DIVYA VASUNDHARA FINANCERS PVT. LTD. vs. A.C.I.T.

Facts

The assessee, Divya Vasundhara Financiers Pvt. Ltd., involved in constructing residential houses, followed the mercantile system of accounting. For the year ending September 30, 1976, relevant to assessment year 1977-78, the company did not show any profit, as flats were sold under hire purchase agreements where ownership transferred only upon full payment. The Assessing Officer (AO) rejected this accounting method and applied a 10% profit. The Commissioner of Income Tax (Appeals) upheld the AO's addition. The Income Tax Appellate Tribunal (ITAT) dismissed the assessee's appeal against this order. The assessee then filed a tax appeal before the High Court of Gujarat.

Held

The High Court held that the Tribunal's interpretation was erroneous. The Court referred to the statutory provisions indicating that the amendments made by the Finance Act, 1987, came into force with effect from 1-4-1988 and would apply to assessment year 1988-89 and subsequent years. The Court stated that no law can be given retrospective effect. Consequently, the Tribunal's reliance on a Supreme Court decision was also deemed erroneous. The substantial question of law was answered in the affirmative, in favour of the assessee. The impugned order of the Tribunal was quashed and set aside, and no further proceedings were required.

Key Issues

1. Whether, on the facts and in the circumstances of the case, the Tribunal is right in its interpretation that the amendment made with effect from 1.4.1988 by the Finance Act, 1987, enlarging the scope of the word “transfer” used in section 2(47)(v) of the Income Tax Act, 1961, was retrospective in nature and therefore would apply for the A.Y 1977-78 also? Assessee's Contention: The Tribunal erred in law by treating the amendment to section 2(47)(v) as retrospective. The assessee argued that the amendment, effective from 01.04.1988, cannot be applied retrospectively to the assessment year 1977-78. Revenue's Contention: The judgment records no specific contention for the revenue on this issue.