Human body treated like a factory in IT assessment?

By T N Pandey

Section 28 of the Income-Tax Act, 1961, taxes income from business or profession after deduction of expenses, as provided in Section 29. These expenses, among others, include expenses on current repairs, insurance and depreciation. Plant has been defined in Section 43(1) in an inclusive way, where there is no mention of 'human body'.

Shanti Bhushan case:

This issue has recently been considered by theDelhi High Court in Shanti Bhushan versusCIT (2011) 199 Taxman 280 (Del). The assessee, an eminent lawyer, incurred expenditure on his heart surgery and claimed such expenditure in his income-tax assessment under Section 31 of the Act as akin to repairs of plant. For 1983-84, he declared professional income of 2,14,050 after claiming deduction of 1,74,000 incurred as expenditure on coronary heart surgery . The surgery considerably improved his health and earning capacity. His income rose from 3.50 lakh in the year of surgery to 106 lakh five years later.

Shanti Bhushan lost his claim up toIncome-Tax Appellate Tribunal (ITAT). TheITAT rejected the claim by a peculiar reasoning saying that a man cannot stop or regulate the functioning of his heart or use it at will to suit his purpose. Since the functioning of heart is involuntary, it cannot be said to have been 'used' for a specific purpose or activity, except to live and to be alive. Therefore, a professional cannot claim that he uses his heart for the purpose of profession. In the case of the assessee, he sharpens his professional skills not by using his heart but by using his brain.

The reasoning given by the ITAT is far-fetched. If the heart stops functioning, the brain will become dead automatically. Good health and life have to go together and, hence, the whole human body is a plant and cannot be dissected into parts such as brain and heart. To make the brain work, keeping the heart in a healthy condition is imperative and only a novice can say that heart is not like a tool in the plant and machinery of human body.

There is apparently a contradiction in the ITAT reasoning. It tantamounts to saying that only the engine in a car is functional - not other parts - and, hence, depreciation should be allowed only on the value of the engine - not on the value of the entire car. In CIT versus Sibbal Cold Storage (1996) 135 Taxation 576 (MP), it has been said that both operative and supportive structures constitute 'plant', and 'plant' includes within its ambit building in which machines are installed. On this analogy, the brain cannot function unless it is in a sound body.

Delhi High Court decision:

The high court has decided the appeal against Shanti Bhushan. The grounds are:

- General well-being of the heart and its functionality cannot be equated with using heart for engaging in trade and professional activity as expenses on repairs and renewals under Section 31 of the I-T Act.

- Section 31 can be invoked when value of plant and machinery is reflected as an asset in the account books; only then can claim for repairs be made.

- The claim is not admissible under Section 37(1) of the Act as it cannot be said to have been incurred wholly and exclusively for the purpose of the Act.

The high court has argued that if the heart was an asset, then it should have been listed as such in the list of assets (properties) of the appellant. This does not weaken the claim of the appellant because there are assets like self-generated goodwill, patents, etc, which are not in the balance-sheet but become liable to capital gain tax when sold. The tax liability under the Act does not depend on accounting entries is an accepted principle in the income-tax law.

Webster defines the word 'plant' as 'the fixtures and tools necessary to carry on any trade (as also profession) or business'. It is 'the machinery, apparatus or fixtures by which business is carried on'. In Scientific Engineering House (P) Ltd versus CIT, AIR 1986 (SC) 338, the observations of the court are that 'plant' will include any article or object, fixed or movable, live or dead, used by a businessman for carrying on his business and it is not necessarily confined to an apparatus, which is used for mechanical operations or processes or is employed in mechanical or industrial business.

Apparently, it is hard to say that a human body is not plant in the case of businessmen and professionals. It is the basis for earning income and, hence, incurring of expenses in keeping it fit and in working condition is primarily for business or profession. The third ground (supra) given by the high court is equally not convincing. The tremendous rise in income of Shanti Bhushan clearly establishes that the amount was spent wholly and exclusively for the purpose of his profession.

It is time that rigid distinction between personal and business expenses is avoided. This does not imply that all personal expenses be deductible without looking at the nexus of expenses in earning incomes. Each issue has to be decided against the background of facts. Recently, the ITAT, in the case of DCIT versusSalman Khan (2011) 130 ITD 81 (Mum), has decided that the expenses incurred by actor Salman Khan in criminal proceedings arising out of hunting and killing a black deer had nothing to do with his professional activity as an actor and, hence, the expenditure was in the nature of personal expenditure - not deductible against his professional income for income-tax computation. No exception can be taken to such decisions. But not in cases like that of Shanti Bhushan.

Once the concept that human body is a plant is accepted, other expenses such as insurance, costs of body part replacement, depreciation, etc, too will become deductible.

(The author is former chairman ofthe Central Board of Direct Taxes)

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HC Del: S 147, infavor of assessee

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HC dismissed the appeal and protect the order of Tribunal on reassessment under section 147

Court : Delhi High Court

Brief : : HC dismissed the appeal and protect the order of Tribunal on reassessment under section 147

Citation : COMMISSIONER OF INCOME TAX Versus NARAYAN SECURITIES PVT. LTD.

Judgment :

IN THE HIGH COURT OF DELHI AT NEW DELHI

ITA No. 40/2009

Judgment reserved on : 2nd MAY, 2011

Judgment delivered on : 3rd JUNE, 2011

COMMISSIONER OF INCOME TAX … APPELLANT

Through: Mr. M.P.Sharma, Advocate.

Versus

NARAYAN SECURITIES PVT. LTD. ... RESPONDENT

Through: Mr. Salil Aggarwal, Advocate

CORAM:

HON’BLE MR. JUSTICE A.K.SIKRI

HON’BLE MR. JUSTICE M.L.MEHTA

1. Whether the Reporters of local papers be allowed to see the judgment? No

2. To be referred to Reporter or not? No

3. Whether the judgment should be reported in the Digest? No

M.L. MEHTA, J.

1. The present appeal filed under Section 260A of the Income tax Act, 1981 (for short ‘the Act’) is directed against the order of the Income Tax Appellate Tribunal (for short ‘Tribunal’) dated 25.07.2008 whereby the Tribunal held the reassessment proceedings under Section 147 to be invalid and quashed the assessment framed by the Assessing Officer under Section 143(3)/147.

2. The Revenue being aggrieved by the said order, is in appealbefore us. The appeal is admitted on the following substantial question of law.

a) Whether ITAT was correct in law and in the facts and circumstances of the case in quashing the re-assessment order passed u/s 143(3)/147 of the Income Tax Act, 1961?

b) Whether ITAT was correct in law in holding that no addition could be made in re-assessment if no additions in respect of the grounds on which the proceedings u/s 147 were initiated had been made by the A.O.?

3. The assessee is a Member of National Stock Exchange and had filed its return of income on 30^thNovember, 1998 for the assessment year 1998-99 declaring income of Rs.84,837/-. Assessing Officer received information from the Additional Director of Income Tax (Inv) (Unit-I, New Delhi) that during the course of search and seizure operation under Section 132 of the Act subsequent investigation was carried out in the case of M/s Rakesh Nagar & Co. it was found that M/s Rakesh Nagar & Co. had deposited huge amount of cash in bank account and issued cheques of various amounts in favour of the assessee. It was found that the bank account was used to launder funds and no real transaction had taken place. It was noted that the assessee had taken money through cheques, which had actually been handed over to the promoters of M/s Rakesh Nagar & Co. for an amount totaling to Rs.8294615/-. It is on this information, after recording reasons, that a notice under Section 148 was issued requiring the assessee to file its true and correct statement of income. The assessee filed reply stating that its return, originally filed, be treated in response to notice under Section 148. In response to notice under Section 143(2) books of accounts, vouchers and bills were called and verified from the return filed by the assessee. The statement of Director of the company was recorded. On perusal of the statement of the Director, the AO had come to the conclusion that there was real trading of shares by the assessee on behalf of M/s Rakesh Nagar & Co. and, therefore,no addition was made on account of the reasons recorded for reopening the case. However, during the re-assessment proceedings Assessing Officer found that the assessee company had incurred losses on account of purchase and sale of shares of Rs.17,98,761/- and also earned profit of Rs.20,89,360/- from other allied activities. The Assessing Officer treated this amount of Rs.17,98,761/- being loss on trading of shares to tax by holding the same to be covered by the explanation to Section 73 of the Act. In appeal, CIT(A) confirmed the addition made by the Assessing Officer. The assessee carried appeal before the Tribunal.

4. The Tribunal relied upon the case of ITO v. Smt. Darshan Kaur of the Amritsar Bench of the Tribuanl and also the case titled CIT v. Atlas Cycle Industries, 180 ITR 319 and CIT v. M.P. Iron Traders 189 CTR 154, holding that the assumption of jurisdiction to frame the assessment by invoking Section 147 of the Income Tax Act was not justifiable in this case and consequently quashed the assessment framed under Section 143(3)/147. It is against this impugned order that the appeal has been preferred by Revenue.

5. The present case is squarely covered by the judgment of this Court in ITA No. 148/2008 titled as Ranbaxy Laboratories Limited v. Commissioner of Income Tax, pronounced today, i.e., 3^rd June, 2011 by this Court.

6. In view of the same, we answer the questions in affirmative in favour of the assessee and against the Revenue and consequently dismiss the appeal.

M.L.MEHTA

(JUDGE)

A.K.SIKRI

(JUDGE)

JUNE 03, 2011

Closing stock of an erstwhile firm converted into stock-in-trade by a propr

IT : Closing stock of an erstwhile firm converted into stock-in-trade by a proprietorship concern will have to be valued at the market value

Income-tax : On dissolution of a firm closing stock has to be valued on the basis of real value i.e., market value, which is independent of the fact whether or not the erstwhile partners of a dissolved firm continue to do business with assets received on dissolution [Section 145 of the Income-tax Act, 1961 - Method of accounting - Valuation of stock] - [2011] 10 taxmann.com 126 (Delhi)

Closing stock of an erstwhile firm converted into stock-in-trade

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Closing stock of an erstwhile firm converted into stock-in-trade by a proprietorship concern will have to be valued at the market value.


Income-tax : On dissolution of a firm closing stock has to be valued on the basis of real value i.e., market value, which is independent of the fact whether or not the erstwhile partners of a dissolved firm continue to do business with assets received on dissolution [Section 145 of the Income-tax Act, 1961 - Method of accounting - Valuation of stock] - [2011] 10 taxmann.com 126 (Delhi)

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Failure To Ask For S. 147 Reasons Fatal: Delhi High Court

CIT vs. Safetag International India Pvt Ltd (Delhi High Court)

If assessee does not ask for s. 147 reasons & object to reopening, ITAT cannot remand to AO & give assessee another opportunity


The assessee’s assessment was reopened u/s 147. *The assessee did not ask for the recorded reasons*. Even before the CIT(A), though the assessee challenged the reopening as being without jurisdiction, *it did not ask for the reasons*. Before the Tribunal, the assessee claimed that *it was not aware that it could demand the reasons and object thereto*. Pursuant thereto the Tribunal *remitted the case to the AO with direction that the reasons & opportunity to object be provided* and denovo assessment be framed if objections were rejected. On appeal by the department, HELD allowing the appeal:

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Closing stock of an erstwhile firm converted into stock-in-trade by a propr

Closing stock of an erstwhile firm converted into stock-in-trade by a proprietorship concern will have to be valued at the market value

Income-tax : On dissolution of a firm closing stock has to be valued on the basis of real value i.e., market value, which is independent of the fact whether or not the erstwhile partners of a dissolved firm continue to do business with assets received on dissolution [Section 145 of the Income-tax Act, 1961 - Method of accounting - Valuation of stock] - [2011] 10 taxmann.com 126 (Delhi)

Decision regarding territorial jurisdiction of High Court in New India Assu

Decision regarding territorial jurisdiction of High Court in New India Assurance Co. Ltd. v. UOI [AIR 2010 Delhi 43 (FB)] referred to a Larger Bench

Income-tax : Statement of law with regard to `cause of action', `sole cause of action', `forum conveniens' and `the imposition of limitation for exercise of jurisdiction under Article 226 and discretionary exercise of power' have been too broadly stated in all encompassing manner by Full Bench of High Court of Delhi in said case (supra) and, therefore, said decision requires to be reconsidered by a Larger Bench [Article 26 of the Constitution of India - Writ - Maintainability of] - [2011] 10 taxmann.com 120 (Delhi)

Delhi HC: Tax evasion suspicion needs to be recorded.

The Delhi high court has ruled that the tax authorities cannot initiate assessment proceedings simply on belief of escapement of tax, or belief that some income has escaped tax, effectively curbing powers of the revenue department to open past cases. Such belief must be based on prudence which a reasonable person is required to apply, said the high court quashing the income escaping assessment proceedings initiated by the Revenue department under section 147 of the Income Tax Act against an assessee. "The formation of belief must be on the base or foundation or platform of prudence which a reasonable person is required to apply," said a bench comprising Chief Justice Deepak Misra and Justice Manmohan in its order. The court added that the reasons why the assessing officer believed some income had escaped tax needed to be recorded as well. According to section 147 of the I-T Act, amended through the Direct Tax Laws (Amendment) Act of 1989 which came into effect from April 1, 1989, cases could be re-opened if the assessing officer has reason to believe that the income has escaped assessment. Prior to Direct Tax Laws (Amendment) Act, 1987, the assessing officer was empowered to make back assessment on fulfilment of two conditions. One, if the assessing officer has reason to believe that by reason of the omission or failure on the part of an assessee income chargeable to tax has escaped assessment for that year. Second, notwithstanding that there has been no omission or failure on the part of the assessee, the income-tax officer has in consequence of information in his possession has reason to believe that income chargeable to tax has escaped assessment for any assessment year. The amended Act dropped these two conditions, widening the power of the assessing officer to open a case if he has reason to believe that income has escaped assessment. The high court on the plea of the assessee Sarthak Securities held the income escapement proceedings under section 147 of the I-T act, 1961 as illegal. The assessee had filed its return for the assessment year 2003-04 declaring an income of Rs 15,360. It was processed and intimation under Section 143(1) was issued on April 6, 2004 accepting the return. The company had allotted shares to four companies on March 31, 2003 for the amount of Rs 2,50,000, Rs 2,50,000, Rs 3,00,000 and Rs 2,50,000, respectively. These companies were active as per the records of the Registrar of Companies (ROC) and were assessed to income-tax. The department on March 25, 2010 issued notice under section 148 of the Act to the assessee saying that it had reason to believe that the income chargeable to tax for the assessment year 2003-04 had escaped assessment and asked the assessee to file its return for the assessment year in question. – www.economictimes.indiatimes.com

ITAT DEL : Member who has taken a view should not be party to a Special Bench

October 10th, 2010
CLC & Sons  vs. ACIT
(ITAT Delhi Special Bench)

In the interest of judicial discipline, a Member who has taken a view should not be party to a Special Bench

A 3 Member Special Bench was constituted to decide whether the assessee was entitled to claim depreciation u/s 32 on intangible assets termed 'Goodwill'. At the hearing, the assessee raised a preliminary objection that as the Judicial Member on the Special Bench has already taken a view about allowability of depreciation on goodwill in the case of Bharatbhai J. Vyas vs. ITO 97 ITD 248 (Ahd.) judicial discipline requires that this Special Bench should consist of persons who have not already taken a view.

Pursuant to this, the Judicial Member expressed the opinion that having already taken a view on the issue of llowability of depreciation on goodwill, it will be in the interest of judicial discipline to recuse himself from the hearing of the appeal before the Special Bench

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HC (DEL) : Confession made during survey is not conclusive & can be retracted

Friends , when ever there is survey and you are recording the statement, please keep in a mind about the following judgment..
Take concrete evidence to support the statement.


CIT vs. Dhingra Metal Works (Delhi High Court)

A survey u/s 133A was conducted in the premises of the assessee during which certain discrepancies were found in stock & cash-in-hand. The assessee surrendered an amount of Rs. 99 lakhs and offered the same to tax. The offer included a sum of Rs. 45 lakhs on account of excess stock found during the survey. Subsequently, the assessee retracted the offer of Rs. 45 lakhs in respect of the stock on the ground that the discrepancy noticed during the survey had been reconciled. The AO rejected the retraction on the ground that it was an after-thought though the CIT (A) and Tribunal upheld the assessee's claim on the basis that the AO had not made any independent investigation and had made the addition on the addition solely on the basis of the survey statement. On appeal by the department, HELD dismissing the appeal:

(i) S. 133A does not mandate that any statement recorded under that section would have evidentiary value. It merely enables the authority to record the statement of any person which may be useful for, or relevant to, any proceeding under the Act. For a statement to have evidentiary value, the survey officer should have been authorised to administer oath and to record sworn statement as under s.132 (4). While s. 132(4) specifically authorizes an officer to examine a person on oath, s. 133A does not permit the same. Paul Mathews 263 ITR 101 (Ker) & Kader Khan 300 ITR 157 (Mad) followed;

 

(ii) In any event though an admission is extremely important piece of evidence, it is not conclusive and it is open to the person who has made the admission to show that it is incorrect.

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147 on the basis of AUDIT OBJECTION.

2009-TIOL-461-HC-DEL-IT

IN THE HIGH COURT OF DELHI

W.P(C) No. 9180/2007 & CM No. 17282/2007

CARLTON OVERSEAS PVT. LTD

Vs

INCOME TAX OFFICER

A K Sikri And Valmiki J Mehta, JJ

Dated: August 18, 2009

Appellant Rep. by: Mr. Ajay Vohra and Ms. Kavita Jha, Advocates.
Respondents Rep. by: Ms. P.L.Bansal, Advocate.

Income tax - Sec 147 - Assessee is a manufacturer and exporter of footwear - claims deductions under Sections 80HHC and 80IB - AO raises queries - Assessee files detailed reply - AO passes assessment order u/s 143(3) - Notice u/s 148 - assessee asks for reasons for reopening assessment - AO furnishes reasons - held, reopening of assessment merely on the observation of audit party amounts to change in opinion which cannot be allowed under Sec 147 - Assessee's appeal allowed

JUDGEMENT

Per: Valmiki J Mehta J.:

1. The petitioner by way of this writ petition has sought the quashing of the notice dated 29.1.2007 issued under Section 148 of the Income Tax Act, 1961 (hereinafter referred to as "the Act"), and by which notice, the Assessing Officer (AO) has sought to re-open the assessment with respect to the assessment year 2002-2003.

2. The petitioner is a Private Limited Company engaged in a business of manufacturing and export of footwear. For the assessment year 2002-2003 the assessee company filed the return of income on 30.1.2002 declaring an income of Rs. 3,02,91,449/-. In this return of income the petitioner had claimed deduction under Section 80-G, 80-HHC and 80-IB of the Act. The return of income was filed along with the following documents:

"(i) Audited Accounts

(ii) Tax Audit Report

(iii) Audit Report in Form No. 10-CCAC for claim of deduction under Section 80-HHC of the Act

(iv) Detailed computation of income along with the detailed working of deduction claimed under Section 80-HHC and 80-IB of the Act

(v) Audit Report on Form 3-CEB relating to international transactions."

3. During the course of the assessment, the Assessing Officer vide questionnaire dated 28.2.2005 asked the following question with respect to the allowability of deduction under Section 80-HHC of the Act:

"Mr. S.C. Goyal, C.A. appeared. Ask to justify deduction under Section 80-HHC in view of the provisions of sub-section (9) of Section 80-IA and why deduction allowed under Section 80-IB should not be deducted while working out deduction under Section 80-HHC. Produce books of accounts. Produce details of interest income also. Case adjourned to 4th March, 2005."

4. The petitioner filed a detailed note on deduction under Section 80-HHC and Section 80-IB which has been filed as Annexure 'A' to the writ petition. The said note justified the entitlement of the petitioner/assessee company for claiming the reliefs under Section 80-HHC and 80-IB. In the last para of the note, it was specifically stated that where there are two reliefs, each relief under a different section, then, the relief should be calculated independently subject only to the condition that aggregate of both the reliefs should not exceed the income of the undertaking. Other portion in the note shows the claim of the assessee to get a double deduction under both the heads and that calculation of relief has to be done independently.

5. An assessment order was thereafter passed under Section 143(3) of the Act on 29.3.2005. The assessee thereafter received the impugned notice dated 29.1.2007 under Section 148 of the Act. On receipt of the notice under Section 148, the assessee company applied for the reasons for re-opening the assessment which were furnished to the assessee as under:

"Reasons for reopening the assessment in the case of M/s Carlton Overseas Ltd. for the A.Y. 2002-03.

Return of income for A.Y. 2002-03 was filed on 31.10.02 declaring the income of Rs. 23,70,590/- and the case was assessed u/s 143(3) at an income of Rs. 27,44,850/-. On perusal of the return, it was noticed that the assessee was allowed deduction of Rs. 70.70 lakhs under Section 80IA and the same was not deducted from the profit of the business for the purpose of calculating deduction u/s 80HHC. As per the sub section 9 of 80IA, the profits considered for the deduction u/s 80IA should be reduced for computing the deduction under any other section mentioned in the chapter VIA. This has resulted in the incorrect allowance of deduction of Rs. 49.08 lakhs involving short, levy of tax of Rs. 24.57 lakhs including interest.

Therefore, I have reason to believe that taxable income of Rs. 24.57 lakhs chargeable to tax has escaped assessment and I am satisfied that it is a fit case for issue of notice u/s 148 of the Income-tax Act.

Sd/-
(V. VIZAY BABU)
Deputy Commissioner of Income Tax
Circle-3(1), New Delhi"

6. Mr. Ajay Vohra, learned counsel for the petitioner has contended that the reasons for re-opening of the assessment clearly do not provide the basis for issuing of the notice under Section 148 inasmuch as no new material has been disclosed for issuing of the notice and the reasons given for re-opening of the assessment merely reflect a change of opinion, and a mere change of opinion is not sufficient for issuing the notice under Section 148. The counsel has further referred to the counter affidavit filed by the Revenue in this Court in which it has been clearly stated that objection was raised by the Revenue Audit Party with regard to allowing of the deduction under Section 80-IA and 80-HHC i.e. after the assessee was allowed deduction of Rs. 70.70 lakhs under Section 80-IA but the said amount was not deducted from the profits of the business while computing deduction under Section 80-HHC, and therefore the mistake has resulted in the incorrect allowance of deduction of Rs. 49.08 lakhs involving a short levy of tax of Rs. 24.57 lakhs including interest. Mr. Vohra contends that it is quite clear in view of the stand taken in the counter affidavit that no new facts have come on record and the impugned notice is merely based on a change of opinion bring on the basis of the same material which was already available with the Assessing Officer at the time of making initial assessment under Section 143(3) of the Act.

7. Mr. Vohra, in support of his contention, has specifically relied upon Transworld International Inc. Vs. Joint Commissioner of Income-Tax, 273 ITR 242 in support of his contention and which holds that when sufficient material was placed on record and the Assessing Officer had arrived at conclusion that the assessee was entitled to a particular relief (depreciation in that case) then on the same material a different view could not be taken as the same amounted to a change of opinion and consequently the notice and the subsequent proceedings are not valid and liable to be quashed.

8. Ms. Prem Lata Bansal, learned counsel appearing for the Revenue has contended that Audit Party can on factual basis ask for re-assessment and which has, therefore, been done in the present case. It is, however, admitted by her that a mere change of opinion does not permit action under Section 147/148 of the Act.

9. We find that the arguments on behalf of the petitioner are well founded and it must succeed. The Audit Report merely gives an opinion with regard to the non-availability of the deduction both under Section 80-IA and under Section 80-HHC and that the deduction under Section 80-IA was not deducted from the profits of the business while computing deduction under Section 80-HHC. Clearly, therefore, there was no new or fresh material before the Assessing Officer except the opinion of the Revenue Audit Party.

10. Since it is settled law that mere change of opinion cannot form the basis for issuing of a notice under Section 147/148 of the Act, therefore, we do not propose to burden our judgment with the said judgments. In fact, as stated above, the counsel for the Revenue does not dispute this principle of law.

11. In view of the above, the present writ petition is allowed and the impugned notice dated 29.1.2007 issued by the respondent No.2 is quashed. A writ in the nature of prohibition is issued commanding the respondents, more particularly the respondent No. 2, to forbear in giving any effect to or taking any steps whatsoever pursuant to and in furtherance of the notice under Section 148 of the Act for the proceedings initiated with respect to the assessment year 2002-03.

12. The writ petition is disposed off accordingly.

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