1975 (11) TMI 59 - AT - Income Tax

Business receipts held taxable, net profit rate applied, costs & interest included in income. Appeal partially allowed.

The Tribunal held that the business was not discontinued, and the receipts were taxable as business receipts. A net profit rate of 12.5% was applied to ... - Issues Involved:1. Taxability of the amount received after the discontinuance of business.2. Whether the amount received is a business receipt or income.3. Applicability of Section 28(i) and Section 56 of the IT Act, 1961.4. Determination of net profit rate on contract receipts.5. Treatment of costs and interest awarded by the court.Issue-wise Detailed Analysis:1. Taxability of the Amount Received After Discontinuance of Business:The appellant contended that the sum of Rs. 1,31,246 received after the discontinuance of its business should not be taxable under Section 28(i) or any other provision of the IT Act, 1961. The firm argued that the business was discontinued in 1963, and thus, the receipts in question were not taxable in the year under appeal. However, the AAC found that the assessee had been filing returns and declarations indicating the continuation of the business. The Tribunal concluded that the business was not discontinued as the firm continued to maintain its establishment and file necessary documents indicating ongoing business activities.2. Whether the Amount Received is a Business Receipt or Income:The ITO treated the entire decretal amount as business receipts, while the assessee argued that the amount was a contract receipt and not income. The AAC and the Tribunal held that the amount received was in the nature of a revenue receipt and hence taxable. The Tribunal noted that the assessee had been offering amounts for assessment on the basis of receipts, supporting the view that the amount was a business receipt.3. Applicability of Section 28(i) and Section 56 of the IT Act, 1961:The assessee argued that for a receipt to be taxable under Section 28(i), the business must be carried on during the relevant accounting period. Since no business was carried on in the year of account, the receipts should not be taxable under Section 28(i). The Tribunal rejected this argument, stating that the business was not discontinued, and thus, the receipts were taxable under Section 28(i). The Tribunal also dismissed the applicability of Section 56, as the receipts retained their character as business receipts.4. Determination of Net Profit Rate on Contract Receipts:The assessee alternatively contended that if the receipts were considered contract receipts, a net profit rate should be applied. The Tribunal agreed with this contention, noting that in previous years, a net rate of 12.5% had been applied to contract receipts. The Tribunal directed that the profit be determined by applying a net rate of 12.5% on the contract receipts of Rs. 90,587.5. Treatment of Costs and Interest Awarded by the Court:The Tribunal held that the costs of Rs. 8,121 and miscellaneous expenses of Rs. 23 awarded by the court were assessable as the assessee's income. The assessee had already been allowed litigation expenses in earlier years. Similarly, the interest of Rs. 32,586 was treated as the assessee's revenue receipt and included in its income. The ITO was directed to recompute the assessee's income accordingly.Conclusion:The Tribunal concluded that the business was not discontinued, and the receipts were taxable as business receipts. The net profit was to be determined by applying a rate of 12.5% on the contract receipts. The costs and interest awarded by the court were also to be included in the assessee's income. The appeal was allowed in part.