Taxation in India: Some Landmark Cases and Judgements: 5 December 09 WWW - Afterschool.tk 1

TAXATION IN INDIA :
some landmark cases and judgements

by :
DR. T.K. JAIN
AFTERSCHO☺OL
centre for social entrepreneurship
sivakamu veterinary hospital road
bikaner 334001 rajasthan, india
FOR – CSE & PGPSE STUDENTS
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5 DECEMBER 09 www.afterschool.tk 1
My word.....
Ours is a great country with immense entrepreneurial potential.
However, our legal system and taxation system is so cumbersome
that our creativity and talent is wasted / unnecessarily diverted in
these sectors. I wish that these are simplified so that an ordinary
entrepreneur can understand these without help from any expert. I
wish that more people should become entrepreneurs, rather than
becoming an expert in avoiding taxation. Let us wish that some
person should simplify our taxation system. I have tried to simplify
Indian legal system and taxation system for Indian entrepreneurs –
but it is so complicated that even if you simplify it, it will remain
complicated. An ordinary Indian entrepreneur wishes to remain an
honest entrepreneur and contribute to the development of nation, but
our systems and processes force him to adopt unfair means ..
First step ... - read it
Download the following material and read it

before you read this presentation :
http://www.scribd.com/doc/28597434/Income-Tax-L
K. Lakshmansa & Co. v. CIT
(1981)
Is rearing silk worms agriculture : a farmer
grew mulberry leaves and fed the same to silk-
worm, it was held that the income derived from
rearing of silk-worms was not agricultural
income because the silk cocoons produced by
silk-worms did not bear any character of an
agricultural produce or as a marketable form of
mulberry leaves.
CIT v. Kamakshya Narain Singh
(1948)
interest on arrears of rent payable in respect of

agricultural land is not agricultural income
because the source of income (interest) is not
from land but it is from rent which is a
secondary source of income and is taxable
under income from other sources.
Mustafa Ali Khan v. CIT
Is every land agricultural land? :

Unless there is some measure of cultivation of
the land, some expenditure of skill and labour
upon it, it cannot be said to be used for
agricultural purposes within the meaning of the
Act.
Triveni Engg. Works Ltd. v.
C.I.T. (Delhi) 1985
Appreciation in the value of foreign currency

held on capital account is not treated as Income
Egyptian Hotels Ltd. v. Mitchell
What is the place of business ? : It is not where

the directors have power to do, but where from
they actually do, that is of importance in
determining the question of the place where the
control is exercised.
C.I.T. v. Ramakrishna Deo (1959)
In case of exempted income, the assssee has to

prove that his income falls under Section 10.
(sec. 10 is about exempted incomes )
C.I.T. v. B. Gopalkrishna Murthy
(1971)
The payment of gratuity by the Life Insurance

Corporation of India under the Staff
Regulations is wholly exempt from tax under
Section 10(10), as the object and purpose of
the gratuity scheme of the Life Insurance
Corporation of India and the Revised Pension
Rules of the Central Government are the same
Digvijay Woollen Mills Ltd. v.
Mahendra Prataparai Buch (1980)
wages of fifteen days or seven days (for the

calculation of gratuity), as the case may be,
will be calculated by dividing the monthly
wages last drawn by 26, i.e. maximum number
of working days in a month
Gestetner Duplicators (P) Ltd. v.
C.I.T. (1979)
Salary for sec. 10(10AA) for the purpose of

encashment of earned leave means, Basic
salary and includes dearness allowance if terms
of employment so provide. It also includes
commission based on fixed percentage of
turnover achieved by an employee as per terms
of contract of employment
Addl. C.I.T. v. A.K. Mishra
Any special allowance in cash or the value of any benefit

granted by the employer to an employee with the specific
object of enabling the employee to meet the expenses incurred
by him in the performance of the duties of his office or
employment of profit, is exempt from tax to the extent to
which such expenses are actually incurred for that purpose.
This allowance may include TA, CA etc., but it does not
include entertainment allowance, perquisites and the allowance
to meet personal expenses like. City Compensatory Allowance
CIT v. Tejaji Farasram
Kharawalla Ltd. (1968)
Out of the special allowances received by the

employee, if any surplus remains in the hands
of the assessee out of a lump sum paid to him
by the employer for the purpose, the surplus
would be taxable in the hands of the assessee
as income. (sec. 10 (14))
C.I.T. v. Mehar Singh Sampuran
Singh Chawla (1973)
No tax exemption is available for surrender of

salaries. If this surrender of salary represents a
donation for charitable purpose, the employee
may qualify for deduction from gross total
income under Section 80G
Reade v. Brearley (1933)
Is fictional salary taxable : when there is only

book entries and no money is actually paid to
employeethe fictional salary would not be
taxable
Brooke Bond Employees Union v.
Union of India (1989)
Dearness allowance is taxable as part of salary

only when form part of retirement benefit
otherwise not
M.C. Muthanna v. CIT (1989)
Interest income in excess of permissible limit

(i.e. @12%) credited to the P.F. account of an
employee, is to be treated as ‘Salary’ for
purposes of Sections 15 and 16
Kashi Pd. Kataruka v. C.I.T.
(1975)
For annual value of House property, we have
to find fair rent. The fair rent arrived at for this
purpose would be normally based upon various
circumstances such as local conditions,
demand for houses in that locality,valuation by
the local authority etc., etc. However, if the fair
rent of the property is fixed under the Rent
Control Act of the State concerned, it shall be
taken into account.
M.V. Sonavala v. CIT (1989)
Income from house property has to be

computed on the basis of sum for which
property might reasonably be let out from year
to year and not at amount received by assessee
as actual compensation or rent
CIT v. K.K. Dhanda (HUF)
(1989)
Loss relating to self-occupied house property

could be set off against income from other
sources
CIT v. Smt. Sreelekha Banerjee
(1989)
In determining annual value of house

propoerty salary paid to caretaker cannot be
taken into account
C.I.T. v. L. Kuppu Swamy
Chettiar (1981)
If tax on property is enchanced with

retrospective effect by municipal or local
authorities and the enhanced tax relating to the
prior year is demanded during the assessment
year, the entire demand is deductible in the
assessment year
Clive Buildings Cola Ltd. v. CIT
(1989)
fire tax, conservancy tax, education, water tax,

etc. levied by any municipality or local
authority & actually paid in respect of any
house property are allowed as deductible taxes
C.I.T. v. Dewan Chand Dholan
Das (1981)
A partnership firm using its own building for

the residence of its partners cannot claim the
concessions in respect of self-occupied
residential house
D.R. Sunder Raj v. C.I.T. (1979)
Concessions of self occupied property are not

available in a case where the assessee lets out
his house to his employer and employer allots
the same to the assessee for his residential
purposes. In such a case, the assessee occupies
the house not as an owner but as a sub-tenant
of his employer
Nathmal Bankat Lal Parikh and
Company v. C.I.T. (1980)
Replacement of an old diesel engine by a new

engine in a motor van used for business
purposes was done with a view to preserve and
maintain the asset in existence and, as no
enduring benefit was derived by the assessee,
the expenditure was allowed under Sec. 31 as
normal repairs and maintenance expenditure.
C.I.T. v. Alps Theatre (1967)
When we talk of depreciation allowed under

sec. 32, building refers only to the super-
structure and not the land on which it is erected
C.I.T. v. Kalyani Spinning Mills
Ltd. (1981)
Depreciation under sec. 32 is available on

Roads to residential quarters for employees at
the rates applicable to first class building
Following have been held to be
plant : -
1. In a hotel, pipe and sanitary fittings : C.I.T. v. Taj Mahal Hotel (1971)
2. In an electric supply company, mains service lines and switch gears :
C.I.T. v. Warner Hindustan Limited
3. Well.
4. for manufacturer of oxygen, gas-cylinder for storing gas.
5. Technical know-how in the form of blue prints, instruction, technical
manuals. C.I.T. v. Festo Elgi Pvt. Ltd. (1981) .
6. Thermocole insulation. (C.I.T. v. Yamuna Cold Storage (1981) )
7. Data Processing Machines. C.I.T. v. I.B.M. World Trade Corporation
(1981)
Challapali Sugar v. C.I.T. (1973)
interest paid on the loan taken for purchase of

plant / machinery upto the date of
commencement of production will be
capitalised and treated as part of the actual cost
of the plant on which depreciation and
investment deposit benefits will be allowed.
Shree Vallabh Glass Works Ltd.
v. C.I.T. (1981)
preliminary expenses of revenue nature

necessary for putting plant and machinery in
working condition are part of actual cost of
plant and machinery.
P. Alikunju M.A. Nazeer Cashew
Industries v. CIT (1987)
Capital gain on Compulsory acquisition and

capital gain (sec. 54D) : running of a lodge’
can also be said to be an ‘industrial
undertaking’ within the meaning of Section
54D.
Durga Narain Singh v. CIT (1947)
Rent as agricultural income : recipient of rent

or revenue should be the owner of the land.
The expression revenue is used in the broader
sense of: return, yield or income, and not in the
sense of land revenue.
C.I.T. v. Pangal Vittal Nayak &
Co. Pvt. Ltd. (1969)
If an assessee earns commission on speculative

transactions, he is not entitled to set-off under
section 70 against speculative loss as there is
no element of speculation in the commission
C.I.T. v. Handicraft Handloom
Export Corporation (1982)
Under section 70, if loss incurred by a wholly

owned subsidiary company is reimbursed by
the holding company, the subsidiary company
cant carry forward and set-off the loss. Loss of
subsidiary cant be set off with profit of holding
company.
Dwarkadass Leeladhar v. CIT
(1963)
Normal losses cant be set off by someone else

other than assessee. However, exceptions are :
accumulated business loss of an amalgamating
company under Section 72A & the share of
loss of partnership taken over by one of its
partners can be set-off by the partner
Keshrichand Bhanabhai v. CIT
(1951) 20 ITR 201 (Bombay)
However, loss incurred by HUF cannot be

carried forward and set-off after its partition
against income of firm formed thereafter by
certain coparceners
Union of India v. Gosalia
Shipping (P) Ltd. (113 ITR 307
(S.C.) )
As per sec. 172, Ships have to pay tax @ 7.5%
on carriage, before they leave a port from
India. However, no tax is payable, if a non-
resident company hires a ship from another
non-resident and loads the ship with own
goods in India, neither the owner of the ship
nor the lessee receives any amount on account
of the carriage of the goods.(Section 172(2))
Commissioner of Income-tax v.
Kashi Nath & Co. (1988)
Commissioner of Income tax can give best
judgement assessment as per sec. 142 and
revise assessment as per sec. 263, but this
power of revision is quasi-judicial in character.
He must give reasons in support of his
conclusion that the assessment order is
erroneous
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TAXATION IN INDIA :

some landmark cases and judgements

Download the following material and read it

interest on arrears of rent payable in respect of

Is every land agricultural land? :

Appreciation in the value of foreign currency

What is the place of business ? : It is not where

In case of exempted income, the assssee has to

The payment of gratuity by the Life Insurance

wages of fifteen days or seven days (for the

Salary for sec. 10(10AA) for the purpose of

Any special allowance in cash or the value of any benefit

Out of the special allowances received by the

No tax exemption is available for surrender of

Is fictional salary taxable : when there is only

Dearness allowance is taxable as part of salary

Interest income in excess of permissible limit

Income from house property has to be

Loss relating to self-occupied house property

In determining annual value of house

If tax on property is enchanced with

fire tax, conservancy tax, education, water tax,

A partnership firm using its own building for

Concessions of self occupied property are not

Replacement of an old diesel engine by a new

When we talk of depreciation allowed under

Depreciation under sec. 32 is available on

interest paid on the loan taken for purchase of

preliminary expenses of revenue nature

Capital gain on Compulsory acquisition and

Rent as agricultural income : recipient of rent

If an assessee earns commission on speculative

Under section 70, if loss incurred by a wholly

Normal losses cant be set off by someone else

However, loss incurred by HUF cannot be

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