There have been a number of landmark judgements in the year 2012 and making a short-list of just 10 of them is not an easy task. Yet, the author, thanks to his experience and expertise, achieves this task. Of course, he can’t resist the temptation to make a “honourable mention” of several other important judgements. See, if you agree with his choice of the top-10 and his analysis of the judgements
(Please, can we now end this soap opera)
Vodafone enjoys the pride of place as the numero uno landmark judgement of the year though it has now, despite its path-breaking and revolutionary stance over tax-planning and substance vs. form, attained the dubious status of a never ending soap opera.
Faced with the prospect of having to refund nearly $40 billion, the Finance Minister opposed the judgement tooth and nail and after a lot of hungama in Parliament and elsewhere, ushered in retrospective amendments to s. 9 to supercede the judgement. Then, providentially for Vodafone, there was a change in guard in the Finance Ministry and the new incumbents appeared to be sympathetic to Vodafone. A Committee called the Shome Committee was hastily formed to denounce the retrospective amendments and pave the way for their reversal. However, just when one thought Vodafone would have the last laugh, the tax department took advantage of a change in guard in the Supreme Court and threw a googly by making yet another attempt, nearly one year after the judgement was delivered, to again persuade the Supreme Court to refer the controversy to a larger Bench.
Now, this only means that one hasn’t heard the last of the controversy and one shouldn’t be surprised if Vodafone occupies pride of place in the list of landmark judgements of 2013.
(Mr. AO, if you use extra-legal measures to recover tax, you won’t get that coveted promotion; instead, you may get the boot)
Assessee’s being hounded by the tax department for recovery of tax dues will say a silent prayer to the Rajasthan High Court for coming to their rescue in time of distress. The Court played the role of Knight in shining armour by bluntly telling the department that when the AO made a ‘high pitched’ assessment, the demand had to be stayed till the first appeal as there would be “serious prejudice to the assessee and miscarriage of justice”. The Court went to the extent of stating that if the tax was recovered with coercive measures, it could result in insolvency or closure of business and was akin to “execution of a death sentence, pending trial”.
In UTI Mutual Fund vs. ITO, the Bombay High Court was faced with a piquant situation. The CBDT Chairman thought of a hare-brained scheme of linking the promotion of his minions to the amount of loot (tax) that they bring to the kitty. Well, he got a well-deserved rap on his knuckles when the Court caustically observed that the department’s recovery action was "unfortunate and hasty". So as to leave nothing to imagination, the Court made it clear the CBDT Chief’s "administrative directions for fulfilling recovery targets for the collection of revenue should not be at the expense of foreclosing remedies which are available to assessees for challenging the correctness of a demand".
One rap on the knuckles is not enough and so the Court had to deliver another one in Nishith Madanlal Desai vs. CIT (Bombay High Court) where it reminded the department, in exaggerated politeness, that the "AO & appellate authorities are not mere tax gatherers but they have duty to be fair to the assessee"
(What, you expect an Assessing Officer to apply his mind?)
Does anybody have the courage to haul up the department for its incompetence and excesses? Well, the Karnataka High Court showed that it can do more than just pay lip-service while disciplining the department. It hauled up the department by the collar for filing frivolous appeals and directed it to pay costs of Rs. 1 lakh. It bluntly stated that the appeal had been filed to shirk responsibility and "save the skin" whilst wasting taxpayers’ funds and casing harassment to the assessee. The best part is that the costs were directed to be recovered from the salary of the incompetent officer who authorised the filing of the appeal.
So, hopefully, the next time, the Babu mechanically gives his approval, he will pause a minute to reflect on his action.
4. Court On Its Own Motion vs. CIT (Delhi High Court)
4. Court On Its Own Motion vs. CIT (Delhi High Court)
(Mr. Babu, how would you like it if credit was not given for your hard-earned TDS)
If there is one thing that infuriates taxpayers the most, it is being denied credit for the TDS that they have paid. Any that infuriation turns to absolute fury when the denial is because of some stupid computer programme than an incompetent Assessing Officer has designed. And to add insult to injury, the taxpayer is called upon to pay the tax and threatened with dire consequences if he fails to do so.
Well, the High Court really took its gloves off when it took the top brass of the department to task. It called the problem "apparent, real and enormous" and blamed it squarely on the "failure of administration and arbitrariness" on the part of the department. The department’s pathetic attempt to defend itself was called "unconvincing and unsatisfactory". The Court also blasted the top brass of the department for expressing "complete helplessness" and seeking "to absolve themselves from responsibility" and attempting to be a "silent spectator" while "unwarranted harassment and inconvenience" is caused to the taxpayer.
Well, after such caustic strictures, do you think the department will remedy its wayward ways? I won’t hold my breath!
(So sorry, now you cannot torture taxpayers with third-degree methods)
The department is a firm believer in the adage "Spare the rod and spoil the taxpayer". Also, they believe that taxpayers are no better than hardened criminals and that unless third-degree methods are used, tax cannot be recovered.
Well, sadly for them, the Judiciary did not share their sentiments and their excesses met with the strong disapproval of the Human Rights Commission and the Patna High Court. The High Court did some plain speaking and pointed out that interrogation till late night and sleep deprivation amounted to “torture” & violation of “human rights”.
However, luckily for the department, the erring officials escaped paying the heavy costs that the Human Rights Commission had imposed on them owing to a technicality.
(Ah, at last, a quietus to an unending controversy)
S. 80HHC enjoys the dubious distinction of being called the most-complicated and most-amended section in the Income-tax Act. So, tax payers breathed a huge sigh of relief when the two judgements of the Supreme Court putting a seal on the controversy were delivered.
The first was in M/s Topman Exports vs. CIT where it was held that the entire sale proceeds of the DEPB realized on transfer of the DEPB and not just the difference between the sale value and the face value of the DEPB represent profit on transfer of the DEPB. This was followed in quick succession byACG Associated Capsules Pvt. Ltd vs. CIT where it was held that the netting principle had to be applied while determining the ineligible profits that had to be excluded for computing the deduction.
The verdicts came as a sweet relief to the assessees because the victory that they had secured from the Special Bench after great difficulty on both issues in Topman Exports vs. ITO 318 ITR 87 (Mum)(SB)(AT) and Lalsons Enterprises 89 ITD 25 (Del) (SB) had been unceremoniously reversed by the Bombay High Court. Worse, the High Court had passed strictures against the Tribunal. The assessees were feeling very bitter about the incident and the verdicts of the Supreme Court reversing the High Court and reviving the Special Bench verdicts has redeemed their faith that justice will always be done.
Yet, another judgement that brought a gentle smile of relief to the taxpayers was Avani Exports vs. CIT where the Gujarat High Court held that the retrospective effect given to 3rd & 4th Provisos to s. 80HHC so as to deny/restrict the benifit to exporters having a turnover of more than Rs. 10 crores is ultra vires. This view was followed by the Bombay High Court in Vijaya Silk House (Bangalore) Limited vs. UOI (Bombay High Court)
(Mr. TPO, Sorry, but you are not God)
If you are unlucky enough to fall into the clutches of the Transfer Pricing Officer, you will not escape unscathed. The TPO thinks that he is God and that he knows better that what you or your Board of Directors know about how a business should be run. So, it is all in a day’s work for the TPO to disallow all of your legitimate expenditure with a single stroke of the pen on the ground that the expenditure was "not necessary" to be incurred.
Well, the High Court unceremoniously put the TPO in his place by tersely holding that he had no authority to examine the necessity of, or rewrite, the transaction entered into by the assessee.
Now, it is high time that the Mandarins sitting in their cozy chairs in the CBDT show the good grace of accepting this judgement and direct the TPOs and AOs not to disallow any expenditure on the ground that it is not necessary.
(Joy, but short-lived)
Even optimistic assessees were surprised by this verdict which held, by a majority, that a disallowance u/s 40(a)(ia) for TDS failure could be made only to amounts “payable” as at 31st March and not to amounts already “paid” during the year. In that case, though the assessee had incurred brokerage expenses of Rs.38.75 lakhs, it was held that the disallowance could be made only for Rs. 1.78 lakhs which was due to be paid as of 31st March and not the balance which was remitted without TDS. One of the Members of the Bench wrote a dissenting judgement that the view of the majority would frustrate the object of s. 40(a)(ia).
In the meanwhile, the assessees’ joy over the verdict was short-lived because the Andhra Pradesh High Court stayed the judgement on the department’s plea.
9. B4U International Holdings Ltd vs. DCIT 74 DTR 162 (Mum)
(Mr. Mandarin, next time, pause to think before you legislate)
Does the department pause for a moment to reflect on what repercussion its action will have? Its knee-jerk reaction to any judgement which is counter to its interests is to amend the law and that too retrospectively without caring for the unsettling effect that this will have on the taxpayers.
Well, this time, the department has egg on its face because in its unholy haste to supersede the law that computer software is not taxable as "royalty" by retrospectively amending s. 9(1)(vi), it completely lost sight of the DTAA. The Tribunal made short work of the retrospective amendment by dryly observing that it could not override the DTAA.
Fortunately, this interpretation met with the approval of the High Court in Nokia Networks OY 78 DTR 41 (Del) and of another Bench of the Tribunal in WNS North America Inc vs. ADIT (ITAT Mumbai)
The consequence of this, namely, that the retrospective amendments were a dead letter, sent the Mandarins scurrying back to the drawing board. When we last checked, the Mandarins were still hunched over the drawing board trying to figure out a solution to the mess.
(Say hello to the new controversy on what is "change of opinion")
Its amazing how certain provisions are cursed to be a source of perennial controversy. S. 147 enjoys that dubious distinction. Though several decades have elapsed since the provision was first enacted and there are hundreds of voluminous judgements of the Supreme Court & High Courts on the issue, the law is far from clear, and it unlikely to reach any finality over the foreseeable future.
The Full Bench of the Delhi High Court pronounced in Kelvinator 256 ITR 1 (Del FB) that if an assessee had produced all the material on record, but the AO chose to ignore it, he was to have "deemed to have applied to his mind" and was not permitted to reopen the assessment. This judgement did not go down well with certain Benches of the High Court though others swore by it. When the Supreme Court affirmed the judgement (320 ITR 521 (SC)), one thought the controversy had been given a quietus. However, now another Full Bench has, by a divided verdict, thrown open the entire issue to debate. The Full Bench has held, by a majority, that even if the assessee has produced the material, the AO is not precluded from reopening the assessment if he has not specifically applied his mind to the material. Justice Easwar has written a powerful dissenting judgement in which he has argued that the attempt to re-examine the settled law has created an "undesirable element of uncertainty" and that this is not "in conformity with the parameters of judicial discipline and comity".
Now, we are waiting with bated breath to see what the Supreme Court has to say about this controversy.
Apart from the top-10, there are several judgements that deserve a honourable mention. Lets’ take a quick look at them:
This judgement virtually undid the “binding” character of AAR Rulings by holding that they may be challenged in the High Court. Also, the Court ruled that a direct challenge to the Supreme Court would not be maintainable except in exceptional circumstances.
Now, the problem with this is if that the aggrieved party (whether the assessee or the department) is permitted to challenge the ruling (first in the High Court and then in the Supreme Court, which can drag on for decades), what happens to the professed object of giving "speedy" and "final" AAR verdicts? Instead, the Court ought to have held that the "decision" cannot be challenged – only the "decision making process" can be challenged and that too on limited grounds.
Is “Goodwill” an intangible asset eligible for depreciation u/s 32 was the seminal point that arose for consideration and fortunately for the assessees, the verdict was in their favour. The joy was, however, spoilt by the Delhi High Court holding in Sharp Business System vs. CIT (Delhi High Court) that the same principle did not apply to a non-compete right.
This judgement, though in favour of the assessee, leads to unsatisfactory consequences. The Court ruled that even if an assessee had concealed his income or filed inaccurate particulars under the normal provisions, he cannot be subject to s. 271(1)(c) penalty if he is assessed to s. 115JA book profits. Now, this is not correct because if the assessee has wrongly computed a higher loss than what he is entitled to, he gets the benefit of that in the subsequent years. So, there is no reason why the assessee should not be hauled up and asked to pay the price.
Here, the Supreme Court took a liberal view and held that even a bogus claim would not attract s. 271(1)(c) penalty if the assessee could show that he had made a “bona fide/ inadvertent/ human error”.
The judgement attracted some critisism with some commentators observing that it diluted the deterrent effect of s. 271(1)(c) though others maintained that the liberal approach was justified on the facts of the case.
The Supreme Court flayed the department for the "peculiar phenomenon" of delay in filing high stakes appeals. It obviously suspected that some unscrupulous officers of the department were hand-in-glove with unscrupulous assessees that appeals should be filed late so that they may be dismissed by the Court. It ordered that the matter be brought to the notice of the Finance Minister and the Law Minister though whether anything will ever come out of it is anybody’s guess.
The Court slammed the Department’s practice of hurriedly passing assessment orders shortly before the limitation period and putting citizens to great harassment by raising exorbitant demands. In a major relief to assessees, the Court ruled that a deductor cannot be treated an assessee in default till it is found that the assessee (recipient) has also failed to pay such tax directly. The department has to first proceed against the recipient before proceeding against the deductor.
This law was followed by the Kolkota Bench of the Tribunal in Ramakrishna Vedanta Math and it was bluntly held that the non payment of taxes by the recipient is a condition precedent to invoking s. 201(1) & the onus is on the AO to demonstrate that the condition is satisfied.
Here, the Third Member took a view that many may not agree with. It held that even a s. 143(1) assessment cannot be reopened u/s 147 in the absence of “new material”
Now, it is a little incongruous that if the AO has passed a s. 143(3) assessment order, then he is entitled to reopen within 4 years if he has not looked at the material but in a case where he has only passed a s. 143(1) Intimation (and has definitely not looked at the material), he is restrained from reopening.
It is the law that the AO is required to supply the assessee with a copy of the recorded reasons as soon as the ROI is filed though this is observed more in breach and it is a common practice for the reasons to be furnished before the Tribunal and the matter remanded to the AO.
Now, this will not be permissible because the Tribunal has held, following Fomento Resorts & Videsh Sanchar Nigam 340 ITR 66 (Bom), that the recorded reasons have to be supplied before the reassessment order is passed. If it is not, then the reassessment order is void. The subsequent supply of the reasons does not validate reassessment order, the Tribunal ruled firmly.
The High Court’s verdict that a disallowance u/s 14A cannot be made if there is no tax-free income is refreshing and effectively overrules the contrary verdict of the Special Bench in Cheminvest 121 ITD 318 (Ahd) (SB). The High Court’s judgement was followed in Avshesh Mercantile P. Ltd. vs. DCIT(ITAT Mumbai)
This judgement undid the department’s practice of preparing a panchnama with the sole object of extending the period of limitation u/s 158BE. The Special Bench held that a panchnama which does not record a search does not extend limitation. The High Courts have also taken the same view inCIT vs. Plastika Enterprises 23 DTR 333 (Bom), SK Katyal 308 ITR 168 (Del), White & White Minerals 239 CTR 330 (Raj) & C. Ramaiah Reddy 244 CTR (Kar) 126.
Here, in a detailed and well-explained judgement, it was held that a “controlled transaction” can never be regarded as “comparable” even if at ALP
The question whether the Tribunal has the power under the Third Proviso to s. 254 to extend stay beyond 365 days is the subject of judicial controversy with the Karnataka High Court in CIT vs. Ecom Gill Coffee Trading Pvt. Ltd dissenting from the view of the Bombay High Court in Ronuk Industries 333 ITR 99 (Bom) and that of the Special Bench in Tata Communications Ltd vs. ACIT138 TTJ (Mum) 257. In a short but sweet judgement, the Delhi Bench of the Tribunal has now ruled that this controversy has to be resolved in favour of the assessee.
The question as to when a business can be said to have been "set up" is as old as the hills. In a detailed judgement, the Special Bench has reiterated the law on the subject in the context of an incomplete project to construct a canal and a dam.
The Special Bench explained the entire law on taxing non-compete fee u/s 28(va) & 55(2)(a).