1985 (1) TMI 135 - AT - Income Tax

Issues Involved:
1. Taxability of reimbursement of expenses under Section 41(1) vs. Section 176(3A) of the Income-tax Act, 1961.
2. Taxability of service fees under Section 176(3A).
3. Set-off of unabsorbed depreciation.
4. Levy of interest under Section 217(1A).
5. Relief under Section 80MM for both assessment years.
6. Levy of interest under Section 216.

Detailed Analysis:

1. Taxability of Reimbursement of Expenses under Section 41(1) vs. Section 176(3A):
The primary issue was whether the reimbursement of expenses amounting to Rs. 1,10,940, received by the assessee-company after discontinuation of its business, should be taxed under Section 41(1) or Section 176(3A) of the Income-tax Act, 1961. The assessee argued that the amount received was a reimbursement of expenses like provident fund contributions and overhead expenses, which were previously allowed as deductions. Therefore, it should be taxed under Section 41(1). The Income Tax Officer (ITO) and Commissioner (Appeals) opined that since the business had been discontinued, the amount should be taxed under Section 176(3A).

The Tribunal concluded that Section 41(1) applies to receipts in respect of any allowance, deduction, loss, or expenditure made and allowed in previous years when the business was in existence. The Tribunal held that the amount of Rs. 1,10,940 received in the year under review, representing reimbursement of expenses, should be taxed under Section 41(1), citing Supreme Court decisions in CIT v. Ajay Products Ltd., C. A. Abraham v. ITO, and CIT v. Vegetable Products Ltd.

2. Taxability of Service Fees under Section 176(3A):
The assessee received service fees of Rs. 5,930, which was also under contention. The Tribunal held that the service fees are rightly taxable under Section 176(3A) as it represents income for services rendered by the assessee-company earlier. The section provides that for taxation purposes, it should be treated as if the company is in existence.

3. Set-off of Unabsorbed Depreciation:
The assessee sought to set off unabsorbed depreciation of Rs. 10,010 from the assessment year 1976-77 against the income under Section 41(1) or any business income. The Tribunal agreed that unabsorbed depreciation should be allowed to be set off against the income of Rs. 5,930, following the Tribunal's order in the assessee's own case for 1978-79.

4. Levy of Interest under Section 217(1A):
The assessee contested the levy of interest under Section 217(1A). The Tribunal noted that the assessee has the right to appeal against the levy of interest if taken along with other grounds of appeal, citing the Bombay High Court decision in CIT v. Diamler Benz A. G. The Tribunal remitted the matter to the ITO for verification and examination of whether the income under Section 41(1) and Section 176(3A) would be entirely absorbed by carry forward losses. If the losses absorb the entire income, the interest levied would be deleted.

5. Relief under Section 80MM:
For both assessment years, the assessee sought relief under Section 80MM. The Tribunal noted that the relief under Chapter VIA of the Act is limited to the gross total income before deduction of claims under Chapter VIA. The relief would be limited to the income on account of service fees received, i.e., Rs. 5,930 for 1979-80 and Rs. 5,000 for 1980-81.

6. Levy of Interest under Section 216:
The assessee also contested the levy of interest under Section 216. The Tribunal, following its earlier reasoning regarding interest under Section 217, held that the interest under Section 216 is not justified and deleted the same.

Conclusion:
The appeals were partly allowed. The Tribunal held that the reimbursement of expenses should be taxed under Section 41(1), service fees under Section 176(3A), and allowed the set-off of unabsorbed depreciation. The levy of interest under Section 217(1A) was remitted for verification, and the interest under Section 216 was deleted. Relief under Section 80MM was limited to the income from service fees.

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