Section 256(2)

Section 256(2) — the law in short

What the courts have decided on section 256(2), in one screen. Read this first; open an entry when you need the facts, the reasoning and the source.

• Union of India v. M.V. Valliappan — a five-Judge Bench upholds s.171(9), and holds that a partial partition after the cut-off has no significance even if an earlier assessment recognised it Supreme CourtHelps department
  The department is ignoring a partial partition my client's family made in April 1979, even though the Income-tax Officer recognised it and gave the family the benefit of it in that very assessment year. Is there any authority that the recognition once given must stand?
  No — the Supreme Court has held the opposite, and by a Constitution Bench. In Union of India v. M.V. Valliappan the Court allowed the Revenue's appeals, set aside the judgments of the Madras and Karnataka High Courts which had struck down s.171(9) of the Income-tax Act, 1961 and s.20A of the Wealth-tax Act, 1957, and dismissed the writ petitions challenging the sub-section. Dealing directly with the argument that a partial partition of 13 April 1979 had been recognised in the assessment year and the benefit given to the assessee, the Court held that this "has no significance in view of crystal clear language used in the sub-section that partial partition taking place after the cut off date is not to be inquired into and if inquired the findings would be null and void."
• V.S.M.R. Jagadishchandran v CIT Supreme CourtHelps department
  I sold a property and the buyer paid off my mortgage out of the price. Can I deduct that repayment as cost of acquisition, or is it a diversion at source?
  Neither. The Supreme Court held that where the assessee created the mortgage himself, discharging it out of the sale proceeds is not cost of acquisition, not cost of improvement and not a diversion of income by overriding title. The owner mortgaged what was already his, so he acquires nothing by paying the mortgagee off. The Court distinguished the case of a mortgage created by a previous owner, where the successor takes only the mortgagor's interest and by clearing the debt acquires the mortgagee's interest, which is deductible under section 48. The appeal was dismissed.
• 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.
• CIT v Mussadilal Ram Bharose Supreme CourtHelps taxpayerSuperseded by amendment
  My income was estimated at a higher profit rate after my books were rejected, so my return fell well short of the assessment. Does that by itself mean penalty for concealment?
  No. The Supreme Court held that the Explanation to section 271(1) raises a presumption, not a conclusion. Once the returned income falls below the stipulated proportion of the assessed income, the onus shifts to the assessee to show that the failure did not arise from fraud or gross or wilful neglect - but that onus is rebuttable. Where the fact-finding body, on relevant and cogent material, is satisfied that the assessee was not guilty and the Revenue leads no further evidence, no penalty follows. Whether the onus is discharged is a question of fact, and its answer raises no question of law.
• CIT v Orissa Corporation (P) Ltd Supreme CourtHelps taxpayer
  I gave the lenders' names, addresses and PAN and filed their confirmations, but I cannot produce them and the summonses came back unserved. Can the loans still be added under section 68?
  Not on these facts. The Supreme Court declined to disturb the Tribunal's finding that the assessee had discharged its burden. The assessee had given the names and addresses of the creditors, the Revenue knew they were income-tax assessees and had their index numbers on its own files, and beyond issuing summonses under section 131 at the assessee's request the Revenue did nothing - it never examined the creditors' sources to see whether they were creditworthy, and made no effort to pursue them. In those circumstances the assessee could do no more, and the Tribunal's conclusion was neither unreasonable, perverse nor without evidence.
• Commissioner of Income-Tax v Shambhu Investment Pvt Ltd High CourtHelps department
  I let furnished table space with security, electricity, water and common amenities for a single monthly charge. Is that business income or income from house property?
  Income from house property, on these facts. The Calcutta High Court held that the mere attachment of income to immovable property is not by itself decisive; what must be seen is the assessee's primary object in exploiting the property. If the main intention is to let the property or a portion of it, the receipt is rental income; if it is to exploit the property by way of complex commercial activities, it is business income. Here there was no separate charge or agreement for furniture, fixtures or services, the monthly rent was comprehensive, and interest-free security advances of Rs 4,25,000 had already recovered the whole cost of the let portion. Applying the Sultan Brothers tests, the letting was inseparable and the object was letting.
• Commissioner of Income-Tax v Banwari Lal Banshidhar High CourtHelps taxpayer
  The officer rejected my books and estimated my income by applying a gross profit rate, and then also disallowed my cash purchases under section 40A(3). Can he do both?
  No. The Allahabad High Court held that where the books are rejected and income is computed by applying a gross profit rate on the sales shown, no deduction is allowed to the assessee on account of purchases, so there is nothing to disallow under section 40A(3). Applying the gross profit rate takes care of everything, and there is no need for the officer to scrutinise the amount spent on purchases or to look at section 40A(3) and rule 6DD(j) at all. The disallowance of Rs 91,926 was rightly deleted by the Tribunal. Having agreed on that primary ground, the Court declined to go into the Tribunal's alternative finding on rule 6DD(j) and returned that question unanswered.
• 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.
• CIT v Sophia Finance Ltd High CourtHelps department
  My company received share application money. Can the Assessing Officer use section 68 on it at all, or is share capital simply a capital receipt he cannot touch?
  He can. The Delhi High Court, sitting as a Full Bench, held that section 68 is widely worded - it covers any sum found credited in the books, whatever colour the assessee gives it - so the officer has jurisdiction, and indeed a duty, to enquire whether the alleged shareholders actually exist. If they are identified and shown to have invested, the money is a capital receipt and nothing more happens. If they do not exist, there is no valid issue of share capital, because shares cannot be issued to non-existent persons, and the credit may be charged as the company's income.

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.