X & A, Delhi

The AO is not correct. In a case where the assessee maintains mercantile system of accounting undoubtedly the liability to pay sales tax accrued the moment the sale or purchase transaction is completed. Whether the sales tax is actually paid or not, the liability always remains and it has to be duly reflected in the books of account maintained by the assessee for this purpose. That is always in normal circumstances. In the present case, however, the liability mentioned above was not the normal liability of paying sales tax. In this case, the assessment proceeding for the salestax had been completed only at a point of time during the period covered by the assessment year 1997-98 and it was only at this time that the assessee had been intimated about the liability to pay additional sales tax. This was not a case of liability to pay normal sales tax which undoubtedly had been paid by the assessee where the liability actually had arisen in the years relevant to assessment years.

Hence the additional sales tax paid in the financial year 1996-97 is allowable in the assessment year 1997-98.

Our firm collected certain amount of sales tax from the customers and paid it to the concerned department. Some of the customers challenged the levy of tax and the impugned provisions were struck down by the High Court. We got back the taxes paid from the concerned sales tax department. The A.O. now wants to impose tax on this amount treating it as our income. Is the view of the A.O. correct?

M Zakaria, Coimbatore (TN)

Yes, in view of the Supreme Court’s decision in the case of CIT v.Thirumalaiswamy Naidu & Sons (1998) 230 ITR 534 (SC). The Court, in this decision, has held that the refund will have the character of revenue receipt. As and when the assessee is required to refund back the amount, he will be entitled to claim deduction under Section 41(1) of the Income-Tax Act.

Kindly elucidate what is the Madras High Court’s rationale in upholding a decision of the Assessing Officer imposing additional tax on the difference between the amount of loss returned and the amount of loss determined on making assessment in terms of section 143(1). What is the concept of ‘reading down’ referred to by the Court in this decision?

K Parameshwaran, Chennai

The salient aspects merging from the Madras High Court’s decision i the case of Sukra Diamonds Tools P. Ltd v. DCIT (1998) 229 ITR 682 (Mad.) (I believe this is the decision about which the query relates as the name of the case has not been mentioned in the query) are as under:

The notes on Finance Bill, 1993 state that the amendmentwas introduced only to overcome certain judicial pronouncements. It has been made clear in the Notes on Clauses of the Finance Bill that the intention is to impose a penalty for filing an improper return. Therefore, it is not correct to say that under the impugned provision of law, the authorities are levying income-tax on the loss suffered by the assessee. Such an interpretation would be doing violence to the plain reading of the section. The argument that there should be some levy for increasing the same by way of additional income tax also falls to the ground because there is no levy of income tax as such under the impugned provision of law.

Reading down implies interpreting the provision in such a manner that its constitutional validity does not get struck down. In the case under consideration, the Supreme Court has not considered it necessary to read the provision down as it found the relevant law, prima facie, valid and in accordance with the constitutional provisions.

The Court has observed thatit is not necessary for the impugned provision of law to be in tune with the charging section. This is because there is no levy of income-tax or additional income-tax under the impugned provision of law. It is only a levy of sum calculated in a particular manner.

That apart, the necessity of reading down a section will arise only if the court is faced with the situation of striking down the provision of law. If the court feels instead of striking down the provision of law, the same can be saved by reading down the provision of law, the same can be saved by reading down the section, then such a course is adopted by courts of law. Under the guise of reading down the provision of law, the court cannot read directly the opposite of what a section is intended for and what it plainly conveys.

There is considerable controversy as to what is meant by the phrase ‘Regular Assessment’ in various sections of the IT Act, 1961? Please indicate the correct interpretation of this phrase.

S S Ratna, Noida(UP)

The controversy has since been resolved by the Supreme Court. As to what is regular assessment, the Supreme Court in Modi Industries Ltd. v. CIT (1995) 216 ITR 759 (SC) observed:

‘‘For all the above reasons - particularly having regard to the scheme of the Act and use of the phrase regular assessment in various sections of the Act - we are of the view that in section 214, regular assessment has been used in no other sense than the first order of assessment passed under section 143 or section 144. If any consequential order has to be passed by the ITO to give effect to an order passed by the higher authority, that consequential order cannot be treated as the regular assessment nor can the date of the consequential order be treated as the date of the regular assessment.’’

When the assessee had paid more tax than the tax assessed in the regular assessment, interest cannot be charged under section 215 on the basis of any subsequent assessment or reassessment.

Whether in the case of aDevelopment Agreement concerning a land with a Developer of land by building flats on the same with a stipulation that some of the flats so built would be given to the owner of the land free of cost in lieu of land along with a sum of money....... provisions of Chapter XXC of the Income-tax Act are attracted?

Mohini Luthara, Delhi

Yes. Neither the Income-tax Act nor the Transfer of Property Act recognises a development agreement as a special mode of transfer of the property. Any such agreement depending upon its scheme and contents has necessarily to fall within the recognised modes of transfer though the modes of transfer envisaged in such agreement may be more than one.

The fact that a part of the consideration for the transfer of the undivided share in the immovable property is to be by way of construction to be put up on the land transferred as also on the land retained, does not take away such an arrangement from the purview of Chapter XXC of the Act.

It must therefore be held thatnotwithstanding the description of the document as a development agreement, the subject matter of the transfer being an undivided share in the land, and the consideration being partly in money and partly in a thing which was not in existence - that thing being a flat which the transferee was required to construct, the provisions of Chapter XXC of the Act are attracted.