In Ita 794/2008 v. — Lakshm1Vilas Bank Ltd., (1996 Itr Vol.220 Page205)?”

IN THR HIGH COURT OF KARNATAKA AT BANGALOREDATED THIS THER [th]DAY OF OCTOBER 2014| PRESENT THER HON’BLE MR JUSTICE N. KUMAR AND THR HON’BLE MR JUSTICBK B. MANOHAR ITA No. 795/2008 & ITA No.794/2008 ITA NO 795 OF 2008| BETWREN 1.THERE COMMISSIONER OF INCOME TAC.R.BUILDING, ATTAVARA,C.R.BUILDING, ATTAVARA, MANGALORE, oDASSISTANT COMMISSIONER OF INCOME TAXCIRCLE-1, UDUPI ...APPELLANTSCIRCLE-1, UDUPI ...APPELLANTS (BY SRI K V ARAVIND, ADV.) AN 1.M/S MANIPAL FINANCE CORPORATION LTDMANIPAL HOUSE,MANIPAL-576 104_ RESPONDENT (By Sri S PARTHASARATHI, Adv.) ITA filed u/S.260-A of I.T.Act, 1961 arising out ofOrderdated|07-03-2008passedin.ITANo.627/BNG/2007, for the Assessment Year 2004-05,praying that this Hon'ble Court may be pleased to allowthe appeal and set aside the order passed by the ITATBangalore in ITA No.627/BNG/2007 dated 07/03/2008. confirm the orders of the Appellate Commissioner andAssistant Commissioner, Income Tax, Circle — 1, Udupi. ITA NO 794 OF 2008| BETWRBN 1.THR COMMISSIONER OF INCOME TAX.C.R.BUILLDING,ATTAVARAMANGALORE,C.R.BUILLDING,ATTAVARAMANGALORE, 2.ASSISTANT COMMISSIONER OF INCOME TAXCIRLCE-1,C R BUILDING,UDUPIAPPBRLLANTS|CIRLCE-1,C R BUILDING,UDUPIAPPBRLLANTS| (By Sri K V ARAVIND, ADV.) ANT 1.M/S MANIPAL FINANCE CORPORATION LTD|MANIPAL HOUSE,MANIPAL-576104MANIPAL HOUSE,MANIPAL-576104 ... RESPONDENT (By Sri S PARTHASARATHI, Adv.) ITA filed u/S.260-A of I.T.Act, 1961 arising out ofOrder.datedO7-03-2008passed1nNITANo.626/BNG/2007, for the Assessment Year 2003-2004praying that this Hon'ble Court may be pleased toformulate the substantial questions of law statedtherein and allow the appeal and set aside the orderpassed by the ITAT Bangalore in ITAT Bangalore in ITANo.626/BNG/2007|datedO7-03-2008 confirmtheorders of the Appellate Commissioner and AssistantCommissioner, Income Tax Officer, Income Tax, Circle —|1, Udupi. These appeals coming on for hearing this day, NKumar J. delivered the following: JUDGMENT As common questions of law are involved in both these appeals, they are taken up for considerationtogether and disposed of by this common order. 2. The substantial questions of law which arisesfor consideration in both the appeals are as under: (i) In ITA 7959/2008, “Whether the Tribunal was correct inholding that the sum of Rs.1,78,12,000/-received by the assessee as fixed depositduring the earlier assessment year waswritten off during the current assessmentyear under a settlement resulted in cessationof a liability in the ordinary course of thebusiness of the assessee resulting in incomehiable to tax?” (1) In ITA 794/2008 “Whetherthe|second.AppellateTribunal was right in holding that a sum ofRs.2,/5,/6,000/- received by the assessee asfixed deposit during the earlier assessmentyear was written off by forfeiture during thecurrent assessment year under a settlementresulted in cessation of a liability in theordinary course of the business of theassessee resulting in income lable to tax inview of decision of Apex Court in the case ofCommissioner of Income Tax — vs — Lakshm1Vilas Bank LTd., (1996 ITR Vol.220 Page205)?”. (1) In ITA 794/2008 “Whetherthe|second.AppellateTribunal was right in holding that a sum ofRs.2,/5,/6,000/- received by the assessee asfixed deposit during the earlier assessmentyear was written off by forfeiture during thecurrent assessment year under a settlementresulted in cessation of a liability in theordinary course of the business of theassessee resulting in income lable to tax inview of decision of Apex Court in the case ofCommissioner of Income Tax — vs — Lakshm1Vilas Bank LTd., (1996 ITR Vol.220 Page205)?”. 3. The assesses is a non-banking financialcompany which was carrying on the business ofaccepting deposits from the public and carried on theactivity of hire purchase, leasing of machinery, vehiclesetc. with effect from 01.07.2002. Due to loss in the’business, the assessee discontinued the business ofaccepting deposits from the public. The assesseecompany framed a scheme of compromise arrangementunder section 391 of the Companies Act and placed thesame before the Hon'ble High Court of Karnataka for its"consideration. Under the scheme of compromise andarrangement, the assessee undertook to repay thedeposits within a period of 5 years and interest as wellwithin a period of 6 years. During the pendency of thematter before the Hon’ble High Court, the assessee withthe consent of the parties came to a settlement. Theetfect of the said settlement was that individual|depositors would forego their interest as well as part ofthe principal amount deposited with the assessee andwould accept the lesser amount in final settlement oftheir claim. The difference in the principal amount 1.e., the amount received minus the amount repaid to thedepositor was taken as capital receipt and the unpaidinterest that was credited was written back or offered asexceptional income. The assessing authority held thisunpaid capital sum of deposits is nothing but theforfeited portion of the fixed deposit which was acceptedby the assessee during the course of his business sinceforfeited amount is not payable to any of the personsand the assessee has become the owner of such§amount, the same is taxable in the hands of theassessee. Receiving the deposit is the business of theassessee. Till the deposit is repaid, it will remain ashability and once part of the deposit only is repaid infull settlement, the balance amount which is forfeited bythe assessee is nothing but a revenue receipt as it isaccepted by the assessee during the regular course ofbanking business which is no longer required to berepaid. Therefore, the said amount was treated asincome and tax was levied. Aggrieved by the saidorder,theaSSCSSEpreferredaynappealTOthe Commissioner of Income Tax (Appeals), Mangalore-Goa. The appeal came to be dismissed. 4. Aggrieved by the said order, the assesseepreferred an appeal to the tribunal. The tribunal relyingon the Judgment of the Bombay High Court in the caseof MAHINDRA & MAHINDRA LIMITED vs CIT ((2003)261 ITR 5O1 (Bom)) held the balance amount of depositwhich could not be paid by the assessee_ to thedepositors was never a charge to the Profit & LossAccount and thereby, at no point the tax liability, if any,of the earlier years was reduced. What was borrowedby the assessee was a capital asset repayable as such itcould be repaid in view of the circumstances in whichthe assessee was placed. Section 41(1) of the Act wouldget attracted only when there is an amount that ischarged to the Profit & Loss Account reducing the taxhability of any earlier years and therefore, the claim ofthe assessee was upheld and the orders passed by thelower authorities was set-aside. Aggrieved by the saidorder, the revenue is in appeal. o. Learned counsel for the revenue assailing theimpugned orders contends the assessee has receivedthe entire amount by way of deposit. While settling theclaim of the depositors, the entire amount is not repaid.That portion of the amount which was not repaid,continued to remain with the assessee and therefore,the said amount constitutes the income in the hands otthe assessee and is liable to tax. Therefore, he submits|the order passed by the tribunal is illegal and requiresto be set-aside and the orders passed by the lowerauthorities requires to be restored. 6. Per contra, learned counsel appearing for theassessees submitted in the facts of the case, the.assessee sustained loss in business, the assessee was.unable to repay the amount received as_ deposit. Therefore, a settlement was arrived at wherein thedepositors agreed to receive reduced amount indischarge of the liability and therefore, what was notpaid to him is not the amount which is either forfeitedby the assessee or is available at his hands to be charged as income under the Act. He relies on theJudgment of this Court and various other High Courtsin support of his contention and submits the orderpassed by the tribunal is valid and do not call forinterference. 7. This Court had an occasion to consider Section2(24) of the Income Tax Act which defines what an‘income’ is as well also Section 41(1) of the Act in theCASEOT COMMISSIONERORINCOME-TAXVS_INDUSTRIAL CREDIT AND DEVELOPMENT SYNDICATELTD. ((2006) 285 ITR 310 (Karn)). After referring to theJudgment of the Apex Court in the case of CIT vsCHAMANLAL MANGALDAS AND CO. ((1960) 39 ITR 8(SC)), CIT vs SHIV PRAKASH JANAK RAJ AND.CO.P.LTD. ((1996) 222 ITR 583)), MORVI INDUSTRIESLTD. Vs CIT ((1971) 82 ITR 835(SC)) and CIT vs T VSUNDARAM IYENGAR AND SONS LTD. ((1996) 222 ITR344, this Court has held as under: From the foregoing what emerges is thatincome-tax is a levy on income. The IT Act.takes into account two points of time at which the liability to tax is attracted, viz.,the accrual of the income or its receipt. It isthe income which has really accrued orarisen to the assessee that is taxable.|Whether the income has really accrued orarisen to the assessee must be judged in thelight of the reality of the situation. Income is—what comes in from outside. Given its|ordinary and natural meaning, the wordincome will take in any monetary return"coming in". When in reality there is neitheraccrual nor receipt of income by theassessee, even though an entry to that effectmight, in certain circumstances have beenmade in the books of account, it would notconstitute income for the purpose of levy oftax. In other words, income means realincome and not fictional one. This involves|really two aspects. One is that the receiptshould connote a real or tangible coming andnot something notional or fictional. A rebateobtained by the purchaser or remission ofdebt by a creditor would not result in thecreation of income in the hands ot the!purchaser or debtor. As in those instances|the assessee does not receive any income tohis nets though by such rebate or remissionhe is benefited to the extent of the rebate or remission. | 8. Similar view has been taken by the MadrasHigh Court in the case of ISKRAEMECO REGENT LTD.Vs COMMISSIONER OF INCOME TAX ((2011) 331 ITR317),|Bombay|High|Court1n theCaSCoT COMMISSIONBROFINCOMETAX.VS|XYLONHOLDINGS PVT. LTD. ((2013) 90 DTR (Bom) 209). | 9, As against this, the revenue relied on the|Judgment|ot the Apex.Court1n theCASEoT COMMISSIONER OF INCOMB TAX vs LAKSHMI VILAS|BANK LTD. ((1996) 220 ITR 3005). 8. Similar view has been taken by the MadrasHigh Court in the case of ISKRAEMECO REGENT LTD.Vs COMMISSIONER OF INCOME TAX ((2011) 331 ITR317),|Bombay|High|Court1n theCaSCoT COMMISSIONBROFINCOMETAX.VS|XYLONHOLDINGS PVT. LTD. ((2013) 90 DTR (Bom) 209). | 9, As against this, the revenue relied on the|Judgment|ot the Apex.Court1n theCASEoT COMMISSIONER OF INCOMB TAX vs LAKSHMI VILAS|BANK LTD. ((1996) 220 ITR 3005). That was a case where the bank had purchasedthe securities at face value. This cost cannot be'§anything less than the price which was actually paid bythe bank. The bank would have handed over the'§securities to the constituents if he had not defaulted. Inthat case, the bank would have been entitled only to thebrokerage. Since the Company defaulted, the depositamount was forfeited and the end result of the’transaction was that the bank became full owner of thesecurities and the amount lying in deposit with itbecame its own money. The forfeited amount becamethe bank’s income made in the course of its bankingbusiness and had to be assessed accordingly in the yearin which it became the bank’s money. In that context, it was held after its forfeiture, the deposited amountbecame the property of the bank. The money that wasutilized for the purchase of the security was the bank’smoney and therefore, it was held when the depositbecame the money of the bank, it is liable to tax, as inreality the bank received the said amount by way olforfeiture. | 10. Similarly, in the case of COMMISSIONER OF|INCOME TAX vs T V SUNDARAM IYENGAR & SONS|LTD. ((1996) 222 ITR 344 (SC)) the money was receivedby the assessee in the course of carrying on hisbusiness although it was treated as deposit and was ofcapital nature, at the point of time it was received byefflux of time the money has become the assessee’s ownmoney. What remains aiter adjustment of the depositshas not been claimed by the customers. The claims ofthe customers have become barred by limitation. Theassessee itself has treated the money as its own moneyand taken the amount to its profit and loss account.There was no explanation from the assessee while the surplus money was taken to its Profit and Loss Accounteven if it was somebody else’s money. In that context, itwas held when the claim of the customer became time|barred and when the assessee treated it as its moneyand taken it to the Profit and Loss Account, it is anincome earned by the assessee in the course of itsbusiness and therefore, it was taxable. Therefore, theaforesaid two judgments of the Apex Court has noapplication to the facts of this case. 11. In the instant case, no-doubt the assessee|received the deposits. The deposits were repayable withinterest. The assessee sustained loss in the business.They framed a scheme of compromise/arrangement.During the course of such a claim before the HighCourt, the assessee entered into an arrangement withthe depositors who were willing to receive a portion ofthe amount deposited by them towards settlement oftheir claim. Therefore, those depositors were paid aportion of the money which they had deposited. Withsuch payment, the entire hability to pay the amount 11. In the instant case, no-doubt the assessee|received the deposits. The deposits were repayable withinterest. The assessee sustained loss in the business.They framed a scheme of compromise/arrangement.During the course of such a claim before the HighCourt, the assessee entered into an arrangement withthe depositors who were willing to receive a portion ofthe amount deposited by them towards settlement oftheir claim. Therefore, those depositors were paid aportion of the money which they had deposited. Withsuch payment, the entire hability to pay the amount received stood extinguished. However, by suchextinguishment of the liability, the assessee did notreceive any amount either by forfeiture or by discountand it is a case of sheer inability to pay the amountreceivedby oT deposits.Underthosecircumstances, though such rebate or remission hasbenefitted the assessee insofar as discharging hishability to the depositor, in reality it did not result inany income at the hands of the assessee unless there is"accrual or receipt of income by the assessee, it wouldnot constitute income for the purpose of levy of tax. Theincome to be taxed under the Act should be real incomeand not fictional one. Therefore, the tribunal was.justified in holding that the balance amount of depositwhich was not repaid under the arrangement, did notconstitute an income and therefore, the assessee is notlable to pay any tax under the said context. 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