Section 256(1)

Section 256(1) — the law in short

What the courts have decided on section 256(1), in one screen. Read this first; open an entry when you need the facts, the reasoning and the source.

• Sudarshan Silks & Sarees v CIT Supreme CourtHelps taxpayerValidity unconfirmed
  The Tribunal cancelled my penalty on the facts. Can the High Court set that aside as perverse when no such question was ever referred to it?
  No. The Supreme Court set aside the Karnataka High Court's order and restored the orders of the Commissioner (Appeals) and the Tribunal cancelling penalty under section 271(1)(c). The Tribunal is the final court of fact. Its finding on facts can be examined by the High Court in reference jurisdiction only if a question is referred saying that the finding is perverse, in the sense that no reasonable person could have reached it. The question actually referred was only whether the Tribunal was right in upholding the cancellation of penalty. Perversity having been neither raised nor referred, the High Court was precluded from discussing it.
• T. Ashok Pai v CIT Supreme CourtHelps taxpayerPartly overruled — read this first
  My bank's tax department prepared my return and got it wrong. I corrected it by revised returns which were accepted. Can concealment penalty still be levied on me?
  Not on these facts. The Supreme Court set aside the Karnataka High Court's judgment and allowed the assessee's appeal. The Tribunal had found the assessee bona fide, the fault lying with the professional group at his bank that handled his tax affairs, and had held that penalty could not be sustained where the revised return was accepted and no penalty was levied by reference to the original return. The reference to the High Court was general and raised no question of perversity, and the existence of mens rea is essentially a question of fact for the Tribunal. The Court also held that concealment of income and furnishing inaccurate particulars carry different connotations.
• CIT v Kesaria Tea Co Ltd Supreme CourtHelps taxpayer
  I wrote back an old provision for disputed sales tax in my books. Can the officer tax it under section 41(1) as a cessation of liability?
  No, not on these facts. The Supreme Court held that section 41(1) applies only if the liability has ceased finally, without the possibility of it reviving. Writing the provision back in the books is a unilateral act by the assessee and does not by itself end the liability in the eye of law. Here the purchase tax dispute with the sales tax department was still alive, so nothing had ceased in the year of the write-back. The Court affirmed the Kerala High Court and the Tribunal and dismissed the Revenue's appeal.
• CIT v Bijoy Kumar Almal Supreme CourtHelps taxpayer
  My client owns a one-third share in the house he lives in with his brothers. The officer has computed the relief on the whole property and then split the balance three ways. Is that right?
  No. Where a house is owned by two or more persons whose respective shares are definite and ascertainable, section 26 requires the share of each person in the income computed under sections 22 to 25 to be included in his own total income, and the relief under section 23(2) is available to each co-owner separately out of his own share — not once over the whole property. The Supreme Court held the language of section 26 is clear enough even without the Explanation added to it in 1976, which puts the same result beyond doubt.
• CIT v G.R. Karthikeyan Supreme CourtHelps department
  I won prize money in a car rally that was a test of skill, not a lottery or a race. Is it taxable when it does not fit any sub-clause of section 2(24)?
  Yes. The Supreme Court held that section 2(24) is an inclusive definition, so a receipt can be income even though it falls under none of the sub-clauses. It is wrong to test a receipt against sub-clause (ix) and conclude, if it does not fit, that it is not income. The rally was a contest, the assessee entered it to win, and the prize was a return for his skill and endurance. If money not earned in the true sense is income, money earned by skill and toil is income too. It may be casual, but section 10(3) itself shows casual income is income.
• Prakash Cotton Mills P Ltd v CIT Supreme CourtCuts both ways
  The AO disallowed a payment because the statute calls it a penalty. Does the label decide it?
  No. Where a statutory impost paid as damages, penalty or interest is claimed under s.37(1), the officer has to examine the scheme of the statute that imposed it and decide whether it is compensatory or penal in substance, whatever it is called. If it is purely compensatory the deduction must be allowed; if the impost is composite, the compensatory and penal parts have to be separated and only the compensatory part allowed.
• Apoorva Shantilal Shah v CIT Supreme CourtHelps taxpayerSuperseded by amendment
  As karta and father I divided some family shares between myself and my minor sons. Can the officer refuse to record the partial partition because the shares are unequal?
  No. The Supreme Court held that a father may effect a partial partition of joint family property between himself and his minor sons, in exercise of his superior right as father or as patria potestas, and that such a partition is valid under Hindu law. It does not become invalid because the shares are unequal; an aggrieved son may challenge it, and until a competent court holds it invalid it stands. The officer may enquire whether the partition is genuine and refuse recognition if it is sham, but cannot refuse it for unequal division. The appeal was allowed.
• Gestetner Duplicators P Ltd v CIT Supreme CourtHelps taxpayer
  We pay our salesmen a turnover commission on top of salary and contribute to the provident fund on both. Is the contribution on the commission deductible?
  Yes. The Supreme Court held that commission payable to salesmen as a term of the contract of employment, at a fixed percentage of turnover, is salary within rule 2(h) of Part A of the Fourth Schedule, so the provident fund contribution referable to it is deductible under section 36(1)(iv). Salary and wages both mean remuneration for work done, and it makes no difference that one part is measured by time and the other by turnover; the whole remuneration partakes of the character of salary. The Court also held that while recognition of the fund stands, the assessing authorities cannot question whether it meets the conditions for recognition.
• Kailashben Manharlal Chokshi v CIT High CourtHelps taxpayer
  I disclosed a large sum in the search statement and retracted two months later. Will the retraction hold?
  Partly, and only for what the department cannot corroborate. An admission is evidence but not conclusive, so additions for house property, gold and furniture that rested only on the retracted statement were deleted, while the amount matched by unaccounted cash actually found was upheld.
• Agrawal Warehousing and Leasing Ltd v CIT High CourtHelps taxpayer
  The Commissioner (Appeals) refused to follow a Tribunal decision in my favour because he thought it was wrong. Can he do that?
  No. The Madhya Pradesh High Court held that orders of the Tribunal bind all the Revenue authorities working within its jurisdiction, and the Commissioner (Appeals) committed both judicial impropriety and an error of law in declining to follow a Tribunal decision he thought incorrect. His course was to follow it and leave the Department to appeal. The Tribunal was equally wrong to overrule its own earlier decision, given by the same Bench; it should have asked the President to constitute a larger Bench under section 255(3). The questions were answered for the assessee and the matter went back to the Tribunal.
• CIT v Metachem Industries High CourtHelps taxpayerValidity unconfirmed
  There are credits in my partners' capital accounts. The officer says the partners cannot prove where the money came from and is adding it to the firm's income. Can he?
  No, once the firm has identified the depositor and he owns the entry. The Madhya Pradesh High Court answered the reference against the Revenue and held that where it is established that an amount was invested by a particular person, partner or otherwise, the firm's responsibility is over. The firm cannot be asked whether the money invested was properly taxed; it need only explain that the investment was made by that individual, and it is for him to account for it. If he owns the entry the firm's burden under section 68 is discharged, and the officer's remedy is to proceed against that person, if necessary under section 69.
• CIT v Gabriel India Ltd High CourtHelps taxpayer
  The Commissioner has issued a section 263 notice saying my assessment order does not discuss a deduction the officer allowed. Is a brief order by itself erroneous?
  No. The Bombay High Court held that an order is erroneous only if it is not in accordance with law, or was passed without any enquiry in undue haste. Where the officer raised a query, got a written explanation and allowed the claim on it, his order cannot be branded erroneous merely because he did not discuss the matter elaborately or because the Commissioner would have decided differently. And the Commissioner must himself reach a finding that the order is erroneous and prejudicial before he sets it aside; he cannot simply remit the point for the officer to look at again.
• CIT v Ramesh Electric and Trading Co. High CourtHelps department
  The Tribunal did not deal with some of my grounds. Can I get its order rectified under section 254(2) so it looks at them again?
  No, not on that ground alone. The Bombay High Court held that section 254(2) gives the Tribunal a power to amend, not to review. The mistake must be obvious and patent, not one that has to be established by a long process of reasoning on a point on which two views are possible. Failure to consider an argument advanced by a party is not an error apparent from the record, though it may be an error of judgment. The Tribunal, having decided on the merits that the commission was not genuine, had no jurisdiction to reopen the whole dispute and allow the deduction.
• Ahmedabad Electricity Co Ltd v CIT High CourtHelps taxpayer
  A judgment in my favour came after my appeal was filed. Can I raise it as an additional ground before the Tribunal even though it was never before the first appellate authority?
  Yes. A larger Bench of the Bombay High Court held that the Tribunal has jurisdiction to permit additional grounds to be raised before it even though they do not arise from the order of the Appellate Assistant Commissioner, so long as they relate to the subject matter of the entire tax proceedings. The words pass such orders thereon as it thinks fit in section 254(1) confer the widest jurisdiction; thereon does not cut it down. Whether to allow a new ground remains a discretion, to be exercised for good reason. Both references were answered in favour of the assessee.
• CIT v Bhaichand H. Gandhi High CourtHelps taxpayer
  An unexplained deposit appears in my bank statement but nowhere in my own cash book. Can it be added under section 68 as a cash credit in my books?
  No. The Bombay High Court held that a pass book supplied by a bank to its customer is a copy of the customer's account in the bank's own books. The relationship between banker and customer is debtor and creditor, not trustee and beneficiary, so the bank does not keep the pass book as the customer's agent or under his instructions. It is therefore not a book of the assessee, nor a book maintained by him for any previous year, and section 68 - which operates on a sum found credited in the books of an assessee maintained for any previous year - does not apply to it.
• Additional CIT v Abhai Maligai High CourtHelps taxpayerSuperseded by amendment
  I built a structure for a temple at my own cost instead of handing over money. Can I claim the s.80G deduction for what I spent?
  Not now. Explanation 5 to s.80G, inserted by the Finance Act 1976 with effect from 1 April 1976, declares that no deduction is allowed under the section unless the donation is of a sum of money. This judgment allowed such a claim only because it concerned AY 1969-70, before that Explanation existed, and the Madras High Court expressly recorded that the Explanation was inserted to get over decisions of that kind.

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.