JUDICIAL UPDATE [FOR NOVEMBER, 2018 EXAMINATION]

1. Does the Central Board of Direct Taxes (CBDT) have the power to amend legislative provisions
through a Circular?
Commissioner of Income-tax and Anr v. SV Gopala and Others [2017] 396 ITR 694 (SC)
Facts: The CBDT had issued a Circular invoking the powers under Section 119 of the Income-tax Act, 1961.
The Circular amended the provisions contained in Rule 68B of the Second Schedule to the Income-tax Act,
1961 relating to time limit for sale of attached immovable property.
Issue: Does the CBDT have the power to amend legislative provisions through a Circular?

Supreme Court’s Decision: The Supreme Court observed that the CBDT does not have the power to amend
legislative provisions in exercise of its powers under section 119 of the Income-tax Act, 1961 by issuing a
Circular. The High Court had held so on similar grounds. The Supreme Court, accordingly, upheld the
decision of the High Court quashing the circular for being ultra vires.

2. Can dividend distribution tax under Section 115-O of Income-tax Act, 1961 be levied in respect of the
dividend declared out of agricultural income?
Union of India v. Tata Tea and Others [2017] 398 ITR 260 (SC)
Facts of the case: The petitioner is a tea company engaged in cultivating and processing tea in its factory
for marketing. The cultivation of tea is an agricultural process while the processing of tea in the factory is an
industrial process. The petitioners contend that when the company distributes dividend, it is taxed under
Section 115-O. The tax on dividend declared by it in this case is nothing but a tax on agricultural income. The
legislative competence for taxing agricultural income lies with the State Government and not the Central
Government.
Issue: Can dividend distribution tax be levied on dividend income of a tea company under section 115-O?
Supreme Court’s Observations: As per entry 82 of List I the Union Parliament has the competence to tax
“income other than agricultural income.” Section 115-O pertains to additional tax at the stage of distribution
of dividend by domestic company which is covered by entry 82 in List I. When dividend is declared to be
distributed and paid to a company’s shareholders it is not impressed with character of the source of its
income. The Court relied on Mrs. Bacha F Guzdar v. CIT AIR 1955 SC 74 which looked into the nature of the
dividend income in the hands of the shareholders. Dividend is derived from the investment made in the
company’s shares and the foundation rests on the contractual relations between the company and the
shareholder.
Dividend is not ‘revenue derived from land’ and hence cannot be termed as agricultural income in the hands
of a shareholder. Hence, despite the petitioner’s company being involved in agricultural activities, in the
shareholder’s hands, the income is only dividend and not agricultural income.
The Calcutta High Court had upheld the vires of section 115-O but put a qualification that additional tax levied
under section 115-O shall be only to the extent of 40% which is the taxable income of the tea company. The
Supreme Court overturned this cap placed by the Calcutta High Court. Section 115-O is within the
competence of the Parliament and hence, no limits can be placed on the same.

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 Supreme Court’s Decision: When dividend is declared to be distributed and paid to a company’s
shareholders, it is not impressed with character of the source of its income. Section 115-O is within the
competence of the Union Parliament and therefore dividend distribution tax can be levied in respect of the
entire dividend declared and distributed by a tea company.

3. Is an assessee receiving refund consequent to waiver of interest under sections 234A to 234C of the
Income-tax Act, 1961 by the Settlement Commission, also entitled to interest on such refund under
section 244A?
K. Lakshmansa and Co. v. Commissioner of Income-tax and Anr [2017] 399 ITR 657(SC)
Facts of the case: The assessee had approached the Settlement Commission for waiver of interest under
sections 234A to 234C of the Income-tax Act, 1961. The Settlement Commission partially waived the interest
but refused to grant interest on refund on the grounds that section 244A does not provide for payment of
interest in such cases. Further, the Settlement Commission’s power to waive interest does not enable the
Commission to provide for payment of interest under section 244A.
The High Court held that since waiver of interest was at the discretion of the Settlement Commission, no right
flowed to the assessee to claim refund as a matter of right under law.
Issue: When refund is awarded by the Settlement Commission at its discretion under section 244A, is there
a right to receive interest on the same?
Supreme Court’s observations: The Supreme Court observed that the right to claim refund is automatic
once the statutory provisions have been complied with. The statutory obligation to refund, being non-
discretionary, carries with it the right to interest. Section 244A is clear and plain – it grants a substantive right
of interest and is not procedural.
Under section 244A, it is enough if the refund becomes due under the Income-tax Act, 1961 in which case the
assessee shall, subject to the provisions of that section, be entitled to receive simple interest. The expression
“due” only means that a refund becomes due pursuant to an order under the Act which either reduces or
waives tax or interest. It does not matter that the interest being waived is discretionary in nature; the moment
that discretion is exercised and refund becomes due consequently, a concomitant right to claim interest
springs into being in favour of the assessee.
The Supreme Court, thus, did not agree with the High Court opinion that when discretionary power has been
exercised, no concomitant right to claim interest on refund arises in favour of the assessee.

Supreme Court’s Decision: Overruling the High Court Decision, the Supreme Court held that the assessee
has a right to interest on refund under section 244A.

4. Whether certain receipts by co-operative societies from its members (non-occupancy charges,
transfer charges, common amenity fund charges) are exempt based on the doctrine of mutuality?
Income-tax Officer v. Venkatesh Premises Co-operative Society Ltd. [2018] 402 ITR 670 (SC)

Supreme Court’s observations: The doctrine of mutuality is based on the common law principle that a
person cannot make a profit from himself. The income of a co-operative society from business is taxable
under section 2(24)(vii) and will stand excluded based on the principle of mutuality. The essence of the
principle of mutuality lies in the commonality of the contributors and the participants who are also the

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 beneficiaries. The contributors to the common fund must be entitled to participate in the surplus and the
participators in the surplus are contributors to the common fund. Any surplus in the common fund shall,
therefore, not constitute income but will only be an increase in the common fund meant to meet sudden
eventualities.
The Supreme Court made the following observations:
 If for convenience, part of the transfer charges were paid by the transferee, they would not partake of the
nature of profit. The amount is appropriated only after the transferee was inducted as a member. In the
event of non-admission, the amount was returned. The moment the transferee was inducted as a
member the principles of mutuality would apply.
 Non-occupancy charges were levied by the society and were payable by a member who did not himself
occupy the premises but let them out to a third person. The charges were utilised only for common benefit
of facilities and amenities to the members.
 Contribution to the common amenity fund taken from a member disposing of property was utilized for
meeting heavy repairs to ensure hazard-free maintenance of the properties of the society which ultimately
benefitted the members. Membership forming a class, the identity of the individual member not being
relevant, induction into membership automatically attracted the doctrine of mutuality.
 If a society had surplus floor space index available, it was entitled to utilise it by making fresh construction
in accordance with law. Naturally, such additional construction would entail extra maintenance charges.
If the society first inducted new members who were required to contribute to the common fund for availing
of the common facilities, and then granted only occupancy rights to them by draw of lots, the ownership
remaining with the society, the receipts could not be bifurcated into two segments of receipt and costs,
so as to hold the former to be outside the purview of mutuality classifying it as income of the society with
commerciality.

Supreme Court’s Decision: The doctrine of mutuality, is based on the common law principle that a person
cannot make a profit from himself. Accordingly, the transfer charges, non-occupancy charges common
amenity fund charges and other charges are exempt owing to application of the doctrine of mutuality.

5. Whether technical fee paid under a technical collaboration agreement for setting up a joint venture
company in India is to be treated as revenue or capital expenditure, where, upon termination of the
agreement, the joint venture would come to an end?
Honda Siel Cars India Ltd. v. CIT [2017] 395 ITR 713 (SC)
Facts of the case: The assessee, Honda Siel Cars India Ltd., is a joint venture company between Honda
Motors, a Japanese company and Siel Ltd., an Indian company. The assessee and Honda Motors entered
into a technical collaboration agreement (TCA) on May 21, 1996 under which a technical fee of 30.5 million
USD was payable by the assessee in five equal instalments on a yearly basis. Under the agreement, TCA
Honda Motors had to provide manufacturing facilities, know-how, technical information, information regarding
intellectual property rights to the assessee which the assessee was entitled to exploit only as a licensee,
without any proprietary rights. The assessee treated the technical fees as revenue while the Revenue
authorities contended that it is capital in nature.
Issue: Whether the technical fee of 30.5 million USD payable by the assessee is in the nature of revenue
expenditure or capital expenditure?

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 Appellate Authorities’ views: The Tribunal held that the assessee had acquired only a limited right to use
and not a proprietary right, and hence, the expenditure was revenue in nature. It did not matter that the
agreement was entered into at the time of setting up the business. The High Court, however, held that though
the rights were in the nature of a right to use, the joint venture’s business was set up pursuant to the
agreement, and hence, the expenditure was capital in nature.
Supreme Court’s Observations: From a review of relevant precedents, the Court observed that if a limited
right to use technical know-how is obtained for a limited period for improvising existing business, the
expenditure is revenue in nature. However, if technical know-how is obtained for setting up a new business,
the position may be different. There is no single principle or test for determining the nature of expenditure; it
is a question to be answered based on the circumstances in each case.
In the given facts, the very purpose of the TCA was to set up the Joint Venture. The collaboration included
not only transfer of technical information, but, complete assistance, actual, factual and on the spot, for
establishment of plant, machinery, etc. so as to set up a manufacturing unit. Upon termination of TCA, the
joint venture itself would come to an end. Though the TCA is framed in a manner to look like a licence for a
limited period having no enduring nature but a close scrutiny into the said agreement shows otherwise.

Supreme Court’s Decision: Affirming the decision of the High Court, the Supreme Court held that, in this
case, technical fee is capital in nature since upon termination of TCA, the joint venture itself would come to
an end.

Note – In this case, since the amount paid for obtaining limited right to use technical know-how for a limited
period is held to be capital in nature, it would be an intangible asset eligible for depreciation@25%.
6. Whether section 40(a)(ia) is attracted when amount is not ‘payable’ to a sub-contractor but has been
actually paid?
Palam Gas Service v. CIT [2017] 394 ITR 300 (SC)
Facts of the case: The assessee, Palam Gas Service, is engaged in the business of purchase and sale of
LPG cylinders. The assessee had arranged for the transportation to be done through three sub-contractors
within the meaning of section 194C. During the relevant assessment year, when the assessee made freight
payments of Rs.20,97,689 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: Whether the provisions of Section 40(a)(ia) would be attracted when the amount is not 'payable' to a
sub-contractor but has been actually paid? Would the obligation to deduct tax depend on the method of
accounting followed by an assessee?
Supreme Court’s Observations: The Supreme Court noted the difference in opinion amongst the various
High Courts. On the one hand, the High Courts of Punjab & Haryana, Madras, Calcutta and Gujarat held that
Section 40(a)(ia) extended to amounts actually paid. The Allahabad High Court had, however, held otherwise.
The Supreme Court agreed with the observations of the majority High Courts and held that section 40(a)(ia)
covers not only those cases where the amount is payable but also when it is paid. Accordingly, the judgment
of the Allahabad High Court in CIT v. Vector Shipping Services (P.) Ltd. [2013] 357 ITR 642 stands overruled.
The Supreme Court reaffirmed that the obligation to deduct tax at source is mandatory and applicable
irrespective of the method of accounting adopted. If the 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

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 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.

Supreme Court’s Decision: The Supreme Court, accordingly, upheld the decision of the majority High
Courts that 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, as the case may be, depending on the system of accounting followed
by the assessee.

7. Whether rental income earned from letting out of premises is to be treated as business income or as
income from house property?
Raj Dadarkar and Associates v. Assistant Commissioner of Income Tax [2017] 394 ITR 592 (SC)
Facts of the case: The assessee had acquired the right to conduct a market on certain land from Municipal
Corporation, Greater Bombay under an auction on May 28, 1993. The premises allotted to the appellant was
a bare structure and it was for the appellant to make the premises fit to be used as a market. The appellant
spent substantial sums to construct 95 shops and 30 stalls. From the years 1999 to 2004, the assessee
treated income from sub-letting of such shops and stalls as business income. The return of the assessee for
assessment year 2000-2001 was reopened by Assessing Officer by issuing notice under section 148.
Issue: Whether the income earned by the appellant is to be taxed under the head 'Income from house
property' or 'Profits and gains from the business or profession'?
Supreme Court’s Observations: The Supreme Court held that wherever there is an income from leasing
out of premises, it is to be treated as income from house property. However, it can be treated as business
income if letting out of the premises itself is the business of the assessee. The question has to be decided
based on the facts of each case as was held in Sultan Brothers Pvt Ltd. v. CIT [1964] 51 ITR 353 (SC).
In the given facts, it was an undisputed fact that the assessee would be considered to be a deemed owner
under section 27(iiib) read with section 269UA(f) as it had a leasehold right for more than 12 years. The only
evidence adduced for proving that letting out and earning rents is the main business activity of the appellant
was the object clause of the partnership deed. The clause provided that "The Partnership shall take the
premises on rent to sub-let or do any other business as may be mutually agreed by the parties from time to
time." The Supreme Court held the clause to be inconclusive and observed that the assessee had failed to
produce sufficient material to show that its entire or substantial income was from letting out of the property.

Supreme Court’s Decision: The Supreme Court, accordingly, held that, in this case, the income is to be
assessed as “Income from house property” and not as business income, on account of lack of sufficient
material to prove that the substantial income of the assessee was from letting out of the property.

Note - In Chennai Properties and Investments Ltd. v. CIT (2015) 373 ITR 673, the Supreme Court observed
that holding of the properties and earning income by letting out of these properties is the main objective of
the company. Further, in the return of income filed by the company and accepted by the Assessing Officer,
the entire income of the company comprised of income from letting out of such properties. The Supreme
Court, accordingly, held that such income was taxable as business income. Likewise, in Rayala Corporation
(P) Ltd. v. Asst. CIT (2016) 386 ITR 500, the Supreme Court noted that the assessee was engaged only in
the business of renting its properties and earning rental income therefrom and accordingly, held that such
income was taxable as business income. In this case, however, on account of lack of sufficient material to
prove that substantial income of the assessee was from letting out of property, the Supreme Court held that
the rental income has to be assessed as “Income from house property”.

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8. Whether the nature of an expenditure can be considered debatable for not invoking prima facie
adjustment under section 143(1)(a), where the jurisdictional High Court has taken a view that the
expenditure is capital in nature even though some other High Courts have held that the same is
revenue in nature?
Deputy Commissioner of Income Tax v Raghuvir Synthetics Ltd. [2017] 394 ITR 1 (SC)
Facts of the case: The assessee is a public limited company. For the relevant assessment year, it had filed
its return claiming revenue expenditure of Rs.65,47,448 on advertisement and public issue. The company
claimed that if the sum cannot be considered as revenue expenditure, then, alternatively, the said expenditure
may be allowed under section 35D by way treating such expenditure as preliminary expenses. The Assessing
Officer issued an intimation under section 143(1)(a) disallowing a sum of Rs.58,92,700 incurred on public
issue.
Appellate Authorities’ Views: The first appellate authority allowed the assessee’s appeal by holding that
the concept of “prima facie adjustment” under section 143(1)(a) cannot be invoked as there could be more
than one opinion on whether public issue expenses were covered by section 35D or 37. The Tribunal as well
as the Division Bench of the High Court dismissed the appeal of the Revenue on the ground that the issue
was debatable and hence, the expenditure cannot be disallowed while processing return of income under
section 143(1)(a).
Supreme Court’s Observations: The Supreme Court noted that there was divergence of opinion amongst
the various High Courts on the nature of the expenses incurred on raising share capital. While the High
Courts of Madras, Andhra Pradesh and Karnataka had held the preliminary expenses to be revenue in nature,
High Courts of Allahabad, Himachal Pradesh, Delhi, Calcutta, Bombay, Punjab and Haryana, Gujarat and
Rajasthan had held the expenses to be capital in nature.

Supreme Court’s Decision: The Supreme Court held that, in the case of the assessee, the issue was not
debatable. Since the registered office of the assessee is in Gujarat, the law laid down by the Gujarat High
Court is binding on the assessee.

9. Whether “premium” on subscribed share capital is “capital employed in the business of the
company” under section 35D to be eligible for a deduction?
Berger Paints India Ltd v. CIT [2017] 393 ITR 113 (SC)
Facts of the case: The assessee is a company engaged in the manufacture of paints. For the relevant
assessment years, the assessee claimed deduction under section 35D of a sum representing share premium
as being a part of the capital employed. The said deduction was disallowed by the Assessing Officer.
Issue: Whether “premium” on subscribed share capital is “capital employed in the business of the company”
under section 35D to be eligible for a deduction?
Supreme Court’s Observations: The Supreme Court observed that the share premium collected by the
assessee on its subscribed issued share capital could not be part of “capital employed in the business of the
company” for the purpose of section 35D(3)(b). If it were the intention of the legislature to treat share premium
as being “capital employed in the business of the company”, it would have been explicitly mentioned.
Moreover, column III of the form of the annual return in Part II of Schedule V to the Companies Act, 1956
under Section 159 dealing with capital structure of the company provides the break-up of “issued share
capital” which does not include share premium at the time of subscription. Hence, in the absence of the
reference in section 35D, share premium is not a part of the capital employed. Also, section 78 of the

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 Companies Act, 1956 requires a company to transfer the premium amount to be kept in a separate account
called “securities premium account”.

Supreme Court’s Decision: Affirming the decision of the High Court, the Supreme Court held that the
assessee is not entitled to claim deduction in relation to the premium amount received from shareholders at
the time of share subscription.

Note – Under the Companies Act, 2013, Serial No. IV of Form MGT-7 (Annual Return) read with section 92
relates to the capital structure of a company, including break-up of issued share capital and section 52 deals
with securities premium. Thus, the rationale of the Supreme Court ruling in the above case would hold good
in the Companies Act, 2013 regime.
10. Whether payments made by the agents in India responsible for booking cargo and acting as clearing
agents, to use a centralized communication system maintained by the assessee-company engaged
in shipping business, can be treated as fees for technical services?
Director of Income-Tax (International Taxation) v. A.P. Moller Maersk [2017] 392 ITR 186 (SC)
Facts of the case: The assessee was a foreign company engaged in shipping business and was a tax
resident of Denmark. The assessee had agents working for it across the globe, who booked cargo and acted
as clearing agents. In India, the assessee had three agents. The assessee had set up and maintained a
vertically integrated communication system called Maersk net system in order to help all its agents. The
agents paid for the system on a pro rata basis. The Assessing Officer contended that the amounts paid by
the Indian agents were fees for technical services taxable under Article 13(4) of the India and Denmark DTAA.
The assessee argued that the arrangement was merely a cost sharing system and the payments were only
a reimbursement of expenses.
Supreme Court’s Observations: The Supreme Court observed that, for the sake of convenience of its
agents, the assessee had set up a centralised communication system which was an integral part of the
international shipping business of the assessee. The expenditure incurred for running this system was shared
by all the agents and payments to assessee were merely as reimbursement of expenses incurred. The
payments could not be treated as fees for technical services. Moreover, the Revenue authorities had
accepted that assessee’s freight income in the relevant assessment years was not chargeable to tax as it
arose from the operation of ships in international waters in terms of Article 9 of the India and Denmark DTAA.
Once that was accepted and it was found that the communication system was an integral part of the shipping
business, payments received from agents could not be treated as in lieu of any technical services.

Supreme Court’s Decision: The Supreme Court, accordingly, held that amounts paid by Indian agents to
the non-resident company would not be liable to tax as fee for technical services under Article 13(4) of the
India and Denmark DTAA.

11. Whether payment of sums due, after the deadline stipulated by the Settlement Commission, would
save the petitioner from withdrawal of immunity from prosecution?
Sandeep Singh v Union of India [2017] 393 ITR 77 (SC)
Facts of the case: The petitioner is a dealer in real estate at Amritsar. A search was conducted on August
21, 2009 at his business and residential premises under section 132(1) subsequent to which the assessee
filed an application before the Settlement Commission under section 245C(1). The case was settled before
the Settlement Commission on December 12, 2014. Pursuant to the assessment after settlement, the

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 petitioner was unable to pay the amount due by the stipulated date. He sought an extension for 14 months
but was only given time until July 31, 2015.
The assessee filed a writ petition before the High Court seeking quashing / modification of the Settlement
Commission’s order granting partial extension of time. By the time the matter was heard by the Supreme
Court, he had paid off all pending amounts.
Supreme Court’s Observations: The Supreme Court explained that in case payments are not made within
the time granted by the Settlement Commission or in case the person fails to comply with any other condition,
subject to which the immunity was granted, the immunity shall stand withdrawn.
It is not in dispute that all payments were made by the assessee on January 20, 2016 before approaching
the Supreme Court. Though the time originally granted was only up to July 31, 2015, all sums having been
paid now, there is no need to relegate the assessee to the Settlement Commission. Settlement Commission
has the power to extend the timelines. Hence, in the instant case, it shall be taken that the assessee has
made the payments within the time granted under section 245H(1A).

Supreme Court’s Decision: The Supreme Court held that the assessee having cleared all taxes due vide
order of Settlement Commission, albeit after stipulated deadline, is immune from prosecution.

12. Is loan to HUF who is a shareholder in a closely held company chargeable to tax as deemed dividend?
Gopal & Sons (HUF) v. CIT (2017) 391 ITR 1 (SC)
Facts of the case: The assessee is a HUF which holds 37.12% shares in M/s. G.S. Fertilizers (P.) Ltd., a
closely held company. During the relevant previous year, it received loans and advances from the company.
Its return was scrutinized by the Assessing Officer who treated the loans and advances as deemed dividend
under section 2(22)(e). The company declared in its annual return that the advances were given to the HUF
but the share certificates were issued in the name of the HUF’s Karta, Shri Gopal Kumar Sanei.
Appellate Authorities’ views: The CIT (Appeals) confirmed the order of the Assessing Officer. The Tribunal,
however, observed that since a HUF cannot be a registered or beneficial shareholder of a company, the
amount cannot be taxed as deemed dividend. The High Court restored the order of the Assessing Officer by
observing that the assessee did not dispute that the karta is a member of HUF which has taken the loan from
the company and, therefore, the case is covered by section 2(22)(e).
Issue: Whether loan given by a closely held company to a HUF is chargeable to tax as deemed dividend
under section 2(22)(e) despite the stated position of law being that a HUF cannot be a shareholder in a
company?
Supreme Court’s Observations: When a loan is given by a closely held company, it is chargeable to tax as
deemed dividend if the loan was given to a shareholder (having more than 10% shares in the company) or
to a concern in which the shareholder has substantial interest (having more than 20% share in the concern).
‘Concern’ includes HUF.
In the instant case, loans were given to the HUF. There was some dispute as to who was the shareholder -
the Karta or the HUF as share certificates were issued in the name of the former but the annual return
mentioned the latter. The Court observed that in either scenario, section 2(22)(e) would be attracted. If the
HUF was the shareholder, as it held more than 10% shares, situation was covered. If the Karta was the
shareholder, the HUF would be the concern in which the Karta has substantial interest.

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 Further, on the issue whether a HUF can be a shareholder or not, it was observed that on account of
Explanation 3 to section 2(22)(e), a concern includes a HUF.

Supreme Court’s Decision: The Supreme Court, accordingly, held that the loan amount is to be assessed
as deemed dividend under section 2(22)(e).

13. Whether receipt of higher compensation after notification of compulsory acquisition would change
the character of transaction into a voluntary sale?
Balakrishnan v. Union of India & Others (2017) 391 ITR 178 (SC)
Facts of the case: The assessee owned vast area of agricultural land. The State Government acquired the
property for development of a techno park. The assessee was awarded compensation of Rs.14.37 lakhs.
Aggrieved by the amount, the assessee initiated negotiations with the Collector, further to which
compensation was increased to Rs.38.42 lakhs. The assessee claimed exemption from capital gains under
section 10(37)(iii) stating that the transfer of agricultural land was on account of compulsory acquisition. The
Revenue authorities contended that the exemption should be denied as it was not a compulsory acquisition
but a voluntary sale.
Issue: 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)(iii)?
Supreme Court’s Observations: The Supreme Court observed that the acquisition process was initiated
under the Land Acquisition Act, 1894. The assessee entered into negotiations only for securing the market
value of the land without having to go to the Court. Merely because the compensation amount is agreed
upon, the character of acquisition will not change from compulsory acquisition to a voluntary sale. The Court
also drew attention to a recently enacted legislation titled, Right to Fair Compensation and Transparency in
Land Acquisition, Rehabilitation and Resettlement Act, 2013, which empowers the Collector to pass an award
with the consent of the parties. Despite the provision for consent, the acquisition would continue to be
compulsory.

Supreme Court’s Decision: The Supreme Court held that when proceedings were initiated under the Land
Acquisition Act, 1894, even if the compensation is negotiated and fixed, it would continue to remain as
compulsory acquisition. The claim of exemption from capital gains under section 10(37)(iii) is, therefore,
tenable in law.

14. Whether omission to issue notice under section 143(2) is a defect not curable in spite of section
292BB?
Travancore Diagnostics (P) Ltd v. Asstt. CIT (2017) 390 ITR 167 (Ker)
Facts of the case: The assessee had a diagnostic laboratory in Kollam and a branch at Kottarakara. A
survey under Section 133A was conducted, consequent to which the assessee filed its return of income. On
the basis of certain incriminating documents and materials unearthed during the survey, a notice under
section 148 was issued. Subsequently, the incomes were assessed for assessment years 2009-10 and 2010-
11 under section 143(3) read with section 147.
The assessee raised additional jurisdictional grounds before the Appellate Tribunal. The assessee contended
that for the assessment year 2009-10, the assessment was completed under section 143(3) read with section
147. However, a notice under section 143(2) was not issued. The Tribunal held that in view of section 292BB,
the assessee’s participation in the reassessment proceedings would condone the omission to issue a notice.

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 Issue: Whether failure to issue notice under section 143(2) would vitiate the assessment notwithstanding the
assessee’s participation in the proceedings? Would section 292BB come to the rescue of the Revenue
authority if they omit to issue notice under section 143(2)?

High Court’s Decision: The Apex Court had, in Asstt. CIT v. Hotel Blue Moon (2010) 321 ITR 362, held that
without the statutory notice under section 143(2), the Assessing Officer could not assume jurisdiction. Here,
Assessing Officer recorded his inability to generate a notice as the return was not filed electronically. Such
defect cannot be cured subsequently, since it is not procedural but one that goes to the root of the jurisdiction.
Even though the assessee had participated in the proceedings, in the absence of mandatory notice, section
292BB cannot help the Revenue officers who have no jurisdiction, to begin with. Section 292BB helps
Revenue in countering claims of assessees who have participated in proceedings once a due notice has
been issued.

15. Is interest on enhanced compensation under section 28 of the Land Acquisition Act, 1894 assessable
as capital gains or as income from other sources?
Movaliya Bhikhubhai Balabhai v. ITO (TDS) (2016) 388 ITR 343 (Guj)
Facts of the case: The petitioner’s agricultural lands were compulsorily acquired for undertaking an irrigation
project. The petitioner challenged the compensation awarded by the Collector which led to award of additional
compensation of Rs.5,01,846 and interest amounting to Rs.20.74 lakhs under section 28 of the Land
Acquisition Act, 1894. The petitioner filed an application in the prescribed form to the Assessing Officer for
issuance of a certificate with ‘nil’ tax deduction at source.
The application was rejected by the Assessing Officer on the ground that the interest amount is taxable at
source as per section 57(iv) read with sections 56(2)(viii) and 145A(b). Aggrieved with the rejection of
application, the assessee filed a writ before the High Court.
High Court’s Observations: The High Court observed that the assessee has received interest under section
28 of the Land Acquisition Act, 1894 which represents enhanced value of land and thus, partakes the
character of compensation and not interest. Hence, the interest under section 28 is liable to be taxed under
the head of ‘Capital Gains’ and not under ‘Income from Other Sources’. On the other hand, interest under
section 34 of the Land Acquisition Act, 1894 is for the delay in making payment after the compensation
amount is determined. Such amount is liable to be taxed under the head ‘Income from Other Sources’.

High Court’s Decision: The High Court held that the interest awarded under section 28 of the Land
Acquisition Act, 1894 was not liable to tax under the head of ‘Income from other sources’ and thus, was not
deductible at source. The Revenue authority had erred in refusing to grant a certificate under section 197 to
the petitioner for non-deduction of tax at source.

Note: The Land Acquisition Act, 1894 has now been repealed and replaced by the Right to Fair
Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013. Section 72
and Section 80 of the new legislation have similar provisions regarding award of interest.
16. Whether the Assessing Officer is bound to consider the report of Departmental Valuation Officer
(DVO) when it is available on record?
Principal CIT v. Ravjibhai Nagjibhai Thesia (2016) 388 ITR 358 (Guj)
Facts of the case: The assessee sold his property for Rs.16 lakhs. The State stamp valuation authority
valued the property at Rs.233.71 lakhs. During the course of assessment proceedings, at the request of the

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 assessee, the Assessing Officer referred the matter of valuation to the DVO who valued the property at
Rs.24.15 lakhs. The Assessing Officer passed the order before the receipt of the report of the DVO by treating
Rs.217.71 lakhs (difference between Rs.233.71 lakhs and Rs.16 lakhs) as undisclosed income. The report
of the DVO was received by the Assessing Officer after the date of assessment order but before the order
was received by the assessee.
Appellate Authorities’ Views: The Commissioner (Appeals) directed the Assessing Officer to compute the
capital gain by taking the value given by the DVO. The Revenue carried the matter before Tribunal. The
Tribunal agreed with the view of the CIT (Appeals) and dismissed the appeal. The Tribunal relied on CIT v.
Dr. Indra Swaroop Bhatnagar (2012) 349 ITR 210 (All) which held that the DVO’s valuation under section
50C(2) is binding on the Assessing Officer.
Issue: Whether the Assessing Officer having made reference to the DVO must consider the report of the
DVO for the purpose of assessment?
High Court’s Observations: The High Court observed that when the Assessing Officer has referred the
matter to DVO, the assessment has to be completed in conformity with the estimate given by the DVO. As
the DVO has estimated the value of the capital asset at an amount lower than the value assessed by the
stamp valuation authority, as per 50C(2), it is such valuation which is required to be taken into consideration
for the purposes of assessment.

High Court’s Decision: The High Court held that capital gains has to be computed in conformity with the
value so determined by the DVO.

17. Does the CIT (Appeals) have the power to change the status of assessee?
Mega Trends Inc. v. CIT (2016) 388 ITR 16 (Mad).
Facts of the case: The assessee filed its return of income as a partnership firm for the relevant assessment
year admitting a total income of Rs.174.36 lakhs. The firm consisted of thirteen individuals and two firms.
The return of income was selected for scrutiny which led to disallowance of certain deductions to the tune of
Rs.262.50 lakhs. The assessee preferred an appeal. The CIT (Appeals) invoked section 251 and issued a
show cause notice proposing to change the assessee’s status to AOP on the reasoning that a partnership
firm cannot be a partner in another firm. The assessee filed writ of certiorari to quash the show cause notice.
Note: ‘Certiorari’ is “a writ issued by a superior court calling up the record of a proceeding in a lower court
for review”.
High Court’s Observations: The Revenue contended that the CIT(Appeals) has power to modify
assessee’s status, since a partnership firm is a relationship between persons who have agreed to share the
profits of the business carried on by all or any of them acting for all, and the term persons only connotes
natural persons. Since some of the partners are other firms, the assessment cannot be carried out as a firm.
They relied on the Supreme Court’s ruling in Dhulichand Laxminarayan v. CIT (1956) 29 ITR 535 (SC) to
argue this point.
The High Court observed that, under section 251(1), the powers of the first appellate authority are
coterminous with those of the Assessing Officer and the appellate authority can do what the Assessing Officer
ought to have done and also direct him to do what he had failed to do. If the Assessing Officer had erred in
concluding the status of the assessee as a firm, it could not be said that the Commissioner (Appeals) had no
jurisdiction to go into the issue. The appeal was in continuation of the original proceedings and unless fetters

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 were placed upon the powers of the appellate authority by express words, the appellate authority could
exercise all the powers of the original authority.

High Court’s Decision: The High Court held that the power to change the status of the assessee is available
to the assessing authority and when it is not used by him, the appellate authority is empowered to use such
power and change the status. The Court relied on a full bench decision of the Madras High Court in State of
Tamil Nadu v. Arulmurugan and Co. reported in [1982] 51 STC 381 to come to such conclusion.

18. Is the increase in gross total income consequent to disallowance under section 40(a)(ia) eligible for
profit-linked deduction under Chapter VI-A?
CIT v. Sunil Vishwambharnath Tiwari (2016) 388 ITR 630 (Bom)
Facts of the case: The assessee engaged in development of housing projects filed his return of income for
the relevant assessment year after claiming deduction of Rs.16.82 lakhs under section 80-IB(10) [now,
section 80-IBA]. The return was selected for scrutiny. In the assessment, a sum of Rs.83 lakhs towards sub-
contract payment; Rs.1.75 lakh as commission payment and Rs.7.96 lakhs towards advertisement expenses
were disallowed for non-deduction of tax at source by invoking section 40(a)(ia). While based on the
assessment, the total income was fixed at Rs.92.71 lakhs, the Revenue authority limited the deduction under
section 80-IB(10) to the original amount claimed by the assessee.
Appellate Authorities’ Views: The CIT (Appeals) held in favour of the assessee by stating that there cannot
be a separate treatment for addition to income and deductions from gross total income i.e., the amount which
is added to gross total income would be eligible for corresponding deduction from gross total income. The
Tribunal affirmed the view of CIT (Appeals).
Issue: Whether the increase in gross total income on account of disallowance of expenditure under section
40(a)(ia) must be considered for the purpose of deduction under section 80-IB in the absence of any explicit
restriction therein?
High Court’s Observations: The High Court observed that the fact that the assessee had not deducted tax
at source was undisputed. On account of such non-deduction, expenses had been disallowed under section
40(a)(ia) which goes on to increase the income chargeable under the head ‘Profits and gains of business or
profession’. As deduction under section 80-IB(10) is with reference to the assessee’s gross total income,
such enhanced income becomes eligible for deduction. Disallowance under section 40(a)(ia) would, thus, be
tax neutral for the assessee, on account of the enhanced profit-linked deduction available to him.

High Court’s Decision: Affirming the Tribunal’s order, the High Court held that the assessee is entitled to
claim deduction under section 80-IB(10) in respect of the enhanced gross total income as a consequence of
disallowance of expenditure under section 40(a)(ia).

Notes:
(1) Section 80-IB(10) allows deduction at 100% of the profits in respect of housing projects approved before
31.03.2008. Students may note that, presently, section 80-IBA provides for such deduction @100% of
the profits and gains from housing project subject to satisfaction of the conditions mentioned therein.
(2) The CBDT has, in its Circular No.37/2016 dated 2.11.2016, mentioned that the courts have generally
held that if the expenditure disallowed is related to the business activity against which the Chapter VI-A
deduction has been claimed, the deduction needs to be allowed on the enhanced profits. Thus, the
settled position is that the disallowances made under sections 32, 40(a)(ia), 40A(3), 43B, etc. and other

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 specific disallowances, relating to the business activity against which the Chapter VI-A deduction has
been claimed, result in enhancement of the profits of the eligible business, and that deduction under
Chapter VI-A is admissible on the profits so enhanced on account of such disallowance.
19. Can the notified ICDSs be stated as ultra vires, to the extent they are in contravention with the
provisions of the Income-tax Act, 1961 and/or settled judicial precedents?
Chamber of Tax Consultants and Anr v. Union of India W.P.(C) 5595/2017 & CM APL 23467/2017
Facts of the case: In this case, the petitioners filed a writ petition challenging the constitutional validity
of the ten Income Computation and Disclosure Standards (ICDSs) notified by the Central Government
vide Notification dated 29th September 2016, Circular No. 10/2017 dated 23rd March 2017 containing
25 FAQs relating to the said ICDS and amendment to section 145. The ten ICDS standards are to be
followed by all assessees (other than an individual or HUF who is not required to get his accounts of the
previous year audited in accordance with the provisions of section 44AB) following the mercantile system
of accounting, for the purposes of computation of income chargeable to tax under the head of ‘Profits
and gains from business and profession’ and ‘Income from other sources’ from A.Y.2017-18.
The petitioners argued that the consequence of notification of ICDSs is that the concerned assessees
have to maintain a parallel set of books of accounts. They also argued that the ICDSs are contrary to
provisions of Income-tax Act, 1961 and several judgments of the High Court and Supreme Court.
Issue: Can the notified ICDSs be stated as ultra vires, since they are contrary to the Income-tax Act,
1961 and settled judicial precedents?
High Court’s Observations: On this issue, the Delhi High Court made the following observations -
 Section 145(2) empowers the Central Government to notify ICDSs to be followed by any class of
assessees or any class of income. However, section 145(2) has to be read down to restrict power of
Central Government to notify ICDSs that do not seek to override binding judicial precedents or
provisions of Income-tax Act, 1961. The power to enact a validation law is an essential legislative
power that can be exercised, in the context of the Act, only by the Parliament and not by the
Executive. In case of a conflict between ICDS and provisions of Income-tax Act, 1961 and settled
judicial precedents, the latter would prevail.
 ICDS I which does away with the concept of 'prudence' is contrary to the Act and binding judicial
precedents and is, therefore, unsustainable in law.
 ICDS II pertaining to valuation of inventories eliminates distinction between a continuing partnership
business after dissolution from one which is discontinued upon dissolution. This is contrary to the
Supreme Court’s judgment in Shakti Trading Co. (2001) 250 ITR 871 (SC). It fails to acknowledge
that the valuation of inventory at market value upon settlement of accounts of the outgoing partner
is distinct from valuation of the inventory in the books of the business which is continuing. ICDS II is
thus, ultra vires the Act.
 The treatment to retention money under Paragraph 10(a) in ICDS-III will have to be determined on
a case to case basis by applying settled principles of accrual of income. ICDS-III seeks to bring to
tax the retention money, the receipt of which is uncertain/conditional, at the earliest possible stage,
irrespective of the facts. Hence, to that extent para 10 (a) of ICDS III is ultra vires.

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  Para 12 of ICDS III read with para 5 of ICDS IX, dealing with borrowing costs, makes it clear that no
incidental income can be reduced from borrowing cost. This is contrary to the decision of the
Supreme Court in CIT v. Bokaro Steel Limited (1999) 236 ITR 315.
 Para 5 of ICDS-IV requires an assessee to recognize income from export incentive in the year of
making of the claim if there is 'reasonable certainty' of its ultimate collection. This is contrary to the
decision of the Supreme Court in Excel Industries (2015) 358 ITR 295, and is, therefore, ultra vires.
 As far as para 6 of ICDS IV is concerned, the proportionate completion method as well as the contract
completion method have been recognized as a valid method of accounting under the mercantile
system of accounting by the Supreme Court in CIT v. Bilhari Investment Pvt. Ltd. (2008) 299 ITR 1
(SC). Therefore, to the extent that para 6 of ICDS IV permits only one of the methods, i.e.,
proportionate completion method, it is contrary to the above decisions and thus, ultra vires.
 Para 8 (1) of ICDS-IV is not ultra vires the Income-tax Act, 1961 or judicial precedents. It is valid.
 ICDS VI which states that marked to market loss/gain in case of foreign currency derivatives held for
trading or speculation purposes are not to be allowed, is not in consonance with the ratio laid down
by the Supreme Court in Sutlej Cotton Mills Limited v. CIT (1979) 116 ITR 1 (SC), insofar as it relates
to marked to market loss arising out of forward exchange contracts held for trading or speculation
purposes. It is, therefore, ultra vires the Act.
 ICDS VII which provides that recognition of government grants cannot be postponed beyond the
date of actual receipt, is in conflict with the accrual system of accounting. To that extent it is ultra
vires the Act.
 ICDS VIII pertains to valuation of securities. For those entities not governed by the RBI to whom Part
A of ICDS VIII is applicable, the accounting prescribed by the AS has to be followed which is different
from the ICDS. The Preamble to the ICDS stated that the standards were not meant for the purpose
of maintenance of books of accounts. However, such entities will now be required to maintain
separate records for income tax purposes for every year since the closing value of the securities
would be valued separately for income tax purposes and for accounting purposes. To this extent
Part A of ICDS VIII is ultra vires the Act.
 To the extent the specific ICDS are ultra vires, the impugned notification 29th September 2016 and
Circular No. 10/2017 are also ultra vires.

High Court’s Decision: To the extent the specific ICDS are contrary to relevant provisions of the
Income-tax Act, 1961 and binding judicial precedents, they are ultra vires the Act.

Note - The above Delhi High Court ruling has been reported to help students appreciate that the
power to enact a validation law is an essential legislative power that can be exercised, in the context
of the Act, only by the Parliament and not by the Executive. Accordingly, to the extent the notified
ICDSs are found to be in contravention of the Act or settled judicial precedents, they would be ultra
vires. It is noteworthy that the Finance Act, 2018 has, however, retrospectively inserted/amended
certain provisions in the Income-tax Act, 1961 with effect from A.Y. 2017-18 to bring certainty in the
wake of this judicial pronouncement. Consequent to these new/amended provisions incorporated in
the Income-tax Act, 1961 itself, the notified ICDSs are required to be complied with by the taxpayers.

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