2002 (4) TMI 27 - HC - Income Tax

1. Whether on the facts and in the circumstances of the case the Income-tax Appellate Tribunal was justified in law allowing interest paid to third parties placing reliance on the judgment of CIT v. Jain Construction Co. whereas in the said judgment the High Court has not held that interest to third parties are allowable out of income arrived by applying net profit rate? - 2. Whether on the facts and in the circumstances of the case and position of law the Income-tax Appellate Tribunal was justified in giving the relief on account of the sales tax refund which was credited by the assessee-firm itself in his profit and loss account and declared it as the part of its income under section 41(1) of the Act? - we are of the opinion that the basic condition for invoking section 41(1)(a) of the Act has not been satisfied in the case. The amount of sales tax refund in the hands of the assessee during the previous year relating to the assessment year in question cannot be deemed to be income of that year merely on the basis of drawing inferences that it might have been allowed as deducted in the earlier assessment years. - The appeal therefore fails and is hereby dismissed

Summary

Issues Involved:
1. Whether the Income-tax Appellate Tribunal was justified in allowing interest paid to third parties.
2. Whether the Income-tax Appellate Tribunal was justified in giving relief on account of the sales tax refund credited by the assessee in its profit and loss account.

Issue-wise Detailed Analysis:

1. Allowance of Interest Paid to Third Parties:
The first issue concerns whether the Income-tax Appellate Tribunal (ITAT) was justified in allowing the interest paid to third parties while determining the taxable income on an estimate basis. The court referenced its decision in CIT v. Bhawan va Path Nirman (Bohra) and Co. (No. 1) [2002] 258 ITR 431 (Raj), which addressed similar issues for the assessment years 1994-95 and 1996-97. The court upheld the ITAT's method of estimating taxable income by applying a net profit rate, subject to adjustments for depreciation and interest. The court noted that this practice had been consistently followed for six consecutive years prior to the assessment year 1994-95. The court concluded that the ITAT's decision to allow the deduction of interest payable to third parties was justified, as it was based on the assessee's case history and did not warrant interference.

2. Relief on Account of Sales Tax Refund:
The second issue pertains to the inclusion of a sales tax refund received during the previous year relevant to the assessment year 1995-96 in the taxable income. The court examined whether the refund should be considered taxable under section 41(1) of the Income-tax Act. Section 41(1)(a) stipulates that any refund of an allowance or deduction made in a previous assessment year should be included in the taxable income of the year in which it is received. The court noted that for section 41(1)(a) to apply, there must be a specific consideration and allowance of the deduction in an earlier assessment year.

The court referenced the Supreme Court's decision in Tirunelveli Motor Bus Service Co. P. Ltd. v. CIT [1970] 78 ITR 55, which held that the allowance or deduction must be specifically identified in the earlier assessment year for section 41(1)(a) to apply. The court found no evidence that the sales tax refund had been specifically considered and allowed as a deduction in any prior assessment year. The court also noted that when income is assessed on an estimate basis, it is not possible to determine which specific expenses were considered and allowed. Consequently, the court concluded that the basic condition for invoking section 41(1)(a) was not satisfied in this case, and the sales tax refund could not be deemed taxable income for the assessment year in question.

Conclusion:
The court dismissed the appeal, affirming the ITAT's decisions on both issues. The allowance of interest paid to third parties was upheld, and the sales tax refund was not deemed taxable under section 41(1)(a) due to the lack of specific consideration and allowance in prior assessment years. The appeal was dismissed with no order as to costs.