Sales tax refund received by the transferee of the business subsequent to transfer of entire business cannot be taxed u/s 41(1) in the hands of transferor:

AO made addition u/s 41(1) in respect of sales tax refund. Hon’ble ITAT observed that the appellant-firm had, during the year under consideration, transferred all its assets and liabilities to M/s. Hemraj Trading Co. (HMT) and the said sales tax refund was received by HMT subsequent to such transfer. Earlier, Hon’ble ITAT had set aside the said matter to the file of AO with a direction to tax the said sum in the hands of the assessee only if such sales tax refund has been given by HMT to the partners of the appellate-firm. In the second round of litigation, the partners of the assessee-firm had placed their affidavits before AO stating that they haven’t received such refund. Still, AO made the said addition which was confirmed by CIT(A). It was thus held that the addition so made was against the directions of the Hon’ble ITAT and hence, the same was deleted. However, the Hon’ble ITAT stated in its order that the revisionary authorities under the sales tax realised their mistake and had demanded such refund back from HMT along with interest. Further, the said matter was under litigation. Hence, in case such refund was received by partners of the appellant-firm, then AO shall be free to proceed as per law.

[VIRAJ TRADING CO. & ORS. Vs. ITO – ITA Nos.2588 to 2590/Ahd/2010]