Supreme Court ruling prompts tax authority to rectify earlier decision on electricity subsidy

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Case Name:

Mepco Industries Ltd. Vs Commissioner of Income Tax & Anr. (High Court of Madras)

W.A.Nos.2769 and 2770 of 2004

Date: 29th November 2007

Key Takeaways

1. A subsequent Supreme Court decision can be grounds for rectifying a previous tax order.

2. The tax authority can initiate rectification proceedings based on new legal interpretations.

3. Taxpayers should be given an opportunity to present their case in light of new legal precedents.

Issue

Can the Commissioner of Income Tax rectify a previous order based on a subsequent Supreme Court decision that changes the interpretation of how certain subsidies should be treated for tax purposes?

Facts

1. MEPCO Industries Ltd. (the appellant) received electricity subsidies from the Government of India for the assessment years 1993-94 and 1994-95.

2. The company initially claimed these subsidies as capital receipts.

3. The Commissioner of Income Tax (CIT) initially accepted this claim in a revision petition under Section 264 of the Income Tax Act on April 30, 1997.

4. Subsequently, the CIT initiated rectification proceedings based on a Supreme Court decision in the case of Sahney Steel & Press Works Ltd vs. CIT (1997) 228 ITR 253 (SC).

5. In the rectification order, the CIT held that the subsidies should be treated as revenue receipts.

Arguments

Appellant (MEPCO Industries Ltd.):

- The CIT cannot rectify an order based on a subsequent Supreme Court decision.

- There was no apparent mistake in the original order to justify rectification.

Respondent (Commissioner of Income Tax):

- The Supreme Court decision in Sahney Steel & Press Works Ltd vs. CIT clarified the law on how such subsidies should be treated.

- The rectification was necessary to align the order with the Supreme Court's interpretation of the law.

Key Legal Precedents

1. Sahney Steel & Press Works Ltd vs. CIT (1997) 228 ITR 253 (SC): This Supreme Court decision held that power tariff subsidies given to a company after it had commenced production should be treated as revenue receipts.

Judgment

1. The High Court upheld the CIT's rectification order, finding it justified based on the Supreme Court's decision in Sahney Steel & Press Works Ltd vs. CIT.

2. The court ruled that rectification proceedings initiated on the basis of a subsequent Supreme Court pronouncement declaring the law on a point previously dealt with by the CIT are not illegal.

3. The court directed the appellant to make a representation before the Assessing Officer with objections and necessary materials to support their claim.

4. The Assessing Officer was instructed to pass orders in accordance with the law declared by the Supreme Court.

FAQs

Q1: What is the significance of this judgment?

A1: This judgment establishes that tax authorities can rectify previous orders based on subsequent Supreme Court decisions that clarify or change the interpretation of tax laws.

Q2: Does this mean all past tax orders can be changed based on new court decisions?

A2: Not necessarily. The judgment specifically relates to rectification of orders where there's a clear pronouncement from the Supreme Court on a relevant point of law.

Q3: What options does the taxpayer have in such situations?

A3: The taxpayer can make a representation to the Assessing Officer with objections and supporting materials to argue their case in light of the new legal interpretation.

Q4: How does this judgment impact the treatment of subsidies for tax purposes?

A4: While the specific treatment of subsidies wasn't directly addressed, the judgment upholds the principle that power tariff subsidies given after a company has commenced production should generally be treated as revenue receipts, as per the Supreme Court's decision in Sahney Steel & Press Works Ltd vs. CIT.

Q5: What sections of the Income Tax Act were relevant in this case?

A5: The case involved Section 264 (revision of orders) and Section 154 (rectification of mistakes) of the Income Tax Act.

The writ appeals are filed by against the order of the learned single Judge dated 8.12.2000 made in W.P.Nos.10663 and 10664 of 1998.

2. The appellant herein preferred revision petitions under Section 264 of the I.T.Act before the Commissioner of Income Tax claiming relief that the electricity subsidy received by the appellant from the Government of India in a sum of Rs.56,16,456 and Rs. 64,56,107/- for the assessment years 1993-94 and 1994-95 respectively may be treated as capital receipt. The Commissioner of Income Tax, the first respondent herein granted the relief as sought for by the appellant herein in his order dated 30.4.1997. However subsequent to that a rectification proceedings was sought to be taken by the Commissioner of Income Tax as there was a mistake apparent from the record. In the rectification proceedings, the Commissioner of Income Tax by placing reliance on the decision of the Supreme Court in SAHNEY STEEL AND PRESS WORKS LTD AND OTHERS VS. COMMISSIONER OF INCOME TAX (228 ITR 253) held that the power tariff subsidy was given to the assessee company after it had commenced its production and hence the subsidy received by the appellant were to be treated as revenue receipt. The order of the Commissioner of Income Tax was challenged before this Court by way of writ petition on the ground that as there was no mistake apparent from the record, the order of the Commissioner of Income Tax passed under Section 264 cannot be rectified based on the subsequent decision of the Supreme court. By order dated 8.12.2000, the learned single Judge rejected the plea of the assessee on the ground that the rectification proceedings were initiated on the strength of the subsequent pronouncement of the Supreme Court SAHNEY STEEL AND PRESS WORKS LTD AND OTHERS VS. COMMISSIONER OF INCOME TAX (228 ITR 253) declaring the law on the points that had been dealt with by the Commissioner in his earlier order and consequently the learned single Judge held that the order of the Commissioner could not be said to be suffering from any illegality. The said order is now put in issue before this Court in the present writ appeals.

3. A perusal of the order of the learned single Judge shows that the order of the Commissioner of Income Tax, the first respondent herein was upheld by this Court on the ground that when the law declared by the Apex Court in the above said decision on the points that had been dealt with the Commissioner has been followed by the Commissioner, there is no need to interfere with the order of the Commissioner under Article 226 . We are in complete agreement with the view expressed by the learned single Judge. Learned counsel for the assessee however, submitted that the facts of the case dealt with by the Apex Court stand on a different footing which is based on the power subsidy scheme implemented by Andhra Pradesh Government. Hence, he prayed for reversing the order of the learned single Judge. We do not agree.

4. Having regard to the fact that the issue has to be decided on the facts of the case projected and in the light of the decision of the Apex Court in SAHNEY STEEL AND PRESS WORKS LTD AND OTHERS VS. COMMISSIONER OF INCOME TAX (228 ITR 253), it is but proper that the appellant approaches the Deputy Commissioner of Income Tax the second respondent herein to consider their claim in accordance with law. Hence, we do not find any justification to interfere with the order of the learned single Judge. Accordingly, we direct the appellant herein to make their representation before the assessing authority, the second respondent herein on or before 20.12.2007 with the objections and necessary materials to support their claim. After considering the same, the assessing authority shall pass order in terms of the law declared by the Apex Court in the decision cited above. It is made clear that if the appellant assessee fails to make their representation on 20.12.2007 , it is open to the authorities concerned to pass orders finalising the assessment order in terms of the order passed by the Commissioner of Income Tax, the first respondent herein under Section 154 of the Income Tax Act.

5. With these observations, the writ appeals are disposed of.

No costs. (K.R.P.,J.) (C.V.,J.)

29.11.2007

K.RAVIRAJA PANDIAN,J.

and

CHITRA VENKATARAMAN,J.