Test: Landmark Judgments - CLAT PG MCQ

In CIT v. Shaan Finance (P) Ltd., the Supreme Court ruled that leasing is a valid business activity, and companies can claim depreciation on assets leased to others as long as the assets are used in their business. This ruling helped clarify the tax treatment for leasing companies, allowing them to benefit from depreciation deductions, which is essential for their financial operations.

The Supreme Court reiterated that while legitimate tax planning is allowed, deductions can be denied for sham transactions designed to evade taxes. This ruling emphasizes the importance of genuine business activities in claiming tax benefits, distinguishing between valid tax strategies and those intended merely to circumvent tax obligations.

The Supreme Court upheld that treaty shopping is permissible unless explicitly prohibited, as demonstrated in the Azadi Bachao Andolan case. The court emphasized the validity of the India-Mauritius Double Taxation Avoidance Agreement (DTAA) and reinforced the importance of Tax Residency Certificates (TRCs) in determining eligibility for treaty benefits, thus promoting international investment strategies.

The landmark ruling in McDowell & Co. Ltd. established that while tax planning is permissible, transactions that are artificial and lack commercial substance—designed solely to avoid tax—can be disregarded by the courts. This principle laid the groundwork for anti-avoidance measures in tax legislation, influencing the introduction of General Anti-Avoidance Rules (GAAR) in India.

The Supreme Court's decision in CIT v. B.C. Srinivasa Setty established that capital gains tax applies only when there is a computable cost of acquisition. Since goodwill is a self-generated asset without a definite cost, its transfer does not incur capital gains tax. This ruling was significant as it clarified the treatment of intangible assets under the Income Tax Act, influencing how similar cases are approached in terms of tax implications.

Landmark judgments establish binding precedents that lower courts must follow, shaping the interpretation and application of tax laws for future cases. Additionally, these rulings can prompt legislative amendments, reflecting the dynamic relationship between judicial decisions and tax policy development. This ensures consistency in legal interpretations and provides clarity for taxpayers and practitioners alike.

The Supreme Court ruled that provisions in Double Taxation Agreements (DTAs) take precedence over domestic tax laws when they offer more beneficial terms to the taxpayer. This decision reinforced the importance of DTAs in international taxation, promoting compliance and investment between countries by allowing residents to benefit from favorable tax treatment.

The Supreme Court ruled that income generated from letting out property, regardless of the nature of the agreement (including hire-purchase), should be classified as income from house property under Section 22 of the Income Tax Act. This ruling clarified the tax implications for property owners and businesses, ensuring consistent treatment of rental income.

The Supreme Court determined that the transfer of shares in a foreign company does not equate to the transfer of underlying Indian assets, thus such offshore transactions are not taxable in India. This ruling clarified the legal framework regarding indirect transfers and was significant for multinational companies structuring their operations, although it led to subsequent legislative changes to address concerns about tax base erosion.

The Vodafone case prompted the government to introduce retrospective amendments to Section 9, clarifying the tax liabilities associated with indirect transfers of Indian assets. This legislative response aimed to address concerns raised by the judgment and to ensure that the tax authority could levy taxes on such transactions, reflecting the ongoing evolution of tax policy in response to judicial rulings.