, and its attempt would have
invited certain death in the distant and unprotected provinces of the
empire.
In the control of his soldiers, Ibn-Hafsun adopted all those politic
expedients which raise commanders to popularity and renown,—
inexorable justice, unstinted liberality, prompt recognition of efficient
service, merciless punishment of serious infractions of discipline. His
increasing power invited the adherence of malcontents who held
responsible posts under the government, among them not a few
renegades, those pests of every administration whose credulous
weakness heeded their protestations or trusted their loyalty. In the
year 886, Ibn-Hafsun was assisting one of these traitors in the
defence of Alhama against the prince Al-Mondhir. The bandit
chieftain had been wounded in a sally, and the garrison was about to
surrender, when news reached the prince of the death of his father,
and necessitated his immediate return. This unhoped-for change in
his fortunes offered an opportunity which the wily Ibn-Hafsun was not
slow to appreciate. By plausible representations he induced many
towns to submit to his authority, and the accession of Al-Mondhir
found him at once confronted with a powerful enemy, whose military
genius and fertility of resource promised a long and doubtful struggle
for supremacy.
The death of Mohammed was sudden and peaceful. His reign of
thirty-four years was the most stormy and unfortunate of any hitherto
directed by the Ommeyade monarchs. In addition to manifold
political calamities, it was afflicted with a drought severe beyond all
hitherto mentioned in the annals of Spain, with famine and
pestilence, and with earthquakes that increased the mortality to an
appalling degree.
This epoch is conspicuous for the shameful degradation of the
Ommeyade dynasty of Spain. In its general features, it also presents
an epitome of the evils which afflicted the Hispano-Arab domination
under every ruler and in every age. The inherent vices of the Moslem
system; the irreconcilable character of the constituents of Moslem
society—their turbulence, malignity, and faithlessness—were
discernible alike under the administration of Abd-al-Aziz, the first of
the emirs, and of Boabdil, the last of the kings. The condition of
Mohammed at times seemed desperate. The majority of his subjects
were in rebellion. Twenty years of warfare had failed to subdue
Toledo, which, with the extensive territory subject to it, was now
practically independent. The power of the Christians was increasing
daily. Their boundaries were steadily advancing southward. Their
banners had even been seen from the walls of the capital. The
Franks had obtained a permanent foothold in the Gothic March,
forever lost to the jurisdiction and the faith of Islam. The mighty
kingdom which had once reached from the banks of the Garonne to
the Mediterranean had shrunk to the dimensions of an insignificant
principality. Septimania, Leon, Aragon, Catalonia, and a large portion
of Castile were in the hands of the enemy. In the North, the walis of
the scattered fortresses which still preserved a nominal allegiance to
the Emir were secretly leagued with the infidel. In the West, the
audacious Ibn-Merwan plundered at will the rich settlements of
Estremadura and Lusitania. Valencia and Murcia, the nurseries of
many a serious revolt, exhibited unconcealed signs of disaffection,
caused by the imposition of excessive taxes and the uncontrolled
rapacity of their governors. In the South, the daring Ibn-Hafsun, the
representative of the prejudices and the aspirations of a numerous
and growing faction, exercised despotic rule over the greater part of
Andalusia. Brigands swarmed on the highways. Travel was
impossible, except under the protection of a strong escort.
Communication between the great cities of the Peninsula was as
difficult as if they had been separated by vast continents or seas. At
one time, for eight years, intercourse was entirely suspended
between Saragossa and Cordova. In every community an ill-defined
but universal presentiment of impending evil prevailed. Society was
distracted by the quarrels of theologians, frivolous in their nature, but
often serious in their consequences. In the history of Islam, a dispute
concerning a religious formula or the authenticity of a tradition had,
more than once, led to a bloody proscription, or involved entire
nations in war. While the majority of the Christian tributaries
acquiesced in the conditions imposed by the Moslem laws, numbers
of deluded fanatics, resorting to every species of outrage and
blasphemy, courted the tortures and the fame of martyrdom. Much of
the country was depopulated. Where the inhabitants remained,
agricultural and commercial operations greatly declined, and in some
districts were absolutely suspended. The public revenues were
diminished to such an extent that even the penuriousness of the
Emir, aided by the extortions of his merciless officials, could with
difficulty provide for the necessary expenses of the royal household.
At the death of Mohammed, scarcely one-fourth of the territorial area
over which he claimed sovereign jurisdiction acknowledged the
legitimacy of his title or contributed to the maintenance of his power.
The evidences of national decadence are only too perceptible in
the disappearance of public spirit and military virtue; in the incessant
prosecution of intestine warfare; in the almost unresisted
encroachments of the Christian arms; in the habitual treachery of
officers entrusted with high commands; in the jealousies of courtiers
and the intrigues of fanatics; in the feigned enthusiasm of crusades
inaugurated in obedience to the principles of Islam, sometimes
crowned with partial success, but often terminating in disgrace and
disaster.
The character of Mohammed was principally remarkable for
irresolution and parsimony. He surrendered whole provinces and
degraded his dignity by humiliating concessions extorted by the
threats of insolent chiefs of banditti. Such was his meanness that, in
a transaction involving the payment of more than a hundred
thousand dinars, he defrauded the treasury officials of a few pieces
of copper. He reduced the pay of his soldiers. He condescended to
share the salaries of government employees, whom he appointed
conditionally upon the division of their earnings. Yet, with these
serious faults, he was the patron of science, the friend of the
learned, a graceful poet and orator, and one of the most
accomplished calligraphists of his time. The lack of effective
organization; the secret and implacable hostility that pervaded every
branch of the body politic; the boldness and tenacity of the Asturians,
aided by the sympathy of an innumerable body of Christian
ecclesiastics domiciled in every city and village of the empire; and
the unavoidable catastrophes of nature, render it extremely
problematical whether, under similar circumstances, a prince
possessed of greater ability than Mohammed could have better
sustained the declining fortunes of the emirate.
CHAPTER XI
REIGN OF AL-MONDHIR; REIGN OF ABDALLAH
886–912
Parallel between the Policy of the Moorish and Asturian Courts—

Alfonso III.—His Conquests—Energy of Al-Mondhir—Siege of
Bobastro—Stratagem of Ibn-Hafsun—The Emir is Poisoned—
Abdallah ascends the Throne—Conditions of Parties and Sects—
Prevalence of Disorder—Insurrection at Elvira—Success of the
Arab Faction—Disturbances at Seville—General Disaffection of
the Provinces—Ibn-Hafsun defeated at Aguilar—Disastrous and
Permanent Effects of the Continuance of Anarchy—Sudden
Death of Abdallah—Important Political Changes wrought by a
Generation of Civil Warfare.
A striking parallel exists between the successive events that
compose respectively the political history of the rival kingdoms of
Christian and Moorish Spain. In the circumstances of physical
environment, in national traditions, in manners, language, and
religious belief, no two races could be more dissimilar. Yet, in many
respects, the accounts of the disturbances following the accession of
the Kings of the Asturias and the Emirs of Cordova are counterparts
of each other. Both monarchies were, in theory, elective. The
independent spirit of the Arab and the untamed ferocity of the Goth
were equally opposed to the subordination necessarily implied by the
adoption of the law of hereditary descent. As the ruler grew more
powerful, he naturally became more anxious to transmit to his
descendants the authority which had been gained by his valor or
confirmed by his prudence. To secure to his family this coveted
advantage, he was accustomed to solicit, in his lifetime, the public
acknowledgment of his son as heir apparent, who had, not
infrequently, been associated with him in the conduct of the
administration. A council composed of the principal officers, prelates,
and nobles of the realm was convoked, and required to show its
devotion to king or emir by swearing allegiance to the prince whom
paternal affection, and sometimes distinguished merit, had
designated as the future sovereign. This assent, prompted by
interest and the certainty of royal favor, was seldom refused, and,
strengthened by custom until it became a part of the constitution,
was, after a few generations, regarded as a mere ceremonial,—the
formal assertion of a right whose legality had been tacitly established
by considerations of public policy, if not by ancient prescription. But
such was the effect of a regulation in governments which preserved
the forms of election but repudiated its untrammelled exercise, that
the choice of the monarch, as soon as he ascended the throne,
generally found himself embroiled with his less fortunate brethren,
each of whom believed that he had been defrauded of his birthright.
That the mere consent of the council was not deemed conclusive is
proven by the fact that possession of the palace was deemed prima
facie evidence of title, a principle recognized equally at Oviedo and
Cordova. With insubordination came civil war and the lamentable
consequences of internecine conflict. The savage instincts of the
Gothic princes caused them to blind their unfortunate rivals and
immure them for life in the foul and reeking cells of subterranean
dungeons. The vengeance of the Moor, however, was usually
satisfied with short imprisonment, and, if the culprit expressed
contrition, he was often restored to favor and his crime condoned.
The student of ancient Spanish history cannot fail to be deeply
impressed with the different methods of dealing with treason in the
north and south of the Peninsula, regions arrayed against each other
in continual hostility,—exhibiting marked resemblances when they
were least to be expected, and, in disposing of offences aimed at the
throne and life of the monarch, displaying, on the one hand, an
indulgence dictated by a magnanimity that seemed almost suicidal;
on the other, a severity characterized by atrocities that could only
proceed from the grossest barbarism.
The long and illustrious reign of Alfonso III., worthily named The
Great, which occupies so much space in the early annals of the
Reconquest, affords a conspicuous example of the vicissitudes and
trials that attended the adventurous lives of the princes of the
Asturian monarchy. Associated with his father Ordoño for four years
preceding his advent to the throne, he was far from being a novice
when summoned to assume the grave responsibilities of sovereignty.
The four brothers of the King, jealous of the paternal preference, and
disputing the legality of a custom that arbitrarily excluded from the
succession even those most eligible under the provisions of the
ancient Visigothic constitution, united their forces in a formidable
attempt to subvert the authority of Alfonso. The enterprise resulted
disastrously; the barbarous severity of the laws was demonstrated
without the mitigation that might have been expected from the
influence of fraternal sympathy, and the unhappy princes were
deprived of their eye-sight and imprisoned for life in the castle of
Oviedo. Three of them speedily sank under the hardships of
confinement; but the fourth, Veremundo, succeeded, by some
fortunate circumstance, in escaping, and was eventually raised by
his adherents to the government of Astorga. In this strong city,
occasionally assisted by the arms of the Moors, he successfully
defied the attacks of the King of the Asturias for more than seven
years. The address and courage necessarily implied by this
determined resistance are in themselves sufficiently remarkable; but
the fact that the hero who directed operations which thwarted the
designs and repulsed the forces of an entire kingdom for this
extended period was totally blind may well awaken surprise and
admiration.
The eminent abilities of Alfonso III. were displayed on many a
hotly contested field and in many a critical emergency during his long
career. His arms were carried farther into the country of the enemy
than the bravest of his predecessors had ventured to penetrate.
Coimbra, Oporto, Zamora, Toro, Simancas, and numerous other
cities of less importance were added to the dominions of the
Christian monarchy by the efforts of his valor or the terror of his
name. The sound of his trumpets had awakened the affrighted
peasantry whose fields occupied the fertile slopes of the Sierra
Morena. His banners had been repeatedly seen from the battlements
of Merida. His squadrons had menaced the suburbs of the Moslem
capital. He enforced with unabated rigor the ruthless policy of
extermination inaugurated by the first monarch of his name. The
captives taken in his numerous expeditions were, for the most part,
distributed among the estates of the ecclesiastical order and the
royal demesnes, to be employed in the construction of churches,
monasteries, castles, and palaces. With each advance of the line
marking the boundary of the two kingdoms to the southward, new
fortresses were erected, the most famous of which was that which
stood upon the site of modern Burgos, a city whose fortunes have
ever been so closely identified with those of the Castilian monarchy.
The province of Navarre, heretofore considered as an insignificant
principality, whose allegiance to the Asturian Crown was conceded
rather by the indifference of its inhabitants than based upon the
acknowledgment of any well-defined obligation, was, by the marriage
of Alfonso III. to Ximena, daughter of the count, enabled to claim, for
the first time in history, the position of an independent kingdom. For
thirty-one years Alfonso maintained an incessant contest with the
Emirs of Cordova. He saw the dominions of the descendants of
those terrified fugitives who had taken shelter in the wilds of the
Pyrenees extended far beyond the Douro and the Tagus to the
shores of the distant Guadiana. He witnessed the thorough
consolidation of the temporal and ecclesiastical powers, a union
portending so much to the future renown and dishonor of Spain. The
shrine of Santiago had already been enriched by the devotion of the
pious and the fears of the wicked; the rude hamlet had begun to
assume the appearance of a city; the homely chapel had been
replaced by a stately cathedral; and a constant stream of weeping
and hysterical pilgrims attested the growth of a spirit of fanaticism
whose effects were to be, erelong, conspicuously exhibited in those
romantic deeds of daring which abound in the annals of the
Reconquest. At the close of his reign, three-fourths of the Peninsula
—a territory that, with the exception of a corner of the mountain
wilderness, had once paid tribute to the followers of Mohammed—
was in the possession of the champions of Christendom or their
allies.
The youth of the new Emir, Al-Mondhir, had, like that of his
ancestors, been passed amidst military exercises or in warlike
enterprises. No prince had yet ascended the throne under more
auspicious circumstances, nor, at the same time, better qualified to
restore the tarnished lustre of the Moslem name. His discretion and
sagacity bore a just proportion to the impulsive courage that
distinguished him among a nation of heroes. The energy of his
character may be inferred from his response to the Toledans, who,
immediately after his accession, sent him the customary tribute,
which he at once returned with the following message, “Keep your
money for the expenses of war, for, if God so wills, I shall soon
attack you.”
The absence of Al-Mondhir, as has been already related, gave the
redoubtable rebel Ibn-Hafsun an opportunity to greatly increase his
following, and to secure, by threats and delusive promises, many
important fortresses in Andalusia. The resolute prince, thoroughly
cognizant of the dangerous character of his adversary, did not suffer
him to long enjoy the advantages which the domestic misfortune of
others rather than his own abilities had enabled him to obtain.
Leaving Cordova quietly at the head of a body of veteran troops, he
suddenly laid siege to the strong post of Archidona, commanded by
an ally of Ibn-Hafsun, and, like him, a renegade. The boldness of this
chieftain, who, while defaming the religion he had renounced,
declared his willingness to be executed in case of capture, led Al-
Mondhir to tempt the cupidity of the citizens by an enormous bribe;
the apostate was surrendered, and, in accordance with the terms of
his defiance, underwent a death ignominious in the eyes of all
Mussulmans,—crucifixion between the bodies of two of the most
unclean of animals. Terrified by this example of severity, Archidona
opened its gates. The cavalry of the Emir then swept the country of
provisions; some towns were plundered; a score of insurgents
selected for prominence in their party were executed; and the entire
army of Al-Mondhir, flushed with success and animated by the hope
of booty and vengeance, invested the formidable stronghold of
Bobastro.
While he entertained little fear that his castle could be taken, the
cunning Ibn-Hafsun determined to provide if possible against such a
contingency, and relieve his followers from the disastrous
consequences of a blockade. With every appearance of sincerity, he
professed a desire to conclude a permanent peace. Al-Mondhir, with
all his experience, was not proof against the humble protestations of
regret and assurances of future loyalty proffered by the rebel
chieftain. A treaty was drawn up virtually at the dictation of the latter.
At his request, a hundred mules, guarded by an escort of a hundred
and sixty horsemen, were furnished to convey his family and
property to Cordova. His apparent submission having removed all
suspicions of his good faith, he escaped without difficulty in the dead
of night; and having returned to Bobastro, which the army of the Emir
had quitted, he collected a few soldiers, massacred the escort, and
by daybreak was once more under shelter of the towers of the
fortress. The rage of Al-Mondhir, aroused to the highest pitch by this
exhibition of duplicity, impelled him to take a solemn oath that he
would never cease his efforts until the perfidious rebel should have
paid the extreme penalty of his treason. The blockade was renewed,
but with diminished vigor, as the discipline of the troops was not only
lax, but they were disheartened at the prospect of a protracted siege,
the opinion prevailing among them that Bobastro was impregnable.
Aware of the increasing discontent, a conspiracy was formed against
Al-Mondhir by his brother Abdallah and the eunuchs of the palace;
the court physician was prevailed upon to use a poisoned lancet to
bleed his royal patient for some trifling indisposition; and the gallant
prince, whose career bade fair to be one of the most illustrious of his
dynasty, died in excruciating torture after a reign of a little less than
two years. He left no sons, and the criminal design of Abdallah,
which had been pushed rapidly to its execution for this very reason,
having been accomplished, that prince, informed of the death of Al-
Mondhir before it was known to his friends, appeared suddenly in
camp, asserted his claim to the throne, and received the reluctant
homage of the officers of the army.
The soldiers, who respected the abilities and stood in awe of the
ferocious spirit of Ibn-Hafsun, displayed no grief at the death of their
sovereign. With every manifestation of joy, they turned their backs
upon the rebel stronghold, and, without preserving the semblance of
military order, began a straggling march towards their homes. Each
village which this armed rabble traversed was the scene of hundreds
of desertions, and of the plunder of the already grievously oppressed
inhabitants. The disorderly retreat had not escaped the notice of Ibn-
Hafsun, and he was already close in the rear of the retiring column
when a messenger arrived from the usurper imploring his

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