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.

Amounts received under non-compete agreements are capital receipts and not taxable till amendment by Finance Act, 2002 :Supreme Court

Guffic Chem P.Ltd. vs C.I.T,Belgaum and anr., decided on 16^th March, 2011

CIVIL APPEAL NO.2522 OF 2011 (arising out of S.L.P. (C) No. 6081 of 2010)

Assessment Year: 1997-98

Relevant facts:

1. The assessee received Rs. 50,00,000/- from Ranbaxy as non-competition fee under an agreement dated 31.3.1997.

2. Assessee agreed to transfer its trademarks to Ranbaxy and in consideration of such transfer assessee agreed that it shall not carry on directly or indirectly the business hitherto carried on by it on the terms and conditions appearing in the agreement.

3. The agreement defined the period, i.e., a period of 20 years commencing from the date of the agreement. The agreement defined the territory as territory of India and rest of the world.

4. In short, the agreement contained prohibitive/restrictive covenant in consideration of which a non-competition fee of ` 50 lakhs was received by the assessee from Ranbaxy. The agreement further showed that the payment made to the assessee was in consideration of the restrictive covenant undertaken by the assessee for a loss of source of income.

Question/s before the Hon’ble Court:

1. Whether a payment under an agreement not to compete (negative covenant agreement) is a capital receipt or a revenue receipt is the question which arises for determination in this case?

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

Para 7: “Two questions arose for determination, namely, whether the amounts received by the appellant for loss of agency was in normal course of business and therefore whether they constituted revenue receipt? The second question which arose before this Court was whether the amount received by the assessee (compensation) on the condition not to carry on a competitive business was in the nature of capital receipt? It was held that the compensation received by the assessee for loss of agency was a revenue receipt whereas compensation received for refraining from carrying on competitive business was a capital receipt. This dichotomy has not been appreciated by the High Court in its impugned judgment. The High Court has misinterpreted the judgment of this Court in Gillanders' case (supra). In the present case, the Department has not impugned the genuineness of the transaction. In the present case, we are of the view that the High Court has erred in interfering with the concurrent findings of fact recorded by the CIT(A) and the Tribunal. One more aspect needs to be highlighted. Payment received as non-competition fee under a negative covenant was always treated as a capital receipt till the assessment year 2003-04.”

The decision is available here.

Supreme Court: Parliament may exercise legislative powers extra-territorially only in cases of existence of sufficient nexus

Gvk Industries Ltd. v. Income Tax Officer, on 1^st March, 2011

CIVIL APPEAL NO. 7796 OF 1997

Relevant facts:

The Appellant by way of a writ petition filed in Andhra Pradesh High Court had challenged an order of the Respondents which decided that the Appellant was liable to withhold a certain portion of monies being paid to a foreign company, under either one of Sections 9(1)(i) or 9(1)(vii)(b) of the Income Tax Act (1961). The Appellant had also challenged the vires of Section 9(1)(vii)(b) of the Income Tax Act (1961) for want of legislative competence and violation of Article 14 of the Constitution. The High Court having upheld that Section 9(1)(i) did not apply in the circumstances of the facts of the case, nevertheless upheld the applicability of Section 9(1)(vii)(b) on the facts and also upheld the constitutional validity of the said provision. The High Court mainly relied on the ratio of the judgment by a three judge bench of this court in ECIL. Hence, the appeal.

Question/s before the Hon’ble Court:

1. Is the Parliament constitutionally restricted from enacting legislation with respect to extra-territorial aspects or causes that do not have, nor expected to have any, direct or indirect, tangible or intangible impact(s) on or effect(s) in or consequences for: (a) the territory of India, or any part of India; or (b) the interests of, welfare of, wellbeing of, or security of inhabitants of India, and Indians?

2. Does the Parliament have the powers to legislate "for" any territory, other than the territory of India or any part of it?

The Hon’ble Court held that:

Para 42: “A question still remains, in light of the extreme conclusions that may arise on account of the propositions made by the learned Attorney General. Is the Parliament empowered to enact laws in respect of extra-territorial aspects or causes that have no nexus with India, and furthermore could such laws be bereft of any benefit to India? The answer would have to be no.”

Para 52: “The learned Attorney General is not only seeking an interpretation of Article 245 wherein the Parliament is empowered to make laws "for" a foreign territory, which we have seen above is impermissible, but also an interpretation that places those vaguely defined laws, which by definition and implication can range over an indefinite, and possibly even an infinite number, of fields beyond judicial scrutiny, even in terms of the examination of their vires. That would be contrary to the basic structure of the Constitution.”

Also, while answering the questions posed before the Hon’ble Court, it was held that -

Para 76: “The answer to the above (Question 1) would be yes. However, the Parliament may exercise its legislative powers with respect to extra-territorial aspects or causes, - events, things, phenomena (howsoever commonplace they may be), resources, actions or transactions, and the like - that occur, arise or exist or may be expected to do so, naturally or on account of some human agency, in the social, political, economic, cultural, biological, environmental or physical spheres outside the territory of India, and seek to control, modulate, mitigate or transform the effects of such extra-territorial aspects or causes, or in appropriate cases, eliminate or engender such extra-territorial aspects or causes, only when such extra-territorial aspects or causes have, or are expected to have, some impact on, or effect in, or consequences for: (a) the territory of India, or any part of India; or (b) the interests of, welfare of, wellbeing of, or security of inhabitants of India, and Indians.”

“The answer to the above (Question 2) would be no. It is obvious that Parliament is empowered to make laws with respect to aspects or causes that occur, arise or exist, or may be expected to do so, within the territory of India, and also with respect to extra-territorial aspects or causes that have an impact on or nexus with India as explained above in the answer to Question 1 above. Such laws would fall within the meaning, purport and ambit of the grant of powers to Parliament to make laws "for the whole or any part of the territory of India", and they may not be invalidated on the ground that they may require extra-territorial operation. Any laws enacted by Parliament with respect to extra- territorial aspects or causes that have no impact on or nexus with India would be ultra-vires, as answered in response to Question 1 above, and would be laws made "for" a foreign territory.”

The decision is available here.

Supreme Court: Exemption notification to be construed strictly; No interference on fact findings of lower authorities, unless evidence to contrary.

M/s. Uttam Industries v. Commnr. of Central Excise, Haryana, dated 21 February, 2011

CIVIL APPEAL Nos. 3727-3728 OF 2005

Relevant Facts:

The appellants were engaged in the manufacture of aluminum circles and utensils. The appellants claimed benefit of Notification No. 1/93 dated 28.02.1993 as well as benefit of Notification No. 135/94-CE dated 27.10.1994. A show cause notice was issued to the appellants contending inter alia that the benefit of the second Notification was not available to the appellants.

The appellants filed an appeal before the Commissioner Central Excise (Appeals), wherein it was held that the appellants had not fulfilled the stipulated conditions laid down in Notification as the appellants availed Modvat Credit and therefore they are not entitled to the benefit of the said Notification. It was also held by the appellate authority that the appellants did not place any material on record to show that they had fulfilled conditions of the Notifications for availing benefit of Modvat Credit.

The appellants filed an appeal before the Customs, Excise and Service Tax Appellate Tribunal. By Judgment and Order dated 10.03.2004 the aforesaid appeal filed by the appellants was also dismissed holding inter alia that in this case it is not disputed by the appellants that they were availing the credit in respect of the inputs used in the manufacture of the aluminum circles and therefore they are not entitled to the benefit of the Notification granting exemption.

Still aggrieved the appellants filed the present appeals.

Held:

The court upheld the decisions of the lower authorities. It observed:

Para 8: ‘On going through the records it is clearly established that the appellants are availing Modvat Credit in respect of inputs used in the manufacture of aluminum circles. The order-in-original, the orders passed by the appellate authority and as also by the Tribunal concurrently held that admittedly the appellants are availing such Modvat Credit in respect inputs used in the manufacture of the aluminum circles. Consequently, the appellants are not entitled to avail the benefit of Notification granting exemption inasmuch as for availing such benefit under the said notification the pre-condition is that the aluminum circles are to be cleared for intended use in the manufacture of utensils and no credit of duty paid on inputs has been taken in respect of the inputs used in the manufacture of the aluminum circles. All the aforesaid three authorities below having held concurrently in the same manner as stated hereinabove. Such finding has become final and it is not open to the appellants to challenge the same. We also hold that the appellants failed to bring any evidence on record that the appellants were not availing of Modvat Credit on the same goods in respect of which they were also claiming benefit of exemption under Notification.’

Para 9: ‘That being the position we are not inclined to interfere with the aforesaid finding of fact recorded by the Tribunal and the authorities below on the aforesaid issue.’

Para 10: ‘It is by now a settled law that the exemption notification has to be construed strictly and there has to be strict interpretation of the same by reading the same literally. In this connection reference can be made to the decision of this Court in Collector of Customs (Preventive), Amritsar vs. Malwa Industries Limited reported at 10 (2009) 12 SCC 735 as also to the decision in Kartar Rolling Mills vs. Commissioner of Central Excise, New Delhi reported at (2006) 4 SCC 772 wherein also it was held by this Court that finding recorded by the Tribunal and the two authorities below are findings of fact and such findings in absence of evidence on record to the contrary is not subject to interference.’

Supreme Court: Penalty/criminal proceedings not to continue if adjudication proceedings in favour of person, except on technical grounds

Radheshyam Kejriwal v. State of West Bengal, on 18^th February, 2011

3 Judge bench, per majority of Justice H. S. Bedi and Justice C. K. Prasad

Question/s before the Hon’ble Court: “It is trite that standard of proof required in criminal proceedings is higher than that required before adjudicating authority and in case accused is exonerated before the adjudicating authority whether his prosecution on same set of facts can be allowed or not is the precise question which falls for determination in this case.”

Relevant facts: On 22nd May, 1992 various premises in occupation of the appellant Radheshyam Kejriwal besides other persons were searched by the officers of the Enforcement Directorate. The appellant was arrested on 3rd May, 1992 by the officers of the Enforcement Directorate in exercise of the power under Section 35 of the Foreign Exchange Regulation Act, 1973 (hereinafter referred to as the `Act') and enlarged on bail on the same day.

The Enforcement Directorate on the same allegation which was the subject matter of adjudication proceeding laid complaint against the appellant for prosecution under Section 56 of the Act before the Metropolitan Magistrate. After the issuance of process and exoneration in the adjudication proceeding appellant filed application for dropping the proceedings, inter alia, contending that on the same allegation the adjudication proceedings having been dropped and the appellant exonerated, his continued prosecution is an abuse of the process of the Court.

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

“Para 19: “It will not make any difference on principle that latter judgments pertain to cases under the Income Tax Act. The ratio which can be culled out from these decisions can broadly be stated as follows:-

(i) Adjudication proceeding and criminal prosecution can be launched simultaneously;

(ii) Decision in adjudication proceeding is not necessary before initiating criminal prosecution;

(iii) Adjudication proceeding and criminal proceeding are independent in nature to each other;

(iv) The finding against the person facing prosecution in the adjudication proceeding is not binding on the proceeding for criminal prosecution;

(v) Adjudication proceeding by the Enforcement Directorate is not prosecution by a competent court of law to attract the provisions of Article 20 (2) of the Constitution or Section 300 of the Code of Criminal Procedure;

(vi) The finding in the adjudication proceeding in favour of the person facing trial for identical violation will depend upon the nature of finding. If the exoneration in adjudication proceeding is on technical ground and not on merit, prosecution may continue; and

(vii) In case of exoneration, however, on merits where allegation is found to be not sustainable at all and person held innocent, criminal prosecution on the same set of facts and circumstances cannot be allowed to continue underlying principle being the higher standard of proof in criminal cases. (emphasis supplied)

In our opinion, therefore, the yardstick would be to judge as to whether allegation in the adjudication proceeding as well as proceeding for prosecution is identical and the exoneration of the person concerned in the adjudication proceeding is on merits. In case it is found on merit that there is no contravention of the provisions of the Act in the adjudication proceeding, the trial of the person concerned shall be in abuse of the process of the court.”

The decision is available here.

Supreme Court: Advance Tax payable on MAT and in default, interest u/s 234B, 234C applicable

Jt.C.I.T.,Mumbai v. M/S.Rolta India Ltd. on 7 January, 2011

Question before the Hon’ble Court: “Whether interest under Section 234B can be charged on the tax calculated on book profits under Section 115JA? In other words, whether advance tax was at all payable on book profits under Section 115JA?”

Relevant Facts: Assessee furnished a return of income on 28.11.1997 declaring total income of Rs. Nil. On 28.3.2000, an order under Section 143(3) was passed determining the total income at nil after set off of unabsorbed business loss and depreciation. The tax was levied on the book profit worked out at Rs. 1,52,61,834/- determined as per the provisions of Section 115JA. The interest under Section 234B of Rs. 39,73,167/- was charged on the tax on the book profit as worked out in the order of assessment.

Upholding the appeal of the Department, the Hon’ble Court held, inter alia that:

Para 8: “The pre-requisite condition for applicability of Section 234B is that assessee is liable to pay tax under Section 208 and the expression "assessed tax" is defined to mean the tax on the total income determined under Section 143(1) or under Section 143(3) as reduced by the amount of tax deducted or collected at source. Thus, there is no exclusion of Section 115J/115JA in the levy of interest under Section 234B. The expression "assessed tax" is defined to mean the tax assessed on regular assessment which means the tax determined on the application of Section 115J/115JA in the regular assessment.”

Para 9: “…held that Section 115JB, with which we are concerned, is a self-contained code pertaining to MAT, which imposed liability for payment of advance tax on MAT companies and, therefore, where such companies defaulted in payment of advance tax in respect of tax payable under Section 115JB, it was liable to pay interest under Sections 234B and 234C of the Act.”

The decision is available here.