1986 (1) TMI 161 - AT - Income Tax

Summary

Issues Involved:

1. Taxability of Rs. 3,50,154 received by the assessee under section 41(1) of the Income-tax Act, 1961.
2. Applicability of section 41(1) to the deductions made by the assessee.
3. Taxability of the interest component on the amount received.
4. Validity of the assessee's accounting method and adjustments.
5. The Commissioner's partial relief of Rs. 1,45,000 and its implications.

Issue-wise Detailed Analysis:

1. Taxability of Rs. 3,50,154 under section 41(1):

The assessee received Rs. 3,50,154 from DESU following a decree by the Delhi High Court. The ITO added this amount to the assessee's income under section 41(1) of the Income-tax Act, 1961, arguing that the liability to pay the full amount to DESU had already accrued under the mercantile system of accounting. The Commissioner (Appeals) partially sustained this addition but gave relief of Rs. 1,45,000, stating that the issue was not final as DESU had filed an appeal. The Tribunal held that section 41(1) was not applicable as the assessee did not claim the expenditure relating to the purchases, and thus, there was no question of assessing him now when he got back the amounts from DESU.

2. Applicability of section 41(1) to the deductions:

The Commissioner (Appeals) and the ITO argued that the assessee's method of reducing the purchase price by the amount withheld by DESU was against accounting procedures. The Tribunal noted that the assessee's method of accounting was mercantile, and he should have shown the full purchase price and sales price in the trading account. However, the Tribunal found that section 41(1) was not applicable as the assessee did not claim the deductions in the first place. The Tribunal relied on the Supreme Court's decision in Tirunelveli Motor Bus Service Co. (P.) Ltd. v. CIT, which held that section 41(1) applies only when an allowance or deduction has been made in the assessment of any year.

3. Taxability of the interest component:

The Commissioner (Appeals) held that the entire interest awarded by the Court was taxable in the year of accrual, rejecting the assessee's contention that only the interest for the period 1-4-1977 to 1-2-1978 should be taxed. The Tribunal agreed with the Commissioner (Appeals) but restored the issue to the file of the Commissioner (Appeals) to determine the quantum of the disputed portion of the interest attributable to the sum of Rs. 1,45,000, which was excluded by the Commissioner (Appeals).

4. Validity of the assessee's accounting method and adjustments:

The ITO and the Commissioner (Appeals) argued that the assessee's method of reducing the purchase price by the amount withheld by DESU was incorrect and against the mercantile system of accounting. The Tribunal noted that the assessee's method of accounting was mercantile, and he should have shown the full purchase price and sales price in the trading account. However, the Tribunal found that the assessee's adjustments were made with full disclosure and acceptance by the ITO for the assessment year 1973-74, and thus, there was no case for bringing the amount to tax for the assessment year 1978-79.

5. The Commissioner's partial relief of Rs. 1,45,000:

The Commissioner (Appeals) excluded Rs. 1,45,000 from the taxable amount, following the decision in Lakshman Prakash v. CIT, as the issue was still pending before the Delhi High Court. The Tribunal confirmed the Commissioner (Appeals)'s action, stating that the amount was still to be 'ascertained' at the close of the relevant previous year, and thus, the question of taxing it did not arise.

Conclusion:

In conclusion, the Tribunal held that section 41(1) was not applicable to the amount of Rs. 3,50,154 received by the assessee, as the assessee did not claim the deductions in the first place. The Tribunal also held that the interest component was taxable but restored the issue to the file of the Commissioner (Appeals) to determine the quantum of the disputed portion. The Tribunal confirmed the Commissioner (Appeals)'s partial relief of Rs. 1,45,000, stating that the amount was still to be 'ascertained' at the close of the relevant previous year. The assessee's appeal was allowed in part for statistical purposes, and the department's appeal was dismissed.