Analysis of eight important decisions – December 2010 to May 2011

By CA Anant N. Pai

1. Re-assessment u\s 147:- Jurisdiction and its scope.

The decision of the Bombay High Court in the case of CIT vs. Jet Airways {I} Ltd. reported in
[2011] 331 ITR 236 {Bom} presents an interesting authority on the subject of the scope of jurisdiction
of an Assessing Officer to re-assess income believed to have escaped assessment.

The generally known line of thinking is that once an Assessing Officer has ‘reasons to believe’ that
income of an assessee has escaped assessment, he can re-open the assessment by issue of a notice u\s
148. In short, the formation of such belief is the founding material on basis of which he assumes
jurisdiction to re-open the assessment. If these reasons do not exist, then the jurisdiction of the
Assessing Officer becomes questionable and the Court can intervene to quash the re-assessment
proceedings as ill founded.

It is also logical that re-assessment proceedings which have been validly initiated by formation of a
proper ‘belief’ will also have to be dropped if it is found in the course of the proceedings that income
has factually not escaped assessment.

On the other hand, once re-assessment proceedings have been validly initiated, then the Assessing
Officer is empowered to also assess other incomes which have come to his notice during the re-
assessment proceedings that have escaped assessment, even if the same were not the items on the
basis of the notice u\s 148 had been issued.

This is the legal matrix that we see in the day to day situations involving re-assessment proceedings.

The case before the Bombay High Court in the Jet Airways decision referred above presented a
different situation. In this case, the case was validly re-opened on the basis of a belief that income ‘X
had escaped assessment. But, in the re-assessment order passed u\s 147 by the Assessing Officer, no
addition was made in respect of this ‘X’ income, but an addition was made for ‘Y” income which was
noted to have escaped assessment.

The Bombay High Court held that such addition of ‘Y’ income cannot be sustained when no addition
was been made for ‘X’ income. The Bombay High Court noted that there is indeed a power with the
Assessing Officer to assess escaped incomes other than the those on the basis on which the notice u\s
148. This power is explicit in the language used in Explanation 3 to section 147. But, this power is
conditioned by the word ‘and also’ in this language. According the High Court, the words ‘and also’
are used in a conjunctive and cumulative sense indicating that the other escaped incomes can be
assessed only in conjunction with the escaped incomes on the basis of which notice u\s 148 had been
issued. If at all the Assessing Officer wishes to assess only the other escaped incomes independently,
then he must issue another fresh notice u\s 148 for this purpose.

This decision, according to me, should bring in to the fore the dual aspects of jurisdiction viz it's
‘vesting’ and it's ‘sphere of operation’. Jurisdiction, in its primary form, connotes the power of an
authority to take cognisance of the case and determine it. This is the ‘vesting’ aspect of jurisdiction.
The second is the ‘sphere’ of the authority i.e. the limits within which the vested power can be
exercised.

In the context of re-assessment u\s 147, the vesting of the jurisdiction takes place when the Assessing
Officer ‘has reasons to believe’ that income of an assessee has escaped assessment. Once jurisdiction
has so vested with the Assessing Officer, the same is not absolute but conditioned by the sphere of
authority circumscribed in Explanation 3 of the provisions. Explanation 3 here permits assessment of

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other incomes that escaped assessment, only if the items of alleged escaped incomes, which formed
the basis on which the notice u\s 148 was issued, are necessarily assessed.

The Bombay High Court decision in Jet Airways case, in my view, therefore sets the right balance
between these two twin aspects of jurisdiction.

2. Charitable institutions – difference between ‘objects’ and ‘powers’ -

Income tax exemption to charities u\s 11 is available only if the objects of the trusts and institutions
are charitable. Here too, a distinction has been made by the Courts with regard to the main objects
and the incidental objects. As to whether a trust is to be treated as ‘charitable’ or not, has to be tested
vis-a-vis the main objects and not the incidental objects. After all the main objects are the dominant
objects for which the trust has been formed and the function of the incidental objects is to only
supplement the main object. Where the main objects themselves are distributive, it is essential that
each of the main objects is charitable in nature. Otherwise, the exemption for charities would be
denied. This is rightfully, so because the trustees have the option to apply the incomes and the funds
of the trust for non charitable purposes also.

This is age old law regarding exemption for charities as spelled out by the Supreme Court in
Dharmoposhaman vs. CIT [1978] 114 ITR 463 {SC} and being followed to recent times in the DIT
vs. Bharat Diamond Bourse [2003] 126 Taxman 365 {SC}.

Just as there is difference between the main objects and the incidental objects, there is also a
difference between the objects of the trust and the powers of the trustees mentioned in the trust deed.
But, quite frequently, this vital legal distinction between the objects and the objects is lost sight by the
Income Tax Department and exemption for charities is denied mistaking the powers of the trustees as
the objects of the trust.

Such a case came before the Delhi Tribunal in the case of IILM Foundation vs. CIT [2011] 44 SOT
37 {Del}. Here, the assessee was a company registered u\s 25 of the Companies Act, 1956. It filed an
application for registration as a charitable institution u\s 12A of the Income Tax Act. The registration
was refused by the Commissioner on the ground that not all of the objects of the company were
charitable. In appeal, the Tribunal found that the predominant objects of the company were veritably
charitable. It was also noted by the Tribunal that the so called objects which the Commissioner found
as objectionable to charity were actually powers of the trust and not its objects. Based on these
findings, the Tribunal held that the company should be granted registration u\s 12A.

As regard the fine distinction between objects of the trust and the powers of the trustees, Readers
should find useful authorities in the cases of Yogiraj Charity Trust vs. CIT [1976] 103 ITR 777,
782 {SC} and the Federation of Indian Chambers of Commerce and Industry [1981] 130 ITR 186
{SC}. The decision of the Delhi Tribunal in the IILM Foundation vs. CIT [2011] 44 SOT 37 {Del}
shows that despite the precedents laid by the Supreme Court, tax litigation on the issue of grant of
exemption to charities is continuing unabated.

It should be clear that the difference between ‘the objects’ and the ‘powers’ lies in recognising that
whereas the former constitute the ‘ends’ to be achieved by the trust, the ‘powers’ constitutes the
‘means’ to achieve these ‘ends’. If this simple distinction is noted by the Income Tax Department at
the time of processing the assessees’ applications for registration u\s 12A, much undesirable litigation
can be avoided. From the assessees' side, it is also desirable the lines of distinctions between main
objects, incidental objects and powers of the trustees are firmly demarcated by the draftsmen in the
trust deeds so that there is no confusion over it by the Income Tax Department.

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3. Exemption u\s 54F – whether net consideration to be invested is the actual consideration
received by assessee or deemed consideration u\s per section 50C

The decision of the Bangalore Tribunal in the case of Gauli Mahadevappa vs. ITO reported in
[2011] 9 ITR {Trib} 129 {Bangalore} involves a very though provoking issue. In this case, the
assessee, a freedom fighter had sold a plot of land for an agreed consideration of Rs. 20,00,000. From
these sale proceeds and another Rs. 4,00,000 of his other funds, the assessee invested Rs. 24,00,000
towards purchase of a residential house and claimed exemption u\s 54. In the assessment that
followed, the Assessing Officer found that the stamp duty value of the house was Rs. 36,00,000 and
treated this amount as the deemed sale consideration u\s 50C of the Income Tax Act. He also
reworked the exemption u\s 54 by taking the net consideration at Rs. 36,00,000.

In the appellate proceedings, the Tribunal has held that whereas the capital gains u\s 48 has to be
computed taking Rs. 36,00,000 as the deemed transfer consideration applying the provisions of
section 50C, the exemption u\s 54F has to be computed by taking the net consideration at Rs.
20,00,000 and not Rs. 36,00,000. In coming to this conclusion, the Tribunal had observed that section
54F is a separate code by itself which has to be construed independent of the computational
provisions of section 48. The deeming provisions u\s 50C should be confined to the provisions of
section 48 and not extended in to the provisions of section 54F. In saying so, the Tribunal has relied
on the decision of the Bombay High Court in the case of CIT vs. Ace Builders P. Ltd. [2006] 281
ITR 210 {Bom}, where it was held that the deeming fiction in section 50 [treating gains on transfer of
a block of assets as short term capital gains] was restricted to section 48 and not to the exemption
provisions of section 54E.

The Tribunal has also noted that what is required to be invested for purchase of residential house to
claim exemption u\s 54F is the ‘net consideration’ which expression has separately defined in section
54F without reference to section 50C.

In effect, whereas the Tribunal has confirmed that the transfer consideration to be deemed at Rs.
36,00,000 [i.e. the stamp duty value of the property transferred] for computing the capital gains u\s
48, it has allowed the assessee to favourably compute the exemption u\s 54F on the basis of net
consideration of Rs. 24,00,000 actually received.

According to me, this decision rendered in contrasting styles, sets the right balance in the play of
operations of the provisions of section 48, section 50C and section 54F respectively without an
encroachment of one provision in to the sphere of the other. The presence of separate definition of the
expression ‘net consideration’ in section 54F coined with the opening words ‘for the purpose of this
section’ should also support a proposition that this definition is to be construed ‘for the purpose’ it
was enacted i.e. to grant the exemption proportionate to the ‘investible’ consideration utilised for
purchase of a residential house. The decision of the Tribunal should also accord with the established
canon laid down in Supreme Court decisions that a tax exemption provision must be interpreted to
advance the exemption rather than deny or restrict it. Readers are advised to read this exhaustively
reasoned decision.

4. Capital gains:- Transfer of a business undertaking for non monetary consideration.

Transaction is an ‘exchange’ and not ‘sale’. Slump sale provisions of section 50B therefore not
applicable. Cost of acquisition not determinable – no taxable capital gains.

The decision of the Mumbai Tribunal in the case of Bharat Bijlee {ITA no. 6410/M/08 dated 11-3-
2011 – E Bench for A.Y. 2005-06} reported on www.itatonline.org highlights the distinction between
a ‘sale’ and an ‘exchange’ and consequently, the differing capital gains’ tax implications flowing from
the same.

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Before I delve in to this decision, permit me to give a brief legal preview for the same.

We are all aware that the event that triggers taxation of capital gains is the transfer of a capital asset
for consideration at a gain. A running business is also a capital asset {CIT vs. F.X. Pereira & Sons
{Travancore} P. Ltd. [1990] 184 ITR 461 [Ker]}. Likewise, a business undertaking, which may be a
component of a larger business, is also a capital asset (Indian Bank Ltd. vs. CIT [1985] 153 ITR 282
{Mad}.Therefore, a transfer of a business undertaking for a consideration should generally invite
capital gains tax.

But, where it is not possible to compute the cost of acquisition of the capital asset transferred, the
capital gains provisions fail and there is no capital gains’ tax.{CIT vs. B.C. Srinivasa Shetty [1981]
128 ITR 294 [SC].}.

Earlier, when a business undertaking as a whole was sold for a ‘slump price’, i.e. without the sale
consideration being attributed to individual assets transferred, it was held there could not be an cost of
acquisition attributable to the business and hence, it was not possible to compute capital gains for tax
purposes {CIT vs. Artex Manufacturing Co. [1997] 227 ITR 260 [SC]} and PNB Finance vs. CIT
[307 ITR 75 {SC}].

To counter such situation, the Legislature, vide Finance Act 1999, brought the provisions of sections 2
[42C] and 50B respectively on the statute to enable taxation of capital gains from slump sale. Section
2 [42C] defined slump sale to mean ‘transfer of one or more undertakings as a result of sale for a
lump sum consideration without values being assigned to the individual assets and liabilities in such
sales [emphasis supplied in bold underline]. Section 50B provided the mechanism to tax capital
gains from the slump sale. The earlier lacuna of the impossibility of computing the cost of acquisition
was overcome by deeming the ‘net worth’ of the business [cost of assets minus liabilities] as the cost
of acquisition of business undertaking sold. With this amendment, the taxation of capital gains
resultant from sale on business undertakings at a slump price was enabled.

The facts in the Mumbai Tribunal decision in the case of Bharat Bijilee Limited vs. ACIT were that
the assessee transferred its undertaking on a “going concern” basis pursuant to a scheme of
arrangement u/s 391 to 394 of the Companies Act. In consideration, the transferee allotted preference
shares & bonds to the assessee. The assessee claimed that the transfer was not liable to tax on capital
gains on the basis that there was no “cost of acquisition” of the undertaking. The AO held that the
transaction was a “slump sale” as defined in s. 2(42C) and that the gains had to be computed u/s 50B.
This was upheld by the CIT (A).

The Tribunal reversed the decisions of the lower authorities by holding that there was no slump sale
involved in the first place. This is because in order to constitute a “slump sale” u/s 2(42C), the transfer
must be as a result of a “sale” i.e. for a money consideration and not by way of an “Exchange”. The
difference between a sale and an exchange is this that in the former the price is paid in money, whilst
in the latter it is paid in goods by way of barter. The presence of money consideration is an essential
element in a transaction of sale. If the consideration is not money but some other valuable
consideration it may be an exchange or barter but not a sale. Since in the instant case, the undertaking
was transferred in consideration of shares & bonds, it was a case of “exchange” and not “sale” and so
s. 2(42C) and s. 50B cannot apply.

The Tribunal further noted that the “capital asset” which was transferred was the “entire undertaking”
and not individual assets and liabilities forming part of the undertaking. There was therefore neither
any reason for apportioning the consideration to the various assets comprised in the undertaking nor
could the “cost of acquisition” of the undertaking be determined. In the absence of a cost/date of

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acquisition, the computation & charging provisions of s. 45 fail and the transaction cannot be
assessed.

In short, the Tribunal held that there can neither be a taxation u\s 50B nor under the normal provisions
of section 45.

While according to me the decision has been rightly arrived by the Tribunal, I would only drop a word
of care to be exercised to assessees who want to take the benefit of the decision. In the instant case
before the Tribunal, the consideration for transfer of the undertaking was found to be not money, but
in kind i.e. shares and bonds. On this basis, the Tribunal concluded that the transaction was not a sale,
but an exchange.

It would be a different story if the business undertaking was transferred for a monetary price, which
was to be discharged by issue of shares and bonds. In such case, the price constitutes the monetary
consideration and the transaction becomes a sale inviting the slump sale provisions of section 50B.

In short, if a business undertaking is transferred for shares and bonds without reference to a monetary
price in the transfer agreement, the transaction is an exchange. On the other hand, if the same business
undertaking is transferred for such a price mentioned in the agreement and the payment of the price is
merely settled by issue of shares and bonds, the transaction is of sale {see CIT vs. Ramakrishna
Pillai (R.R.) 66 ITR 725 (SC)}. Whereas in the former case, the slump sale provisions of section 50B
will not be attracted as held by the Mumbai Tribunal in the Bharat Bijlee case, the said provisions
will certainly be attracted in the later case.

This is the fine line of distinction, which the Readers are advised to take note.

5. Sale of land after division in to plots: - whether capital gains or business income?

The issue whether gains from land dealings are to be assessed as business incomes or capital gains has
often engaged the attention of tax authorities. In coming to any conclusion, the vital considerations are
the motive of the assessee at the time of purchasing the property and his subsequent conduct with the
same. If the motive and the conduct are commensurate with that of an investor, the gains from the
sale of the property ought to be assessed as capital gains. On the other hand, if the motive and conduct
are characteristic of a trader, the gains ought to be taxed as business income.

Generally, if the holding period is substantially long and he has also enjoyed revenue from the
property during the holding period, a presumption may be drawn in his favour that he is an investor
and not a trader. The profit on subsequent sale of the property would be a case of capital accretion
taxable as capital gains and not business income. [G. Venkatswami Naidu and Co. vs. CIT [1959\
35 ITR 594 {SC}]. On the other hand, if the property is developed by the assessee shortly after its
purchase and later sold in bifurcated units, it would be a case of a business venture. [Raja J.
Rameshwar Rao vs. CIT [1961] 42 ITR 179 {SC}].

It is not uncommon that one may come across a hybrid situation i.e. where the property is initially
held for a long tenure but later sub-divided in plots and sold. In such case, the test is to be answered
by taking an overall view of all the factors involved. The decision of the Hyderabad Tribunal in ITO
vs. Omkarmal Rambilas Ginning and Pressing Factory as reported in [2011] 44 SOT 544 /10
taxmann.com 90 {Hyd} produced such a test.

The facts of the case were that the assessee held a large tract of land and utilised the same for
agricultural purposed for long period. At the end of such period, the assessee divided the land in to
219 residential plots and sold the same. It was the contention of the assessee that the land was so sub

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divided only to make it marketable as large properties are not easy to sell in the open market. The
assessee had not carried on any development activities like laying roads, drainage and sanitary
connection. In assessment, the gains from the sale of the plots was assessed as income as against
capital gains returned by the assessee. In further appeal, the Commissioner {Appeals} held in favour
of the assessee.

In the appeal preferred by the Department, the Tribunal has upheld the order of the Commissioner
{Appeals}. The Tribunal noted that the assessee had held the property for a long period and even
carried agricultural operations on the same. From this act, the Tribunal inferred that the land has held
as investment by the assessee and he had no intention to trade in it. The Tribunal appreciated that the
division of the land in to plots was necessary to make the property marketable and get a better price.
This act should be seen as an endeavour to merely to achieve a proper realisation of the capital asset
and the surplus from such realisation ought to have to be therefore assessed only as capital gains. The
fact that the assessee did not indulge in further development of land like laying of roads, drainage or
sanitary connections also supported the assessee’s stand that it had no intention of embarking on a
business activities. Accordingly, the Tribunal held that the gains from sale of the plots were assessable
as capital gains and not business income.

According to me, the Tribunal has rightly come to its conclusions. The conclusions also accord with
the view of the Supreme Court in P.M. Mohammed Meerakhan vs. CIT [1969] 73 ITR 735 {SC} /
Khan Bahadur Ahmed Alladin & Sons vs. CIT [1968] 68 ITR 573 {SC} / Janki Ram Bahadur
Ram vs. CIT [1965] 57 ITR 21 {SC} that the question whether a transaction amounts an adventure in
nature of trade should be answered by taking an overall view after considering relevant factors in to
consideration.

In the case before the Hyderabad Tribunal, the overall motive and conduct of the assessee were akin
to an investor rather than a trader. The decision according to me is therefore well founded.

6. Redemption vs. Conversion of units – tax implications different?

The decision delivered by the Mumbai Tribunal in the case of ACIT vs. ABC Bearings Ltd. [2011]
44 SOT 338 {Mum} require careful consideration by the readers.
The facts in this case that that Unit Trust of India [UTI] had issued US-64 units which were readily
traded in the market. In the year 2002-03, UTI faced severe financial crunch and the Net Asset Value
{NAV} of the US 64 units dipped below the face value of the unit of Rs. 10. To help the various unit
holders of US 64, the Government of India decided to close the various schemes formulated by UTI
and give two options to the investors viz :- (i) to either surrender the units and take cash or (ii) to get
the units converted in to 6.75 per cent tax free bonds guaranteed by the Government. A price was also
fixed for the first 5000 units at Rs. 12 per unit to help the small investors and beyond that the price
was fixed at Rs. 10 per unit.

The assessee, ABC Bearings Ltd, claimed a loss of Rs, 37.04 under the head ‘capital gains’ on
account of the conversion of units of UTI in to tax free bonds. In assessment, the Assessing Officer
was of the view that the conversion of units in to bonds did not amount to transfer and disallowed this
loss. The Commissioner {Appeals} however allowed the appeal in favour of the assessee.

Before the Tribunal, the assessee argued that there was a relinquishment of the units and therefore, a
transfer u\s 2 [47] was to be imputed. The assessee has here relied on the Supreme Court decision in
the case of Anarkali Sarabhai vs. CIT [1997] 224 ITR 422 {SC}, wherein redemption of shares
was held to be ‘relinquishment’ and hence a transfer u\s 2 [47].

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The Tribunal has however not accepted this proposition of the assessee. According to the Tribunal the
decision of the Supreme Court in Anarkali Sarabhai was not applicable as there was no redemption
of the units, but only a conversion in to bonds. Capital gains provisions can be invoked only if there
is a ‘transfer’ as defined in section 2 [47]. The instant case of the assessee did not involve a transfer
by way of ‘exchange’. In case of the exchange, the property purported to be transferred should
continue to exist in the hands of the purported transferee. In the instant case, the Units 64 ceased to be
in existence and therefore, there was no ‘exchange’ involved.

According to the Tribunal in order to constitute a ‘relinquishment’, it is necessary that the assessee
should ‘withdraw’ himself from the asset [CIT vs. Rasiklal Maneklal {HUF} 177 ITR 198 {SC}].
The Tribunal was of the view that the assessee had not abandoned its rights in Units 64, but only got
new tax free bonds on the strength of its rights in the Units 64 and therefore, there was no
‘relinquishment’ involved. {This is an aspect which the readers may please appraise}. The
Tribunal also held that there was no transfer u\s 2 [47] by way of ‘extinguishment’. According to the
Tribunal, this was only a simple case of ‘conversion’ of one asset in to another and there was no
‘transfer’ of capital loss. The assessee's claim for the loss under the head ‘capital gains’ was thus
disallowed by the Tribunal.

From this decision, several issues should crop up in the minds of the readers. One way of looking is
that the assessee, by opting for the tax free government bonds instead of monetary payment in
consideration, is expressly ‘consenting’ in giving up its holding rights in respect of Units 64. Does
this not amount to abandonment of its rights in the units so as to constitute a ‘relinquishment?

Another possibility is that this could be just a case of redemption of units by payment of consideration
in kind [i.e. bonds]. It is pertinent that the Mumbai Tribunal has held in the case of Administrator of
Estate of Late E. F. Dinshaw vs. ITO [2011] 8 ITR [Trib] 771 {Mumbai} that redemption of units
by mutual fund is only a buy back of the units and hence there is a transfer u\s 2 [47] qua the unit
holder. Here, the Mumbai Tribunal has applied the decision of the Supreme Court in Anarkali
Sarabhai vs. CIT [1997] 224 ITR 422 {SC} to the effect that in the redemption event there is a
surrender or abandonment of rights by the unit holder, which constitutes a ‘relinquishment’.

The Readers may also ascertain whether the units 64 ‘automatically’ became ‘government bonds’ or
whether the government bonds were ‘issued’ in lieu of the units surrendered? Whereas in the former
case, there may be a case of ‘conversion’, in the latter case, it may not be said so. Readers are advised
to probe this very interesting decision on these lines.

7. Penalty u\s 271 [1][c] not to be levied - when High Court has admitted the quantum appeal on
the same issues.

When an assessee canvasses a claim based on possible legal view, penalty for concealment of income
should not be levied merely because the claim had been disallowed in the assessment. The decision of
the Supreme Court in the case of Cement Marketing Co. of India Ltd vs. CST [1980] 124 ITR 15
{SC}, though rendered in sales tax case, is good law on this subject even for income tax matters.

In this direction, the decision of the Mumbai Tribunal in the case of Nayan Builders & Developers
Pvt. Ltd. vs. ITO {‘B’ Bench in ITA no. 2379/M/09 dated 18-3-2011 for Assessment Year 1997-98
reported in www.itatonline.org} should augur as a welcome development for the assessees.

The facts of the case are that in the quantum proceedings, the Tribunal upheld the addition of three
items of income. The assessee filed an appeal to the High Court which was admitted. The AO levied
penalty u/s 271(1)(c) in respect of the said three items. The penalty was upheld by the CIT (A).

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The Tribunal has deleted the penalty. According to the Tribunal, once the High Court admits
substantial question of law on an addition, it becomes apparent that the addition is certainly debatable.
In such circumstances penalty cannot be levied u/s 271(1) (c). The admission of substantial question
of law by the High Court lends credence to the bona fides of the assessee in claiming deduction. Once
it turns out that the claim of the assessee could have been considered for deduction as per a person
properly instructed in law and is not completely debarred at all, the mere fact of confirmation of
disallowance would not per se lead to the imposition of penalty. In short, the Tribunal has laid down
the rule that once the High Court admits a quantum appeal on any issue, penalty u\s 271 [1][c] on the
same issue is not permissible. In coming to the conclusion, the Tribunal has also referred the decisions
of the Ahmedabad Tribunal in Rupam Mercantile vs. DCIT [2004] 91 ITD 237 {Ahd}{TM} and
Smt. Rumila Ratilal Shah vs. ACIT [1998] 60 TTJ 171 {Ahd} to the same effect.

According to me, the above decision of the Mumbai Tribunal is well founded. The amended
provisions of section 260A of the Income Tax Act presently permit a High Court to admit an appeal
on if it involves a question of ‘substantial law’. A mere question of law can longer be entertained by
the High Court and it has to be shown that the question involved is ‘substantial’ in legal effect to merit
admission.

An useful authority as to what constitutes a substantial question of law can be found in the decision of
the Punjab and Haryana High Court in the case of Sanguri Vanaspati Mills Ltd. vs. CIT [2006] 283
ITR 267 {P & H}. Here, the High Court has referred to the decision of the Supreme Court in Santosh
Hazari vs. Purushottam Tiwari [2001] 251 ITR 84 {SC} dealing with an analogous provision
contained in section 100 of the Code of Civil Procedure. Here, the Apex Court has re-iterated the tests
laid down by the Constitution Bench in Sir Chunilal V. Mehta and Sons vs. Century Spg. & Mfg.
Co. Ltd. AIR 1962 SC 1314 for determining whether a question raised in a case is ‘substantial
question of law’ or not. The tests would be as following:-

[i] Whether it is of general public importance or

[ii] Whether it directly or substantially affects the rights of the parties or

[iii] Whether it is an open question in the sense or that it is not finally settled by the Supreme Court or

[iv] Whether it is not free from difficulty and

[v] Whether it calls for discussion for alternative views.

From the above discussion, it should be clear that when the High Court admits an appeal as involving
a substantial question of law, it should logically follow that the issue is very debatable. Therefore, a
benefit of doubt must be given in favour of the assessee in penalty proceedings that he had made a
bona fide claim in the assessment, for which no penalty for concealment of income u\s 271 [1][c]
ought to be levied.

Seen from this angle, the above decision of Mumbai Tribunal in Nayan Builders’ case is a step in the
right direction. The decision should hopefully cull much unwanted litigation in the penalty arena in
the near future.

8. Waiver of loan taken by assessee– when income u\s 28 [1][iv]?

When a loan taken by the assessee is waived by the lender, the benefit of waiver received by the
assessee cannot be taxed u\s 41 [1] of the Income Tax Act. This is because what can be taxed u\s 41

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[1] is only the benefit of a cessation or remission of liability received by an assessee in respect of an
expenditure claimed as a deduction in the past. When an assessee takes a loan, there is no question of
claiming any expenditure as deduction. So, the provisions of section 41 [1] does not come in to play,
when the loan is subsequently waived by the lender.

The issue that survives is whether the benefit of the loan waiver can be taxed as business income u\s
28 [1][iv]. Section 28 [1][iv] subjects to tax as business income ‘the value of any benefit or perquisite,
whether convertible in to money or not, arising from business or the exercise of profession’.

In the case before the Bombay High Court in Mahindra and Mahindra Ltd. vs. CIT [(2003) 261
ITR 501 {Bom}, the assessee had taken a loan for acquiring capital assets. The High Court had held
that the waiver of the principal amount of this loan by the lender was not taxable as business income
u\s 28 [1][iv]

Subsequently, the Supreme Court had held in the case of T.V.S. Sunderam Iyengar and Sons Ltd
[1996] 222 ITR 344 {SC} that unclaimed security deposits’ amounts received from trade customers
and ultimately appropriated by the assessee to himself were liable to be taxed as business income.
This was of course involving a security deposit and not a loan.

The Bombay High Court the case of Solid Containers Ltd. vs. Dy. CIT [2009] 308 ITR 417 has
distinguished its earlier decision in the case of Mahindra and Mahindra Ltd. on the ground that the
case pertained to waiver of loan taken for a capital asset, whereas in the instant case before it, the loan
waived pertained to the trading operations of the assessee. The High Court applying the above
Supreme Court of T.V.S. Sunderam Iyengar and Sons Ltd held that the benefit of waiver of loan
taken by the assessee for business purposes was taxable u\s 28 [1][iv].

Referring to the above decisions, the Delhi High Court in the case of Logitronics P. Ltd. vs. CIT
[2011] 333 ITR 386, 402 {Del}has held that the question whether waiver of loan is income or not
depends on whether loan was used for capital or revenue purposes. If the loan was taken for acquiring
a capital asset, the waiver thereof would not amount to any income exigible to tax u/s 28(iv) or 41(1).
On the other hand, if the loan was taken for a trading purpose and was treated as such from the very
beginning in the books of account, its waiver would result in income more so when it was transferred
to the P&L A/c in view of Sundaram Iyengar 222 ITR 344 (SC).

According to me, this decision of the Delhi High Court fairly reconciles the findings of the Supreme
Court and the High Courts in coming to its above conclusion. The benchmarks for taxing or not taxing
the benefit derived by an assessee from waiver of loan taken seems to me laid down with some
firmness after this decision.

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