1976 (10) TMI 2 - HC - Income Tax

Court affirms Income-tax Officer's assessment under Income-tax Act. Compensation tax liability based on accrual.

The court upheld the validity of the assessment made by the Income-tax Officer under section 143(3) of the Income-tax Act, 1961. Regarding the ... 1961 Act, Assessment Year, Revised Returns Issues Involved:1. Validity of the assessment made by the Income-tax Officer (ITO).2. Justification of the Tribunal's decision regarding the compensation received by the assessee and its taxability.Summary:Issue 1: Validity of the AssessmentThe first question referred to the court was whether the assessment made by the ITO was valid in law. The court noted that the assessee had filed two revised returns after the commencement of the Income-tax Act, 1961. According to clause (b) of sub-s. (2) of s. 297 of the Act, the assessment for the year 1961-62 could be made under the provisions of the present Act. The court upheld the view that the assessment under s. 143(3) of the present Act was valid, even if it could have been made under s. 23(3) of the old Act, as the jurisdiction under both sections did not differ materially. Therefore, the assessment in question was valid in law.Issue 2: Justification of the Tribunal's Decision on CompensationThe second question concerned whether the Tribunal was justified in holding that the compensation received by the assessee had become receivable prior to the previous year, according to the mercantile system of accounting, and whether it was necessary to consider its nature as revenue or capital receipt.1. Mercantile System of Accounting: The Tribunal found that the assessee followed the mercantile system of accounting, and the right to receive compensation accrued on the date of the decree (December 15, 1953). The court agreed that the year of accrual, not the year of receipt, determined the tax liability.2. Items of Compensation: - Rs. 1,11,466: The court excluded this item from the scope of the reference as it was reserved for consideration in a separate appeal by the revenue. - Rs. 20,443: The ITO had already treated this amount as a capital receipt, so its assessability did not arise for consideration. - Rs. 27,498 (Loss of Profit): The court held that compensation for loss of profit and interest accrued up to the date of the decree should be taxed in the year they accrued, not when received. - Interest: Interest up to the date of the decree and subsequent interest accrued year by year should be taxed in the respective years of accrual.3. Costs Awarded: The court noted that costs awarded by the court should be treated as revenue receipts if litigation expenses are considered business expenditure.The court concluded that the Tribunal was justified in its decision that it was unnecessary to consider whether the compensation represented partly or wholly revenue receipt in the appeal (ITA No. 17355 of 1966-67). The Tribunal was also justified in not considering whether the capital cost of the plant should have been reduced by Rs. 1,11,466 in the said appeal.Conclusion:(i) The assessment in question is valid in law.(ii) The Tribunal's findings regarding the compensation received by the assessee and its taxability were justified, and it was unnecessary to consider the reduction of the capital cost of the plant by Rs. 1,11,466 in the appeal ITA No. 17355 of 1966-67.The court directed the parties to bear their own costs in this reference.