Brief case: Premium collected not tax-deductible

A weekly selection of key court orders

Premium collected not tax-deductible

The Supreme Court (SC) ruled last week that the premium collected by a company on its subscribed issued share capital is not part of "capital employed in the business of the company" and it would not be entitled to claim income tax deduction on that amount received from shareholders. The SC said so while dismissing the appeals titled Berger Paints India Ltd vs CIT. Earlier, the Income Tax Appellate Tribunal and the Delhi High Court had held the same view, interpreting Section 35D of the I-T Act. The company had unsuccessfully argued that it had issued shares on a premium which was a part of the capital employed in their business and therefore eligible for deduction under Section 35D. 

Bank cannot claim attached property 

If a person acquires assets through criminal activities and they are mortgaged with a bank, the state has the first claim on them once they are attached by a court. A bank cannot ask the court to release the properties on the ground that the properties have been mortgaged with it for raising loans. In this case, Punjab National Bank vs State of UP, a family turned to crime, terrorised Varanasi district and acquired properties. When none filed complaints against them, the police charged them with serious crimes under the Indian Penal Code and the state’s gangsters Act. The district magistrate attached their property. The bank wanted to release the property to realise its claims. The high court dismissed its petition, observing that the “right of the state to confiscate property acquired by criminal activities and tax evasion has priority over bank dues as such the property cannot be released in favour of the bank”. Explaining the gruesome nature of the crimes used to acquire wealth by the father, Jaiswal, and sons Babloo and Dabloo, the court remarked: “It is a well-known fact that over the last few decades, smuggling, foreign exchange violations, tax evasion, drugs activities and crime have all got mixed up. Evasion of taxes is integral to such activity. It would be difficult for any authority to say, in the absence of any accounts or other relevant material, that among the properties acquired by a gangster, which of them or which portions of them are attributable to criminal activities and which properties or which portions thereof are attributable to violation of other laws.”

Full disclosure in insurance policies 

A claim of life insurance cannot be rejected on the ground of non-disclosure of full information if the information sought is already with the insurer or its development officer. The Calcutta High Court stated so in the judgment, LIC vs Insurance Ombudsman. A woman took out nine policies totalling Rs 80 lakh. When she died, the claimants had no problem in settling four policies. But in the fifth and later policies, the proposal form asked whether she had other policies. The query was left blank. LIC rejected the claim on the ground that there was no full disclosure of information and therefore the principle of “utmost good faith” was violated. The claimants went to the Ombudsman. 

It allowed their petition. LIC therefore moved the high court alleging the insured was guilty of suppressing material facts. The claimants argued that LIC cannot be an “aggrieved person” under the Insurance Act and the rules; it cannot challenge the award of the Ombudsman. The court agreed.  It also stated that the insured cannot be held guilty of suppression of facts as the information sought was with LIC itself, its agent and development officer, in the first four policies. LIC was deemed to know what it asked for. 

Low price not lone factor in tenders 

In floating tenders by a public authority, low price quoted by one bidder may not be the only criterion to choose it, but public interest is also an important consideration, the Delhi High Court stated last week while dismissing the appeal case, State Construction Integrated Works vs National Highways Authority of India. If the price quoted by the only bidder is too high and the project is urgent and critical, the authority can change the eligibility conditions, the court clarified. In this case, the rival company was earlier disqualified as it did not have the required qualifications. However, as the only successful bidder was quoting a high price, the rule was tweaked to let in the rival. This was challenged in the court, alleging that the goalposts have been shifted to accommodate the rival which was earlier disqualified. The high court rejected the argument and stated that it was not an arbitrary decision, it was well-considered by the authorities and it was in public interest as the four-lane bridge was urgently required on the Delhi-Mumbai highway to replace a dilapidated one at Versova Creek. 

Arbitration award ‘patently illegal’ 

The Delhi High Court last week set aside the arbitration award in the case, Bhel vs Bajaj Allianz General Insurance stating that it was “contrary in terms of the contract, patently illegal and against the fundamental policy of Indian law”. The public sector undertaking had got its 10 major units insured for all perils. 

In the Hyderabad unit, a 50mt turbine fell from the crane, substantially damaging the floor. A claim was filed but the surveyor opined that the impact damage was not specifically covered in the policy. So the insurer rejected the claim, leading to arbitration. The award went against Bhel, which appealed to the high court. The court analysed the terms of the contract and surveyor’s report and stated that the policy was wrongly interpreted by the surveyor and the arbitrator. The court said that Bhel can now seek fresh arbitration. 

Cap on compensation lifted 

The Commercial Courts Act has lifted the cap on compensation to be paid by the losing party to the winner. This is especially so in frivolous and vexatious cases, the Bombay High Court stated in its judgment, Dashrath Rathod vs Fox Star Studios India. It ordered the petitioner, who wanted an injunction against the release of a film, to pay Rs 5 lakh as compensation. Half of it will go for legal aid to assist poor litigants, and half to Tata Memorial hospital, “both worthy causes”. Dashrath moved the court three days before the premiere of a film alleging violation of his copyright. The high court narrated in dramatic detail how the petitioner and his lawyers wasted judicial time and of those litigants who were in the queue before the court. Judges cannot work overtime, nor the staff who often commute two hours in one direction, the judgment asserted.