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2006 (3) TMI 204 - AT - Income TaxCessation of liability - Chargeable to tax - earnest money or an advance - NCDs were issued in order to borrow the funds to raise the capital - capital nature or a revenue receipt - HELD THAT:- We have examined the judgment of the Hon'ble Gujarat High Court in the case of Chetan Chemicals (P.) Ltd.[2001 (10) TMI 12 - GUJARAT HIGH COURT] in which Their Lordships have held that on a reading of section 41(1) of the Income-tax Act, 1961, it is apparent that before the section can be invoked, an allowance or a deduction has been granted during the course of assessment for any year in respect of loss, expenditure or trading liability which is incurred by the assessee, and subsequently during any previous year the assessee obtains, whether in cash or in any other manner, any amount in respect of such trading liability by way of remission or cessation of such liability. In that case, either the amount obtained by the assessee or the value of the benefit accruing to the assessee can be deemed to be the profits and gains of business or profession and can be brought to tax as income of the previous year in which such amount or benefit is obtained. We find that the NCDs were issued to raise a capital of the assessee before commencement of the business and whatever earnest money or advance was received on account of issuance of NCDs, was kept in separate account and was shown as loan liability upon the assessee and this liability was never debited to the profit and loss account nor was its deduction claimed in the relevant assessment year. Since, the NCDs were issued in order to borrow the funds to raise the capital, the amount received in lieu thereof has assumed the character of capital receipt if at all not treated to be a loan liability, inasmuch as issuance of NCDs was not a business of the assessee. Thus, the earnest money or an advance amount received on account issuance of NCDs, if forfeited on account of nonpayment of call money, the loan liability would only convert into a capital receipt. It would not assume a character of revenue receipt or business receipt because NCDs were not issued in the course of regular business of the assessee as evident from the facts of the case. Assessee's main business is of cement and it was in the process of set up of cement manufacturing plant at Satna during the impugned assessment year. In these circumstances, we are constrained to hold that the amount received by the assessee in lieu of issuance of NCDs which were forfeited later on account of non-payment of call money assumes a character of capital receipt which earlier was shown as a loan liability in the books of account of the assessee. If we consider this receipt to be a business receipts even then it would not be taxable to tax under the provisions of section 41(1) of the Act, inasmuch as there was no allowance or deduction of this liability in the earlier years. We also do not find any provision in this Act according to which this type of receipts are chargeable to tax. We, therefore, are of the considered view that the revenue was not justified in treating this receipt as revenue receipt. We therefore, set aside the order of CIT(A) and delete the addition. In the result, the appeal of the assessee is allowed.
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