2008 (8) TMI 156 - HC - Income Tax

Waived loan retained in business treated as taxable income once reflected in profit and loss account; appeal dismissed

SOLID CONTAINERS LTD. Versus DEPUTY COMMISSIONER OF INCOME-TAX AND ANOTHER

HC held that a loan obtained for trading, later waived and retained in the business, constituted taxable income as it enriched the trading operations. ... Loan for business purposes - Nature of credit balance returned back - capital receipt - section 28(iv) Or under provisions of section 41(1) - HELD THAT:- The facts of the present case are entirely different in as much as it was a loan taken for trading activity and ultimately, upon waiver the amount was retained in business by the Assessee. Thus, the principle stated by the Supreme Court in the case of T.V. Sundaram Ayengar & Sons Ltd.[1996 (9) TMI 1 - SUPREME COURT] would be squarely applicable to the facts of the present case. The amount which initially did not fall within the scope of the provisions rendering it liable to tax subsequently have become the Assessee's income being part of the trading of the Assessee. Similar view was also taken by a Bench of Madras High Court in the case of Commissioner of Income tax v. Aries Advertising Pvt. Ltd., [2002 (2) TMI 84 - MADRAS HIGH COURT]. The court took the view that the Assessee because of trading operation became richer by the amount which had been transferred and/or retained in the Profit and Loss Account of the Assessee. Thus, we are of the considered view that no question of law much less substantial question of law arises for consideration in the present appeal. Appeal dismissed in limine. Issues:1. Whether the loan amount returned by the Assessee constitutes income under section 41(1) of the Income Tax Act.2. Whether the loan amount was a capital receipt and not liable to be taxed as business income.Analysis:1. The appeal was against the Income Tax Appellate Tribunal's order, which rejected the Assessee's contention that the returned loan amount was a capital receipt and not income under section 41(1). The Assessing Officer added the amount to the Assessee's income, considering it as arising directly from business activity. The Tribunal upheld this addition citing the Supreme Court's decision in CIT v. T.V. Sundaram Iyengar and Sons Ltd., [1996] 222 ITR 344, where it was held that certain amounts, though not taxable initially, change character and become taxable income when they become the assessee's own money due to statutory or contractual rights.2. The Assessee argued that the loan was a capital receipt and not taxable under section 41(1) or section 28 of the Income Tax Act. However, the Tribunal found justification in adding the amount to the Assessee's income based on the Apex Court's decision and section 28(iv) of the Act. The Tribunal emphasized that the amount, though initially considered capital, became taxable income as it was retained in the business by the Assessee. The Tribunal also referred to the Madras High Court's decision in Commissioner of Income tax v. Aries Advertising Pvt. Ltd., 2002 (255) ITR 510, where a similar view was taken regarding trading operations enriching the Assessee.3. The Court cited the principle laid down in CIT v. T.V. Sundaram Iyengar and Sons Ltd., [1996] 222 ITR 344, emphasizing that amounts received in the course of trading transactions, even if not initially taxable, change character and become taxable income when they become the assessee's own money due to statutory or contractual rights. The Court highlighted that the Assessee, by retaining the money in the business, treated it as its own money, leading to its classification as taxable income. The Court dismissed the appeal, stating that no substantial question of law arose based on the settled legal position and the facts of the case.In conclusion, the judgment upheld the addition of the loan amount to the Assessee's income, considering it as arising from business activity and becoming taxable income as per relevant legal provisions and judicial precedents.