Tribunals to provide reasoning for judgments

BUSINESS LAW

The Supreme Court has again asked the tribunals to provide the reasoning while delivering their judgments. It reiterated this demand while directing the customs tribunal to reconsider the case of the Commissioner of Customs vs Peerless Consultancy Services Ltd as the tribunal had not discussed the reasons for its conclusion.

"What the tribunal appears to have done is to refer to the arguments of the parties and then come to abrupt conclusions without discussing in detail as to how the conclusions of the commissioner were erroneous. The order is therefore vulnerable."

In this case, the company was engaged in the business of computerised printing and exported for the first time consignments of steel balls worth Rs 14 crore to Malaysia under the Duty Entitlement Pass Book (DEPB) scheme.

The commissioner held that the goods were over-invoiced to avail of higher DEPB credit and the market value indicated on the shipping bills was also inflated. The tribunal had accepted the defence of the assessee firm. The Supreme Court set aside the tribunal's order for fresh consideration.

Tribunal ruling on product tariff classification upheld

The Supreme Court has dismissed the appeal of M/s Continental Profiles Ltd challenging the ruling of the Customs, Excise & Gold (Control) Appellate Tribunal (CEGAT) in the dispute over the classification of electrical valve actuators for excise duty.

The firm argued that the product fell under tariff item 85.43 naming appliances which depend upon electricity.

However, the revenue authorities insisted that it fell under 85.01 that includes machines for the production, transformation or storage of electricity like generators and transformers. The stand of the authorities was upheld by CEGAT. The Supreme Court approved of this view.

Bad debts not acceptable as expenditure in I-T returns

The Supreme Court has overruled the Gujarat High Court and applied the amended provisions of Sections 143, 147 and 148 of the Income Tax Act in the appeal case, Assistant Commissioner vs Rajesh Jhaveri Stock Brokers Pvt Ltd. The company had filed returns declaring losses.

The return was processed under Section 143(1), accepting the loss filed by the firm. Later, a notice under Section 148 was issued on the ground that the claim of bad debts as expenditure was not acceptable.

The firm then filed a return of income declaring the same loss under protest. The revenue authorities furnished the reasons. The firm raised various objections against it. The authorities rejected all of them holding that the initiation of reassessment proceedings was valid.

The firm challenged the authorities' stand in the high court, which accepted the arguments. However, the Supreme Court elaborately discussed the relevant provisions and held that the high court was in error.

Sale tax on over-retention charges on loaned goods

The Supreme Court has overruled the Orissa high court and stated that sale tax could be imposed on over-retention charges on gas cylinders. In this case, State of Orissa vs Asiatic Gases Ltd, the firm manufactured and sold medical oxygen and industrial gases by filling them in cylinders.

If the cylinders were not returned after a specified period, the company charged an amount for over-retention. The issue was whether that amount could be included in the sale price for tax purpose.

The high court held that there was no transfer of right to use cylinders and the charge levied for over-retention of cylinders was in the nature of penalty. It did not form part of the sale price as defined in the state sales tax law.

Allowing the appeal of the state government, the Supreme Court ruled that when the goods (cylinders) were given on loan to the customers, the transfer of the right to use the goods came into existence. The levy was on the transfer of the right to use the goods for a consideration, according to the Supreme Court judgment.

'Bad and doubtful claims' not expenditure

The Supreme Court has pointed out that the Income Tax Act has provided for a special mode in which general insurance companies should be assessed and this would prevail over other rules.

Section 44 of the Act governs the insurance companies, the court stated in its judgment in Commissioner of Income Tax vs Oriental Fire & General Insurance Co Ltd.

During the assessment of the company, the revenue authorities maintained that it was not entitled to any deduction in respect of the provisions of taxation by way of "reserve for bad and doubtful debts".

The company disputed this and moved the tax tribunal, which held that the assessment was wrong. The Delhi high court also upheld the tribunal's view.

The revenue authorities therefore moved the Supreme Court which dismissed the appeal. The judgment pointed out that under the Insurance Act, every insurer was required to prepare the balance sheet, the profit and loss account and a revenue account at the end of each calendar year.

They are audited and scrutinised by the Controller of Insurance who has wide powers under the law. In view of these special provisions under the Insurance Act, insurance companies are dealt with differently in the Income Tax Act.

The jurisdiction of the income tax officers in passing assessment orders is limited as this business is not governed by the ordinary principles applicable to others.

According to Rule 5(a) of the income tax law, the annual accounts furnished before the Controller of Insurance would be taken to be the balance of the profits. While dismissing the appeal of the authorities, the Supreme Court also concluded that "bad and doubtful claims" could not be described as expenditure.

Arbitration clause survives after the end of contract

The Supreme Court has ruled that even if a contract comes to an end, the arbitration clause in it would survive because it is a collateral term.

"Even if the performance of the contract comes to an end on account of repudiation, frustration or breach of contract, the arbitration agreement would survive for the purpose of resolution of disputes arising in connection with the contract," the court stated in its judgment in National Agricultural Coop Marketing Federation India Ltd vs Gains Trading Ltd.

In this case, disputes arose between the two parties over the delivery of iron ore fines. The arbitration agreement provided that if there was any dispute, it shall be resolved "by arbitration in Hong Kong in accordance with the provisions of the Arbitration and Conciliation Act".

The Marketing Federation nominated three arbitrators, but Gains Trading declined to name anyone. On the contrary, it argued that the contract had come to an end as the parties had agreed to cancel it.

They were negotiating a new one. Since the contract had been abrogated, the arbitration clause also came to an end, it argued.

The Supreme Court rejected the argument. It explained that an arbitration clause which formed part of the contract has to be treated as an independent agreement.

Gains Trading then argued that since the venue of the arbitration was Hong Kong, the Chief Justice of India could not nominate arbitrators under the Indian Act. It further argued that the laws of Hong Kong would apply in this case and not the Indian law. The Supreme Court rejected these contentions also.