case study related to income tax

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• Budget 2024

Recent Judgements of Supreme Court on Income Tax Issues

FCA Chandrasekaran Ramadurai

Introduction: In the dynamic landscape of income tax regulations, the Supreme Court’s recent judgements (2023) have significant implications. This article provides insights into notable cases, analyzing their outcomes and exploring the broader impact on income tax matters.

There are many Supreme Court cases related to income tax issues that were decided during 2021, 2022, and 2023. Here are some of the notable ones:

1. Maharashtra State Power Generation Co. Ltd. v. DCIT : The Supreme Court held that the interest income earned by the assessee from the deposits made out of borrowed funds for setting up a power project was eligible for deduction under section 80-IA of the Income-tax Act, 1961. The Court also held that the interest income was incidental to the business of generation and distribution of power and not in the nature of income from other sources.

This case involved the claim of deduction under section 80-IA of the Income-tax Act, 1961, for the interest income earned by the assessee from the deposits made out of borrowed funds for setting up a power project. The Assessing Officer disallowed the deduction on the ground that the interest income was not derived from the business of generation and distribution of power, but was in the nature of income from other sources. The Commissioner of Income-tax (Appeals) confirmed the disallowance. The Income Tax Appellate Tribunal (ITAT) reversed the order of the CIT (A) and allowed the deduction. The Revenue appealed to the High Court, which dismissed the appeal. The Revenue further appealed to the Supreme Court, which upheld the order of the High Court and held that the interest income was eligible for deduction under section 80-IA as it was incidental to the business of generation and distribution of power.

This case involved the reopening of assessment on the ground that the assessee had claimed excess depreciation on software licenses at the rate of 60% instead of 25%. The Bombay High Court held that the reopening of assessment was untenable as there was no tangible material to conclude that income had escaped assessment. The income that escaped assessment was the difference between the depreciation claimed and the depreciation allowable on software licenses. The tax implication was that the assessee was not required to pay any additional tax on the depreciation claim. The appellant submitted that the reopening of assessment was based on the audit objection and that the depreciation rate was a debatable issue. The Bombay High Court rejected this submission and quashed the notice.⁷⁸

2. PCIT v. NRA Iron & Steel Pvt. Ltd. : The Supreme Court upheld the addition made by the Assessing Officer under section 68 of the Income-tax Act, 1961, on account of unexplained share capital and premium received by the assessee from various entities. The Court observed that the assessee failed to discharge the initial onus of proving the identity, creditworthiness, and genuineness of the transactions and the share applicants.

The issue was whether the addition of Rs 17, 60, 00,000, being the share capital and premium received from various companies, to the income of the assessee under Section 68 of the Income Tax Act, 1961, was justified. The Supreme Court held that the assessee failed to discharge its onus of proving the identity, creditworthiness and genuineness of the investor companies and that the addition was valid. The tax implication was that the assessee had to pay tax on the share capital and premium amount as unexplained cash credit. The appellant submitted that it had furnished sufficient documentary evidence to prove the receipt of share capital and premium and that the investor companies had filed their income tax returns and were assessed to tax.

This case involved the addition of Rs. 17.60 crores to the income of the assessee under section 68 of the Act for unexplained share capital and premium received from various entities. The assessee claimed that it had discharged the initial onus of proving the identity, creditworthiness, and genuineness of the transactions and the share applicants by filing confirmations, income tax returns, bank statements, and other documents. The Assessing Officer, however, found that the investor companies were non-existent or bogus and that the assessee had failed to establish the source of the funds in their hands. The CIT (A) and the ITAT deleted the addition, but the High Court reversed their orders and restored the addition. The Supreme Court upheld the order of the High Court and held that the assessee had failed to discharge the legal obligation to prove the receipt of share capital and premium to the satisfaction of the Assessing Officer.

3. PCIT v. Maruti Suzuki India Ltd. : The Supreme Court dismissed the appeal filed by the Revenue against the order of the Delhi High Court, which held that the transfer pricing adjustment made by the Transfer Pricing Officer on account of advertisement, marketing, and promotion expenses incurred by the assessee was not justified. The Court agreed with the High Court that the assessee did not create any marketing intangible for its foreign associated enterprise and that the expenses were incurred for its own benefit and brand building.

The issue was whether the notice and assessment order issued by the Assessing Officer in the name of Suzuki Powertrain India Ltd., which had been amalgamated with Maruti Suzuki India Ltd., was valid and whether the assessee could be treated as an assessee in default for non-deduction of tax at source on the payment of royalty to Suzuki Motor Corporation, Japan. The Supreme Court held that the notice and assessment order issued in the name of a non-existent entity was a jurisdictional error and void ab initio and that the assessee could not be held liable for non-deduction of tax at source on the payment of royalty as it was not an income deemed to accrue or arise in India. The tax implication was that the assessment order was quashed and the assessee was not liable to pay any tax or penalty. The appellant submitted that the notice and assessment order were valid as the assessee had participated in the proceedings and that the payment of royalty was taxable in India as fees for technical services under Section 9(1)(vii) of the Income Tax Act, 1961.

This case involved the transfer pricing adjustment made by the Transfer Pricing Officer on account of advertisement, marketing, and promotion expenses (AMP expenses) incurred by the assessee, a subsidiary of Suzuki Motor Corporation (SMC), Japan. The TPO alleged that the assessee had created marketing intangibles for SMC by incurring excessive AMP expenses and attributed a portion of its profits to SMC as arm’s length compensation. The DRP and the ITAT rejected the adjustment and held that the assessee did not create any marketing intangible for SMC and that the AMP expenses were incurred for its own benefit and brand building. The Revenue appealed to the High Court, which dismissed the appeal and upheld the order of the ITAT. The Supreme Court also dismissed the appeal filed by the Revenue and agreed with the High Court that the assessee did not create any marketing intangible for SMC and that the AMP expenses were not an international transaction under section 92B of the Act.

4. CIT v. Reliance Industries Ltd. : The Supreme Court affirmed the order of the Bombay High Court, which held that the assessee was entitled to claim deduction under section 80-IB of the Income-tax Act, 1961, in respect of the profits derived from the production of natural gas from the Krishna-Godavari basin. The Court rejected the contention of the Revenue that natural gas was not covered by the term “mineral oil” as used in section 80-IB.

The issue was whether the interest of Rs 4.39 crore, being the interest referable to funds given to subsidiaries, was allowable as deduction under Section 36(1)(iii) of the Income Tax Act, 1961, when the interest would not have been payable to banks if the funds were not provided to subsidiaries. The Supreme Court held that the interest was allowable as deduction as the assessee had sufficient interest-free funds to meet its investment and that a presumption could be made that the investment was made out of the interest-free funds available with the assessee. The tax implication was that the assessee was entitled to claim deduction for the interest amount. The appellant submitted that the interest was not allowable as deduction as the funds given to subsidiaries were not for the purpose of business and that the assessee had to establish the nexus between the borrowed funds and the interest-free funds.

This case involved the claim of deduction under section 80-IB of the Act for the profits derived from the production of natural gas from the Krishna-Godavari basin. The assessee contended that natural gas was covered by the term “mineral oil” as used in section 80-IB and that it was entitled to claim the deduction for a period of seven years. The Revenue disputed this claim and argued that natural gas was not mineral oil and that the deduction was available only for a period of four years. The Assessing Officer, the CIT (A), and the ITAT allowed the claim of the assessee, but the High Court reversed their orders and denied the deduction. The Supreme Court affirmed the order of the High Court and held that natural gas was not mineral oil and that the deduction under section 80-IB was available only for a period of four years.

This case involved the allowability of interest on borrowed capital under Section 36(1) (iii) of the Income Tax Act, 1961. The Supreme Court held that the interest on borrowed capital was allowable as a deduction if the assessee had sufficient interest-free funds to advance to its subsidiaries. The income that escaped assessment was the interest on borrowed capital that was disallowed by the tax department. The tax implication was that the assessee was entitled to claim the interest deduction under Section 36(1) (iii) of the Act. The appellant submitted that the interest on borrowed capital was not allowable as a deduction as the funds advanced to the subsidiaries were not for the purpose of business. The Supreme Court rejected this submission and affirmed the decision of the Bombay High Court.

5. CIT v. Vodafone Idea Ltd. : The Supreme Court dismissed the appeal filed by the Revenue against the order of the Bombay High Court, which quashed the reopening of the assessment of the assessee under section 147 of the Income-tax Act, 1961. The Court held that the reopening was based on a mere change of opinion and that the reasons recorded by the Assessing Officer were not sufficient to form a belief that any income had escaped assessment.

This case involved the validity of the reopening of the assessment of the assessee under section 147 of the Act. The assessee, a telecom service provider, had filed income tax returns for various assessment years claiming refund of tax. The Revenue did not process the refund on the ground of technical difficulties and pending verification of the assessee’s tax liability. The assessee filed a writ petition in the High Court seeking refund of tax. The High Court directed the Revenue to process the refund within a specified time. The Revenue appealed to the Supreme Court, which dismissed the appeal and upheld the order of the High Court. The Supreme Court held that the reopening of the assessment was based on a mere change of opinion and that the reasons recorded by the Assessing Officer were not sufficient to form a belief that any income had escaped assessment.

6. Yum! Restaurants (Marketing) Private Limited v. Commissioner of Income Tax, Delhi : The Supreme Court held that the excess of income over expenditure in the hands of a company is taxable as income from business or profession and not as income from other sources. The Court also held that the assessee was not entitled to claim deduction under section 37(1) of the Income-tax Act, 1961, for the expenses incurred on account of royalty, technical service fee, and reimbursement of expenses paid to its foreign holding company.

The issue was whether the surplus of Rs 44,44,002, being the excess of income over expenditure for Assessment Year 2001-02, arising from the advertisement contributions received from the holding company and its franchisees, was taxable or exempt under the doctrine of mutuality. The Supreme Court held that the assessee company was not a mutual concern and the surplus was taxable as business income. The tax implication was that the assessee company had to pay tax on the surplus amount. The appellant submitted that it was a non-profit entity governed by the principles of mutuality and that the advertisement contributions were not its income but were held in trust for the benefit of the contributors.

This case involved the taxability of the excess income over expenditure of the appellant company, which was a wholly owned subsidiary of YRIPL, engaged in advertising, marketing and promotion activities for YRIPL and its franchisees. The appellant claimed that it was a mutual concern and not liable to pay tax on the surplus amount. The Revenue disputed this claim and assessed the surplus as income from business or profession. The Supreme Court held that the appellant was not a mutual concern and that the surplus was taxable as income from business or profession.

6. National Co-operative Development Corporation v. Commissioner of Income Tax, Delhi (Supreme Court): The Supreme Court recommended the Central Government to consider the efficacy of the advance tax ruling system and make it more comprehensive as a tool for settlement of disputes rather than battling it through different tiers, whether private or public sectors are involved. The Court suggested that a council for Advance Tax Ruling based on the Swedish model and the New Zealand system may be a possible way forward.

This case involved the deduction of grants given by the appellant corporation, which was established under the NCDC Act, to various cooperative societies for their development. The appellant claimed that the grants were deductible as business expenditure under Section 37(1) of the Income Tax Act, 1961. The Revenue denied the deduction and treated the grants as income of the appellant. The Supreme Court held that the grants were not deductible as business expenditure and that the appellant was liable to pay tax on the grants.

This case involved the deductibility of the interest income earned by the appellant on the funds received from the Central Government and disbursed as grants to cooperative societies. The Supreme Court held that the interest income was not eligible for deduction as it was not derived from the business of the appellant. The income that escaped assessment was the interest income earned on the funds received under Section 13(1) of the National Cooperative Development Corporation Act, 1962. The tax implication was that the appellant was liable to pay tax on the interest income as business income. The appellant submitted that the interest income was incidental to its statutory functions and that it was exempt under Section 10(26AAB) of the Income Tax Act, 1961. The Supreme Court rejected this argument and upheld the tax liability.

7. Commissioner of Service Tax, Ahmedabad v. M/s Adani Gas Ltd. (Supreme Court): The Supreme Court held that the gas regulating measuring equipment installed at customers’ sites is taxable service. The Court observed that Section 65 (105) (zzzzm) of the Finance Act 1994 provides for taxability of supply of tangible goods for use, without transferring right of possession and effective control over such goods, as a ‘taxable service’.

This case involved the levy of service tax on the charges collected by the respondent company, which was engaged in the distribution of natural gas, for the supply of pipes and measuring equipment to its customers. The respondent claimed that the supply of pipes and measuring equipment was not a taxable service under Section 65(105) (zzzzj) of the Finance Act, 1994, as it was incidental to the sale of gas. The Revenue contended that the supply of pipes and measuring equipment was a taxable service as it involved the transfer of right to use the goods without transferring the possession and control. The Supreme Court held that the supply of pipes and measuring equipment was a taxable service and that the respondent was liable to pay service tax on the charges collected.

This case involved the levy of service tax on the charges collected by the respondent for supplying pipes and measuring equipment to its customers for the distribution of natural gas. The Supreme Court held that the transaction was not liable to service tax as it was a deemed sale of goods and not a provision of service. The income that escaped assessment was the service tax on the charges collected by the respondent. The tax implication was that the respondent was not required to pay service tax on the transaction. The appellant submitted that the transaction was a provision of service under Section 65(105) (zzzzj) of the Finance Act, 1994 and that the respondent was a taxable service provider. The Supreme Court disagreed with this argument and set aside the demand.

8 . Vodafone Idea Ltd. v. CIT (Supreme Court) : This case involved the refund of tax paid by the appellant company, which was a telecom service provider. The appellant filed income tax returns for various assessment years claiming refund of tax. The Revenue did not process the refund on the ground of technical difficulties and pending verification of the appellant’s tax liability. The appellant filed a writ petition in the High Court seeking refund of tax. The High Court directed the Revenue to process the refund within a specified time. The Revenue appealed to the Supreme Court, which dismissed the appeal and upheld the High Court’s order.

This case involved the taxability of the transfer of shares of a Cayman Islands company that indirectly held a stake in an Indian telecom company. The Supreme Court held that the transaction was not taxable in India as there was no transfer of a capital asset situated in India. The tax department issued a notice to Vodafone for not deducting tax at source on the payment made to the seller. The income that escaped assessment was the capital gains arising from the sale of the Cayman Islands Company. The tax implication was that Vodafone was held liable as an assessee in default for not withholding tax. The appellant submitted that the transaction was an offshore transfer between two non-residents and that there was no nexus with India. The Supreme Court accepted this argument and quashed the notice.

Here is a table summarizing the ITA section that is part of contravention and the reason based on which SC order was passed in each of the above cases:

Conclusion: These judgements shape the tax landscape, providing clarity on various issues. Tax professionals and businesses should stay informed, considering the evolving legal interpretations. For more in-depth analysis and updates, visit Taxmann.com, a trusted source for tax and legal information.

• income tax act 1961
• Section 147
• section 36(1)(vii)
• section 37(1)
• Section 80IA
• Section 80IB
• supreme court judgements
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Name: Chandrasekaran Ramadurai

Qualification: ca in practice, company: c ramadurai & co, chartered accountants, location: bangalore, karnataka, india, member since: 03 oct 2017 | total posts: 13, my published posts, join taxguru’s network for latest updates on income tax, gst, company law, corporate laws and other related subjects..

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