55 Amendments that go against the court rulings

In Budget 2008 there are 55 amendments to the Income-Tax Act, 1961. Amendments to statutory provisions are made because of (i) changes in the economy, (ii) to plug the existing loopholes, and (iii) to provide a fillip to priority areas.

While a push given to certain sectors of the economy by means of incentives and tax holidays is generally welcomed by taxpayers, changes made to plug the loopholes in the provisions are normally not. In addition to the aforementioned reasons, amendments are made to unsettle court decisions which favour the taxpayers.

The following are some of the amendments which have approved or negatived some of the current court decisions.

Agricultural income

Income from saplings or seedlings grown in a nursery was held as agricultural income in the CIT vs Soundarya Nursery (2000 241 ITR 530 Madras) case. A contra decision can be found in H. H. Maharaja Vibhuti Narain Singh vs State of UP (1967 65 ITR 364 Allahabad).

The Finance Bill, 2008 has proposed to confirm the decision rendered in the Soundarya Nursery case by deeming such nursery income as agricultural income. Because of the amendment, even where basic operations are not carried out on land, such income will be deemed as agricultural income, eligible for exemption.

Charitable purpose

Any activity in relation to trade, commerce or business for a cess or fee is not tax-free from the assessment year 2009-10. This amendment nullifies the Supreme Court decision in the CIT vs Gujarat Maritime Board (2007 295 ITR 561 SC) case.

In this case, the Maritime Board was meant for the development and maintenance of minor ports in Gujarat. The application for registration was rejected and it was held that the assessee’s predominant purpose was to develop minor ports in the Gujarat and, hence, is eligible for registration under Section 12A. Now this decision stands nullified because of the amendment.

Business expenditure

Expenditure paid otherwise than by account-payee crossed cheque or account-payee crossed bank draft in excess of Rs 20,000 is not allowable. Taxpayers generally resort to more than one payment with each being within the monetary limit and, thereby, avoid disallowance. More than one payment in a single day was accepted by the courts (CIT vs Aloo Supply Company — 1980 121 ITR 680 Orissa) as not violative of Section 40A(3).

Now the amendment says that if the aggregate payment to a person in a day exceeds Rs 20,000 otherwise than by the prescribed mode, it is to be disallowed.

Book Profit

Deferred tax liability debited to profit and loss (P&L) account was not to be added to the net profit while computing the book profit under Section 115 JB (Shree Umaid Mills Ltd vs CIT — 2007 17 SOT 72 JP; CIT vs Balarampur Chini Mills Ltd — 2007 14 SOT 372 Kolkata).

The Finance Bill, 2008 provides for retrospective amendment for adding the amount of deferred tax provision debited to P&L account and thereby nullifies the tribunal decisions.

Deemed satisfaction

While completing the assessment, the assessing officer (AO) must record his satisfaction about the concealment for levy of penalty. The amendment now says that it is sufficient if the order contains a direction for initiation of penal proceedings. Such remark in the assessment order shall be deemed as the AO being satisfied about the need for initiating penalty proceedings.

This amendment nullifies the decision in the CIT vs Ram Commercial Enterprises Ltd (2000 246 ITR 568 Delhi) case.

Reasons for reassessment

For issue of notice under Section 148, sanction must be obtained from the Joint Commissioner. In Dr Shashi Kant Garg vs CIT (285 ITR 158 Allahabad), it was held that the Joint Commissioner must issue the notice. Now the amendment proposed by inserting Explanation to Section 151(2) says that it is enough if the AO has recorded the reasons and the Joint Commissioner or the Commissioner is satisfied about the fitness of the case. The amendment, retrospectively applicable, nullifies the court decision.

Reassessment of pending appeal

Where the assessment is completed and pending before the appellate authorities, the AO cannot initiate reassessment proceedings even in respect of other matters. Now a proviso to Section 147 is proposed to be inserted to allow reassessment of the matters other than those which are in appeal, reference or revision.

In CIT vs Sakseria Cotton Mills Ltd (124 ITR 570), it was held that only the points on which the appeal is made would merge with appellate order and in respect of other matters the limitation would start from the date of original order.

In effect, reassessment in respect of uncontested issues might get time barred if the proceedings are initiated after the disposal by the appellate authority. To overcome this difficulty, the Finance Bill, 2008 proposes to empower the AO to reassess the income in respect of matters other than those which are subject to appeal.

Monetary limit for appeal

In Berger Paints India Ltd vs CIT (Civil Appeal Nos.1081 to 1083 of 2004) it was held by the apex court that in one case if the appeal is not made, on the very same issue in the case of any other assessee an appeal cannot be made. To nullify the decision a new Section 268 A is proposed to be inserted, whereby an appeal not filed for an assessment year is no bar for preferring an appeal in another assessment year or in any other case.

The aforementioned decisions are ones that have been nullified by the Finance Bill, 2008. Every year it has become routine to find some of the court decisions favouring the assessee being upset by the amendments, sometimes retrospectively and where it could not be backed by reasons, by means of deeming provisions.