From our Legal Corner - tomorrow's cases

By Vijay Kumar

Income Tax

Interest earned on surplus funds deposited in banks cannot be business income; against an income of Rs 2.28 lakh, assessee claims expenditure of Rs 2.7 Cr - Business expenditure allowable : ITAT

THE assessee company was incorporated with the main object of acquiring a holding of equity and preference shares of companies engaged in the business of cement, ready mix and aggregate and to provide financial management. It was the first return of the assessee company. The Assessing Officer noted that the total capital was at Rs.209.33 crores which was raised during this year, out of which a sum of Rs.207.78 crores was invested in the shares of Lafarge India Ltd. The assessee company also earned interest on fixed deposits of Rs.2,28,000/- against which, it had claimed administrative and other expenses to the tune of Rs.2,69,85,000/-. The Assessing Officer, while following the judgement of the High Court in the case of CIT Vs. K.K.Doshi & Co, held that interest earned on fixed deposits was required to be taxed under the head "income from other sources". As regards the assessee's claim for deduction of expenses, the Assessing Officer observed that it had invested Rs.207 crores in M/s.Lafarge India Ltd., a company engaged in manufacturing of cement. The Assessing Officer further held that the assessee had made shares investments, income from which being dividend qualifies for exemption under section 10(33) and natural consequence of that was that no deduction of expenditure was permissible. Accordingly, total income was determined at Rs.2,28,000/- by disallowing the business loss as claimed by the assessee and charged it to tax under the head income from other sources'. In the first appeal, the CIT(A) categorized such interest income under the head 'business income'. He further held that since no dividend income was earned hence provisions of Section 14A could not be attracted, resultantly deduction for expenses claimed by the assessee was allowed.

Warrant of authorisation issued by Addl Director without proper authority - entire search and assessment consequent to such invalid search is bad in law and annulled : ITAT

REVENUE sometimes loses cases, because elementary principles are ignored. The Income Tax department just lost a case because they did not know who should issue the search warrant.

The assessee is an individual and is a medical practitioner. A search and seizure operation was conducted on 22.6.1998 under section 132(1) of the Income-tax Act, in the business premises of VLS Finance Ltd. & residential premises of the husband of the assessee. The assessee is wife of the Vice Chairman of VLS Finance Ltd. There was no authorization in the name of the assessee. During the search proceedings, some documents, loose papers etc. were seized from the residential premises C-561, Defence Colony, New Delhi, Cash of Rs. 8 lacs was also seized, which belonged to VLS Finance Ltd. The authorized officers recorded a statement of the assessee during the search operation on 22/6/1998. During the search operation, the authorized officer had noted the details about bank lockers in the name of the assessee. These bank lockers were put under restraint by the orders passed under section 132(3) of the Act. The assessing officer issued notice under section 158-BC of the Act and the block return, in pursuance of that notice was filed by the assessee on 29.8.2000, disclosing NIL undisclosed income.

Customs

Re-packing of film rolls - Duty demanded is less than Cenvat Credit that would have been available - Demand set aside; What about manufacture?

THE appellant imported film in plastic canisters and cleared on payment of applicable duties of Customs including countervailing duty. These canisters containing the rolls were put in pre-printed cartons bearing particulars such as MRP, such cartons were repacked into larger cartons, (1 x 10) x 100, and such larger cartons were issued to the market. The department found a "manufacturing" activity in this exercise in terms of Section 2 (f) (iii) of the Central Excise Act. And that resulted in a duty demand of over Rs.20 Crores.

See our columns tomorrow for the judgements