1997 (1) TMI 19 - HC - Income Tax

Summary

Issues:
1. Whether the excess collection made by the assessee should be included in computing income for a specific assessment year.
2. Whether "borrowed capital" should be deducted from the capital for the purpose of relief under section 80J of the Income-tax Act, 1961.

Analysis:

Issue 1:
The case involved the question of whether the excess collection made by the assessee, amounting to Rs. 6,41,942 and due to the Government of Tamil Nadu, should be included in computing income for the assessment year 1974-75. The Income-tax Officer proposed to add back this sum in the draft assessment, which was accepted by the Inspecting Assistant Commissioner. However, on appeal, the Appellate Assistant Commissioner and the Tribunal both ruled in favor of the assessee, stating that the excess collection payable to the Government was allowable as a deduction in the assessment year under consideration. The Revenue argued that the liability did not arise during the previous year and was contingent until a final decision was made by the Government to reduce the issue price. The court held that the liability was fastened on the assessee during the assessment year, as quantified by the Government prior to the close of the accounting year. Since the assessee followed the mercantile system of accounting, the court upheld the decision of the Tribunal in deleting the addition, ruling in favor of the assessee.

Issue 2:
Regarding the second question, whether "borrowed capital" should be deducted from the capital for the purpose of relief under section 80J of the Income-tax Act, 1961, the court referred to a similar case decided by the Supreme Court in Lohia Machines Ltd. v. Union of India [1985] 152 ITR 308. The Supreme Court had held that borrowed capital should be excluded while computing the capital base for the purpose of relief under section 80J of the Act. In line with this precedent, the court answered question No. 2 in the negative and in favor of the Department, affirming that borrowed capital should not be deducted for the purpose of relief under section 80J of the Income-tax Act, 1961.

In conclusion, the court ruled in favor of the assessee for Issue 1, stating that the excess collection made by the assessee should not be included in computing income for the assessment year. However, for Issue 2, the court held that "borrowed capital" should not be deducted from the capital for the purpose of relief under section 80J of the Income-tax Act, 1961, in line with the Supreme Court precedent.