Case Digest on Income Tax Judgments by High Courts 2016-17 – Part 1

High Court judgments on income tax matters play a crucial role in shaping tax law and policy, providing clarity on complex tax issues and resolving disputes between taxpayers and tax authorities. These rulings have far-reaching implications, as they often set precedents that influence future tax cases. In this article, we will explore some notable High Court judgments on income tax, highlighting key cases and their implications. The Income Tax Department is governed by the Central Board for Direct Taxes (CBDT) and is part of the Department of Revenue under the Ministry of Finance. Users can get details related to the department, its organisational setup, functions, tax law and rules, international taxation, etc. Information about PAN, TAN, TDS, Form16, tax information network, Tax Return Prepare Scheme (TRPS), Aaykar Sampark Kendra (ASK), tax payers, etc. is given. Users can access online services such as filing income tax return, pay taxes, view tax credit, status of tax return, etc. Delhi HC quashes Income Tax dept’s notices to Vodafone, TATA as TDS defaulters VODAFONE ESSAR MOBILE SERVICES LIMITED & ORS vs UNION OF INDIA & ORS The common question that arises for consideration in the writ petitions concerns the validity of the action initiated by the Respondent Income Tax Department against the Petitioners under Sections 201(1) and 201(1A) of the Income Tax Act, 1961 for non-deduction of tax at source for periods earlier than four years prior to 31st March 2011. These petitions, in turn, involve the interpretation of the proviso to sub-section (3) of Section 201 of the Act, which was inserted with effect from 1 st April 2010. Despite the department’s stand, a bench comprising Justice S Muralidhar and Justice Vibhu Bakhru said, under the amended provisions of the Act the government cannot initiate proceedings against a company for failing to deduct TDS four years prior to March 31, 2011. The Delhi High Court has quashed notices issued by the Income Tax department to Vodafone Essar Mobile Services Ltd (VEMSL) and Tata Teleservices Ltd (TTSL) to initiate proceedings to declare them as TDS defaulters. “ITAT is bound to follow the decisions of Higher Courts”; Bombay HC quashes Impugned order against HDFC HDFC BANK LTD vs DCIT For the Assessment Year 2008-09, HDFC Bank declared income of Rs. 241.72 crores, including Rs. 5.81 crores from tax-exempt securities treated as stock in trade. The bank paid interest on borrowed funds but didn't disallow expenses on tax-free securities, stating these were funded by interest-free funds. However, the Assessing Officer assessed the income at Rs. 1067.93 crores and invoked Section 14A. The Commissioner and the Tribunal upheld this decision despite HDFC Bank's arguments that it had sufficient interest-free funds and that the securities were stock in trade. The Tribunal's order contradicted the High Court's earlier ruling in HDFC Bank Ltd's favour. The High Court criticised the Tribunal for not following the binding precedent and disregarding the doctrine of precedent, leading to confusion. It set aside the Tribunal's order, directing it to reconsider the case. The Court emphasised the importance of adhering to precedents to maintain clarity in tax laws and avoid arbitrary actions. The Court acted under Article 227 of the Constitution, as the Tribunal's refusal to follow established precedent was considered a case of judicial indiscipline that could lead to legal uncertainty and chaos. Voluntary contributions towards the political parties are not capital receipts and the income of a political party by way of voluntary contributions would be included in the Taxable Income; Delhi HC COMMISSIONER OF INCOME TAX vs INDIAN NATIONAL CONGRESS (I)/ALL INDIA CONGRESS COMMITTEE The High Court of Delhi heard two appeals involving the Indian National Congress Committee and the Commissioner of Income Tax, New Delhi, due to their shared issues. These appeals revolved around the interpretation of "income by way of voluntary contributions received by a political party" in Section 13A of the Income Tax Act. The ITAT, in its previous order, found that the Assessee's accounts for the AY 1994-95 were incomplete, rendering the exemption under Section 13A unavailable. Simultaneously, the ITAT determined that the Assessing Officer couldn't use Sections 144 and 145 to estimate the Assessee's income from voluntary contributions, leading to a remand to the AO for recomputation. The AO, after careful examination of accounts and evidence, imposed penalties under sections 271(1)(b) and 271(1)(c). The Commissioner (Appeals) upheld this, citing the INC's failure to file timely accounts, a prerequisite for Section 13A benefits. The INC appealed this decision to the ITAT, which confirmed the original order. In the High Court, it was clarified that Section 13A doesn't serve as a computation section. Income from voluntary contributions is included in taxable income unless Section 13A conditions are met, as voluntary contributions aren't considered capital receipts. The INC couldn't demonstrate sufficient cause under Rule 46A(1)(b) and 46A(1)(c) to present additional evidence at the appellate stage. In conclusion, S. Muralidhar J. emphasised the importance of proper auditing of political party accounts due to their significant role in democracy and large sums of unaccounted public money. He recommended that the executive and legislature take the Law Commission of India's suggestions seriously to ensure transparency and accountability in political party operations, strengthening democracy. Delhi HC Sets Aside the Order of ITAT favouring exemption to the Janata Party u/s 13A of Income Tax Act COMMISSIONER OF INCOME TAX vs JANATA PARTY The Delhi High Court, responding to an appeal by the CIT against the "Janata Party," overturned the ITAT's decision that had cleared the party of any wrongdoing regarding the misuse of S.13A of the Income Tax Act. In 1995, the Income Tax Department issued a notice to the Janata Party to file an income tax return for the AY 1995-96. The party filed a return in 1996, declaring Rs. 68,84,800 as voluntary contributions and claimed exemption under Section 13A. However, it later claimed that this return included only the central office's accounts. In 1998, they disclosed the existence of additional bank accounts but attributed their omission to a bona fide error. The Assessing Officer determined Rs. 1,23,72,370 as taxable income, alleging concealing of income, inability to provide books of accounts, and misuse of s.13A. The Commissioner of Income Tax (Appeals) upheld this order, leading the party to file an appeal with the ITAT. The ITAT found that the Janata Party hadn't violated Section 13A and couldn't reject the accounts based on the Revenue authorities' objections. They also noted the challenges posed by a political party with a nationwide presence, having bank accounts in various locations. However, the Delhi High Court, the bench of Justice S. Muralidhar, considering the appeal by the Department, disagreed with the ITAT's decision. The Court held that the ITAT had not provided valid reasons for overturning the AO and CIT(A)'s well-reasoned orders. They deemed the ITAT's finding on the applicability of Section 13A as contrary to the evidence, ruling in favour of the Revenue and against the Assessee. Delhi HC brings “Hotel Industries” under the ambit of S. 194-I of the Income Tax Act, 1961 APEEJAY SURRENDERA PARK HOTELS LTD. AND ANR vs UNION OF INDIA & ORS In a significant ruling, the Delhi High Court clarified that Section 194-I of the Income Tax Act indeed applies to hotel industries. The judgment was delivered by a bench comprising Justices S. Muralidhar and Vibhu Bakhru. It was determined that charges for hotel rooms constitute "rent" under the provision, thereby bringing hotel industries under the scope of Section 194-I, which deals with tax deduction at source on rental payments. The petitioners in this case, APEEJAY Surendra Park Hotels Ltd and the Federation of Hotel and Restaurant Association of India, had challenged the circulars issued by the Central Board of Direct Taxes (CBDT), which sought to impose TDS on payments made by tour operators and travel agents to hotels on behalf of foreign tourists. The court upheld the validity of these circulars and emphasised that whether such payments fall within the definition of 'rent' under Section 194-I depends on the specific circumstances of each case. Delhi HC grants Exemption for Payments towards the Penal Interest for Violation of Agreement under Income Tax Act CEAT LIMITED vs THE CENTRAL BOARD OF DIRECT TAXES & ORS The Delhi High Court, in response to a writ petition filed by CEAT Ltd against the CBDT, granted an exemption to CEAT Ltd under Section 10(15)(iv)(c) of the Income Tax Act, 1961, for the penal interest amount paid due to an agreement violation. CEAT Ltd had entered into an agreement with a consortium of banks, represented by SIFL, to finance their tire cord plant in Gwalior. The agreement provided for a term loan facility, interest payments, and compliance with certain financial ratios. The Department of Economic Affairs had previously approved the foreign exchange loan, including interest payments, under Section 10(15)(iv)(c). CEAT Ltd had sought a refund of tax deducted at source (TDS) on the penal interest, as it was considered interest within the Act's definition and exempt under Section 10(15)(iv)(c). The ITO rejected the application for a refund, arguing that only SIFL, as the tax deductor, could apply for the refund. CEAT Ltd appealed to the CIT(A) and also requested the CBDT for necessary instructions under Section 119 of the Act, but their requests were denied. The High Court invalidated the CBDT's order on the grounds of a lack of natural justice principles and misinterpretation of the agreement clauses, directing the DCIT to grant the exemption to CEAT Ltd. Calcutta HC allows deduction for the Expenses Incurred in Development of Software Application u/s 36(1)(iii) of the Income Tax Act INDIAN ALUMINIUM COMPANY LIMITED vs COMMISSIONER OF INCOME TAX- III, KOLKATA The Calcutta High Court delivered a significant judgment on March 18th, granting a deduction under Section 36(1)(iii) to M/s. Indian Aluminum Company Ltd for expenses related to application software development. The company, engaged in aluminium production, incurred an expenditure of Rs. 41,08,556 on software development, treating it as deferred revenue expenditure. They amortised Rs. 2,40,000 in the Profit and Loss Account. The assessing officer earlier disallowed the expenditure, deeming it capital expenditure. The CIT(A) ruled in favour of the assessee, but the Tribunal reversed this decision, holding it was capital in nature. The High Court ruled in favour of the assessee, stating that application software expenses should be considered revenue expenditure. They invalidated the Tribunal's order and clarified that, as per Explanation-8 to Section 43(1) of the Act, interest paid on borrowed funds used for acquiring capital assets in an ongoing business could be deducted under Section 36(1)(iii) of the Act. A Foreign Company’s Obligation to Withhold Presumptive Tax and Deposit it with the Department u/s 44D(b) of the Income Tax Act is Optional; Calcutta HC M/S TIMKEN INDIA LIMITED AND OTHERS vs DEPUTY COMMISSIONER OF INCOME TAX The Calcutta High Court's landmark decision clarified that foreign companies can choose whether to deposit presumptive tax. It involved a foreign company providing technical services to its Indian subsidiary at cost. The Indian subsidiary sought tax deduction exemption, which the assessing officer denied, saying it should be addressed during regular assessments. The court confirmed that resident assesses must deposit presumptive tax. However, foreign companies under Section 44D(b) can still claim deductions, allowing them to seek refunds after tax withholding during remittances by residents. This upholds their right to claim deductions if they can substantiate their eligibility under the Act. Tax Liability of Foreign Company u/s 44BB towards the Income earned by them in India is subject to the PE concept: Delhi HC PGS EXPLORATION (NORWAY) v. ADDITIONAL DIRECTOR OF INCOME TAX The appellant, PGS Exploration, a Norwegian company, provides geophysical services worldwide, primarily seismic data acquisition for hydrocarbon exploration. They were engaged by Indian companies, B.G. Exploration and Production India Limited and Reliance Industries Limited. PGS opted for a presumptive tax under Section 44BB(1) of the Income Tax Act at a 10% rate. The Income Tax Authorities approved lower TDS rates. However, the Assessing Officer rejected this, deeming their income as "fees for technical services" under Section 9(1)(vii) of the Income Tax Act, 1961, taxed under Section 115A. Disputing this, the appellant appealed to the Dispute Resolution Panel (DRP) and the Tribunal, both of which upheld the decision. The Tribunal referred the matter to the AO for a determination on the existence of a Permanent Establishment (PE) in India. The Delhi High Court affirmed the Tribunal's decision, stating that income was taxable under Section 44BB only if a PE existed in India. The case was remanded to the Assessing Officer for assessment under Section 44BB of the Income Tax Act. Benefit from waiving loan amount by the Bank in one time settlement is an ‘income’ from Business; Madras High Court COMMISSIONER OF INCOME TAX vs M/S. RAMANIYAM HOMES P. LTD In a recent judgment, the Madras High Court ruled that the benefit received from a bank's waiver of a portion of a loan under a one-time settlement falls under the category of 'income' from business according to Section 28(iv) of the Income Tax Act. The court was hearing an appeal by the Commissioner of Income Tax, Chennai. The court emphasised that even though the benefit may not directly arise from "the business" of the assessee, it certainly arises from "business." The absence of the prefix "the" before "business" makes a significant difference. The court also explained that when an asset is used, the interest paid on the capital borrowed to acquire the asset can be deducted. When the loan amount is repaid, two entries are made in the books of account – one in the profit and loss account for payments and another in the balance sheet for the outstanding loan. However, when a portion of the loan is waived by the lender, only one entry is made in the books, reducing the total loan amount on the balance sheet and increasing the amount shown as Capital Reserves. Alternatively, the waived portion of the loan is treated as a capital receipt in the profit and loss account itself. Compensation of MACT shall not come under the ambit of ‘Income’, TDS cannot be deducted for Compensation; Madras HC THE MANAGING DIRECTOR vs CHINNADURAI CITATION: 2016 TAXSCAN (HC) 105 In a significant ruling, the Madras High Court declared that Tax Deduction at Source (TDS) cannot be deducted from compensations awarded by the Motor Accidents Claims Tribunal (MACT). The court considered whether it was appropriate to insist on TDS for the interest accrued on compensation under the Income Tax Act, 1961. The Tamil Nadu State Transport Corporation argued that Sections 194-A and 156 of the Income Tax Act required TDS on the interest portion awarded by MACT. The court, however, rejected this argument, emphasising the larger public interest involved. Justice M.V. Muralidharan noted that compensation cannot be treated as income, as its purpose is to restore and rehabilitate victims of motor accidents. The court ruled that social welfare legislation, such as the Motor Vehicle Act, takes precedence over taxation legislation. The Petitioner Corporation was directed not to deduct TDS, and any such deducted amounts were to be deposited in addition to the already awarded compensation. “Fee for Non-Compete” is a Capital Receipt, and Hence, not Taxable under the Income Tax Act; Madras HC COMMISSIONER OF INCOME TAX vs M/s.TTK HEALTHCARE LTD., In a recent case, the Madras High Court ruled that a fee paid by a company for a Non-Compete agreement is considered a capital receipt, not revenue, for Income Tax purposes. The court was reviewing an appeal filed by the Revenue. The case involved M/s TTK Bio-med Limited, which received a non-compete fee from London International Group PIC when it discontinued its condom business. The Assessing Officer had initially considered this fee as revenue, but the Income Tax Appellate Tribunal later determined it to be a capital receipt. The High Court upheld the Tribunal's decision, emphasizing that compensation for impairing a source of income should be treated as a capital receipt. It noted that the introduction of Section 28(va) in the Income Tax Act from April 1, 2003, removed the distinction between such receipts. This ruling aligns with a recent Delhi High Court decision in the case of Priya Desh Gupta vs. Deputy Commissioner of Income Tax, which also stated that non-compete fees are not considered business income and dismissed reassessment proceedings against the Assessee. Services of Construction & Installation Cannot be termed as “Fees for Technical Services”: Delhi HC TECHNIP SINGAPORE PTE LTD. vs DIRECTOR OF INCOME TAX & ANR. CITATION: 2016 TAXSCAN (HC) 101 In a recent decision, the Delhi High Court ruled that services related to construction and installation cannot be classified as "fees for technical services." The case pertained to an order passed by the Authority of Advance Ruling (AAR) in a petition by M/s Technip Singapore PTE Ltd. M/s Technip Singapore PTE Ltd. is a provider of offshore construction and engineering services to the oil and gas industry. They had entered into a contract with IOCL for offshore construction work involving the installation of equipment. The AAR had initially classified the income under the contract as taxable in India as "fees for technical services." However, the High Court found that the payment for mobilisation/demobilisation and installation could not be treated as royalty or fees for technical services. The services provided were related to construction and installation of equipment and did not involve the transfer of technology, skill, experience, or know-how. Therefore, the court quashed the AAR's order, stating that the work of installation was not ancillary to the mobilisation/demobilisation, and the payment for installation did not qualify as fees for technical services. Income from windmill division entitled for deduction under Section 80IA of Income Tax Act; Madras HC THE COMMISSIONER OF INCOME TAX vs M/s.PREM TEXTILE INTERNATIONAL The Madras High Court's division bench recently ruled that income from a windmill division is eligible for deductions under Section 80IA of the Income Tax Act, 1961. The case involved M/s. Prem Textile International, which is engaged in exporting home textile products and generating power through wind energy. The Commissioner of Income Tax had challenged the Income-Tax Appellate Tribunal's order, arguing that the Tribunal erred in allowing the deduction under Section 80-IA for the windmill division. However, the High Court upheld the Tribunal's decision, citing a previous case involving Velayudhaswamy Spinning Mills Pvt. Ltd., which had similar circumstances. The Court concluded that the orders of the appellate authority and the Tribunal were valid and there were no grounds to reverse them. Therefore, income from the windmill division qualifies for deductions under Section 80IA. No need to deduct TDS from payment of the religious Priests and Nuns; Madras HC THE CORRESPONDENT, HOLY CROSS PRIMARY SCHOOL vs THE PCIT In a recent judgment, the Madras High Court quashed an order that required the petitioner, Holy Cross Primary School, to deduct TDS from the salaries of religious nuns. The petitioners are part of Catholic institutions, including religious priests and nuns working in schools owned by Catholic dioceses, congregations, or institutions. The issue revolved around TDS being deducted when salaries were paid directly by the government to religious priests and nuns, who, in turn, transferred their salaries to their respective dioceses or congregations. The court emphasised that the government is the paying authority, and the Income Tax Department will grant exemptions from TDS upon receiving these affidavits and being satisfied that salaries are paid to the diocese or congregation, not to the individuals. Assesse cannot be asked to pay Tax twice; Gujarat HC slams Income Tax dept. for Technical Snag RAMSANGBHAI BANABHAI CHAUDHARY vs INCOME TAX OFFICER The Gujarat High Court division bench criticized the Income Tax department for a technical glitch in their computer system. The petitioner, an Additional District and Sessions Judge in Rajkot, had his salary income subject to tax deduction at the source. The department, while deducting and depositing the tax regularly, experienced a technical issue that prevented the correct tax figures from being reflected in their system. As a result, the department issued a demand for Rs. 1,38,683 from the petitioner for outstanding tax dues. The court, composed of Justice Akil Kureshi and Justice A J Shastri, ruled that the petitioner should not be asked to pay tax twice due to a technical defect in the department's system. Consequently, all demand notices and proceedings against the assessee were quashed. Amendment to the definition of ‘charitable purpose’ would not give jurisdiction to Commissioner of Income Tax to cancel the Registration; Bombay HC DIT(EXEMPTIONS) v. M/s KHAR GYMKHANA The dispute centered around whether the amended Section 2(15) of the Act, which restricted the definition of "charitable purpose" by excluding certain business activities exceeding Rs. 25 lakhs, would allow the Director of Income Tax to cancel registration under Section 12AA(3) of the Act. The Tribunal's order allowed the Assessee's appeal, setting aside the cancellation of registration under Section 12AA(3). The Tribunal held that cancellation is only permissible when the activities of the trust or institution are not genuine or are not being carried out in accordance with their objects, which wasn't the case here. The Bombay High Court division bench ruled that an amendment to the definition of charitable purpose by adding a proviso does not automatically grant jurisdiction to the Commissioner of Income Tax to cancel registration under Section 12AA(3) of the Income Tax Act. The Court, while dismissing the appeal by the Director of Income Tax (Exemptions), emphasised that registration can only be cancelled if there is a change in the nature of the institution's activities or if the activities are not genuine. The Circular supported this position by stating that registration would continue even when business receipts exceed Rs. 25 lakhs, allowing the Assessing Officer to deny exemption for the specific assessment year. Assessment completed against an Amalgamating Company even after Amalgamation is Valid: Calcutta HC CIT vs M/S. SHAW WALLACE DISTILLERIES LTD. The Calcutta High Court upheld an Income Tax Department assessment against a company after it concealed its merger and filed a return. The assessing officer made additions and initiated proceedings. The company claimed it had merged with another company, and the lower authorities agreed. However, the High Court determined that under the Income Tax Act, all pre-merger liabilities became the responsibility of the merged company. Despite the company's silence and actions, the order from March 31, 2005, related to the assessment year 2002-2003 remained valid. Consequently, the Court ruled in favour of the Income Tax Department, finding that the lower authorities had made an incorrect decision. Income from Letting out the Godown ‘may be’ treated as business income: Calcutta High Court ARVIND AND COMPANY v. CIT In this case, the Calcutta High Court stated that income from renting out a godown could be considered as business income, contrary to it being classified as income from a house property. The case involved a firm that had stopped its cotton business and began renting out a godown. The firm argued that the interest payment to partners, as per their Partnership Deed, should be allowed as a deduction under Section 40(b)(iv) of the Income Tax Act. The Revenue contended that, since the business had closed and there was no intention to resume it, the income should be considered from a house property. The Court determined that the question of whether the business had permanently closed or could potentially resume was a matter of fact, requiring documentary and other evidence. Similarly, whether the interest payment was authorized by the Partnership Deed had not been addressed by statutory authorities. The Court found merit in considering the income from the godown rental as business income. Consequently, the Court remanded the case to the Assessing Officer to assess whether the income should be treated as business income and whether the interest payment to partners could be allowed as a deduction, based on appropriate evidence and in accordance with the law. An Order for Re-assessment passed against a non-existing entity is invalid: Bombay HC JITENDRA CHANDRALAL NAVLANI & ANR. vs UNION OF INDIA The Bombay High Court, in a recent ruling, declared that a reassessment order against a non-existing entity is beyond the jurisdiction of the tax authorities. In this case, the Assessing Officer had issued a notice to reopen the assessment for the Assessment Year 2008-09 to M/s. Addler Security Systems Pvt. Ltd., which had dissolved. The Director of the dissolved company pointed out that it no longer existed. Despite this, the Assessing Officer proceeded to pass an assessment order for the dissolved entity. The High Court, in a writ petition, invalidated both the notice and the assessment, emphasising that they were issued in relation to a non-existing entity, and therefore, lacked jurisdiction. Assessee is entitled for deduction u/s 43B of the Income Tax Act to the interest on loan waived by bank in one time settlement: Madras HC CIT vs M/s.SAMUDRA SHOE OVERSEAS LTD., The Madras High Court, in agreement with the ITAT decision, ruled that the assessee is eligible for a deduction under Section 43B of the Income Tax Act for interest on a loan waived by the bank in a one-time settlement. The Commissioner of Trichy had challenged this decision on the grounds of substantial questions of law. The appellant argued that the Tribunal was mistaken in allowing the deduction because the assessee hadn't actually paid the interest, and Section 43B only permits deductions for interest paid to financial institutions before filing the income tax return. However, the division bench, consisting of Justice S.Manikumar and Justice D.Krishna Kumar, rejected the appellant's contentions and upheld the Tribunal's decision in favour of the assessee. Claim towards Stamp Duty expenses incurred by the Assessee should be allowed under Income Tax Act; Gujarat HC M/S. PRITHVI ASSOCIATES vs Asst. CIT The Gujarat High Court ruled that the Assessee's claim for exemption on Stamp Duty expenses incurred while entering into a contract is eligible under the Income Tax Act. The Division Bench invalidated the Appellate Tribunal's order and upheld the claim made by the Assessee. The Assessee sought an allowance of Rs. 12,28,560 for stamp duty expenses incurred in a contract with the Maharashtra State Road Transport Corporation. The Assessing Officer initially disallowed the claim, but the CIT(A) allowed it on appeal. The Revenue then appealed the CIT(A)'s decision to the Tribunal, which reversed the decision and reinstated the disallowance. The Assessee challenged the Tribunal's decision in the High Court, arguing that the Tribunal had erred in setting aside the CIT(A)'s order. The Court agreed with the Assessee, stating that the payment of stamp duty was compulsory under the Bombay Stamp Act and did not affect future profits. The Court emphasised that accounting practices cannot override the provisions of the Income Tax Act and that such compulsory statutory levies should be allowed as a whole in the year they are incurred. Therefore, the Court allowed the Assessee's appeal and ruled in their favour. Revenue cannot verify the Claim of Deduction already approved by the prescribed Authority under Income Tax Rules; Gujarat HC PCIT vs B.A.RESEARCH INDIA LTD The Gujarat High Court ruled that once the prescribed authority grants approval for a deduction under income tax rules, the revenue authorities cannot re-examine the conditions. The case involved an Assessee who claimed a deduction under section 80IB(8A) of the Income Tax Act for income derived from research and development activities, including storing clinical samples. The Assessing Officer disallowed the claim, leading to an appeal and a revision petition. The Commissioner believed the assessment was erroneous and prejudicial to the Revenue and directed a fresh assessment. The Tribunal overturned the Commissioner's decision, emphasising that revenue authorities cannot challenge the prescribed authority's approval. The Revenue appealed to the High Court, arguing that the prescribed authority's approval is just one of the conditions to be fulfilled, and in this case, the Assessing Officer had granted the deduction without verifying other conditions. The High Court determined that the prescribed authority is a specialised body with expertise in scientific research and development. The relevant requirements are complex and best assessed by such an expert body. Once the prescribed authority has granted approval, the Assessing Officer cannot ignore it and conclude that the prescribed conditions are not met by the Assessee. Therefore, the Court ruled in favour of the Assessee. Surplus Funds invested with Companies would fall within the meaning of ‘interest’ u/s 2 (7) of the Interest Tax Act; Delhi HC HOUSING & URBAN DEVELOPMENT CORPN. LTD. vs THE DY. COMMISSIONER OF INCOME TAX The Delhi High Court has ruled that surplus funds invested with companies do not fall under the definition of 'interest' in the Interest Tax Act. The case involved HUDCO, a housing finance company that deposited surplus funds with Steel Authority of India Limited (SAIL). The Assessing Officer and Commissioner of Income Tax (Appeals) initially rejected HUDCO's argument that the interest earned on the deposit was not considered 'interest' under the Act. However, the Appellate Tribunal overturned these decisions, stating that the funds deposited with SAIL could be considered a loan for which interest compensation was paid. The High Court agreed with the Tribunal, stating that the Act's definition of 'interest' was exhaustive and did not include interest on deposits. The Court also noted that the Special Bench of the ITAT had correctly rejected the argument that interest on deposits should be included in the definition. “Both Employees’ Contribution & Employer’s Contribution to EPF are covered u/s 43B of Income Tax Act”; Patna HC M/s BIHAR STATE WAREHOUSING CORPORATION LTD. vs CIT The Patna High Court's Division Bench has ruled that both employers' and employees' contributions to the Employees' Provident Fund (EPF) should be treated the same under the provisions of Section 43B of the Income Tax Act, 1961. The Court held that no distinction should be made when allowing deductions for both these contributions. In the case in question, the Assessing Officer disallowed the payment of the employer's contribution to the EPF under Section 43B, and also treated the employee's contribution as "Income from Other Sources." The Court agreed with the argument that both contributions should be treated the same under Section 43B. However, the disallowance of the amount provided for gratuity was upheld as the provision for payment of gratuity had not been made towards an approved gratuity fund and had not become payable during the financial year in question. Delhi HC Invalidates the Order of Income Tax dept to Attach the Property Against which SARFAESI Proceedings are Completed SURESH KUMAR GOYAL vs CHIEF COMMISSIONER INCOME TAX-2 & ORS. The Delhi High Court division bench recently nullified an attachment order by the Income Tax Department for income tax recovery. This decision was based on the fact that proceedings under the SARFAESI Act were initiated prior to the tax department's order. The case involved a property purchased by the petitioner through a public auction by IDBI Bank. The property was previously under tax recovery proceedings for the owner's tax dues and was also mortgaged to IDBI Bank. The bank initiated SARFAESI proceedings in 2012. In 2013, the Tax Recovery officer issued an attachment order for the property. In 2014, the bank took possession of the property. The bank informed the tax officer about the mortgage and SARFAESI proceedings. In 2015, the property was auctioned, and the petitioner purchased it. The bank frequently informed the tax officer about the sale. The tax officer requested payment of tax dues, and the petitioner paid a portion to the bank. The bank issued a sale certificate for the property in favour of the petitioner. However, it did not mention the tax department's attachment order. When the petitioner tried to register the sale deed, the Sub-Registrar requested a No-Objection Certificate (NOC) from the tax officer. The petitioner requested a refund from the bank, but their efforts to cancel the attachment order failed. The petitioner filed a writ petition challenging the tax officer's order and requested the court to direct the Sub-Registrar to register the sale deed. The court found that the SARFAESI notice was issued before the tax department's attachment order and that the tax department couldn't prevent the registration of the sale deed. The court set aside the attachment order passed by the Tax Recovery officer. Overseas owner not bound to Income Tax for the Income from IPR Transfer: Delhi High Court CUB PTY LIMITED (FORMERLY KNOWN AS FOSTER'S AUSTRALIA LTD) vs UOI & ORS The Delhi High Court ruled that an owner residing abroad is not liable for income tax on income from the transfer of intellectual property rights, such as logos, brands, and trademarks. The case involved a petition filed by Cub Pty Limited (formerly known as Foster's Australia Ltd) regarding the location of intangible assets, which are considered capital assets. Section 9(1)(i) of the Income Tax Act, 1961, states that income arising from the transfer of a capital asset situated in India is deemed to have accrued or arisen in India. The division bench invalidated the order of the Authority for Advance Ruling (Income Tax), New Delhi, which claimed that the income from the transfer of trademarks and Foster's Brand Intellectual Property accrued in India and was taxable under the Income Tax Act, 1961. The court emphasized that the situs (location) of intangible assets should follow the principle of "mobilia sequuntur personam," meaning that the location of intangible assets is determined by the owner's location. As the owner of the trademarks and intellectual property was not in India during the transaction, the court concluded that the situs of these assets was not in India. No provision for ‘detention of goods’ under the Customs Act, rules Delhi High Court WORLDLINE TRADEX PRIVATE LIMITED vs THE COMMISSIONER OF CUSTOMS (IMPORT) & ORS. The Delhi High Court ruled that there is no provision in the Customs Act that justifies the detention of goods by authorities, including Customs or DRI (Directorate of Revenue Intelligence), without recording reasons. The petitioner, Worldline Tradex Private Limited, engaged in importing mobile accessories, faced a situation where their goods were detained. They had imported unbranded mobile accessories and other items. Despite multiple requests and communication with authorities, the goods were not released. The division bench of Justice S. Muralidhar and Justice Najmi Waziri pointed out that the Customs Act does not allow for the simple detention of goods without reason. They emphasised that the proper officer must record reasons to believe that the goods are liable for confiscation under the Act before seizing them. The court noted that in this case, no such order was issued, and no reasons to believe that the goods were liable for confiscation were recorded. The court ruled that the detention of the petitioner's goods was without legal authority and should not be considered a valid seizure under Section 110(1) of the Customs Act. This judgment clarified the necessity of recording reasons before detaining or seizing goods and highlighted that detention without such reasons is not in accordance with the law. Proceedings u/s 38 of the DVAT Act cannot result In reopening of concluded assessment; Delhi HC NUCLEUS MARKETING & COMMUNICATION vs COMMISSIONER OF DELHI VALUE ADDED TAX, DEPARTMENT OF TRADE & TAXES The Delhi High Court held that proceedings under Section 38 of the Delhi Value Added Tax Act (DVAT), which pertain to refund claims, cannot be used to reopen a concluded assessment. The court also noted that the reason for reassessment is not a valid ground for rejecting a refund claim. The petitioner, Nucleaus Marketing and Communication company, sought a refund with interest in accordance with Section 38 of the DVAT Act. The refund was due for specific periods, and the petitioner had followed the prescribed procedures. The petitioner argued that, according to the law, the refund should have been issued within a specified time frame, but it was not. The Department contended that they had initiated a reassessment due to certain documents found during a survey at the petitioner's business premises, and therefore, the refund could not be granted at that stage. The court emphasized that there are strict time limits outlined in the DVAT Act, and the Commissioner should have adhered to those time limits. The court pointed out that the proceedings under Section 38 cannot be used to reopen a concluded assessment, and the proper course of action for reassessment is different. In conclusion, the court found that the failure to process the refund claimed by the petitioners for the specified tax periods was unjustified. The court ruled that the Department could not raise objections to the refund and interest claimed by the petitioners in light of the legal principles explained in the judgment. Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates

Case Digest on Income Tax Judgments by High Courts 2016-17 – Part 1

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