1982 (11) TMI 10 - HC - Income Tax

High Court rules Railway sum not taxable under Income Tax Act; parties to bear own costs

Commissioner Of Income-Tax Versus Thakurdas

The High Court held in favor of the assessee, ruling that the sum received from the Railways was not chargeable to tax as business profit or under section ... Business Income, Chargeable To Tax, Profits Issues:1. Whether the sum received by the assessee from the Railways during the relevant accounting year is chargeable to tax as business profit or under section 41(1) of the Income Tax Act, 1961.Detailed Analysis:The case involved a reference under section 256(1) of the Income Tax Act, 1961, where the Income-tax Appellate Tribunal referred a question of law to the High Court regarding the taxability of a sum of Rs. 2,00,930 received by the assessee from the Railways during the assessment year 1975-76. The assessee-firm had abandoned a contract with the Railways due to unforeseen circumstances and had not carried on any business from the assessment year 1967-68 onwards. The Income Tax Officer (ITO) contended that the amount was chargeable to tax under section 41(1) of the Act. However, the Appellate Authority held that as the assessee was not carrying on any business during the relevant assessment year and since the provisions of section 176(3A) of the Act were not applicable at that time, the amount could not be taxed as business income. The Appellate Authority also ruled that since no actual allowance or deduction had been made in any assessment year, the amount could not be taxed under section 41(1) of the Act.The Tribunal upheld the findings of the Appellate Authority, stating that the sum received by the assessee when it had ceased to carry on any business was not chargeable to tax as business profit. Additionally, the Tribunal found that the conditions for charging tax under section 41(1) of the Act were not met. Referring to a previous decision, the Tribunal emphasized that section 41(1) of the Act requires an actual allowance or deduction, not a notional one. Citing the decision in Naubatram Nandram v. CIT [1972] 86 ITR 805, the Tribunal concluded that the provisions of section 41(1) were not applicable in this case.In the final judgment, the High Court concurred with the Tribunal's findings, ruling in favor of the assessee and against the Department. The Court agreed that the sum received from the Railways was not chargeable to tax as business profit or under section 41(1) of the Act. The Court also directed that each party bear their own costs in the reference.