1977 (8) TMI 35 - HC - Income Tax

Court Rules Establishment Expenses Not Deductible; Solatium & Balancing Charge Taxable

The court held that the establishment expenses claimed by the assessee for the assessment years 1961-62 and 1962-63 were not deductible as the legal ... Balancing Charge, Legal Fiction, State Electricity Board Issues Involved:1. Deduction of establishment expenses for the assessment years 1961-62 and 1962-63.2. Taxability of solatium of Rs. 1,89,000 received by the assessee.3. Liability to balancing charge under section 41(2) of the Income-tax Act, 1961, for the assessment year 1962-63.Issue-wise Detailed Analysis:1. Deduction of Establishment Expenses:- Facts: The assessee claimed deduction of Rs. 47,917 and Rs. 55,292 for the assessment years 1961-62 and 1962-63, respectively, arguing that these expenses were incurred during the negotiation period with the Board and should be allowed under commercial expediency.- Income-tax Officer's View: The claim was rejected on the grounds that the assessee's business had ceased with the termination of the licence, and no expenditure could be allowed unless the business was being carried on during the relevant accounting years.- Appellate Authorities' View: Both the Appellate Assistant Commissioner and the Tribunal upheld the Income-tax Officer's decision, stating that the legal fiction under section 41(2) was only for taxing the balancing charge and not for allowing expenses.- Court's Decision: The court agreed with the Tribunal, emphasizing that the legal fiction created under section 41(2) is limited to taxing the balancing charge and cannot be extended to allow the deduction of expenses. The court cited the principle that a legal fiction should be limited to the purpose for which it was created. Thus, the expenses incurred in the relevant accounting years were not deductible.2. Taxability of Solatium of Rs. 1,89,000:- Facts: The assessee received a solatium of Rs. 1,89,000 from the Board and claimed it as a casual or non-recurring receipt or a capital receipt, arguing it should not be taxable.- Income-tax Officer's View: The solatium was considered part of the sale proceeds of the assets and thus taxable.- Appellate Authorities' View: Both the Appellate Assistant Commissioner and the Tribunal confirmed the Income-tax Officer's decision, holding that the solatium was part of the sale price and taxable under section 41(2).- Court's Decision: The court referred to the decision in Sonepat Light Power and General Mills Ltd. v. Commissioner of Income-tax, which held that the solatium should be included in the sale price for the purpose of section 10(2)(vii) of the Indian Income-tax Act, 1922. Consequently, the court ruled that the solatium of Rs. 1,89,000 is part of the sale price of the assets for determining liability under section 41(2) of the Income-tax Act, 1961.3. Liability to Balancing Charge under Section 41(2):- Facts: The assessee argued that the balancing charge of Rs. 5,95,218 became due and payable on December 6, 1959, when the undertaking vested in the Board, and thus should be taxed in the assessment year 1960-61, not 1962-63.- Income-tax Officer's View: The balancing charge was taxable in the assessment year 1962-63 as the purchase price was determined and received in March 1962.- Appellate Authorities' View: Both the Appellate Assistant Commissioner and the Tribunal upheld the Income-tax Officer's decision, stating that the balancing charge was taxable in the year it was ascertained and received.- Court's Decision: The court followed the Delhi High Court's decision in P.C. Gulati, Voluntary Liquidator, Panipat Electric Supply Co. Ltd. v. Commissioner of Income-tax, which held that the moneys payable become due when they are ascertained. Since the purchase price was ascertained in March 1962, the balancing charge was rightly taxable in the assessment year 1962-63. The court rejected the alternative contention that it should have been taxed in the assessment year 1960-61 under the Indian Income-tax Act, 1922, as the amount was not ascertained by then.Conclusion:- Question 1: The expenses incurred during the assessment years 1961-62 and 1962-63 are not deductible.- Question 2: The solatium of Rs. 1,89,000 is part of the sale price of the assets and taxable under section 41(2).- Question 3: The balancing charge of Rs. 5,95,218 is taxable in the assessment year 1962-63.The assessee is liable for costs.