commercial vehicles used for transportation of goods on hire are depreciable at 30% and not at 15%

Where assessee was commercially using vehicles for transporting goods on hire, assessee was entitled for depreciation at rate of 30 per cent according to CBDT Circular No. 609 dated 29-7-1991


Section 32, read with section 143, of the Income-tax Act, 1961 - Depreciation - Allowance/Rate of (Rate of depreciation) - Assessment year 2009-10 - Assessee was engaged in business of transportation of municipal waste and claimed depreciation at rate of 30 per cent - Assessing Officer allowed depreciation at 15 per cent - Whether, where there was a commercial exploitation of vehicles for transporting goods on hire and thus nature of assessee's business was under ambit of Circular No. 609 dated 29-7-1991, assessee was entitled for depreciation at rate of 30 per cent - Held,  [In favour of assessee]


facts of the case:-

■		The assessee was engaged in the business of transportation of municipal waste. It had various vehicles namely wheel tippers, push carts and light good vehicles etc. It had claimed depreciation at the rate of 30 per cent.
■		The Assessing Officer confronted the assessee as to why depreciation should not be allowed at the rate of 15 per cent. The assessee had filed a detailed note indicating his activities and as to why depreciation was applicable at the rate of 30 per cent. The Assessing Officer was not satisfied with the contention of the assessee. He allowed the depreciation at the rate of 15 per cent and made an addition.
■		The Commissioner (Appeals) confirmed the action of Assessing Officer. HELD ■   The Board has issued a circulars No. 609 dated 29-7-1991 pointing out as to how this controversy is to be silenced. [Para 4] ■   The facts of the present case are perused in the light of the Bombay High Court decision in CIT v.S.C. Thakur & Bros. [2010] 322 ITR 463/[2009] 180 Taxman 348 as well as in the light of thecirculars No. 609 dated 29-7-1991 and No. 652 dated 14-6-1993 of the Board, then it would reveal that the Commissioner (Appeals) has failed to construe the circular in right perspective. According to the Commissioner (Appeals) the circular is applicable if an assessee has used the motor vehicle for transporting the goods on hire or the higher rate of depreciation would be applicable or given on hire like Taxis. In the present case, the assessee has been transporting the solid waste of municipality on hire. Thus, the very nature of the assessee's business is such which bring him in the ambit of the said circular. It is not the case where a person is running any consultancy firm and used a motor car for himself. Here the vehicles are used for transporting the goods of third concern by virtue of a contract. There is a commercial exploitation of the vehicles for transporting the goods on hire. Therefore, the assessee is entitled for higher rate of depreciation. The appeal of the assessee allowed and the disallowance is deleted.

Institutions set-up to provide placement services to ex-army personnel and their widows were charitable institutions

Facts of the case :-

		The assessee was a welfare and non-profitable organization set-up by Indian Army. Its aims and objectives, inter alia, included placement for retired army personnel and their widows.
		Its application for registration under section 12A was rejected by DIT on the ground that assessee was doing a commercial activity as it was a placement agency which was charging fee for its services.
		The aggrieved assessee filed the instant appeal before the Tribunal. Tribunal held in favour of assessee :-   As per section 2(15) charitable purpose includes advancement of any object of general public utility. However, the proviso to sec. 2(15) provides that advancement of any object of general public utility shall not be a charitable purpose if it involves carrying on of any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business for a cess, fee or consideration.   Thus, rendition of a service would vitiate a charitable nature of the activity only when the service is rendered to a trade, commerce or business. In the instant case the service was rendered to ex-army personnel, their widows and dependents, rather than to any trade, commerce or business and, therefore, proviso to section 2(15) was not applicable.   There was nothing on record to suggest that this organization was set-up on any commercial basis. Mere receipt of fees from applicants could not convert a charitable activity into a commercial activity.   The assessee-institution was set-up by Indian army and it sought to promote the well being of their personnel after their retirement from the services, as also of the widows and dependents of the brave army men who sacrificed their lives, and would help them to integrate in the civil society by taking up suitable employment. This was an activity of general public utility, and, therefore, was covered by definition of charitable purpose.   Therefore, the activities undertaken by assessee-institution were not with a profit motive and such activity could not be considered as business activity. The DIT was to be directed to grant registration to assessee-institution under section 12A.

Mere cash deposit of above 10 lakhs in bank account doesn’t indicate that income has escaped assessment, says ITAT

The assessee had deposited cash in excess of Rs 10 lakhs in his saving bank account but he had not filed return of income. The AO reopened the assessment of assessee, as he had reason to believe that there was an escapement of income of Rs 10 lakhs. The Tribunal held that the AO proceeded on the fallacious assumption that bank deposits constituted undisclosed income and overlooked fact that the source of deposit need not necessarily be income of the assessee.

Facts of the case :

		The assessee had deposited Rs 10 lakhs (approx) in his saving bank account but no return of income was filed by him. The AO reopened the assessment of assessee, as he had reason to believe that there was an escapement of income of Rs 10 lakhs on part of assessee.
		The instant appeal was filed against validity of reassessment proceedings.

held in favour of assessee as under:

		At the stage of recording the reasons for reopening the assessment, the formation of prima facie belief that an income has escaped the assessment is necessary. However, it is also necessary that there must be something which indicates, even if not establishes, the escapement of income from assessment.
		Merely because some further investigation had not been carried out, which, could have led to detection to an income escaping assessment could not be a reason enough to hold the view that income had escaped assessment.
		In the instant case, merely the fact that deposits have been made in a bank account do not indicate that these deposits constitute an income which had escaped assessment.
		AO proceeded on the fallacious assumption that bank deposits constituted undisclosed income and overlooked the fact that the sources of deposit need not necessarily be income of the assessee. The reassessment proceedings could not be resorted to unless there was reason to believe, rather than suspect, that income had escaped assessment. Thus, reassessment proceeding was to be set aside.

Trust entitled to exemption even if it charged fee for commercial activity, being incidental to its charitable nature

Fee charged by trust for processing subsidy applications could not be deemed as commercial receipts if it was incidental to its charitable objectives. Thus, assessee-trust was entitled to exemption under Section 10(23C)(iv).

Facts of the case:-

		The assessee, National Horticulture Board (NHB) was an autonomous society set up by the Government to promote, develop horticultural activities and to enhance the social and economic well-being of the farmers, etc.
		As a part of pursuing these objectives, one of the activities in which assessee was involved in was disbursement of subsidy received from the ministry of agriculture in respect of qualified horticulture projects and, in this regard, assessee had received certain sum on account of cost of application form and the brochure from subsidy seekers.
		Assessee had filed its return (including the amount received from subsidy seekers) and it claimed exemption under section 10(23C)(iv).
		The Assessing Officer ('AO') disallowed the exemption by contending that the amount so received were for services rendered to the customers, which were in the nature of business, commerce and trade and, therefore, the activities of assessee could not be treated as charitable activities.
		On appeal, CIT(A) affirmed the order of AO. Aggrieved by the order of CIT(A), assessee filed the instant appeal before the Tribunal. held in favour of assessee as under:

		First proviso to Section 2(15) provides that the advancement of any other object of general public utility shall not be a charitable purpose, if it involves the carrying on of any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity.
		Thus, the above proviso has two limbs, one is related to carrying on of any activity in the nature of trade, commerce or business and other one is related to carrying on any activity of rendering any service in relation to any trade, commerce or business.
		There was no dispute that first limb of first proviso was not attracted on facts of the instant case, in as much as it was not even revenue's case that the assessee was engaged in activity in the nature of trade commerce or business. The addition was made by revenue by invoking the second limb, i.e., rendering of services in relation to any trade, commerce or business.
		The Delhi High Court in case of GS1 v. DGIT (Exemption) [2013] 38 taxmann.com 364 (Delhi) held that even for invoking second limb of first proviso to Section 2(15), it was sine qua non that the assessee had extended services to business, trade or commerce and such services have been extended in the course of business carried on by the assessee.
		It was, thus, clear that even in a situation in which an assessee receives a fees or consideration for rendition of a service to the business, trade or commerce, as long as such a service was subservient to the charitable cause and was not in the nature of business itself, the disability under second limb of first proviso to Section 2(15) will not come into play.
		The Delhi High Court in case of GS1(Supra) also observed that a small contribution by way of fee that the beneficiary pays would not convert charitable activity into business, commerce or trade in the absence of contrary evidence.
		Thus, in view of the judgment of Delhi High Court, AO was not justified in contending that the assessee's activities cease to be charitable activities under section 2(15) merely because the assessee had charged fees for processing the subsidy applications.

No rectification to reduce depreciation on vapour absorption machine at 25% if it was eligible to 100% depreciation

Section 32, read with section 154, of the Income-tax Act, 1961, read with Appendix-I, of the Income-tax Rules, 1962 - Depreciation - Allowance /Rate of (Vapour Absorption Machine) - Assessment year 2000-01 - Assessing Officer found that depreciation on Vapour Absorption Machine, an energy saving device was to be allowed to assessee at rate of 100 per cent - Whether proceedings under section 154 by merely stating that Vapour Absorption machine was a part of Centralized Air Conditioner and liable for depreciation at 25 per cent was not justified as same was counter to Para III, 3(iii)D(b) of Appendix-I to Income-tax Rules, 1962 - Held, yes

FACTS

■		The Assessing Officer found that depreciation on Vapour Absorption Machine, an energy saving device, was allowed to the assessee at the rate of 100 per cent instead of 25 per cent. Therefore, the Assessing Officer recomputed the depreciation at 25 per cent under section 154.
■		The assessee preferred an appeal before the Commissioner (Appeals). On appeal the Commissioner (Appeals) placing reliance on Appendix-I to the Income-tax Rules, 1962, which states that energy saving devices includes vapour absorption refrigeration systems, held that Vapour Absorption machine system was eligible for 100 per cent depreciation. However, the plea of the assessee that the Assessing Officer was not justified in passing an order under section 154 was rejected by the Commissioner (Appeals).
■		On cross appeal, the Tribunal, took the view that the issue as to whether Vapour Absorption Machine System was liable for 100 per cent depreciation or not was a debatable issue, which required examination of materials, details, particulars and application of mind and could not be rectified in the proceedings initiated under section 154 and consequently, held that the Assessing Officer lacked jurisdiction to exercise the power under section 154. The Tribunal, thus, dismissed the appeal filed by the revenue and allowed the cross-objection filed by the assessee.

HELD

■		The revenue tried to plead that vapour absorption machine installed by the assessee is part of the centralized air conditioner and it cannot be used as an independent machine and, therefore, depreciation at 25 per cent should only be allowed.
■		The said plea raised by the revenue cannot be accepted as it is evident from the order of the Commissioner (Appeals) that Vapour Absorption System is included in Energy Saving Devices specified in Para III, 3(iii) D(b) of Appendix-I to the Income-Tax Rules, 1962 and is eligible for 100 per cent depreciation. When there is a specific provision in the Income-Tax Rules allowing depreciation at 100 per cent to Vapour Absorption System and the same was granted by the Assessing Officer at the first instance, the subsequent proceedings for rectification under section 154 by merely stating that Vapour Absorption Heat Pump is a part of the Centralized Air Conditioner and liable for depreciation at 25 per cent, without giving any reasons, runs counter to Para III, 3(iii) D(b) of Appendix-I to the Income-tax Rules, 1962. Therefore, the Tribunal was justified in dismissing the appeal filed by the revenue and allowing the cross appeal filed by the assessee.

Tax benefits for export of software

Tax benefits for export of software

In this article the author has examined the contents of the CBDT's circular giving clarifications on various issues which relate to sections10A, 10AA & 10B of the I.T. Act, 1961. According to the author, the circular has clarity, on the issue of tax benefits for the export of software.

Introduction

1. Fast developments in the field of information technologies, including in the field of softwares, have made their impact, inter alia, on taxation aspects. There had been a growing realization that the Indian businesses should get tuned to the new culture of working of I.T. Softwares, which has by now assumed the status of an Industry.

Software development (also known as application development, software design, designing software, software application development, enterprise application development or platform development) is the development of a software product. The term 'software development' may be used to refer to the activity of computer programming, which is the process of writing and maintaining the source code, but in a broader sense of the term it includes all that is involved between the conception of the desired software through to the final manifestation of the software, ideally in a planned and structured manner. Therefore, software development may include research, new development, prototyping, modification, re-use, re-engineering, maintenance or other activities that result in software products [http://en.wikipedia.org].

2. Software in the context of the Income-tax Act, 1961 (the Act)

2.1 Under section 10A - Section 10A provides for exemption of income, inter alia, for the export of computer software, which has been defined in the Explanation 2 to section 10A as under:-

"(i)

'computer software' means -

(a)		any computer programme recorded on any disc, tape, perforated media or other information storage device; or
(b)		any customized electronic data or any product or service of similar nature, as may be notified by the Board,

		which is transmitted or exported from India to any place outside India by any means".
		Explanation 2 to section 10A, clarifying the position regarding onsite services reads as under:-
		"For the removal of doubts, it is hereby declared that the profits and gains derived from onsite development of computer software (including services for development of software) outside India shall be deemed to be the profits and gains derived from the export of computer software outside India".

2.2 Under section 10AA - It is a special provision in respect of newly established units in Special Economic Zones (SEZs) conferring tax benefits on such undertakings, including on export of computer software. Explanation 2 to this section clarifies the position regarding export of such software in regard to on the spot services as follows:-

Explanation 2 - For the removal of doubts, it is hereby clarified that the profits and gains derived from onsite development of computer software (including services for development of software) outside India shall be deemed to be the profits and gains derived from the export of computer software outside India.

This Explanation clearly says that onsite development outside India would constitute export and profits therefrom will be entitled to the benefit of section 10AA.

2.3 Under section 10B - This section of the Act is titled 'Special provision in respect of newly established 100 per cent EOU. The definition of computer software in this section is the same as in section 10A (supra) and the Explanation 3 to this section likewise clarifies the position in regard to on the spot development of computer software thus:-

Explanation 3 - For the removal of doubts, it is hereby declared that the profits and gains derived from onsite development of computer software (including services for development of software) outside India shall be deemed to be the profits and gains derived from the export of computer software outside India.

CBDT's Circular No. 01/2013, dated 17th January, 2013

3. The circular clarifies the position regarding export of computer software in the context of sections 10A, 10AA & 10B.

The relevant aspects from this circular are discussed in the later paragraphs.

The foregoing discussion shows that there was no confusion regarding grant of tax benefits under sections 10A, 10AA & 10B concerning receipts relating to onsite development of computer software outside India. However, to put the matter beyond doubt, the position has been clarified in replies to queries 4(a) & (b) in following few paras :-

4. Queries

4. (a) Whether onsite development of computer software qualifies as an export activity for tax benefits under sections 10A, 10AA & 10B of the I.T. Act, 1961?

4. (b) Whether receipts from deputation of technical manpower for such onsite software development abroad at the client's place are eligible for deduction under sections 10A, 10AA & 10B?

5. Detailed replies to above two queries

Reply to query at Sl. No. 4.(a) - CBDT had earlier issued a circular (Circular No. 694, dated 23-11-94), which provided that a unit should not be denied tax holiday under section 10A or 10B on the ground that the computer software was prepared onsite, as long as it was a product of the unit, i.e., it was produced by the unit. However, certain doubts appear to have arisen following the insertion of theExplanation 3 to sections 10A & 10B (vide Finance Act, 2001) and Explanation 2 to section 10AA (vide Special Economic Zones Act, 2005) providing that 'the profits and gains derived from onsite development of computer software (including services for development of software) outside India shall be deemed to be the profits and gains derived from the export of computer software outside India, and a clarification has been sought on the impact of the Explanation on the tax benefits as compared to the situation that existed prior to the amendments.

The matter has been examined in details. In view of the position of law, as it stands now, it is clarified that the software developed abroad at a client's place would be eligible for benefits under the respective provisions, because it would amount to deemed export and tax benefits would not be denied merely on this ground. However, since the benefits under these provisions can be availed of only by the units or undertakings set-up under specified schemes in India, it is necessary that there must exist a direct and intimate nexus or connection of development of software done abroad with the eligible units set-up in India and such development of software should be pursuant to a contract between the client and the eligible unit. To this extent, Circular No. 694, dated 23-11-1994 stands further clarified.

Reply to Query at Sl. No. 4.(b) - The clarification given reads as follows:-

It has also been brought to notice that it is a common practice in the software industry to depute technical manpower abroad (at the client's place) for software development activities (like upgradation, testing, maintenance, modification, trouble shooting, etc.), which often require frequent interaction with the clients located outside India. Due to the peculiar nature of the software development work, it has been suggested that such deputation of technical manpower abroad should not be considered as detrimental to the benefits of the exemption under sections 10A, 10AA & 10B merely because such activities are rendered outside the eligible units/undertakings.

The matter has been examined in details. Explanation 3 to sections 10A & 10B and Explanation 2 to section 10AA clearly declare that profits and gains derived from services for development of software outside India would also be deemed as profits derived from export. It is, therefore, clarified that profits earned as a result of deployment of technical manpower at the client's place abroad, specifically for the software development work pursuant to a contract between the client and the eligible unit should not be denied benefits under sections 10A, 10AA and 10B, provided such deputation of manpower is for the development of such software and all the prescribed conditions are fulfilled.

6. Queries on other related issues :

6.1 Query - Whether it is necessary to have separate master service agreement (MSA) for each work contract and to what extent it is relevant?

6.1-1 Reply to Query at Sl. No. 6.1 - As per the practice prevalent in the software development industry, generally two types of agreements are entered into between the Indian software developer and the foreign client. Master Services Agreement (MSA) is an initial general agreement between a foreign client and the Indian software developer, setting out the broad and general terms and conditions of business under the umbrella of which specific and individual Statement of Works (SOW) are formed. These SOWs, in fact, enumerate the specific scope and nature of the particular task or project that has to be rendered by a particular unit under the overall ambit of the MSA. Clarification has been sought whether more than one SOW can be executed under the ambit of a particular MSA and whether SOW should be given precedence over MSA?

The matter has been examined. It is clarified that the tax benefits under sections 10A, 10AA and 10B would not be denied merely on the ground that a separate and specific MSA does not exist for each SOW. The SOW would normally prevail over the MSA in determining the eligibility for tax benefits, unless the Assessing Officer is able to establish that there has been splitting up or reconstruction of an existing business or non-fulfilment of any other prescribed condition.

6.2 Query - Whether Research & Development (R&D) activities pertaining to software development would be covered under the definition of computer software stipulated under Explanation 2 to sections 10A and 10B?

6.2-1 Reply to query at Sl. No. 6.2 - The definition of computer software stipulated under Explanation 2 to sections 10A & 10B includes 'any customized electronic data or any product or service of similar nature, as may be notified by the Board..'. The CBDT had already issued Notification No. 890(E), dated 26-9-2000 specifying such items. The notification includes engineering and design but does not specifically include R&D activities related to software development in respect of which clarification has been sought.

After examining the matter, it is clarified that the services covered by the aforesaid notification, in particular the engineering and design do have the inbuilt elements of R&D. However, for the sake of clarity, it is reiterated that any R&D activity embedded in the engineering and design would also be covered under the said notification for the purpose of Explanation 2 to the above provisions.

6.3 Query - Whether tax benefits under sections 10A, 10AA & 10B would continue to remain available in case of a slump sale of a unit/undertaking?

6.3-1 Reply to query at Sl. No. 6.3 - The vital factors in determining the above issue would be the facts such as how a slump sale is made and what is its nature? It will also be important to ensure that the slump sale would not result into any splitting-up or reconstruction of existing business. These are factual issues requiring verification of facts. It is, however, clarified that on the sole ground of change in ownership of an undertaking, the claim of exemption cannot be denied to an otherwise eligible undertaking and the tax holiday can be availed of for the unexpired period at the applicable rates for the remaining years, subject to fulfilment of prescribed conditions.

6.4 Query - Whether it is necessary to maintain separate books of account by an assessee in respect of its eligible units claiming tax benefits under sections 10A & 10B?

6.4-1 Reply to query at Sl. No. 6.4 - Since there is no requirement, in law, to maintain separate books of account, the same cannot be insisted upon. However, since the deductions under these sections are available only to the eligible units, the Assessing Officer may call for such details or information pertaining to different units to verify the claim and quantum of exemption, if so required.

6.5 Query - Whether tax benefits under section 10AA can be enjoyed by an eligible SEZ unit consequent to its transfer to another SEZ?

6.5-1 Reply to query at Sl. No. 6.5 - This issue relates to cases where an eligible SEZ unit is shifted from one SEZ to another SEZ on account of commercial exigencies. This shifting is permissible under Instruction No. 59 (F.No. C-4/2/2010-SEZ) issued by the Deptt. of Commerce (SEZ Division), provided approval from the Board of Approvals (BoA) has been obtained. Doubts have been raised whether such shifting of an eligible unit would deprive the unit/undertaking of tax benefits, provided there is no splitting-up or reconstruction of an existing business?

The matter has been examined and it is clarified that the tax holiday should not be denied merely on the ground of physical relocation of an eligible SEZ unit from one SEZ to another in accordance with Instruction No. 59 of the Deptt. of Commerce (referred to above), if all the prescribed conditions are satisfied under the I.T. Act, 1961. It is further clarified that the unit so relocated will be eligible to avail of the tax benefit for the unexpired period at the rates applicable to such years.

6.6 Query - Whether new units/undertakings set up in the same location where there is an existing eligible undertaking would amount to expansion of the existing unit/undertaking.

6.6-1 Reply to query at Sl. No. 6.6 - Whether setting-up of a new unit/undertaking in a location (covered by section 10A, 10AA or 10B), where an eligible unit is already existing, would amount to expansion of already existing unit is a matter of fact requiring examination and verification. However, it is clarified that setting-up of such a fresh unit in itself would not make the unit ineligible for tax benefits, as long as the unit is set-up after obtaining necessary approvals from the competent authorities, provided it has not been formed by splitting-up or reconstruction of an existing business and it fulfils all other conditions prescribed in the relevant provisions of the law.

Where assessee has not sought any income exemption, there cannot be any expense thereagainst to be disallowed

Section 14A of the Income-tax Act, 1961, read with rule 8D of the Income-tax Rules, 1962 - Expenditure incurred in relation to income not includible in total income (Conditions precedent) - Whether where assessee did not make any claim for exemption of any income from payment of tax, disallowance under section 14A could not be made - Held, yes

Commissioner of income-tax - I

v.

Corrtech Energy (P.) Ltd

■		The assessee invested some money in shares out of the funds available to him. He borrowed funds for his business. The interest expenses claimed by the assessee was disallowed proportionately by the Assessing Officer under section 14A by applying rule 8D.
■		On appeal, the Commissioner (Appeals) confirmed such disallowance by observing that the assessee made investment in shares which would result only in dividends which would be exempt from tax and that not receiving any exempt income during current year would not entitle assessee to claim expenses related to investments.
■		On second appeal, the Tribunal held that the assessee had not claimed any exempt income in this year, in such a situation section 14A could have no application. The Tribunal, deleted the addition made under section 14A.
		held ■   Section 14A(1) provides that for the purpose of computing total income under chapter IV, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act. In the instant case, the Tribunal has recorded the finding of fact that the assessee did not make any claim for exemption of any income from payment of tax. It was on this basis that the Tribunal held that disallowance under section 14A could not be made. In the process tribunal relied on the decision of Division Bench of Punjab and Haryana High Court in case of CIT v. Winsome Textile Industries Ltd. [2009] 319 ITR 204 in which also the Court had observed that where the assessee did not make any claim for exemption, section 14A could have no application.

INTERPRETATION OF TAX LAWS

INTERPRETATION OF TAX LAWS


72 FREQUENTLY ASKED QUESTIONS

I. GENERAL RULES

Q.1 What is ‘Interpretation of law’.

Ans. According to Salmond ‘Interpretation or Construction’ means “the process by which the Courts seek to ascertain the meaning of the legislature through the medium of authoritative forms in which it is expressed.”.

The main body of the law is to be found in statutes, together with the relevant statutory instruments and in case law as enunciated by Judges in the Courts. But the Judges not only have the duty of declaring the law, they are also frequently called upon to settle disputes as to the meaning of words or clauses in a statute.

Statutes are normally drafted by legal experts who are experts in the particular branch of law of which the statute was to be a part. Although such persons are skilled in the law, due to the volume of legislation the statutes are often obscure and cryptic and we find courts and lawyers are busy in unfolding the meaning of ambiguous words and expressions in a statute. The age old process of application of the enacted law has led to formulation of certain rules of interpretation or construction.

Q.2 What are the basic rules of Interpretation governing the taxing statutes in general?

Ans. Rules of interpretation or canon of interpretation

The first and the most elementary rule of construction is that it is to be assumed that the words and phrases of legislation are used in their technical meaning if they have acquired one, or otherwise in their ordinary meaning, and the second is that the phrases and sentences are to be construed according to the rules of grammar.

The rule of construction is “to intend the legislature to have meant what they have actually expressed”. The object of all interpretation is to discover the intention of Parliament but the intention of Parliament must be deduced from the language used, for it is well accepted that the beliefs and assumptions of those who frame Acts of Parliament cannot make the law.

When Parliament enacts law, the law must be understood with reference to the language used in the provision construed in the light of the scheme of the Act and object of the statute and the provisions therein.

Where the plain literal expression of the statutory provision produces a manifestly unjust result, which could never have been intended by the legislature, the Court can modify the language to achieve the intention of the legislature and produce a rational construction.

A) Literal rule

If the language of the statute is clear and unambiguous, words must be understood in their plain meaning. The wordings of the Act must be construed according to its literal and grammatical meaning, whatever the result may be.

There is no room for any intendment. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used.

ICAI vs. Price Waterhouse, (1997) 90 Comp. Case 113, 140, 141 (SC)

State of West Bengal vs. Scene Seven P. Ltd. AIR 2000 SC 3089, 3094

Harbajan Singh vs. Press Council of India (2002) 3 SCC 722, 727

B) Intention of Legislature

The intention of the legislature assimilates two aspects:

a) In one aspect it carries the concept of “meaning’, i.e. what the words mean.

b) In another aspect, it conveys, the concept of purpose and object or the reason and spirit pervading through the statute.

The dominant purpose of construction of any statutory provision is to ascertain the intention of the legislature and the primary role is to ascertain the same by reference to the language used. The Supreme Court in Doypack Systems Pvt. Ltd. vs. UOI [1998 (2) SCC 299] laid down :

“It has to be reiterated that the object of interpretation of a statute is to discover the intention of Parliament as expressed in the Act. The dominant purpose in construing a statute is to ascertain the intention of the legislature as expressed in the statute, considering it as a whole and in its context that intention, and therefore, the meaning of the statute, is primarily to be sought in the words used in the statute itself, which must, if they are plain and unambiguous be applied as they stand”. The object of all interpretation is to discover the intention of Parliament, but the intention of Parliament must be deduced from the language used.”

“It is settled law that the expression used in a taxing statue would ordinarily be understood in the sense in which it is harmonious with the object of the statute to effectuate the legislative intention. It is equally settled law that, if the language is plain and unambiguous, one can only look fairly at the language used and interpret it to give effect to the legislative intention.”

CIT vs. Gwalior Rayon Silk Mfg. Co. Ltd. (1992) 196 ITR 149 (SC)

Keshavji Ravji & Co. vs. CIT (1990) 183 ITR 1 (SC)

K.P. Varghese vs. ITO (1981) 131 ITR 597 (SC)

C) The mischief rule of interpretation (Heydon’s rule)
A statute is to be construed so as to suppress the mischief in the law and advance the remedy. This was set out in Heydon’s case (1584) 3 Co. Rep. 7a. Under this rule the judge will look at the Act to see what was its purpose and what mischief in the common law it was designed to prevent.

Broadly speaking, the rule means that where a statute has been passed to remedy a weakness in the law, the interpretation which will correct that weakness is the one to be adopted.

CIT vs. Shahzada Nand & Sons. (1966 ) 60 ITR 392 (SC)

Classic Builders & Developers vs. UOI (2001) 251 ITR 492, 497 (MP)

Reckitt Colman of India Ltd. vs. ACIT (2001) 252 ITR 550 ( Cal .)

D) Strict construction of penal law
Remedial statutes are known as welfare, beneficial or social justice oriented legislations. Penal statutes, on the other hand, are those which provide for penalties for contravention of the law and are directed against the offender in relation to the state by making him liable to imprisonment, fine, forfeiture or other penalty.

A remedial statute receives a liberal construction, whereas a penal statute is strictly construed. In case of remedial statutes the doubt is resolved in favour of the class of persons for whose benefit the statute is enacted; whereas in case of penal statutes the doubt is resolved in favour of the alleged offender.

The principle applied in constructing a penal act is that if, in construing the relevant provisions, “there appears any reasonable doubt or ambiguity”, it will be resolved in favour of the person who would be liable to the penalty. If there are two reasonable constructions we must give the more lenient one. The court must always see that the person to be penalised comes fairly and squarely within the plain words of the enactment. It is not enough that what he has done comes substantially within the mischief aimed at by the statute.

“The subject is not to be taxed without clear words for that purpose …..”

CIT vs. Provident Inv. Co. Ltd. (1954) 32 ITR 190 (SC)

J.K. Steel Ltd. vs. UOI AIR 1970 SC 1173

CIT vs. Indo Oceanic Shipping Co. Ltd. (2001) 247 ITR 247 (Bom)

Hansraj & Sons vs. State of J & K (2002) 6 SCC 227, 237-39

E) The Golden Rule : Purposive interpretation
This rule is to some extent an extension of the literal rule and under it the words of a statute will as far as possible be construed according to their ordinary, plain, and natural meaning, unless this leads to an absurd result. It is used by the courts where a statutory provision is capable of more than one literal meaning and leads the judge to select the one which avoids absurdity, or where a study of the statute as a whole reveals that the conclusion reached by applying the literal rule is contrary to the intention of Parliament.

A construction which would defeat the very object of the legislature should be avoided.

Keshavji Ravji & Co. vs. CIT (1990) 183 ITR 1 (SC)

CIT vs. Gwalior Rayon Silk Mfg. Co. Ltd. (1992) 196 ITR 149 (SC)

Vikrant Tyres Ltd vs. ITO (2001) 247 ITR 821, 826 (SC)

F) Ejusdem generis rule
Under this rule where general words follow particular words the general words are construed as being limited to persons or things within the class outlined by particular words.

The words used together should be understood as deriving colour and sense from each other. They should be read together as one.

The rule of ejusdem generis is to be applied “with caution” and “not pushed too far”. It may not be interpreted too narrowly or unnecessarily if broad based genus could be found so as to avoid cutting down words to dwarf size.

— U.P. State Electricity Board vs. Hari Shanker Jain AIR 1979 SC 65

— Rohit Pulp & Paper Mills Ltd. vs. Collector of Central Excise AIR 1991 SC 754

G) Expressio unius est exclusio alterius
The expression of the thing implies the exclusion of another.

Q.3. What are the principles of natural justice?
Ans. Principles of natural justice are soul of an administration of justice and needs to be adhered to in order to make the order just and fair.

Natural justice is an important concept in administrative law. The doctrine of natural justice is a facet of fair play in action and if a statutory provision can be read consistent with the principles of natural justice, the court must and can do so as the legislature is presumed to intend to act in consonance with those principles.

a) Nemo debet essejudex in propria causa

No man shall be a judge in his own cause or the deciding authority must be impartial and without bias; and

b) Audi alteram partem

Hear the other side, or both the sides must be heard or no man should be condemned unheard or that there must be fairness on the part of the deciding authority.

The above principle got acceptance in India by The Supreme Court in the case of A.K. Kraipak vs. UOI AIR 1970 SC 150 and Maneka Gandhi vs. UOI AIR 1978 SC 597.

Q.4. Whether order passed in violation of principles of natural justice is void ab-initio?

Ans. Any order made in violation of principles of natural justice is void and a nullity.

Shreeram Durga Prasad [RB vs. Settlement Commission (1989) 176 ITR
169 (SC)]

Nawaabkhan vs. State of Gujarat AIR 1974 SC 1471

“….. Any decision which is unfair and arbitrary fall foul of the principles of Article 14 of the Constitution of India which envelops within itself the requirement of fairness which, in turn, in these days is a requirement of the principles of natural justice. …”

CWT vs. Jagdish Prasad Choudhary (1995) 211 ITR 472 ( Patna ) [F.B.]

The principles of natural justice are so fundamental that it is not to be construed as a mere formality. Where the materials relied upon are not enclosed in a show cause notice, there is no sufficient opportunity.

Appropriate Authority vs. Vijay Kumar Sharma (2001) 249 ITR 554 (SC)

The right is so fundamental that the failure to observe the principles of natural justice cannot be made good in appeal.

Lack of opportunity before the Assessing Officer cannot be rectified by the appellate authority by giving such opportunity.

Tin Box Co. vs. CIT (2001) 249 ITR 216 (SC)

Q.5 Whether irregularity in exercise of jurisdiction will render the order void.
Ans. Jurisdiction is a matter, which is at the root of any valid proceedings. Valid service of a valid notice within time is the foundation of a valid assessment
(a) Jurisdiction is not a matter of consent as held in the case of Sarita Jain vs. CIT (2003) 261 IR 499 (Del.)

(b) Service of Notice is not a mere procedural requirement

Upadhyaya (RK) vs. Shanabhai P. Patel (1987) 166 ITR 163 (SC)

(c) Need for proper sanction prior to filing a prosecution case is a matter of jurisdiction

Bohra (SA) ITO vs. Krishna Construction Co. (1998) 230 ITR 708 (Guj)

(d) In CIT vs. Bharat Kumar Modi (2000) 246 ITR 693 (Bom). The court held that an irregularity in the exercise of jurisdiction cannot result in annulment of the entire assessment proceedings. The appellate authorities were justified in setting aside the assessment.

Q.6. What is the theory of form and substance?

Ans: In revenue matters, what is material is the substance of the transaction and not the form. The doctrine of substance over the form was cited with approval by House of Lords in the following cases:

(a) Secretary of State in Council of India vs. Scobel (1903) 4 TC 618 (HL)

(b) Duke of Westminster vs. IRC (1936) 19 TC 490 (HL)

(c) IRC vs. Wesleyan General Assurance (1940) 30 TC 11 (HL)

(d) Sir Kikabhai Premchand vs. CIT (1953) 24 ITR 506 (SC)

(e) CIT vs. Kharwar (DM) (1969) 72 ITR 603 (SC)

(f) Panipat Woollen & General Milks Co. Ltd. (1976) 103 ITR 66 (SC)

Q.7 When two interpretations are possible, how should the court interpret the provision?

Ans. Where a provision in a taxing statute can be reasonably interpreted in two ways, that interpretation which is favourable to the assessee has got to be accepted.

CIT vs. Vegetable Products Ltd. (1973) 88 ITR 192(SC).

Chartered Housing Bhomka Finance Corpn vs. Appropriate Authority (2001) 250 ITR 1, 18 (Kar)

CIT vs. A.J. Abraham Anthraper (2004) 268 ITR 417, 432 (Ker)

Kapti Comm. Agency vs. State of U.P. (2004) 134 STC 436 448 452 (All)

Q.8 What is the meaning of Doctrine of Territorial Nexus.

Ans. Article 245(1) of the Constitution States “Subject to the provisions of this Constitution, Parliament may make laws for the whole or any part of the territory of India and the legislature of a State may make laws for the whole or any part of the State. Article 245(2) states. No Law made by the Parliament shall be deemed to be invalid on the ground that it would have extra – territorial operation.”.

Thus it makes clear that extra-territorial operation will not make a Parliamentary law invalid.

State vs. Narayandas AIR 1958 Bom 68(FB). AIR 1955 SC 661 at 750.

II. EXEMPTION – DEDUCTION

Q.9 What is the general rule for interpretation of provisions relating to exemptions ?

Ans. Provisions for deduction, exemption and relief should be interpreted liberally, reasonably and in favour of the assessee.

CIT vs. South Arcot District Co-operative Marketing Society Ltd. (1989) 176 ITR 117 (SC),

CIT vs. U.P. Co-operative Federation Ltd. (1989) 176 ITR 435 (SC),

Bajaj Tempo Ltd. vs. CIT (1992) 196 ITR 188 (SC)

IV. PENALTIES

Q.10 How to interpret the penalty provisions

Ans. The rule of strict construction applies to penal provisions.

Bhagwati Trading Co. vs. CIT (1977) 109 ITR 353

Ganesh Properties P. Ltd. vs. CIT (1993) 202 ITR 434 ( Cal )

In penal statutes if two possible and reasonable interpretation are possible the court must lean towards the construction which exempts the subject from penalty rather than one which imposes the penalty.

B.K. Agarwal vs. State of Orissa AIR 1966 (SC) 2531

CIT vs. Vegetable Products Ltd. (1973) 88 ITR 192 (SC)

V. OTHER ACTS, RULES, OPINIONS

Q.11 Whether interpretation given in different statutes of direct taxes is applicable to other Acts?

Ans. Where there are different statutes in pari materia though made at different times, they will be taken and construed together as one system and explanatory to one another. This principle applies with greater force in case of taxing statutes like Income-Tax, Gift Tax, Wealth Tax which bear intimate connection with one another (Verghese vs. CIT (1981) 131 ITR 597; C.I.T. vs. Ranga Pai (1975) 100 ITR 413) (Ker). Accordingly it has been held that rules of valuation prescribed under one Act have to be applied to valuation issues under other Acts (1983) 141 ITR 802 (Bom) and (1974) 96 ITR 87 (Mys) and (1985) 155 ITR 637.

CWT vs. Imperial Tobacco Co. of India Ltd. (1966) 61 ITR 461 (SC)

State of Assam vs. D. P. Barua (1970) 75 ITR 18 (SC).

All Kerala C.A. Associations vs. Union of India (2002) 258 ITR 679 (Ker.)

Nasiruddin vs. Sita Ram Agarwal (2003) 2 SCC 577, 585

Commissioners of Customs vs. Indian Oil Corpn. Ltd. (2004) 267 ITR 272,
277-78 (SC)

But this principle need not apply to read special provisions of one Act into the provisions of another and vice versa ITO vs. Varghese K.P. (1973) 91 ITR 49 (Ker)(FB)

Q.12. Whether opinion of Law minister is binding on Court?

Ans. In Builders Association vs. Union of India (1994) 209 ITR 877 (SC) the court held that the opinion of law minister and reply of minister in Parliament regarding a taxing provision cannot be treated as binding on the Court.

Q.13 Whether the reports of Select Committees, will be binding while interpreting the taxing statutes ?

Ans. Reports of Commissions or Inquiry Committees preceding the introduction of a Bill have also been referred to for similar purpose, i.e. either as evidence of historical facts or of surrounding circumstances or of mischief or evil intended to be remedied. For example, reference was made to the Indian States Finance Enquiry Committee Reports in A. Thangal Kunju Musaliar vs. Venkatachalam Potti, AIR 1956 SC 246; 29 ITR 349 (S.C.); to the Income-tax Enquiry Report, in CIT vs. Sodra Devi (1957) 32 ITR 615 (S.C.) (AIR 1957 SC 832); to the Press Commission’s Reports, in Express Newspaper (Pvt) Ltd. vs. Union of India (AIR 1958 SC 578) and to the report of a committee appointed to bring about changes in Company Law resulting in the passing of amending Act No. 65 of 1960 in Madanlal Fakirchand Dudhediya vs. S. Changdeo Sugar Mills Ltd. (AIR 1962 SC 1543). And, reference to the report of the Expert Committee on Financial Provisions was made in Union of India vs. Harbhajan Singh Dhillon (1972 83 ITR 582 (S.C.); AIR 1972 SC 1061. In Gopalan’s case, reference was made to the report of the Drafting Committee of the Constituent Assembly in interpreting Article 21 of the Constitution.

In India , reports of Select Committees or their chairmen can be studied to ascertain the meaning of an ambiguous provision. [S.P. Gupta vs. Union of India AIR 1982 SC 149 (para 313)]. Reports of the committee which preceded the enactment of the legislation, reports of Joint Parliamentary Committee, report of a commission set up for collecting information leading to the enactment are permissible aids to construction (R.S. Nayak vs. A.R. Antulay, (1984) 2 SCC 183). The question in CIT vs. P.K. Noorjahan (1997) 11 SCC 198; (1999) 237 ITR 570 (S.C.), was whether the word ‘may’ in section 69 of the Income Tax Act can be read as ‘shall’. The Supreme Court of India pointed out that in the Bill introduced in Parliament, the word ‘shall’ had been used, but during the consideration of the Bill and on the recommendation of the Select Committee, the word was substituted by the word ‘may’. It was held this clearly indicates the legislative intent and hence the word cannot be read as ‘shall’.

Report of Commissions & Committees — taken into Consideration

Haldiram Bhujiwala and another vs. Anandkumar Deepak Kumar &
Anr. (2000) 3 SCC 250

Rosy and Another vs. State of Kerala and others. (2000) 2 SCC 230

Reports of a joint parliamentary committee, report of a commission set up for collecting information leading to the enactment are permissible external aids to construction.

Nayak (RS) vs. Antulay (AR) AIR 1984 SC 684

Against – Asst. CIT vs. Velliappa Textiles Ltd (2003) 263 ITR 550, 560 (SC)

Dissenting M.V. Javali vs. Mahajan Borwell (1998) 230 ITR 1 (SC)

Q.14 Whether parliamentary debate can be considered for interpretation of taxing statute.?.

Ans. In cases of ambiguity, the legislative debate ,which resulted in coming in to existence of the provision can be looked in to .

S.P.Gupta vs. Union of India AIR 1982 SC 149. (para 313.) CIT vs. Mahindra & Mahindra Ltd (1983) 144 ITR225 1 (SC).

Q.15. Whether the Finance Ministers Speech is relevant for interpretation a provision.

Ans. In J.B. Boda &CO;vs. CBDT (1997) 223 ITR 271 (SC), the court held that the Finance Ministers speech is relevant for interpretation a provision. In Allied Motors (P)Ltd vs. CIT (1977) 224 ITR 677 (SC). ,the court held that the budget speech of the Finance minister and memorandum explaining the Finance Bill as also the Dept. circular showing the departmental understanding are relevant in construing the provision.

Q.16. Whether budget speech of finance minister and memorandum explaining the provision, are relevant for interpretation?

Ans. In Allied Motors (P) Ltd vs. CIT (1997) 224 ITR 677(SC), the court held that, finance ministers, speech, memorandum explaining the provisions are relevant in construing the provision.

In Kumar J.C. Sinh Eileen AIR 1955 SC 515, the court held that the statement of object and reasons of an enactment cannot be used to ascertain true meaning and effect of statutory provision, but it can certainly be seen for limited purpose of understanding the background, antecedent state of affairs object of legislation.

CIT vs. D’costa Brother (1963) 49 ITR 1 (Bom). CIT vs. Mahindra & Mahindra Ltd. (1983) 144 ITR 225(SC)

Finance Minister’s Speech before Parliament can be relied on to throw light on object & purpose of provisions.

Kerala State ID Corpn Lt d. vs. CIT 259 ITR 51 (SC) (2003)

Sound-N-Music (BR) vs. Bhardwaj (OP) 1988 173 ITR 433 (Bom)

Narisamha Rao (PV) vs. State CBI AIR, 1998 (SC) 2120

Q.17 What is the relevance of a meaning given in dictionaries and text books for interpretation?

Ans. When a word is not defined in the statute a dictionary is often useful in ascertaining its meaning. Courts usually rely on standard dictionaries, such as Webster’s or the Oxford Dictionary.

CIT vs. Raja Benoy Kumar Sahas Roy (1957) 32 ITR 466 (SC)

Q.18 When are the provisions of the General Clauses Act applicable to interpretation of taxing statutes.

Ans. The General Clauses Act has been enacted to avoid superfluity and repetition of language in various enactments. The object of this Act is to shorten the language of Central Acts, to provide as far as possible, for uniformity of expression in the Central Acts, by giving definition of series of terms in common use, to state explicitly certain convenient rules for the construction and interpretation of the Central Acts, and to guard against slips and oversights by importing into every Act certain common form clauses, which otherwise ought to be inserted expressly in every Central Act. In other words, the General Clauses Act is a part of every Central Act and has to be read into each Act unless specifically excluded. Even in cases where the provisions of the Act do not apply, courts in the country have applied its principles keeping in mind the inconvenience that is likely to arise otherwise, particularly when the provisions made in the Act are based upon the principles of equity, justice and good conscience.
State of Punj vs. Harnek Singh (2002) 3 SCC 481, 490
Q.19 When there are two special statutes, both containing non obstante clauses, which will prevail.
Ans. Statute latter in time shall prevail.
Maruti Udyog Ltd vs. Ram Lal (2005) 2 Supreme Court Cases 638.
VI. PRECEDENTS
Q.20. Whether circulars issued by CBDT are binding on the tax authority?
Section 119 (1) of the Income-tax Act, 1961 specifically empower the CBDT to issue general instructions for the general administration of the Act and such instructions issued are binding on the officers of the Department. The only exception is that such instructions shall not be issued in a particular case nor shall it interfere with the exercise of judicial powers by the appellate authorities. As circulars of CBDT are binding on the authorities and if in spite of his attention being drawn to it, if an authority refuses to follow it, such orders could be set aside by the Appellate Authorities on the sole ground that the ITO was bound to follow the circular. In Navneetlal Zaveri vs. AAC (1965) (56 ITR 198) (SC) the Supreme Court laid down that the circulars are binding on the authorities, and they are bound to follow them. In both Navneetlal Zaveri and Ellerman Lines Ltd.’s case (1971) (82 ITR 913), even though the circulars were not strictly according to law, still the Supreme Court held that such circulars were binding. Contrary observations were made in State Bank of Travancore’s case (1986) (158 ITR 102). The contrary observations of Madras High Court have not been approved by the Supreme Court in UCO Bank vs. CIT (1999) 237 ITR 889 (SC). It has also been held that circulars bind the Department but not the assessee. It is open to an assessee to challenge its correctness before the Appellate Authorities.
Commissioner of Custom vs. IOC Ltd. (2004) 267 ITR 272, 277 (SC)
K. P. Verghesse vs. CIT (1981) 131 ITR 597 (SC)
A Circular which does not specifically state that it is issued under sec. 119 has still to be treated as one so issued as held in UOI vs. Azadi Bachao Andolan (2003) 263 ITR 706 (SC)

Q.21 What is the binding effect of withdrawal of circular in the middle of the accounting year?

If a circular was operative at the beginning of the relevant assessment year, its subsequent withdrawal has to be ignored, and for that relevant year the circulars should be given effect to [CIT vs. Edwards (1979) 119 ITR 335 (Ker) FB].

Unit Trust of India vs. Unny (PK) (2001) 249 ITR 612 (Bom)

Q.22 Whether notification can Act retrospective.?.

Ans. A notification cannot operate with retrospective effect, unless the statute expressly permits it.

Cannaore Spg & Wvg Mills vs. Collector 1978 ELT 375 SC..

Q.23 Whether the decision of other High Courts are binding?

Ans. In interpreting an all India statute, the decisions of other High Courts should ordinarily be followed, for sake of uniformity.

Flexoplast Abrasive Ltd vs. Union of India 1980 ELT 513 (Bom). Ramanlal Amarnath (Agency) LTD vs. CIT (1973) 91 ITR 250 (Bom).

UOI vs. Kamlakshi Finance Corpn Ltd. AIR 1992 SC 711, 712

CIT vs. G.M. Mittal Stainless Steel P. Ltd. (2003) 263 ITR 255, 258 (SC)

Q.24 Whether English and American decisions are binding on Indian Courts ?

Ans. In India we have adopted the common law system which pre vails in England , the United States , Australia etc and not the civil law system which prevails in continental Europe . Hence English and American decisions can be referred to, and on analogous provisions, fundamental concepts, and general principles unaffected by the specialities of the English or American tax statutes, such decisions are useful guides. (Nown Estates (P) Ltd. vs. CIT AIR 1977 SC 153 (para 6). The decisions relating to specific provisions are of little use, since the Indian tax laws are not in pari materia with those in foreign coun tries. (CIT vs. A. Gajapathy Naidu (1964) 53 ITR 114 (SC) (117).

Decision of the Privy Council rendered before 1950 would be binding upon the High Courts of India, unless, of course, there is a decisions to the contrary by the Supreme Court.

Salzgitter Industries Bav GMBH vs. CIT (1990) 184 ITR 7 (Bom)

Any decision of the House of lords (in UK ) likewise, only has persuasive values is entitled to respect

CIT vs. Bai Shirinbai K. Kooka (1962) 46 ITR 86 (SC)

Q.25 What is the relevance of Opinions expressed by courts of other countries.

Ans. Generally, opinions expressed by the courts of the countries of United States, Canada or Australia are not helpful in construing the collocation of legislative heads in the constitution of India, although they may be some relevance in determining the true character of particular legislation. (2005) 139 STC 537 (SC).

Q.26 What are the general principles of precedent?

Ans. In CIT vs. B. R. Constructions (1993) 202 ITR 222 (AP) (FB), the AP High Court has discussed in detail the general principles regarding the binding nature of precedent which reads: The effect of a binding precedent in India is that the decisions of the Supreme Court are binding on all the Courts. Article 141 of the Constitution embodies the rule of precedents. All the subordinate Courts are bound by the j udgements of the High Courts. A single Judge of a High Court is bound by the judgement of another single Judge and a fortiori judgements of Benches consisting of more Judges than one. So also, a Division Bench of a High Court is bound by the judgement of another Division Bench or a Full Bench. A single Judge or Benches of High Courts can not differ from the earlier judgements of co-ordinate jurisdiction merely because they hold a different view on the question of law for the reason that certainty and uniformity in the administration of justice is of paramount importance. But if the earlier judgement is erroneous or adherence to the rule of precedents results in manifest injustice, differing from an earlier judgement will be permissible. When a Division Bench differs from the judgement of another Division Bench, it has to refer the case to a Full Bench. A Single Judge cannot differ from a decision of a Division Bench except when that decision or a judgement relied upon in that decision is overruled by a Full Bench or the Supreme Court, or when the law laid down by a Full Bench or the Supreme Court is inconsistent with the decision. It may be noticed that a precedent will not be binding (i) if it is reversed or overruled by a higher Court; (ii) when it is affirmed or reversed on a different ground; (iii) when it is inconsistent with the earlier decisions of the same rank (iv) when it is subsilentio; and (v) when it is rendered per incuriam.

A judgement can be said to be per incuriam if it is rendered in ignorance of the provisions of a statute or a rule having statutory force or a binding authority. But if the provision of the Act was noticed and considered before the conclusion was arrived at, merely on the ground that it has erroneously reached the conclusion, the judgement cannot be ignored as being per incuriam. The rule of per incuriam is of limited application.” A judgement can be said to be per incuriam if it is rendered in ignorance of the provisions of a statute or a rule having statutory force or a binding authority. But if the provision of the Act was noticed and considered before the conclusion was arrived at, merely on the ground that it has erroneously reached the conclusion, the judgement cannot be ignored as being per incuriam. The rule of per incuriam is of limited application.

In Union of India vs. Raghubir Singh (1989) 178 ITR 548 (551-57) (SC), the Apex Court held that, the doctrine of binding precedent has merit of promoting certainty and consistency in judicial decisions and enables an organic development of law, besides providing assurance to an individual as to the consequence of transactions, forming part of his daily affairs.

In Union of India vs. Dhanwanti Devi (1998) 6 SCC 44, 51-52, the Hon’ble Supreme Court held that a decision is an authority for what it decides. The essence of a decision is its ratio. The principle on which a question has been decided is alone binding precedent.

Director of Income Tax vs. Paper Product Ltd. ( Del ) 257 ITR 1 (2002)

Y.S.C. Babu vs. Charmanand Managing Director, Syndicate Bank (AP) 253 ITR 1 (2002)

Agarwal Warehousing & Leasing Lt d. vs. CIT (MP) 257 ITR 235 (2002)

Sayaji Iron & Engg. Co. vs. CIT (Guj) 253 ITR 749 (2002)

Goodyear India Ltd. vs. State at Haryana (SC) 188 ITR 402 (1991)

Baba Parasu Kaikadi vs. Babu (2004) 1 SCC 681

Q.27 What is Ratio decidendi?

A decision is only an authority for what it actually decides and not for what may logically follow from it. It is the rule deductible from the application of law to the facts and circumstances of the case which constitutes its ratio decidendi [UOI vs. Dhanwanti Devi (1996) 6 SCC 44, 51-52] A case is a precedent and binding for what it explicitly decides and no more. The ratio decidendi is the underlying principle, namely, the general reason or the general ground upon which the decision is based on the test of abstract from the specific peculiarities of the particular case which gives rise to the decision. In the course of delivering a judgement the judge may make observations which are not relevant to the issue before the court. These observations may not strictly be relevant to the issue involved or may not be relevant for deciding the issue in question. These observations are known as ‘obiter dicta’.

It is easy to describe what is ratio decidendi. But it is very difficult to trace the ratio in a judgement. Several tests are suggested for the purpose of deducing a ratio in a judgement. One of the tests which is supposed to be fairly workable is the test of reversal. As per this test one has to identify the proposition of law put forward in a judgement, reverse it and then see if the reversal would have altered the actual decision. If it alters the decision, then the proposition is the ratio of the decision; on other hand if the reversal does not affect the decision, then the proposition is not the ratio of the decision. In other words, the ratio is the general rule without which the case would have been decided otherwise. This test however is not helpful when no proposition of law is given in support of the decision, nor it is very helpful where a court gives several reasons for its decision logically in such cases it may follow that the first reason is ratio and other reasons are obiter. Where a case has been argued on several points, the judge may decide on one of the propositions of law and merely indicate his views on the remaining points.

The proposition of law which was material to decide the case shall constitute ratio. However, where the judge declares that he is deciding the case on more than one ground, then each proposition on which he bases his decision will qualify as a ratio.

Thus, to be the ratio decidendi amongst others the minimum requirements are: (1) that the matter was directly in issue; (2) that the issue needs to have been decided; and (3) the matter has been decided by giving reasons [Industrial Credit & Investment Corporation of India Ltd. vs. Dahanesh D. Ruparelia (2000) 99 Comp. Case 181, 185 (Bom).

UOI vs. Chajju Ram (2003) 5 SCC 568, 576

Q.28 To what extent would a judgment of the Supreme Court constitute a binding precedent?

Ans. Article 141 of the Constitution of India provides that the law declared by the Supreme Court shall be binding on all courts within the territory of India . Thus the law as interpreted by the Supreme Court is binding on all Courts and Tribunals in India CGT vs. Aluminium Corporation of India Ltd. (1972) 85 ITR 167, 172 (SC). The decision of the Supreme Court in taxation matters amounts to a declaration of law as contemplated by Article 141 of the Constitution of India. Karamchand Premchand Pvt. Ltd. vs. CIT (1975) 101 ITR 46, 52 (Guj.). The High Court cannot ignore a decision of Supreme Court on the ground that the relevant provision was not brought to the notice of the Supreme Court, Badlachandas Mathurdas Lukhani Municipal Committee AIR 1970 SC 1002. Tata Iron & Steel Co. Ltd. vs. D.V. Bapat ITO (1975) 101 ITR 292, 327 (Bom). The Tribunal is bound to follow the principle of law laid down by the Supreme Court. It is not open to the Tribunal to say that the Supreme Court decision was not relevant simply because, it was not under the statute under which the Tribunal is working. Bhavnagar University vs. Palitana Sugar Mill Pvt. Ltd. AIR 2003 SC 511. Ratio is Binding AIR 2002 SC 1598, AIR 2002 SC 834. CIT vs. Vallabhdas Vithaldas & Others (2002) 253 ITR 543 (Guj.)

The view expressed by the Supreme Court is an authority on the subject provided the facts and situation is identical. The Supreme Court in State of West Bengal vs. Kesoram Industries Ltd. (2004) 266 I.T.R. 721 (SC) corrected inadvertent error in India cement Ltd. vs. State of Tamil Nadu (1990) 1 SCC 12 on the aspect of ‘Royalty is not tax after 14 years.’

Deys Medical Stores Ltd. vs. Commissioner of Trade Tax (2004) 134 SC 1,
8, 9 (All)

U.P. Pollution Board and others vs. Kaneria Industrial Limited & others 259 ITR 321 (SC)

Delhi Administration vs. Manoharlal (2002) 7 SCC 222, 227

Q.29 Whether rejection of SLP can be considered as an order of Supreme Court? What is the binding effect?

Ans. A mere dismissal of SLP does not mean that the judgement of the High Court stands affirmed by the Supreme Court. The effect of a dismissal is that no appeal was permitted and not that an appeal against the said judgement was dismissed by the Supreme Court affirming the view of the High Court. J. K. Charitable Trust vs. WTO (1996) 222 ITR 523 (All.)

Rejection of SLP does not mean that the judgement of High Court has been approved by the Supreme Court on merit.

CIT vs. Quality (1997) 224 ITR 77 (Pat.)

Smt. Tej Kumari vs. CIT (2001) 247 ITR 210 ( Patna ) (FB)

V.M. Salgaonkar vs. CIT (2004) 243 ITR 383 (SC)

Kunhayammed vs. State of Kerala (2000) 245 ITR 360 (SC)

Q.30 Whether appeal dismissed by the Supreme Court is binding on the Tribunal though the order may not be speaking?

Ans. Where a decision of the Supreme Court is virtually a non speaking order which does not set out the facts or the reason for the conclusion or direction given, it cannot be treated as a binding precedent. Government of India vs. Workmen of State Trading Corporation (1997) 11 SCC 641. State of Manipur vs. Thinjujam Brojen Muti AIR 1996 SC 2124. Ajith Kumar Rath vs. State of Orissa AIR 2000 SC 85.

Kanhayamal vs. State of Kerala (2000) 245 ITR 360 (SC)

Q.31 Whether a judgement of the Supreme Court is retrospective or prospective?

Ans. Law is settled by the Supreme Court. Law laid down by Supreme Court is the law in existence since its enactment. It is retrospective in operation. Such law is from inception unless and until spelt as prospective by the Supreme Court. All Courts, Tribunals, authorities and citizens are bound to follow the diction laid by the Supreme Court or else shall be liable to contempt.

M. A. Murthy vs. State of Karnataka and Others (2003) 264 ITR 1 (SC), Kil Kotagiri Tea and Coffee Estate Co. Ltd. vs. ITAT (1988) 174 ITR 579 (Ker.)

CESC Ltd. vs. Dy. CIT (2004) 270 ITR 383, 387 ( Cal .)

Q.32 When there are two judgements of the Supreme Court, which are contrary to each other, which judgement should the Tribunal follow? Is obiter dicta of the Supreme Court binding on the Tribunal?

Ans. Article 141 of the Constitution prescribes that judgements of the Supreme Court are binding on all Courts and based on the rule of precedent the latest judgement is to be followed as that is the last word spoken by the Apex Court . The Supreme Court sits in Division Bench of two or three Judges. In Jawed Ahmad‘s case the Supreme Court observed that it may be inappropriate for a Division Bench of three Judges to purport to overrule the decision of Division Bench of two judges, although it may be otherwise where a Full Bench or a Constitution Bench does so. Obiter dicta of the Supreme Court is binding on the Tribunal. The Full Bench of the Andhra Pradesh High Court in Ushodaya Enterprises Ltd. vs. Commissioner of Commercial Taxes (1993) 111 STC 711 observed “ In a case of conflict arising from the decisions of co-equal Benches of the Supreme Court, the High Court is free to disregard the decision which is based on an obvious mistake of fact or the one which purports to follow the ratio of an earlier decision though such ratio is found to be non-existent. The High Court can legitimately decline to follow such decision and follow the earlier decision which is backed by reasoning – whether it is accepted to the High Court or not, and which is free from an such apparent flaw. The later decision need not be automatically followed despite the fact that it rests on a conclusion based on an erroneous impression that an earlier decision took a particular view which in fact it has not taken.” In our view the same principle may be followed by the Tribunal.

Delhi Development Authority vs. Ashok Kumar Behal, (2002) 7 SCC 135, 141

Divisional Controller vs. Mohadeva Shetty, AIR 2003 SC 4172, 4178

Q.33 What is the binding nature of the decision of High Courts?

Ans. As per the doctrine of precedent, all lower courts, Tribunals and authorities exercising judicial or quasi-judicial functions are bound by the decisions of the High Court within whose territorial jurisdiction these courts, Tribunals and authorities function. In CIT vs. Kantilal Nathuchand (1964) 53 ITR 420 (Guj.), the Court doubted, but followed for the sake of uniformity among the High Courts the judgement of another High Court in the matter of interpretation of the Income-tax Act. Also refer CIT vs. Chimanlal J. Dalal & Co. (1965) 57 ITR 285 (Bom). Tribunals functioning within the jurisdiction of a particular High Court are bound to follow the decision of the jurisdiction High Court — State of AP vs. Commercial Tax Officer (1988) 169 ITR 564 (AP); Air Conditioning Specialists Pvt. Ltd. vs. Union of India (1996) 221 ITR 739 (Guj). The Assessing Officer is bound to follow the decision of Supreme Court as also the decision of High Court of the State within whose jurisdiction he is functioning — K. Subramanian, ITO vs. Siemens India Ltd. (1985) 156 ITR 11 (Bom). The order of the Tribunal not applying the decision of jurisdictional High Court was held to be erroneous — Shri Mahabir Industries vs. CIT (1996) 220 ITR 459 (Guwahati). Not following the decision of the High Court within whose jurisdiction the ITO acts, would tantamount to committing contempt of that court — Siemens India Ltd. vs. K. Subramaniam (ITO) (1983) 143 ITR 120 (Bom.).

The decision of a High Court does not have binding force outside the State. Dr. T. P. Kapadia vs. CIT (1973) 87 ITR 511 (Mys.). CIT vs. Thana Electricity Supply Ltd. (1994) 206 ITR 727 (Bom.), Geoffrey Manners & Co. Ltd. vs. CIT (1996) 221 ITR 695 (Bom.), CIT vs. Vardhman Spinning (1997) 226 ITR 296 (P&H), N. R. Paper and Board Ltd. & Others vs. DCIT (1998) 234 ITR 733 (Guj.). No reference can be made on a question of law which is settled by a decision of the jurisdictional High Court. CIT vs. HIM Containers Ltd. (1995) 216 ITR 674 (Guwahati) Kiersentec vs. CIT 11 Taxman 70 (Bom.) (1982), CIT vs. G.M. Mittal Stainless Steel P. Ltd. (2003) 263 ITR 255, 258 (SC) , R.D. Joshi & Co. vs. CIT (2001) 251 ITR 332 (MP), Nicco Corpn. Ltd. vs CIT (2001) 251 ITR 791 (Cal.)

The decision of one High Court is neither binding precedent for another High Court nor for Courts or Tribunals outside the territorial jurisdiction. The fact that there is only one decision of any one High Court on a particular point or that of different High Courts have taken identical views in that regard is not at all relevant for that purpose. Whatever may be the conclusion, the decisions cannot have the force of binding precedent on other High Courts or any other subordinate courts or Tribunals outside their jurisdiction. That status is reserved only for the decisions of the Supreme Court, which are binding on all courts in the country by virtue of Article 141 of the Constitution. Consolidated Pneumatic Tool Co. (India) Ltd. vs. CIT (1994) 209 ITR 277, 282 (Bom), Universal Ferro & Allied Chemicals Ltd. vs. P.G.K. Warrier (1983) 143 ITR 959 (Bom.).

In CIT vs. G. Dalabhai & Co. (1997) 226 ITR 922 (Guj), it was observed

“Before parting with the case, we notice with anguish the language used by the Income Tax Officer in his assessment order saying that ‘With due respect to the decision of the Gujarat High Court, I do not follow the same’. The Income Tax Officer in not following the decision of the Gujarat High Court within whose supervisory territory he was functioning, is far from satisfactory, that is the least we can say. The minimum decorum of the system of hierarchy that Tribunals in the administration of justice and their Judicial subordination to the High Court of the territory in which they function requires that they restrain in the use of proper expression while following or not following the decision of the High Court”.

Agrawal Werehousing and Leasing Ltd. vs. CIT (2002) 257 ITR 235 (MP)

Q.34 When there are two judgements of the jurisdictional High Court, which are contrary to each other and the latter judgement is delivered without referring to the earlier judgement, which judgement should the Tribunal follow?

Ans. It is clear that when there are conflicting judgements of the jurisdictional High Court, normally the latter judgement would prevail provided it has referred to the earlier decision and distinguished the same. However, if the earlier judgement is not referred to at all, and there are two conflicting judgements, it is open to the Tribunal to follow that judgement, the reasoning of which appeals to the Tribunal. Since both the jurisdictional High Court judgement are binding the Tribunal has to prefer one or the other judgment and in such a case it can prefer either of the two judgments. Amarsingh Yadav vs. Santi Devi AIR (1987) Patna 191 and CIT vs. Madhukant M. Mehta (1981) 132 ITR 159 (Guj).

Yogiraj Charity Trust vs. CIT (1984) 149 ITR 7, 17, ( Del ).

Q.35 When there are two judgements of the jurisdictional High Court which are contrary to each other which will be binding on Income Tax Appellate Tribunal?

Ans. The later judgement shall be of binding on the Tribunal.

When there are conflictory decisions of Courts of Co-ordinate Jurisdiction, the later decision is to be preferred if reached after full consideration of the earlier decision.

CIT vs. Thomas Electricity Suppliers Ltd. (1994) 206 ITR 737 (Bom.) (738).

Q.36 What is the precedent value of orders passed by different Benches of Tribunal?

Ans. A decision of a Division Bench and Third Member Bench is binding on the Single Member Bench. A decision of a Special Bench is binding on all the Benches of the Tribunal. A decision of the Special Bench can be distinguished or disregarded if there is any contrary view of the jurisdictional High Court or of the Supreme Court. A co-ordinate Bench should follow the view of another co-ordinate Bench or else refer the matter to a larger Bench through the President. S. I. Roopal and Others vs. Government through Chief Secretary, Delhi & Others AIR 2000 SC 594, Union of India vs. Paras Laminates Pvt. Ltd. (1990) 186 ITR 722 (SC), Pradip Chandra Parija vs. Pramod Chandra Patniak (2002) 254 ITR 99 (SC), Agrawal Warehousing and Leasing Ltd. vs. CIT (2002) 257 ITR 235 (MP), CIT vs. L. G. Ramamurthi & Others (1977) 110 ITR 453 (Mad.), Export House vs. ITO (1985) 23 TTJ 285 (Amritsar), Chandulal Venichand vs. ITO (1991) 38 ITD 138 (Ahd.)

Q.37 Whether one Bench of the Tribunal is bound to follow the order of another Bench?

Ans. For the sake of uniformity, one Bench of the Tribunal is bound to follow the view expressed by another Bench of the Tribunal unless the earlier view is per-incurium — CIT vs. L. G. Ramamurthi (1977) 110 ITR 453 (Mad), CIT vs. S. Devaraj (1969) 73 ITR 1 (Mad). Modu Timblo (Individual) vs. CIT (1994) 206 ITR 647(Bom.) – Union of India vs. Paras Laminates Pvt. Ltd. (1990) 186 ITR 722 (SC), Pradip Chandra Parija vs. Pramod Chandra Patnaik (2002) 254 ITR 99 (SC), Agrawal Warehousing & Leasing Ltd. vs. CIT (2002) 257 ITR 235 (M.P.), The Bench should not come to a conclusion totally contradictory to the conclusion reached by the earlier Bench of the Tribunal. Where a Bench wants to differ from an earlier Bench decision, the matter should be referred to a larger Bench on a request made to the President — CIT vs. Goodlass Nerolac Paints Ltd.. (1991) 188 ITR 1 (5) (Bom). Sayaji Iron and Engineering Co. vs. CIT (2002) 253 ITR 749 (Guj.), Sis Ram Sharma & Co. vs. ITO (1988) 25 ITD 410 (Delhi) (TM), Subarna Plantation & Trading Co. Ltd. vs. ITO (1989) 28 ITD 177 (Cal.), Longwalia Poultry Farm vs. Dy. CIT (1998) 67 ITD 45 (Chan.) (TM), Birumal Gaurishankar Jain vs. Income Tax Settlement Commission (1992) 195 ITR 792 (ITSC) (SB), Union of India vs. Paras Laminates Pvt. Ltd. (1990) 186 ITR 722, 726, 727 (SC), Sub. Inspector Rooplal & Another vs. Lt. Governor, New Delhi & Others (2000) 1 SCC 644, 654 (SC), Dy. CIT vs. Reliance Industries Ltd. (2004) 88 ITD 273 (Mum) (SB).

Q.38 Whether the decision of Tribunal is binding on lower authorities?

Ans. Judicial discipline demands that authorities subordinate to the Tribunal accept as binding the decisions of the Tribunal. In Khalid Automobiles vs. Union of India (1995) 4 SCC (Suppl.) 653, the Court held that an order of the Tribunal was binding on the assessing officer and the first appellate authority and that failure to follow the same may constitute contempt of Tribunal’s order. See Rajendra Mills Ltd. vs. Jt. CIT (1971) 28 STC 483 (Mad.), Serethil Raja Metal vs. CTO (1990) 79 STC 38 (Mad.) and Union of India vs. Kamlakshi Finance Corporation Ltd. AIR 1992 SCC 711, 712 (SC).

In Voest Alpine Ind. GmbH vs. ITO (2000) 246 ITR 745, (749) (Cal.), the Court condemned the action of assessing officer in making an assessment contrary to the decision of the Tribunal which had become final. Also see Bank of Baroda vs. H. C. Shrivatsava & Another (2002) 256 ITR 385 (390) (Bom.), Asstt. CCE vs. Dunlop India Ltd. (1985) 154 ITR 172 (SC), Govindram Seksaria Charity Trust vs. ITO (1987) 168 ITR 387 (MP), Agarwal Warehousing & Leasing Ltd. vs. CIT (2002) 257 ITR 235 (MP), C. D. Thandani ITO vs. Universal Ferro & Allied Chemicals Ltd. (1988) 172 ITR 30 (Bom.)

Q.39 Is CIT(A) bound to follow the decision of the Tribunal?

Ans. Yes. CIT(A) being subordinate to the Tribunal is bound to follow the view of the Tribunal. Agrawal Warehousing and Leasing Ltd. vs. CIT (2002) 257 ITR 235 (MP)

Q.40 When there is a special bench decision and after the decision of Special Bench a High Court other than jurisdictional High Court has taken a contrary view whether Tribunal has to follow Special Bench or High Court.

Ans. High Court decision does not extend beyond its territorial jurisdiction.

CIT vs. Thana Electricity Supply Ltd 206 ITR 727 (Bom)

Q.41 Whether Third member decision is binding on division bench.

Ans. Third member decision is a decision of full bench because Three Judges have applied their mind.

P.C. Puri vs. CIT (1985) 151 ITR 584 ( Del )

Q.42 When there are two orders of Tribunal, which one has to be followed.

Ans. Where there are conflicting decisions of courts of co-ordinate jurisdiction, the later decision is to be preferred if reached after full consideration of the earlier decisions.

CIT vs. Thana Electricity Supply Ltd (1994) 206 ITR 727 (Bom)

Q.43 When there are two orders of tribunal one of Mumbai Bench against the assessee and the other of Ahmedabad Bench in favour of assessee, which order is binding on the Mumbai Bench.

Ans. If the Ahmedabad Tribunal decided the matter in favour of assessee, after considering the Mumbai Tribunal. The order of Ahmedabad Tribunal required to be followed or otherwise?

The matter may be referred to special Bench.

CIT vs. L.G. Ramamurthi & Others (1977) 110 ITR 453 (Mad),

Pradeep Chandra Parija and others vs. Pramod Chandra Patnaik & Others. (2002) 254 ITR 99 (SC)

VII. DOUBLE TAXATION AGREEMENTS CONVENTION

Q.44. What is the binding effect of treaties?

Ans. liberal interpretation of the agreement and the treaty will override t he provisions of domestic law has been accepted by the Apex Court .

Circular No. 333, dated 2-4-1982 (1982) 137 ITR ( St. ) 1

Provisions of treaty will prevail over provisions of I. T. Act.

UOI vs. Azadi Bachao Andolan (2003) 263 ITR 706 (SC)

Q.45. What is the binding effect of types of international instruments, such as, Convention, Protocol, Agreement, Arrangement, Declaration?

Ans. International conventions cannot override express provisions of statute.

Peoples union for civil Liberties v Union of India (2005) AIR 2419(SC)

VIII. GENERAL

Q.46 When orders passed by the taxing authorities are neither speaking nor reasoned, can it be challenged?

Ans. An order should be speaking, should contain detailed recording of evidence for and against, explanation of both sides, arguments raised by both sides and the reasons for arriving at a particular view. A reasoned and speaking order is bedrock of justice whether or not an appeal or revision lies against it. The Supreme Court in Siemens Engineering & Manufacturing Co. vs. UOI, AIR 1976 SC 1785 stated:— “It is now well settled law that where an authority makes an order in exercise of a quasi judicial function, it must record its reasons in support of the order it makes and the order must be supported by reasons. The Supreme Court in S. N. Mukherjee vs. UOI, AIR 1990 (SC).

The Supreme Court in State of West Bengal vs. Atul Krishna Shaw, 1990 SC 2205 stated “giving of reasons is an essential element of administration of justice. A right to reason is, therefore, an indispensable part of sound system of judicial review. Reasoned decision is not only for the purpose of showing that the citizen is receiving justice but also a valid discipline for the Tribunal itself. Therefore, statement of reasons is one of the essentials of justice.”

It stated that the order should be a speaking order. The Supreme Court in Kishan Lal vs. UOI observed that even though in section 220(2A) of the IT Act, it is not stated that any reasons are to be recorded in the order deciding such an application, it is implicit in the said provision that whenever such an application is filed the same should be decided by a speaking order. The principles of natural justice in this regard would be clearly applicable. A decision which is taken by the authority under section 220 (2A) can be subjected to judicial review, by filing a petition under Article 226 of the Constitution. This being so and where the decision of the application may have repercussion with regard to the amount on interest which an assessee is required to pay, it would be imperative that some reasons are given by the authority while disposing of the application. The matter was restored to the file of the Chief Commissioner to decide in accordance with law.

Anusayaben A. Doshi vs. JCIT (2002) 256 ITR 685, 686 (Bom)

UOI vs. GTC Inds. Ltd. (2003) 5 SCC 106, 112

Q.47 High Court deciding the case without considering the Judgement of Supreme Court, which judgement, the tribunal has to follow

Ans. Article 41 of the Constitution of India -

‘The Law declared by the SC shall be binding on all courts – within the territory of India ’. Once there is pronouncement of the highest court of land, same is binding on all courts tribunals and all authorities in view of this article. Tribunal must follow the decision of Supreme Court.

Q.48 Can revenue take conflicting stands?

Ans. The revenue cannot take conflicting stands. It has got the assistance of technical persons and should be consistent. It cannot discriminate between the assessees. Seshasayee Paper and Boards Ltd. vs. CIT (2003) 260 ITR 419 (Mad.), Union of India vs. Kaumudini Narayan Dalal (2001) 249 ITR 219 (SC), Berger Painters vs. CIT (2004) 266 ITR 99 (SC), Union of India vs. Satish Panalal Shah (2001) 249 ITR 221 (SC).

Q.49 What is the rule of interpretation of documents/ agreements?
Ans. It is the duty of Court to interpret a document of contract as was understood between the parties. The terms of the contract have to be construed strictly without attending the nature of the contract as it may affect the interest of parties adversely (2005) 123 Companies Cases 663 (SC) Polymat India Ltd. and others vs. National Insurance Co. Ltd.
Q.50 How to interpret the delay in filing of appeal?
Ans. The Supreme Court in Collector of Land Acquisition vs. Mrs. Katiji & Others (1987) 167 ITR 471, has held that the Court should have a pragmatic and liberal approach. The Hon’ble Supreme Court in N. Balakrishnan vs. M. Krishnamurthy (1998) 7 SCC 123 condoned delay of 883 days and has observed that condonation of delay is a matter of discretion of the court. Section 5 of the Limitation Act does not provide discretion only in the cases of delay within a certain limit. The only criterion is the acceptability of explanation irrespective of the length of delay. The primary function of the court, being the adjudication of the disputes between the parties and to advance substantial justice, it is not enough to turn down the plea of the litigant and to shut the door against him for some lapse on his part which has caused the delay. If theaost consideration to the suitor. The Supreme Court in Vedabai vs. Shantaram Baburao Patil & another (2002) 125 S.T.C. 375 observed that the Court has to exercise its discretion, keeping in mind that the principle of advancing justice is of prime importance and the expression “sufficient cause” should receive a liberal construction. The approach of Courts should be pragmatic so as to impart substantial justice and substantial Justice.
Collector land acquisition vs. MST, Katiji and Others (1987) 167 ITR 471 (SC)
Q.51 Whether mistake of Lawyer or Accountant
Ans. Wrong legal advice given or other mistake made by the assessee’s lawyer or chartered accountant may constitute good reason or sufficient cause for condoning delay in filing an appeal or an application or a writ or for not imposing penalty, or for setting aside an ex parte order passed on non appearance of a party. Ordinarily, a case should not be dismissed for failure of the lawyer to appear at the hearing.
Concord of India Ins. Co. Ltd Vs. Nirmaladevi & Ors (1979) 118 ITR 507 (SC); Manoj Ahuja and Anr. vs. IAC (1984) 150 ITR 696 (P & H); IAC vs. Kedarnath Jhunjhunwala (1981) 133 ITR 746, 755 (Pat); Arun S. Meher vs. M.A. Twigg (1984) 153 ITR 131 (Bom); Avtar Krishandas vs. CIT (1979) 133 ITR 338 (Del);CIT vs. Khemraj Ramshmichand (1976) 114 ITR 75 (MP); Subhkaran & Sons vs. N.A. Kazi (1984) 152 ITR 231 (Bom); Kwality Restaurant & Ice Cream Co. vs. CIT (1984) 158 ITR 188 (Del); CIT vs. India Capacitors Ltd (1987) 180 ITR 641 (Cal); Ganesh, Dass Ram Gopal vs. IAC (1982) 142 ITR 101 (Allah)
Q.52 How to interpret sections dealing with procedure?
Ans. There is no vested right in procedure or as to cost. Enactments dealing with this subject apply to pending action, unless a contrary intention is expressed or clearly implied.
The Hon’ble Supreme Court the case of Shreenath vs. Rajesh (AIR 1998 SC 1827) noted as under:
“In interpreting any procedural law, where more than one interpretation is possible, the one which curtails the procedure without eluding justice is to be adopted. The procedural law is always subservient to and is in aid to justice. Any interpretation which eludes or frustrates the recipient of justice is not to be followed. “
K.M. Sharma vs. ITO (2002) 254 ITR 772, 779 - 80 (SC)
Haresh Dayaram Thakur vs. State of Maharashtra (2000) 6 SCC 179, 187
Q.53 How to interpret sections dealing with limitation?
Ans. Limitation law has to be liberally construed (Collector Land Acquisition vs. Mst. Katiji (1987) 167 ITR 471 (SC); Premchand Bansal & Sons vs. ITO (1999) 237 ITR 65 (Del), Seshammal (R) vs. ITO (1999) 237 ITR 185 (Mad.), Concord of India Insurance Co. Ltd. vs. Nirmala Devi (1979) 118 ITR 507 (SC) followed in Avtar Krishnan Das vs. CIT (1982) 133 ITR 338 (Del.)
In CST vs. Auraiya Chamber of Commerce, (1987) 167 ITR 458 (SC); the Supreme Court directed admission of delayed claim for refund on the ground that “in interpreting relevant procedural provisions, fairness and justice should be the approach, and even in fiscal statute, equity should prevail wherever language permits”.
Q.54 When AO followed the order of Tribunal can CIT, review the order of AO, on the ground that, there is contrary judgement of Courts ?
Ans. An order passed by ITO following the decision of the tribunal can not be held to be erroneous & prejudicial of the interest of the revenue.
Kiran Agencies vs. ITO (1983) 15 TTJ 460 (Nag)
Indures (P) Ltd. vs. IAC (1991) 38 ITD 635 Del.
Q. 55 Whether finding of settlement Commission is binding on tribunal.
Ans. Settlement Commission is a Tribunal and not court
The Finding given by the Tribunal is not binding on the Income Tax Appellate Tribunal Similarly the order of the Income tax Appellate Tribunal will not have binding effect on the Settlement Commission. Order of Settlement Commission and Tribunal will have persuasive value.
CIT vs. B.N. Bhattacharya (1979) 118 ITR 461 (SC).
VII. LEGAL MAXIMS - PRINCIPLES
Q.56 . Whether interpretation of penal provisions should be construed strictly?
Ans. The penal provisions must be construed strictly.

CIT vs. Sundaram Iyengar & Sons (P) Ltd (1975) 101 ITR 764 (SC)

ITO vs. Kaysons India (2000) 246 ITR 489 (P & H)

However the penal provision giving benefit to a assessee such as section 273A has to be construed liberally. Handa (RP) vs. ITO (1992) 198 ITR 54 (P & H)

Q.57 What is the binding effect of orders of authority for advance rulings?

Ans. The Act has made the ruling binding in the case of one transaction only and the parties involved in that case in respect of that transaction. For other transactions and for other parties the ruling will be of persuasive nature. Advance ruling are judgments in personam and not in rem. Cyril Engg. Pereira , In re (1999) 239 ITR 650 ( AAR )

Union of India vs. Azadi Bachao Andolan (2003) 263 ITR 706 at 742(SC)

In Dy. CIT vs. Biston Consulting Group Pvt. Ltd. (2005) 93 TTJ 293 (Bom.), the Tribunal held that the Ruling of given by the Authority for Advance Rulings are not certainly not binding precedents on the Tribunal.

Q.58. How to interpret statutes relating to appeals?

Ans. A right of appeal is the creation of the statute and an assessee has a right of appeal only if there is a statutory provision for it CIT vs. Ashok Engg. (1992) 194 IRR 645 (SC). But a provision for appeal should be liberally construed and should be read in a reasonable and practical manner CIT vs. T.V. Sundaram (1999) 236 ITR 524 (Mad.). It is always desirable not to place, a restricted meaning to such a provision and take away the right of appeal provided to a party.

DCIT vs. Shanthabaram (2003) 260 ITR 156 (Kar.)

Q.59. What is the rule for lifting the corporate veil?

Ans. A company is a legal personality entirely distinct from it’s members and a company is capable of enjoying rights and being subjected to duties which are not the same as those enjoyed or borne by its members. But, in certain exceptional cases, the court is entitled to lift the corporate veil and to pay regard to the economic realities behind the legal facade. (Jindal (MD) vs. CIT (1987) 164 ITR 28 ( Cal ).

The doctrine of lifting of corporate veil has been invoked in the following cases ;

(a) where a corporate entity is attempted to use for fraudulent purpose PNB Finance Ltd. vs. Shital Prasad Jain (1983) 54 Comp Case 66 (Del.)

(b) To willfully disobey the courts order Jyoti Ltd vs. Kanwalji Kaur Bhasin (1987) 62 Comp Cases 626 (Del.)

(c) To frustrate sales tax or capital gains tax liability – Trackways (P) Ltd. vs. CST (1981) 47 STC 407 (MP), Wood Polymer Ltd. In re (1977) 109 ITR 177 Guj.

To deprive workman of the legitimate bonus – Workmen of Associated Rubber Inds. Ltd. vs. Associated Rubber Inds. Ltd. (1986) 157 ITR 77 (SC)

Q.60 How to interprete the law relating to Refunds.

Ans. Provisions giving refund must be interpreted liberally in favour of the assessee Calcutta Electric Supply Corporation (Indian) Ltd. vs. ITO (1992) 197 ITR 563 (Cal.)

Q.61 In case of two contradictory decisions, which decision to be followed ?

Ans. If there are two apparently contradictory decisions, decision of larger bench to be followed.

CIT vs. Sundaram Industries Ltd (2002) 253 ITR 396 (Mad),

Siemens India Ltd. vs. State of Maharashtra (1986) 62 STC 40, 50 (Bom)

N.C. Dhoundial vs. Union of India (2004) 2 SCC 579, 587

Q.62 What is the principle of Resjudicata

The principle is that the cause of action cannot survive, if it is covered by an earlier judgment. It literally means a matter already decided.

The strict doctrine of resjudicata is not applicable to tax matters. The reason being each assessment year being independent of others all issues relevant to a particular assessment year could be considered and decided, irrespective of the fact that the same issues arose in the earlier years. However questions of fundamental nature or questions relating to assessment which do not vary every year but depends on the nature of the property or questions on which the rights of parties to be taxed are based, principle of res-judicata to that extent would apply to tax matter. Further, principle of finality to a decision and rule of consistency does apply to income tax proceedings.

Kotak Mahindra Fin. Ltd. vs. Dy. CIT (2004) 265 ITR 114, 149 (Bom)

Ashok Leyland Ltd. vs. State of T.N. (2004) 3 SCC 1, 144.

Q. 63 What is the Rule of Estoppel

Estoppel is a rule of equity which forbids truth being pleaded or a representation, on the faith of which another has acted to his detriment, being retracted

Nirmala L. Mehta vs. CIT (2004) 269 ITR 1, 11 (Bom)

B.L. Sreedhan vs. K.M. Munireddy (2003) 2 SCC 355, 366

CIT vs. Bhattachargee (BN) (1979) 118 ITR 461 (SC )

UOI vs. Anglo Afghan Agencies Ltd. AIR 1968 (SC) 718

The principle of estoppel strictly does not apply to income tax proceedings (CIT vs. VMRP Firm (1965) 56 ITR 67 (S.C.). But rules similar to the rule of estoppel may be applicable under certain circumstances. In any case there cannot be estoppel against a statute. The principle of promissory estoppel was considered in detail by the Supreme Court in Motilal Padampat Sugar Mills case (1979) 118 ITR 326 (SC)