The Income Tax authorities are Eavesdropping!

A recent meeting of chief secretaries and top police officials of States and Union Territories in New Delhi gave a carte blanche to the authorities to tap/intercept telephones (See here). Law enforcement agencies can now tap anyone's phone for security or operational reasons for 72 hours without getting permission from the Union home secretary or principal secretary (home) of states. After the meeting, the Central Board of Direct Taxes (CBDT) was quick to assert its power to tap telephones for conducting its investigations.

The law on the power to tap telephones was laid down by the Hon’ble Supreme Court in PUCL v. Union of India, (1997) 1 SCC 301. The case laid down the checks, subject to which the Government may tap telephones under section 5(2) of the Indian Telegraph Act, 1885.

The Court in unequivocal terms held that firstly, the occurrence of a ‘public emergency’ is a sine qua non for the exercise of power under section 5(2). In fact, the law expressly states that reasons are to be recorded in writing for the tapping of telephones. Secondly, the emergency has to be in terms of public safety. Thirdly, it was held that a mere ‘economic emergency’ would not fall within the meaning of ‘public emergency’. Fourthly, the court laid down that an authorization for tapping of phones could only be given by the Home Secretary or Home Secretaries of States. The pre-condition to delegation of this power, if at all, is the existence of an urgency, which would be needed to be recorded in the reasons as required by section 5(2).

A bare perusal of this judgment questions claim of the government and especially the CBDT to have an unbridled power to tap telephones. The checks in the system were read as a part of the law in order to ensure that there is no misuse of the power, as granted under law.

The Hon’ble Supreme Court has time and again read the right to privacy as a part of our right to life under Article 21 of the Constitution of India. This Fundamental Right of privacy is being whittled down by the frequent abuse of power by the Government. The tapping of phones and the subsequent leaks of the Ratan Tata and Niira Radia tapes to the media are a case in point.

Thus, it is very important that the government play by the rules and operate within the prescribed boundaries of the exercise of power. If this unrestricted access to telephones is not subjected to the necessary checks as prescribed by the Hon’ble Supreme Court, then our much cherished fundamental rights are bound to erode by this casual misuse of power.

Advance tax payable is liable to be adjusted against an amount illegally retained with the department, upon specific request: Delhi High Court

Matter: Vishwanath Khanna v. Union of India, decided on 03 June, 2011

Assessment Years: 1995-96, 1999-2000, 2000-01, 2001-02, 2002-03, 2003-04

Relevant Facts:

1. A search and seizure operation was carried on at M/s Foto Traders in which cash and bullion worth approx Rs 5, 00,000 were seized.

2. Under an order u/s 132(5), the AO assessed the income of M/s Foto Traders as an unregistered partnership and passed the assessment. This was opposed by the petitioner.

3. The petitioner approached the Settlement Commission and the Commission ordered that the concern M/s Foto Traders is a sole proprietorship and assessed it accordingly.

4. The assessee was to file Income tax returns for the AY’s in question save 1995-96, but did not pay the advance tax due to the fact that a huge amount was lying with the department.

5. The department sought to levy interest u/s 234 A, B, C and 220(2) upon the assessee for non-payment of advance tax.

Questions of law:

1. Whether interest under Sections 234A, 234B, 234C and 220 (2) of the Act could be charged when according to the petitioner, sufficient amount of the petitioner was lying deposited with the Department wherever advance tax could be adjusted?

2. From which date the petitioner is entitled to interest on the amount which became refundable after giving effect to the orders passed by the Income Tax Settlement Commission?

Upholding the appeal of the Assessee, the Hon’ble Court held that:

1. The respondent would not be justified in levying interest, as the amount of advance tax payable by the petitioner for these assessment years could be adjusted from the amount lying with the Department in the petitioners own account. (para 15)

2. Interest is payable to the assessee u/s 132B(4) and 244A as well alongwith costs of Rs. 10,000.

The decision is available here.

A deduction u/s 37 is sustainable only if it is made for the purposes of the business or even incidental to the business: Delhi High Court

Matter: M/s Pragati Constructions Co. v. Dy.CIT, decided on 31 May, 2011

Assessment Year: 1989-90

Relevant Facts:

1. The assessee was was carrying on the business of construction, purchase and sale of flats. In a bid for construction of flats for the DDA, the assessee lent some money to a sister concern, Pragati Construction Co. Pvt. Ltd.(“PCL”) to the tune of Rs. 44,00,000. This money was forwarded to the DDA.

2. This money was forfeited by the DDA for non-payment of rest of the money and non construction of the flats. PCL adjusted Rs. 36,00,000 towards certain previous amounts due. A payment of Rs. 5,00,000 was effected by PCL to the assessee.

3. Finally, Rs. 31,00,000 was shown as outstanding amount in the assessees books after settlement and payment of certain amount by the DDA. The amount was written off as bad debts by the assessee on the receipt of a certain letter 14.12.1988 that it would not be able to return the money.

4. The AO held that the amount was never a debt but infact an advance, and therefore the same could not be written off u/s 36(1)(vii) of the Income Tax Act, 1961. The CIT(A) and Tribunal ruled in favour of the department

Question of law made under a reference:

1. Whether, on the facts and in the circumstances of the case the ITAT has erred in law in disallowing the loss of Rs 31.05 lakhs claimed by the assessee as a trading loss in its business of purchase and sale of flats?

Dismissing the appeal of the Assessee, the Hon’ble Court held that:

1. The condition, required to be fulfilled to sustain a deduction under Section 37 of the I.T. Act that the expense should be incurred for the purpose or should be incidental to the business of the assessee is not fulfilled in the instant case.

The decision is available here.

Amounts expended by an advocate for bypass surgery of his heart not allowable as expense: Delhi High Court

Matter: Shanti Bhushan v. CIT, ITR No. 230/1994, decided on 31.05.2011

Assessment Year: 1982-83

Relevant Facts:

1. The assessee filed a revised return in which he claimed expenses to the extent of Rs. 1,74,000/- for coronary surgery performed on him in Houston, USA.

2. The assessee claimed that the human heart is a plant and the expenses should be deducted as expenses u/s 31 of the Income Tax Act, 1961.

3. The AO rejected the claim of the assessee that the expenses are allowable u/s 31 or 37. The CIT (A) and the Tribunal rejected the claims of the assessee.

Question of law made under a reference:

1. Whether, on all facts and circumstances of the case, the expenses incurred by the assessee on coronary by-pass operation should have been allowed as a allowable deduction either under Section 31 or Section 37 of the I. T. Act, 1961?

Dismissing the appeal of the Assessee, the Hon’ble Court held that:

1. It is important that in order to claim deduction for expenses incurred in the repair of the plant that the same be reflected in the balance sheet of the assessee. The heart was not a part of the balance sheet.

2. A heart is not the ‘tool’ for an advocates business and therefore, it is not a plant u/s 31 of the Income Tax Act, 1961.

3. The amount used for the surgery is not used wholly and exclusively for the purposes of the business.

The decision is available here.

Recording of reasons is a condition precedent for proceeding for action u/s 158BD (material of another person found during search): Delhi High Court

Lead Matter: CIT XIII v. Radhey Shyam Bansal, decided on on 30 May, 2011, ITA No.582/2008

Relevant Facts:

1. A search was conducted under Section 132 of the Income Tax Act (the “Act”) in the premises of one Manoj Aggarwal of Baldev Park, Delhi on 30.8.2000.

2. In the course of search it was found that there were a lot of bogus accommodation entries found. Consequently, the Assessing Officer (“AO”) of Mr. Agarwal wrote to the AO of the respondent assessee, Mr. Radhey Shyam Bansal that he was acting as mediator in transactions of bogus accommodation entries.

3. Upon a notice being served, the assessee Mr. Bansal filed a block return from AY 1991-92 to 2001-02.

4. AO: Income by way of commission to the extent of Rs. 50,85,315/- was added. Also an amount of Rs. 9,81,29,575 was added u/s 69 as unexplained investment. The order of the AO was challenged before the CIT (A) who did not provide any relief to the assessee.

5. The Tribunal set aside the orders on the basis:-

a. There was no satisfaction of the AO recorded.

b. The issue of notice was beyond the limitation period.

Questions of law:

1. Whether the Assessing Officer is bound to record satisfaction within the meaning of Section 158BD of the Act, during the process of Assessment of the person searched under Section 158BC of the Act?

2. Whether satisfaction as contemplated in Section 158BD of the Act has been duly recorded regard being had to be letter dated 15.7.2003 or in the assessment order, wherein undisclosed income of the respondent-assessee has been reflected and negation of such satisfaction by the Income Tax Appellate Tribunal is erroneous and perverse for not accepting such satisfaction?

Dismissing the appeal of the Department, the Hon’ble Court held that:

1. Recording of satisfaction by the assessing officer of the searched person is a condition precedent. Satisfaction must be recorded by the said assessing officer that any undisclosed income belongs to any person, other than the person searched.

2. No satisfaction is borne out by the statements of the AO.

The decision is available here.