Tuesday, July 31, 2012

Low Tax Effect Circular is retrospective & dept Must Show “Cascading Effect”

CIT vs. Varsha Dilip Kohle (Bombay High Court)

Low Tax Effect Circular is retrospective & dept Must Show "Cascading Effect"

The department filed an appeal in the year 2010 where the tax effect was Rs. Rs.6,69 lakhs. The issue raised was whether deduction of interest payment on funds introduced in the firm, (in the form of loan), could be allowed against remuneration received from the firm. In response to the point whether Instruction No.3 of 2011 dated 9.2.2011 issued by the CBDT which states that appeals should not be filed where the tax effect was less that Rs. 10 lakhs, the department argued that (i) as the appeal had been filed prior to the issuance of the circular, the circular did not apply and (ii) as the appeal had a "cascading effect" involved a "common principle", the appeal could not be dismissed in view of the Supreme Court's verdict in Surya Herbals. HELD dismissing the appeal:

In CIT vs. Polycott Corp 138 ITR 144 (Bom) & CIT vs. Vijaya V. Kavekar, it was held that Circular No.3 of 2011 has retrospective operation and applies even to pending cases. As regards Surya Herbals, the appeal does not involve any "cascading effect" as the department has not shown whether there are other appeals which raise the same point.

See also: CBDT's lettr dated 2.9.2011 & Virgo Marketing (SC)

Related Judgements
CIT vs. Virgo Marketing Pvt. Ltd (Supreme Court) In view of Para 11 of CBDT Instruction No.3/2011 dated 9th February, 2011, liberty is granted to the Department to move the High Court by way of review within four weeks.
CIT vs. Surya Herbal Ltd (Supreme Court) Liberty is given to the Department to move the High Court pointing out that the Circular dated 9th February, 2011, should not be applied ipso facto, particularly, when the matter has a cascading effect. There are cases under the Income – Tax Act, 1961, in which a common principle…
CIT vs. M/s Ranka & Ranka (Karnataka High Court) Though paragraph 11 of Instruction No. 3/2011 provides that the revised tax limits will apply only to fresh appeals, the same has to be held to be applicable to pending appeals as well because (i) the Department has not kept in mind the object with which such Instructions have…

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