2010 (7) TMI 221 - HC - Income Tax

Income u/s 41(1)- Assessee received refund of custom duty as per order of Bombay High court- This duty was allowed as deduction in earlier previous year- Department added this amount as income u/s 41(1)- Assessee challanged the addition pleading that refund was conditional and will have to be repaid within 60 days if the apex court s order comes against him- The High court decided in favour of the department.

Summary

Issues:
1. Interpretation of Section 41(1) of the Income Tax Act, 1961 regarding addition made on account of Excise Duty Refund.

Analysis:
1. The case involved a question of law referred by the Income Tax Appellate Tribunal regarding the deletion of an addition made on account of Excise Duty Refund for the assessment year 1987-88. The Assessing Officer added the refund amount to the income of the assessee based on Section 41(1) of the Act. The assessee contended that the right to receive the income had not accrued as the liability would cease only upon the final verdict by the Supreme Court. The Tribunal accepted the assessee's plea partially, leading to the current appeal before the High Court.

2. The revenue argued that as per Section 41(1) of the Act, since there was a cessation of liability in the relevant year, the amount was taxable. They relied on the judgment in Polyflex (India) Pvt. Ltd. v. Commissioner of Income-tax and contended that the Tribunal's reliance on a different judgment was misplaced. The High Court agreed with the revenue's submission.

3. Section 41(1) of the Act states that if an allowance or deduction has been made in any year and the assessee subsequently obtains any amount in respect of such loss or expenditure, it shall be deemed as profits chargeable to tax. The High Court referred to the interpretation of this provision by the Supreme Court in Polyflex (India) Pvt. Ltd.'s case, where it was held that specific conditions must be met for Section 41(1) to apply.

4. In Polyflex (India) Pvt. Ltd.'s case, the Supreme Court dealt with a similar situation where excise duty refunded to the assessee was held taxable under Section 41(1). The Court emphasized that once the assessee receives a refund for an expense claimed as a deduction earlier, it is taxable income. The Court clarified that the possibility of the refund being set aside in the future is not a relevant consideration.

5. The High Court distinguished another judgment, Hindustan Housing & Land Development Trust Limited's case, where the Court held that an amount received by the assessee pending a dispute was not taxable as there was no absolute right to receive it. However, in the current case, the High Court relied on the Polyflex judgment to rule in favor of the revenue, stating that the amount received by the assessee was taxable under Section 41(1).

6. Ultimately, the High Court answered the question of law in favor of the revenue, upholding the addition made on account of the Excise Duty Refund as taxable income for the assessment year 1987-88.