The Hindu Business Line : Guarding the chicken from a hungry taxman

In King Henry VI, York speaks of ‘an empty eagle set to guard the chicken from a hungry kite’, and Queen Margaret laments, in response, “So the poor chicken should be sure of death.” No different, you’d agree, from what assessees normally dread in the hands of the taxman. Worse then should be a situation when the taxman goes after chicken. And that is what happened in the Bee Pee Poultries case, which cam e up before the Punjab and Haryana High Court not long ago.

The question was whether the ITAT (Income-Tax Appellate Tribunal) was right in law in holding that poultry farming was an industrial undertaking producing articles and things entitling the assessee to claim deduction under Section 80-I of the Income-Tax Act, 1961.

Industrial undertaking must be involved in manufacture or production, not trading, said the court, citing earlier verdicts on similar facts. Also, that production of a new article or bringing into existence some new commodity must be involved.

For instance, the Madhya Pradesh High Court had discussed the issue in the Indian Poultry case, more than a decade ago, and observed thus: “Basically the chicks remain chicks only. There is no substantial change so as to acqui re new commercial identity. Chicks are smaller ones and when they are reared for some time, they develop suitably for table purposes. Therefore, there is no change of the substance.”

Another precedent cited in the Bee Pee verdict was the apex court’s decision in CIT vs Venkateshwara Hatcheries (P) Ltd (1999). “From a perusal of the self-stated steps taken by the assessee for the alleged production of chicks it is clear that the assessee does not contribute to the formation of chicks. The formation of chicks is a natural and biological process over which the assessee has no hand or control,” reads a snatch from the text posted recently on www.manupatra.com . The Supreme Court considered the issue and held that running of poultry farm does not involve any manufacture or production, nor articles or things were involved, chicks being animate creatures and development of eggs was a natural process.

So, if you were to ask a taxman why the chicken crossed the road, he would reply promptly: ‘To get taxed!’

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Earth stations and toilets

A nearly 20,000-word order of the Mumbai ITAT dated August 17 is about how earth stations of VSNL are not ‘undertakings’ for the purpose of Section 80IA of the I-T Act. The Assessing Officer’s (AO’s) view was that earth station is “a link in a long chain, which started from the telephone instrument through which a subscriber makes a call and culminated at the receiver’s end, passing through various landlines, earth station and satellite.”

Earth station is a part of the transmitting chain and not an independent undertaking; it is like “a sub-station in an electric supply network,” he opined. “He also held that the assessee should have commenced providing telecommunication services on or after April 1, 1995, so as to qualify for the deduction under Section 80IA, whereas in the present case, the assessee has been providing the service right from 1986,” reads the text of order, on www.taxindiaonline.com .

Of special interest in the text should be the portion that draws inspiration from the interpretation of “water supply & fittings” in the G. S. Pai & Co case.

“Water supply fitting should be understood in the sense of sanitary fittings. Consequently, it was held that the water supply fitting would only include such pipes as are used in toilets and bathrooms and, therefore, would not include heavy pipes. In view of this ruling, the word ‘basic’ would, therefore, mean voice communication through the existing system prior to the introduction of the cellular technology.”

A must-read order for the telecom-watchers.

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Informer’s reward

In the first week of November 1964 the Chairman of the Central Board of Direct Taxes, New Delhi, made an announcement in a press conference that the rate of reward to those furnishing information about concealed income was stepped up from 2.5 per cent to a minimum of 7.5 per cent of the extra tax which would be generated as a result of such information and in suitable cases the reward might go up to 10 per cent.

This nugget of information is what a recent decision of the Bombay High Court begins with. Mansinh Hansraj Khatau, the petitioner in this case, provided information to the Department almost a dozen times, and claimed his reward, amounting to Rs 5 lakh. The suit, however, got dismissed, with the court deciding that he was not eligible for the reward because the petitioner could not prove that the Department had generated additional income or revenue of Rs 1 crore, as averred by him.

So, what is the moral of the story?

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Slaughtered stock

The Garrett Trading Ltd case that came up before the UK tax tribunal was about three transactions in which the company “bought vodka and whisky stored in a tax warehouse owned by Promptstock Ltd from York Wines Ltd and sold th em to Balbinder Unipessoal LDA (BUL), a Portuguese company which at BUL’s request it shipped to DIT Spedition Logistik (DIT), a tax warehouse in Germany under a duty suspended movement.”

If that is a heady start, read on: “The transport was provided by See Transporte, an Austrian company, which subcontracted it to Mid Cheshire Transport Ltd with its director Mr G Marshall driving two of the loads and an employee Mr Yarwood the third. Mr Marshall says that they swapped trailers with another lorry at Transmark in Calais, which took the alcohol to DIT while he returned with a different trailer carrying bottled water under a contract with Cotrama Logistique, a French company, to transport bottled water to England.”

Then?

“Normally he travelled out to France to collect the water with an empty trailer, but on these occasions he took the appellant’s goods, although for security reasons he declared the trailer as being empty to Seafrance, the ferry company. Customs’ case is that the goods never left the UK and were ‘slaughtered’, i.e., were split up into smaller loads and sold on the black market in the UK…”

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Unreasonable sentence

At a US court, one William Tomko, Jr. pleaded guilty to a fraudulent scheme to evade personal income taxes, which resulted in a tax deficiency of more than $2,25,000. The District Court imposed a sentence “consisting of 250 hours of community service, three years of probation (including one year of house arrest), and a fine of $2,50,000. Tomko was also ordered to undergo twenty-eight days of in-house treatment for alcohol abuse.”

This sentence is unreasonable and an abuse of discretion for the District Court, ruled the US Court of Appeals for the Third Circuit in a decision dated August 20.

Tailpiece

“We found that our archery students performed better…”

“With improved bows?”

“No, with a taxman painted on the target board!”

D. MURALI
http://Detaxification.blogspot.com

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