The controversy was sparked off in the first place by a legislative and departmental fiasco. Section 115J was inserted by the Finance Act 1987 to provide that companies would pay a minimum tax on their book profits. Predictably, the draftsman forgot to provide as to whether such assessees were obliged to pay advance tax given that their book profits would only be known at the end of the year. The assessees were quick to pounce on the lacunae and hollered that they were not liable to pay advance tax and the consequent interest thereon but the department would have none of that. The assessees faced stiff resistance at all fronts and even at the stage of the High Court, it was the department which drew first blood with the Gauhati High Court holding in their favour in Assam Bengal Carriers 239 ITR 862 with the pithy words “If you are bidden to treat an imaginary state of affairs as real, your imagination must not boggle when faced with the consequences”.

Well, the assessees were in no mood to treat the so-called imaginary state of affairs as real and continued their assault in the Madhya Pradesh High Court (Itarsi Oils & Flours 250 ITR 686), Madras High Court (Holiday Travels 263 ITR 307) and the Bombay High Court (Kotak Mahindra 265 ITR 119), in all of which they faced resounding defeat. The Madras High Court made short work of the assessee’s submissions that they could not “estimate” book profits by observing that if normal profits could be estimated there was no reason why the same could not be done with book profits.

However, it is truly said that litigation is a game of chance and if you play long enough, you may well hit the jackpot. This is exactly what happened when the Karnataka High Court, without being told by the department of the judgements of the other High Courts, decided in favour of the assessee in Kwality Biscuits 243 ITR 519.

That should have sent alarm bells ringing in the department but sadly they continued their deep slumber even when the Kwality Biscuits matter reached the Supreme Court. By a one – line order “The appeals are dismissed” (284 ITR 434), the Supreme Court brought an anti – climactic end to the simmering dispute. Surprisingly, though the department had brought heavy artillery to Court (the Attorney General), none of the contrary High Court judgements were cited and the hard work done by the department in defending their interpretation vaporized into thin air.

Anyway, once bitten – twice shy. The draftsman who re – incarnated section 115J in its new avatar of section 115JA added a ubiquitous sub-section (4) to the latter to provide that all of the other provisions of the Act would apply to MAT companies. He could have been more articulate given the hoary background of the case but he chose to be cryptic as usual.

Determined not to let the ghost of Kwality Biscuits haunt them in section 115JA, the department put up a spirited fight in Ashima Syntex and thoroughly convinced the Special Bench that whatever may have been their sins in section 115J, the assessees could not be allowed to escape scot – free in section 115JA. They took their victory one step forward and even persuaded the Karnataka High Court to endorse their stand in Jindal Thermal Power 286 ITR 182 (Kar) in the context of section 115JB, the second re – incarnation of s. 115J.

However, having worked so hard before the Special Bench to redeem their interpretation of section 115JA, the department was back to its wayward ways in Snowcem India 313 ITR 170. The department did not even bother to read the section before the Court leave alone pointing out the judgements in their favour. The result: The assessees were very happy to accept the matter as “covered” in their favour by Kwality Biscuits.

Anyway, the Third Member now found himself in the piquant position of having to choose between a judgement of a non-jurisdictional High Court and that of a Special Bench.

It is not that the issue had not arisen earlier. In Godavari Devi Saraf 113 ITR 589, the Bombay High Court pithily observed that the Tribunal, being an all – India body, had to follow laid down by the High Court of any State. A non – jurisdictional High Court judgement was also binding on the Tribunal. However, they were careful to qualify the dictate by the words “so long as there was no contrary judgement of any other High Court”. What was left unsaid but is quite clear by inference is that if there is a conflict amongst the non – jurisdictional High Courts, the Tribunal is free to take its own view. This principle was followed by the Tribunal in Tej International 69 TTJ (Del) 650, Aurangabad Holiday Resorts 118 ITD 1 (Pune) and was also echoed by the Special Bench in Rishi Roop Chemical 36 ITD 35 (Del) (SB). In all of these, non-jurisdictional High Court judgements were followed in preference to Special Bench judgements.

Sadly, even on this seemingly elementary proposition of law, there is a conflict of judicial opinion with a contrary view taken in Patil Vijayakumar 151 ITR 48 (Kar), Ved Prakash 178 ITR 332 (P&H), Shah Electrical 207 ITR 350 (Guj) and Taylor Instrument 232 ITR 771 (Del) that the Tribunal is not bound by a judgement of a non-jurisdictional High Court. Surprisingly, the Bombay High Court itself, in Thana Electricity Company 206 ITR 727 declared (after noticing Godavari Devi Saraf) that “The decision of one High Court is neither binding precedent for another High Court nor for courts or Tribunals outside its own territorial jurisdiction”. This was reiterated in Consolidated Pneumatic 209 ITR 277 (Bom). Following this dictate, the Special Bench in Mahindra & Mahindra 122 TTJ (Mum) (SB) 577 refused to follow the judgement of the Delhi High Court on the point before it.

The end result of this confounding confusion of conflicting judgements is that it is impossible to say with any conviction whether or not the Tribunal is bound by a judgement of a non-jurisdictional High Court.

This imbroglio in the law came to the assistance of the department before the Third Member though the Third Member toed the Rishi Roop line and held that a solitary High Court judgement would be binding. The Third Member evolved a new argument – that a judgement which is per incuriam need not be followed even if it was the only High Court judgement in the Country. Snowcem India was branded as being “per incuriam” on the ground that it omitted to note the impact of sub-section (4) to section 115JA – the blame for which must squarely lie on the department for failing to draw the Court’s attention to it. One can only hope that the department does its homework – at least when arguing important matters in Court – to prevent such ignominy in the future.

To be fair to the aficionados, on the first part, the Legislature did lead them up the garden path by promising depreciation on virtually everything under the sun. The draftsman, probably having a moment of “goodwill” towards the taxpayers, drafted the term “intangible assets” to include not only all the known intangible assets like “knowhow, patents, copyrights, trademarks, licences and franchises” but also “any other business or commercial rights of similar nature”. Enthused by the seemingly unlimited scope of the definition, the aficionados set off a flurry of claims – on goodwill, non-compete fees, stock exchange card – there was no stopping them – if it looked intangible, it was depreciable!

The aficionados also displayed a remarkable sense of alacrity. When their argument that a stock exchange card is not a capital asset for purposes of wealth-tax and capital gains was successively thrown out by the Special Bench in Jagan Nath Sanyal 72 ITD 1 (Del) (SB) and R. M. Valliappan 103 ITD 63 (Che) (SB), they quickly recovered their wits and used the same arguments that had been used to decide against them to urge that they were entitled to depreciation. After all, if a stock exchange card is an “asset” liable to wealth-tax and is also a “capital asset” liable for capital gains, then surely it is also an “intangible asset” for purposes of depreciation, they argued.

The perseverance paid up big time and despite a couple of hiccups on the way, they managed to wrest a ruling from the Tribunal in Techno Shares & Stocks 101 TTJ (Mum) 349 that a stock exchange card was indeed an “intangible asset” eligible for depreciation.

There was now no stopping the aficionados. Non-compete fees were held to be an “intangible asset” eligible for depreciation in Real Image Tech 177 TM 80 (Che) and Medicorp Technologies 30 SOT 506 (Che). The Tribunal went on to hold that “the capability to have market value, assignability, transferability, diminution in value, were no more the ‘touch stones’ on which admissibility for depreciation u/s 32 had to be tested”. Goodwill was held to be eligible in Kotak Forex Brokerage Ltd (ITA no. 2692/Mum/2007) while Marketing Rights were held eligible in Sarabhai Zydus Animal Health Ltd (ITA no. 26/ Del of 2005). Even a License for making roads for the government was held eligible in Asoka Info (P) Ltd 123 TTJ 77 (Pune).

However, the euphoria was short-lived because the department discovered an Achilles heel in the definition – the rule of ejusdem generis. Unfortunately, the draftsman, while he had been charitable in giving the definition a wide meaning, made a fatal mistake. He qualified the words “any other business or commercial rights” with the words “of similar nature”. The department seized the advantage and rammed home the point that the intention of the legislature was to grant depreciation only to those intangible assets which looked like intellectual property and not to all intangible assets. Much to the dismay of the aficionados, the argument appealed to the High Court and it held that the term ‘licences’ and ‘any other business or commercial rights’ in s. 32(1)(ii) applied only to intellectual properties. Sadly, whatever may be the money-spinning abilities of a stock exchange card, ‘intellectual property’ it is not!

The aficionados are now running around panic-stricken because while stock exchange cards find themselves in the worst-case scenario (they are liable to wealth-tax, capital gains and still get no depreciation), the million dollar question is how to salvage non-compete fees, goodwill and the other esoteric items from being classified as non-intellectual property assets.

Emboldened by their success in Techno Shares, the department came out with all guns blazing in Plastiblends. The assessees’ had earlier tasted dramatic success in Someshwar Sakhar Kharkhana 177 ITR 443 (Bom) and Mahendra Mills 243 ITR 56 (SC) where their argument that depreciation was an allowance which could not be thrust on them was upheld. A half-hearted attempt to supercede these judgements was made in 1988 by way of deletion of sections 34(1) and 34 (2). This amendment merely neutralized one of the grounds given in the judgment while leaving it still potent. A more serious attempt was made by the Finance Act 2001 which introduced Explanation 5 in s. 32 to provide that depreciation would apply irrespective of whether the assessee had claimed it or not.

Meanwhile, the aficionados’ gambit of extending the principle of Someshwar Sakhar Kharkhana 177 ITR 443 (Bom) and Mahendra Mills 243 ITR 56 (SC) to Chapter VI-A met a stumbling block in Vahid Paper Converters 98 ITD 165 (SB) where the Special Bench ruled that depreciation had to be deducted whilst computing s. 80-IA and other Ch. VI-A deductions even if the same had not been claimed in the regular computation of income.

Down but not out, the aficionados thought that they would have a cakewalk in the High Court. After all, they were armed with the formidable judgement of the Supreme Court in Mahendra Mills where it had been laid down in no uncertain terms that depreciation was optional.

However, the High Court came down heavily on the assessees: “We see no merit in the contentions” it said. “Reliance on Mahendra Mills (supra) is wholly misplaced” it thundered, pointing out that Mahendra Mills had neither considered the scope of deduction under Chapter VI-A nor could it be read to mean that by disclaiming current depreciation the assessee could claim enhanced deduction under any other provision of the Act. The Court also observed tongue-in-cheek that “the assessee is disclaiming depreciation neither with a view to be charitable nor with a view to pay more tax than what is legally payable” but with a view to claiming deduction under section 80-IA at a figure higher than what it would have normally got. It did not mince words in calling the attempt of the aficionados a “device adopted to inflate the profits of eligible business” and thundered that this attempt had to be rejected.

All was, however, not lost for the aficionados. They managed to secure a stunning verdict from the High Court in G. R. Shipping that even a barge lying at the bottom of the ocean throughout the year was still eligible for depreciation. In other words, even an asset which had not been “used” for even a day was eligible for full depreciation. In that case, the Tribunal had, in a more detailed judgement, held that after the introduction of the concept of “block of assets” by the Taxation Laws (Amendment) Act, 1988 w.e.f 1.4.1988, the “user” of individual assets in the block could not be looked at and if there was a ‘block’ in existence, depreciation had to be allowed. Thus in one stroke of the pen, the concept of “active and passive” user of assets painstakingly developed by the department over the past several years became redundant.

The Circular, issued in an era where fair play was still respected, was a masterful analysis of section 9 which provided a tax liability on non-residents from income accruing or arising through or from business connection in India.

The Circular was essentially a series of illustrative instances and guidelines designed to guide befuddled taxpayers from the labyrinth of tax laws. Written in a simple and easy-to-understand style, it told you in clear terms whether your transaction was taxable or not and the reasons for the same.

The Circular had its share of admirers. Picked up for scrutiny … minutely examined … dissected … on a number of occasions …. by the finest legal brains … it still held up and came up on top! There is a long list of judgements which endorsed the correctness of the interpretation of section 9 made in the Circular … Morgan Stanley 292 ITR 416 (SC), SET Satellite (Singapore) 11 DTR 313 (Bom) / 173 TM 475, Gulf Oil (Great Britain) Ltd. 108 ITR 874 (Bom.) and Amadeus Global 113 TTJ 767 (Del.) … the list goes on.

In the end the reason for the withdrawal is very tame and unconvincing: “…interpretation of the Circular by some of the taxpayers to claim relief is not in accordance with the provisions of section 9 of the Income-tax Act, 1961 or the intention behind the issuance of the Circular.”

Since when have Circulars started to get withdrawn because of the taxpayers’ interpretation?

Meanwhile, the battle as to whether benevolent Circulars issued by the Board are binding on the Revenue even if they are contrary to the law rages on. The first salvo in favour of the assessees was fired several decades ago in Navnit Lal C. Javeri 56 ITR 198 (SC) and Ellerman Lines Ltd 82 ITR 913 (SC)where it was held that a circular in favour of the assessee was binding on the department even if it was contrary to the statutory provision.

A discordant note was struck in State Bank of Travancore 158 ITR 102 (SC) that “circulars cannot detract from the Act” though this was fortunately promptly reversed in UCO Bank 237 ITR 889 (SC)

A new twist was given in Hindustan Aeronautics Ltd 110 TM 311 (SC) that while circulars or instructions given by the board were binding in law on the authorities under the Act this was not the position if the Supreme Court or the High Court had declared the law. It was held that it not open to a Court to direct that a circular should be given effect to and not the view expressed in a decision of the Supreme Court or the High Court.

Even on this new angle, a discordant note was expressed in CCE vs Dhiren Chemical Industries 139 ELT 3 that even though the view expressed by the court was against the assessee the view expressed by the CBEC had to prevail because that was in favour of the assessee.

Ultimately, a five-judge bench held in Rattan Melting & Wire Industries 220 CTR SC 98 came down heavily on the assessees by stating that “a circular which is contrary to the statutory provisions has really no existence in law”.

Of course, some experts are severely critical of the judgement and urge that it should be reconsidered.

Meanwhile, all may not be lost yet for the assessees. In Oman International Bank 313 ITR 128 (Bom.) it was held that though the Circulars issued by the CBDT were not binding on the court, it was binding on the authorities and while it was for the Court to read the section in its proper context, while so reading the Court will bear in mind the circular issued by the CBDT. The Board’s interpretation of a statutory provision in favour of the assessee has to be borne in mind, the Court ruled.

Of course, whether there will at all be any Circulars favourable to the assessee under the present regime is a million dollar question!!

Daga Capital came close to being referred to a 5 Member Bench for reconsideration. In GE Capital, the Bench fairly acknowledged that at the time of hearing, its initial impression was to write a reference to the President for constituting a larger Bench though it stopped itself because an appeal had already been filed in the Bombay and Delhi High Courts against Daga Capital and as per the decision of the President in Star India a reference to a larger Bench cannot be made when the High Court is seized of the issue. It, however, was considerate enough to direct that the appeals be blocked for 6 months or till the disposal of appeal by the Bombay High Court in Daga Capital whichever was earlier.

Cheminvest added to the pall of gloom by holding that the disallowance under section 14A has to be made even if assessee has no tax-free income in the year.

There was some reprieve, however, in the form of Citizen Hotels (ITAT Mumbai) and Indexport Ltd (ITAT Mumbai) where it was held that section 14A & Daga Capital could not put the assessee in a worse position than what the AO had subjected him to.

Likewise, in Topstar Mercantile (Bombay High Court) it was held that the Tribunal could not remand the matter to the AO to apply Daga Capital if the AO had originally not made any disallowance on the ground of s. 14A.

On the same lines, in CIT vs. Hindustan Tin Works Ltd. (2009) 24 DTR 88 (Del.), it was held if during the assessment proceedings, and during the appellate proceedings before the CIT(A), the revenue not had invoked section 14A and there was no material before the Tribunal, the Tribunal was justified in not permitting the department to raise an additional ground on section 14A.

Meanwhile, both the Bombay and the Delhi High Courts are seized of appeals filed against Daga Capital and it will be interesting to see which verdict is the first to come out.

Of course, what the verdict is will be more interesting …. LOL!!

Update:

Section 14A is probably the only section to have the dubious distinction of being referred to the Special Bench multiple times.

The latest one expected to join the club is whether section 14A can apply to a partner’s share of profit from a firm. Is the said profit exempt from tax as provided by s. 10(2A) or is it really income which, in view of the pass-through nature of firm, has suffered tax in the hands of the firm and is not charged to tax in the hands of the partner only to avoid double taxation? Well, the issue was nicely settled in favour of the assessee by the judgements of the Bombay Bench in Sudhir Kapadia vs. ITO & Hitesh Gajaria vs. ACIT. Unfortunately, a contrary view was taken by the Bombay Bench in Dharmasingh Popat vs. ACIT without noticing the earlier two decisions. The result: The services of the Special Bench will probably be requisitioned again to resolve the controversy.

Meanwhile, a bit of good news trickled in from Chandigarh. In CIT vs. Hero Cycles, the Punjab & Haryana High Court ruled that the dreaded Rule 8D would apply only if there was in fact some expenditure relatable to the exempt income. Just how important this ruling is can be gauged from the fact that the Revenue vehemently argued there that whether one likes it or not, some expenditure, directly or indirectly, is always incurred which must be disallowed u/s 14A. Fortunately, the Court made light work of the submission and brought some cheer to the beleaguered assessees.