Commissioner of Income Tax vs Western Rolling Mills Ltd.

Manohar, J.—This is an application by the department for a direction that the Tribunal should state the case and raise and refer the following question to this Court:

Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in upholding the order of the CIT (A) holding that the sum of Rs. 4,04,218 being reimbursement of the amount paid by Western Ministil Ltd. to the assessee towards reimbursement of the tax liability of the assessee is not chargeable to tax and on that ground deleting the said sum from the computation of total income?

The assessee had given certain loans to Western Ministil Ltd., which was a sister concern, in the year relevant to the assessment year 1976-77. The assessee did not charge any interest in respect of this loan. However, while making the assessment of the assessee for the assessment year 1976-77, the ITO disallowed a sum of Rs. 6,41,618 out of interest claimed as deduction by the assessee with the result that the assessee-company was required to pay tax on the said sum of Rs. 6,41,618. This resulted in an additional tax liability of Rs. 4,02,418.

Western Ministil Ltd. agreed to reimburse the assessee in respect of this tax liability in the accounting year relevant to the assessment year 1983-84. Accordingly, it paid to the assessee the said sum of Rs. 4,02,418 which represented the additional tax liability incurred by the assessee. In the assessment year 1983-84, the ITO brought receipt of this sum of Rs. 4,02,418 to tax in the hands of the assessee. In appeal, the Commissioner (Appeals) deleted that addition. This deletion has been confirmed by the Tribunal on the ground that there was no question of that reimbursement being taxed in the hands of the assessee. The Tribunal has declined to refer the above question. That Tribunal has also observed that had the assessee charged the said sum of Rs. 6,41,618 to the sister concern; the sister concern would have been entitled to a deduction of that amount and the assessee''s tax liability would have remained the same. Therefore, even if the sister concern now gets a deduction of the said sum of Rs. 4,02,418, it would not be better off regarding its tax liability than if the interest had been actually charged because they would have got a deduction of Rs. 6,41,618 and that too much earlier, i.e., in the assessment year 1976-77. Section 41(1) of the income tax Act, 1961 (''the Act'') has no application to the facts of the present case because in the case of the assessee no allowance or deduction has been made in the assessment year 1976-77. The receipt of the said amount by way of reimbursement of tax liability also does not fall within the ambit of section 28(iv) because the receipt of the said amount is not a benefit arising from the business of the assessee. In our view, the Tribunal had rightly declined to frame the question as referred to us. Rule discharged. No order as to costs.