The Supreme Court has asked the Income Tax Appellate Tribunal (ITAT) to decide the validity of a department notice seeking to initiate reassessment proceedings against Swaraj Engines Ltd. The issue has been remanded to the tribunal in view of the revenue departments appeal pending before it.

The tax authorities had initially allowed deductions to Swaraj Engines, a joint venture between Kirloskar Group and the Punjab government, for the assessment year 1990-91 and six successive years from 1991-92 to 1996-97, under Section 80-I of the Income Tax Act 1961.

While the deduction under Section 143(1)(a) of the Act was confirmed for 1997-98, the department had issued notice to the firm in 2002 purporting to withdraw deductions on the grounds that the assessee, in its annual report for FY 1988-89 had indicated sales of 346 engines manufactured before March 31, 1989.

Taking into account the particulars of sales, the revenue department stated that the manufacturing or production of engines had allegedly started during 1989-90, and thus the firm was not entitled to the benefit during 1997-98. Even the Punjab and Haryana High Courts had dismissed Swaraj Engines plea against initiation of the reassessment proceedings.

However, while the appeal was pending in the apex court, the commissioner of income tax (appeals) (CIT) had allowed deduction for 1997-98, saying that assembling of the engine did not amount to manufacturing for the purposes of claiming deduction.

However, the departments appeal against the CITs order is pending before the tribunal. While additional solicitor general, Vivek Tankha, argued the case for the department, senior counsel ML Verma represented the assessee.