Case BriefsSupreme Court

Supreme Court: Explaining the term ‘dividend’ under Section 2(22)(e) of the Income Tax Act, 1961, the Court said that the said provision gives an artificial definition of ‘dividend’ and creates a fiction, thereby bringing any amount paid otherwise than as a dividend into the net of dividend under certain circumstances. Stating that the dividend taken note of by this provision is a deemed dividend and not a real dividend, the Court explained that loan or payment made by the company to its shareholder is actually not a dividend. In fact, such a loan to a shareholder has to be returned by the shareholder to the company. It does not become income of the shareholder.

The Court, however, clarified that for certain purposes, the Legislature has deemed such a loan or payment as ‘dividend’ and made it taxable at the hands of the said shareholder. The conditions required to be fulfilled to attract tax under the said clause are:

  • Payment is to be made by way of advance or loan to any concern in which such shareholder is a member or a partner.
  • In the said concern, such shareholder has a substantial interest.
  • Such advance or loan should have been made after the 31.05.1987.

The question that came before the bench of Dr. A.K. Sikri and Abhay Manohar Sapre, JJ was that whether in view of the settled principle that HUF cannot be a registered shareholder in a company and hence could not have been both registered and beneficial shareholder, loan/advances received by HUF could be deemed as dividend within the meaning of Section 2(22)(e) of the Income Tax Act, 1961 especially in view of the term “concern” as defined in the Section itself.

The Court noticed that, in the present case, the Karta is, undoubtedly, the member of HUF. He also has substantial interest in the assessee/HUF, being its Karta as he was entitled to not less than 20% of the income of HUF. Hence, it was held that the provisions of Section 2(22)(e) of the Act get attracted and it is not even necessary to determine as to whether HUF can, in law, be beneficial shareholder or registered shareholder in a Company. As per the provisions of Section 2(22)(e) of the Act, once the payment is received by the HUF and shareholder is a member of the said HUF and he has substantial interest in the HUF, the payment made to the HUF shall constitute deemed dividend within the meaning of clause (e) of Section 2(22) of the Act. [Gopal and Sons v. CIT, Kolkata, 2017 SCC OnLine SC 17, decided on 04.01.2017]


Case BriefsSupreme Court

Supreme Court: Deciding the question as to whether a former ‘ruler’ is entitled to get full benefit of the exemption granted to him under Section 10 (19A) of the Income Tax Act 1961 from payment of income-tax or it is confined only to that portion of palace which is in his actual occupation as residence and the rest which is in occupation of the tenant would be subjected to payment of tax, the Court held that the Legislature did not intend to tax portion of the “palace” by splitting it in parts. Even if the Ruler had let out the portion of his residential palace, yet he would continue to enjoy the exemption in respect of entire palace because it is not possible to split the exemption in two parts, i.e., the one in his occupation and the other in possession of the tenant.

Interpreting the related provisions, the Court said that in Section 10(19A) of the I.T. Act, the Legislature has used the expression “palace” for considering the grant of exemption to the Ruler whereas on the same subject, the Legislature has used different expression namely “any one building” in Section 5 (iii) of the Wealth Tax Act. No reliance could be placed on Section 5(iii) of the Wealth Tax Act while construing Section 10(19A) for the reason that the language employed in Section 5(iii) is not identical with the language of Section 10(19A) of the I.T. Act. If the Legislature intended to split the Palace in part(s), alike houses for taxing the subject, it would have said so by employing appropriate language in Section 10(19A) of the I.T. Act. Also, Section 23(2) and (3), uses the expression “house or part of a house”. Such expression does not find place in Section 10(19A) of the I.T. Act. Likewise, there is no such expression in Section 23, specifically dealing with the cases relating to “palace”.

In the present case which related to the ‘Umed Bhawan Palace’ used by the ‘ruler’ as his official residence and some part of which had been requisitioned to the Defence Ministry, the bench of Ranjan Gogoi and Abhay Manoher Sapre, JJ further said that if two Statutes dealing with the same subject use different language then it is not permissible to apply the language of one Statute to other while interpreting such Statutes. Similarly, once the assessee is able to fulfill the conditions specified in section for claiming exemption under the Act then provisions dealing with grant of exemption should be construed liberally because the exemptions are for the benefit of the assessee. [Maharao Bhim Singh of Kota v. Commissioner of Income Tax, 2016 SCC OnLine SC 1428, decided on 05.12.2016]

Case BriefsSupreme CourtTaxation

Supreme Court: Deciding the question that whether the Deputy Director of Income Tax was competent to make complaint regarding commission of offence under Sections 109/191/193/196/200/420/120B/34 IPC against the appellants for making false statements denying of having any locker either in individual names or jointly in any bank, the Court, answered in negative and held that the Deputy Director of Income Tax cannot be construed to be an authority to whom appeal would ordinarily lie from the decisions/orders of the I.T.Os. involved in the search proceedings in the case in hand so as to empower him to lodge the complaint in view of the restrictive preconditions imposed by Section 195 CrPC.

Taking note of the provisions under the Income Tax Act, 1961, the Bench of P.C. Ghose and Amitava Roy, JJ said that though under Section 116 of the IT Act, under clause (d) thereof, Deputy Director of Income Tax, Deputy Commissioner of Income Tax and Deputy Commissioner of Income Tax (Appeals) have been bracketed together, it is only the Deputy Commissioner (Appeals), as is apparent from Section 246(1) of IT Act, who has been conferred with the appellate jurisdiction to entertain appeals, albeit from specified orders passed by an assessing officer as mentioned in that sub-section. The Deputy Director of Income Tax in particular, has not been designated to be the appellate authority or forum from such orders or any other order of the assessing officer.

It was further explained that the decisive and peremptory prescription of Section 195(4) of the Code is not merely the levels of the rank inter se but the recognised appellate jurisdiction ordinarily exercised by the authority or the forum concerned for a complaint to be validly lodged by it, if in a given fact situation, the initiation of prosecution is sought to be occasioned not by the court in the proceedings before which the contemplated offence(s) had been committed, but by a court to which ordinarily appeals therefrom would lie. [Babita Lila v. Union of India, 2016 SCC OnLine SC 890, decided on 31.08.2016]

Case BriefsSupreme Court

Supreme Court: In a case where the assessment order for actor Amitabh Bachchan’s income in the year 2001-2002 was in question, the bench of Ranjan Gogoi and P.C. Pant, JJ held that the Commissioner of Income Tax (CIT) is empowered to revise the said order under Section 263 of the Income Tax Act, 1961 as making a claim which would prima facie disclose that the expenses in respect of which deduction has been claimed has been incurred and thereafter abandoning/withdrawing the same gives rise to the necessity of further enquiry in the interest of the Revenue.

The assessee, in his earlier stand had stated that the expenses incurred were for security purposes and that payments have been made out of cash balances available and later, by a re-revised return, he withdrew his claims, acting upon which, the Assessing Officer abandoned the enquiry.

Explaining the law on revisional power of CIT, the Court said that There can be no doubt that so long as the view taken by the Assessing Officer is a possible view the same ought not to be interfered with by the Commissioner under Section 263 of the Act merely on the ground that there is another possible view of the matter. Permitting exercise of revisional power in a situation where two views are possible would really amount to conferring some kind of an appellate power in the revisional authority which is a course of action that must be desisted from. However, the Court said that the present case was an exceptional one and required a revision as the matter had not been investigated by the Assessing Officer and that the notice issued under Section 69-C of the Act could not have been simply dropped on the ground that the claim has been withdrawn. [Commissioner of Income Tax v. Amitabh Bachchan, 2016 SCC OnLine SC 484, decided on 11.05.2016]

Case BriefsHigh Courts

Madras High Court: In the present case where questions were raised on the constitutionality of Section 94A(1) of the Income Tax Act, 1961 on the ground that the impugned provision contravenes Articles 14, 19, 51, 253 and 265 read with Entry 82 of List 1 of VII Schedule of the Constitution and is beyond the legislative competence of Parliament under Articles 246 and 248 read with Entry 10, 14, 82 and 97 of List 1 of VII Schedule of the Constitution, the Division Bench of V. Ramasubramanian and T. Mathivanan, JJ., upheld the constitutionality of Section 94A (1) of the Income Tax Act stating that in the present times when scams like Panama Leaks are being revealed, the provisions related to tax avoidance are the need of the hour.

India had entered into an ‘Agreement for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and on Capital’, with the Republic of Cyprus in 1994. The challenge against Section 94A (1) came up before the Court as the petitioners via their counsel Arvind P. Datar argued that the provision has conferred sweeping powers upon the Central Government to specify any country as a notified jurisdictional area in relation to transactions entered into by any assessee, irrespective of whether such country is one, with whom a bilateral Treaty has already been entered into or not. It was further contended that since the State has an obligation under Article 51(c) of the Constitution to foster respect for Treaty obligations. So to specify by notification, any country as a notified jurisdictional area, without reference to the existence of a Treaty with that country, violates Articles 14, 19(1)(g), 51, 245, 253 and 269 of the Constitution and suffers from the vice of excessive delegation.

Observing the constitutional scheme and the contentions of the petitioner, the Court at length discussed the Constitutional provisions enshrined in Articles 245-255 and Article 51(c) along with the 7th Schedule of the Constitution. It was observed by the Court that it is clear from the language of Section 94A (1) that the Parliament did not show any disrespect to the bilateral tax avoidance Treaty as the provision was enacted in consonance with the resolution passed by the G-20 Nations to take action against non-cooperative jurisdictions including tax havens. The Court further stated that ‘haven’ practically means ‘a place of safety’, and in the recent past where revelations of stashed money in foreign countries for the purposes of tax avoidance are getting exposed, the term ‘tax haven’ has assumed different connotations. [T. Rajkumar v. Union of India, 2016 SCC OnLine Mad 2001, decided on 12.04.2016]

High Courts

Himachal Pradesh High Court– While deciding an appeal, where the Court was asked to determine three substantial questions as to whether the conversion of gram Dal into Besan powder, by a process of mere roasting and grinding, amounts to ‘manufacture’ and the profits so derived are eligible for deduction under Section 80IB(4) of the Income Tax Act, whether the profits eligible for deduction under Section 80IB (4) of the Act are necessarily to be computed after allowing depreciation under Section 32 and whether the mandate of section 80IB(2)(iv) is complied with even if ten or more workers are employed for only seventy three days in a year, a division bench of Mansoor Ahmad Mir CJ and Tarlok Singh Chauhan J, held that conversion herein amounts to manufacture and the assessee is entitled to the deduction under Section 80IB(4) and the profits eligible for deduction being computed after allowing depreciation under Section 32 only from April 1, 2002. Deciding on the third question, the Court held in favour of the revenue department stating that the facts depicts that the assessee had not employed ten or more workers during the ‘substantial part of the year’.

The Court while deciding the above questions referred to the Supreme Court decision in Idandas v. Anant Ram Chandra Phadke (1982) 1 SCC 27 wherein the Court culled out three tests for the purpose of determining ‘manufacturing processes’ namely (1);That it must be proved that a certain commodity was produced; (2) That the process of production must involve either labour or machinery; (3) That the end product which comes into existence after the manufacturing process is complete, should have a different name and should be put to different use. In other words, the commodity should be so transformed so as to lose its original character.

The Court further discussed in detail the relevant clauses of Section 80 IB. and also referred to Commissioner of Income Tax v. Sree Senha Valli Textiles P. Ltd., 2003 259 I.T.R. 77 wherein it was held that the newly added Explanation 5 inserted in Section 32(1); of the Act takes effect only on and from April 1, 2002, and will not be applicable for prior years. CIT v. Shree Triveni Foods, 2015 SCC OnLine HP 998, decided on April 23, 2015

High Courts

Allahabad High Court: While deciding a case relating to Section 11BB of the Income Tax Act, 1961 which deals with interest on late payment of refunds, where Respondents alleged that petitioner has waived their right to claim the interest, the division bench of Rajes Kumar and Shashi Kant, JJ held that the payment of interest under the aforesaid provision is statutory and automatic, it is neither dependent on the claim of the party nor on the discretion of the authority concerned, hence, waiver of the interest by the party has no relevance. The Court further held that interest under the Section 11 BB of the Act becomes payable, if after expiry of three months from the receipt of application for refund, the amount claimed is still not refunded and officers concerned are not required to wait for instructions from any superior officers for grant of interest. Shree Balaji Aromatics Pvt Ltd., v Union of India, Civil Misc. Writ Petition No. 1062 of 2007, decided on 24th of April, 2014

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