1986 (11) TMI 76 - AT - Income Tax

Issues Involved:
1. Validity of CIT's order under Section 263 of the Income Tax Act.
2. Computation of profits under Section 41(2) of the Income Tax Act.
3. Deductibility of reserves and liabilities from the sale consideration.
4. Jurisdiction and authority of the IAC under Section 144A of the Income Tax Act.
5. Applicability of the Gujarat High Court decision in the case of Artex Manufacturing Co. vs. CIT.

Issue-wise Detailed Analysis:

1. Validity of CIT's Order under Section 263 of the Income Tax Act:
The assessee challenged the CIT's order passed under Section 263 of the Act, arguing that the CIT had no power to revise the ITO's order dated 9th July 1982. The assessee contended that since the ITO framed the assessment as per the directions of the IAC under Section 144A, the CIT could not revise it. The Tribunal disagreed, emphasizing that the CIT's order dated 11th Dec 1980, which set aside the original assessment, was not appealed against and thus became conclusive. The Tribunal upheld the CIT's authority to revise the ITO's order, citing that the IAC, being a subordinate authority, exceeded his powers by issuing directions under Section 144A that conflicted with the CIT's earlier order.

2. Computation of Profits under Section 41(2) of the Income Tax Act:
The core issue was whether the entire sale consideration of Rs. 13 lakhs should be considered for computing profits under Section 41(2) of the Act. The CIT argued that the entire amount should be considered, while the assessee had deducted certain reserves and liabilities, computing the profit at Rs. 2,40,001. The Tribunal supported the CIT's view, stating that the ITO erred in allowing deductions for reserves and liabilities, and directed that the full sale consideration should be used for computing profits under Section 41(2).

3. Deductibility of Reserves and Liabilities from the Sale Consideration:
The CIT's order emphasized that the amounts transferred to the purchaser for Contingencies Reserve, Development Reserve, and Regular Payment Deposits were liabilities and not admissible as deductions from the sale consideration. The Tribunal agreed, noting that these amounts were statutory obligations and should not reduce the sale price. The Tribunal also noted that the assessee failed to establish that the Consumers Contribution was a reserve rather than a liability, thus supporting the CIT's decision to include the full sale price for profit computation.

4. Jurisdiction and Authority of the IAC under Section 144A of the Income Tax Act:
The Tribunal highlighted the differences between Sections 144A and 144B, noting that while the IAC can issue directions under Section 144A before the assessment is framed, these directions should not conflict with superior authority orders. The Tribunal concluded that the IAC overstepped his authority by issuing directions that contradicted the CIT's earlier order under Section 263, thereby justifying the CIT's action to revise the ITO's assessment.

5. Applicability of the Gujarat High Court Decision in the Case of Artex Manufacturing Co. vs. CIT:
The assessee argued that no profits under Section 41(2) could be worked out due to the sale of the entire undertaking, relying on the Gujarat High Court decision in Artex Manufacturing Co. vs. CIT. The Tribunal distinguished the facts, noting that in the present case, the sale agreement specifically allocated Rs. 13 lakhs to plant and machinery and distribution lines, unlike the lump sum consideration in the Artex case. Thus, the Tribunal found the Artex decision inapplicable and upheld the CIT's order to consider the full sale price for profit computation.

Conclusion:
The Tribunal dismissed the appeal, upholding the CIT's order under Section 263 of the Income Tax Act. The Tribunal confirmed that the entire sale consideration of Rs. 13 lakhs should be considered for computing profits under Section 41(2), and deductions for reserves and liabilities were not permissible. The Tribunal also validated the CIT's authority to revise the ITO's assessment despite the IAC's directions under Section 144A, distinguishing the case from the Artex Manufacturing Co. decision.

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