2013 (4) TMI 286 - HC - Income Tax

Disallowance u/s 43B on account of outstanding luxury tax liability - whether ITAT corrected in directing the A.O. to work out the disallowance on the basis of actual realisation of the luxury tax and not on the basis of unrealised luxury tax although the assessee was maintaining its accounts under mercantile system - Held that - The Act imposes tax on income. The word income has been defined under Section 2 (24) of the Act. Scope of total income has been provided under Section 5 stating total income of any previous year of a person, who is resident includes all income from whatever source derived which (a) is received or is deemed to be received in such year by or on behalf of such person; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year or (c) accrues or arises to him outside India during such year. Thus in order to form income of a person, the person must receive or deemed to receive any sum. The amount of luxury tax which was not received cannot form part of the income of any person. Section 43B of the Act is concerned with deduction claimed by the assessee. It does not caste duty on the assessee to realize the various amounts mentioned in it. In case, where a person has not realized luxury tax from the customers then under the law he being liable to pay it and it will be realize from him under the relevant law irrespective of the fact that he has collected or not. But it does not give the Assessing Officer any jurisdiction to add it in the gross income of the assessee. CIT (A) as well as the Tribunal have concurrently found that the respondent has not realized the amount of luxury tax, which was added in his gross income. The case laws relied upon by the counsel for the Revenue are not applicable in this case as in those cases the assessee had actually collected the amount of sales tax and has not paid to the Department - the question referred is answered in the affirmative i.e. against the Department and in favour of the assessee.

Summary

Issues:
1. Interpretation of Section 43B of the Income Tax Act, 1961 regarding the treatment of luxury tax liability in the case of a hotel business.
2. Determination of whether luxury tax not realized by the assessee should be added to the gross income under mercantile accounting system.
3. Application of legal principles from previous judgments to the current case.

Analysis:
1. The case involved a reference made by the Income Tax Appellate Tribunal, Allahabad Bench, regarding the treatment of luxury tax liability under Section 43B of the Income Tax Act, 1961. The main question was whether the Assessing Officer was justified in directing the disallowance of luxury tax based on actual realization rather than unrealized luxury tax, despite the assessee maintaining accounts under the mercantile system.

2. For the Assessment Years 1987-88 and 1988-89, the respondent, a public limited company in the hotel business, had luxury tax liabilities. The Assessing Officer sought to add these amounts to the gross income of the respondent under Section 43B. However, the Commissioner of Income-tax (Appeals) found that the luxury tax not collected cannot be treated as income, leading to the deletion of the additions made by the Assessing Officer.

3. The Revenue filed appeals against the orders of the Commissioner of Income-tax (Appeals), which were later consolidated and heard by the Tribunal. The arguments presented by the Senior Standing Counsel for the Revenue emphasized the applicability of Section 43B and previous judgments to support the addition of luxury tax to the gross income. However, the High Court analyzed the provisions of the Income Tax Act, emphasizing that income must be received or deemed to be received for it to be considered as part of the total income.

4. The High Court further delved into the scope of deductions under Section 43B, highlighting that deductions can only be allowed when the assessee has a liability to pay under the law and has actually made the payment. In this case, since the respondent did not claim any deduction for the luxury tax liability, there was no basis for the addition to the gross income.

5. The Court distinguished the present case from previous judgments cited by the Revenue, emphasizing that the legal character of the transaction must be considered in determining whether a receipt is taxable. The Court ultimately ruled in favor of the respondent, stating that luxury tax not realized by the assessee cannot be added to the gross income, as it does not meet the criteria for inclusion under Section 43B.

In conclusion, the High Court's judgment clarified the interpretation of Section 43B regarding luxury tax liabilities, emphasizing the importance of actual payment and the legal character of transactions in determining taxable income.