Sanjeev Woollen Mills v CIT (SC) - Valuation of Closing Stock at Market Value - Validity of Tax Officer's Invocation of 1st Proviso to Section 145(1)

          In  Sanjeev Woollen Mills v CIT, the question before the Supreme Court of India was whether, in a case in which the taxpayer had valued its closing stock of finished goods at market value, the Assessing Officer had jurisdiction to invoke and apply the first proviso to Section 145(1) of the (Indian) Income-tax Act, 1961 [ i.e., Section 145(1) as it stood prior to its amendment with effect from April 1, 1997 by the Finance Act, 1995 ], on the ground that, in the opinion of the Assessing Officer, the income of the taxpayer could not properly be deduced from such method of valuation.

2.          By a judgment dated November 24, 2005, P P Naolekar, J, speaking for the Court, held as follows :

(i)     The recognized and settled accounting practice is that closing stock "..... has to be valued on the cost basis or at the market value basis if the market value of the stock is less than the cost value.".

(ii)     In the instant case, the taxpayer had not adopted the "established and settled practice" (i.e., the accounting practice aforesaid), inasmuch as the market value of the closing stock had been taken into consideration while arriving at the chargeable income although such market value was greater than the cost thereof.

(iii)     Since there was no transfer of the goods constituting the closing stock, having regard to the fact that such closing stock constituted the opening stock of the succeeding year, the "..... profit earned is only notional.".

(iv)     Income (i.e., the "notional" profit aforesaid) which has not been "derived at by the assessee" cannot be said to be income chargeable to tax.

(v)     Consequently, the "..... rejection of the accounts maintained by the assessee for the valuation of the closing stock by the assessing officer and confirmed by the High Court ....." was in accordance with law.

(vi)     Accordingly, the "..... power exercised by the assessing officer under Section 145 (being) as per the principles enunciated by various authorities and the courts .....", there was no good or sufficient reason to interfere with the order passed by the High Court.

3.          The Court, therefore, dismissed the taxpayer's appeal.

Sedco Forex International Drill, Inc v CIT (SC) - Salary paid outside India for field break in the UK NOT taxable in India

           In an important judgment delivered on November 17, 2005 in Sedco Forex International Drill, Inc v CIT, the Supreme Court has, reversing the judgment of the Uttaranchal Pradesh High Court, held that the salaries paid outside India (i.e., in the United Kingdom) by the Appellant-taxpayer to its employees (who were tax residents of the United Kingdom) in respect of periods of "field break(s)" undertaken outside India (i.e., in the United Kingdom) (which employees had, prior to undergoing such "field break(s)", rendered services in India under a wet lease of oil rigs by the Appellant-taxpayer to the Oil and Natural Gas Commission, India) were not chargeable to Indian income-tax in the hands of the concerned employees under Section 9(1)(ii) of the Income-tax Act, 1961 ("Act"), inasmuch as such salaries were not paid for "service rendered in India".

2.           The Supreme Court held that the first clause in the contracts entered into by the Appellant-taxpayer with the concerned employees relating to the payment of salaries for services to be rendered in India was distinct from the second clause relating to the payment of salaries for the "field break(s)". While the first clause clearly fell within the extended meaning given to the words "earned in India" in Section 9(1)(ii) of the Act, the second clause did not; accordingly, since the phrase "earned in India" is part of the statutory fiction created by Section 9(1)(ii), "(t)here is no question of introducing a further fiction by extending the Explanation" (i.e., the Explanation to that Section as such Explanation stood prior to its amendment with effect from April 1, 2000) "to include whatever has a possible nexus with service in India.". (emphases supplied)

3.           Although the High Court had not referred to the 2000 amendment to the Explanation aforesaid, the Supreme Court proceeded to deal with the question of whether such Explanation was clarificatory in nature and hence applicable with retrospective effect from the date on which the provision [Section 9(1)(ii)] to which it was an Explanation came into force, since that question was raised by the Respondent-Revenue. The Court ruled against the Revenue on this issue by holding that "(w)hen the Explanation seeks to give an artificial meaning (to the phrase) 'earned in India' and bring about a change effectively in the existing law and in addition is stated to come into force with effect from a future date, there is no principle of interpretation which would justify reading the Explanation as operating retrospectively.". (emphasis supplied)