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 taxpayer
  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.
• Berger Paints India Ltd v. CIT, Calcutta (SC, 17 February 2004) — where the Revenue has accepted a High Court's statement of the law in one assessee's case it cannot challenge it in another without just cause Supreme CourtHelps taxpayer
  The department accepted a High Court decision in someone else's case and never appealed it, and is now arguing the opposite against my client. Can it?
  Not without just cause. The Supreme Court held that if the Revenue has not challenged the correctness of the law laid down by a High Court and has accepted it in the case of one assessee, it is not open to the Revenue to challenge its correctness in the case of other assessees, without just cause. The Gujarat High Court in Lakhanpal National Ltd had held that the whole of the excise and customs duty actually paid in a year is deductible under section 43B irrespective of how much of it is embedded in closing stock; that decision was never challenged, was followed by the Bombay and Madras High Courts and by a Special Bench of the Tribunal, and none of those was challenged either. The Court found no just cause for a departure, held that the Commissioner, the Tribunal and the Calcutta High Court had erred in permitting the Revenue to contend to the contrary, set aside the Calcutta High Court's judgments for all three assessment years and answered the questions in favour of the assessee.
• N. Bagavathy Ammal v CIT Supreme CourtHelps department
  My client received agricultural land from a company in liquidation. Agricultural land is not a capital asset, so is there anything to tax under s.46(2)?
  Yes. The Supreme Court held that the word 'assets' in s.46(2) is not to be read as 'capital assets' as defined in s.2(14). A shareholder who receives assets of any kind on liquidation is chargeable on the market value of those assets on the date of distribution, and the exclusion of agricultural land from the definition of capital asset does not help him.
• 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 Madras Auto Service (P) Ltd Supreme CourtHelps taxpayer
  I demolished my landlord's building and put up a new one at my own cost, and the new building belongs to him. I got a 39-year lease at a fraction of the market rent for it. Is what I spent capital or revenue?
  Revenue, on these facts. The Supreme Court held that the expenditure has to be looked at from a commercial point of view and asked what advantage the assessee actually got. It got no capital asset, because the building belonged to the lessor from the moment the first brick was laid, and it could therefore claim no depreciation. What it got was a long lease of suitable premises at a rent far below the market, which is a saving of future rent - a saving in the revenue field. Whatever substitutes for revenue expenditure should normally be considered as revenue expenditure.
• Miss P. Sarada v CIT Supreme CourtHelps department
  I have a running account with my company. I overdrew during the year, but the account was squared up by a journal adjustment on the last day of the year against another shareholder's credit balance. Can the withdrawals still be deemed dividend?
  Yes. The Supreme Court held that the legal fiction comes into play as soon as the money is paid, so each withdrawal made when the shareholder has no credit balance is a deemed dividend on the date it is made. A subsequent adjustment or repayment, even one made on the last day of the accounting year, does not alter the position.
• Jonas Woodhead and Sons (India) Ltd v CIT Supreme CourtHelps department
  My collaboration agreement pays the foreign company a running royalty on turnover. The Department wants to treat a quarter of it as capital. Can a single royalty be split at all?
  It can. The Supreme Court upheld a finding that a quarter of the royalty was capital, on facts where the foreign firm had not merely supplied technical know-how but had furnished plans and designs and rendered valuable services in setting up the factory itself, the business was new, and after the agreement expired there was no bar on the assessee continuing to make the product. The Court held it difficult to treat the whole payment as revenue merely because it was calculated as a percentage of gross turnover. How the money is paid does not settle what it was paid for.
• 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.
• Smt. Sarifabibi Mohmed Ibrahim v CIT, Gujarat Supreme CourtHelps department
  My land is still entered as agricultural in the revenue records and I have paid land revenue on it right up to the sale. The Assessing Officer says it stopped being agricultural land years ago. Can he do that?
  Yes. Whether land is agricultural land is a question of fact to be decided on a cumulative consideration of all the circumstances, and the revenue entry is only one relevant fact, not a conclusive one. Where the land had not been cultivated for four years, was agreed to be sold to a housing society for building, and permission to sell it for a non-agricultural purpose had been applied for and obtained, the Supreme Court held it was not agricultural land on the date of sale even though it was still recorded as agricultural and land revenue was still being paid.
• 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.
• Alembic Chemical Works Co Ltd v CIT Supreme CourtHelps taxpayer
  I paid a foreign firm a lump sum for technical know-how that raised the yield of a product I was already making. The Assessing Officer says section 37(1) is shut because I bought an asset of enduring benefit. Is the payment capital?
  Not on these facts. The Supreme Court held that the outlay was for the better conduct and improvement of the existing business and was therefore revenue. It reached that by refusing to treat the once-for-all payment and the enduring benefit as decisive: those ideas are not statutory conditions, there is no single definitive criterion, and what matters is the purpose of the outlay and its intended object and effect, judged in a common-sense way with regard to business realities. In a fast-moving field the know-how itself may lack the durability an enduring capital asset needs.
• 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.
• CIT, Gujarat-II v R.M. Amin (Supreme Court) — a distribution on liquidation is not a transfer within s.2(47), and s.46(2) is itself the charging provision without which no capital gain could be charged at all Supreme CourtHelps taxpayerSuperseded by amendment
  Is a receipt by a shareholder on the winding up of a company a "transfer" that can be charged under section 45 on its own, or does the charge depend entirely on section 46(2)?
  It depends entirely on s.46(2), and this decision — which is about liquidation and not about buy-backs, so the 1 October 2024 changeover does not touch it — is why. The Supreme Court held that when a shareholder receives money or assets on the liquidation of a company he receives them in satisfaction of a right that already belonged to him by virtue of holding the shares, not by any transaction amounting to sale, exchange, relinquishment or transfer, and that this reasoning covers extinguishment of rights in a capital asset as well. It then held that s.46(2) "was enacted both with a view to make shareholders liable for payment of tax on capital gains as well as to prescribe the mode of calculating the capital gains", and that but for that sub-section it would not have been possible to charge capital gains on a liquidation distribution at all. Because s.46(2) then applied only to companies within the s.2(17) definition, and the company in liquidation was a Uganda company outside it, no charge could be sustained and the Revenue's appeal was dismissed with costs.
• C. Krishna Prasad v. CIT — a single person is not a family: the sole surviving coparcener with no other member is assessed as an individual Supreme CourtHelps department
  My client took his share on a partition and is now the only member — unmarried, no wife, no children. He wants to file as an HUF because the property he received is ancestral. Can he?
  No. The Supreme Court held that a single person, male or female, does not constitute a family, and that an assessment in the status of a Hindu undivided family can be made only when there are two or more members. "Family" connotes a group of people related by blood or marriage; plurality of persons is an essential attribute of a family; and s.2(31) treats a Hindu undivided family as an entity distinct and different from an individual. The appeal was dismissed with costs and the assessee remained assessable as an individual.
• 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.
• Ganesh Chhababhai Vallabhai Patel v. CIT (Gujarat High Court) — a s.161(1) assessment on the trustee carries the rate applicable to the beneficiary's TOTAL income, and s.154 rectification lies where it did not High CourtHelps departmentNo later treatment found
  Our trust was assessed under section 161 on the beneficiaries' shares at the rate their shares alone attracted. Four years later the Assessing Officer rectified it under section 154 and applied each beneficiary's personal rate on his whole income. Could he do that in rectification?
  Yes. The Gujarat High Court held that it is settled from CIT v. Kamalini Khatau that section 161(1) permits the Income-tax Officer to assess either the representative assessee or the person represented — the latter by force of section 166 — and that where he assesses the trustee, the assessment must be made in the same status as the beneficiary and at the rate applicable to that beneficiary's TOTAL income, which includes his income from outside the trust. Applying the rate relatable only to the beneficiary's share of the trust income was therefore a mistake apparent from the record, and calling for the beneficiaries' own assessment orders in order to work out that rate was not a fresh inquiry that took the case outside section 154. The Court also rejected the trust's reliance on the Central Board of Direct Taxes' circular of 24 February 1967, but in doing so it stated the principle the circular lays down: once the choice has been made to tax either the trustee or the beneficiary, it is not open to the Department to go behind it and assess the other at the same time. That principle was held simply to have no application, because the beneficiaries had not been assessed again — only the rate on the trustee's assessment had been corrected.
• CIT v Metachem Industries High CourtHelps taxpayer
  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 Mr and Mrs Govind B.C. Ghanekar High CourtHelps departmentNo later treatment found
  The gift deed says nothing about taking anything back, so surely the transfer is irrevocable and ss.61 to 63 cannot apply?
  The deed is not the only place to look. Section 63 enlarges the meaning of 'revocable transfer'; it does not confine it. Where the general law that governs the parties itself allows the transfer to be cancelled at will — there, Article 1181 of the Portuguese Civil Code permitting gifts between spouses to be freely cancelled by the donor — the transfer is revocable within s.61 and the income is chargeable in the transferor's hands.
• 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.
• Dr J.M. Mokashi v CIT High CourtHelps departmentHigh Courts differ
  I pay my wife a salary in my own professional practice. She has no degree but she does the work. Can the Assessing Officer club that salary with my income under s.64(1)(ii)?
  On the Bombay High Court's view, yes. The proviso to s.64(1)(ii) contains two conditions and both must be satisfied: the spouse must possess technical or professional qualifications, and the income must be solely attributable to the application of his or her technical or professional knowledge and experience. Knowledge and experience in the second condition cannot be read back into the first, so a spouse who does the work competently but holds no qualification fails at the threshold.
• 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.
• CIT v. Belapur Sugar and Allied Industries (Bombay High Court) — the order under s.163 treating a person as agent of a non-resident must be passed BEFORE the notice that starts the assessment on him High CourtHelps taxpayer
  The Assessing Officer served a section 163 notice and the notice starting the assessment on the same day, and only passed the order treating us as agent of the non-resident years later. Is the assessment good?
  On the Bombay High Court's reasoning, no. The Court held that an order under section 163 is to be passed in the first place and only thereafter is the notice starting the assessment to be served on the person sought to be made liable as a representative assessee, that is, as the agent of a non-resident. It preferred the majority view of the Full Bench of the Punjab and Haryana High Court in CIT v. Kanhaya Lal Gurumukh Singh, holding that the Privy Council's decision in CIT v. Nawal Kishore Kharaiti Lal, decided under the Indian Income-tax Act, 1922, is no longer applicable to the 1961 Act because of the specific statutory changes — in particular that an order treating a person as agent is now appealable, and that the assessee's right of appeal would be meaningless if the determination could follow the notice. On the facts the determinations under section 163 were made only on 28 March 1969, and by then the limitation period then prescribed for the notice had expired, so no valid notice could be issued and the reassessments failed. The Court also upheld the Tribunal's decision to let the assessee raise the point for the first time before it, because a point going to the jurisdiction of the assessment may be taken though not taken below.
• Chhatmull Agarwal v CIT High CourtCuts both ways
  Can an assessee appeal against an addition he agreed to during the assessment?
  The Punjab & Haryana High Court held that an assessee's agreement to an addition recorded in the assessment order does not take away the statutory right of appeal. The remedy of appeal can be availed of notwithstanding the recital of consent, because the Act contains no bar founded on agreement.
• 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.
• CIT v Emirates Commercial Bank Ltd High CourtCuts both waysOverruled
  Our head office sent staff to work on the Indian branch and debited us the cost. Does the s.44C five per cent ceiling apply to it?
  No. Section 44C imposes a ceiling on head office expenditure of a common nature — expenditure incurred for various branches, or for the head office and the branch — that has to be allocated. Expenditure incurred exclusively for the Indian branch is outside s.44C altogether, even where the head office paid it first and recovered it by debit note.

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.