1985 (11) TMI 75 - AT - Income Tax

Issues Involved:
1. Taxability of sales tax refund under Section 41(1) of the Income Tax Act.
2. Applicability of Section 176(3A) to the sales tax refund.
3. Applicability of Section 170(1)(b) to the sales tax refund.
4. Applicability of Section 28(iv) to the sales tax refund.
5. Disallowance of sales tax liability under Section 43B.
6. Allowance of sales tax liability paid in a different assessment year.

Issue-wise Detailed Analysis:

1. Taxability of Sales Tax Refund under Section 41(1):
The Income Tax Officer (ITO) included the refund amount of Rs. 1,02,108 as the assessee's income under Section 41(1) of the Income Tax Act, treating it as revenue receipt. The assessee argued that the amount could not be assessed under Section 41(1) based on the Supreme Court's decision in CIT vs. Hukumchand Mohanlal and the Allahabad High Court's decision in Mohanlal & Sons vs. CIT. These decisions held that the successor in business or legal representative is not liable under Section 41(1) for amounts received by the predecessor. The Tribunal agreed with this argument, noting that the refund was received by the successor company, not the original firm that paid the tax. Hence, Section 41(1) did not apply.

2. Applicability of Section 176(3A):
Section 176(3A) applies to sums received after the discontinuance of a business. The Tribunal examined whether the business was discontinued or succeeded. The business of New Cawnpore Flour Mills was taken over as a going concern by the assessee company, indicating succession, not discontinuance. The Tribunal referenced the Supreme Court's decision in CIT vs. A. N. Piggies & Co. and other cases, concluding that the business was succeeded, not discontinued. Therefore, Section 176(3A) was not applicable.

3. Applicability of Section 170(1)(b):
Section 170(1)(b) is a procedural section for assessing income during the transition from one entity to another. The Tribunal noted that this section applies only if the amount is considered income of the previous year. Since the refund amount was not deemed income of the previous year, Section 170(1)(b) was not applicable.

4. Applicability of Section 28(iv):
Section 28(iv) concerns the value of benefits or perquisites arising from business. The Tribunal cited the Gujarat High Court's decision in CIT vs. Alchemic (P) Ltd., which held that Section 28(iv) does not apply to cash receipts. Since the sales tax refund was a cash receipt, Section 28(iv) was not applicable.

5. Disallowance of Sales Tax Liability under Section 43B:
The ITO disallowed the sales tax liability of Rs. 1,33,654 under Section 43B, as it was not paid by the end of the relevant accounting year. Section 43B allows deductions only in the year the tax is actually paid. The Tribunal upheld this disallowance, referencing the Supreme Court's decision in Kedarnath Jute Mfg. Co. Ltd. vs. CIT, which established that liability for sales tax arises when the sales occur, not when the tax is paid.

6. Allowance of Sales Tax Liability Paid in a Different Assessment Year:
The assessee argued for the deduction of Rs. 1,96,994 paid in a different assessment year under Section 43B. The Tribunal directed the ITO to verify whether this liability was allowed in any previous year. If not, it should be allowed as a deduction for the assessment year under appeal.

Conclusion:
The appeal was partly allowed. The Tribunal held that the sales tax refund was not taxable under Sections 41(1), 176(3A), 170(1)(b), or 28(iv). The disallowance of sales tax liability under Section 43B was upheld, but the ITO was directed to verify and allow the deduction of Rs. 1,96,994 if it was not previously allowed.

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