1982 (2) TMI 83 - AT - Income Tax

Summary

Issues:
1. Whether the deduction of forfeited staff service deposit by the assessee, a subsidiary company, and its treatment as a trading receipt for taxable income calculation was erroneous and prejudicial to the revenue's interest.
2. Whether the Commissioner had jurisdiction under section 263 to set aside the ITO's order and direct a reassessment for the assessment year 1975-76.
3. Whether the security deposit taken from employees by the company should be considered a trading receipt for income tax purposes, and if subsequent forfeiture of the deposit changes its nature.

Analysis:
1. The judgment involves an appeal by the assessee, a subsidiary company, against the Commissioner's order under section 263 concerning the deduction of forfeited staff service deposit amounting to Rs. 35,856. The Commissioner found the ITO's allowance of the deduction as prejudicial to revenue, stating that although the deposit was not a trading receipt initially, it took on that character upon appropriation to the general revenue. The Commissioner set aside the ITO's order and directed a reassessment.

2. The assessee challenged the Commissioner's jurisdiction under section 263, arguing that the ITO's order had merged with the Commissioner (Appeals) order. However, the Commissioner rejected this argument, citing that the deduction issue was not part of the appeal before the Commissioner (Appeals). The Tribunal agreed with the Commissioner's view, stating that there was no merger of orders. The Tribunal's decision aligned with the Gujarat High Court's ruling in a similar case.

3. The Tribunal analyzed whether the security deposit taken from employees should be considered a trading receipt for income tax purposes. The assessee argued that the nature of the receipt was fixed upon receipt and subsequent forfeiture did not change its character. The Tribunal agreed with the assessee, stating that the security deposit, even when forfeited, did not transform into a trading receipt. It emphasized that the deposit was not initially a trading receipt and the subsequent events did not alter its nature. The Tribunal concluded that the Commissioner's order was not sustainable on merits and reinstated the ITO's order, allowing the assessee's appeal.

In conclusion, the Tribunal held that the security deposit taken from employees by the company should not be treated as a trading receipt for income tax purposes, and the Commissioner's decision under section 263 was set aside in favor of the assessee.