2004 (7) TMI 31 - HC - Income Tax

High Court rules against Revenue on sales tax treatment under Income-tax Act section 263

Commissioner of Income-Tax Versus Rane Brake Linings Ltd.

The High Court of Madras ruled against the Revenue in an appeal concerning the treatment of sales tax under section 263 of the Income-tax Act. The court ... Sum representing the sales tax debited but not paid within the previous year - held that even though sales tax payable by the assessee was collected from the parties and the same was paid after the close of the period of assessment concerned, but before the filing of the return, it is allowable as deduction under section 43B – Thus, the directions of AO adding back a sum representing the sales tax debited but not paid within the previous year, as directed by CIT, is illegal and therefore, a nullity in the eye of law, even though the same was not challenged in appropriate proceedings. The non-filing of an appeal against an illegal order or an order which has become a nullity, in our considered opinion, cannot, in any way, either validate the same or render it enforceable in law. Issues:1. Appeal against order under section 263 of the Income-tax Act regarding sales tax treatment.2. Entitlement to challenge Assessing Officer's directions without appealing Commissioner's order.3. Legality of adding back sales tax amount under section 43B of the Act.4. Applicability of Allied Motors (P.) Ltd. v. CIT [1997] 224 ITR 677 judgment.5. Validity of Assessing Officer's directions in light of legal precedent.Analysis:The High Court of Madras heard an appeal related to an order under section 263 of the Income-tax Act concerning the treatment of sales tax. The case revolved around the assessment year 1986-87, where the Commissioner of Income-tax directed the Assessment Officer to add back a specific sales tax amount not paid within the previous year. The respondent did not appeal against this direction initially. Subsequently, the Assessing Officer incorporated this amount into the taxable income for the year in question.The respondent then appealed to the Commissioner of Income-tax (Appeals), who upheld the Assessing Officer's decision. However, the Tribunal, following the precedent set in Allied Motors (P.) Ltd. v. CIT [1997] 224 ITR 677 (SC), allowed the appeal, setting aside the Commissioner's order. The appellant, the Revenue, challenged the Tribunal's decision, questioning the right to appeal when the initial revision order was not challenged.The main issue addressed by the court was not the respondent's right to challenge the Assessing Officer's directions without appealing the Commissioner's order, but rather the legality of adding back the sales tax amount. Citing the precedent in Allied Motors (P.) Ltd. v. CIT [1997] 224 ITR 677, the court concluded that the Assessing Officer's directions were unlawful. The court emphasized that failing to appeal against an illegal or null order does not validate or enforce it. Therefore, the court dismissed the appeal, ruling against the appellant/Revenue.In summary, the judgment clarified the legal position regarding the treatment of sales tax under section 43B of the Income-tax Act, emphasizing the importance of following established legal precedents and the invalidity of enforcing illegal orders, even if not challenged through appropriate proceedings.