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2009 (8) TMI 836 - AT - Income TaxCessation of Loan Liability u/s 28 or 41 - assessee has shown a closing balance of unsecured loans taken from holding company which has written off the entire amount as irrecoverable from the assessee - assessee submission that the loan was obtained for investment in shares, not of the holding company as held by AO but of other concerns and has incurred losses. Accordingly, the company stood dissolved now, but the holding company has written off the amount as there was no chance of recovering the amount in the relevant year - CIT(A), while accepting that provisions of section 41(1) does not apply and AO’s action is not found justified, in making the addition of loan liability as income under section 41(1), held that the provisions of section 28 would apply HELD THAT:- The holding company has advanced funds to the assessee-company in 1998 which was received as share application money, later on transferred to unsecured loan. The amounts were utilised in investments and the incomes thereon were offered under the head ‘capital gains’ and not as ‘business income’. As rightly held by the CIT(A), provisions of section 41(1) invoked by the AO does not apply. For attracting the provisions of section 41(1) the first requisite condition to be satisfied is that the assessee should have got the deduction or benefit or allowance in respect of loss, expenditure or trading liability incurred by it and consequently, during any previous year the assessee should have received any amount in respect of such loss, expenditure or trading liability by way of remission or cessation thereon. The remission would become income only when the assessee has claimed deduction earlier. In the instant case the assessee has not got any deduction on account of acquisition of capital assets as the same has been reflected in the Balance Sheet and not in the P & L Account and hence, applicability of provisions of section 41(1) are not there. The CIT(A)’s order to that extent is correct both on facts and on law. However, he wrongly invoked the provisions of section 28. The assessee’s business activity may comprise investment in shares and securities, but as far as computation of income is concerned the profit and loss in that transactions are said to be under the head ‘capital gains’ but not as ‘business income’, hence, the gain earned by the assessee in the course of business in investment and advance of loans is in the capital field but cannot be on the revenue field. There is no benefit or perquisite arising to the assessee in this regard. Moreover, the assessee has to write off the amount in the books of account and the amount was still outstanding at the end of the year. As rightly pointed out by the ld counsel the decision of the Hon’ble Bombay High Court in the case of Solid Containers Ltd. [2008 (8) TMI 156 - BOMBAY HIGH COURT] does not apply to the facts of the case and, moreover, similar to the decision of the Hon’ble Bombay High Court in the case of Mahindra & Mahindra Ltd.[2003 (1) TMI 71 - BOMBAY HIGH COURT]. The loans availed for acquiring the capital asset, i.e., shares, when waived cannot be treated as assessable income for invoking the provisions of section 28. Since the original receipt was undoubtedly on account of capital nature, its waiver does not have the quality of changing the same into a revenue receipt. We are of the opinion that the provisions of section 28 does not apply and the amount is not taxable under the provisions of the Act. Accordingly, order of CIT is dismissed and assessee’s grounds are allowed. AO is directed to delete the amount.
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