Sections 139(1), 148, Circular No. 14(XL-35), dated 11-4-1955 — Income assessed can be lower than the income returned by the assessee — A receipt returned by the assessee can be reduced at the Appellate stage if the same is, in law, not taxable.
Facts:
The assessee retired as a school teacher on 31- 7-1998. He received an amount of Rs.10,92,796 inclusive of interest of Rs.3,29,508. Interest was received by virtue of writ petition filed by the assessee. Since the amount received by the assessee included interest on which tax was deducted at source, the AO issued a notice u/s.148 of the Act upon noticing that income has escaped assessment (since assessee had not filed return of income). The assessee filed return of income returning income of Rs.6,19,392 and claimed relief u/s.89(1) of the Act. The AO restricted the relief u/s.89(1) to Rs.65,817 and assessed the total income at Rs.8,86,500.
The returned income as well as assessed income included interest received as per the order of the High Court. Upon completion of the assessment the assessee came to know that interest received pursuant to the order of the High Court, being non-statutory interest in the form of damages/ compensation, the same is not chargeable to tax. He filed an appeal to the CIT(A) and contended that interest wrongly returned by him be held to be not taxable in view of the decision of the Punjab & Haryana High Court in the case of CIT v. Charanjit Jawa, (142 Taxman 101). The CIT(A) rejected the same by stating that the assesse had offered the income in his return and the same cannot be reduced at the Appellate stage.
Aggrieved, the assessee preferred an appeal to the Tribunal.
Held:
The Tribunal noted that the moot question was whether the income determined by the AO on the basis of the return filed by the assessee can be a figure lower than the income returned by the assessee. It held that the principle for determining the taxable income of the assessee under the Act should be within the purview of the law in force. If the taxable income determined by the AO is not in accordance with such principle it is open to the assessee raise the contention to before the higher authorities for following the law to determine the actual taxable income of the assessee. The Tribunal held that the lower authorities cannot say that merely because the assessee has returned income which is higher than the income determined in accordance with the legal principles, such returned income can be lawfully assessed. An assessee is liable to pay tax only on his taxable income. The AO cannot assess an amount which is not taxable merely on the ground that the assessee has returned the same as its income. It is always open to the assessee to show before the higher authorities that income though returned as income is not taxable under law.
On merits, the Tribunal held that the case of CIT v. Charanjit Jawa, (supra) supports the view that interest received as a result of the order of the High Court was not a statutory interest and was in the form of damage/compensation and the same was not liable to tax. The Tribunal held that the interest of Rs.2,53,730 received by the assessee as per the order of the High Court was not taxable and the same is a capital receipt. The Tribunal also found support from the Circular issued by the CBDT being Circular No. 14 (XL-35) dated 11-4-1955 which has directed the officers not to take advantage of the ignorance of the assessees. The Tribunal directed the AO to treat the sum of Rs.2,53,730 as capital receipt.
The appeal filed by the assessee was allowed.
