2010 (2) TMI 4 - HC - Income Tax

Cessation of liability Power of the commissioner to revise - CIT revised the order u/s 263 to include the sum of Rs.1,75,32,600/- in the total income of the assessee under Sec.41(1) of the Income Tax Act on the ground that there had been a complete cessation of liability in regard to this amount in the previous year relevant to the assessment year 1982-83 ITAT confirmed the order held that - when the Assessing Officer took a possible view, while passing an order of assessment, the Commissioner exceeded his jurisdiction in seeking recourse to his power under Section 263. At the least, it must be held that the question as to whether the liability of the assessee had ceased in the previous year relevant to the Assessment Year 1982-83, was an issue on which a possible view was that there was no final or irrevocable remission or cessation of liability, within the meaning of Section 41(1) of the Act, during Assessment Year 1982-83 order of CIT and ITAT reversed.

Issues Involved:
1. Jurisdiction of the Commissioner under Section 263 of the Income Tax Act, 1961.
2. Cessation of liability under Section 41(1) of the Income Tax Act, 1961.
3. Validity of the Tribunal's decision upholding the Commissioner's order.

Detailed Analysis:

1. Jurisdiction of the Commissioner under Section 263 of the Income Tax Act, 1961:
The Commissioner of Income Tax initiated proceedings under Section 263 by issuing a notice on 15th December 1986. The Commissioner held that the judgment of the Kerala High Court dated 15th April 1981 had attained finality as no appeal was filed before the Supreme Court. Consequently, the liability of the assessee was deemed to have ceased at the beginning of the accounting year relevant to Assessment Year 1982-83. The amount of Rs.1,75,32,600/- was thus assessable as income under Section 41(1) for Assessment Year 1982-83. The Assessing Officer was directed to revise the assessment accordingly.

The assessee challenged this order before the Income Tax Appellate Tribunal, which dismissed the appeal. The Tribunal held that the judgment of the High Court was in favor of the assessee and that the liability had ceased during Assessment Year 1982-83 since the time prescribed for filing an appeal before the Supreme Court had expired.

2. Cessation of liability under Section 41(1) of the Income Tax Act, 1961:
Section 41(1) stipulates that if an allowance or deduction has been made in respect of a loss, expenditure, or trading liability incurred by the assessee, and subsequently, any amount is obtained in respect of such loss or expenditure, or some benefit is received by way of remission or cessation of the liability, the amount obtained shall be deemed to be profits and gains of business or profession and chargeable to income.

The Kerala High Court's judgment dated 15th April 1981 quashed the notifications fixing the price of eucalyptus, as the statutory requirements were not complied with. The State Government issued fresh notifications, which were again challenged by the assessee. The High Court quashed these notifications on 28th May 1984. Special Leave Petitions were filed before the Supreme Court, which granted interim orders requiring the assessee to pay at 60% of the notified rates. A settlement was eventually reached on 27th October 1988.

The Assessing Officer had taken a view that the liability had not irrevocably ceased by virtue of the High Court's judgment, which was considered a possible view. The Commissioner, however, held that the liability had ceased and invoked Section 263 to revise the assessment.

3. Validity of the Tribunal's decision upholding the Commissioner's order:
The Tribunal's decision was based on the assumption that the liability had ceased with the High Court's judgment. However, the High Court's judgment did not conclude the proceedings, as fresh notifications were issued, and the matter was further litigated. The eventual settlement in 1988 indicated that the liability was not conclusively determined during the previous year relevant to Assessment Year 1982-83.

The Supreme Court in Malabar Industrial Co. Ltd. vs. CIT and Commissioner of Income Tax vs Max India Ltd. clarified that Section 263 can only be invoked if the order is erroneous and prejudicial to the interests of the Revenue. An order is erroneous if it involves an incorrect assumption of fact or incorrect application of law. The view taken by the Assessing Officer was a possible view, and hence, the order could not be deemed erroneous or prejudicial to the interests of the Revenue.

Conclusion:
The High Court concluded that the Tribunal was not justified in upholding the order of the Commissioner of Income Tax under Section 263. The view that there was no cessation of liability during the previous year relevant to Assessment Year 1982-83 was a possible view. Thus, the reference was answered in favor of the assessee, and the Tribunal's order was deemed unsustainable. There was no order as to costs.

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