Commissioner of Income Tax vs Swaraj Motors (P.) Ltd.

T. Kochu Thommen, J.—Pursuant to the direction of this court in O. P. No. 1917 of 1978, the following questions have been referred to us by the Income Tax Appellate Tribunal, Cochin Bench:

"(1) Whether, on the facts and in the circumstances of the case, and in the absence of an appeal being filed against the order of the ''first Appellate Assistant Commissioner who disposed of the appeal ex parte'' directing the Income Tax Officer ''to compute the profit u/s 41(2) in accordance with the provisions of the Income Tax Act and the rules made thereunder'', the Tribunal is right in law and has jurisdiction to consider the ambit and application of Section 41(2) in the appeal filed against the second order of the Appellate Assistant Commissioner ?

(2) Whether the Income Tax Appellate Tribunal has correctly interpreted the order of the first Appellate Assistant Commissioner ?

(3) Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that Section 41(2) of the Income Tax Act has no application to the facts of the case ?"

During the accounting year relevant to the assessment year 1963-64, certain assets belonging to the company were transferred to the transferee company on the basis of an order made by this court u/s 394(2) of the Companies Act, 1956, and the capital of the company representing the value of those assets was accordingly reduced. The Income Tax Officer included a sum of Rs. 19,672 as income of the assessee on the basis of computation made u/s 41(2) of the Income Tax Act, 1961. The Appellate Assistant Commissioner held that the profit to be added u/s 41(2) was not correctly computed by the Income Tax Officer. The Appellate Assistant Commissioner, therefore, issued a direction to the Officer to recompute the profit in terms of Section 41(2). This is what he had stated:

"As regards the computation of profit u/s 41(2), the Income Tax Officer has proceeded on the ground that initial depreciation originally granted has to be withdrawn u/s 41(2) when there is a sale. I am unable to agree with this argument. When there is a sale, initial depreciation allowed to the appellant is to be deducted from the cost for arriving at the written down value for the purpose of computing the profit u/s 41(2). The section does not provide that the entire amount of initial depreciation is to be withdrawn. The assessment order is, therefore, set aside and the Income Tax Officer is directed to do the assessment afresh in accordance with law and, in particular, to compute the profit u/s 41(2) in accordance with the provisions of the Income Tax Act and the rules made thereunder."

Accordingly, the Income Tax Officer completed the assessment after recomputing the profit in accordance with the direction of the Appellate Assistant Commissioner. The profit so recomputed is Rs. 17,048. The appeal by the assessee was rejected by the Appellate Assistant Commissioner. On further appeal, the Tribunal held that there was no sale of the assets by reason of transfer pursuant to the orders made u/s 394(2) of the Companies Act.

It is contended on behalf of the Revenue that the order of the Appellate Assistant Commissioner dated August 21, 1974, directing the Income Tax Officer to recompute the profit assessable in terms of Section 41(2) was not challenged by the assessee. Although the original order of the Income Tax Officer was set aside for the reason that he had not correctly applied Section 41(2), the positive direction contained in the order of the Appellate Assistant Commissioner was to correctly recompute the profit in terms of Section 41(2). In so far as the applicability of Section 41(2) is concerned, that was a final order which has remained unchallenged. The subsequent proceeding of the Income Tax Officer was only in obedience of that order. The order of the Appellate Assistant Commissioner is thus res judicata in so far as the assessee was concerned in respect of the profit for which he was found liable to pay tax u/s 41(2). The Tribunal was, in our view, therefore, not justified, as rightly contended on behalf of the Revenue, in interfering with the final order of the Appellate Assistant Commissioner in regard to the applicability of Section 41(2), See the principle stated by Chagla C.J. in Income Tax Appellate Tribunal, Bombay and Others Vs. S.C. Cambatta and Co. Ltd., .

Accordingly, we answer questions Nos. 1 and 2 in the negative, that is, in favour of the Revenue and against the assessee. In the light of this answer, it is unnecessary for us to consider question No. 3, and we decline to answer the same.

We direct the parties to bear their respective costs in this tax referred case.

A copy of this judgment under the seal of the High Court and the signature of the Registrar shall be forwarded to the Income Tax Appellate Tribunal, Cochin Bench.