PR. COMMISSIONER OF INCOME TAX vs. M/S RAJASTHAN CO-OPERATIVE DAIRY FEDERATION LTD.

Facts

The Revenue is in appeal against an order of the ITAT which upheld the deletion of an addition of Rs. 4,74,77,000/-. For Assessment Year 2004-05, the Assessing Officer (AO) treated this amount as income under Section 41(1)(a) of the Income Tax Act. The assessee, a cooperative society, had secured a loan from NDDB, with the Government of Rajasthan as guarantor, subject to an annual commission. This commission was shown as payable to the Government. The State of Rajasthan subsequently wrote off this liability, allowing it to be treated as a capital grant for capital and rehabilitation purposes. The AO considered this a cessation of liability and taxable income. The CIT(A) deleted the addition, holding it was not a remission/cessation of liability but a capital grant.

Held

The High Court held that the ruling in Commissioner of Income Tax, Madurai Vs. T.V. Sundaram Iyengar & Sons Ltd. would not apply in this case. The Court noted that both the CIT(A) and ITAT had concurrent findings of fact. The crucial factor was that the write-off by the State was conditional upon the amount being utilized for capital/rehabilitation purposes by the assessee. This conditionality, coupled with the fact that the loan utilized by the assessee was for capital purposes and the assessee continued to be liable to repay the loan amounts, distinguished the present case from the precedent cited by the Revenue. The Court found that the transaction was not a simple remission or cessation of liability but a conditional grant for capital expenditure. Therefore, no substantial question of law arose.

Key Issues

1. Whether the amount of Rs. 4,74,77,000/-, representing guarantee commission payable to the Government of Rajasthan, which was written off by the State and allowed to be treated as a capital grant, could be brought to tax as revenue income under Section 41(1)(a) of the Income Tax Act, 1961. Assessee's Contention: The CIT(A) and ITAT held that the write-off by the Government was not a remission or cessation of liability but a capital grant, conditional upon its use for capital/rehabilitation purposes. Therefore, it did not fall under Section 41(1)(a). Revenue's Contention: The Revenue argued, relying on Commissioner of Income Tax, Madurai Vs. T.V. Sundaram Iyengar & Sons Ltd. (1996) 222 ITR 344 (SC), that once amounts are treated as revenue and later the assessee treats them as its own money, they should be treated as income. The AO had disallowed the amount, treating it as income under Section 41(1)(a).