Himachal Pradesh High Court Judgments — 2007

The High Court answered the first question in favor of the assessee and against the revenue. It held that it is well-settled law that an assessee can file a revised return and claim benefits under Sections 80HH and 80J, even if not claimed in the original return, as long as the assessment is not finalized. The Court also noted that filing of an audit report is not a mandatory condition precedent for granting relief, citing various High Court judgments (Madhya Pradesh, Punjab & Haryana, Madras) that held filing of the audit report even during assessment proceedings or at a later stage amounted to substantial compliance. The Court referred to Section 139(5) of the Act, which allows filing a revised return before assessment is made. Regarding the second question, the Court held that it did not arise for consideration. The Court observed that for both assessment years, the original assessment orders were recalled upon applications by the assessee, and the assessments were re-opened, meaning the returns had not been finalized when the revised returns were filed. Therefore, the reference for the second question was deemed invalid and returned unanswered. The operative direction was to answer question 1 in favor of the assessee and not answer question 2.

The High Court answered the first question in favor of the Revenue and against the assessee. The Court relied on the Apex Court's judgment in Britannia Industries Ltd. Vs. Commissioner of Income Tax, W.B., Kolkata, which held that the intention of the legislature in introducing sub-section (4) of Section 37 was to specifically exclude expenses towards rents, repairs, and maintenance of premises used for guest houses. The Court found the language of the statute clear and unambiguous, requiring literal interpretation. For the second question, the High Court answered in favor of the assessee and against the Revenue. The Court followed its own previous decision in ITR No. 10 of 1995, which was based on the Apex Court's ruling in Commissioner of Income-tax, Hyderabad Vs. M/s P.J. Chemicals Ltd. The Apex Court held that government subsidies, being incentives, do not partake of the character of a payment intended to meet the actual cost of assets and should not be deducted from the actual cost for depreciation purposes. The operative direction is to answer the reference accordingly.

The High Court held that the ITAT was right in holding that the return filed under Section 148 should be treated as a return filed under Section 139(2) of the Act, entitling the assessee to carry forward the loss. The Court reasoned that Section 148(1) explicitly states that the Assessing Officer shall serve a notice containing all or any of the requirements which may be included in a notice under Section 139(2), and that the provisions of the Act shall apply as if the notice were issued under Section 139(2). This creates a legal fiction, deeming the return filed pursuant to a Section 148 notice as a return filed under Section 139(2). Section 80 of the Act, as it stood at the relevant time, permitted carry-forward of losses if determined in pursuance of a return filed under Section 139. Since the return filed under Section 148 is deemed to be a return under Section 139(2), the condition of Section 80 is met. The Court distinguished the case from Smt. Ashima Hariharan by noting that the Kerala High Court did not fully consider the implications of Section 148. The question is answered in favour of the assessee.

The High Court held that even for an assessee following the mercantile system of accounting, a liability can be said to be properly incurred only when the dispute between the parties is settled or finally adjudicated upon. The Court found that the factual situation was different from ordinary cases because the enhanced sales tax liability arose from a retrospective amendment that was challenged by the assessee. A stay order was in operation in favour of the assessee until November 18, 1982. Therefore, the liability to pay the enhanced sales tax of Rs. 3,15,000/- was considered to have arisen only when the dispute was finally settled on November 18, 1982. Consequently, the assessee was entitled to claim the deduction in the assessment year 1983-84. The Court answered the reference in favour of the assessee and against the Revenue. No issue was expressly left undecided.

The High Court held that the cost of assets shall not be reduced by the amount of subsidy received from the Government for the purpose of working out depreciation under Section 32 read with Section 43(1) of the Income Tax Act, 1961. The Court followed the decision of the Supreme Court in CIT v. P.J. Chemicals Ltd., which had settled the matter against the revenue. The Supreme Court had interpreted the expression 'actual cost' liberally and held that government subsidy, being an incentive, does not partake of the character of a payment intended to meet the actual cost of the asset. The Court specifically set aside the judgment of the Punjab and Haryana High Court that was relied upon by the Tribunal. The reference was answered in favour of the assessee and against the revenue.

The High Court held that the CIT(A)'s order dated 20.12.1985 had indeed set aside the assessment and remanded the matter back to the Assessing Officer (AO) with liberty to raise all points. However, the assessee then chose to approach the Inspecting Assistant Commissioner (IAC) under Section 144A of the Income Tax Act. In deciding this application, the IAC made observations and issued directions that were adverse to the assessee, specifically holding that the insurance claim of Rs. 1,87,178/- was assessable in the year under consideration and no loss of Rs. 63,800/- was allowable. Crucially, the assessee did not challenge the IAC's order. The Court reasoned that since the assessee did not challenge the IAC's order, it attained finality. The AO was bound by the IAC's directions. Therefore, the High Court found no error in the order of the Appellate Tribunal which held that the assessee was bound by the directions issued by the IAC, as the order had not been challenged in appeal. The reference was answered against the assessee.

The High Court held that the Tribunal was correct in its finding that the sums of Rs. 65,000/- and Rs. 1,90,000/- were not advances for property sale. The assessee's explanation was found to be false due to inconsistencies in Anil Kapur's statement versus the receipt, the cash nature of the transactions, the failure of the depositors to show the source of funds, and the lack of sale agreements or evidence of property construction and handover. The Court rejected the argument that the income should be taxed in the depositors' hands, stating that the assessee had falsified accounts and failed to explain the nature and source of funds. Therefore, questions 1 and 2 raised by the assessee were decided against him. Regarding the FDR interest, the Court held that it was income from other sources and not business income, citing Commissioner of Income Tax, Cochin Vs. Dr. V.P.Gopinathan. The Court found no direct nexus between the FDR income and business loan interest payments, and the interest received was income in the assessee's hands that could not be diminished by interest paid on a loan from the same bank. Thus, question 1 raised by the Revenue was answered in its favour. Question 2, concerning the loan from Gulam Mohd. Dar, was held to be a pure question of fact, and the Tribunal's finding that it was a genuine loan was upheld, answering it against the Revenue.