Some relevant tax issues

For assessment of income, a notice is issued seeking the taxpayer to produce
the necessary details for examination of the statements filed and income
admitted by him. Technically, a notice must be served on the taxpayer as if it
were a summons issued by a court under the Code of Civil Procedure, 1908.

In CIT vs Inderpal Malhotra (171 Taxman 359) a notice under Section
143 (2) was issued by means of registered post on the last day of the period of
limitation. The law says that the notice under Section 143(2) is required to be
served within 12 months from the end of the month in which the return was filed.
The court held that the statute has used the word ‘served’ in Section 143(2)
and, hence, mere dispatch or issue of notice before the prescribed time is not
sufficient compliance of the legal requirement.

Accordingly, the notice dispatched by registered post on the last of the
limitation time was held as inadequate for seeking compliance from the assessee
and, hence, the decision went in the assessee’s favour.

Tribunal subordinate to HC

In the hierarchy of appellate authorities, the Tribunal is the final
fact-finding authority. However, in respect of questions of law, both the
taxpayer and the Revenue can transverse beyond the Tribunal, to the High Court
and thereafter to the Supreme Court.

In National Textile Corporation Ltd vs CIT (171 Taxman 339), it was
observed by the court that the tribunal is subordinate to the High Court and
hence has to follow the decision of the jurisdictional High Court without making
any comment on the said decision or ignoring it on any grounds except those
which are well-recognised. It referred to a catena of cases in which there have
been deviations from binding decisions of superior authority and held that the
tribunal cannot ignore the decision of the jurisdictional High Court and give a
contrary decision.

Modvat credit

Where the taxpayer acquires a plant and machinery and pays excise duty on
such acquisition, he can claim credit in respect of such duty against duty
payable on goods manufactured by him. Whether the duty credit, which is eligible
for such adjustment, is chargeable to tax as income was the issue in CIT vs
Jay Bee Industries (171 Taxman 386)

The court held that merely because the Modvat credit is irreversible would
not mean that it is an income to be taxed. Following the precedent of the apex
court in the CIT vs Indo Nippon Chemicals Co Ltd (130 Taxman 179) case,
it held that the Modvat credit eligible for adjustment against duty payable is
not chargeable as income.

Estimate of stock on survey

During the course of survey by the income-tax authorities, the value of stock
in the premises surveyed is compared with the books of account to detect and tax
the unaccounted stocks as income. Such stock valuation is a matter of conjecture
in most of the cases.

Whether such stock valuation might result in concealment penalty is to be
decided based on facts. In SSR Pirodia vs Union of India (171 Taxman
the addition towards excess value of stock found at the time of survey
was sustained but the concealment penalty was set aside by the tribunal as the
addition to income was made on the basis of mere estimate. The further
consequence of prosecution was quashed by the court in view of relief from
concealment penalty granted by the tribunal.

Forfeiture of exemption

Where a charitable trust advances or allows its funds to remain with an
interested person without security or adequate interest, then such trust is not
eligible for exemption contained in Sections 11 and 12 of the Act.

In Kanahya Lal Punj Charitable Trust vs DIT (171 Taxman 134), the assessee
gave advance to a company which had substantial interest in the trust. It was
stated that the advance was towards purchase of land for a school project of the

The plea of the assessee was taken as an after-thought and the court held
that the income of the trust has been used to the benefit of a person referred
to in Section 13(3) which is one of the disqualifying acts contained in Section

Accordingly, the benefit of exemption had to be cancelled to the trust. It
held that the disqualification under Section 13(1)(c) would result in taxation
of entire income of the trust, including voluntary contributions and income from
property held under trust. Such disqualification would saddle the trust to pay
tax on its total income without any exclusion.

However, if the trust for example, does not keep its unspent income in the
approved investments as enumerated in Section 11(5), then only income from such
investments would be subjected to maximum marginal rate of tax and the other
incomes would continue to enjoy the benefit of exemption contained in Sections
11 and 12.

Enhancement of income in appeal

The Commissioner (Appeals) can confirm, reduce, enhance or annul an
assessment order of the AO. The power to enhance the income liable to tax is to
be exercised only after providing an opportunity of hearing to the taxpayer.
However, there is no embargo in sourcing information from the AO while enhancing
the income in an appeal proceeding. It was so held in Goel Die Cast Ltd vs CIT
(171 Taxman 272).

The above has appeared in Hindu and authored by Mr.L.K.Subramani
(The author is an Erode-based chartered


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