1980 (7) TMI 270 - HC - Income Tax

Court rules settlement agreement lacked clarity on interest remission, Section 10(2A) not applicable.

The court held that Section 10(2A) of the Indian Income-tax Act was not applicable in a case involving a settlement agreement where the remission of ... - Issues:Interpretation of Section 10(2A) of the Indian Income-tax Act, 1922 in relation to remission of interest and capital amount in a settlement agreement.Analysis:The case involved an application under s. 66(2) of the Indian I. T. Act, 1922, where the Income-tax Appellate Tribunal was directed to draw up a statement of the case regarding the justification of holding no addition under section 10(2A) of the Act. The assessee, who owned a rice mill, had mortgaged his property to a bank, which was later closed, leading to a settlement agreement with the official liquidator. The settlement involved a payment of a reduced amount in full satisfaction of the claim, including interest and costs. The Income Tax Officer (ITO) added back the interest amount under s. 10(2A) during assessment proceedings for the year 1961-62, leading to an appeal by the assessee before the Appellate Assistant Commissioner (AAC).The AAC agreed with the ITO that the assessee benefitted from the settlement by remission of interest and capital, but upon scrutiny, found that the assessee had paid a portion of the interest previously allowed. The AAC reduced the addition by that amount and sustained the addition of the balance. The assessee further appealed to the Income-tax Appellate Tribunal, which concluded that the addition of the balance amount to the profit was not tenable in law.The Tribunal's decision was based on the interpretation of s. 10(2A), which deems any amount received or benefit accrued due to remission of a deduction made in a previous year as profits or gains. However, in this case, it was unclear whether the entire interest was remitted in the settlement, making it difficult to identify conclusively the particular item for which remission was granted. Referring to the Supreme Court's decision in Tirunelveli Motor Bus Service Co. P. Ltd. v. CIT [1970] 78 ITR 55, the court emphasized the need for clear identification of the remitted amount for application of s. 10(2A).The court noted that the settlement agreement did not clearly indicate a complete rebate of the interest, as the order mentioned settlement in full satisfaction of the claim, including interest. As a result, it was deemed speculative to determine the exact remission granted on the interest amount. Consequently, the court held that s. 10(2A) was not applicable in this case due to the lack of clarity on the remitted amount, aligning with the principles established in the Tirunelveli Motor Bus Service case. Thus, the court answered the question referred in the affirmative and against the department, ruling in favor of the assessee.