1985 (11) TMI 74 - AT - Income Tax

Remission Or Cessation Of Trading Liability Discontinued Business Succession To Business Business Income

Summary

Issues Involved:
1. Taxability of sales tax refund under Section 41(1) of the Income-tax Act, 1961.
2. Applicability of Section 176(3A) regarding business discontinuance.
3. Applicability of Section 170(1)(b) concerning succession of business.
4. Taxability under Section 28(iv) for benefits or perquisites.
5. Disallowance of sales tax liability under Section 43B.
6. Deduction of sales tax liability paid in a subsequent year.

Detailed Analysis:

1. Taxability under Section 41(1):
The primary issue is whether the sales tax refund of Rs. 1,02,108 received by the assessee, a successor company, is taxable under Section 41(1) of the Income-tax Act, 1961. The Tribunal referred to the Supreme Court decision in Hukumchand Mohanlal's case, which held that Section 41(1) does not apply to a successor in business. The Allahabad High Court in Moti Lal & Sons' case reiterated that Section 41(1) applies only if the same assessee who received the allowance or deduction also receives the refund. Since the assessee is a successor to the firm, New Cawnpore Flour Mills, and not the original entity that paid the tax, Section 41(1) does not apply.

2. Applicability of Section 176(3A):
Section 176(3A) deals with income received after business discontinuance. The Tribunal examined whether the business was discontinued or succeeded. Citing the Supreme Court decision in CIT v. A. W. Figgies & Co., the Tribunal concluded that the business was not discontinued but succeeded by the assessee. Therefore, Section 176(3A) does not apply as there was no complete cessation of business.

3. Applicability of Section 170(1)(b):
Section 170(1)(b) is a procedural section dealing with the assessment of income in cases of business succession. The Tribunal noted that this section applies only if the amount is considered income of the previous year. Since the refund is not income in the hands of the assessee, Section 170(1)(b) is inapplicable.

4. Taxability under Section 28(iv):
Section 28(iv) concerns the value of any benefit or perquisite arising from business. The Gujarat High Court in CIT v. Alchemic (P.) Ltd. held that Section 28(iv) applies only to non-cash benefits. As the refund is a cash receipt, Section 28(iv) does not apply.

5. Disallowance under Section 43B:
The assessee's claim for a sales tax liability of Rs. 1,33,654 was disallowed under Section 43B, which mandates that tax liabilities are deductible only in the year of actual payment. The Tribunal upheld this disallowance, referencing the Supreme Court decision in Kedarnath Jute Mfg. Co. Ltd., which established that the liability to pay tax arises when the sales occur, independent of assessment.

6. Deduction of Subsequent Year Payment:
The assessee claimed a deduction for a sales tax payment of Rs. 1,96,994 made in the subsequent year. The Tribunal directed the ITO to verify whether this liability was allowed in any earlier year. If not allowed previously, it should be deducted in the current assessment year under Section 43B, subject to the section's Explanation.

Conclusion:
The Tribunal concluded that the sales tax refund of Rs. 1,02,108 is not taxable under Sections 41(1), 176(3A), 170(1)(b), or 28(iv). The disallowance of Rs. 1,33,654 under Section 43B was upheld. The Tribunal remanded the issue of the Rs. 1,96,994 sales tax payment to the ITO for verification and potential deduction. The appeal was partly allowed.