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II. Direct Taxes Case Laws:
1. State
of Karnataka Vs. Selvi J. Jayalalitha & Ors, Criminal Appeal Nos.
300-303 of 2017, Date of Judgement: 14.02.2017, Supreme Court of India
Issue:
Whether income tax returns and the assessments orders passed
thereon, would not constitute a full proof defence against a charge of
acquisition of assets disproportionate to the known lawful sources of
income as contemplated under the Prevention of Corruption Act,1988 (PC
Act) and that further scrutiny/analysis thereof is imperative to
determine as to whether the offence as contemplated by the PC act is
made out or not?
Held: Yes
Brief Facts:
Selvi J. Jayalalitha being a public servant was found to have
acquired and possessed pecuniary resources and properties in her name
and family & friends and the firms floated by them, which were
overwhelmingly disproportionate to her known sources of income to the
extent of Rs.66,65,20,395/- which is an offence of criminal misconduct
within the definition of Sec.13(1)(e) punishable under Section 13(2) of
1988 Act. To discharge the allegations, ld. senior counsel of the
respondent contended that the term “income” which has been used in
Section 13(1)(e), would include all earnings, sources whereof are not
prohibited by law and it is always open to the accused to prove those
other sources of income which have not been taken into account or
brought into evidence by the prosecution.
The term
“income”, according to him, would also include receipts in the form of
“gifts” and “loans” which have been disclosed to and accepted by the
income tax authorities. According to him, income tax/wealth tax returns
and assessment orders, being public documents, are admissible in
evidence. Under the 1988 Act the burden on the accused is proved by
preponderance of probabilities as in a civil case and same is the degree
of proof required under the Income Tax Act also. Therefore, where the
assessee had established the income and the extent of the expenditure
before the Income Tax authorities, the judicial decision there under
would be binding on the prosecution in a case under the 1988 Act. He
further contended that assessee’s income and expenditure have been
accepted by the Income Tax authorities for all the five years of the
check period. In none of the assessment years any income is assessed as
from an unexplained source.
Held:
In this regard, various extracts of the judgement of the Hon’ble
Supreme Court related to above mentioned issue are highlighted as under:
“175.
The decision is to convey that though the I.T. returns and the orders
passed in the I.T. Proceedings in the instant case recorded the income
of the accused concerned as disclosed in their returns, in view of the
charge levelled against them, such returns and the orders in the I.T.
Proceedings would not by themselves establish that such income had been
from lawful source as contemplated in the explanation to Section 13(1(e)
and that independent evidence would be required to account for the
same.
176. Where the income tax returns relied upon by the defence as well
as the orders passed in the proceedings pertaining thereto have been
filed/passed after the charge-sheet had been submitted, neither the
income tax returns nor the orders passed in the proceedings relatable
thereto, either definitively attest the lawfulness of the sources of
income of the accused persons or are of any avail to them to
satisfactorily account the disproportionateness of their pecuniary
resources and properties as mandated by section 13(1)(e) of the
Prevention of Corruption Act, 1988.
180.
This Court ruled that the fact that the accused, other than the two
Ministers, had been assessed to income tax and had paid income tax could
not have been relied upon to discharge the accused persons in view of
the allegation made by the prosecution that there was no separate income
to amass such huge property. It was underlined that the property 255
in the name of the income tax assessee itself cannot be a ground to hold
that it actually belongs to such an assessee and that if this
proposition was accepted, it would lead to disastrous consequences. This
Court reflected that in such an eventuality it will give opportunities
to the corrupt public servant to amass property in the name of known
person, pay income tax on their behalf and then be out from the mischief
of law.
183.
The import of this decision is that in the tax regime, the legality or
illegality of the transactions generating profit or loss is
inconsequential qua the issue whether the income is from a lawful source
or not. The scrutiny in an assessment proceeding is directed only to
quantify the taxable income and the orders passed therein do not certify
or authenticate that the source(s) thereof to be lawful and are thus of
no significance vis-à-vis a charge under Section 13(1)(e) of the PC
Act.
197. It
was emphasized that to examine the genuineness of a gift, the test of
human probability was very appropriate. It was reiterated that a gift
cannot be accepted as such to be genuine merely because the amount has
come by way of cheque or draft through banking channels unless the
identity of the donor, his creditworthiness, relationship with the donee
and the occasion was proved. Unless the recipient proved the
genuineness of the transaction, the same could be very well treated as
an accommodation entry of the assessee's own money, which was not
disclosed for the purpose of taxation.
198. In
all however, the process undertaken by the Income Tax authorities under
Section 68 of the Act is only to determine as to whether the receipt is
an income from undisclosed sources or not and is unrelated to the
lawfulness of the sources or of the receipt. Thus even if a receipt
claimed as a gift is after the scrutiny of the Income Tax Authorities
construed to be income from undisclosed sources and is subjected to
income tax, it would not for the purposes of a charge under Section
13(1)(e) of the Act be sufficient to hold that it was from a lawful
source in absence of any independent and satisfactory evidence to that
effect.”
(Please click here for judgment)
2. CIT
Vs. M/s Virat Investment & Mercantile Co., I.T.A. Nos. 709/2004,
37/2005 & 636/2004, Date of Order: 19.01.2017, High Court of Delhi
Issue:
Whether service charges/ interest paid for raising funds to subscribe
the rights issue and for retaining control in the other company, is an
allowable expenditure?
Held: Yes
Brief facts:
The assessee was an investment company which had reported, a loan
transaction with LIC Mutual Funds to fund its subscription of
Rs.1,50,00,000/- in Shreyans Industries Ltd. in the assessment year
1992-93. The assessee was an existing shareholder with 28% equity
holding in the company and wished to subscribe to certain debentures
which had both convertible and non-convertible elements. The LIC Mutual
Funds, through an agreement, required the assessee to ensure that the
debentures were subscribed in its name & the loan carried the
interest rate of 19.5% p.a. AO disallowed the interest paid to LIC
Mutual Funds Corporation on the ground that it was inadmissible by
virtue of Section 57 (iii) of the IT Act, 1961. However, CIT(A) &
ITAT both held the appeal in assessee’s favour. Thereafter, the Revenue
appealed before the Hon’ble High Court and contended that the object of
the expenditure ultimately was to retain control of the 28% shareholding
and thus, it should be treated on the capital side.
Held:
The Hon’ble High Court upheld the decision of ITAT. It was concluded
that the interest expenditure is not of the kind that went into capital
stream as the expenditure clearly is not towards acquisition of the
capital nor it is an integral part of it, it is service alone. It is of a
similar kind that would otherwise have been permitted under Section 37
of the IT Act. Since this expenditure does not pertain to the stream of
income covered by Section 37 and is not excluded by Section 57(3), thus
it is allowed.
Hence, the appeal was held against the Revenue and in favour of the assessee.
(Please click here for judgment)
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