Himachal Pradesh High Court Judgments — 2008

The High Court held that the reassessment proceedings for AY 1992-93 and 1993-94 were not sustainable. The Court relied on the Supreme Court decision in Kerala State Industrial Development Corporation Ltd. vs. Commissioner of Income-Tax, which held that Section 5 of the Act allows computation of chargeable interest on the basis of interest actually received. The Court further cited Commissioner of Income-Tax vs. Tarajan Tea Co. (P) Ltd. to establish that an order passed in another assessee's case does not constitute 'information' under Section 10 for reopening. The Tribunal's observation that the return for AY 1992-93 was non est due to late filing was not the basis for reopening by the Assessing Officer and did not affect the merits. Thus, substantial question of law No. 1 in IT appeal Nos. 1 and 2 of 2002 was decided in favour of the assessee. Regarding the second issue, the Court followed the Kerala High Court's decision in Commissioner of Income-Tax vs. State Bank of Travancore, which held that interest earned on refinancing operations, representing rediscounting, should be excluded from taxable interest. As the revenue did not present different terms and conditions for refinance, this judgment was deemed applicable. Therefore, substantial question of law No. 2 in IT Appeal Nos. 1 and 2 of 2002 and substantial question of law No. 1 in IT Appeal Nos. 9 and 10 of 2004 were decided in favour of the assessee. Substantial question of law No. 2 in IT appeal Nos. 9 and 10 of 2004 was decided against the assessee as it was not a substantial question of law. The appeals were allowed, and the ITAT orders were set aside.

The High Court held that the ITAT's order deeming the second set of notices (issued on 18.11.1997) as illegal and improper was incorrect. The Court reasoned that while successive notices can generally be issued within the limitation period, the facts of this case were peculiar. The second set of notices were necessitated by the High Court's earlier order declaring the original returns invalid. The Court noted that the Assessee itself had declared significant positive income with audited accounts in response to the earlier notices, and the subsequent assessment returns were quashed solely because they originated from an invalid return. The Court viewed the second set of notices as a continuation of the earlier ones, or at least as valid independent notices, especially when considering the exclusion of time during which proceedings were stayed by the High Court. Therefore, the questions of law were decided in favour of the Revenue and against the Assessee, and the appeals were disposed of accordingly.

The High Court held that the declaration made by the assessee under the Voluntary Disclosure of Income Scheme, 1997 (VDIS) was in total violation of Section 64(2)(ii) of the Income Tax Act, 1961. This section prohibits disclosure of income for the previous year in which a search under Section 132 was initiated or for any earlier previous year. In this case, the search was conducted on May 19, 1994, and the trial balance seized related to February 28, 1993. The assessee, who had previously denied any connection to 'Chand Gupta', later disclosed the Rs. 14,07,143/- as income of Chander Prakash Gupta HUF. The Court found this conduct to be not above board, as the assessee deliberately withheld the fact that the income was subject to the search operation. Therefore, the certificate issued under Section 68 was not binding on the Assessing Officer. The Court found the AO's order, which relied solely on this invalid certificate, to be against law and prejudicial to the interest of the Revenue. Consequently, the appeal filed by the Revenue was allowed, the order of the ITAT was set aside, and the order of the CIT was restored. No issue was expressly left undecided.

The High Court held that the interest income earned by the assessee on deposits made with the H.P. State Cooperative Bank is eligible for deduction under Section 80P(2)(a)(i) of the Income Tax Act, 1961. The Court noted that the Supreme Court in Commissioner of Income Tax v. Karnataka State Cooperative Bank Apex Bank [2001] 231 ITR 194 (SC) and subsequent judgments like Commissioner of Income Tax v. Nawanshahar Central Co-operative Bank Ltd. [2007] 289 6 (SC) had held that income derived from funds placed with other banks or invested in approved securities, which is imperative for carrying on banking business or statutorily required, arises from the business carried on by the cooperative society. The Court found that Section 57 of the H.P. Cooperative Societies Act, 1968, mandates cooperative societies to maintain reserve funds and invest them in specific ways, including with approved banks. The Court dismissed the Revenue's argument regarding the Registrar's approval as an argument of desperation, stating it was not raised earlier and that approval could be inferred from the Registrar's approval of balance sheets. Furthermore, the Court noted that even if Section 80P(2)(a)(i) was not applicable, the income would be deductible under Section 80P(2)(d) as it was derived from investments with another cooperative society. The appeal of the revenue was accordingly rejected.

The High Court held that the assessee has the right to change its method of valuing stock, provided the change is bona fide and in accordance with normally accepted accounting practices. The Court found that the assessee provided reasonable grounds for changing the method, specifically the practical difficulties in applying FIFO due to stock being spread across 250 locations. The Court noted that while a change in method might cause a temporary distortion in profit calculation for the year of change, this would be rectified in subsequent years. The revenue failed to point to any provision of law prohibiting such a change or requiring prior permission from tax authorities. The Court relied on Karnataka High Court in [1993] 201 ITR 674 and Bombay High Court in [1993] 202 ITR 789. Therefore, the ITAT was justified in allowing the change and deleting the addition. The ratio is that an assessee can change its accounting method for stock valuation if it faces practical difficulties and the change is bona fide and consistent with accepted accounting principles, without needing prior permission from tax authorities.

The High Court held in favor of the assessee. It found that the amended Section 36(1)(vii) of the Income Tax Act, 1961, clearly states that a deduction for bad debt is allowable once it is written off as irrecoverable in the assessee's accounts. The word 'established' was deleted from the provision, signifying the legislature's intent to remove the requirement of proving irrecoverability. The Court reasoned that the amendment, along with the corresponding amendment to Section 36(2)(iii) and supported by CBDT Circular No. 551, aimed to eliminate litigation by allowing deduction in the year of write-off. The Court distinguished the revenue's cited judgments, finding them inapplicable due to different assessment years or factual contexts. The ratio decidendi is that post-amendment, writing off a debt in the books is sufficient for claiming a deduction, and the assessee is not required to prove the debt's irrecoverability. The appeal was allowed.

The High Court followed the reasoning of the Bombay High Court in CIT vs. Cinceita (P.) Ltd., and the decisions of the Madras, Kerala, and Gujarat High Courts, which held that expenditure on stamp duty and registration charges for a lease deed is revenue expenditure, irrespective of whether it is incidental to capital expenditure. The Court respectfully disagreed with the Karnataka High Court's view in Hotel Rajmahal's case, which treated such expenditure as capital in nature when securing leaseholding rights for a long period. The substantial question of law was answered against the revenue. The appeal filed by the Revenue was dismissed. No order as to costs.

The High Court held that the appeal filed by the Revenue was without merit. Regarding the deduction of Rs.1,50,000/- for interest, the Court noted that the ITAT had worked out the amount at Rs.12,000/- per annum, which was the exemption limit for interest income during the block period. As the Revenue's counsel did not counter this submission, the Court found the deduction justified. Concerning the assessee's appeal, the Court found no material indicating that the additions sustained by the ITAT for household expenses (Rs.6,00,000/-) and marriage expenses (Rs.1,00,000/-) were unjustified. The AO's observations regarding the assessee's family, children's education, high standard of living, and vehicle usage supported the addition for household expenses. For marriage expenses, the assessee's admission of spending Rs.1,93,000/- on two marriages, one being his daughter's, justified the addition. The Court also clarified that the block period was ten years and a few months, making the interest calculation at Rs.12,000/- per annum result in Rs.1,20,000/-, not Rs.3,00,000/- as claimed by the assessee. The Court found no addition on account of hotel income, but rather an addition for excess stock in M/S Beauty Palace, which was justified. Therefore, both appeals were dismissed.

The High Court held that the Income Tax Department was well within its rights to ask the assessee to explain the source of funds used for investments made in properties registered in Prem Singh's name. The Court reasoned that the Benami Transaction Prohibition Act, 1988, primarily prohibits benami transactions and the recovery of such property, and makes engaging in such transactions a criminal offense. However, it does not impact the Income Tax Act's provisions allowing authorities to inquire into the source of funds. The Court rejected the assessee's argument that only the registered owner (benamidar) could be questioned, stating this would give a premium to illegal acts. The Court found an inherent fallacy in the argument that a person involved in a benami transaction, while potentially liable criminally, could not be asked to disclose the source of funds. The Court relied on the Kerala High Court judgment in CIT vs. K. Mahim, which held that the Income Tax Officer's primary concern is the source of investment, and the benami nature is incidental. The Court dismissed both appeals, answering both questions of law against the assessee and in favor of the revenue. The procedural issue regarding the restoration of the appeal was implicitly decided against the assessee by the dismissal of the appeals.

The High Court held that the Tribunal was not correct in upholding the addition. While the question of the correctness of an estimation is usually a question of fact, it becomes a substantial question of law when authorities apply different yardsticks to similar cases, rendering the action arbitrary and capricious, thus hit by Article 14. The Court found that the Tribunal and CIT had dealt with three restaurant cases in Shimla. In Baljees' Restaurant and Alfa Restaurant, the estimation was based on a multiple of 2.2 times the raw material cost. The CIT applied a multiple of 2.5 for the assessee, considering a higher proportion of raw material consumption in sweet items sold from the counter in Baljees' case. However, the assessee's restaurant and Alfa Restaurant were engaged in the same business, and the assessee had provided gross profit percentages (36.92%, 36.33%, 37.13%) for the previous three years, which were similar to Alfa Restaurant's case. Therefore, there was no plausible reason for the Tribunal to deviate from the norm established in Alfa Restaurant's case. The revenue's contention that gross profit figures were not declared was incorrect as the assessee had submitted a letter with this information. The appeal was allowed, setting aside the Tribunal's order. However, since the assessee's appeal before the Tribunal was dismissed in default, the order of the CIT was restored, and no further benefit could be granted to the assessee.

The High Court held that the question of law was no longer res integra, having been concluded by the Apex Court's judgment in Virtual Soft Systems Ltd. vs. Commissioner of Income Tax, Delhi I. The Court noted that prior to the amendment of Section 271(1)(c) by the Finance Act, 2002, Explanation 4 to the said section required a positive assessed income on which tax was payable for the imposition of penalty. Both Clause (a) and Clause (c) of the pre-2002 Explanation 4 applied only when the end result was a positive assessed income. The Court found that in both cases before it, no positive income was declared or assessed, and therefore, no tax was payable. Consequently, the penalty for concealment of income could not be levied. The High Court rejected the appeals filed by the Revenue, upholding the ITAT's decision. No order as to costs was made.

The High Court held that the poultry sheds are indeed 'plant' within the meaning of Section 43(3) as it stood at the relevant time. The ITAT's finding that the sheds were specifically designed to protect birds from disease, ensure proper lighting and air circulation, facilitate scientific feeding and water systems, manage manure, and provide a conducive environment for egg-laying was accepted. The Court reasoned that the specific design for furthering production is the key factor, making the argument that the building could be used for other purposes irrelevant. For the second issue, the Court held that extra shift allowance is available on all items of machinery or plant on which normal depreciation is allowed, provided the concern worked double or triple shifts, irrespective of whether each specific item worked extra shifts. This principle was derived from the Supreme Court's judgment in South India Viscose Ltd. Vs. Commissioner of Income-tax. Therefore, both questions were decided in favour of the assessee.

The High Court held that the Income Tax Appellate Tribunal was wrong in deleting the penalty of Rs. 1,10,130/-. The Court found that the Tribunal's reliance on Bombay High Court decisions in CIT Vs. P.M. Shah and CIT Vs. Dharamchand L. Shah was misplaced, as these decisions were specifically overruled by the Apex Court in K.P. Madhusudhanan Vs. Commissioner of Income Tax. The Apex Court held that Explanation 1 to Section 271(1)(c) is part of the section and does not require separate invocation. The notice under Section 271(1)(c) itself puts the assessee on notice of the potential application of the Explanation. The Court also distinguished the case of Sir Shadilal Sugar and General Mills Ltd. by noting that the addition of Explanation 1 to Section 271(1)(c) changed the legal position. The Court found that the assessee failed to substantiate the explanation offered, which was found to be false. The notice for penalty proceedings was served, and the assessee had sufficient knowledge. Therefore, no separate notice was required for the Explanation. The penalty was exigible.

The High Court focused on substantial question of law No. 3. It held that the CIT(A) was justified in entertaining the additional ground of appeal concerning Section 80P. Citing the Supreme Court in Jute Corporation of India Ltd. v. Commissioner of Income Tax, the Court stated that appellate authorities have wide powers and are not debarred from entertaining additional grounds, as their powers are co-terminus with the original authority. The Court noted that neither the CIT(A) nor the ITAT had considered whether the assessee fulfilled the conditions for Section 80P. The ITAT's decision to set aside the CIT(A)'s order solely on the ground of exceeding jurisdiction was found to be incorrect. Consequently, the Court held that the matter needed to be considered afresh by the Assessing Officer. The Assessing Officer was directed to decide the matter after affording adequate opportunities to the parties, considering all pleas and contentions, including those raised before the High Court, within four months. The other substantial questions of law were expressly left undecided, with parties having the liberty to agitate them before the Assessing Officer or in subsequent proceedings.

The High Court held that the ITAT was not right in law in concluding that a specific notice was required before levying interest under Sections 139(8) and 215. The Court interpreted Section 215(3) to mean that only a 'notice of demand' in the prescribed form specifying the sum payable is required, not a show cause notice. The requirement of a notice of demand is for the purpose of exercising the power of waiving or reducing interest under Section 215(4). The Court also held that the assessee's appeals against the levy of interest under Section 215, pursuant to orders passed under Sections 154/155, were not maintainable. Relying on Supreme Court and High Court decisions, it was held that while the levy of interest is part of the assessment process, the question of waiver or reduction of interest cannot be the subject of an appeal under Section 246(c). Such matters are to be dealt with by the Commissioner in revisional jurisdiction. The assessee had not exercised his right under Section 155(4) to apply for waiver or reduction. Therefore, both questions of law were answered in favour of the Revenue. The appeals were allowed.

The High Court held that the Tribunal was wrong in cancelling the Commissioner's order as it was not without jurisdiction. The Assessing Officer's order was erroneous and prejudicial to the interest of the revenue because it was passed without considering relevant material and without applying its mind correctly, including failing to consider Circular No. 41(V-6)D of 1952. The Court found no material on record to support the Tribunal's decision regarding interest on sticky loans. Therefore, the Commissioner rightly exercised his power under Section 263(1). For the second issue concerning the discount on bonds, the Court relied on its previous decision in H.P. Financial Corporation Ld. vs. Commissioner of Income Tax (1998) 232 ITR 158 (HP), which held that such discount should be spread over the period of the bonds. The matter was remanded back to the Assessing Officer to frame a fresh assessment order in light of these observations.

The High Court held that the submissions of the learned counsel for the respondent (assessee) were unacceptable. In view of the settled position of law, particularly the Supreme Court decisions in Tuticorin Alkali Chemicals & Fertilizers Ltd. and Autokast Ltd., the interest of Rs. 3,09,586/- received by the assessee on short-term deposits during the assessment year 1989-90 is liable to be taxed under Section 56 of the Act. The Court found that the ITAT's decision was incorrect. The substantial question of law was answered accordingly, and the appeal was allowed. The operative direction was to allow the appeal, implying that the interest income should be taxed as held by the Assessing Officer.

The High Court held that the assessment in the status of a Body of Individuals (BOI) could not be sustained. The Court referred to the Supreme Court's decision in Meera and Company, Ludhiana v. Commissioner of Income Tax, which clarified the scope of 'person' under Section 2(31)(v) to include AOPs and BOIs, emphasizing that these categories are for combinations of individuals or other persons engaged in a joint enterprise. However, the Court then invoked Section 26 of the Income Tax Act, 1961. This section mandates that where property is owned by two or more persons with definite and ascertainable shares, they shall not be assessed as an association of persons, but the share of each person in the income from the property shall be included in their total income. Since the co-owners were undisputedly assessed individually, the provisions of Section 26 were attracted, prohibiting their reassessment as an AOP/BOI. Consequently, the High Court found that the assessment in the status of BOI was in derogation of Section 26. The Court answered substantial questions (c), (d), and (f) accordingly, stating that the individuals, having already been assessed, could not be reassessed as an AOP/BOI due to the applicability of Section 26. The issue regarding the disallowance of salary expenses (question f) was implicitly addressed by the overall finding that the BOI assessment was invalid.

The High Court held that the question of law is no longer res integra and has been answered by the Supreme Court in Allied Motors (P) Limited versus Commissioner of Income Tax (1997) 224 ITR 677. The Supreme Court held that a proviso inserted to remedy unintended consequences, make a provision workable, or supply an obvious omission, and which is required to give a reasonable interpretation to the section, should be treated as retrospective. The Court noted that various High Courts (Gujarat, Calcutta, Patna) have taken a similar view, holding the amendment inserting the first proviso to Section 43B as curative, explanatory, or retrospective. The Delhi High Court's view that the proviso would be available only prospectively was considered incorrect. Therefore, the High Court concluded that the proviso to Section 43B is remedial and retrospective in character. The question was answered in favour of the assessee and against the revenue. The reference stood disposed of with no order as to costs.

The High Court held that for the assessment year 1982-83, which was prior to the amendment effective from April 1, 1985, the Income Tax Officer had no authority to impose interest on an increased income resulting from rectification. The Court noted that the provisions of sections 139(8) and 215(3) as they stood prior to April 1, 1985, only provided for a reduction of interest if the tax amount was reduced, and did not contain a provision for increasing interest if the tax liability was enhanced. This provision for increasing interest was introduced by the amendment effective April 1, 1985, and the amendment was not retrospective. The Court relied on decisions from the Punjab and Haryana High Court in Panna Lal vs. Commissioner of Income Tax and the Gujarat High Court in Commissioner of Income Tax vs. Vishwajit M. Mehta. The question of law was answered in favour of the assessee and against the revenue. The reference was disposed of with no order as to costs.

The High Court answered the first question in favour of the revenue. It reasoned that Section 139(10) stipulated that a return showing total income below the maximum amount not chargeable to tax would be deemed never to have been furnished if not filed within the prescribed time, unless it fell under one of the six provisos. The court noted that the assessee's return, showing a loss, was a return of income below the taxable limit. It found that the assessee's return did not fall under any of the exceptions listed in the provisos to Section 139(10). Therefore, the return was rightly held to be nonest. Regarding the second question, the court held that it was not a question of law. It stated that a return of loss, whether from business profits or depreciation, remains a return of loss, and the mere inclusion of depreciation loss does not exempt it from the rigors of Section 139(10). Thus, the second question was also answered against the assessee.

The High Court held that the Tribunal was correct in upholding the addition of interest on an accrual basis. The court reasoned that the assessee followed the mercantile system of accounting, and the accounting period for assessment year 1982-83 ended on March 31, 1982. The loans were outstanding, and the interest had accrued by that date. The Board's Resolution to waive the interest was passed on June 26, 1983, which was after the close of the accounting period. The court emphasized that for the concept of real income to apply, the decision to waive off interest must be taken before the end of the accounting year, based on commercial expediency. The decision to waive interest after accrual is of no consequence. The court cited the Supreme Court judgments in State Bank of Travancore and Shiv Prakash Janak Raj & Co. Pvt.Ltd. to support its view that the concept of real income cannot be used to defeat the provisions of the Act. The reference was answered in favor of the revenue.

The High Court held that the hotel premises cannot be classified as 'plant' for the purpose of depreciation. The Court relied on the Supreme Court's decision in Commissioner of Income-Tax vs. Anand Theatres, 244 ITR 192. The reasoning was that Section 32 of the Income Tax Act clearly envisages separate depreciation for buildings, machinery, and plant. The definition of 'plant' under Section 43(3) does not include buildings. The depreciation rules specifically provide for depreciation on buildings, furniture, fittings, machinery, and plant. The Supreme Court in Anand Theatres observed that a building used for running a hotel is not an apparatus or adjunct for running the hotel. Furthermore, specific provisions exist for additional depreciation on buildings used for hotels under Section 32(1)(v). The Court also referred to English case law and the observations in Carr v. Sayer, 65 TC 15 (Ch.D.), which held that a hotel building remains a building and is not plant. Therefore, the ITAT's decision to treat hotel premises as 'plant' and allow depreciation at 15% was found to be incorrect. The question was decided in favour of the Revenue. The Registrar General was directed to send a copy of the order to the ITAT.

The High Court held that prior to April 1, 1989, the property of the assessee was required to be assessed as per the provisions of Rule 1BB of the Wealth Tax Rules, 1957, which was in existence at that time. For the assessment year 1989-90, the wealth assessment had to be determined in the manner laid down in Part B of Schedule-III, as per the amended provisions. The Court found that Rule 1BB partakes the character of a rule of evidence, not substantive law, deeming market value based on a recognized valuation method. Regarding penalty appeals, the Court found no fault with the ITAT's order. It reasoned that the assessee had consistently shown the same property value since 1967-68, which the department had accepted. There was no evidence that the Ministry of Urban Development's notification was known to the assessee when they filed their returns. Given that a substantial portion was rented out and the assessee had reasons to believe valuation should be based on capitalization, it was not a case for imposing penalty under Section 18(1)(c). The appeals filed by the revenue were dismissed, and the references were answered accordingly. The ITAT was directed to pass necessary orders to dispose of the quantum cases conformably to this judgment.