1986 (4) TMI 15 - HC - Income Tax

High Court ruling: Income exclusions, penal interest, repairs allowance, evidence remand, rental income classification, business losses set-off

The High Court upheld the exclusion of interest from total income due to pending litigation, disallowed penal interest for late filing of returns, allowed ... Appeal To AAC, Appeal To Tribunal, Balancing Charge, Business, Business Expenditure, Income, Repairs Issues Involved:1. Inclusion of interest in the total income.2. Levy of interest under section 139 of the Income-tax Act.3. Disallowance of repairs expenditure.4. Inclusion of sale proceeds of old machinery in total income.5. Treatment of rental income from godowns as business income.6. Set-off of business losses against rental income from godowns.Issue-wise Detailed Analysis:1. Inclusion of Interest in the Total Income:The assessee included Rs. 6,27,433 as interest receivable from a debtor, Chandpur & Co., in its income for the assessment years 1970-71 and 1971-72. The Tribunal held that due to the pending litigation, interest had not actually accrued to the assessee, distinguishing the Supreme Court decision in Gurjargravures P. Ltd. The Tribunal directed the exclusion of the interest from the total income. The High Court upheld this decision, noting that the right to obtain interest depended on the court's discretion under section 34 of the Code of Civil Procedure, 1908, and no interest was received post-filing of the suit. The court confirmed that the assessee should be taxed only on income that lawfully accrues or arises.2. Levy of Interest under Section 139 of the Income-tax Act:The Income-tax Officer levied penal interest under sections 139, 215, 216, and 217 for late filing of returns. The Appellate Assistant Commissioner and the Tribunal allowed the appeal against the imposition of interest. The High Court, referencing decisions in CIT v. Lalit Prasad Rohini Kumar and CIT v. Karam Chand Thapar & Bros. (P.) Ltd., held that an appeal could be made against the levy of interest if the assessee denied liability to pay such interest. The court answered this issue in favor of the assessee.3. Disallowance of Repairs Expenditure:The assessee claimed Rs. 42,755 for repairs of its buildings, which the Income-tax Officer disallowed due to lack of detailed evidence. The Tribunal allowed the claim, noting that expenses were incurred, certified by auditors, and necessary for business operations. The High Court upheld this decision, emphasizing that the Tribunal's findings were based on evidence and had become final and binding. The court answered this issue in favor of the assessee.4. Inclusion of Sale Proceeds of Old Machinery in Total Income:The Income-tax Officer included Rs. 1,34,246 from the sale of old machinery in the total income due to the inability to ascertain the written down value. The Tribunal, referencing a 1940 circular from the Central Board of Revenue, held that the sale proceeds should be deducted from the aggregate written down value of the entire machinery and plant. The High Court remanded the matter to the Tribunal for further evidence to ascertain the written down value, noting the practicality of the circular and the lack of evidence to assume nil written down value.5. Treatment of Rental Income from Godowns as Business Income:The assessee argued that rental income from godowns should be treated as business income, claiming the godowns were commercial assets. The Tribunal held that the income should be assessed under 'Income from house property' but allowed the set-off of business losses against this income. The High Court noted the need to examine the terms and conditions of letting out the godowns and whether they were used for business purposes. The court found the Tribunal's direction to set off business loss against rental income erroneous and answered this issue in favor of the Revenue, declining to answer related questions due to lack of relevant evidence.6. Set-off of Business Losses Against Rental Income from Godowns:The Tribunal allowed the set-off of business losses against rental income, treating godowns as commercial assets. The High Court disagreed, stating that the income from godowns chargeable under 'Income from house property' cannot be set off against business losses. The court answered this issue in favor of the Revenue, emphasizing the need for detailed examination of the terms of letting out the godowns.Conclusion:The High Court provided a detailed analysis of each issue, upholding the Tribunal's decisions on the inclusion of interest, levy of interest under section 139, and disallowance of repairs expenditure. However, it remanded the issue of the sale proceeds of old machinery for further evidence and found the Tribunal's treatment of rental income and set-off of business losses against such income erroneous, ruling in favor of the Revenue on these points.