TaxTMI 
TaxTMI 
1997 (9) TMI 143
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....m. As a result of these facts, the assessee-company suffered huge losses. It also got involved in the security scam in early 1992 in the above-mentioned process. The affairs of the company were investigated by Janakiraman's Committee Report. The company admitted before the Janakiraman's committee that several irregularities had been committed by it and especially by its officer Ms. Latha Sriram (designated by the assessee-company as dealer). 3. It is an undisputed fact that DB was acting as the manger-banker of the assessee-company. The assessee enjoyed huge overdraft facilities from DB. The major portions of the transactions entered into by the assessee, whether of purchase or sales of shares and securities, were routed through DB only. On account of the huge loss suffered by the company, DB decided to write off a sum of Rs. 47.3 crores due to it from the assessee. This amount is stated to be consisting of Rs. 44,69,88,170 towards the principal and Rs. 2,60,11,830 towards interest. According to the lower authorities, the assessee-company treated the last item of Rs. 2,60,11,830 as its income for the current year. It, however, contended that the other amount of Rs. 44,69,88,170 ....
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....for the previous year ended on 31-3-1993 was Rs. 379.77 crores while that of sales by assessee to DB was Rs. 1086.205 crores. These figures were certainly at variance with the figures stated to have been given to the Assessing Officer by the assessee-company. We also note this variance for which there is no immediate answer before us from the side of the assessee. At the same time again, we are of the opinion that these variations would not effectively alter the situation inasmuch as the CIT(Appeals) himself has accepted the position that the stiles to DB in any case exceeded the purchases from DB, in value. The CIT(Appeals) actually came to the conclusion that there is no question of any portion of the write-off being attributable to the trading transactions between the assessee and DB. 5. The CIT(Appeals) furthermore examined the nature of transactions between the company and DB which, according to him, had the following several facets: "(a) DB was one of the financiers to the appellant. It allowed certain overdraft facilities to the appellant which was increased to Rs. 3 crores and this was continued thereafter. (b) DB acted as banker to the appellant. In this capacity ....
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....by DB has resulted in a benefit by way of cessation of a corresponding portion of the liability of the assessee which was caused by the trading transactions of the assessee. He ultimately held that the entire amount of Rs. 47.70 cores written off by DB constitutes benefit by way of cessation of liability arising from business transactions and hence, is assessable in the hands of the assessee for this year under section 41(1) or under section 28(iv). 9. During the course of the hearing of the appeal before us, Shri Dastur, learned counsel for the assessee has firstly emphasised on the fact that the CIT(Appeals) himself has admitted that so far as direct trading transactions in securities and shares, etc., between the assessee and DB are concerned, the sales by the assessee to DB far exceeded the purchases made by the assessee from DB. Hence, rather DB owed to the assessee on this account and not otherwise. It is thus contended that there is no question of remission of any liability by DB on this account. On the basis of the facts of the case as discussed above, we agree with the contentions of Shri Dastur. This point has been admitted even by the CIT(Appeals) himself. 10. Ther....
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....), it is necessary that the trading liability, loss or expense should have been allowed in an earlier year and the remission or cessation of the liability must taken place in a later year. The Karnataka High Court merely stated as under: "The purpose of section 41(1) is quite clear. Its idea is to levy tax on any amount received by the assessee subsequently or any benefit received by an assessee during any subsequent year in respect of which he had earlier obtained an allowance or deduction while computing his income." Use of separate expressions for the amount being received by the assessee subsequently or any benefit received by the assessee during any subsequent year shows that the intention of the Karnataka High Court might not have been that it is necessary for the purpose of applicability of sec lion 41(1) that the benefit must come to the assessee in a subsequent year alone. In any case, the CIT(Appeals) himself has admitted that for the purpose of section 41(1), the allowance of expense, loss, etc., must have taken place in a year earlier than the one in which the benefit was ultimately obtained by way of remission, cessation of the liability concerned. At the same ti....
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....alysing the facts of the case, the Delhi High Court held that the debt owed by the assessee to a Bombay firm was a trading debt which had been allowed for the purpose of income-tax and hence, the provisions of section 10(2A) of the Income-tax Act, 1922 [corresponding to section 41(1) of the 1961 Act] would apply to that amount. The Delhi High Court, however, also held that so far as the account of a firm M/s. JD was concerned, the liability of the assessee to JD arose because JD had paid a sum of Rs. 1,80,000 to the Bombay firm on the assessee's account; vis-a-vis the assessee and JD, the payment was not made for the purchase of stock-in-trade and it was simply a credit in respect of an amount borrowed by the assessee from JD in order to discharge its liability to the Bombay firm. Shri Dastur has thus strongly argued that inasmuch as the liability of the assessee to DB had not arisen out of any trading operations between the assessee and DB and the assessee merely owed a loan to DB which was waived or remitted, there cannot be any question of applicability of the provisions of section 41(1). 13. The facts of the case clearly indicate that the assessee had incurred expenses in pa....
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....s been held repeatedly by different courts [for example by Supreme Court in the case of State of Madras v. G.J. Coelho [1964] 53 ITR 186 at page 194 that the liability towards interest payment incurred on loan specifically utilised for acquiring capital assets would also form revenue expense in the hands of the assessee. It is, thus, clear that the loans from credits stand completely on a different footing from the transactions in which the assessee indulged by utilising such loans. In the instant case, therefore, we completely agree with the contention of the assessee that the trading transactions of the assessee can neither be equated nor can directly be connected with the liability of the assessee towards loan incurred by it from its banker, viz, DB. Ultimately therefore, we are of the opinion that so far as remission of principal amounts are concerned, the provisions of section 41(1) would not at all be applicable. 15. As regards the applicability of the provisions of section 28(iv), Shri Dastur has argued in the following lines: (i) No positive benefit accrued to the assessee by way of remission or the liability by the bank. Benefit of the nature of cessation of liabilit....
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....ons as above have their individual force, yet, we are of the view that the main reason why the provisions of section 28(iv) would not applicable to the present case is that the benefit did not arise in the instant case to the assessee on its revenue account. As mentioned earlier, the Madras High Court has held in the case of P. Ganesa Chettiar that a debt forgiven or waived cannot constitute income. Even according to general commercial principles and various decisions of different courts, it cannot be said that a waiver of a loan as such constitutes income in the hands of the debtor. Such waiver clearly affects the capital account of the assessee and hence, in ordinary sense, such waiver cannot constitute income of the assessee. Section 28(iv) deals with the extended definition of business income. However, for the purpose of applicability of the same, the benefit or perquisite must relate to the revenue account of the assessee. The learned DR has placed reliance on a judgment of the Delhi High Court in the case of K.S. Malik v. CIT [1980] 124 ITR 522 in this connection. Shri Dastur has however argued that this particular decision has been delivered by the Delhi High Court before so....
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....3 1993-94 ----------------------------------------------------------------- Rs. Rs. Rs. ----------------------------------------------------------------- Interest on Overdraft 2,57,164 16,38,950 1,66,64,484 Guarantee Commission - 85,050 18,00,000 Bank charges 22,312 1,51,941 74,731 Custodian charges - 10,46,105 7,26,215 Service Charges&n....
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....sment order that the assessee-company claimed total loss of Rs. 29,36,80,000 towards compensation for settlement/cancellation of securities contract. The details of loss claimed by the assessee are as under: (i) Amount paid to ANZ Grindlays Bank, Bombay, for breach of contract for purchase of 5 crore units of Unit Trust of India and sale of 1 crore of such units- Rs. 96,80,000 (ii) Amount paid to Reliance Capital and Finance Trust (RCFT) on account of negotiated damages and compensation for cancellation of contracts for sale of 10 crore units of Unit Trust of India. This issue has been discussed in detail both in the assessment as well as in the first appellate order. So far as payment to ANZ Grindlays Bank is concerned, the facts of the case are that the assessee-company had entered into two different contracts with ANZ for purchase of 5 crore units of UTI at the rate of 14.381 and sale of 1 crore units at the rate of 13.969. The stipulated date for delivery for both the contracts was 31-7-1992. The contracts were not performed. So far as the payment to RCFT is concerned, it is stated that the assessee-company had on 30-4-1992 built up an over-sold position of units of....
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....no physical delivery had taken place to this extent. The Assessing Officer also emphasised on the fact that even as per the assessee's own admission, the dealings in securities were unauthorised. He also referred to the admission made by the assessee that the above contracts were in the nature of ready-forward transactions. Ultimately, he disallowed the entire claim of loss of Rs. 29,36,80,000 as speculative loss and otherwise also being towards illegal payments. The CIT(Appeals) also discussed the facts of the case in detail. He referred to various correspondences between the assessee and ANZ and came to the conclusion that even before or at least on the stipulated date of delivery being 31-7-1992, neither of the parties involved had the intention to fulfil the obligations under the contract and that is why they resorted to the process of settlement of the contract. He thus endorsed the view of the Assessing Officer that both the contracts were of speculative nature and hence, the losses were required to be disallowed as speculative losses. 21. Regarding the observation of the Assessing Officer that the Special Court had held that ready-forward transactions were illegal, the CI....
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....ition of 'delivery' in section 2(2) of the Sale of Goods Act which has been held to include both actual and constructive or symbolical delivery has no bearing on the definition of speculative transaction in the Explanation. A transaction which is otherwise speculative would not be a speculative transaction within the meaning of Explanation 2 if actual delivery of the commodity or the scrips has taken place; on the other hand, a transaction which is not otherwise speculative in nature may yet be speculative according to Explanation 2 if there is no actual delivery of the commodity or the scrips." The above discussions made by the Supreme Court are therefore clear that in order to consider some transactions to be speculative, one has got to examine the same from the four corners of the definition as given in section 43(5) which is as below: "43(5) 'Speculative transaction' means a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips." Shri Dastur has tried to argue in this connection that the expression "commodi....
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....ford Illustrated Dictionary is "useful thing; article of trade". The Calcutta High Court held in the case of Nirmal Trading Co. that the right to renounce the new allotment of shares did not constitute a commodity. However, such a right is abstract in nature and hence, the Calcutta High Court might have considered such right to be not falling within the general definition of "commodity". On the other hand, however, units of UTI are not only useful things but also articles of trade in as much as they can be purchased and sold quite easily. They are also material things which can be given and taken physical delivery of. It is required to be noted in this connection that in section 43(5), the Legislature used the expression "commodities including stocks and shares". The intention of the Legislature that the commodity includes stocks and shares is, therefore, clear. A question may therefore arise that if stocks and shares be included within the general definition of commodities as such, what is the use of mentioning the same once more. Our answer to this question would be that the Legislature, being sure of (he position that the expression "commodity" includes stocks and shares, men....
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....tilal P. Ltd.: "A transaction cannot be described as a 'speculative transaction' within the meaning of sub-section (5) of section 43 of the Income-tax Act, 1961, where there is a breach of the contract and on a dispute between the parties damages are awarded as compensation by an arbitration award. What is really settled by the award of such damages and their acceptance by the aggrieved party is the dispute between the parties. Section 43(5), however, speaks of a settlement of the contract, and a contract is settled when it is either performed or the promise dispenses with or remits, wholly or in part, the performance of the promise made to him or accepts, instead of it, any satisfaction which he thinks fit. It is this sense of the law which must prevail in sub-section (5) of section 43 and not that of the layman." 25. In the background of such legal position, let us now examine whether in the instant cases, the contracts were actually settled or the settlement took place after the breach of the contracts. 26. In the case of the contracts with ANZ, there is no doubt about the fact that the contracts were not fulfilled by both the sides. They accused each other with regard ....
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....re units of UTI to the assessee, the buy-back arrangement was in respect of Rs. 1 crore units alone. He has furthermore argued that in a proper buy-back arrangement as meant by the Reserve Bank of India, there should be a contract to the initial sale by the bank or a financial institution and thereafter a purchase at a higher price. The higher price for purchasing back contract would compensate the gain derived by the bank/financial institutions during the period of interregunum between sale and the purchase on account of user of the sale consideration in that period. In the instant case however, the bank was required to sell the units at 14.381 and to purchase the same at 13.969. Shri Dastur thus argues that this is not a case of buy-back arrangement as considered by RBI in its circular mentioned above. We feel inclined to agree with the arguments of Shri Dastur. In this case, the arrangement was quite strange from the view point of the assessee that it contracted to purchase certain units at a higher price and sell the same thereafter at a lower price. The CIT(Appeals) has, therefore been right in observing that from day one the contracts were intended to cause loss to the ass....