The Commissioner of Income Tax-I vs. M/s. A.P.Rayons Ltd.,

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 Section 41 and other relevant provisions of the Income Tax Act (for short ‘the Act’).

The respondent is a Company established with foreign collaboration. At one point of time, it became sick; and as part of the scheme evolved by the Board for Industrial 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, the Company has been amalgamated with another under the Scheme. In the financial year, which is previous to the assessment year 1994-95, the Swedish Company waived 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, declaring income of Rs.1,36,73,777/-. The Assessing Officer initially gave an intimation of prima facie adjustment under Section 143 (1) (a) of the Act and thereafter passed an order under Section 143 (3) of the Act on 29.03.1996, assessing the total income at Rs.1,82,46,846/-. The said order became final.

The jurisdictional Commissioner identified the case of the respondent for suo motu revision under Section 263 of the Act. Accordingly, a show cause notice was issued, 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 made to 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 the very initiation of proceedings under Section 263 of the Act. It has also stated that the facts of its case are different and distinguishable from those in the judgment of the Supreme Court in T.V.Sundaram Iyengar’s case. The Commissioner was not satisfied with the explanation and he passed an order dated 25.03.1998, holding that the respondent is under obligation to pay income tax on the sum of Rs.70,00,000/-.

The respondent filed I.T.A.No.360/Hyd/98 before the Hyderabad Bench ‘A’ of the Income Tax Appellate Tribunal. The appeal was allowed by the Tribunal through order dated 18.02.2003. Hence, this further appeal by the Revenue, under Section 260-A of the Act.

Smt. Kiranmayee, learned counsel, representing Mr.J.V.Prasad, learned Standing Counsel for the appellant, submits that undisputedly the respondent derived the benefit of retaining the sum of Rs.70,00,000/-, which was advanced to it as a loan, and on that account, the amount deserves to be treated as income and that 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 under Section 263 of the Act cannot be sustained in law. It is also her plea that the ratio of the judgment of the Supreme Court in T.V.Sundaram Iyengar’s case squarely applies to the facts of the present case and the effort made by the Tribunal to distinguish the same by referring to some other cases cannot be sustained in law.

Mr. Ch.Pushyam Kiran, learned counsel for the respondent, on the other hand, submits that the very occasion to invoke Section 263 of the Act to the facts of the case did not exist and the Tribunal has correctly reversed the order passed by the Commissioner. He submits that, at no point of time, the respondent claimed any deduction or allowance of the amount in question and, thereby, the occasion to treat it as income on the cessation of liability to repay, did not arise.

The returns filed by the respondent for the assessment year 1994-95 were processed 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 in the latter exercise, the income to the extent of about Rs.50,00,000/- was added and the same became final. The jurisdictional Commissioner took up the case of the respondent for re-opening or exercise of suo motu powers of revision under Section 263 of the Act. Though extensive arguments were advanced before the Commissioner as well as the Tribunal as to the very permissibility of invocation of Section 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 respondent or its predecessor availed the loan of Rs.70,00,000/- advanced by one of the promoters. Since it was raised for the purpose of restructuring and revival of the company, the question of such amount being treated as a trade receipt, does not arise. It was not even the case of the revenue that the amount of Rs.70,00,000/- was received in the course of trade or business. Once the amount is not received in the course of trade, for all practical purposes, it tends to become part of capital. The agency, 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 purview of the trade activity. The waiver of loan has only resulted in cessation of the liability on the part of the respondent to repay it. The entire controversy is as to whether such a 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 or categories of income. However, the necessity is felt only as a step in the elimination process. The amount received as a loan for revival of a sick company does not fall into any of the categories of income under Section 14 of the Act. It safely becomes part of the capital. The Act does not provide for levy of tax on capital. The only provision, which deals with the change of character of amounts received by an assessee, is Section 41 of the Act. It reads as under: “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 assess (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 cash or in any other manner whatsoever, any amount in respect of which loss or expenditure was incurred by the first-mentioned person or some benefit in respect of the trading liability referred to in clause (a) by way of remission or cessation thereof, the amount obtained by the successor in business or the value of benefit accruing to the successor in business shall be deemed to be profits and gains of the business or profession, and accordingly chargeable to income-tax as the income of that previous year

(The remaining part of the Section is omitted as not necessary for 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 assessment year in respect of loss, expenditure or trading liability, the said amount is liable to be treated as income, if the liability in relation thereto, ceased in the subsequent year. It is more in the case of successors in business.

Three aspects become relevant in this regard. The first is that the amount must be the one, as regards which, allowance or deduction has been made in any earlier assessment year. The second is that the obligation in respect of such amount, be it as to repayment or other similar obligation; must have ceased in the subsequent year. The third is that the event should occur vis-à-vis the successor of an assessee, in business. If these facts of the present case are verified with those aspects, it becomes clear that the occasion to apply them does not arise. The reason is that it was not even

alleged by the Commissioner that the respondent has claimed deduction or allowance of the amount of Rs.70,00,000/- in the earlier assessment year. The second is that the amount was never received as part of the activity of trade or business. Though the third ground applies, namely that it is a successor, that would not make much of difference. The principle underlying under Section 41 of the Act is that if an amount is received by an assessee in the course of trade, and deduction thereof is claimed by citing the obligation to repay; such as when the security deposits are received; and the obligation to repay the amount has ceased, either by act of the parties or by operation of law, such as limitation, the corresponding amount deserves to be treated as income. The reason is that the assessee retains that amount devoid of any obligation to repay; and naturally tax is to be paid 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.R for 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 the capital. The writing-off such loan would, if at all, result in the fluctuation of the value of the capital assets. Though in a remote sense, the situation can be compared to the one of the increase in the market value of a land owned by a company/assesee. For example, if the assessee purchased the land for the purpose of its business activity for a sum of Rs.10,00,000/- and over the period, the value has appreciated to Rs.50,00,000/-, the assessee cannot be said to have got the income of Rs.40,00,000/-. Similarly, if loan was taken by an assessee, not being for trading purpose and it is written-off, to certain extent, it would result in fluctuation in the asset value, and the amount cannot be treated as an item of income.

The judgment of the Supreme Court in T.V.Sundaram Iyengar’s case was 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 measure of security. For one reason or the other, the assessee was relieved from the obligation to repay the deposits. The assessee itself was so clear that it has shown 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 gets transformed into trade receipt. The fact that the assessee itself entered that amount into profit and loss account, weighed with the Supreme Court. The facts of the present case are totally different. Firstly, the respondent did not enter the loan amount in the profit and loss account, before, or after it was written-off. Secondly, it was not a trade receipt. The Tribunal has taken this and other aspects into account and 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.

The miscellaneous petitions, if any, filed in this appeal shall stand disposed of. ______________________ L.NARASIMHA REDDY,J

____________________ CHALLA KODANDA RAM,J 17.12.2014 Note: L.R.copy B/o v v