2006 (1) TMI 196 - AT - Income Tax

Summary

Issues Involved:
1. Jurisdiction of the Assessing Officer in considering the matter afresh.
2. Taxability of the subsidy amount received by the assessee.
3. Deductibility of the subsidy amount as a liability.

Issue-wise Detailed Analysis:

1. Jurisdiction of the Assessing Officer:
The assessee questioned the jurisdiction of the Assessing Officer (AO) in considering the matter afresh, alleging that the AO overlooked the directions given by the Tribunal. The Tribunal had directed the AO to examine whether the assessee had remitted the subsidy back to the Government and whether it was taxable in the hands of the assessee. The AO found that the assessee had not remitted the subsidy back to the Government and held it taxable. The Tribunal concluded that the AO had not overlooked the Tribunal's directions and upheld the AO's jurisdiction in this matter.

2. Taxability of the Subsidy Amount:
The primary issue was whether the subsidy related to bogus production was liable to be taxed. The assessee had declared bogus production and sales of fertilizers and received a subsidy from the Government. The AO reconstructed the trading account by excluding the cost and sales of the bogus production but retained the subsidy amount, treating it as income. The Tribunal noted that the subsidy was revenue in nature and connected with the sale price of fertilizers. Despite the detection of bogus production, the subsidy amount was received and accounted for by the assessee, and thus, it accrued as income. The Tribunal held that the subsequent dispute regarding the repayment of the subsidy did not affect its initial accrual as income and upheld its taxability.

3. Deductibility of the Subsidy Amount as a Liability:
The assessee argued that the subsidy amount should be deductible as it was liable to be refunded due to the detection of bogus production. The Tribunal noted that in a mercantile system of accounting, a liability becomes deductible when it arises, not when it is paid. However, the liability to repay the subsidy was contingent upon the outcome of ongoing litigation, and thus, it had not crystallized. The Tribunal held that the assessee's claim for deduction was premature and could only be considered if and when the liability to repay the subsidy was established in the future.

Conclusion:
The Tribunal dismissed the appeal of the assessee, upholding the AO's jurisdiction and the taxability of the subsidy amount. The Tribunal also concluded that the claim for deduction of the subsidy amount as a liability was premature and could only be considered if the liability to repay the subsidy crystallized in the future. The Tribunal emphasized that the taxability of income is governed by the provisions of the Income-tax Act and not by accounting practices.