Category Archives: Taxation

IT Auction Sales Sacrosant

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In an appeal filed by Janatha Textiles, a partnership firm of Radhey Shyam Modi, Pawan Kumar Modi, Padmadevi Modi and Indira Chirmar, a firm that had been in tax arrears, the Supreme Court not only said that the IT department could attach the property of defaulters to recover the debt but also that if it sold the property, the sales were sacrosanct.

A Bench of the Supreme Court comprising Justices Ashok Bhan and Dalveer Bhandari held that auction sales by the Income Tax Department could not be interfered with unless there were grave irregularities in the process of sale. It said that it was necessary to extend such protection to such sales to ensure that auctioned property fetched the market value or fair price of the property.

Auctions are usually governed by Sections 64 and 20 of the Sales of Goods Act, and relevant case law. There are also provisions in the Port Trust Act and the Code of Civil Procedure which deal with certain kinds of auctions although the provisions in these two statues are not universally applicable.

In addition to statutory provisions, the terms of the auction concerned also play a role of vital importance. Auctions are merely a kind of sale, and the terms of the auction are a reflection of the intention or to parties. Although goods are usually sold by an auctioneer on behalf of the owner, there is nothing to stop a person from selling his own goods in an auction.

An auction is not in itself an offer, it is merely an invitation to treat. In other words, each bid made at an auction is an offer and it is open to the auctioneer to accept or reject that offer provided that he acts in accordance with the terms of the auction. The general principle of the auction is, however, that every higher bid supersedes the previous bid.

The concept of an auction Section 64 of the Sale of Goods Act is a guiding factor on the principles of an auction. It says:

In the case of sale by auction–

(1) where goods are put up for sale in lots, each lot is prima facie deemed to be the subject of a separate contract of sale;

(2) the sale is complete when the auctioneer announces its completion by the fall of the hammer or in other customary manner; and, until such announcement is made, any bidder may retract his bid;

(3) a right to bid may be reserved expressly by or on behalf of the seller and, where such right is expressly so reserved, but not otherwise, the seller or any one person on his behalf may, subject to the provisions hereinafter contained, bid at the auction;

(4) where the sale is not notified to be subject to a right to bid on behalf of the seller, it shall not be lawful for the seller to bid himself or to employ any person to bid at such sale, or for the auctioneer knowingly to take any bid from the seller or any such person; and any sale contravening this rule may be treated as fraudulent by the buyer;

(5) the sale may be notified to be subject to a reserved or upset price;

(6) if the seller makes use of pretended bidding to raise the price, the sale is voidable at the option of the buyer.

The section similar to Section 58 of the English Act, and can therefore be construed in similar terms. It is however important to bear in mind that the statutory provisions contained in Section 64 may be subject to a contract to the contrary. This effectively means that it would be the terms of the auction concerned which would prevail.

Reference materials and relevant cases:

  1. Pollock and Mulla, The Sale of Goods Act 
  2. (1869) LR 9 Eq 60
  3. [1895] All. E.R (Rep) 829
  4. [1907] 2 K.B. 1
  5. AIR 1961 Cal 54
  6. AIR 1961 MP 274
  7. [1963] Suppl. 2 S.C.R. 608
  8. Ouchterloney Valley Estates Ltd. v. State of Kerala (23.10.1964 – SC)
  9. AIR 1980 SC 1468
  10. AIR 1989 All 64
  11. AIR 1992 MP 250
  12. 2005(190)ELT161(Cal) 

DTAA with Luxembourg Announced

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The Ministry of Finance has announced that the Government of India has signed a Double Taxation Avoidance Agreement (DTAA) with the Government of the Grand Duchy of Luxembourg.

It has said that:

‘The DTAA covers income-tax and wealth tax including any surcharge thereon in the case of India. It covers income tax on individuals, corporation tax, capital tax and communal trade tax in the case of Luxembourg.

The rate of tax in the country of source cannot exceed ten percent of the gross amount of payment in case the beneficial owner of the payments (of dividend, interest, royalties, etc.) is a resident of the other country.

Capital gains from the alienation of shares are taxable in the country of the company’s residence.

Double taxation is avoided by each country giving credit for taxes paid by its residents in the other country.

To deal with fiscal evasion, information can be exchanged in cases which are under investigation in either country. Also, both countries are to assist each other in the collection of revenue.’

With reference to another DTAA, in a 2008 judgment which dismissed the IT Department’s plea to tax Hyundai Heavy India Co. Ltd. at a higher rate, a Bench the Supreme Court reportedly said, “[T]he provisions of Section 90 (2) [of the Finance Act] does not say that DTAA will override the provisions of the Finance Act. Tax rate prescribed by an Act of Parliament cannot be whittled down by reference to the provisions of an earlier assessment.”

Customs Exemption for Private Hospitals

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Private hospitals are entitled to exemption from customs duty on imported equipment only if they provide free treatment to the poor held a Bench of the Supreme Court comprising Justices Harjit Singh Bedi and Tarun Chatterjee on May 16, 2008 in the case of M/s. Andromeda Foundation India P.Ltd. v. D.G.H.S. (Director General Health Services) & Ors..

On March 1, 1988, a Notification was issued by the Government of India whereby medical equipment imported for specified purposes was exempted from the payment of customs duty.

In this case, taking advantage of the Notification, a private hospital imported three machines. According to the exemption Notification the imported equipment was also to be used to provide free services to the poor. Since this did not appear to have been done, the Customs Duty Exemption Certificate was withdrawn and an attempt was made to recover customs duty from the hospital.

The matter ultimately reached the Supreme Court which found that Section 124 of the Customs Act which deals with the confiscation of goods had absolutely no applicability to the case.

The Court said that having imported medical equipment on concessional terms, it was incumbent on the hospital to have scrupulously observed the conditions of the import and to have followed the guidelines designed to ensure that the equipment was being properly utilized.

In Mediwell Hospital & Health Care’s case it was held that:

“The competent authority, therefore, should continue to be vigilant and check whether the undertakings given by the applicants are being being duly complied with after getting the benefit of the exemption notification and importing the equipment without payment of customs duty and if on such enquiry the authorities are satisfied that the continuing obligations are not being carried out then it would be fully open to the authority to ask the persons who have availed of the benefit of exemption to pay the duty payable in respect of the equipments which have been imported without payment of customs duty. “

Although this judgment has been overruled in a subsequent matter on a different point, the Bench said that the observations quoted above still hold the field.

The case of Jagdish Cancer & Research Centre was also referred to. In that case, the Supreme Court considered the implications of the non-compliance with the conditions of import and observed:

“It would, not at all, be necessary to prescribe any period to achieve the given percentage of patients treated free. It should generally be all through the period. It being at least 40 per cent, there is hardly any occasion to say that in case there is more than 40 per cent in a given period, that may make good the deficiency in the previous or the following year.”

Saying that it was also conscious of the large scale misuse of the medical equipment imported under the exemption notification, the Supreme Court said that it is essential that the authorities regulatory monitor the use of the equipment.

The Court did not rule in favour of the hospital in this case.

(This article is an edited extract of the judgment.)

Fringe Benefit Tax

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Fringe Benefit Tax was introduced by the Finance Act, 2005 and came into effect on April 1, 2006. As its name suggests, it is levied on fringe benefits which some employees receive.

In the case of R & B Falcon (A) Pty Ltd. v. Commissioner of Income Tax, 2008, a Bench of the Supreme Court comprising Justices S.B. Sinha & V.S. Sirpurkar interpreted Section 115WB of the Income Tax Act, 1961 which deals with the imposition of tax on fringe benefits. It said:

Section 115 WB comprises three sub-sections. Section 115WB (1) contains the interpretation section. It is in two parts. It provides for a direct meaning, as also an expanded meaning. The expanded meaning of the said provision is contained in sub-section (2). Sub-section (1) takes within its sweep any consideration for employment, inter alia, by way of privilege service, facility or amenity directly or indirectly, sub-section (2) thereof expands the said definition stating as to when the fringe benefit would be deemed to have been provided. The expansive meaning of the said term ‘benefits’ by reason of a legal fiction created also brings within its purview, benefits which would be deemed to have been provided by the employer to his employees during the previous year. Indisputably, sub-section (3), which exempts certain ‘benefits’ from the purview of the tax refers to sub-section (1) only. It does not have any application in regard to the matters which have been brought within the purview of the fringe benefit tax by reason of application of the deeming provision.

The taxes to be levied on the fringe benefits provided or deemed to have been provided by an employer to employees during the previous year is at the rate of 30 per cent on the value of such fringe benefits. The object for imposition of the said tax, as is evident from the said circular dated 29.8.2005, is to bring about equity.

The intention of the Parliament was to tax the employer who, on the one hand, deducts the expenditure for the benefit of the employees including entertainment, etc. and on the other when the employees getting the perks are to be taxed, those who get direct or indirect benefits from the expenditures incurred by the employer, no tax is leviable. The tax aims to bring about horizontal equity and not vertical equity.

If fringe benefits are provided for consideration for employment, which is given or provided to the employee by way of an amenity, reimbursement or otherwise; clearly sub-section (1)(a) shall be attracted.

When the expenditure incurred by the employer so as to enable the employee to undertake a journey from his place of residence to the place of work or either reimbursement of the amount of journey or free tickets therefor are provided by him, the same, would come within the purview of the term ‘by way of reimbursement or otherwise’.

The Advanced Law Lexicon defines “otherwise” as: “By other like means; contrarily; different from that to which it relates; in a different manner; in another way; in any other way; differently in other respects in different respects; in some other like capacity.”

The Parliament, in introducing the concept of fringe benefits, was clear in its mind in so for as on the one hand it avoided imposition of double taxation, i.e., tax both on the hands of the employees and employers; on the other, it intended to bring succour to the employers offering some privilege, service, facility or amenity which was otherwise thought to be necessary or expedient. If any other construction is put to sub-sections (1) and (3), the purpose of grant of exemption shall be defeated. If the latter part of sub-section (3) cannot be given any meaning, it will result in an anomaly or absurdity. It is also now a well settled principle of law that the court shall avoid such constructions which would render a part of the statutory provision otiose or meaningless. [See Visitor and Ors. v. K.S. Misra [(2007) 8 SCC 593]; Commissioner of Sales Tax, Delhi and Ors. v. Shri Krishna Engg. Company and Ors. [(2005) 2 SCC 692].

The matters enumerated in Section 115WB (2) are not covered by sub-section (3) thereof, and the amenity in the nature of free or subsidized transport is covered by sub-section (1).

Fringe benefit tax being a tax on expenditure, the only concern of the revenue should be as to whether such expenditure has been made. The place of residence of the employee is immaterial.

It is payable in the year in which the expenditure is incurred irrespective of whether the expenditure is capitalized or not. However, the same expenditure will not be liable to FBT again in the year in which it is amortized and charged to profit.

The provision relating to the computation of the value of the fringe benefits is contained in section 115WC. It is a settled principle of law that where the computation provisions fail, the charging section cannot be effectuated. Therefore, if there is no provision for computing the value of any particular fringe benefit, such fringe benefit, even if it may fall within Section 115WB (1)(a) is not liable to FBT.

(This is an edited excerpt of the judgment.)

Vaseline is a Drug

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In a case involving tax, bench of the Supreme Court headed by Justice S B Sinha has held that vaseline is a drug.

The Income Tax Appellate Tribunal had held that petroleum jelly should be taxed as belonging to the ‘cosmetics and toilet preparation’ category. Ponds India (merged with Hindustan Unilever) filed a petition against this in the Allahabad High Court which was dismissed in October 2005.

Ponds then moved the Supreme Court which has allowed its petition since a license is required to produce it, it is recognised by Indian Pharmacopeia and it does not contain any perfume as a cosmetic ordinarily would.

As the Court said, “The said definition [of a drug under the Drugs and Cosmetics Act, 1940] is an extensive one. It even applies to preparations applied on human body for the purpose of killing insects like mosquitoes, which per se does not have any medicinal or any value for curing any disease or disorder in human beings.”

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Cases on Section 40A(2)(a) of the Income Tax Act and Sugarcane Prices

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Section 4 of the Income Tax Act is the charging Section and it has imposed a tax on the income earned by a person in the previous year. ‘Person’ as per Section 2(31)(v) has been defined as ‘an association of persons or a body of individuals whether incorporated or not.

M/s Meera and Co., Ludhiana v. CIT, Punjab, J&K, Chandigarh, Patiala (1997) 4 SCC 677 at Page 683, Para. 11:
In the case of CIT v. Salem Distt. Urban Bank Ltd. a Bench of three Judges of the Madras High Court took the view that “association of individuals” in Section 3 of the Income Tax Act, 1922 would apply even to a corporate body which for the most part was composed of cooperative societies. On behalf of the appellant reliance was placed on the judgment in the case of CIT v. Ahmedabad Millowners’ Assn. where it was held that the expression “association of individuals” in Section 3 meant an association of human beings. Leach, C.J., considered the opinion expressed in Trustees of Sir Currimbhoy Ebrahim Baronetcy Trust v. CIT preferable to that expressed in the case of Ahmedabad Millowners’ Assn. and held that “association of individuals” did not mean an association of human beings only. Leach, C.J., observed:
“… If a corporate body created by a statute is an individual within the meaning of the section and I hold that it is — a cooperative society registered under the Cooperative Societies Act must fall within the same category. It is a corporate body and has perpetual succession. I consider that it is not reasonable to suppose that the Legislature intended that there should be a difference in the meaning of the word ‘individual’ and the plural ‘individuals’. If the word ‘individual’ includes a corporation, the words ‘association of individuals’ must embrace an association of corporate bodies, and therefore, the assessee is an ‘association of individuals’.”

Shri Malaprabha Coop. Sugar Factory Ltd. v. Union of India, (1994) 1 SCC 648, at page 670:
In the State of Maharashtra initially an ex-field advance is fixed uniformly for all cooperative sugar factories. At the end of the season, the actual working results are assessed and the entire profits are passed on to the cane growers as additional cane prices. Thus, the farmers get profits in the form of additional cane prices and this fluctuates widely from factory to factory. In view of this it can be categorically stated that actual cane prices are not available in Maharashtra, particularly for cooperative (sic) as it is of a profit sharing nature (excess over the initial ex-field advance).

Mund and Samont Co. (P) Ltd. v. CIT, (1970) 3 SCC 859, at Page 861-862, Para 9:
Mr Chagla contends that in striking an average for three years the Tribunal erred. Counsel contended that under Section 10(4-A) of the Act, the Income Tax Officer must reach a conclusion that the allowance was excessive or unreasonable having regard to the legitimate business needs of the Company and the benefit derived by or accruing to it therefrom. It is however for the tax-payer to establish by evidence that a particular allowance is justifiable. Apparently no evidence was tendered by the assessee relating to the duties of the Managing Director and the Deputy Managing Director, the services rendered by them, the manner in which the profits earned by the assessee were enhanced by reason of their special aptitude or qualifications, the legitimate business needs of the assessee and the benefit derived by or accruing to the assessee in consequence of the services rendered by the Managing Director and the Deputy Managing Director. In the absence of any such evidence, the finding recorded by the Income Tax Officer and confirmed by the Appellate Assistant Commissioner and the Tribunal must be accepted. We are unable to agree with Counsel for the assessee that even if the tax-payer does not produce any evidence in support of the claim for allowance, the Income Tax Officer must independently collect evidence and decide that the allowance claimed is excessive or unreasonable having regard to the legitimate business needs of the assessee before the power under Section 10(4-A) may be exercised.

U.P. Coop. Cane Unions Federations v. West U.P. Sugar Mills Assn.,(2004) 5 SCC 430, at Page 479, Para 59:
Per Venkatarama Reddi, J. (Dissenting)
Turning to first question, I find no statutory basis for the “State- advised cane price”. The very expression “advised” connotes that the State- advised price has no statutory flavour. If the fixation has been done in exercise of statutory power traceable to any provision in the U.P. Act, it would be most inapt to describe it as “advised price”. The statutorily fixed price can never take the form of advice. It binds, enforces obedience by providing for punishment or penal consequences and does not look for volition of the persons concerned for its compliance. But, that is not the case here. From year to year, the State Government has been announcing the “advised price” in the hope and expectation that the sugar factories in the private sector will also agree to pay that price.

U.P. Coop. Cane Unions Federations v. West U.P. Sugar Mills Assn.,(2004) 5 SCC 430, at Page 470, Para. 39:
…under the 1966 Order the Central Government only fixes the minimum price and it is always open to the State Government to fix a higher price. Under the enactments made by the State Legislatures, areas are reserved for the sugar factories and the cane-growers therein are compelled to supply sugarcane to them and therefore the State Government has incidental power to fix the price of sugarcane which will also be the statutory price. They further lay down that the Cane Commissioner can direct the cane-growers and the sugar factories to enter into agreements for purchase of sugarcane at a price fixed by the State Government and such agreements cannot be branded as having been obtained by force or compulsion.

Cases which Deal with Reliance on the Reports of Valuation Officers

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Whether the assessing officer can rely on the report of the DVO even when there is no obvious reason to reject the books of account

• Unit Construction Co. Ltd. Vs. Joint Commissioner of Income-tax (Cal HC)
[2003] 260 ITR 189
Thus, it appears that it is not necessary that the books of account have to be rejected expressly or that it is to be, in express terms, recorded that the books of account are not reliable or the explanation is not satisfactory. It has to be gathered from the order itself whether in effect the Assessing Officer was satisfied with the explanation or had found that the books of account were not reliable. It is not the technical terms, which must appear in the order. It is the substance of the order that the Assessing Officer was not satisfied with the explanation which is relevant. This is apparent from sections 69 and 69B. Where accounts are not reflected in the account books, it can be explained by the assessee, who under section 69 is entitled to an opportunity to explain. If in the opinion of the Assessing Officer the explanation is not satisfactory, the income can be added.

• Amar Kumari Surana (Smt.) Vs. Commissioner of Income-tax (Raj HC)
[1997] 226 ITR 344 at page 349
It is true that merely on the basis of the fair market value no addition can be made under section 69B of the Act, 1961, but on the basis of sufficient material on record some reasonable inference can be drawn that the petitioner has invested more amount than shown in the account books, then only the addition under section 69B can be made. The burden is on the Revenue to prove that the real investment exceeded the investment shown in the account books of the assessee.
Their Lordships of the Supreme Court in the case of K. P. Varghese [1981] 131 ITR 597 have observed as under (page 618):
“This burden may be discharged by the Revenue by establishing facts and circumstances from which a reasonable inference can be drawn that the assessee has not correctly declared or disclosed the consideration received by him and there is an understatement or concealment of the consideration in respect of the transfer.

• Yadu Hari Dalmia Vs. Commissioner of Income-tax (Del HC)
[1980] 126 ITR 48 at page 57-58
…it follows as a normal rule of presumption and evidence that where an assessee has, in fact, incurred certain expenditure and is not able to account satisfactorily for the same, an inference can be drawn that the expenditure or the unaccounted part thereof must have been met out of the undisclosed income of the previous year. The case of an item of proved expenditure is, in principle, no different from that of a cash credit. In both cases, the assessee is in possession of certain funds during the previous year the source of which he is unable or unwilling to explain satisfactorily. It is a matter entirely within the assessee’s knowledge as to how the cash credits came to be introduced or the items of wealth came to be acquired or the expenditure was incurred and once it is postulated that such cash credit or investment or expenditure belongs to the assessee then his failure to explain the same or to explain it satisfactorily can constitute a reasonable ground for an inference that the source thereof must be an item taxable under the Act. Otherwise, if a non-taxable source or a capital item was utilised for the purpose in question, the assessee could and would easily have come forward with an explanation to the said effect and proved it to the satisfaction of the ITO. We are, therefore, of opinion that the whole history of the introduction of ss. 68 to 69D and the judicial decisions bearing thereupon clearly establish the proposition that these sections are only clarificatory and that even otherwise an addition can be made towards income from undisclosed sources in respect, inter alia, of amounts of expenditure which the assessee is found to have actually incurred but not satisfactorily explained.

Whether the AO has power to refer to the DVO

• Smt. Pushpa Kumari Vs. Commissioner of Income-tax (Pat HC)
[2004] 269 ITR 366
Thus, it was held by the apex court that though under section 55A of the Act the Assessing Officer cannot call for an enquiry report, it can issue com- mission to a Valuation Officer in exercise of power under section 131(1)(d) of the Act.