2008 (7) TMI 39 - HC - Income Tax

A new ground may be allowed to be raised only when it arises from the facts which are on record ITAT is correct in law and on facts in declining the departments request in the form of additional ground of appeal - so questions are decided in favour of the assessee held that sales-tax liability is an allowable deduction held that litigation expenses were not of a capital nature and so they are allowable as an expenditure

Summary

Issues Involved:
1. Disallowance of litigation expenses.
2. Waiver of interest under Section 217 of the Income Tax Act, 1961.
3. Allowability of sales tax liability as a deduction.
4. Taxability of cost and litigation charges.
5. Permissibility of raising additional grounds of appeal by the revenue.

Issue-wise Detailed Analysis:

1. Disallowance of Litigation Expenses:
- Question: Whether the Appellate Tribunal was right in law in confirming the disallowance of the expenditure amounting to Rs. 10,03,627/- being legal, court, and other expenses in connection with the litigation against the National Bank of Pakistan.
- Decision: The court decided against the assessee and in favor of the revenue, referencing its own previous decision in the case of Dalmia Dairy Industries Limited vs. CIT (241 ITR 9), which held that litigation expenses incurred for recovering sale proceeds from Pakistan were of a capital nature and thus not allowable as an expenditure.

2. Waiver of Interest under Section 217:
- Questions: Whether the ITAT is correct in law and on facts in holding that:
- There is no mandate in Rule 40 that in order to exercise discretion of waiving or reducing interest under Section 217, the assessment must first be completed and interest charged.
- The use of the word "waive" against "cancel" signifies that the exercise of discretion should be before the assessment is completed and not after.
- The CIT (A) erred in holding that the assessee's contention against the levy of interest under Section 217 could not be entertained as it was beyond its power to adjudicate whether the facts warranted the levy of interest, its waiver, or reduction.
- The ITO must exercise his discretion to waive interest if he has processed the matter, and the CIT (A) should entertain the appeal on the question and adjudicate whether discretion under Rule 40 has been properly exercised or not.
- Decision: The court held in favor of the assessee, interpreting Rule 40 (1) to mean that the Income Tax Officer has the discretion to reduce or waive interest payable under Section 215 or 217 without the necessity of completing the assessment first. The tribunal's view was upheld as correct in law.

3. Allowability of Sales Tax Liability as a Deduction:
- Question: Whether the ITAT is correct in law in holding that sales-tax liability of Rs. 7,00,057/- is an allowable deduction during the year under consideration.
- Decision: The court decided in favor of the assessee, referencing its previous decision in the assessee's own case (CIT v. Dalmia Dairy Industries Limited, 189 ITR 167), which had already settled the issue for the assessment year 1979-80.

4. Taxability of Cost and Litigation Charges:
- Question: Whether the ITAT is correct in law and on facts in holding that since litigation expenses have been disallowed, cost and litigation charges of Rs. 29,53,197/- are not taxable as revenue receipts.
- Decision: The court held in favor of the assessee, consistent with its decision in the first reference (ITR No. 299/1988).

5. Permissibility of Raising Additional Grounds of Appeal by the Revenue:
- Question: Whether, on the facts and in the circumstances, the ITAT is correct in law and on facts in declining the department's request in the form of an additional ground of appeal.
- Decision: The court agreed with the tribunal's decision to reject the revenue's application to raise an additional ground, as it would have introduced a new source of income not part of the original assessment proceedings. The court referenced the Supreme Court's decision in CIT v. Rai Bahadur Hardutroy Motilal Chamaria (66 ITR 443), which restricts the appellate authority from introducing new sources of income not considered by the assessing officer.

Conclusion:
The three references were answered and disposed of accordingly, with the court ruling in favor of the revenue on the disallowance of litigation expenses and in favor of the assessee on the other issues.