TMI Blog2003 (1) TMI 71X X X X Extracts X X X X X X X X Extracts X X X X ..... as per Reference Application No. 1561 of 1982 filed by the assessee and Reference Applications Nos. 1708 of 1982 and 1709 of 1982 filed by the Department. The main dispute falls under Reference Application No. 1709 of 1982 filed by the Department under which the following questions of law arise for determination. "1. Whether, on the facts and in the circumstances of the case, the sum Of Rs. 57,74,064 due by the assessee to Kaiser Jeep Corporation of America and written off by the lender constituted taxable income of the assessee ? 2. Whether, on the facts and in the circumstances of the case, the assessee having obtained deduction of Rs. 27,29,585 by way of depreciation on the cost of machinery and toolings, was taxable under section 41(l) of the Income-tax Act as the cost of the machinery/toolings being forgone by Kaiser Jeep Corporation during the assessment year 1976-77 ? 3. Whether the Tribunal was right in holding that waiver of the loan repayment was not related to stock-in-trade but to capital asset and, therefore, it was not a remission of liability under section 41(1) of the Act ? 4. Whether the Tribunal was right in holding that the amount of Rs. 57,74,064 con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Jeep International Corporation also situate in USA. The total cost of the toolings received was $ 6,50,000. The toolings were received as per invoice dated September 29, 1965, for $ 309,693.37 ; October 29, 1965, for $ 339,861.63 and on November 16, 1965, for $ 445.00 in all amounting to $ 6,50,000. Consequently, in terms of the approval granted by the Central Government, the assessee received loan for securing the toolings from KJC for which the assessee gave three promissory notes dated September 16, 1965, October 28, 1965, and November 19, 1965, in all for $ 6,50,000. Accordingly, the toolings were supplied by KJC. The cost of the toolings inclusive of the difference in exchange rate consequent upon devaluation of the rupee in 1966 and customs duty paid on the import of the toolings was treated by the company as current assets and shown under the sub-head "Tools". The cost of the tools was amortised each year based on the number of trucks produced. In the company's accounts for the year ending October 31, 1975, corresponding to the assessment year in question, the tools at their amortised value were transferred to fixed assets as the company treated the tools as capital asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee had got the benefit of depreciation allowance over a period of nine years amounting to Rs. 27,29,585 on waiver of the loan, the said amount of Rs. 27,29,585 had to be adjusted or set off against the amount of Rs. 57,74,064. Being aggrieved, the matter was carried in appeal to the Tribunal which took the view that the contract of purchase of toolings and the loan agreement constituted one contract/transaction for purchase of toolings. That, these two transactions cannot be treated as two separate transactions. That, there was only one transaction for purchase. That the Government of India had directed the assessee to obtain a loan in order to finance a purchase because, at that time, there was acute shortage of foreign exchange. That the promissory notes were for value received. That the consideration for which promissory notes came to be made was against shipment of goods. Therefore, the Tribunal, on the facts, came to the conclusion that there was one contract of purchase of the tools and that purchase consideration was paid vide promissory notes. The Tribunal further concluded that section 28(iv) of the Act is applicable only to benefits or perquisites received by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee had purchased the toolings as a part of trading activity. That the assessee had incurred a trading liability of Rs. 57,74,064 when it entered into an agreement for purchase of toolings with KJC. Therefore, on waiver, there was a remission of trading liability and, consequently, section 41(1) of the Act stood attracted. In further alternative, it was urged on behalf of the Department that the assessee had received depreciation allowance for nine years amounting to Rs. 27,29,585 which should have been adjusted against a sum of Rs. 57,74,064 under section 41(1) of the Act. In reply, Mr. Mistry, learned counsel appearing on behalf of the assessee, submitted that the assessee had not imported trading goods. He contended that the assessee had imported toolings as a part of plant and machinery. That the assessee is a manufacturer of jeeps. That the toolings were dies. That these toolings did not constitute trading goods. That the assessee had not received deduction for Rs. 57,74,064 on import of the equipment. He contended that in order to attract section 41(1) of the Income-tax Act, the first requisite which ought to be satisfied was that the assessee should have got ded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , submitted that section 28(iv) was not applicable. That, in any event, such benefit should be in the nature of income. Otherwise, he contended that all capital receipts would become income under section 28(iv). In the circumstances, he contended that no interference is called for in the view expressed by the Tribunal. Findings : At the very outset, we wish to point out three facts which are undisputed: (a) that a loan was advanced by KJC to the assessee, (b) that the assessee had paid interest at 6 per cent. per annum for ten years being the period of contract, (c) that the assessee never got deduction for payment of interest under section 36(1)(iii) or under section 37 of the Act. These three facts are not disputed by the Department. Therefore, we are required to consider the applicability of the provisions of sections 28(iv) and 41(1) of the Act in the light of the abovementioned three undisputed facts. (A) On section 28(iv) : At the outset, we wish to clarify that this judgment is confined to the facts of this case. This is because the value of any benefit or perquisite arising from business, as contemplated by section 28(iv), could accrue in numerous ways. The inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the circumstances, section 28(iv) is not attracted. Lastly, we may mention that, in this case, AMC agreed to forego the principal amount of loan as a part of take-over arrangement with KJC to which the assessee was not a party. The waiver of the principal amount was unexpected. In the circumstances, one fails to understand how such waiver would constitute business income. (B) On section 41(1) : Alternatively, it was argued on behalf of the Department that in this case waiver constituted remission of trading liability and, therefore, section 41(1) stood attracted. We do not find any merit in this argument. Firstly, in the present case, the prerequisite of section 41(1) is not applicable. In order to apply section 41(1), an assessee should have obtained a deduction in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee. In this case, the assessee has not obtained such allowance or deduction in respect of expenditure or trading liability. It is not disputed that the assessee has paid interest at 6 per cent. over a period of ten years to KJC on Rs. 57,74,064. In respect of that interest, the assessee never got deduction unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 41(1) was not attracted. In our case, the most fundamental fact which is required to be borne in mind is that there was no deduction given to the assessee in earlier years and, therefore, Rs. 57,74,064 could not be included as income under section 41(1) of the Act. Lastly, it is important to bear in mind that the toolings constituted capital asset and not stock-in-trade. Therefore, taking into account all the above facts, section 41(1) of the Act is not applicable. In the circumstances the above questions are all answered in the affirmative, i.e., in favour of the assessee and against the Department. This disposes of Reference Application No. 1709 of 1982 filed by the Department : Reference Application No. 1708 of 1982 filed by Department : The learned advocates on both sides have informed us that the questions falling under Reference Application No. 1708 of 1982 stand covered by various judgments of our court. Accordingly, we answer the following questions. "(i) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the assessee was entitled to deduction of 100 per cent. of the initial contribution made to app ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
