Tax Law Cases:

1. Whitney V. Commissioners Of Inland Revenue

Lord Dunedin: Now, there are three stages in the imposition of a tax: there is the declaration
of liability that is the part of the statute which determines what persons in respect of what
property are liable. Next, there is the assessment. Liability does not depend on assessment.
That, ex hypothesi, has already been fixed. But assessment particularises the exact sum
which a person liable has to pay. Lastly, come the methods of recovery, if the person taxed
does not voluntarily pay.

2. Govind Saran Ganga Saran vs Commissioner of Sales Tax And Ors.

The components which enter into the concept of a tax are well known. The first is the
character of the imposition known by its nature which prescribes the taxable event
attracting the levy, the second is a clear indication of the person on whom the levy is
imposed, and who is obliged to pay the tax, the third is the rate at which the tax is imposed,
and the fourth is the measure or value to which the rate will be applied for computing the
tax liability. If those components are not clearly and definitely ascertainable, it is difficult
to say that the levy exists in point of law. Any uncertainty or vagueness in the legislative
scheme defining any of those components of the levy will be fatal to its validity.

3. Cape Brandy Syndicate v. IRC

Rowlatt J said: ‘In a taxing Act one has to look merely at what is clearly said. There is no
room for any intendment. There is no equity about a tax. There is no presumption as to a
tax. Nothing is to be read in, nothing is to be implied’ and ‘subsequent legislation, if it
proceeded on an erroneous construction of previous legislation, cannot alter the previous
legislation’.
Lord Sterndale MR said: ‘I quite agree that subsequent legislation, if it proceed upon an
erroneous construction of previous legislation, cannot alter that previous legislation; but if
there be any ambiguity in the earlier legislation, then the subsequent legislation may fix the
proper interpretation which is to be put upon the earlier.’
Lord Atkinson: ‘Where the interpretation of a statute is obscure or ambiguous, or readily
capable of more than one interpretation, light may be thrown on the true view to be taken
of it by the aim and provisions of a subsequent statute.’

4. Calcutta Jute Manufacturing Co. v Commercial Tax Officer

"In interpreting such a provision, a construction which would defeat its purpose and, in
effect, obliterate it from the statute book should be eschewed. If more than one construction
is possible, that which preserves its workability and efficacy is to be preferred to the one
which would render it otiose or sterile."
We are therefore, not adopting a construction which would upset or even impair the purpose
in introducing section 10A in the Act. The return to be filed by the dealer is the full and
correct return as referred to in section 10 and on failure to furnish such a return the liability
to pay interest from the prescribed date would arise when assessment is completed.
5. Mathuram Agarwal v State of Madhya Pradesh
The statute should clearly and unambiguously convey the three components of the tax law
i.e. the subject of the tax, the person who is liable to pay the tax and the rate at which the
tax is to be paid. If there is any ambiguity regarding any of these ingredients in a taxation
statute then there is no tax in law. Then it is for the legislature to do the needful in the
matter.

6. Saraswati Sugar mills v Haryana State Board

It has to be borne in mind that this Act with which we are concerned is an Act imposing
liability for cess. The Act is fiscal in nature. The Act must, therefore, be strictly construed
in order to find out whether a liability is fastened on a particular industry. The subject is
not to be taxed without clear words for that purpose, and also that every Act of Parliament
must be read according to its natural construction of words.
Construction of words and the meaning to be given for such words shall normally depend
on the nature, scope and purpose of the statute in which it is occurring and to the fitness of
the matter to the statute. The meaning given to the same word occurring in a. social security
measure or a regulating enactment may not be apposite or appropriate when the same word
is interpreted with reference to a taxing statute.

7. Reliance Jute Industries Ltd v Commercial Tax officer

From the charging provisions of the Income Tax Act, it is discernible that the words
"income" or "profits and gains" should be understood as including losses also, so that, in
one sense "profits and gains" represent "plus income" whereas losses represent "minus
income".
In other words, loss is negative profit. Both positive and negative profits are of a revenue
character. Both must enter into computation, wherever it becomes material, in the same
mode of the taxable income of the assessee. Although Section 6 classifies income under six
heads, the main charging provision is Section 3 which levies income tax, as only one tax,
on the "total income" of the assessee as defined in Section 2(15).
An income in order to come within the purview of that definition must satisfy two
conditions: Firstly, it must comprise the "total amount of income, profits and gains referred
to in Section 4(1)". Secondly, it must be "computed in the manner laid down in the Act". If
either of these conditions fails, the income will not be a part of the "total income" that can
be brought to charge.
The expression "income" in the statute appearing in Section 2(24) of the Act has been
clarified to mean that it is an inclusive definition and includes losses, that is, negative profit.

8. Annapurna Biscuit Manufacturing Co. v Commissioner of Sales Tax

In the case of Annapurna Biscuit Manufacturing Co. the court was examining the question
of levy of interest with reference to Section 8 of the Act when there is a change in rate of
tax on account of subsequent judicial pronouncement or retrospective amendment in the
rate of tax. However, in that very case in para 12 (page 66 of STC) it was held that if the
dealer claims that it is not liable to pay tax or liable to pay tax at concessional rate in view
of form C under Central Sales Tax Act or in view of form III-C(1) or under Section 3D of
the U.P. Sales Tax Act and fails to file form “it cannot be said that calculation of tax payable
was in accordance with the Act”. In para 13 (page 66 of STC) of the aforesaid judgment it
has been further observed as follows:
If a dealer determines or calculates tax on assumptions made by it and fails to establish it
then the determination or calculation is not only erroneous but not in accordance with the
Act. As the petitioner’s case is of second category the assessing authority was justified in
demanding interest….
Therefore on a close reading of Division Bench judgment given in the case of Annapurna
Biscuit Manufacturing Co: the liability to pay interest by the dealer-opposite party is
established.

9. Dunlop India Ltd v. Union of India

It is well established that in interpreting the meaning of words in a taxing statute, the
acceptation of a particular word by the trade and is popular meaning should commend itself
to the authority. It is clear that meaning given to articles in a fiscal statute must be as people
in trade and commerce, conversant with the subject, generally treat and understand them in
the usual course. But once an article is classified and put under a distinct entry, the basis of
the classification is not open to question. Technical and scientific tests offer guidance only
within limits. Once the articles are in circulation and come to be described and known in
common parlance, there is no difficulty for statutory classification under a particular entry.
Obiter: It is a good fiscal policy not to put people in doubt and quandary about their liability
to duty. When evidence is well balanced, the best cause in a fiscal measure is to decide and
fix the entry under which the article comes otherwise it will give rise to adoption of varying
standards where uniformity should be the rule.

10. Atlas Cycles Industries Ltd v State of Haryana

The power to tax by the State can be exercised only by the State Legislature. The extent of
the power is fixed by the Constitution. The said legislature can impose all taxes as are
covered by the subjects enumerated in List II (State List) under the Seventh Schedule.
Insofar as the municipalities or 'local self-governments' are concerned, they are authorised
by the State to levy some of these taxes for their own purposes.
The power to tax is a necessary adjunct of a system of 'local self- government'. The amounts
collected by way of taxes are mainly intended to enable them to meet their fiscal needs in
the municipal area.
Emphasis was laid in the judgment upon the fact that the proviso to the sub-section, which
required the resolution of the council determining to levy tax to specify the rate at which
and the date from which tax would be levied, stated that "before passing a resolution
imposing a tax for the first time" the council should publish a notice declaring that intention,
to which objections were sought. There is no provision in the said Act which requires
objections to be invited and considered before the committee of a municipality passes a
resolution imposing a tax "for the first time"
The Supreme Court held that notification imposing a tax could not be deemed to be
extended to new areas in the municipality.
11. Mohammed Ali Khan v Commissioner of Wealth Tax
It is a cardinal principle of construction that the words of a statute are first understood in
their natural, ordinary or popular sense and phrases and sentences are construed according
to their grammatical meaning unless that leads to some absurdity or unless there is
something in the context or in the object of the statute to suggest the contrary. It has been
often held that the intention of the legislature is primarily to be gathered from the language
used, which means that attention should be paid to what has been said as also to what has
not been said. As a consequence a construction which requires for its support addition or
substitution of words or which results in rejection of words as meaningless has to be
avoided.
In case of taxing statute it has been held by this Court in several cases that one must have
regard to the strict letter of the law and if the revenue satisfies the Court that the case fall
strictly in the provisions of law, the subject can be taxed. This being the position, a fair
reading of Section 5(ii) of the Act would reveal that only the building or the part of the
building in occupation of the Ruler which has been declared by the Central Government to
be the official residence under the merged States (Taxation Concessions) Order 1949 will
not be included in the net wealth of the assessee.

12. Grasim Industries Limited v State of Madhya Pradesh

The Supreme Court held that any exemption notification in a fiscal statute must be read in
its entirety and not in parties to find out the meaning.

13. CIT v SKF Ball Bearing

In the above case, the Supreme Court held that where the sale was effected by the agent in
India on behalf of foreign principal and received the sales consideration in India is
considered to be received in India irrespective of the fact that the substantial portion of the
sales consideration is remitted by him before the actual realisation of sale proceeds in India.
The liability to pay income-tax finder s, 4(1)(a) arose on the receipt of the income and the
question whether the income was received in the taxable territory was determined by the
place where the price was received. Profits were received by the Respondent company on
behalf of the foreign corporations in the taxable territory in respect of all sales of consigned
goods irrespective of whether the remittances were made either before after the price was
received.

14. ED Sassoon & Co. Ltd v CIT

When a contract for service is an entire contract, providing for payment on the completion
of a definite period of service, it is a condition precedent to the recovery of any
remuneration thereunder, that the service or duty shall be completely performed unless
either of the contract is altered so as to enable the performer of the service to regard it as
an end, or unless there is a usage that the remuneration is payable in proportion to the time
actually served.
In order that the income can be said to have accrued to or earned by the assesse, it is not
only necessary that he must have contributed to its accruing or arising by rendering services
or otherwise but he must have created a debt in his favour.
 Profits of a company do not accrue from day to day but can be determined only at the end
of an accounting year on the closure of the books of account for that year.

15. Anglo French Textile Co. Ltd. v. CIT

An assessee submitted a return showing the income as "nil" and this return was accepted
by the Income-tax Officer, In the 449 next year the Income-tax Officer sent a notice to the
assessee under s. 34 (1) (b) calling for a fresh return,., The assesses submitted a return
showing the income as nil " and a loss of Rs. 3,92,357 and claimed that the loss should be
recorded and carried forward under s. 24 (2) of the Income-tax Act. The loss was arrived
at by striking a balance in the profit and loss account of just one business:
Held, that the assessee was not entitled to 'have the loss determined and carried forward for
two reasons, first, because when there is no income under any head at all there is nothing
against which the loss can be set off in that year under s. 24 (1) and unless that can be done
sub-s. (2) of s. 24 does not come into play ; secondly, a set-off under s. 24 (2) can only be
claimed when the loss arises under one head and the profit against which it is sought to be
set off under a different head.

16. CIT v RD Aggarwal

The Supreme Court held that the 1922 Act did not contain a definition of the expression
‘business connection’ and that its precise connotation was ‘vague and indefinite’. The
Court further stated that the expression undoubtedly means something more than a
‘business’. A business connection in section 42 of the 1922 Act involves a relation between
the a business carried on by the non-resident which yields profits or gains and some activity
in the taxable territories which contributes directly or indirectly to the earning of such
profits or gains. It predicates an element of continuity between the business of the non-
resident and the activity in the taxable territories.
A stray or isolated transaction is not normally regarded as a business connection. Business
connection may take several forms. It may include carrying on a part of the main business
or activity incidental to the main business of the non-resident through an agent, or it may
merely be a relation between the business of the non-resident and the activity in the taxable
territories which facilitates or assists the carrying on of that business. A relation to be a
business connection must be real and intimate and through or from some income must
accrue or arise directly or indirectly to the non-resident. The income which accrues or arises
through or from the ‘connection’ must arise outside the taxable territories and not within.

17. Hukam Chand Mills v CIT

In this case, the jurisdiction of the Tribunal to entertain and go into the question raised by
the Dept. for the first time before it and to remand the case in the manner it has done was
questioned. The Court held that under Section 33(4) of the Act, the Tribunal has got the
power to entertain the argument of the Dept., to remand, and to give directions to the IT
officer. The Appellate Tribunal Rules, 1946 made under S.5(a)(8) of the Act are merely
procedural in character and do not in any way, circumscribe or control the power of the
Tribunal under S. 33(4).
18. V.V.R.N.M. Subbayya Chettiar v. Commissioner of Income Tax, Madras
The words used in s. 4A (b) show: (i) that, normally a Hindu undivided family will be taken
to be resident, in the taxable territories, but such a presumption will not apply if the case
can be brought under the second part of the provision, (ii)the word "affairs" means affairs
which are relevant for the purpose of the Income-tax Act and which have some relation to
income, (iii) the question whether the case falls within the exception depends on whether
the seat of the direction and control of the affairs of the family is inside or outside British
India, and (iv)the onus of proving facts which would bring his case within the exception
which is provided by the latter part is on the assessee.
Therefore, the test laid down was:
1. Control and management signifies the controlling and directive power.
2. Mere activity by a company in a place does not create residence.
3. Central management and control of a company may be divided.
4. In case of dual residence, there may be two centres of management.

19. Narottam and Parekh Ltd. v Commissioner of Income Tax, Bombay City
It is entirely irrelevant where the business is done and where the income has been earned.
What is relevant and material is from which place has that business been controlled and
managed. "Control and management" referred to in Section 4A(c) is central control and
management. The control and management contemplated by this Sub-section is not the
carrying on of day to day business by servants, employees or agents. The real test to be
applied is, where is the controlling and directing power

20. Radha Rani Holdings

It was held that the stay of a director in India does not make the company a resident in
India.
Since the board of directors, subject to the overall supervision of shareholders, actually
controls and manages the affairs of a company effectively as against the day-to-day
operation of the company, the situs of the board of directors of the company should
determine the place of control and management of the company. This does not mean where
one or more of the directors normally reside but where the board actually meets for the
purpose of determination of the key issues relating to the company.
What is relevant is from where the business is being conducted rather than where it is
actually conducted. The company being an investment company may invest its entire funds
in India but so long as such investment decisions are taken outside India, for the purpose
of determining residential status under Section 6(3)(ii), it cannot be said that the "control
and management" of its affairs is situated wholly in India so as to treat the assessee as
"resident in India".

21. Gillanders Arbuthnot & Co. Ltd. v CIT

It was held that the compensation received by the taxpayer for loss of agency was a revenue
receipt whereas compensation received for refraining from carrying on competitive
business (under negative/restrictive covenant) was a capital receipt.
Having regard to the vast array of business done by the appellant as agents, the acquisition
of agencies was the normal course of business and the determination of individual agencies,
a normal incident, could not affect or impair the trading structure of the appellant, nor
involve a loss of an enduring trading asset. And the compensation received by the appellant,
therefore, did not represent the price paid for loss of a capital asset but only a payment
made for the loss of profit it suffered by the cancellation of its agency and was income
chargeable to the income tax.

22. CIT v West Coast Chemicals & Industries Ltd.

This case shows that where a slump price is paid and no portion is attributable to the stock-
in-trade, it may not be possible to hold that there is a profit other than what results from the
appreciation of capital. The essence of the matter, however, is not that an extra amount has
been gained by the selling out or the exchange but whether it can fairly be said that there
was a trading from which alone profits can arise in business.
Where the business is sold as a going concern and the sale of the assets is a realisation sale,
the difference between the written down value and the price attributable to the assets which
were admitted to depreciation is not taxable under section 10(2)(vii), proviso (ii), as it stood
enacted before it was amended by Act 67 of 1949.

23. Hall and Anderson Pvt. Ltd. v CIT

In the case of sale of immovable properties, the sale can be said to have taken place on the
date of execution of the sale deed and not on the date of the agreement to sell.
The lease transactions per se are not transfers under the Income-tax Law. However, lease-
cum-sale transactions are transfer under the law. Under lease-cum-sale situations, for the
purpose of computation of capital gains, the property is deemed to have been sold
(transferred) on the execution of the lease-cum-sale agreement and handing over possession
of property to the agreement holder (i.e. lessee).

24. Andhra Pradesh CIT v Trustees of HEH Nizam’s Second Supplementary Family
Trust
Conversion of one kind of shares for another, from preference shares to equity shares, was
understood as exchange.
Where one type of share is converted into another type of share (including conversion of
debentures into equity shares) there is, in fact no ‘transfer’, of a capital asset within the
meaning of section 2(47) of the Income Tax, 1961. Hence, any profits derived from such
conversion are not liable to capital gains under section 45(1) of the Income Tax. However,
when such newly converted shares is actually transferred at a later date, the cost of
acquisition of such share for the purpose of computing the capital gains shall be calculated
with reference to the cost of acquisition of the original share of that from which it is derived.

25. Vania Silk Mills Ltd v CIT (1991) 191 ITR 647 (SC)
The court observed that existence of an asset is essential for the transfer. The court held
that money received under an insurance policy in the case of damage or destruction of an
asset cannot be treated as a consideration for transfer of a capital asset and hence no liability
for capital gains tax arises in such a situation. This decision of the Supreme Court has been
nullified by introducing Sec. 45(1A) in the Act, which provides that insurance money
received from an insurer on account of damage or destruction of a capital asset will rise to
capital gains.

26. CIT v Mrs Grace Collis (2001) 248 ITR 323 (SC)
The court held that destruction or loss of an asset can be understood as transfer within the
extended meaning of transfer, which includes ‘extinguishment of any rights in a capital
asset.

27. JK Kashyap v ACIT (2008) 302 ITR 255 (Del.)

The Delhi High Court held that where an assessee receives a sum for relinquishment rights
it is immaterial whether the agreement is completed or not or whether the vendee takes the
possession of the property or not. The word ‘transfer’, under 2(47) of the Act, has a wider
meaning and includes extinguishment of tights in a property and from the facts it is clear
that the assessee acquired interest in the said property which was subsequently relinquished
for consideration leading to transfer within the terms of Sec. 2(47) of the Act, thus attracting
the liability of the capital gains tax.

28. CIT v Chand Ratan Bagri (2010) 230 CTR (Del) 258
The Delhi High Court held that forfeiture of convertible warrants due to failure to make
payments results in extinguishment of rights of the assessee to obtain a share in the
company and results in loss under the head ‘capital gains’.

29. Bennett Coleman & CO. Ltd. [2011] 12 ITR (Trib) 97 (Mum) (SB)
Held that loss arising on account of reduction in share capital cannot be subject to the
provisions of Sec. 45 read with Sec. 48 and, accordingly, such loss was not allowable as
capital loss. The Tribunal held that it was a case of mere substitution of one kind of shares
with another and there was no effective change in the rights of the shareholder and hence,
does not result in extinguishment of rights.

30. Syndicate Bank Ltd. v. Addl. CIT [1985] 155 ITR 681 (Kar.)
Date of acquisition is relevant - The cost of acquisition of the capital asset mentioned in
section 48 implies date of acquisition, and the date of acquisition of the asset is crucial for
determining the capital gain.

31. Kalooram Govindram v. CIT [1965] 57 ITR 335 (SC)

Cost of property received on partition is cost on date of partition - Cost of an asset to a
divided member must necessarily be its cost to him at the time of partition.
32. Ranchhodbhai Bhaijibhai Patel v.CIT [1971] 81 ITR 446 (Guj.)/ CIT v. M.
Ramaiah Reddy [1986] 158 ITR 611 (Kar.)CIT v. Smt. M. Subaida Beevi [1986]
160 ITR 557 (Ker.)
Cost must be as on the date of acquisition - Where the property was not a capital asset
on the date of acquisition but subsequently became a capital asset (like when it happens
when agricultural land is converted into non-agricultural use) prior to its sale, the cost
of acquisition must be only with reference to its date of acquisition, and not with
reference to the date on which it became a capital asset.

33. Bai Shirinbai K. Kooka

It was contended that the profits should be computed by deducting from the selling price,
not the actual cost of the shares, but an amount equal to the fair value of the shares on the
date of the conversion, as representing a notional cost of the shares.
The Bombay High Court accepted this proposition in CIT v. Bai Shirinbai. The Supreme
Court affirmed the decision of the High Court and, while doing so, distinguished the case
from its earlier decision in the case of Sir Kikabhai Premchand v. CIT. In Kikabhai’s case,
the assessee was a silver trader who had withdrawn a certain quantity of silver from his
business and credited the profit and loss account with the cost of the silver. The revenue
had sought unsuccessfully to argue that a notional profit should also be credited to the profit
and loss account. The attempt failed, with the Court holding that no man could trade with
himself.
The observations of the High Court are noteworthy.
 The Income-tax law is familiar both with notional profits and notional distribution
of actual profits
 The case before the Court was not a case of notional profits at all, but a case of
actual real profits
 What was notional was the distribution or allocation of these profits
 It was difficult to contend that the whole of this actual profit could only be attributed
to the business activity of the assessee
The High Court also observed:
 In order to arrive at real profits one must consider the accounts of the business on
commercial principles and construe profits in their normal and natural sense, a sense
in which no commercial man would misunderstand.
 What the shares cost originally to the assessee at a time when she had no business
or trading activity, could not, in a commercial sense, be said to be the cost of the
shares to the business, which started on April 1, 1945.
 The original cost was really a matter of historical record and it had no relevance in
the determination or ascertainment of profits which the business made.
It concluded that, quite obviously, a portion of the profits must be notionally attributable to
the capital appreciation which happened before the conversion.
34. M. Nachiappan v.CIT
Court has held that it was not necessary that the property should been a capital asset on the
date of its acquisition by the assessee for the purposes of ss. 45, 48 and 55.
Where agricultural lands are converted into housing sites and sold, cost of acquisition of
lands is their original cost and not market value on date of conversion - Where the assessee
converted agricultural lands owned by him into housing sites and sold the sites, the cost of
acquisition of the lands for purposes of computation of capital gains will be their original
cost, and not the market value on the date of their conversion into housing sites. The
principles laid down by the Supreme Court in Bai Shirinbai K. Kooka [1962] 42 ITR 86
cannot be invoked, since those principles do not apply to provisions relating to capital
gains.

35. CIT v. Steel Group Ltd. [1981] 131 ITR 234 (Cal.)
Events subsequent to date of acquisition are not relevant- While computing the capital
gains, the assessee is concerned with the cost of acquisition, that is, the price which was
paid by the assessee for acquiring the capital asset on the date it was acquired, subject to
such adjustments as laid down under section 55. The assessee has no concern with what
would be the value of that asset on some subsequent occasion; in other words, subsequent
events need not be taken into consideration.

36. CIT v. K. Raja Gopala Rao [2001] 252 ITR 459 (Mad.)
Mortgage expenses are not excludible - Where the assessee purchased a property and on
the very date of purchase mortgaged the property in order to pay the vendor and for meeting
the cost of stamp duty on the sale deed, and later sold the property, the mortgage expenses
incurred in connection with the acquisition of the property as well as interest payable on
the mortgaged amount would form part of the cost of acquisition of the property for the
purpose of computation of capital gains. The fact that the mortgage was executed after the
sale deed was obtained even though both the documents were signed and registered on the
same day does not render the mortgage and the borrowing made thereunder irrelevant to
the task of determining the cost of acquisition.

37. Parmanand Bhai Patel & Smt. Jyotsna Devi Patel v. CIT [1984] 149 ITR 80 (MP).
Cost of Improvement- Expenses must have actually been incurred - Only those expenses
which have been actually incurred by the assessee in making additions and improvements
in the property ought to be taken into consideration as ‘cost of improvement’ while
computing capital gains under section 55(1)(b) of the Act.

38. Asstt. CIT v. Narendra I. Bhuva (2004) 90 ITD 174(Mum.)

The assessee is also not trader or businessman rather he is holding important position in the
State Government. Therefore, the purchase of car cannot be stated to be usual trade or
business or even incidental thereto. Under the circumstances it will be difficult to accept
the observation of the assessing officer that the transaction is an adventure in the nature of
trade. Accordingly, we hold that the purchase and sale of antique car by the assessee is not
an adventure in the nature of trade.
Issue: Whether the surplus on sale of the car is taxable as long term capital gain or the car
in question is a part of "personal effect" for the purpose of definition of capital asset in
section 2(14) to mean, property of any kind held by an assessee whether or not connected
with his business or profession?
After going through all the decisions, we find that the test which is to be applied for
ascertaining, whether a particular asset is "personal effect" would be whether the particular
asset was intimately and commonly used by the assessee. If we apply this test to the facts
of the case, which is before us, we find that the antique car in question cannot be taken as
"personal effect" of the assessee. From the facts gathered by the assessing officer, it is clear
that the subject car was not used even occasionally by the assessee for his personal purpose.
Whatever submissions has been made before authorities below and before us, in support of
the claim that car was used for personal purposes, is not supported by any evidence.
Whatever evidence has been produced, they are self-serving unsupported by any evidence.
The assessee has failed to produce any evidence that some expenditure was incurred on
repair of the car or running of the car or having used occasionally like participating in any
car rally organized by government or by any other organization. The fact that the car was
not even parked at the residence of the assessee also strengthen the case of the Income Tax
Officer that it was not used by the assessee. The reason for parking at a distant place at the
residence of relative has been given by the assessee before the Commissioner (Appeals) ie.
assessee being prudent business man will not think of parking such a valuable article in
open compound or on the road," also goes against the assessee. One of the plea taken by
the assessee that assessee had purchased the car as a pride of possession. It may have been
kept as a matter of pride but it is difficult to understand how such user can be characterized
as a "personal use". The "personal use", which is contemplated by the exemption is not a
pride of possession. The element of pride of possession call be understood, to some extent,
in the case of Maharaja or Maharani, but it is difficult to understand in the case of a salary
employee like the assessee.
Therefore, on the given facts and in light of the ratio laid down by the decisions relied upon
the by the Departmental Representative unlike the ones relied by learned authorised
representative which are distinguishable, we hold that the antique car held by the assessee
is not a "personal effect" as occurring in section 2(14)(ii) rather it is a capital asset.
Consequently, the surplus realized on its sale is chargeable to Capital gain under section 45
of Income Tax Act, 1961.

39. CIT v. Lingmallu Raghukumar (2001) 247 ITR 801 (SC)

The Supreme Court has held that when a partner retires from a firm and the amount of his
share in the partnership assets after deduction of liabilities and prior charges, is determined
on taking accounts in the manner prescribed by the partnership law, there is no element of
transfer of interest in the partnership assets by the retired partner to the continuing partners
and the amount received by the retiring partner is not capital gain.

40. T.V. Sundaram Iyengar & Sons Ltd. v. CIT (1959) 37 ITR 26 (Mad.)
Capital gains tax is payable in year in which assessee has acquired a right to receive profits,
and its actual receipt in that year is not necessary.
41. B.B. Sarkar v. CIT (1981) 132 ITR 150 (Cal.)
Where assessee spent capital gains partly for purchase of another house and partly for
further construction on it, he would still be entitled to exemption under section 54,

42. CIT v. Madhukumar N. (HUF) (2012) 208 Taxman 394 (Kar.)

It has been held that apart from location of the land, a notification from the Central
Government is also required to treat an agricultural land as urban land.
On this issue, the Karnataka High Court observed that, as per section 2(14), an agricultural
land is not a capital asset except in the following cases-
(a) When it is located within the jurisdiction of a municipality, etc., which has a population
not less than 10,000 or
(b) When it is located within 8 kilometers from the local limit of a municipality, etc.,
mentioned in (a) above, which is notified by the Central Government in this regard.
For an agricultural land to become a capital asset by virtue of (b) above, two conditions
have to be satisfied namely, the population of the municipality etc., should not be less than
10,000 and the same should be notified by the Central Government.

43. CIT v. Kan Construction and Colonizers (P) Ltd (2012) 208 Taxman 478 (All.)
The assessee sold a plot of land for Rs. 79 lakhs. The AO held that the said plot was a
capital asset and that the gains had to be computed in accordance with s. 50C. The CIT (A)
& Tribunal upheld the assessee’s claim that as the said plot was held as stock-in-trade, s.
50C did not apply. On appeal by the department to the High Court, held dismissing the
appeal:
For applicability of s. 50C, it is essential that an asset should be a “capital asset”. The
question whether an asset is a “capital asset” or “stock-in-trade” is one of fact and has to
be determined as per the guidelines laid down. On facts, the assessee was a builder and the
investment in purchase and sale of plots was ancillary and incidental to the business
activity. The assessee had treated the land as stock in trade in the balance sheet.
Consequently, s. 50C had no application.

44. Namdhari Seeds

The assessee company is in the business of cultivation, production and marketing of open-
hybrid seeds both for the domestic and international market and entered in to agreement
with the farmers for production of open-hybrid seeds for its own benefit or on behalf of its
overseas principals. Assessee Company supplied the seeds & supervised the cultivation of
seeds. After harvesting, the company purchased from farmers at fixed price. Assessee
Company has done the process of cleaning, grading and converting into certified seeds.
Assessee has claimed entire income as exempt under section 10(1). Assessing Officer
denied the exemption. On appeal before the Tribunal the tribunal opined that 10 percent of
the net profit should be treated as business income and balance 90 percent of the net profit
as agricultural income exempt from tax. On appeal to High Court by revenue the court held
that the income is not agricultural income.
45. Jindal stainless steel
In the case of "a tax", the levy is a part of common burden based on the principle of ability
or capacity to pay. In the case of "a fee", the basis is the special benefit to the payer
(individual as such) based on the principle of equivalence. When the tax is imposed as a
part of regulation or as a part of regulatory measure, its basis shifts from the concept of
"burden" to the concept of measurable/quantifiable benefit and then it becomes "a
compensatory tax" and its payment is then not for revenue but as reimbursement/
recompense to the service/facility provider. It is then a tax on recompense. Compensatory
tax is by nature hybrid but it is closer to fees than to tax as both fees and compensatory
taxes are based on the principle of equivalence and on the basis of
reimbursement/recompense. If the impugned law chooses an activity like trade and
commerce as the criterion of its operation and if the effect of the operation of the enactment
is to impede trade and commerce then Article 301 is violated.
Therefore, whenever a law is challenged on the ground of violation of Article 301, the
Court has not only to examine the pith and substance of the levy but in addition thereto, the
Court has to see the effect and the operation of the impugned law on inter-State trade and
commerce as well as intra-State trade and commerce.
In Jindal Stainless Ltd. (2) [2006] 145 STC 544 (SC), the Constitution Bench while
considering the scope of articles 301, 302 and 304 of the Constitution vis-a-vis
compensatory tax, observed that taxing laws are not excluded from the operation of article
301, which means that tax laws can and do amount to restrictions on the freedom
guaranteed to trade under Part XIII of the Constitution.

46. Atiabari tea

The Supreme Court in the Atiabari Tea Co. case held that taxes, which hampered free flow
of trade and commerce, contravened Part XIII and, therefore were unconstitutional.
The court emphasized whatever else it (Art.301) may or may not include, it certainly
includes movement of trade which is of the very essence of all trade and is its integral part,
and, further, that primarily it is the movement part of the trade which Article 301 has in its
mind, that the movement or the transport of the trade must be free, and that it is the free
movement or the transport of goods from one part of the country to the other that is intended
to be saved.
The word 'free' in Article 301 cannot mean an absolute freedom or that each and every
restriction on trade and commerce is invalid. The Supreme Court has held in Atiabari that
freedom of trade and commerce guaranteed by Article 301 is freedom from such
restrictions as directly and immediately restrict or impede the free flow or movement of
trade. Therefore Article 301 would not be attracted if a law creates an indirect or
inconsequential impediment on trade, commerce and intercourse which may be regarded
as remote. The word 'free' in Article 301 does not mean freedom from regulation. As has
been observed by the SC: there is a clear distinction between laws interfering with freedom
to carry out the activities constituting trade and laws imposing on those engaged therein
rules of proper conduct or other restraints directed to the due and orderly manner of carrying
out the activities.
47. Automobile transport v. State of Rajasthan
The State of Rajasthan had levied a tax on motor vehicles ( Rs. 60 on a motor car and Rs.
2000 on a goods vehicle per year) used within the state in any public place or kept for use
in the state. The validity of the tax was challenged.
The concept of compensatory tax evolved in this case was something new as in Atiabari,
the court had dismissed the argument that the money realized through the tax would be
used to improve roads and waterways rather curtly by saying that there were other ways,
apart from the tax in question, to realize the money, and that if the said object was intended
to be achieved by levying a tax on the carriage of goods, the same could be done only by
satisfying Art. 304(b).
Decision: The court ruled that Art.301 did not hit the tax, as it was a compensatory tax
having been levied for use of the roads provided for and maintained by the state. Thus, to
this extent, the majority view in Atiabari was now overruled by Automobile.
Since then the concept of regulatory and compensatory taxes has become established in
India with reference to entries 56 and 57, List II, and the concept has been applied in several
cases, and progressively the courts have liberalized the concept so as to permit state
taxation at a higher level.

48. Vodafone International Holdings B.V. v. Union of India & Anr., (2012) 6 SCC 613
Vodafone International Holding (VIH) and Hutchison telecommunication international
limited or HTIL are two non-resident companies. These companies entered into transaction
by which HTIL transferred the share capital of its subsidiary company based in Cayman
Island i.e. CGP international or CGP to VIH.
Sale of CGP share by HTIL to Vodafone or VIH does not amount to transfer of capital
assets within the meaning of Section 2 (14) of the Income Tax Act and thereby all the rights
and entitlements that flow from shareholder agreement etc. that form integral part of share
of CGP do not attract capital gains tax.
The order of High Court of the demand of nearly Rs.12, 000 crores by way of capital gains
tax would amount to imposing capital punishment for capital investment and it lacks
authority of law and therefore is quashed.
The section 195 shall apply in case payments are made by resident to non-resident and not
between two non-resident companies. The present transaction was between two non-
residents entities through a contract executed outside India where the consideration was
also passed outside India and hence VIH is not legally obliged to respond to the notice
under section 163 which relates to the treatment of purchaser as a representative assesses.

49. Hyderabad Secunderabad case

There is no generic difference between a tax and a fee. The State may exercise its power to
collect money by making special assessment or by imposing taxes or fees. A license fee
can also be regulatory when the activities for which a license is given require to be
regulated.
It is, by now, well settled that a license fee may be either regulatory or compensatory. When
a fee is charged for rendering specific services, a certain element of quit pro quo must be
there between the services rendered and the fee charged so that the license fee is
commensurate with the cost of rendering the service although exact arithmetical
equivalence is not expected. However, this is not the only kind of fee which can be charged.
License fee can also be regulatory when the activities for which a license is given required
to be regulated or controlled. The fee which is charged for regulation for such activity
would be validly classifiable as a fee and not a tax although no service is rendered. An
element of quid pro quo for the levy of such fees is not required although such fees cannot
be excessive.

50. Azadi Bacho Andolan

The Supreme Court has now found that Government of India has the power under Sec. 90
to enter into an agreement not only to give relief, where there is double taxation, but also
to avoid potential double taxation by demarcating the respective areas of jurisdiction of
taxation, even if no tax is levied presently in the other country. This aspect of the matter
has already been subject matter of amendment to meet the objection of the High Court in
clearer terms by empowering the Government to enter into agreements for promoting
"mutual economic relations, trade and investments" by Finance Act, 2003. The decision
makes such amendment unnecessary.
It was found that in view of the provisions in the domestic law, the treaty law get
assimilated as part of the domestic law even as laid down by the Supreme Court and High
Courts in a number of cases and conceded by Board Circulars apart from the clear language
of law and the precedents in other countries in interpretation of treaty law. The decision
asserts the principle of `treaty override' to the effect that there can be no tax liability if it is
spared by the Agreement, even if there is liability under the domestic law.
Since treaty law is a concessional law with a view to promoting international trade, the
object is best sub-served by a liberal interpretation as applicable for tax concessions in
interpretation of domestic law. It is again a principle in interpretation of law following
established precedents, that in such cases the law should be liberally interpreted so as to
give effect to the intention of the treaties and not to defeat or frustrate the purpose.
Treaty shopping, even if treated as treaty abuse and bad as felt by developed countries, is
not a matter on which courts are called upon to prevent the same because they have to
interpret the law as it is on the plea, that treaty shopping is unethical. At any rate, treaty
shopping has benefited countries like India, China, Cyprus and other countries by inflow
of capital and technology. The fact, that investments may be routed through Mauritius by
investors to take advantage of better treaty terms in Indo-Mauritius Agreement need not,
therefore, inhibit implementation of the Agreement as long as it is done by incorporating a
company in Mauritius.
Circular No. 789 dated April 13, 2000 recognising incorporation certificate as evidence of
physical residence accords with treaty law and at any rate, it cannot be faulted on grounds
of jurisdiction, since the Board has the necessary power under Sec. 119 of the Act to clarify
the law. Even as held in a number of earlier precedents, the circulars are binding, even if
Sec. 119 is not specifically referred in such circular, since Board has jurisdiction for issue
of such circulars.
A curious development is that, the circular itself has been meanwhile withdrawn and
replaced by a circular authorising the assessing officer to question the physical residence
evidenced by incorporation certificate issued by the participant country in the treaty with
India by Circular No. 1 dated February 10, 2003 of 2003 (2003) 260 ITR (St.) 245. It would
now appear that it is necessary to restore the earlier circular, so as to accord with the
decision of the Supreme Court.
A still another major issue decided in this case is overruling the argument based on
McDowell & Co. Ltd. (1985) 154 ITR 148 (SC). One of the Judges, Justice O. Chinnappa
Reddy in this case had felt that it is neither ethical nor legal to avoid tax and that, such right
to pay least tax as recognised in English Law known as Westminster principle, has ceased
to be good law even in England, the home of such principle, so that the earlier decision of
the Supreme Court in CIT v A. Raman & Co. (1968) 67 ITR 11 (SC) and other cases
holding that tax avoidance is legitimate is not correct.
The Supreme Court in the present case has pointed out that the separate judgement in the
words of Justice Rangnath Misra ruling out only artificial means to avoid tax should be
understood as the ruling of the Court (Bench of five judges) especially in the light of many
subsequent decisions of the Supreme Court and High Courts explaining the judgement.
It was pointed out that the inference that Westminster principle has been overruled in
England is not correct and that at any rate the correct position in English law is that tax
mitigation is not ruled out. The Supreme Court also deprecated the use of the words `sham'
and `device' lightly to undo a legitimate business arrangement.
Since McDowell's case has been used by the tax administration to question every legitimate
arrangement, this decision of the Supreme Court puts the law in proper perspective and
should, therefore, be welcome in clearing many cobwebs in our law relating to tax planning.

51. Davy Ashmore India Ltd

Our attention has been drawn to a decision of the Andhra Pradesh High Court in the case
of CIT v. Visakhapatnam Port Trust. There, the Andhra Pradesh High Court, while
considering the Indo-German Double Taxation Avoidance Agreement, held that in cases
of inconsistency between the Agreement and the Act, the Agreement will prevail. In our
view, where an express provision to the contrary is made in this Agreement, the transaction
will be governed by such Agreement. The conclusion is inescapable that, in case of
inconsistency between the terms of the Agreement and the taxation statute, the Agreement
alone would prevail.
Where a Double Taxation Avoidance Agreement provided for a particular mode of
computation of income, the same should be followed, irrespective of the provisions in the
Income-tax Act. Where there is no specific provision in the Agreement, it is the basic law,
i.e., the Income-tax Act that will govern the taxation of income.

52. GVK Industries v. Income Tax Office

In this case, it was held by the Supreme Court that only those extra-territorial laws are valid
that have a nexus with India. In other words only those extra-territorial laws that seek to
address/remedy a cause through which the Indian interests are getting affected and the one
that is in direct contravention with the law of the land, are valid. In India, there are no full-
fledged laws that are extra-territorial in nature. However, there are laws that have specific
provisions confirming their extra-territorial jurisdiction. Similarly, Section 9 (1) of the
Income-tax Act, 1961 provides a deeming fiction to effectively treat income of a non-
resident assessee taxable which accrues or arises in India. Section 9, thus is extra-territorial
in nature as it is applicable to non-resident assesses, although it seeks to tax only that part
of their income which has a nexus in India.

53. McDowell v. CTO, Supreme Court (1985)

Tax avoidance is reducing or negating tax liability in legally permissible ways by
structuring one's affairs. Any such transaction would be valid only if it has commercial
substance and is not a colourable device. The Supreme Court held that for tax planning to
be legitimate it must be within the legal framework and colourable devices cannot be part
of tax planning. In deciding whether a transaction is a genuine or colourable device, it is
open for the tax authorities to go behind the transaction and examine the "substance" and
not merely the "form".

54. CIT v. Shah Wallace (Bombay HC)

The object of the Indian Act is to tax income, a term which it does not define. It is expanded,
no doubt, into income, profits and gains, but the expansion is more a matter of words than
of substance. Income, their Lordships think, in this Act connotes a periodical monetary
return coming in with some sort of regularity, or expected regularity, from definite sources.
The source is not necessarily one which is expected to be continuously productive, but it
must be one whose object is the production of a definite return, excluding anything in the
nature of a mere windfall. Thus income has been likened pictorially to the fruit of a tree, of
the crop of a field. The word income is not limited by the words profits and gains. Anything
which can properly be described as income, is taxable under the Act unless expressly
exempted.

55. Debeers case

The company carried on the business of diamond mining in South Africa, but its main
management functions were in England.
Held: The question of where a company was resident was one of fact: ‘the principle [is]
that a company resides for purposes of income tax where its real business is carried on. I
regard that as the true rule, and the real business is carried on where the central control
and management actually abides.’

56. Morgan Stanley (PE – Permanent Establishment)

In Morgan Stanley’s case, the Supreme Court concluded that the US company did not have
a PE in India on most accounts, except that if personnel are deputed to India, then the
deputees are likely to constitute a ‘service PE’ in India. Under the India-US tax treaty, if a
US company renders services within India through its personnel for a specified period, the
US company will have a ‘service PE’ in India.
In this case, the court examined the consequences of Morgan Stanley sending personnel to
India (i.e., the Mumbai company) on stewardship and deputation and concluded that as
regards stewardship, no ‘service PE’ will exist, whereas deputation will result in a ‘service
PE’.
In arriving at this conclusion, the Supreme Court has for the first time distinguished
between ‘stewardship’ and ‘deputation’.
The court ruled that stewardship activities, which essentially involved supervision of the
operations of the Mumbai company and similar activities, were for purposes of risk
mitigation and quality control for Morgan Stanley’s benefit. These activities are not the
same as ‘rendering services’ to the Mumbai company and therefore does not result in a PE
of Morgan Stanley in India. This is obviously a welcome development for India’s BPO
industry, a substantial part of which comprises captive outsourcing by multinationals.
Typically, the multinationals send personnel to India to oversee the transitioning of
processes, functioning of Indian operations and similar activities.
The Supreme Court has held that if it can be demonstrated that the activities of these
personnel are in the interest of the non-resident and not the resident, these activities will
not be treated as ‘services’ rendered to the resident and hence the non-resident will not be
taxable in India.
The Supreme Court, on the other hand, held that ‘deputation’ of personnel by Morgan
Stanley to the Mumbai company will expose Morgan Stanley to a service PE in India.
Assuming the existence of Morgan Stanley’s PE in India, the Supreme Court then went on
to evaluate Indian tax consequences in the hands of Morgan Stanley.
Tax treaties generally provide that such part of the non-resident’s income that is
‘attributable’ to the PE will be subject to tax in the PE country.

57. Bhagatram vs. Commissioner of Sales Tax, M. P

In Bhagatram's Case, although it was demonstrated by the appellant State and not disputed
by the respondents that the levy was compensatory, the Court goes on to make an
observation that compensation need not be that which facilitates the trade only. It observes
that the concept of compensatory nature of tax has been widened and if there is substantial
or even some link between the tax and the facilities extended to such dealer directly or
indirectly the levy cannot be impugned as invalid.
It maintained the position that "some connection" between the tax and the trading facilities
extended to dealers directly or indirectly is sufficient to characterize it as compensatory
tax.

58. Gould v. Gould

On behalf of the Government it is urged that taxation is a practical matter and concerns
itself with the substance of the thing upon which the tax is imposed rather than with legal
forms or expressions. But in statutes levying taxes the literal meaning of the words
employed is most important, for such statutes are not to be extended by implication beyond
the clear import of the language used. If the words are doubtful, the doubt must be resolved
against the Government and in favor of the taxpayer.

59. Duke of Westminister

The Duke’s gardener was paid weekly, but to reduce tax, his solicitors drew up a deed in
which it was said that the earnings were not really wages, but were an annual payment
payable by weekly instalments.
Held: To find out what the true relationship was and what the true nature of these payments
were, you had to look at the deed.
Tomlin L said: ‘it is said that in revenue cases there is a doctrine that the Court may ignore
the legal position and regard what is called ‘the substance of the matter’, and that here the
substance of the matter is that the annuitant was serving the Duke for something equal to
his former salary or wages, and that therefore while he is so serving, the annuity must be
treated as salary or wages. This supposed doctrine seems to rest for its support upon a
misunderstanding of language used in some earlier cases. The sooner this misunderstanding
is dispelled, and it’s supposed doctrine given its quietus, the better it will be for all
concerned, for the doctrine seems to involve substituting ‘the uncertain and crooked cord
of discretion’ for ‘the golden and straight method of the law’. Every man is entitled if he
can to order his affairs so that the tax under a tax statute is less than it would otherwise be.
If he succeeds in ordering them so as to secure this result, then, however unappreciative the
Commissioners of Inland Revenue or his fellow taxpayers may be of his ingenuity, he
cannot be compelled to pay an increased tax. This so called doctrine of ‘the substance’
seems to me to be nothing more than an attempt to make a man pay notwithstanding that
he has so ordered his affairs that the amount of tax sought from him is not legally
claimable.’ and ‘Whatever the substance of the arrangements may have been, their fiscal
effect had to be in accordance with the legal rights and obligations they created.’

60. Vodafone – transfer pricing case – Bombay HC

In a major relief to British telecom major Vodafone in the transfer pricing case, the Bombay
High Court on Thursday ruled in its favour, setting aside a tax demand of Rs. 3,700 crore
imposed on Vodafone India by the income tax authorities. This is likely to benefit
multinational companies such as IBM, Royal Dutch Shell and Nokia that face similar tax
demands.The case dates back to financial year 2007-8 involving the sale of Vodafone India
Services Private Ltd., the call centre business of Vodafone, to Hutchison, and the tax
authorities demanded capital gain tax for this transaction. The Income Tax department had
demanded that Rs.8,500 crore be added to the company’s taxable income.
Transfer pricing is referred to the setting of the price for goods and services sold between
related legal entities within an enterprise. This is to ensure fair pricing of the asset
transferred. For example, if a subsidiary company sells goods to a parent company, the cost
of those goods is the transfer price.
The court decision came as Vodafone challenged the order of the Income Tax Appellate
Tribunal which held last year that it structured the deal with Hutchison Whampoa
Properties, a company based in India, to circumvent transfer pricing norms, though it was
an international transaction wherein there was no arm’s length dealing between the related
entities.
Vodafone has repeatedly clashed with the authorities over taxes since it bought Hutchison’s
mobile business in 2007.Vodafone acquired the telecom business of Hutchison in India to
enter the Indian market. And the British company is also fighting another case with the tax
authorities relating to this transaction.
In this current transfer pricing case, Vodafone argued in the High Court that the Income
Tax Department had no jurisdiction in this case because the transaction was not an
international one and did not attract any tax.
The dispute on transfer pricing surfaced after the Income Tax Department issued a draft
transfer pricing order in December 2011 and added Rs. 8,500 crore to Vodafone’s taxable
income for the sale of the call centre business. In 2013, the Income Tax Department issued
a tax demand of Rs. 3,700 crore to Vodafone India.
However, the IT tribunal stayed the demand during the proceeding of the case and asked
Vodafone to deposit Rs. 200 crore by February 15, 2014. It complied with the order.
However, Vodafone argued that the sale of the call centre business was between two
domestic companies and the transfer pricing officer had no jurisdiction over the deal.

61. Knetch v. United States

In a 6-3 decision, Justice William J. Brennan wrote for the majority affirming the lower
court's decision that the transaction was a sham. The loans the insurance company gave
Knetsch were essentially rebates for a substantial portion of the interest payments and the
small amount kept by the company was its fee for providing a "façade of loans" to be used
to provide tax deductions. Justice William O. Douglas dissented, saying that as long as a
transaction is allowed within the limits of insurance policies it should be recognized by the
Internal Revenue Service, and any remedy should be left to the legislature.

62. Gregory v. Helvering

The legal right of a taxpayer to decrease the amount of what otherwise would be his taxes
cannot be doubted. But the question is, whether what was done, aside from the tax motives,
was the thing that the statute intended.

63. Emil Webber v. CIT

In this case, the question before the Hon’ble Court was-whether, on the facts and in the
circumstances of the case, the amount of tax paid by Ballarpur on behalf of the assessee in
assessment years 1974-75 and 1975-76 is taxable under the head “other sources”? The
Hon’ble Court observed that after looking into the matter from any angle, it is clear that the
amount paid by way of tax on the salary received by the assessee can be treated as income
of the assessee. However, it cannot be overlooked that the said amount is nothing but tax
on the salary. By virtue of obligation undertaken by Ballarpur to pay tax on the salary of
the assessee among others, it paid the said tax. Therefore, the payment is for and on behalf
of the assessee and it is not a gratuitous payment. If the tax had not been paid by Ballarpur,
the same would have to have been paid by the assessee. Therefore, it will be unrealistic to
say that the said payment had no connection with the salary. Accordingly, the amount was
held to be includible in the total income as “salary”.

64. Minister of Finance v. Smith

Lord Haldane, in delivering the judgment of the Privy Council in this case, that once the
character of a business has been ascertained as being of the nature of trade, the person who
carries it on cannot found upon elements of illegality to avoid the tax.
Lastly the dictum of Lord Morison is equally forcible:
It is, in my opinion, absurd to suppose that honest gains are charged to tax and dishonest
gains escape: To hold otherwise would involve a plain breach of the rules of the Statute,
which require the full amount of the profits to be taxed and merely put a premium on
dishonest trading. The burglar and the swindler, who carry on a trade or business for profit,
are as liable to tax as an honest businessman, and, in addition, they get their deserts
elsewhere.

65. Godhra Electric Company v. C.I.T

In that case, it was noted that the High Court held that the assessee would be obliged to pay
tax when the profit became actually due and that income could not be said to have accrued
when it is based on a mere claim not backed by any legal or contractual right to receive the
amount at a subsequent date. The High Court however held on the facts of the case that the
assessee had a legal right to recover the consumption charge in dispute at the enhanced rate
from the consumers.

66. Poona Electric Supply v. C.I.T

In this case the subject-matter of the decision was the amount appropriated to "consumers'
benefit reserve account" which was also a reserve statutorily required to be created by
Paragraph II of the Sixth Schedule to the Act. With reference to the claim for deduction of
that amount the Supreme Court observed: "The object of the Act and that of the Sixth
Schedule thereto, as aforesaid, is to statutorily rationalize and regulate the rates chargeable
for the energy supplied in the interest of the public and for electrical development. The
rules embodied in the Sixth Schedule to the Act are intended only to achieve that object.
Under the said rules certain appropriations and certain deductions have to be made to arrive
at the clear profit; otherwise the items may be manipulated to sustain a demand for
abnormal rates. The rules have no concern with income-tax, though for the purpose of
arriving at the clear profit the taxes paid are also deductible. If this distinction is borne in
mind, the problem presented is easily and readily solved. Under s. 10(1) of the IT Act, tax
shall be payable by an assessee under the head ‘profits and gains of business' in respect of
profits and gains of any business carried on by him. The said profits and gains are not
profits regulated by any statute, but profits in a business computed on business principles.
They are business profits and not statutory profits. They are real profits and not notional
profits. The real profit of a businessman under s. 10(1) of the IT Act cannot obviously
include the amounts returned by him by way of rebate to the consumers under statutory
compulsion. It is as if he received only from the consumers the original amounts minus the
amount he returned to them. In substance there cannot be any difference between a
businessman collecting from his constituents a sum of Rs. Y in addition to Rs. X by mistake
and returning Rs. Y to them and another businessman collecting Rs. X alone. The amount
returned is not a part of the profits at all."
The Supreme Court further observed: "The appellant-company is a commercial
undertaking. It does business of the supply of electricity subject to the provisions of the
Act. As a business concern its real profit has to be ascertained on the principles of
commercial accountancy. As a licensee governed by the statute its clear profit is ascertained
in terms of the statute and the Schedule annexed thereto. The two profits are for different
purposes—one is for commercial and tax purposes and the other is for statutory purposes
in order to maintain a reasonable level of rates. For the purposes of the Act, during the
accounting years the assessee credited the said amounts to the ‘consumers' benefit reserve
account'. They were a part of the excess amount paid to it and reserved to be returned to
the consumers. They did not form part of assessee's real profits. So, to arrive at the taxable
income of the assessee from the business under s. 10(1) of the Act, the said amounts have
to be deducted from its total income."

67. CIT v. Wazir Sultan

It is well-settled that for claiming deduction, apart from expenditure being for business, the
same has to be revenue expenditure. Though, there is no rigid rule to determine when
expenditure is capital or revenue, generally acceptable test is where advantage is for
enduring nature, it may be capital expenditure, while if the expenditure is for running of
the business, it is of revenue nature.
This question has to be answered with reference to language employed in Sub-section (5)
of Section 40-A of the IT Act. Insofar as it is relevant, the provision reads thus: "Section
40-A (5) whether the assessee—incurs any expenditure which results directly or indirectly
in the payment of any salary to an employee or a former employee, or incurs any
expenditure which results directly or indirectly in the provision of any perquisite (whether
convertible into money or not) to an employee or incurs, directly or indirectly, any
expenditure or is entitled to any allowance in respect of any assets of the assessee used by
an employee, either wholly or partly, for his own purposes or benefit, then subject to the
provisions of Clause (b), so much of such expenditure or allowance as is in excess of the
limit specified in respect thereof in Clause (c) shall not be allowed as deduction.

68. Meenu Sahik Mamik case – Unavailable.

69. Mcleod Russel india case

It was held that the amount adjusted by the foreign customer from the eligible turnover for
the purpose of computation of exemption under section 10B as claimed by assessee was to
be excluded from the export turnover.

70. L.S. Cables v. Director of Income tax

The Authority for Advanced Rulings in this case held that amount received by the applicant
from offshore supply of equipment’s and materials is not taxable in India under IT Act,
1961 as well as the India-Korea tax treaty. Further, the AAR held that existence of
Permanent Establishment is relevant for the purpose of carrying out the contract for onshore
supplies and services but such a PE would have no role to play in offshore supplies.

71. Airport authority of India case – Advance Ruling

The Authority for Advanced Ruling (AAR) has clarified that tax is not liable to be deducted
from the payments made to a non-resident if the transaction is a sale of equipment and
repairs that took place outside India. The AAR is a quasi-judicial body for settling tax
dispute.
The AAR ruled this on an application filed by the Airports Authority of India (AAI)
regarding its transactions with US-based Raytheon. However, the AAR said tax is required
to be deducted on a software maintenance contract AAI had with Raytheon. The agreement
between AAR and Raytheon was for supply of equipment and training facilities. It also had
an agreement for hardware repair and software maintenance.
A ruling can be sought even if alternate remedy to make an application under section 195(2)
in respect of determination of applicability of TDS provisions or rate of TDS is available
.
72. U.A.E Exchange Center LLC v. UOI and Anr. – Credits: Rohan Aloor
Facts: The petitioner is offering remittance services to NRIs in UAE. The funds are
collected from the NRI remitter by the petitioner in UAE. A one time fee of Dirhams 15
is levied and collected by the petitioner from the NRI remitter in UAE.

The funds are transmitted to the beneficiaries of the NRI remitter, in India either by
telegraphic transfer through normal banking channels via banks in India or are remitted
by involving the liaison offices of the petitioner in India, who in turn, download the
information and particulars necessary for remittance by using computers in India which
are connected to the servers in UAE, by drawing cheques on banks in India and
couriering/despatching the same to the beneficiaries of the NRI remitter in India.

Issue: Whether any income is accrued/deemed to be accrued in India from these

activities carried out by the petitioner in India ?

Ruling of the authority:

Without remittances of funds to the beneficiaries in India performance under the contract
would not have been complete and thus, the downloading of data, preparation of cheques
for remitting the amount, dispatching the same through courier by the liaison offices,
constituted an important part of the main work, which was, remitting the amount to the
beneficiaries as desired by the NRIs. Based on this reasoning, the Authority came to the
conclusion that the work of the liaison offices in India, being a significant part of the
main work of UAE establishment, the liaison office of the petitioner, in India, would
constitute a 'PE' within the provisions of the DTAA. The petitioner challenged the
advance ruling of the authority of advance rulings in India.

The Delhi High Court overruled the advance ruling and ruled that:

The activity carried on by the liaison offices in India did not, in any manner, whatsoever,
contribute directly or indirectly to the earning of profits or gains by the petitioner in UAE.
Every aspect of the transaction was concluded in UAE. The commission for the services
of remittances offered by the petitioner was also earned in UAE. The activity performed
by the liaison offices in India was only supportive of the transaction carried on in UAE. It
did not contribute to the earning of profits or gains by the petitioner in UAE. Therefore,
reasoning the Authority of the impugned order does not commend to us. The court
referred to Expln. 2 to Section 9(1):

The Explanation is a pointer to the fact that in order to have a business connection, in
respect of a business activity carried on by non resident through a person situated in India
it should involve more than what are supportive or subsidiary to the main function.
Illustratively, Clauses (a) to (c) includes activities such as habitually concluded contracts
on behalf of non-resident, maintaining of all stocks and goods and merchandises from
which he regularly delivers goods or habitually secures orders in India mainly or wholly
for the non-resident. The The Authority has clearly erred in applying the ratio of the
judgments of Supreme Court in the case of R.D. Aggarwal and Anglo French Textile Co.
which was not applicable in the present case.

Therefore, this income is not accrued/deemed to accrue in India.