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Here are a few more recent judgments of the Supreme Court which you might find useful and interesting.
Before the current, milder version of MAT was introduced, we had the older version in section 115J. A question that troubled many companies was whether the reference to 'loss' in that section meant loss before depreciation or after depreciation. Much tax liability depended on the interpretation of this term.
The matter had first come to the Tribunal at Hyderabad in the case of V.V. Transvalves. The Tribunal at Hyderabad held against the taxpayer. In a reference, the Andhra Pradesh High Court upheld the view of the Tribunal and held that loss should be taken as meaning before depreciation. This interpretation resulted in a lower adjustment against profits of the company and a higher tax liability on account of the fiction that the provisions created.
This matter went to the Supreme Court in the case of Surana Steels, again from Hyderabad. The Supreme Court has, most wisely, the judgment of the High Court.
The Supreme Court has held that loss should be taken to mean after deduction of depreciation. The well reasoned judgment sets right the wrong caused to many a company, especially in our state.
If yours is one such company that has suffered heavy tax on account of the application of the Tribunal or High Court judgments, you may now take remedial action and get the assessments straightened.
Remember though that the current version of MAT has a clear definition of loss as being before deduction of depreciation. The Supreme Court judgment is unlikely to be of much use in the current law. However, the current law is milder in other respects – specifically because it allows carry forward of tax payment as a credit.
Tax laws provide for tax holidays in many situations. For example, new units are entitled to a percentage of their profits 'derived from' the industrial undertaking being exempted from tax for a number of years. So also, profits of export units are tax-free. In a similar way, profits derived from industrial undertakings in rural or backward areas get a tax holiday.
A question that often comes up is what should be included in the term profits. This is because the section does not exempt all profits of a company from tax, but only profits derived from an industrial undertaking fulfilling the specified criteria. Notice the difference – it is not profits of a company but profits from an undertaking which get the benefit. A company may have many sources of income some of which may not be from the undertaking which is entitled to exemption. In fact, a company may have many undertakings and only one or some of them may be entitled to the tax holiday.
It is because of this that one has to decide as to what is profits derived from an industrial undertaking.
An interesting case went up to the Supreme Court where it had to decide on this issue. In this case, the company was engaged in exporting seafood. It earned some import entitlements under an Export Promotion Scheme of the government. The company could sell the entitlements or import goods against it. This company sold the import entitlements.
The company was entitled to a tax holiday (20% profits being exempt of tax) because its unit was situated in a backward area. The question was whether the sale proceeds of import entitlements was income derived from the undertaking in the backward area. The High Court held that it was.
The Supreme Court held that for an income to be said to be 'derived from' an undertaking there ought to be a direct nexus between the income and the undertaking. Unless the income and the undertaking had a proximate connection it cannot be said to have been derived from the undertaking.
In the case before it, the Court found that the source of the import entitlements can be said to be the Export Promotion Scheme of the Central Government. The direct nexus of the entitlements was with this scheme, not with the industrial undertaking in the backward region. At best, said the Court, the nexus was only incidental.
The Supreme Court has said that the sale proceeds of the entitlements cannot be said to be profits and gains derived from the industrial undertaking entitled to tax holiday.
This judgment will act as a precedent in many types of similar cases.
An interesting case had come up before the Jaipur Bench of the Tribunal that deserves attention.
In this case, an Inspector of the Income Tax Department conducted a survey on the business premises of a taxpayer. In the survey, the Inspector made an inventory of stock and took a sworn statement of the taxpayer.
While doing the assessment, the officer made an addition to the income on the basis of some excess stock found during the survey. The taxpayer challenged the addition and the matter went up to the Tribunal.
The Tribunal held that an Inspector has the power to mark identification only but he is Stock inventory and statement can be recorded only by an Income Tax Officer and other authorities higher than him.
The exercise conducted by the Inspector was illegal and without powers. It had no legal value.
Any action taken by any officer based on such a statement would also be illegal. The assessment made was, therefore, found to be without evidence and the additions made were deleted by the Tribunal.
This order of the Tribunal re-states the correct legal position with regard to an Inspector's powers and deserves to be remembered when an Inspector visits you the next time, alone – that is, and not accompanied by an Income Tax Officer or a higher authority.
The Tooth Fairy, an honest politician and my next door neighbour were walking along a road together when they saw a Rs.500 note. Who picked it up?
My neighbour! The other two are figments of the imagination!!!
Have you heard about the new law they've just passed: Politicians have to be buried 25 feet down! Why's that?
Because, deep down they are nice people!
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