COMMISSIONER OF INCOME TAX vs. SCIENTIFIC CLOCK MFG.CO.

ITR/38/1990HC GujaratGJHC24013225199004 October 2001Author: HONOURABLE MR. JUSTICE MOHIT S. SHAH,HONOURABLE MR. JUSTICE D.A.MEHTA3 pages
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What did the High Court hold?

The High Court, following its earlier decision in the case of Morvi Time Co. (Income Tax Reference No. 52 of 1984, decided on 4/11/1998), held that the payment of rent for the use of intangible assets like goodwill, quota rights, and selling agency rights is an allowable deduction. Therefore, the Tribunal was justified in law in holding that the amount paid for the use of goodwill could not be disallowed and that the order passed by the Commissioner under Section 263 of the Act was rightly set aside. All three questions referred to the High Court were answered in the affirmative, in favour of the assessee and against the revenue. The reference was disposed of accordingly.

What were the facts?

The Commissioner of Income Tax (CIT) invoked jurisdiction under Section 263 of the Income Tax Act, 1961, to revise an order passed by the Assessing Officer. The assessee, Scientific Clock Mfg. Co., had paid rent for the use of goodwill of two trusts that had retired from the partnership firm. The CIT held that the deduction of this rent was erroneously allowed and prejudicial to the revenue's interest. The assessee appealed to the Income Tax Appellate Tribunal (ITAT), which relied on its earlier decision in the case of Morvi Time Company. The revenue preferred a reference to the High Court of Gujarat against the ITAT's decision.

What were the issues?

1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in coming to the conclusion that the order passed by the Commissioner of Income-tax under section 263 of the Income-tax Act, 1961 was liable to be set aside? 2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in coming to the conclusion that the trustees of the Prakash Trust and Ansuman D & Angel D. Trust permit the use of the intangible assets for a consideration as distinguished from the intangible asset itself? 3. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in coming to the conclusion that a share in the assets as distinguished from the asset could be given for user and consideration can be receivable for such use of share in the assets? Assessee's contentions: Not recorded as the assessee did not appear. The Tribunal relied on its decision in Morvi Time Company. Revenue's contentions: The CIT held that the deduction of rent paid for the use of goodwill was erroneously allowed and prejudicial to the interest of revenue, justifying the invocation of Section 263.

Which sections of the Income-tax Act were involved?

Section 263,Section 256(2)

AI-generated summary — verify with the full judgment below

IN THE HIGH COURT OF GUJARAT AT AHMEDABAD

INCOME TAX REFERENCE No 38 of 1990

For Approval and Signature:

Hon'ble MR.JUSTICE M.S.SHAH and Hon'ble MR.JUSTICE D.A.MEHTA ============================================================ 1. Whether Reporters of Local Papers may be allowed : NO to see the judgements?

2.

To be referred to the Reporter or not? : NO 3. Whether Their Lordships wish to see the fair copy : NO of the judgement?

4.

Whether this case involves a substantial question : NO of law as to the interpretation of the Constitution of India, 1950 of any Order made thereunder?

5.

Whether it is to be circulated to the Civil Judge? : NO

The order continues below.

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