1982 (4) TMI 51 - HC - Income Tax

Summary

Issues:
1. Validity of canceling the order under section 263 passed by the Commissioner of Income-tax for the assessment year 1976-77.

Analysis:
The case involved a reference under section 256(1) of the Income Tax Act, 1961, where the Tribunal had canceled the order under section 263 passed by the Commissioner of Income-tax for the assessment year 1976-77. The Commissioner found that the assessee, a company being wound up voluntarily, had derived income from interest on bank deposits and Government securities without carrying on any business. The Commissioner set aside the assessment order passed by the ITO and directed a fresh assessment. The Tribunal, however, held that the company could only carry on business for capital realization after commencing winding up, making any expenditure for capital realization a capital expenditure. Therefore, the Tribunal allowed the appeal by the assessee, stating that no business income was chargeable to tax, and no revenue expenditure could be allowed. The Revenue was aggrieved by this decision and sought a reference to the High Court.

The High Court analyzed the case and found that the Tribunal erred in considering the income received by the assessee from interest on deposits and Government securities as capital receipts. The Court held that such income should be categorized under "Income from other sources" and "Interest on securities." The Court noted that the provisions of section 487 of the Companies Act, which the Tribunal relied on, did not prohibit a company being voluntarily wound up from receiving income from other sources and interest on securities. Therefore, the Commissioner was correct in holding that the ITO's order was erroneous and prejudicial to the Revenue's interests. The High Court concluded that the Tribunal was not justified in canceling the order under section 263 passed by the Commissioner of Income-tax for the assessment year 1976-77.

In conclusion, the High Court answered the reference in the negative, ruling in favor of the Revenue. The parties were directed to bear their own costs in this reference.