[No.197]

Supreme Court

• CIT, New Delhi v. Oriental Fire and General Insurance Co. Ltd.

Respondent engaged in business of general insurance filed income tax returns. Such returns were filed relying on or on the basis of the annual accounts furnished by it before the Controller of Insurance. Assessing Officer opined that Respondent was not entitled to any deduction in respect of provisions of taxation by way of "reserve for bad and doubtful debts". Commissioner (Appeals), however, allowed various deductions and order of Assessing Officer disallowing certain expenditure was set aside. On appeal, Income Tax Appellate held that Assessing Officer was not correct in refusing to accede to deductions claimed by assessee. High Court answered said reference in favour of respondent and against Revenue. Hence, present appeal. Held, Section 36(1)(vii) of the Act lays down conditions for allowance of a claim for a bad debt. A distinction between a 'provision' and 'reserve' had been kept in mind by the authorities under the 1961 Act as also the High Court. Every provision, however, needs not be an expenditure, as the same may represent a liability. While calculating the profit and loss, what is primarily necessary to be taken into account is the gross profit. The amount of income tax payable for the said purpose would not come within the purview of the definition of the term 'expenditure'. It is, therefore, evident that provision of income tax being not an expenditure, the Assessing Officer could not have exercised its jurisdiction in relation thereto. So far as question of 'bad and doubtful claims' is concerned, again the same is not an expenditure. Section 36(1)(vii) of the Act whereupon the learned Additional Solicitor General placed strong reliance, cannot be said to have any application whatsoever in the instant case. It is not relevant for computing the profit under the 1961 Act. In any event, Section 44 of Act provides for a non-obstante Clause and, thus, would prevail over the former. Appeal dismissed.

• ACIT v. Rajesh Jhaveri Stock Brokers Pvt. Ltd. Accountants of India and Ors.

Respondent-company filed its return of income for relevant assessment year declaring total loss of a stipulated amount. Said return was processed under Section 143(1) of accepting loss returned by respondent. Thereafter notice for reopening of assessment under Section 148 was issued on the ground that claim of bad debts as expenditure was not acceptable. Impugned notice under Section 148 was challenged by respondent. High Court allowed writ petition following decision of High Court in Adani Exports v. Deputy Commissioner of Income Tax (Assessment). Hence, present appeal. Whether Authority or Assessing Officer can assess or reassess income chargeable to tax if he has reason to believe that income for any assessment year has escaped assessment? Held, Section 147 authorises and permits Assessing Officer to assess or reassess income chargeable to tax if he has reason to believe that income for any assessment year has escaped assessment. Scope and effect of Section 147 as substituted with effect from April 1, 1989, as also Sections 148 to 152 are substantially different from provisions as they stood prior to such substitution. To confer jurisdiction under Section 147(a) two conditions were required to be satisfied. Firstly Assessing Officer must have reason to believe that income profits or gains chargeable to income tax have escaped assessment, and secondly he must also have reason to believe that such escapement has occurred by reason of either (i) omission or failure on the part of the assessee to disclose fully or truly all material facts necessary for his assessment of that year. Both these conditions were conditions precedent to be satisfied before the Assessing Officer could have jurisdiction to issue notice under Section 148 read with Section 147(a). But under the substituted Section 147 existence of only the first condition suffices. In other words if the Assessing Officer for whatever reason has reason to believe that income has escaped assessment it confers jurisdiction to reopen the assessment. It is however to be noted that both the conditions must be fulfilled if the case falls within the ambit of the proviso to Section 147. The case at hand is covered by the main provision and not the proviso. So long as the ingredients of Section 147 are fulfilled, the Assessing Officer is free to initiate proceeding under Section 147 and failure to take steps under Section 143(3) will not render the Assessing Officer powerless to initiate reassessment proceedings even when intimation under Section 143(1) had been issued. Inevitable conclusion is that High Court has wrongly applied Adani's case which has no application to the case on the facts in view of the conceptual difference between Section 143(1) and Section 143(3) of the Act. Appeal allowed.

High Courts

Bombay

• Sow. Swati Sachin Mahajan (Pagare) V. The State of Maharashtra

Applicant was married to Accused No. 1 and while marriage of applicant with Accused No. 1 was subsisting, Accused No. 1 performed second marriage with Accused No. 2. Applicant filed criminal application before Judicial Magistrate Court against same. However, trial court called for a police report under Section 156(3) CrPC and dismissed said application. Hence, present application. Whether Magistrate was right in calling for a police report under 156(3) Cr.P.C. as offence in question was a non-cognizable offence under Section 494 of IPC? Held, perusal of judgement of Apex Court in Madhu Bala v. Suresh Kumar and Ors would reveal that the investigation by a Police Officer under Section 156(1) of Cr.PC would be only with respect to a cognizable offence and, therefore, a direction to investigate as contemplated under Sub-Section 1 thereof would also in respect of cognizable offence. In so far as present case is concerned, it is not in dispute that Section 494 of IPC is a non-cognizable offence. Therefore, application allowed.

• Carona Limited, a Company registered under the provisions of the Companies' Act, 1956 v. Sumangal Holdings

Appellant and respondent entered into a leave and licence agreement by which Appellant agreed to permit the Respondent, use and occupation of the premises in dispute for a period of nine years. An Arbitration Clause was also contained in the leave and licence agreement. Thereafter, disputes arose between parties and appellant filed an Arbitration Petition. However, learned Trial Court Judge dismissed the Arbitration Petition as not maintainable by relying on the judgment of the Supreme Court in Natraj Studio (P) Ltd. v. Navrang Studio and concluded that under the provisions of Section 41 of the Presidency Small Cause Courts Act, 1882, the exclusive jurisdiction to entertain a suit between a licensor and licensee for the recovery of possession and for the recovery of licence fee was conferred on the Court of Small Causes and the jurisdiction of the Civil Court was held to be barred by necessary implication. Hence, present appeal. Whether ruling in Natraj Studio (P) Ltd. v. Navrang Studio is applicable in present case? Held, In Natraj Studio Pvt. Ltd. v. Navrang Studio, Supreme Court had to consider question as to whether an arbitration agreement could operate in respect of a dispute as to possession of premises where Court of Small Causes had jurisdiction under Section 28(1) of Bombay Rents, Hotel and Lodging House Rates Control Act, 1947. Sub-section (1) of Section 28 of Rent Act provided that notwithstanding anything contained in any law, in Greater Bombay, Court of Small Causes, Bombay, and in any area for which a Court of Small Causes is established under Provincial Small Cause Courts Act, 1887, such Court shall have jurisdiction to entertain and try suits or proceedings between landlords and tenants relating to recovery of rent or possession or between licensors and licensees relating to the recovery of licence fee or charges. Supreme Court held that both on basis of non-obstante provision as well as object of legislation exclusive jurisdiction would vest in Courts stipulated by Legislature and an arbitration agreement cannot be recognised in field. It held that Bombay Rent Act is a welfare legislation aimed at the definite social objective of protection of tenants against harassment by landlords in various ways. Public policy requires that contracts to the contrary which nullify the rights conferred on tenants by the Act cannot be permitted. Therefore, public policy requires that parties cannot also be permitted to contract out of the legislative mandate which requires certain kind of disputes to be settled by special Courts constituted by the Act. It follows that arbitration agreements between parties whose rights are regulated by the Bombay Rent Act cannot be recognised by a Court of law. These observations would apply in construing provisions of Section 41 of Presidency Small Cause Courts Act, 1882. Object of legislation deals with a matter of public interest and the ground which weighed with the Supreme Court in Natraj Studio in excluding the applicability of an arbitration agreement in the field would apply here as well. Therefore, appeal dismissed.

Delhi

• Jugesh Kumar v.State

Appellant-accused was convicted of offence under section 302 IPC by trial court for allegedly making dowry demands to deceased wife and murdering her by setting her on fire. Trial Court made conviction on basis of dying declaration of deceased. Appellant-accused challenged same on ground that entire conviction recorded by Trial Court is founded upon 2 of the 4 dying declarations, recorded before the Inquiry Officer and the said 2 dying declarations were contradicted in material terms by the earlier 2 dying declarations recorded contemporaneously before the landlord of the premises where the incident took place as well as the declaration before the doctor who admitted the deceased. Hence, present appeal. Whether trial court was right in convicting appellant-accused on basis of dying declaration when 2 out of the total 4 dying declarations were contradictory to the other 2 dying declarations. Held, a perusal of four dying declarations revealed that they are inconsistent in material aspects and the appellant was not only entitled to benefit of doubt but to honourable acquittal. Thus the dying declaration being inconsistent and mutually contradictory could not be the sole basis for conviction particularly when there was overwhelming evidence. Further, in the case of State of Punjab v. Praveen Kumar (2005) 9 SCC 769 held, that the Court, while appreciating the credibility of the evidence before it, must view the evidence as a whole so as to come to a conclusion as to its genuineness and truthfulness and that the Court must be satisfied that the dying declaration must be truthful. Thus, in view of the position of law laid down by the Hon’ble Supreme Court in Praveen Kumar’s case in order to convict the accused, the Court should be satisfied about the truthfulness of the dying declaration. However, in the instant case, the 2 dying declarations to the I.O and the SDM were contradicted in material terms by the earlier 2 dying declarations recorded contemporaneously before the landlord of the premises where the incident took place, and the MLC and the testimony of the Doctor who recorded the declaration while admitting the deceased Babita. Thus, in the instant case, the accused was wrongly convicted by the Trial Court on the basis of the Dying Declaration. Appeal allowed.

SEBI

Press Release

• SEBI constitutes High Powered Advisory Committee on consent orders and compounding of offences

Press Release No. PR.No-181 /2007 Dated 06.06.2007: Securities and Exchange Board of India (SEBI) has constituted a high powered advisory committee on consent orders and compounding of offences. Justice Hosbet Suresh, former Judge, High Court of Bombay would be the Chairman of the Committee. SEBI had decided to introduce consent orders and compounding of offences for all matters which are pending regulatory action or pending before Securities Appellate Tribunal (SAT) / Courts.

Press Information Bureau

• Dot Issues Guidelines for Registration of Telemarketers

PIB Dated 06.06.2007: The Government has announced the guidelines for registration of Telemarketers which will enable curbing of unsolicited commercial calls in the country by putting in place a mechanism for reducing the unsolicited commercial communication. It has been the endeavour of the Government to usher in policy decisions that could facilitate better telecommunications facilities to the people as per the National Telecom Policy 1999. Accordingly, Access Service providers shall accept the application from a Telemarketer in the prescribed proforma along with registration processing fee of Rs. 1000/- per telemarketing centre, after 31st August, 2007, the service providers shall not provide/discontinue to provide telecom resources to the persons providing Telemarketing services without registration and National Informatics Centre (NIC) has been authorized to set up a National Do Not Call (NDNC) registry. The Telephone users who do not want unsolicited commercial calls can register with NDNC registry.

• Income Tax Rules Providing Tax Exemption To Charitable And Religious Entities Modified

PIB Dated 13.06.2007: Sections 11 and 12 of the Income Tax Act, 1961 provide for exemption of income of charitable and religious entities. In order to avail of such exemption, the entity is required to make an application for registration under section 12A in form No. 10 A to the Commissioner of Income Tax. Further, income received on behalf of certain charitable and religious entities is entitled for exemption from tax in terms of sub-clauses (iv),(v),(vi) and (via) to clause (23C) of Section 10. Till now, in order to be eligible for such exemption, the entities had to be notified by Central Government (sub-clause(iv) or (v)) or had to be approved by the prescribed authorities (sub-clauses(vi) and(via)). Vide Finance Act, 2007, the approvals in respect of sub-clauses(iv) and (v) have also to be granted by the prescribed authorities with effect from 1st June, 2007. Notifications have been issued on 30th May, 2007 to amend the relevant rules viz,.Rule 2C and Rule 2CA of the Income Tax Rules, 1962 to specify the Chief Commissioners of Income Tax/Directors General of Income Tax who will be the prescribed authorities for receipt of applications and grant of approvals in terms of sub-clauses(iv),(v),(vi) and(via) to clause (23C) of Section 10. The above notifications have been made effective from the 1st day of June, 2007.

• Ministry of Small Scale Industries renamed as Ministry of Micro, Small and Medium Enterprises

PIB Dated 14.06.2007: The Government has merged the erstwhile Ministry of Small Scale Industries and Ministry of Agro and Rural Industries and formed a new Ministry, namely, Ministry of Micro, Small and Medium Enterprises. A Notification of the Cabinet Secretariat has been issued to this effect. In keeping with the new name of the Ministry, the name of the Office of Development Commissioner (Small Scale Industries) has also been changed to Office of the Development Commissioner (Micro, Small and Medium Enterprises).

RBI

Press Release

• Issue of Hybrid Instruments under FDI Scheme

Press Release No. : 2006-2007/1694 Dated 08.06.2007: Some Indian companies have been raising funds under the FDI route, from overseas markets in the form of Optionally or Partially Convertible Debentures and other hybrid instruments which are intrinsically debt-like in nature. It is notified that issuance of such instruments is against both the letter and spirit of the FDI policy which is aimed essentially to attract investments in the nature of equity capital and not surrogate debt instruments. Routing of debt flows through the FDI route circumvents the framework in place for regulating debt flows into the country, whether through overseas foreign currency borrowings (ECB) or through foreign investment in rupee denominated debt. Further, it is also contrary to the stipulation under the ECB policy that foreign currency convertible bonds are to be treated as debt till converted. Accordingly, the RBI has issued a Circular clarifying that only those instruments which are fully and mandatorily convertible into equity, within a specified time would be reckoned as part of equity under the FDI Policy. However, companies which have already received funds from outside India for issue of partially/optionally convertible instruments on or before June 7, 2007 can issue such instruments. Further, the existing investments in instruments which are not fully and mandatorily convertible into equity can continue till their current maturity.

Cases

• BECK, liquidating trustee of ESTATES OF CROWN VANTAGE, INC., et al. v. PACE INTERNATIONAL UNION et al.

Respondent Union represented employees covered by pension plans sponsored and administered by petitioner Company which had filed for bankruptcy. Petitioner-company rejected respondent union's proposal to terminate the present pension plans by merging them with the union's own multiemployer plan. Therefore, respondent union filed a suit in the Bankruptcy Court, alleging that Petitioner-company’s directors had breached their fiduciary duties under the Employee Retirement Income Security Act of 1974 (ERISA), 29 U. S. C. §1001 et seq., by neglecting to give diligent consideration to respondent Union’s merger proposal of pension plans. The court ruled in favour of respondent Union and petitioner appealed to the District Court, which affirmed in relevant part, as did the Ninth Circuit Court. The Ninth Circuit acknowledged that the decision to terminate a pension plan is a business decision and is not subject to ERISA's fiduciary obligations, but reasoned that the implementation of a termination decision is fiduciary in nature. It then determined that merger of pension plans was a permissible termination method and that Company therefore had a fiduciary obligation to consider respondent Union's merger proposal seriously, which it had failed to do. Held, Company did not breach its fiduciary obligations in failing to consider respondent Union's merger proposal because merger is not a permissible form of plan termination under ERISA. Section §1341(b)(3)(A) provides that in any final distribution of assets pursuant to standard termination, the plan administrator shall (i) purchase irrevocable commitments from an insurer to provide all benefit liabilities under the plan, or (ii) in accordance with the provisions of the plan and any applicable regulations, otherwise fully provide all benefit liabilities under the plan. The parties agree that clause (i) refers to the purchase of annuities, and that clause (ii) allows for lump-sum distributions. These are by far the most common distribution methods. To decide that merger is also a permissible method, the Court would have to disagree with the Pension Benefit Guaranty Corporation (PBGC), the entity administering the federal insurance program that protects plan benefits, which takes the position that §1341(b)(3)(A) does not permit merger as a method of termination because merger is an alternative to plan termination. The Court has traditionally deferred to the PBGC when interpreting ERISA. The Court believes that the PBGC's policy is based upon a construction of the statute that is permissible, and indeed the more plausible. Therefore, decision of lower court is reversed and remanded.

• Ann Marie Porto v. Town of Tewksbury

Plaintiffs filed suit against defendant’s school alleging sexual harassment of their son who was diagnosed with general development problems. Plaintiffs alleged that the school system had been deliberately indifferent to the sexual harassment of their child by a peer. The case proceeded to trial, and the jury found in favor of the plaintiffs, awarding compensatory damages and punitive damages to plaintiffs. The district court also awarded attorneys' fees to the plaintiffs. Hence, present appeal by defendant against the jury verdict, various evidentiary rulings, the jury instructions, the damages award, and the amount of attorneys' fees awarded. Held, evidence presented at trial is insufficient to sustain the jury's conclusion that defendant was deliberately indifferent to the student-on-student sexual harassment. Therefore, judgement of lower court vacated judgment granted in favor of defendant.

News

• Supreme Court rules in securities antitrust, auto passenger rights cases

The US Supreme Court handed down decisions in three cases, including Credit Suisse First Boston v. Billing, where the Court held that federal antitrust laws do not apply to a case where investors filed a class action lawsuit against underwriters and institutional investors for their alleged manipulation of initial public offerings. The Court held that there was a "plain repugnancy" between the plaintiffs' antitrust claims and federal securities law and ruled that the securities laws must be interpreted as implicitly precluding the application of the antitrust laws to the conduct alleged in this case. In Brendlin v. California, the Court held that an automobile passenger, like a driver, can challenge the constitutionality of a traffic stop under the Fourth Amendment. In Powerex Corp. v. Reliant Energy Services the Court held that the Ninth Circuit erred in reviewing a district court's decision to remand Reliant Energy's price-fixing lawsuit to state court. Reliant filed the lawsuit in state court and after several defendants filed cross claims for indemnity against additional companies, including Powerex, the cross-claimants sought to have the case removed to federal court.

• Japan high court rejects WWII Chinese slave labor compensation suit

The Japanese Supreme Court has rejected the appeals of Chinese nationals seeking compensation for being forced to work in Japan as slave laborers during World War II, ruling that Japan's 20-year statute of limitations barred their claims. The 42 original plaintiffs, only half of whom are still alive, filed suit in 1997 seeking compensation from the Japanese government and 10 contractors and mining companies that used their labor. The high court's Friday ruling was the second last week where the court rejected former laborers' compensation claims on statute of limitations grounds. In an earlier ruling last week, the court also said that the current Japanese government was not responsible for the wrongdoing of former leaders operating under Japan's constitution at the time. Japan has since adopted a pacifist constitution.

• Enron Broadband CEO sentenced to 27 months in plea deal

Former Enron broadband division chief Kennith Rice was sentenced to 27 months in prison and ordered to forfeit almost $15 million as part of a plea deal with prosecutors for his testimony against former Enron CEO Jeffrey Skilling and company founder Kenneth Lay. As CEO of Enron Broadband Services Kennith made numerous false statements about technology developments designed to mislead investors and artificially inflate the company's stock price.

• Canada court allows "mad cow" class action suit

The Superior Court of Quebec has ruled that some 20,000 cattle breeders can proceed with their class action lawsuit against the federal government of Canada for its handling of bovine spongiform encephalopathy, otherwise known as "mad cow" disease. The suit, which could eventually include over 100,000 farmers, alleges that the Canadian government was negligent by allowing cattle infected with BSE to be imported from the UK, and subsequently failing to inform the public or the cattle industry. The lawsuit is the first class action against the government over mad cow disease, which first appeared in Canada in May 2003. In 1997, the Canadian government implemented regulations prohibiting the feeding of cattle with feed made from cattle body parts. The regulations, however, were not heavily enforced and violators were not required to pay fines before July 2005. The outbreak of BSE, first identified in 1996 in the UK and linked to the deadly Variant Creutzfeldt-Jakob Disease, has encouraged cattle-producing states in the European Union and large importers like Japan to institute strict regulations concerning the feeding, slaughter, and testing of cattle.