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GIST OF CASE LAWS

S. No Case law Issues discussed

1 GOETZE LIMITED Vs. Assessee company first filled return of

COMMISSIONER OF income then claimed deduction through letter.
INCOMETAX Disallowed as that can be done by filling
revised return.
2. KELVINATOR OF INDIA Reopening of assessment
LIMITED Vs. Reopening cannot be done without material
COMMISSIONER OF evidence. Before 1989, the AO should record
reason in writing after 1989 not necessary.
INCOMETAX
3 UP FOREST Claiming exemption as trust
CORPORATION AND The precondition is registration u/s 12A in form 10A
within one year delay can condoned by CCIT/CIT
OTHER Vs. DCIT
4. P.V.A.L. KULANDAGAN Double taxation
CHETTIAR Vs. Assessee having business income and capital gain
COMMISSIONER OF in Malaysia
INCOMETAX Not taxable in India as the Provision of DTAA
prevails over the Act.
5 BROOKE BOND INDIA Expenditure in connection with issue of share
LIMITED Vs. capital whether revenue or capital
COMMISSIONER OF Decide as capital expenditure can’t be claimed as
INCOMETAX business expenditure

6 ANAND THEATRES Vs. Depreciation for building claimed by assessee

COMMISSIONER OF plant (for higher rate).
INCOMETAX
Even building constructed with specification, it
cannot be considered as plant. As per act, plant is
an inclusive and those included are moveable
hence building cannot be considered as plant

7 PODAR CEMENTS Ownership of house property

PRIVATE LIMITED Vs. Not as per common law but as IT law. The person
COMMISSIONER OF should enjoy the property as owner and not on
INCOEMTAX behalf of owner

8 SAHELI LEASING AND Concealment of income and penalty

INDUSTRIES LIMITED Even if there is no income or there is a loss and if
Vs. JOINT the AO found there is concealment, then penalty
COMMISSIONER OF can be levied.
INCOMETAX
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9 TRF LIMITED Vs. Writing off of bad debts

COMMISIONER OF The assessee can write off bad debts when he has
INCOMETAX bad debts, previously before 01/04/89, the bad
debts should be established
10 SHAMBU Property let out with other amenities cannot be
INVESTMENTS (P) considered as business income, and it should be
LIMITED Vs. considered as income from house property
COMMISSIONER OF
INCOMETAX

11 TRILOK NATH Salary paid to member of HUF from firm whether

MAHROTRA Vs. individual income or income of HUF, if it is part of
COMMISSIONER OF return for the investment made HUF in the firm,
INCOMETAX then it is income of HUF

12 CHELLAPALLI SUGAR Cost of asset for the purpose of claiming

LIMITED Vs. depreciation. Interest paid before
COMMISSIONER OF commencement of business will be included in
INCOMETAX. the cost of asset

13 TUTICORINALKALI Income earned before commencement of

CHEMICALS AND business will not be considered as capital and will
FERTILISER LIMITED Vs. be charged as income from other sources
COMMISSIONER OF
INCOMETAX

14 MC. DOWELL AND CO Tax evasion and tax avoidance

LIMITED Vs. Excise duty paid by buyer will be included in the
COMMERCIAL TAX amount of turnover
OFFICER

15 BRITISH PAINTS INDIA Valuation of stock cost or market price which ever
LIMITED Vs. is less. The company excluded the cost of
COMMISSIONER OF overhead and considered only the cost of raw
INCOMETAX
material which is wrong.
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1. GOETZE LIMITED Vs. COMMISSIONER OF INCOMETAX

Section involved 139 and 254

Issue involved: way of claiming deduction.

Assessee filed return for the assessment year 1995-96 on 30/11/1995

Later, claiming deduction by writing letter to the assessing officer on

12/01/1998 stating that they can raise the point of law even before the appellate

tribunal.

The Assessing officer disallowed the claim on the ground that amendment is
possible only through revised return and not by letters.

The Assessing Officer view was affirmed by the CIT (A), Tribunal and Supreme
Court.

2. KELVINATOR OF INDIA LIMITED Vs. COMMISSIONER OF INCOMETAX

Section involved 147

Issue involved: Reopening of assessment

The Assessing officer cannot reopen an assessment mere because of change

of opinion. There must be tangible material evidence to come to the conclusion that
there was escapement of income from assessment.

Prior to 01/04/1989, the reason for reopening of assessment should be

recorded by the Assessing officer in writing. After an amendment with effect from
01/04/1989, the Assessing officer can reopen assessment when there is any reason to

believe.
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3. UP FOREST CORPORATION AND OTHER Vs. DCIT

Section involved: 11(1)(a)

Issue involved: claiming exemption and registration u/s12A

The assessee company is a corporation constituted under UP forest Act and

claimed exemption for their income as they are the local authority as per section
10(20) of the Income tax Act and also contended that eligible for exemption under

section 11(1)(a). The CIT (A) and tribunal stand by the above view.

Based on SLP filled by the revenue, the SC held that the term local authority

not defined in the act and rejected the appeal of the assessee. As far as claiming
exemption u/s11(1)(a) registration u/s12A in Form 10A is to be made before the

expiry of one year from the date of creation of the trust or the establishment of the

institution whichever is later. The CIT/CCIT vested with discretionary power to admit
application after the expiry of the prescribed period.

However, section 12A registration is precondition for claiming exemption

u/s11(1)(a). Without registration exemption cannot be claimed. Hence, the revenue

stand is affirmed.

4. P.V.A.L. KULANDAGAN CHETTIAR Vs. COMMISSIONER OF INCOMETAX

Section involved: 4 and 5

Issue involved: Double taxation.

The assessee is a citizen of Malaysia having business income and income from
capital gains in Malaysia. The business income and income from capital gains

whether taxable in India.

Section 90 of the Income tax Act 1961 says that the global income is taxable

as per section 4 and 5 subject the provision contained in the Double Taxation
Avoidance Agreement.
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Section 90(2) of the Act says that if there is any conflict between the act and
the provision of DTAA, the provision prevails over the act.

If the assessee is a resident of a foreign country his residence in India become

irrelevant and DTAA prevails over section 4 and 5.

Accordingly, the business income and capital gain earned in Malaysia is not

taxable in India.

5. BROOKE BOND INDIA LIMITED Vs. COMMISSIONER OF INCOMETAX

Section covered: 37

Issue involved: Expenses in connection with issue of shares whether capital or

revenue.

Brooke bond India Limited issued shares of Rs.1675000/- of Rs.10/- each and

incurred an expenditure of Rs.1399305/- in connection with issue of shares and

claimed it as deduction from the profit stating that

The additional capital issued was to meet the need for working capital

requirement of the company(Working capital means the funds require to run the day
to day business) which in turn gives more profit to the concern. Therefore the

expenditure should be considered as revenue and not as capital.

The Assessing officer dismissed the claim and treated the expenditure as
capital.

The Supreme Court, citing the Punjab State Industrial Development

Corporation limited Vs. CIT (where the assessee claimed fees paid to the Registrar of
companies in connection with enhancement of capital as revenue which was

dismissed and treated as capital expenditure) dismissed the appeal of the assessee
and allowed the view of the Assessing officer.
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6. ANAND THEATRES Vs. COMMISSIONER OF INCOMETAX

Section covered: 32 and 43(3)

Issue involved: Assessee considered building as plant and claimed higher

depreciation.

The assessee is having two building one for theatre and one for hotel. The
assessee claimed that the building is constructed with specification suited for hotel
and theatre, hence it should be treated as plant and not as building.

There should be a distinction between premises in which business is carried

and plant with which business is carried on. Building which are constructed specially
for a specific business doesn’t make it plant.

Section 43(3) defines plant which is inclusive. Each item included under

section is moveable. Since, building is not a moveable one, which cannot be

considered as plant.

However, section 32(1)(v) provides that building which are constructed for a special
purpose, additional depreciation can be claimed.

7. PODAR CEMENTS PRIVATE LIMITED Vs. COMMISSIONER OF INCOEMTAX

Section covered: 22 and 27

Issue involved: Ownership of House property

As per section 22 of the Income tax Act, owner must be the person who can
exercise the right of the owner not on behalf of the owner but in his own right.

Under common law, owner means a person who got valid legal title over
property as per transfer of property Act, Registration Act.

The assessee company purchased two flats directly from the seller and two
other through sister concern in Bombay. These properties were let out and the

assessee claimed this income is income from other sources as no title deed was
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transferred in the name of the assessee and also contended that the income should
be calculated based on annual value and not on the actual rent received,

The Assessing Officer disallowed both the representation of the assessee

which was affirmed by the CIT(A), Tribunal, Supreme Court.

8. SAHELI LEASING AND INDUSTRIES LIMITED Vs. JOINT COMMISSIONER

OF INCOMETAX

Section covered: 271(1)(c)

Issue covered: concealment of income and penalty.

The assessee filled loss return for the particular assessment year and claimed

100% depreciation for plant and machinery. During assessment, the AO disallowed
depreciation and some other expenses even after that the income was nil. However,

AO charged penalty under section 271(1)(c ) in respect of depreciation.

The Assessee claimed that as there is no income no penalty should be levied.

CIT (A) dismissed the appeal. Tribunal and HC allowed and deleted the penalty.

Whereas the SC, in its judgment quoted section 271(1) [c] said mere because
of the reason that there is no income, no penalty is levied and the view of the AO is

affirmed.

Section 271(1)(c ) is to penalize the assessee

for concealing particulars of income and or furnishing inaccurate particulars of

such income, whether the returned income was profit or loss. Even if no tax was

payable penalty was still leviable.

One word occurring in different sections of the same act can have different
meanings if the objects of the two sections are different and they operate in different
fields.
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9. TRF LIMITED Vs. COMMISIONER OF INCOMETAX

Section covered: 36(i)(vii)

Issue involved: writing off bad debts

Section 36(i)(vii) was inserted by the amendment made in the Act with effect
from 01/04/1989. In the amendment, the word established was deleted.
Accordingly, with effect from 01/04/1989, the assessee can write off the bad debts in

their books and not necessary to establish that the debts are irrecoverable. However,
before 01/04/1989, it was the duty of the assessee to establish that the debts are
irrecoverable to claim deduction for bad debts.

It was held by court in the given case that, the assessing officer has not

examined, whether bad debts or part thereof is written off in the accounts of the

assessee. The mater is remitted to the AO for denova consideration.

10. SHAMBU INVESTMENTS (P) LIMITED Vs. COMMISSIONER OF INCOMETAX

Section covered: 22 and 263

Issue involved: property let out with other amenities, Business income or property

income.

The assessee company let out a part of the property with amenities such as

furniture and fixtures, lights and air conditioner, watch and ward staff, electricity,
water and other common facilities. The assessee company also received security

deposit of Rs.400000.

The assessee company received income from such property and claimed it as

business income.

The commissioner of Incometax made revision order under section 263 stating

that it is erroneous and prejudicial to the interest of the revenue and directed the
Assessing officer to reassess the same as house property income under section 22.
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It is held by the tribunal that the AO is not erroneous and prejudicial to the
interest of the revenue and cancelled the order passed by CIT.

However, it is held by the HC and SC, in the given case, the prime object was

let out the property, such income should naturally be considered as income from

house property under section 22.

11. TRILOK NATH MAHROTRA Vs. COMMISSIONER OF INCOMETAX

Section covered: 4

Issue involved: member of HUF in a partnership firm, salary to member whether

individual income or HUF Income.

If a member of Hindu undivided family joined a partnership firm and is given

salary for managing the firm or rendering special services to the firm, the salary
would be treated as his individual income.

But if the salary is paid to member for the amount invested by the HUF in the
firm or is a part of return of the investment made by Hindu Undivided family in the

partnership firm then such income should be treated as income of HUF.

12. CHELLAPALLI SUGAR LIMITED Vs. COMMISSIONER OF INCOMETAX.

Section involved: 43(1) 32 and 10 (2) (XV)

Issue considered: cost before commencement of business, wealth tax paid whether
deductible as business expenditure

The assessee company borrowed money from IFCI before the commencement
of business for installation of plant and machinery. The company also paid interest
to the financial institution and included the interest into the cost of the plant and
machinery and claimed depreciation for the entire amount.
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The company paid tax on wealth owned by the company and claimed the
wealth tax as business expenditure.

The assessing Officer disallowed the claim stating that interest is revenue

expenditure and which should not be capitalized. The AO also disallowed wealth tax

paid as business expenditure citing section 4 of the Act.

The court held that in case of claiming depreciation, there is no clear rule in
the IT Act as to the cost of the asset. Hence, what is the rule followed in accountancy

should be followed here also. As per accounting rule, cost of asset means all cost
incurred to bring such asset into existence and put them into working condition.

Accordingly, the assessee claim of including the interest paid for the borrowed

capital into the cost of asset is allowed.

As far as payment of wealth tax and deduction as business expenditure, the SC

citing the Indian Aluminum Company limited Vs. Commissioner of Incometax, states

that when a person has a dual capacity of a trader-cum owner, and he pays tax in

respect of property which is used for the purpose of trade, the payment must be
taken to be in the capacity of a trader according to ordinary commercial principles.

The SC allowed both the claims of assessee and order passed against revenue.

13. TUTICORINALKALI CHEMICALS AND FERTILISER LIMITED Vs.

COMMISSIONER OF INCOMETAX

Section covered: 56 Income from other sources 72 set off of losses

Issue involved: interest earned on short term investment before commencement of

business whether business income or Income from other sources and whether such
income used for set off of business loss.
The assessee company had taken loan from various banks and financial
institutions. The company also deposited the unused funds in banks as short term

deposits. In filling the return, the assessee company claimed this as income from
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other sources and also claimed business loss under the head business or professional
income and used the interest income for set off the business loss.
Later company filled a revised return for the above income, stating that the
income earned before commencement of business should be capitalized and also as

the company is liable to pay interest for the loan taken from various banks and
institutions this interest is used for adjusting the interest payable by the company
and accordingly there is no interest income.
The Incometax officer rejected the claim of assessee (that is no interest

income) which was upheld by the CIT (A) and tribunal.

The SC held that

Profits and gains of business or profession is only one of the heads under which the
Company’s income is liable to be assessed to tax. If a company has not commenced

business, there cannot be any question of assessment of its profits and gains of

business. That does not mean that until and unless the company commences its

business, its income from any other source will not be taxed.
The company has chosen not to keep its surplus capital idle, but has decided to

invest it fruitfully. The fruits of such investment will clearly be of revenue nature.

It is true that the company will have to pay interest on the money borrowed by it. But

that cannot be a ground for exemption of interest earned by the company by

utilizing the borrowed funds as its income.

Accordingly, the interest earned by the company is revenue in nature and as

no business is commenced such income will not taxed as business income, interest
income will be taxed as Income from other sources. Further, before commencement
business, no income is charged under the head business or profession no loss can
also be claimed.

Hence, the petitions of the assessee is dismissed and allowed in favour of the
revenue.
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14. Mc. DOWELL AND CO LIMITED Vs. COMMERCIAL TAX OFFICER

Issue Involved: tax evasion and tax avoidance.
The company was a licensed manufacturer of Indian liquor. Buyers of Indian
liquor from the assessee company’s distillery obtain distillery passes for release of

liquor after making payment of excise duty and present the same at the distillery
plant, there upon the bill of sale or invoice prepared by the distillery showing the
price of liquor but excluding excise duty. The assessee company books of account
also did not contain any reference to excise duty paid by the purchaser.

The assessee company paid sales tax to the Andhra Pradesh government
based on turnover excluding the excise duty which was not accepted by the AP sales

tax authorities as turnover includes excise duty.

The matter referred to SC in the year 1982-83 and held by the SC that the

view of the Sales tax authorities were correct as turnover should not be included with

excise duty, since the excise duty did not go into the common till of the company

and did not become a part of the circulating capital.

The AP government amended the AP distillery Rules No. 76 with 76(a) stating

that "No spirit of liquor" manufactured or stored shall be removed unless the Excise

duty specified in rule 6 has been paid by a holder of D-2 licence. Based on the

amendment, the AP sales tax authorities issued notice to the company to tax for the
excise duty which directly paid by the buyer in the year 1982-83. The Company

moved to the high court to quash the notice.

The High Court dismissed the writ petition on the findings (a) that the turnover
related to liquor; and (b) that the excise duty which was payable by the appellant but
had by amicable arrangement been paid by the buyer was actually a part of the
turnover of the appellant and was, therefore, liable to be so included for determining

liability for sales tax.

Tax planning may be legitimate provided it is within the framework of law,
Colourable devices cannot be part of tax planning and it is wrong to encourage or

entertain the belief that it is honourable to avoid the payment of tax by resorting to
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dubious methods. It is the obligation of every citizen to pay the taxes honestly
without resorting to subterfuges.
In the given case, the incidence of excise duty is directly relatable to
manufacture but its collection can be deferred to a later stage as a measure of

convenience or expediency.
The change in Rule 76 of the AP Distillery Rules has clearly affirmed the
position that liability for payment of excise duty is of the manufacturer and the
provisions of rules 80 to 84 do not militate against it. These rules do not detract from

the position that payment of excise duty is the primary and exclusive obligation of
the manufacturer and if payment be made under a contract or arrangement by any

other person it would amount to meeting of the obligation of the manufacturer and
nothing more.

Excise duty though paid by the purchaser to meet the liability of the appellant,

is a part of the consideration for the sale and is includible in the turnover of the

appellant. The purchaser has paid the tax because the law asks him to pay it on
behalf of the manufacturer.

Hence, the petition of the assessee company is dismissed.

15. BRITISH PAINTS INDIA LIMITED Vs. COMMISSIONER OF INCOMETAX

Section Involved: 145

Issue discussed: valuation of stock

The assessee company engaged in the business of manufacturing paints
consistently valued stock at cost of raw materials price excluding the overheads
stating the reason that the goods manufactured by them being the paints is having
limited storage life and if not sold within a limited period will have no market value.

The Incometax Officer rejected the arguments of the company on the grounds
that the well framed accounting rule is stock should be valued at cost or market price
which ever is less. Further, the assessee at no time claimed any deduction for

deterioration or damage to goods in the income statements.

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The CIT (A) and Tribunal upheld the decision of the AO. However, the High
court reversed the decision of the tribunal.
Based on the appeal by the revenue, the SC held that
It is not only the right, but the duty of the Assessing Officer to consider

whether or not the books disclose the true state of accounts and the correct income
can be deducted therefrom. It is incorrect to say, as contended on behalf of the
assessee, that the Officer is bound to accept the system of accounting regularly
employed by the assessee the correctness of which had not been questioned in the

past. There is no estoppel in these matters, and the Officer is not bound by the
method followed in the earlier years.

Accordingly, the appeal is allowed in favour of the revenue.

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PRIVOUS YEAR ‘S OBJCTIVE TYPE QUESTIONS

1. In which of the following decisions the Supreme Court held that tax planning may
be legitimate provided it is within the frame work of tax, colorable devices cannot be
part of tax planning?

A CIT Vs. Podar Cements private limited

B CIT Vs. British Paints India limited

C Mc.Dowell and co limited Vs. Commercial tax Officer

D CIT Vs. Shree sajjan mills limited

2. In which of the following cases the Supreme Court has taken the view that for the
purpose of determining the actual cost for allowance of depreciation and
development rebate, interest paid on amounts borrowed for the purpose of such
depreciable assets could be treated as part of cost?
A CIT Vs. challapalli sugar limited

B CIT Vs. podar cements private limited

C Kedarnath jute manufacturing co limited Vs. CIT

D CIT Vs. Shree sajjan mills limited

3. In which of the following Supreme Court decisions it is held that interest derived by
the assessee from the borrowed fund which are invested in short term deposits in
bank would be chargeable to tax under income from other sources?

A CIT Vs. Podar Cements private limited

B CIT Vs. Tuticorin alkali chemicals and fertilizer limited

C Kedarnath jute manufacturing co limited Vs. CIT

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D None of the above

4. In which of the following decisions the Supreme Court held that any system of
accounting which excludes for valuation of the stock in trade all costs other than the
cost of raw-material for the goods I process and finished products, is likely to result
in a distorted picture of the true sate of business for the purpose of computing the
taxable income?

A CIT Vs. challapalli sugar limited

B CIT Vs. British Paints India limited

C CIT Vs. Tuticorin alkali chemicals and fertilizer limited

D None of the above

5. In which of the following cases the supreme court held that interest earned during

the pre commencement period of business was taxable?

A CIT Vs. Tuticorin alkali chemicals and fertilizer limited

B CIT Vs. Raja vinay kumar sahas

C Shree sajjan mills limited Vs. CIT

D None of the above

6. In chelapalli sugars Limited Vs. CIT it was held that

A Interest was an allowable expenditure

B Depreciation was not allowable
C Interest was includable in cost of plant and machinery
D Interest was not be capitalised

7. McDowell and Company Limited is a landmark judgement on

A Property income
B Striking at the root of attempt to legitimize tax avoidance
C Provision of bad and doubtful debts
D Agricultural income
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8. Tuticorin Alkali Chemicals Vs. CIT deals with taxability of

A Commission income
B Property income
C Interest income prior to commencement of business
D Interest income post commencement of business

9. In McDowell and Company Limited, it was held that

A Excise duty was not part of turnover

B Excise duty was part of turnover
C It is not the duty of every citizen to pay tax honestly
D Agricultural income is not taxable.

10. As per Supreme Court decision in Tuticorin Alkali Chemicals Vs. CIT the
expenditure/ loss incurred before commencement of production was held to be

A Full allowable
B Partially allowable
C Of revenue in nature
D Not allowable

11. In CIT Vs. British Paints India Limited decision was in context of

A Taxation of property income

B Inclusion of property in taxable wealth
C Valuation of closing stock
D Deduction of sales tax

12. In CIT Vs. British Paints India Limited decision it was held that

A The object of stock valuation is to correctly determine profit or loss

B Under section 145 of the Incometax Act, it is the duty of the assessing officer to
deduce correct profits and gains from the accounts maintained
C Exclusion of costs other than the cost of raw materials for valuing closing stock
will result in distorted picture of the profits and gains
D All of the above.
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13. In CIT Vs. Podar cements private limited, the meaning of owner was expounded in
the context of

A Section 2 of the IT Act.

B Section 10 of the IT Act.
C Section 22 of the IT Act.
D Wealth tax Act

1] c 2] a 3] b 4] b 5] a 6] c 7] b 8] c 9] b 10] c

11] c 12] d 13] c

The evil consequence of tax avoidance:

(i) there is substantial loss of much needed public revenue particularly in a welfare

State like ours;

(ii) there is the serious disturbance caused to the economy of the country by the

piling up of mountains of black money directly causing inflation;

(iii) there is "the large hidden loss" to the community by some of the best brains in
the country being involved in the perpetual war waged between the tax avoider and

his expert team of advisers, lawyers and accountants on the side and the tax-

gathered and his perhaps not so skillful, advisers on the other side;
(iv) there is the "sense of injustice and inequality which tax avoidance arouses in the
breasts of those who are unwilling or unable to profit by it"; and

(v) last but not least is the ethics (to be precise, the lack of it) of transferring the

burden of tax liability to the shoulders of the guideless, good citizens from those of
the "artful doggers.