Income-tax – Case law updates - V. K. Subramani - Article published in Business Advisor, dated August 10, 2016 - http://www.magzter.com/IN/Shrinikethan/Business-Advisor/Business/

1. Volume XVI Part 3 August 10, 2016 18 Business Advisor
Income-tax – Case law updates
V. K. Subramani
1. Company engaged in medical activity without
profit motive is exempt from income-tax: In CIT v.
Apeejay Medical Ltd (2016) 383 ITR 297 (Cal), the
assessee, a section 25 company under the Companies
Act, 1956 with the objects in the memorandum of
association being solely for philanthropic purposes,
claimed tax exemption. The claim of the assessee was
disallowed in assessment. The CIT (Appeals) concurred
with the views of the Assessing Officer. The tribunal
however decided the issue in favour of the assessee by holding that the
assessee being a medical institution with non-profit motive deserved total
tax exemption. The issue before the court was whether the order of the
tribunal was correct when the assessee is a private limited company with
objects of philanthropic and charitable purposes. The contention of the
Revenue was that the medical facility was aimed at helping the employees of
the sister concerns and hence it is not eligible for tax exemption as the
activity was not a philanthropic activity nor did the assessee exist solely for
philanthropic purposes. The court held that the activity of the assessee fell
within the definition of section 2(15) and the tax provision providing blanket
exemption. The facts of the case relate to assessment years 1986-87 and
1987-88 and the exemption was claimed under section 10(22A). Presently,
section 10(23C)(iiiae) provides blanket tax exemption for medical
institutions with annual receipt below Rs 100 lakh. The rationale of the
decision is applicable in the present day context also.
2. Reimbursement of expenses would be treated as part of income of
the undertaking and eligible for consequential tax benefits: In CIT v.
Meghalaya Steels Ltd (2016) 383 ITR 217 (SC), the assessee-company was
eligible for tax incentives under Chapter VI-A of the Act. For the assessment
year 2004-05 the assessee-company claimed deduction under section 80-IB
on the profits and gains of its industrial undertaking, which included
transport subsidy, interest subsidy and power subsidy received from the
Government. The Assessing Officer held that the subsidies did not qualify
for deduction under section 80-IB and accordingly disallowed the claim to
the extent of these subsidies. The CIT (Appeals) dismissed the case but the
tribunal and High Court upheld the claim of the assessee. The Apex court
held that the subsidies received were nothing but the reimbursement
of the cost relating to manufacture or sale of products. There is a direct

2. Volume XVI Part 3 August 10, 2016 19 Business Advisor
nexus between profits and gains of the industrial undertaking and the
reimbursement of such subsidies. The subsidies were meant to reimburse,
wholly or partly, costs actually incurred by the assessee in the
manufacturing and selling of its products. Thus, the decision was in favour
of the assessee, affirming the decision of the High Court.
3. Non-resident aircraft operator incurring losses and maintaining
books of account could opt to be out of section 44BBA: In DIT v. Royal
Jordanian Airlines (2016) 383 ITR 465 (Delhi), the assessee was Royal
Jordanian Airlines. It had the status of a Department of the Government in
the Kingdom of Jordan. It had its Principal office in Amman in Jordan. It
appointed J as its general sales agent in India. It commenced its operations
in India and, as it incurred loss, it did not file any return of income in India.
In response to the notice issued under section 148, the assessee filed return
declaring loss and stated that it had not declared its income in terms of
section 44BBA of the Act, viz. presumptive income at 5% of the gross
receipts. The issue before the court was whether the assessee could
maintain books of account and declare loss and be out of the coverage of
section 44BBA of the Act. The court held that the tribunal had recorded a
factual finding that the assessee incurred losses consistently and the
question of the assessee being asked to pay tax on presumptive income
computed under section 44BBA did not arise. Yet another issue which the
court adjudicated was related to the issue of notice under section 148 for
the same assessment year when the proceedings under section 143(3) are
not completed. The court held that the issue of notice under section 148 for
the very same assessment year when the assessment under section 143(3)
is not completed as impermissible in law.
4. No capital gain on conversion of firm into company with revaluation
of assets before such transfer: In Cadd Centre v. Asstt. CIT (2016) 383 ITR
258 (Mad), the assessee-firm was transformed into a company without any
distribution of assets. There was no transfer of capital assets in terms of
section 45(1) of the Act. The firm revalued the assets and was taken over by
the company. The partners of the firm became shareholders of the company
The issue before the court was whether the assessee could
maintain books of account and declare loss and be out of the
coverage of section 44BBA of the Act.

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in the same proportion as in the capital account of the firm. The Assessing
Officer held that transfer of business assets of the firm to the company
constituted distribution of assets and thus attracting the provisions of
section 45(4) of the Act. The CIT (Appeals) held that there was no transfer on
conversion of a firm into company. However, the tribunal held that the
transfer of assets by the firm without dissolution fell within the expression
―or otherwise‖ contained in section 45(4) of the Act and hence it attracted
capital gains tax. The Court held that there was no transfer of assets since
no consideration was received or accrued on transfer of assets from the firm
to the company. The firm had only revalued its assets which will not
amount to transfer. The provisions of section 45(4) are applicable only when
the firm is dissolved. In this case, there is no distribution of assets but only
taking over of the assets from the firm by the company. Thus the decision
was in favor of the assessee.
5. Retention of seized assets beyond time without application of the
same is not valid: In Nadim Dilipbhai Panjvani v. ITO (2016) 383 ITR 375
(Guj), the amount of cash held by the petitioner was seized by the tax
authorities. The petitioner claimed that the cash belonged to some other
person but still it was seized on 25.03.2014 under the election code
procedures which was applicable for general election to Parliament. The
petitioner filed a petition on 14.04.2014 for release of cash with a reminder
on 12.09.2014. Again on 13.07.2015 the petitioner based on the decision in
the case of Mitaben R.Shah v. Dy. CIT (2011) 331 ITR 424 (Guj) sought
release of cash. On 20.07.2015, the income-tax authority rejected the
application of the petitioner inter alia on the grounds that the cash can be
released only when the source is explained to the satisfaction of the
Assessing Officer. The assessment under section 153A was also pending.
The Assessing Officer did not accept the contention of the petitioner that the
decision should have been taken within the time period prescribed in the
second proviso to clause (i) of section 132B(1), viz. 120 days from the date
on which the last of the authorisations for search under section 132 or for
requisition under section 132A, as the case may be, was executed. The
The Court held that there was no transfer of assets since no
consideration was received or accrued on transfer of assets
from the firm to the company. The firm had only revalued its
assets which will not amount to transfer.

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court held that the time limit prescribed in section 132B(1), second proviso
cannot be read as mere declaratory. If such view is taken it would water
down the rigours of the statutory provision and would give unlimited
authority to the Assessing Officer to retain the seized assets awaiting
finalisation of future possible liability for an indefinite period without
deciding the application of the aggrieved person who may have a legitimate
reason and evidence to explain the source of the asset seized. Thus, it held
that the Assessing Officer must release cash in favour of the petitioner along
with interest as per the statute.
6. Reassessment without notice under section 143(2) is invalid: In
Principal CIT v. Shri Jai Shiv Shankar Traders (P) Ltd (2016) 383 ITR 448
(Del), the assessee filed its return of income which was accepted under
section 143(1). Subsequently, it was picked up for scrutiny. After recording
reasons, notice under section 148 was served on the assessee. Finally, the
assessment was completed making an addition of Rs 1 crore under section
68 of the Act. The assessee challenged the order on the reason that while
doing reassessment of the income, no notice under section 143(2) was
issued. The CIT (Appeals) held that no specific notice under section 143(2)
was required to be issued and hence decided the case in favour of the
Revenue. The tribunal however held that if no notice was issued under
section 143(2), such reassessment was not sustainable in law by relying on
the decision of the Supreme Court in Asstt. CIT v. Hotel Blue Moon (2010)
321 ITR 362 (SC). The court held that the Assessing Officer failed to issue
notice under section 143(2) after the assessee made a statement before the
Assessing Officer that the return filed should be treated as return pursuant
to a notice issued under section 148 of the Act and which is fatal to the
order of reassessment. Thus the decision was in favour of the assessee.
Similar such decision could be found in Principal CIT v. Silver Line (2016)
383 ITR 455 (Del), where it was held that failure to issue notice under
section 143(2) before finalising the reassessment order cannot be condoned
even by section 292 BB of the Act.
(V. K. Subramani is Chartered Accountant, Erode.)
The assessee filed its return of income which was accepted
under section 143(1). Subsequently, it was picked up for
scrutiny. After recording reasons, notice under section 148
was served on the assessee.