TaxTMI 
TaxTMI 
2010 (11) TMI 43
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....e Sheet drawn as at 31st March, 2001, is assessable to tax as a revenue receipt in the assessment for the assessment year 2001-02; and whether the findings of the learned Tribunal to this effect were wholly unreasonable, based on irrelevant considerations, contrary to the facts and evidence on record and/or otherwise perverse? (ii) Whether the decision of the Hon'ble Supreme Court in CIT v. T.V. Sundaram Iyengar and Sons Ltd. [(1996) 222 ITR 344 (SC)], applied by the learned Tribunal in passing its said impugned order dated 26th March, 2010, has any application whatsoever, in the facts and circumstances of the instant case, and particularly in relation to Section 28(iv) of the said Act? (iii) Whether on a correct interpretation of Section 28(iv) of the Income Tax Act, 1961, the Tribunal ought to have held that the principal amount of loan waived by the Bank under the OTS, not being a trading liability and also not being a "benefit or perquisite, whether convertible into money or not", the expression used in the said section, did not constitute revenue receipt and/or business income of the appellant assessee assessable to tax in its assessment for the assessment year 2001-02? (iv....
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....ce sheet treating it as capital in nature and the waiver of interest of Rs.2,02,60,247/- was credited in its "Profit and Loss Account" for the financial year ending 31.03.2001 corresponding to the assessment year 2001-02. The assessee filed its return declaring its total income assessable at Rs.45,160/- after setting off the carried forward business losses and unabsorbed depreciation. 2.4. The return was processed under section 143(1) of the Income Tax Act and by subsequent order under section 154 of the said Act, total income was rectified. Again for the purpose of giving effect to the order of the Commissioner of Income Tax (Appeals) for the assessment year 1995-96, the assessment made for the assessment year 2001-02 was revised and the total income was quantified at Rs.82,23,530/-. 2.5. A notice under section 148 of the Income Tax Act was issued by the Assessing Officer on the ground that the assessee has wrongly credited a sum of Rs.5,07,78,410/- in the Capital Reserve account in its balance sheet for the assessment year 2001-02. Therefore, the said account is sought to be assessed in as much as it being a waiver of principle loan amount, the same is assessable under Section ....
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....43(B) of the Income Tax Act has no application, since it would apply only to a business transaction. 4.4. The learned senior counsel strenuously contended that all the authorities have committed a grave error in mechanically applying the judgment rendered by the Honourable Apex Court in COMMISSIONER OF INCOME TAX v. SUNDARAM IYENGAR (T.V.) AND SONS LTD. [(1996) 222 ITR 344] that without appreciating the factual scenario that the loan has been obtained towards the purchase of capital assets and not for a business transaction. The learned senior counsel further submitted that the loan has not been received in the course of trading transaction as in the case of the judgment referred supra and therefore, the same has got no application. It is his further submission that admittedly the facts involved in the judgment referred above would disclose that the transaction therein was a trading transaction as against the facts involved herein. 4.5. The learned senior counsel placed reliance upon the judgment of the Honourable Division Bench of the Bombay High Court in MAHINDRA and MAHINDRA LTD. v. COMMISSIONER OF INCOME TAX [(2003) 261 ITR 501] wherein, the reliance has been made to the Hono....
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....y in the present case on hand, the question of application of Section 41(1) also does not arise for consideration. The learned senior counsel further contended that, that is the reason why the Assessing Officer has rightly taken the view that Section 41(1) has got no application to the present case on hand. 4.9. In support of his contention, the learned senior counsel placed reliance upon the following judgments, COMMISSIONER OF INCOME TAX v. GANESA CHETTIAR (P.) [(1982) 133 ITR 103], COMMISSIONER OF INCOME TAX v. A.V.M. LTD. [(1984) 146 ITR 355], COMMISSIONER OF INCOME TAX v. ALCHEMIC PVT. LTD. [(1981) 130 ITR 168], COMMISSIONER OF INCOME TAX v. MAFATLAL GANGABHAI and CO. (P.) LTD. [(1996) 219 ITR 644], and DEPUTY COMMISSIONER OF INCOME TAX (ASSESSMENT) v. GARDEN SILK MILLS LTD. [(2010) 320 ITR 720] and submitted that Section 28(iv) has no application to a money transaction and therefore, the orders passed by the authorities cannot be sustained. In so far as the scope of Section 41(1) of the Income Tax Act is concerned, the learned senior counsel has made reliance upon the judgments in POLYFLEX (INDIA) PVT. LTD. v. COMMISSIONER OF INCOME TAX [(2002) 257 ITR 343] and TIRUNELVELI M....
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...., the Tribunal has not considered the applicability of the said section, therefore in as much as Section 28(iv) of the Income Tax, 1961 having no applicability to the case on hand, the relevant provision that is applicable is Section 28(i) of the said Act. In the judgment of the Honourable Apex Court in COMMISSIONER OF INCOME TAX v. SUNDARAM IYENGAR (T.V.) AND SONS LTD. [(1996) 222 ITR 344], the applicability of Section 28(iv) has not been considered. As found by the authorities, Section 41(1) of the Income Tax Act is also not applicable and therefore, the findings rendered by the authorities below will have to be seen in the context of the provisions contained in Section 28(i) of the Income Tax Act, 1961. 5.2. The learned Senior Standing Counsel further submitted that the ratio laid down by the Honourable Apex Court in COMMISSIONER OF INCOME TAX v. SUNDARAM IYENGAR (T.V.) AND SONS LTD. [1996] 222 ITR 344]. still holds good. The judgment of the Honourable Apex Court has been followed subsequently in COMMISSIONER OF INCOME TAX v. RAJASTHAN GOLDEN TRANSPORT CO. (P.) LTD. [(2001) 249 ITR 723] and also by a Division Bench of this Court in COMMISSIONER OF INCOME TAX v. SUNDARAM INDUSTR....
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.... capital assets which fact also is not in dispute. The assessee has paid part of the principle and interest amount for the earlier years. There was a settlement under the One Time Settlement Scheme (OTS) by which a settlement has been arrived at between the Bank and the assessee by accepting the adhoc payment of 5 crores made by the assessee already with the waiver of another sum of Rs.5,07,78,410/- as the outstanding principle amount. Further, a sum of Rs.2,02,60,247/- as the interest amount respectively. 7. The loan transaction between the assessee and the Bank and the subsequent settlement by way of rehabilitation process through the BIFR is also not in dispute. It is not the case of the revenue that the above said transactions are not genuine and colourable. The authorities have also not gone behind the transactions but proceeded on the footing that the transactions are true and genuine. The assessee has credited the waiver of principle amount to the "Capital Reserve Account" in the balance sheet treating it as capital in nature and the waiver in its "Profit and Loss Account". 8. The Assessing Officer has applied the provisions contained in Section 28(iv) and held that the am....
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....or perquisite, whether convertible into money or not, arising from business or the exercise of a profession." 12. Similarly, Section 41(1) of the Income Tax Act, 1961 deals with "profits chargeable to tax" and the same is extracted herein: "41(1).Where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee (hereinafter referred to as the first-mentioned person) and subsequently during any previous year,- (a) the first-mentioned person has obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtained by such person or the value of benefit accruing to him shall be deemed to be profits and gains of business or profession and accordingly chargeable to income-tax as the income of that previous year, whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not; or (b) the successor in business has obtained, whether in case or in any other manner whatsoever, any....
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.... ratio laid down in COMMISSIONER OF INCOME TAX v. SUNDARAM IYENGAR (T.V.) AND SONS LTD. [[1996] 222 ITR 344]. Such an approach by the authorities which are creation of the statute is wholly wrong, unwarranted and against the basic principles of law. A right to a reasoned order is a basic and constitutional right and the said order is fundamental to the justice delivery system. A judicial order must be supported by sufficient reasons for coming to the conclusion. An authority which is vested with the quasi judicial power is bound to record his reasons for its conclusions. What weighed in the mind of the authority for its conclusion will have to be expressed in its order. When a power is exercised, the same has to be exercised in accordance with law. The failure to record reason would violate the principles of natural justice and against the basic concept of fairness and transparency. A reasoned order is the soul of an order of an adjudicating authority. 13.3. The above said well established principle of law has been reiterated by the Honourable Apex Court in VICTORIA MEMORIAL HALL v. HOWRAH GANATANTRIK NAGRIK SAMITY [(2010) 3 SCC 732] wherein it has been held as follows: "40. It i....
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....f a Judgment: 14.1. In a multi-court system having its own hierarchy, a judgment rendered by a higher forum has its binding effect on the subordinate Courts. The judicial discipline would require that a judgment rendered by a higher forum will have to be followed by a lower forum in all respects. Further, a judgment of the Honourable Apex Court is binding on all Courts in the whole of the country under Article 141 of the Constitution of India. A binding precedent brings about a stability, uniformity and finality to an issue raised. 14.2. However, a judgment cannot be read like a statute. Courts should not place reliance on decision without discussing factual situation involved in the said decision and how it would apply to the facts involved in the subsequent case. A ratio laid down by a higher forum shall not be taken out of the context and construed like a statute. 15. LORD DENNING while dealing with the law of precedent has observed as follows: "Each case depends on its own facts and a close similarity between one case and another is not enough because even a single significant detail may alter the entire aspect, in deciding such cases, one should avoid the temptation to dec....
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....amounts deposited by the assessee were not in the nature of security deposits and they have been deposited by adjustment made from time to time. The said amount represented the credit balances in the name of the trade parties. The deposit having been taken in the course of trade, the customers did not claim the remaining amount back after adjustment. 20. The claim of the customers have become barred by limitation and the assessee has treated the said amount as its own money. Therefore, a new asset came into being by the automatic operation of law through the trade transaction the said amount has been entered into "Profit and Loss Account". Therefore, in as much as the deposited amount had its character changed, when it becomes the money of the assessee due to the operation of the law of limitation, such an amount would become an income exigible to tax at the hands of the assessee. The ratio laid down by the Honourbale Apex Court is extracted herein: "In the present case, the money was received by the assessee in the course of carrying on his business. Although it was treated as deposit and was of capital nature at the point of time it was received, by efflux of time the money has....
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....y for the purchase of petroleum over a period of years. The unpaid price of the oil supplied was debited in the accounts. In view of the adverse effect of a business slump on the assessee-company, the petroleum producing company accepted payment of a part of the debt and released the assessee-company from its liability to pay the balance which was due. The House of Lords held that the amount remitted could not be included as a revenue receipt. Lord Macmillan observed (p.593): "I cannot see how the extent to which the debt is forgiven can become a credit item in the trading account for the period within which the concession is made." 24. It is a well established principle of law that, every deposit of money would not constitute a trading receipt. Broadly speaking even though a receipt may be in connection with the business, it cannot be said that every such receipt is a trading receipt. Therefore, the amount referable to the loans obtained by the assessee towards the purchase of its capital asset would not constitute a trading receipt. The said issue has been fortified by the judgment of this Court in COMMISSIONER OF INCOME TAX v. A.V.M. LTD. [(1984) 146 ITR 355]. 25. The very sa....
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....ould be an income as defined under Section 2(24) of the Income Tax Act. In other words, to any transaction which involves money, Section 28(iv) has got no application. Hence, we are of the view that Section 28(iv) has no application whatsoever, as admittedly even by the learned senior standing counsel for the revenue to the present case on hand. We do not agree with the stand taken by the learned senior standing counsel for the revenue that section 28(iv) of the Act is not the basis upon which the decision has been arrived at by the authorities below, in as much as the orders passed by them would clearly reveal the above said fact. 27.2. The Division Bench of the Bombay High Court presided over by His Lordship Justice S.H.Kapadia (as he then was) in MAHINDRA and MAHINDRA LTD. v. COMMISSIONER OF INCOME TAX [(2003) 261 ITR 501], while approving the ratio laid down by the Division Bench of the Gujarat High Court in COMMISSIONER OF INCOME TAX v. ALCHEMIC PVT. LTD. [(1981) 130 ITR 168], has held as follows: "At the outset, we wish to clarify that this judgment is confined to the facts of this case. This is because the value of any benefit or perquisite arising from business, as contem....
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....ant and machinery. The consideration paid was for such import. In the circumstances, section 28(iv) is not attracted. Lastly, we may mention that, in this case, AMC agreed to forego the principal amount of loan as a part of take-over arrangement with KJC to which the assessee was not a party. The waiver of the principal amount was unexpected. In the circumstances, one fails to understand how such waiver would constitute business income." 28. The facts involved in the present case are more or less identical to the case dealt with by the Bombay High Court as discussed earlier. The Division Bench has held in the said judgment that the loan agreement in its entirety, as in the present case is not obliterated by the waiver in as much as the assessee has partly complied with, the Assessing Officer has not gone behind the loan agreement, the loan amount was towards the purchase of capital asset and the waiver of the amount was accepted and hence such an activity is not an income assessable to tax. The Division Bench was also pleased to hold that Section 28(iv) does not apply to the benefits in cash or money and it applies only to a transaction arising from business. The said view was als....
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....of an income being that of a loan cannot be made exigible to tax. 30. Similarly, in so far as the applicability of Section 41(1)(a) of the Income Tax Act is concerned, the same also cannot have any application in as much as the said provision would be applicable only to a trading liability. Accordingly, it was held that a loan received for the purpose of capital asset would not constitute a trading liability and hence Section 41(1) has no application. The said issue has also been considered in MAHINDRA and MAHINDRA LTD. v. COMMISSIONER OF INCOME TAX [(2003) 261 ITR 501], wherein it has been held as follows: "Alternatively, it was argued on behalf of the Department that in this case waiver constituted remission of trading liability and, therefore, section 41(1) stood attracted. We do not find any merit in this argument. Firstly, in the present case, the prerequisite of section 41(1) is not applicable. In order to apply section 41(1), an assessee should have obtained a deduction in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee. In this case, the assessee has not obtained such allowance or deduction in respect of expenditur....
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....d not be dealt with by the assessee as a receipt of its trade. Therefore, the amounts referable to loans received for purchase of capital assets would not constitute a trading liability and accordingly section 41(1) was not attracted." 31. A similar view was also taken by the Division Bench of the Honourable Gujarat High Court in COMMISSIONER OF INCOME-TAX v. CHETAN CHEMICALS (P.) LTD. [(2004) 139 TAXMAN 301] wherein it has been held as follows: "2. The assessee, a private limited company, was incorporated in the year 1974-75 as required under the Companies Act, 1956. Since 1976 the company was operating its factory at Nandesari, District Baroda, wherein commercial production of various inorganic chemicals was being carried on. The assessment year is 1982-83 and the accounting period is the year ended on 30th June, 1981. The company maintained its accounts as per mercantile system of accounting. In the course of carrying on its business, the company had obtained unsecured loans from various creditors, and in the light of the financial difficulties faced by the company, the creditors approached the High Court by filing various company petitions. During the course of those proceedi....
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....previous year, whether the business of profession in respect of which the allowance or reduction has been made is in existence in that year or not. On a reading of the provisions, it is apparent that before the section can be invoked, it is necessary that an allowance or a deduction has been granted during the course of assessment for any year in respect of loss, expenditure or trading liability which is incurred by the assessee, and subsequently during any previous year the assessee obtains, whether in cash or in any other manner, any amount in respect of such trading liability by way of remission or cessation of such liability. In that case, either the amount obtained by the assessee or the value of the benefit accruing to the assessee can be deemed to be the profits and gains of a business or profession and can be brought to tax as income of the previous year in which such amount or benefit is obtained. In the facts of the case on hand, without entering into the aspect as to whether the liability to repay the loans would be a trading liability or not, it is an admitted position that there had been no allowance or deduction in any of the preceding years and hence, there is no qu....
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....d unless it is a revenue receipt. Hence in view of the admitted fact the receipt involved in the present case is a capital receipt it cannot be taxed. Further Section 37(1) of the Income Tax Act specifically deals with the capital expenditure which cannot be allowed in computing income. Hence it is very clear that the contentions on behalf of the revenue has no legal basis. 35. The judgments relied upon by the learned senior standing counsel appearing for the revenue also do not apply to the facts on hand. In all those cases, a finding of fact has been rendered that the transactions involved are trading transactions. In JAY ENGINEERING WORKS LTD. v. COMMISSIONER OF INCOME-TAX [(2009) 311 ITR 299], the issue was the applicability of Section 41(1) of the Income Tax Act and also one involving a unilateral return of the assessee which is not the situation in the present case on hand. 36. Similarly in COMMISSIONER OF INCOME-TAX v. RAJASTHAN GOLDEN TRANSPORT CO. (P.) LTD. [(2001) 249 ITR 723] by applying the judgment in COMMISSIONER OF INCOME TAX v. SUNDARAM IYENGAR (T.V.) AND SONS LTD. [[1996] 222 ITR 344], the Honourable Apex Court has observed that if an amount is received in the co....