This Appeal Presents An Interesting Point For Discussion, Referable To Section 41 And Other Relevant Provisions Of The Income Tax Act (For Short ‘The Act’ v. T.v.sundaram Iyengar

HON’BLE SRI JUSTICE L. NARASIMHA REDDY AND HON’BLE SRI JUSTICE CHALLA KODANDA RAM I.T.T.A No.133 OF 2004 JUDGMENT:-(Per Hon’ble Sri Justice L.Narasimha Reddy) This appeal presents an interesting point for discussion, referable to Section41 and other relevant provisions of the Income Tax Act (for short ‘the Act’). The respondent is a Company established with foreign collaboration. At onepoint of time, it became sick; and as part of the scheme evolved by the Board forIndustrial and Financial Reconstruction (for short ‘the B.I.F.R’), one of the promoters,a Swedish Company, advanced a loan of about Rs.70,00,000/-. Thereafter, theCompany has been amalgamated with another under the Scheme. In the financialyear, which is previous to the assessment year 1994-95, the Swedish Companywaived the loan stating to be as part of discharge of obligations under the Scheme. The respondent filed its returns for the assessment year 1994-95, declaringincome of Rs.1,36,73,777/-. The Assessing Officer initially gave an intimation ofprima facie adjustment under Section 143 (1) (a) of the Act and thereafter passed anorder under Section 143 (3) of the Act on 29.03.1996, assessing the total income atRs.1,82,46,846/-. The said order became final. The jurisdictional Commissioner identified the case of the respondent for suomotu revision under Section 263 of the Act. Accordingly, a show cause notice wasissued, requiring the respondent to explain as to why the amount of Rs.70,00,000/-be not treated as income for the concerned assessment year. Reference was madeto the judgment of the Supreme Court in Commissioner of Income Tax v.T.V.Sundaram Iyengar. The respondent submitted explanation. An objection was raised as to thevery initiation of proceedings under Section 263 of the Act. It has also stated that thefacts of its case are different and distinguishable from those in the judgment of theSupreme Court in T.V.Sundaram Iyengar’s case. The Commissioner was notsatisfied with the explanation and he passed an order dated 25.03.1998, holdingthat the respondent is under obligation to pay income tax on the sum ofRs.70,00,000/-. The respondent filed I.T.A.No.360/Hyd/98 before the Hyderabad Bench ‘A’ ofthe Income Tax Appellate Tribunal. The appeal was allowed by the Tribunal throughorder dated 18.02.2003. Hence, this further appeal by the Revenue, under Section260-A of the Act. Smt. Kiranmayee, learned counsel, representing Mr.J.V.Prasad, learnedStanding Counsel for the appellant, submits that undisputedly the respondentderived the benefit of retaining the sum of Rs.70,00,000/-, which was advanced to itas a loan, and on that account, the amount deserves to be treated as income andthat the Tribunal was not correct in reversing the order passed by the Commissioner.She contends that the observation of the Tribunal regarding exercise of power underSection 263 of the Act cannot be sustained in law. It is also her plea that the ratio ofthe judgment of the Supreme Court in T.V.Sundaram Iyengar’s case squarelyapplies to the facts of the present case and the effort made by the Tribunal todistinguish the same by referring to some other cases cannot be sustained in law. Mr. Ch.Pushyam Kiran, learned counsel for the respondent, on the otherhand, submits that the very occasion to invoke Section 263 of the Act to the facts ofthe case did not exist and the Tribunal has correctly reversed the order passed bythe Commissioner. He submits that, at no point of time, the respondent claimed anydeduction or allowance of the amount in question and, thereby, the occasion to treatit as income on the cessation of liability to repay, did not arise. Mr. Ch.Pushyam Kiran, learned counsel for the respondent, on the otherhand, submits that the very occasion to invoke Section 263 of the Act to the facts ofthe case did not exist and the Tribunal has correctly reversed the order passed bythe Commissioner. He submits that, at no point of time, the respondent claimed anydeduction or allowance of the amount in question and, thereby, the occasion to treatit as income on the cessation of liability to repay, did not arise. The returns filed by the respondent for the assessment year 1994-95 wereprocessed not only under Section 143 (1) (a) of the Act, but also under Section 143(3) of the Act. Under the former, the facts and figures were virtually accepted and inthe latter exercise, the income to the extent of about Rs.50,00,000/- was added andthe same became final. The jurisdictional Commissioner took up the case of therespondent for re-opening or exercise of suo motu powers of revision under Section263 of the Act. Though extensive arguments were advanced before theCommissioner as well as the Tribunal as to the very permissibility of invocation ofSection 263 of the Act to the facts of the case, we do not intend to dwell deep into it. Coming to the merits of the matter, it is a matter of record that the respondentor its predecessor availed the loan of Rs.70,00,000/- advanced by one of thepromoters. Since it was raised for the purpose of restructuring and revival of thecompany, the question of such amount being treated as a trade receipt, does notarise. It was not even the case of the revenue that the amount of Rs.70,00,000/- wasreceived in the course of trade or business. Once the amount is not received in thecourse of trade, for all practical purposes, it tends to become part of capital. Theagency, which advanced the loan, has written-off the same. The fact that the writing-off the loan was as part of the obligation under the Scheme framed under B.I.F.R,would certainly become important, for keeping the entire amount outside the purviewof the trade activity. The waiver of loan has only resulted in cessation of the liabilityon the part of the respondent to repay it. The entire controversy is as to whether sucha cessation has the effect of transforming the loan amount, into income. It is too primary to refer to Section 14 of the Act to identify the sources orcategories of income. However, the necessity is felt only as a step in the eliminationprocess. The amount received as a loan for revival of a sick company does not fallinto any of the categories of income under Section 14 of the Act. It safely becomespart of the capital. The Act does not provide for levy of tax on capital. The onlyprovision, which deals with the change of character of amounts received by anassessee, is Section 41 of the Act. It reads as under: “Where an allowance or deduction has been made in theassessment for any year in respect of loss, expenditure ortrading liability incurred by the assess (hereinafter referred to asthe first-mentioned person) and subsequently during anyprevious year,- (a) the first-mentioned person has obtained, whether in cash orin any other manner whatsoever, any amount in respect of suchloss or expenditure or some benefit in respect of such tradingliability by way of remission or cessation thereof, the amountobtained by such person or the value of benefit accruing to himshall be deemed to be profits and gains of business orprofession and accordingly chargeable to income-tax as theincome of that previous year, whether the business orprofession in respect of which the allowance or deduction hasbeen made is in existence in that year or not; or (a) the first-mentioned person has obtained, whether in cash orin any other manner whatsoever, any amount in respect of suchloss or expenditure or some benefit in respect of such tradingliability by way of remission or cessation thereof, the amountobtained by such person or the value of benefit accruing to himshall be deemed to be profits and gains of business orprofession and accordingly chargeable to income-tax as theincome of that previous year, whether the business orprofession in respect of which the allowance or deduction hasbeen made is in existence in that year or not; or (b) the successor in business has obtained, whether in cash orin any other manner whatsoever, any amount in respect ofwhich loss or expenditure was incurred by the first-mentionedperson or some benefit in respect of the trading liability referredto in clause (a) by way of remission or cessation thereof, theamount obtained by the successor in business or the value ofbenefit accruing to the successor in business shall be deemedto be profits and gains of the business or profession, andaccordingly chargeable to income-tax as the income of thatprevious year (The remaining part of the Section is omitted as not necessaryfor the purpose of this case).” From a perusal of this, it becomes clear that where the amount,regarding which allowances or deduction has been claimed in an assessmentyear in respect of loss, expenditure or trading liability, the said amount is liableto be treated as income, if the liability in relation thereto, ceased in thesubsequent year. It is more in the case of successors in business. Three aspects become relevant in this regard. The first is that theamount must be the one, as regards which, allowance or deduction has beenmade in any earlier assessment year. The second is that the obligation inrespect of such amount, be it as to repayment or other similar obligation; musthave ceased in the subsequent year. The third is that the event should occurvis-à-vis the successor of an assessee, in business. If these facts of thepresent case are verified with those aspects, it becomes clear that theoccasion to apply them does not arise. The reason is that it was not even alleged by the Commissioner that the respondent has claimed deduction orallowance of the amount of Rs.70,00,000/- in the earlier assessment year. Thesecond is that the amount was never received as part of the activity of trade orbusiness. Though the third ground applies, namely that it is a successor, thatwould not make much of difference. The principle underlying under Section 41 of the Act is that if an amount isreceived by an assessee in the course of trade, and deduction thereof isclaimed by citing the obligation to repay; such as when the security depositsare received; and the obligation to repay the amount has ceased, either by actof the parties or by operation of law, such as limitation, the correspondingamount deserves to be treated as income. The reason is that the assesseeretains that amount devoid of any obligation to repay; and naturally tax is to bepaid thereon, since it has been received in the course of trade. A loan advanced to a Company as part of a scheme framed by B.I.F.Rfor its revival, can, by no stretch of imagination, be treated as its trade receipt.It has already been mentioned that, at the most, it can be treated as part of thecapital. The writing-off such loan would, if at all, result in the fluctuation of thevalue of the capital assets. Though in a remote sense, the situation can becompared to the one of the increase in the market value of a land owned by acompany/assesee. For example, if the assessee purchased the land for thepurpose of its business activity for a sum of Rs.10,00,000/- and over theperiod, the value has appreciated to Rs.50,00,000/-, the assessee cannot besaid to have got the income of Rs.40,00,000/-. Similarly, if loan was taken byan assessee, not being for trading purpose and it is written-off, to certainextent, it would result in fluctuation in the asset value, and the amount cannotbe treated as an item of income. The judgment of the Supreme Court in T.V.Sundaram Iyengar’s casewas in relation to deposits received by the assessee in the course of its trade.The dealers or other persons kept certain amounts as deposits, as a measureof security. For one reason or the other, the assessee was relieved from theobligation to repay the deposits. The assessee itself was so clear that it hasshown the amounts in the profits and loss account. The Supreme Court took the view that on cessation of liability to repay the amount of deposit, it getstransformed into trade receipt. The fact that the assessee itself entered that amountinto profit and loss account, weighed with the Supreme Court. The facts of thepresent case are totally different. Firstly, the respondent did not enter the loanamount in the profit and loss account, before, or after it was written-off. Secondly, itwas not a trade receipt. The Tribunal has taken this and other aspects into accountand allowed the appeal. We are not convinced to take a different view. The appeal is, accordingly, dismissed. There shall be no order as to costs. of. The miscellaneous petitions, if any, filed in this appeal shall stand disposed ______________________L.NARASIMHA REDDY,J 17.12.2014Note: L.R.copyB/ov v ____________________ CHALLA KODANDA RAM,J