Section 145

Section 145 — the law in short

What the courts have decided on section 145, in one screen. Read this first; open an entry when you need the facts, the reasoning and the source.

• Union of India v Exide Industries Ltd Supreme CourtHelps departmentValidity unconfirmed
  Can I deduct my provision for leave encashment in the year I make it, or only when I pay?
  Only when paid. Section 43B(f) is constitutionally valid: it does not touch your choice of accounting method or take away the deduction, it adds a condition of actual payment for that head and defers the benefit to the year of payment.
• CIT v Vasisth Chay Vyapar Ltd Supreme CourtHelps taxpayer
  We are an NBFC. The AO wants interest on a non-performing loan taxed on accrual even though we have not recognised it. Can he do that?
  No. The Supreme Court agreed with the Delhi High Court that where the assessee is a non-banking financial company governed by the Reserve Bank of India Act, interest on an advance classified as non-performing cannot be said to have accrued, having regard to s.45Q of that Act and the prudential norms issued under it. It is an application of the real-income principle: income that has not really arisen is not taxed because the books are kept on the mercantile basis.
• N.K. Proteins Ltd v DCIT Supreme CourtHelps departmentValidity unconfirmed
  Can the whole of a bogus purchase be added, rather than a percentage?
  On this line of authority, yes. The special leave petitions were dismissed, upholding the High Court, and the effect reported is that the 25% restriction was rejected and the entire fictitious purchase amount fell to be added.
• CIT v Excel Industries Ltd Supreme CourtHelps taxpayer
  The AO has taxed my advance licence and DEPB benefits in the year I exported. Is that the right year?
  No. The benefit accrues only when the imports are actually made, because until then the customs authorities are under no corresponding obligation to give anything up. Income tax is a levy on real income, and until the import happens the entitlement is at best a hypothetical income that may or may not materialise. The Court also declined to let the department reopen a position it had accepted for earlier years without any change in facts or law.
• Southern Technologies Ltd v Joint CIT Supreme CourtHelps departmentValidity unconfirmed
  My NBFC has to debit a provision for non-performing assets to the profit and loss account under the RBI norms. Can the officer add it back when computing my taxable income?
  Yes. The Supreme Court held that a provision for non-performing assets made by a non-banking financial company under the RBI's Prudential Norms Directions 1998 must be added back in computing total income. The Directions are prudential and disclosure norms; they govern income recognition and how the provision is presented in the balance sheet, and have nothing to do with computation of taxable income. The provision is not a write-off, so section 36(1)(vii) is not satisfied, and because the Explanation to section 36(1)(vii) expressly puts a provision for doubtful debt outside that clause, section 37(1) cannot be used instead. The constitutional challenge to sections 36(1)(viia) and 43D also failed.
• Rotork Controls India P Ltd v CIT Supreme CourtHelps taxpayerValidity unconfirmed
  We give a warranty on every unit we sell and provide a percentage of turnover for it each year — can the Assessing Officer disallow that as a contingent liability?
  Not where the provision is properly built. The Supreme Court held on 12 May 2009 that a warranty provision is deductible under section 37 where three conditions are met: a present obligation arising from a past event, the probability of an outflow of resources to settle it, and a reliable estimate of the amount. Where an enterprise sells large numbers of sophisticated goods, past experience of defects in some of them creates a present obligation on the sales already made, and the warranty is part of the sale price. The estimate must rest on a historical trend captured by a proper accounting system, reassessed each year, with unused provisions reversed.
• CIT v Woodward Governor India P Ltd Supreme CourtHelps taxpayerValidity unconfirmed
  I restated my foreign currency creditors at the closing rate and debited an unrealised loss. Can the AO throw it out as a contingent liability?
  No. Under the mercantile system, the loss on restating foreign currency monetary items at the balance sheet date is an item of expenditure under s.37(1), and the word 'expenditure' is wide enough to cover a loss that has not gone out of the assessee's pocket. Section 43A is a separate regime that applies only to an asset acquired from a country outside India, and after its substitution by the Finance Act 2002 it operates only at the time of actual payment.
• CIT v Realest Builders & Services Ltd Supreme CourtHelps taxpayer
  The Assessing Officer says my income accrued in an earlier year than the one I offered it in. Can he simply shift the year without touching my method of accounting?
  No. The Supreme Court dismissed the Revenue's appeals. Where the Department wants to tax a receipt in a different year, it must first ascertain the method of accounting the assessee has followed over the years and show that a change is warranted because that method understates profits. Section 145 allows the Department to insist on a change, but the Assessing Officer must give facts and figures, demonstrate both methods - the assessee's and the Department's - and show the understatement. That was never done here. Absent such a demonstration the presumption is that the whole exercise is revenue neutral, and the year of taxability cannot be shifted.
• CIT v Bilahari Investment Pvt Ltd Supreme CourtHelps taxpayer
  The AO wants to substitute my method of accounting for one that suits him better. What does he have to establish first?
  That the method you follow distorts profits. The Supreme Court held that recognition of income is achievable by more than one method, that an assessee is entitled to arrange its affairs and follow the method the department has accepted in earlier years, and that only where the department records a finding of distortion can it insist on substitution. The case arose on chit discount and the completed contract method over assessment years 1991-92 to 1997-98.
• CIT v Indo Nippon Chemicals Co Ltd Supreme CourtHelps taxpayerValidity unconfirmed
  I value my raw material net of the excise credit and value my closing stock the same way. Can the officer add the unutilised credit to my income?
  No. The Supreme Court dismissed the Revenue's appeals and held that an irreversible credit available on purchase of duty paid raw material does not for that reason amount to income liable to tax. The assessees had consistently used the net method, valuing raw material at purchase price less the credit and valuing unconsumed raw material and work in progress the same way. The Assessing Officer had used the gross method at purchase and the net method at the year end, which the Court called wholly erroneous, because it assumed income to the extent of the credit on unconsumed raw material that the accounts did not reflect. Whichever method is used consistently, the result is the same.
• Sakthi Trading Co v CIT Supreme CourtHelps taxpayer
  Our firm dissolved when a partner died, but the remaining partners carried on the same business. Must the closing stock on the date of dissolution be revalued at market price?
  No. The Supreme Court held that where a firm is dissolved but the business is not discontinued, there is no warrant for revaluing the closing stock at market rate. The ordinary rule, cost or market price whichever is lower, continues to apply. Valuing stock at a market value higher than cost would tax notional profits the assessee has never realised. A.L.A. Firm and G.R. Ramachari, which required market valuation, were cases where the business itself came to an end. The Commissioner's order under section 263 was wrong and the question was answered for the assessee.
• Bharat Earth Movers v CIT Supreme CourtHelps taxpayerSuperseded by amendment
  My liability is certain but I cannot put a final figure on it yet and I will not pay it for years. Can I still deduct the provision?
  Yes, so long as the liability has actually arisen in the year. A liability that has definitely arisen is deductible even though it still has to be quantified and will be discharged later; what is not deductible is a liability that is merely contingent. On the facts, the provision for leave encashment was held to be an accrued liability, not a contingent one — but for years governed by s.43B(f) that particular result no longer holds.
• UCO Bank v CIT Supreme CourtHelps taxpayer
  A Board circular gives me a benefit the section itself does not clearly allow. Can the Assessing Officer ignore it and apply the strict law instead?
  No. The Supreme Court held that the Central Board of Direct Taxes has statutory power under section 119 to tone down the rigour of the law in favour of assessees and to secure a fair administration of the Act, and that circulars issued in exercise of that power bind the authorities administering the Act. Applying the circular of 9 October 1984, it held that interest on doubtful loans credited by a bank to a suspense account, where nothing had been recovered for three accounting years, was not taxable in the fourth year and afterwards until actually received. The bank's appeal was allowed.
• Godhra Electricity Co Ltd v CIT Supreme CourtHelps taxpayer
  I raised my rates and booked the higher billing in my accounts, but customers sued and I could never collect. Must I still pay tax on it?
  No. The Supreme Court held that although the company kept its books on the mercantile system and had passed entries for the enhanced charges, no real income accrued to it. Whether income has accrued must be judged by taking the probability or improbability of realisation in a realistic manner, not by the entries. Here representative suits by consumers, an injunction, a State Government letter advising the company to hold its rates, and the later takeover of the undertaking meant the enhanced charges could never be collected. The entries represented hypothetical income only, and the additions were rightly deleted.
• Brij Bhushan Lal Parduman Kumar v CIT Supreme CourtHelps taxpayer
  I am an MES contractor and the department supplies me cement and steel at fixed rates. The Income-tax Officer added the value of that material to my cash receipts before applying a flat rate. Can he?
  No. The Supreme Court held that where the department supplies stores and materials to a works contractor at fixed rates solely for being used, fixed or incorporated in the works, and the surplus must be returned, there is not even a theoretical possibility of profit in the turnover those stores represent. So on a best judgment assessment the flat rate is to be applied only to the cash payments received from the department, exclusive of the cost of such stores. The Punjab and Haryana High Court's contrary view in Brij Bhushan Lal v CIT (Delhi) was held erroneous.
• Morvi Industries Ltd v CIT Supreme CourtHelps department
  My company gave up its managing agency commission by a board resolution because the managed company was in losses. The resolution came after the commission fell due but before it was payable. Is it still taxable in my hands?
  Yes. The Supreme Court held that income accrues when it becomes due, and that postponing the date of payment bears only on the time of payment, not on accrual. Under the agency agreement the commission fell due on 31 December each year and was payable only after the managed company's accounts were adopted in general meeting. The board resolutions giving up the commission and the office allowance came after the amounts had fallen due. Since the assessee kept its books on the mercantile system and gave the amounts up unilaterally after accrual, they remained part of its total income.
• CIT v Devi Prasad Vishwanath Prasad Supreme CourtHelps department
  The officer rejected my books, estimated my profits at a flat rate, and then also added an unexplained cash credit. Can he do both, and must he say what source the credit came from?
  Yes to both, subject to the facts. The Supreme Court held there is nothing in law preventing the Income-tax Officer, in an appropriate case, from taxing both a cash credit whose source and nature are not satisfactorily explained and the business income he estimates after rejecting the books, following Kale Khan Mohammad Hanif. Whether he may do so in a given case depends on its own facts. Where a cash credit is unexplained the officer may hold it to be the assessee's income and need not show what source it came from; it is for the assessee to prove that it is income from a source already taxed.
• CIT v Dalmia Investment Co Ltd Supreme CourtCuts both waysPartly overruled — read this first
  I received bonus shares and later sold my holding. What is the cost of the bonus shares: face value, nil, or something else?
  Something else. By a majority the Supreme Court rejected both extremes. Face value is wrong, because a bonus share is not a voucher for the amount on its face and nothing was paid for it. Nil is also wrong, because on the issue of bonus shares there is an instant loss in the value of the original holding: the earning capacity of the capital is unchanged, dividends per share fall, and the market price moves accordingly. The correct course, where the bonus shares rank pari passu with the old, is to spread the cost of the original shares over the old and the new taken together. On that basis the cost of Rs 5,84,283 was spread over 31,909 old and 31,909 bonus shares.
• Kale Khan Mohammad Hanif v CIT Supreme CourtHelps department
  My business income was estimated on a percentage of turnover because my books were rejected. Can unexplained credits in those same books still be added separately as income from undisclosed sources?
  Yes, on the way the question was framed. The Supreme Court held that the onus of proving the source of a sum received is on the assessee: if he disputes liability he must show either that the receipt was not income or that it was exempt, and failing that the officer may treat it as taxable income. And the fact that the income of a disclosed business was computed on an estimate does not preclude treating a credit entry in that business's books as income from another, undisclosed source. If it is income of an undisclosed source, it is not income of the disclosed source already taxed, so there is no double taxation.
• Calcutta Co Ltd v CIT Supreme CourtHelps taxpayer
  I sell developed plots and book the whole sale price on the mercantile basis, but I still have to build the roads and drains I promised the buyers. Can I deduct the estimated cost of that work now?
  Yes. The Supreme Court allowed the land developer to debit Rs 24,809, the estimated cost of development work it had covenanted in the sale deeds to carry out, in the year it credited the full sale price of Rs 43,692. The undertaking in the deeds was unconditional, so the liability had accrued even though nothing had been spent. Difficulty in estimating the amount was no reason to call an accrued liability contingent. Even if no clause of section 10(2) of the 1922 Act covered it, the deduction was allowable under section 10(1) — now section 28 read with section 37(1).
• CIT v McMillan & Co Supreme CourtHelps department
  The assessing officer accepted my method of accounting. Can the first appellate authority reject it for the first time in my own appeal and enhance the assessment?
  Yes. By a majority the Supreme Court held that nothing in section 31 read with the proviso to section 13 of the 1922 Act stops the Appellate Assistant Commissioner, in an appeal by the assessee, from exercising the power the Income-tax Officer has to reject a method of accounting from which true profits cannot be deduced, and from computing income under Rule 33. The Income-tax Officer decides first, but he must act reasonably and judicially, and his decision is not final. Once the appellate authority is properly seised of the assessment, section 31(3) imposes no such limitation. Bhagwati J dissented.
• Chainrup Sampatram v CIT Supreme CourtCuts both ways
  My closing stock is worth more than it cost me. Does the rise in value get taxed, and does it matter that the goods were lying outside the place where I trade?
  No to the first and no to the second. The Supreme Court held that valuing closing stock is only a step in working out the year's trading result, not a source of profit, so no 'notional profit' arises from the valuation and appreciation in unsold stock is not brought to charge — the rule is cost or market price, whichever is lower. But the Court also held that the source of business profits is the business and they accrue where the business is carried on. The silver lying at Bikaner was still the Calcutta firm's unsold stock, so the whole profit accrued at Calcutta and the exemption failed. The appeal was dismissed.
• Sir Kikabhai Premchand v CIT Supreme CourtHelps taxpayerValidity unconfirmed
  I took silver and shares out of my own business and settled them on trusts. Must I credit the business with their market value on the day I took them out?
  No, on these facts. By a majority of four to one the Supreme Court held that the withdrawal was not a business transaction: the business made no profit, sustained no loss and the assessee derived no income from it. He was entitled to enter the assets at cost, so that the opening and closing entries cancelled out. The Court refused to separate a business from its sole owner and to introduce, by a fictional sale, a profit that did not exist. It also rejected the argument that the State was deprived of a potential profit, because each year is a self-contained accounting period and only income of that year can be taxed. Bhagwati J dissented.
• Dhakeswari Cotton Mills v CIT Supreme CourtCuts both ways
  Can the Assessing Officer estimate income on departmental material the assessee has never been shown?
  The officer estimated gross profit by comparing the assessee with other mills, without disclosing the comparative data or letting the assessee lead rebuttal evidence. The Supreme Court set the assessment aside, holding that an estimate cannot rest on pure guess and that the material relied on must be disclosed to the assessee. It is the foundational Indian authority on natural justice at the assessment stage.
• PCIT v Rajesh Suresh Chopra High CourtHelps taxpayerValidity unconfirmed
  If an estimate on the disputed purchases cannot be avoided, is there a High Court figure I can point to?
  Yes, on these facts. The Gujarat High Court dismissed the department's appeal against a Tribunal order that had confined the addition on roughly Rs 116.50 crore of alleged accommodation-entry purchases to 6 per cent, holding that no substantial question of law arose because the questions proposed were already answered by a coordinate bench, which had held 6 per cent of bogus purchases to be fair and reasonable. It is a percentage a High Court has let stand, not a rule — the figure follows the facts, and the department's contrary line on whole-invoice additions is unaffected.
• The Chamber of Tax Consultants v UOI High CourtHelps taxpayerSuperseded by amendment
  Can the CBDT use ICDS notified under s.145(2) to override a Supreme Court or High Court decision on how income is computed?
  No. The Delhi High Court read s.145(2) down so that the power to notify income computation and disclosure standards cannot be used to override binding judicial precedent or a provision of the Act, and struck down several ICDS provisions that did exactly that — including part of ICDS III on construction contracts and part of ICDS VI on foreign exchange. Parliament's answer was the Finance Act 2018, which put much of the struck-down material into the Act itself.
• CIT v Gian Chand Labour Contractors High CourtHelps department
  The officer rejected my books and applied a flat net profit rate. Can I still claim my freight and other expenses separately?
  No. Once the books are rejected and income is estimated by applying a net profit rate, that rate is taken to have already absorbed every deduction that would otherwise be computed under sections 30 to 43A. You cannot have the estimate and the expenses too.
• Indwell Constructions v CIT High CourtHelps taxpayer
  The officer rejected my firm's books and estimated the profit. Can he then also add back the interest and remuneration the firm paid its partners?
  No. Once the books are rejected and the profit is estimated, the estimate stands in substitution for a computation under s.29, and every deduction that s.29 brings in is deemed to have been taken into account in arriving at it. The Court added that the embargo in s.40 is taken into account in the same way. To add back one specific item out of the profit and loss account is to rely on the very books that have been rejected, which the officer cannot do. The separate addition of Rs 63,859 for interest and remuneration paid to partners was held not permissible, and the reference was answered in the negative and in favour of the assessee. Read the reasoning carefully before relying on it, because it cuts both ways: the same sentence that stops the Revenue adding an item back is the sentence the Revenue uses to resist a further deduction claimed on top of an estimate.
• Awadhesh Pratap Singh Abdul Rehman v CIT High CourtHelps departmentValidity unconfirmed
  The officer rejected my books and made a best-judgment assessment because I kept no stock register. Is that enough on its own to reject?
  Not on its own — but it does not have to be. The absence of a stock register or cash memos may not by itself show that the accounts are false or incomplete; where it is coupled with unverifiable purchases and sales, missing vouchers for expenses and an implausibly low profit, the officer is justified in rejecting the books and assessing to the best of his judgment.
• C. Eswara Reddy & Co v ACIT ITATCuts both waysSuperseded by amendment
  The officer rejected my firm's books and estimated the profit at a percentage of receipts. Can the firm still deduct salary and interest paid to its partners from that estimated figure?
  For the years this order governs, yes. The Tribunal held that s.44AD(2) deems only the deductions under ss.30 to 38 to have been given full effect; s.40 is not deemed to have been allowed, and the proviso to s.44AD(2) as it then stood said in terms that salary and interest paid to a partner shall be deducted from the income computed under s.44AD(1), subject to the ceiling in s.40(b). Taking a clue from that scheme, the Tribunal directed the officer to allow partner salary and interest from the estimated income. On depreciation it went the other way: because depreciation is allowable under s.32, which falls inside ss.30 to 38, no separate deduction for depreciation was permitted from the estimate. The order concerns assessment years 2003-04 and 2004-05 and rests squarely on a proviso Parliament has since deleted.
• Brahma Center Development P Ltd v PCIT ITATHelps taxpayerValidity unconfirmed
  The Commissioner has revised my assessment saying no inquiry was made, but the officer did ask about the very item. Is that revision good?
  No, on this Tribunal's view. The Delhi Bench set the revision aside because the Assessing Officer had put a specific question on the interest adjusted against project expenditure, the company had explained it and the officer had accepted the explanation - so there was an inquiry, and the Principal Commissioner was not justified in invoking s.263. The TaxGuru note of the order also records a prospectivity point on Explanation 2, but it records it as the observation of a Mumbai Bench that the order noticed, not as this Bench's own holding.
• Hari Gopal Chopra v CIT Advance RulingHelps taxpayerValidity unconfirmed
  I have come back to India after seven years working abroad and my NRNR rupee deposits and foreign currency deposits are still running. Do the non-resident concessions stop the day I become resident, and when is the interest taxed?
  No, they do not stop automatically. The Authority ruled that Hari Gopal Chopra, who returned to India on 24 May 1996 after employment in Zambia, remained entitled to the Chapter XII-A benefits under s.115H after becoming resident, provided he filed the written declaration that section requires with his return. It also ruled that interest on his non-resident non-repatriable rupee deposits was taxable only in the year the deposits matured, because nothing had been credited to his account before then, and that interest on his foreign currency deposits with a scheduled bank was exempt under s.10(15)(iv)(fa) for assessment year 1997-98 and later years for which he was found resident but not ordinarily resident. The ruling binds only the applicant.

Listed strongest first: Supreme Court, then High Court, then Tribunal, then CBDT. Nothing here has yet been read in full by a chartered accountant — open an entry to see where it came from.