1990 (2) TMI 93 - AT - Income Tax

Tribunal partially allows appeal, upholds disallowance of contribution, but allows bad debts as trading loss

The appellant's appeal was partially allowed. The Tribunal upheld the disallowance of the contribution to the Molasses & Alcohol Reserve Fund. ... Interpretation of 'sold' under section 41(2) - Scope of 'moneys payable' under section 41(2) - Deeming fiction in section 41(2) to be strictly construed - Exchange under section 41(2) and section 118 Transfer of Property Act - Transfer in a scheme of amalgamation under sections 391/394 Companies Act excluded from 'sold'Contribution to reserve funds - Disallowance of contribution to Molasses & Alcohol Reserve Fund of the assessee - HELD THAT: - The CIT(Appeals) confirmation of the disallowance was maintained for the reasons previously recorded for assessment years 1979-80 and 1980-81. The tribunal finds no reason to disturb those earlier conclusions and rejects the ground raised by the appellant in respect of the contribution claimed as deduction. [Paras 3]Ground rejected; disallowance upheld.Bad debts and trading loss - Onus of proof for bad debts - Deductibility of Rs. 24,003 written off as bad debts (balances on advances to transport contractors) - HELD THAT: - The assessee explained that the amounts arose from running-account advances to transport operators who ceased performing their contracts and absconded, leaving unrecovered advance balances. The ITO had rejected the claim for lack of evidence and the CIT(Appeals) confirmed the disallowance without considering the assessee's alternative contention that the amounts constituted trading losses or losses in the course of business. The tribunal finds merit in the alternative contention and that the revenue authorities did not examine admissibility of the claim as a trading loss. [Paras 5]Order of CIT(A) set aside on this point; matter restored to ITO to consider admissibility of deduction of Rs. 24,003 as trading loss or loss incurred in the course of business.Interpretation of 'sold' under section 41(2) - Scope of 'moneys payable' under section 41(2) - Exchange under section 118 Transfer of Property Act - Transfer in a scheme of amalgamation under sections 391/394 Companies Act excluded from 'sold' - Strict construction of deeming provisions - Whether amounts representing difference between book value and written down value of assets transferred to Akola Oil Industries Ltd. are taxable as deemed profits under section 41(2) - HELD THAT: - Section 41(2) is a deeming provision and must be strictly construed. The tribunal analysed (a) whether the transaction amounted to a 'sale' or 'exchange' within the meaning of section 41(2) and the Transfer of Property Act; (b) whether any 'moneys payable' (price or other monetary consideration) was receivable by the assessee; and (c) whether the assessee received consideration. The scheme effected a tripartite arrangement between the transferor company, the transferee company and the shareholders, effected under a court-sanctioned scheme of arrangement under sections 391/394 of the Companies Act. An exchange requires a reciprocal transfer between the same parties; the present arrangement was not a bipartite exchange but a transfer under a scheme whereby consideration took the form of shares allotted to shareholders, coming into existence only on allotment. Clause (2) of the Explanation to section 41(3) expressly excludes transfers in a scheme of amalgamation from being treated as 'sold'. No cash price or other 'moneys payable' within the meaning of the Explanation was paid to the transferor company; the difference was met by allotment to shareholders and the company itself did not receive monetary consideration. Applying these principles, the tribunal concluded there was neither a sale/exchange nor moneys payable to the assessee attracting section 41(2). [Paras 11, 12, 13]Assessment under section 41(2) in respect of the impugned amount reversed; inclusion as deemed profit set aside.Final Conclusion: Appeal allowed in part: the inclusion under section 41(2) is reversed; the disallowance of the reserve fund claim is sustained; the disallowance of Rs. 24,003 for bad debts is set aside and remitted to the ITO for fresh consideration as a possible trading loss. Issues Involved:1. Disallowance of contribution to Molasses & Alcohol Reserve Fund.2. Disallowance of bad debts written off during the year.3. Inclusion of a sum under Section 41(2) of the Income Tax Act.Issue-wise Detailed Analysis:1. Disallowance of Contribution to Molasses & Alcohol Reserve Fund:The appellant, a public limited company engaged in the manufacture of sugar, contested the disallowance of Rs. 5,02,620 towards the Molasses & Alcohol Reserve Fund. The CIT (Appeals) had previously ruled against the appellant for the assessment years 1979-80 and 1980-81. The Tribunal upheld the CIT (Appeals)'s decision, rejecting the first ground of appeal.2. Disallowance of Bad Debts Written Off:The appellant claimed a deduction of Rs. 24,003 as bad debts, which was disallowed by the ITO due to lack of evidence. The CIT (Appeals) confirmed this disallowance. During the hearing, the appellant argued that these amounts were 'left over advances' to transport operators who had abandoned their contracts. The Tribunal found merit in this argument, noting that the revenue authorities had not appreciated this aspect. The Tribunal set aside the CIT (Appeals)'s order on this issue and directed the ITO to reconsider the admissibility of the deduction as a trading loss. This ground was treated as allowed.3. Inclusion of Sum Under Section 41(2) of the IT Act:The main issue was the inclusion of Rs. 26,93,099 under Section 41(2) of the Income Tax Act. The appellant had transferred its unit, Berar Oil Industries, to Akola Oil Industries Ltd. (AOIL) as per a scheme approved by the Bombay High Court. The ITO considered this a sale, assessing a profit of Rs. 26,93,099 under Section 41(2). The CIT (Appeals) upheld this, stating that there was consideration involved as AOIL had issued shares to the shareholders of the appellant company.The appellant argued that there was no sale or consideration within the meaning of Section 41(2). They contended that the transaction was a scheme of arrangement approved by the High Court, not a sale, and no cash consideration was involved. The Tribunal agreed with the appellant, stating that there was neither a sale nor an exchange, and no consideration was paid to the appellant company. The Tribunal held that the transaction did not fall within the purview of Section 41(2) and reversed the CIT (Appeals)'s decision. This ground of appeal was allowed.Conclusion:The appeal by the assessee was allowed in part. The Tribunal upheld the disallowance of the contribution to the Molasses & Alcohol Reserve Fund but allowed the reconsideration of the bad debts as a trading loss. The Tribunal also ruled that the inclusion of the sum under Section 41(2) was incorrect, reversing the CIT (Appeals)'s decision on this issue.