Strict construction of deemed income: court-approved scheme transfers without money consideration may fall outside section 41(2).

A deemed-income provision relating to transfer of depreciable assets is to be strictly construed, and a court-approved scheme of arrangement that does not amount to a sale or exchange to the assessee-company and does not result in money consideration received by it does not attract section 41(2). The transfer of the Berar Oil Industries unit under a scheme under sections 391 and 394 of the Companies Act, 1956, was treated as a tripartite arrangement involving shares allotted to shareholders, not "moneys payable" to the company. The material on bad debts also indicated that advances to transport operators, left unrecovered after contracts were not completed, may require examination as a trading or business loss rather than as bad debts.

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Issues: (i) Whether the disallowance of Rs. 24,003, claimed as bad debts, was to be sustained or the matter restored for consideration as a trading loss or business loss; (ii) Whether the amount brought to tax under section 41(2) on transfer of the Berar Oil Industries unit under the scheme of arrangement was assessable as deemed profit.

Issue (i): Whether the disallowance of Rs. 24,003, claimed as bad debts, was to be sustained or the matter restored for consideration as a trading loss or business loss.

Analysis: The amount represented balances on advances made to transport operators, and the explanation was that these balances had become irrecoverable after the operators left the work without completing the transport contracts. The earlier treatment of the claim as bad debts had not addressed the alternative character of the amounts as business-related advances capable of being considered as trading loss.

Conclusion: The disallowance was set aside and the matter was restored to the Assessing Officer to examine deduction of Rs. 24,003 as a trading loss or loss incurred in the course of business. The issue was decided in favour of the assessee.

Issue (ii): Whether the amount brought to tax under section 41(2) on transfer of the Berar Oil Industries unit under the scheme of arrangement was assessable as deemed profit.

Analysis: Section 41(2), being a deeming provision, was held to require strict construction. On the facts, the transfer took place under a court-approved scheme of arrangement under sections 391 and 394 of the Companies Act, 1956, with assets moving in the course of a tripartite arrangement involving the transferor company, the transferee company, and the shareholders. The consideration took the form of shares allotted to the shareholders, not money received by the assessee-company. The transaction was held not to constitute a sale or an exchange within the statutory sense, and the company itself did not receive any "moneys payable".

Conclusion: The addition under section 41(2) was not sustainable and was deleted. The issue was decided in favour of the assessee.

Final Conclusion: The appeal succeeded on the principal tax addition and also obtained remand on the minor disallowance issue, resulting in relief to the assessee on both issues, with the second issue requiring fresh consideration by the Assessing Officer.

Ratio Decidendi: A deemed-income provision concerning sale of depreciable assets must be strictly construed, and a court-approved transfer under a scheme of arrangement that does not involve a sale or exchange to the assessee-company and does not bring money consideration to it does not attract section 41(2).

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