1986 (8) TMI 33 - HC - Income Tax

Compensation in Liquidation Not Taxable; Interest Objections Allowed

The High Court held that compensation received by a company in voluntary liquidation was not taxable under section 41(2) of the Income-tax Act, 1961, as ... Appeal To AAC, Balancing Charge, Electric Supply Undertaking Issues Involved:1. Taxability of compensation received u/s 41(2) of the Income-tax Act, 1961.2. Entitlement to raise objections to the charging of interest u/s 215 of the Income-tax Act, 1961.Summary:Issue 1: Taxability of Compensation Received u/s 41(2)The United Provinces Electric Supply Co. Ltd., in voluntary liquidation, had its undertakings at Allahabad and Lucknow taken over by the Uttar Pradesh State Electricity Board upon the expiry of its licenses. Compensation was paid, but the assessee disputed the adequacy and initiated arbitration. The Income-tax Officer taxed the excess amount received over the written down value of the assets u/s 41(2) of the Income-tax Act, 1961. The Appellate Assistant Commissioner partially agreed but excluded solatium from the taxable amount. The Income-tax Appellate Tribunal held that the compensation was not taxable in the assessment year 1965-66 as it was not finalized, following the Delhi High Court's decision in P.C. Gulati v. CIT [1972] 86 ITR 501. The High Court upheld the Tribunal's decision, stating that u/s 41(2), taxability arises only when the compensation is finally determined, which was not the case here as arbitration was pending.Issue 2: Objection to Charging of Interest u/s 215The Tribunal allowed the assessee to raise objections to the charging of interest u/s 215 before the Appellate Assistant Commissioner. The High Court affirmed this, referencing CIT v. Lalit Prasad Rohini Kumar [1979] 117 ITR 603 (Cal) and CIT v. Karam Chand Thapar & Bros. (P.) Ltd. [1979] 119 ITR 751 (Cal).Conclusion:The High Court answered both questions in favor of the assessee, stating that the compensation was not taxable in the year under consideration as it was not finalized, and the assessee was entitled to raise objections to the charging of interest u/s 215 in appeals. No order as to costs was made.