TMI Blog2008 (8) TMI 402X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 on 28th March, 2002. 4. In the course of assessment proceedings, the AO had noticed that the assessee company had made a forfeiture of a sum of Rs. 10.65 crores claimed to be a loan received by the assessee company from erstwhile USSR based company M/s Soufintrade Co. Ltd. (hereinafter referred to SFT), and credited the same to its reserves and surplus account in the balance sheet. The AO further stated that this amount was utilized for issue of bonus share. 5. The facts of the case have been discussed by the AO in paras 4 to 6 of his order as under: "4. M/s Comecom Overseas (P) Ltd. (COPL) with its registered office at D-5. Kalindi, New Delhi and M/s Soufintrade Overseas Ltd. (SFT), a joint stock company in USSR, allegedly, entered into an agreement on 14th Nov., 1991 to form a joint venture company India in the name of M/s Eurolink Overseas (P) Ltd. for the purpose of production and development of computer software in India with equity participation of Rs. 70 lacs each, by both the companies. The name of M/s Eurolink Overseas (P) Ltd. was subsequently changed to M/s Velocient Technologies (P) Ltd. i.e., the company under assessment. Apart from equity participation, the Ru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he purpose of setting up of software development unit in India. Instead, the money was invested in another group concern, namely, M/s Milestone Leasing Finance (P) Ltd. in the form of share capital. (v) A letter was written by the assessee company on 23rd June, 1993. The gist of the letter is as under: 'You will appreciate that the project was put together based on your assurance about the buy back and assured market concept. However, due to your failure to provide us software development opportunities, we have landed ourselves in a situation whereby we may have to incur heavy loss during the current year and coming year, as we are constrained to look to other untapped markets namely USA and far east. We, therefore, once again request you to kindly get us some valuable contracts from your associates and acquaintances. This way at least we will be able to sustain ourselves and your efforts will help us to make this project a grand success.' Again on 7th Sept., 1993, 11th Nov. Jan., 1994 and 7th March, 1994 similar letters were written asking for business. (vi) In earlier years the assessee company had also made export sales to M/s SFT, the Russian company, which indicate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trade advances which are to be treated as income in the hands of the assessee company on its forfeiture. The CIT(A) has placed reliance upon the ratio of decision in the case of T.V. Sundaram Iyengar Sons Ltd. 10. Being aggrieved with the order of the CIT(A) in confirming the addition of Rs. 10.65 crores, the assessee has preferred this appeal before the Tribunal. 11. The learned counsel for the assessee has invited our attention to the various documents and papers in the paper book filed by the assessee. These papers include particularly the copy of joint venture agreement and its approval from the Government of India under which sum of Rs. 10.65 crores were received by the assessee company from SFT. The learned counsel for the assessee has also made a reference to the assessment proceedings as well as the assessment order for the asst. yr. 1993-94, in which year the said amount was credited as loan being received from SFT. The various observations and the facts discussed by the AO as well as by the CIT(A) in their respective orders were explained by the learned counsel for the assessee, and thus submitted that it was not a case of receiving trade advances as alleged by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... td. vs. CIT has been raised at the appellate stage for the first time, and was not considered by the AO. The assessment is already going back to the AO on the issue of exemption under s. 10A, therefore in the light of discussion made above, while refraining from expressing any opinion on the correctness or otherwise of the addition of the forfeited amount on the basis of decision of the Hon'ble Supreme correctness or otherwise of the addition of the forfeited amount on the basis of decision of the Hon'ble Supreme Court in the case of TVS Iyenger Sons Ltd. vs. CIT, I would consider it just and proper to set aside the entire assessment to the AO's file to be made afresh after giving the appellant sufficient and proper opportunity to present its case and to pass a speaking order on the contentions raised by the appellant." 15. On perusal of the aforesaid order of the CIT(A), dt. 31st March, 2000, it is seen that CIT(A) has rejected the AO's action in treating the aforesaid sum of Rs. 10.65 crores as profit chargeable to tax under s. 41(1) on the preliminary ground that the AO has not made out a case that the amount in question was allowed as a deduction or allowance in any earlier ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as if their suspicion in itself is material against the assessee. In short, both the learned AO and the learned CIT(A) have acted on no material at all beyond suspicion to reject the assessee's explanation under the provisions of s. 68. There is also considerable force in the contention of the assessee that as far as the assessee was concerned it had received the sum of Rs. 10.65 crores from COPL and the amount consisted of the initial capital of the assessee. The assessee was incapable of having earned this kind of money at that stage. For that reason also, the explanation of the assessee as to the nature and source of the receipt of sum of Rs. 10.65 crores could not be doubted." 17. However, without prejudice to the action taken by the AO in the asst. yr. 1993-94, the issue to be decided in the present case is as to whether a sum of Rs. 10.65 crores can be considered to be the income under the head "Profits and gains of business or profession" under s. 28 of the Act in the year under consideration in which the assessee has transferred the aforesaid amount from the alleged loan account to the reserve account. The authorities below have considered the aforesaid income as income a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hus held: "that if a commonsense view of the matter were taken, the assessee, because of the trading operation, had become richer by the amount which it transferred to its P L a/c. The moneys had arisen out of ordinary trading transactions. Although the amounts received originally were not of income nature, the amounts remained with the assessee for a long period unclaimed by the trade parties. By lapse of time, the claim of the deposit became time-barred and the amount attained a totally different quality. It became a definite trade surplus. The assessee itself had treated the money as its own money and taken the amount to its P L a/c. The amounts were assessable in the hands of the assessee." 21. In the aforesaid case of CIT vs. T.V. Sundaram Iyengar Sons Ltd., the following cases were referred to see how the principle of law in this respect was understood and applied by the Courts time and again: 1. Morley (Inspector of Taxes) vs. Tattersall (1939) 7 ITR 316 (CA); 2. Jay's the Jewellers Ltd. vs. IRC (1947) 29 Tax Cases 274 (KB); 3. CIT vs. A.V.M. Ltd. (1986) 56 CTR (Mad) 171 : (1984) 146 ITR 355 (Mad); 4. CIT vs. Batliboi Co. (P) Ltd. (1984) 41 CTR (Bom) 388 : (1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y different quality and it became a definite trade surplus in the case of the assessee. The Court held that on the expiry of the respective periods of limitation, the surpluses assumed a new character in the hands of the assessee pawnee and became the property of the pawnee and accordingly were income assessable to income-tax. 24. Again, in yet another English case in the case of Elson vs. Prices Tailors Ltd. 40 Tax Cases 671, the assessee, a company was making garments to the orders of the customers. At the time of placing of orders, customers paid a deposit of 25 per cent of the value of the garments and the assessee was left with the garments ordered. In several cases, the customers failed to collect the garments and the unclaimed deposits. In regard to these unclaimed deposits, the assessee contended (i) that they represented a part of the purchase price of goods ordered and were accordingly recoverable by the customers at any time before they had taken delivery of the goods; (ii) that the deposits so recoverable contained no ingredient of profit and did not fall to be brought into account as a trading receipt as at the date at which they were made by the customers; (iii) tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... distiller was bound to repay when the bottles were returned. Additionally, the assessee took from the wholesalers certain further amounts described as security deposits without the Government's sanction and entirely as a condition imposed by the assessee itself for the sale of its liquor. The moneys described as security deposits were also returned as and when the bottles were returned. The price of the bottles received by the assessee was entered by it in its general trading account while the additional sum was entered in the general ledger under the heading "Empty bottles return security deposit account". After the bottles were returned, the assessee was left with a surplus in the security deposit account. The question was whether this amount left with the assessee even after the refunds were made could be treated as business income of the assessee. It was held by a Bench of three Judges of Hon'ble Supreme Court that the additional amounts taken as deposits were integral part of the commercial transactions of the sale of liquor in bottles. When they were paid, they were the moneys of the assessee and remained thereafter the moneys of the assessee. They were the assessee's tradi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mes the exhibitors did not send the collections but instructed the assessee to set off or adjust its security deposits against overdue collections. Sometimes. the deposits were kept for the purpose of adjustment either wholly or in part against the dues of the exhibitor towards payment of collections. It happened that even after adjustment some balance was still left in deposits with the assessee. No one came forward to claim these deposits and the assessee after waiting for five years decided to appropriate the amounts for its own use by making suitable book entries. It was held, the amount could be treated as chargeable receipts of the assessee from trade. 30. In the case of Punjab Steel Scrap Merchants Association Ltd., the assessee received deposits in advance for supply of scrap while dealing in scrap iron. In other words, the deposits were received by the assessee in the course of trading transactions. In the case of Punjab Distilling Industries Ltd., the assessee, in the course of carrying on business as a distiller of country liquor received the security deposit in the course of sale of its liquor to the licensed wholesalers. Thus, the amount was received in connection wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and the amount becomes the assessee's own money because of limitation or by any other statutory or contractual right, the commonsense of the matter demands that the amount should be treated as income of the assessee. The crux of the decision of the Hon'ble Supreme Court in the case of T.V. Sundaram Iyengar Sons Ltd. is that the money should be received in the course of trading transactions or the money had arisen out of the ordinary trading transactions. The requirement that such money becomes the assessee's money because of limitation or by any other statutory or contractual right is an additional requirement to treat such money as income of the assessee. To apply the principle laid down by the Hon'ble Court in the case of CIT vs. T.V. Sundaram Iyengar Sons Ltd., to any given case, it is, therefore, necessary that the money should be received in the course of trading transactions or it had arisen out of the ordinary trading transactions. If this primary requirement is fulfilled, then and then only the next condition becomes relevant, i.e., such amount remained with the assessee unclaimed by the trade parties and the amount becomes the assessee's own money because of limitati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vanced by M/s SFT for setting up of software development facility in India. As per the terms of the agreement, SFT was required to help the proposed joint venture company to set up software development facility in India, to provide technical assistance and to procure the orders from Russia and other countries for the proposed joint venture for software development. As per the terms of the agreement, the tenure of the loan was 5 years and no interest was payable for this period. However. interest @ 6 per cent was payable after the expiry of the aforesaid period of 5 years. But, during the financial year 1995-96, i.e., before the expiry of 5 years, the assessee company transferred the loan amount to its reserve account. The Ministry of Industry, Department of Industrial Development, (foreign collaboration IInd section) of Government of India has granted approval to foreign collaboration proposal for the purpose of development of computer software with a foreign equity participation of 49 per cent amounting to Rs. 34.30 lacs against total paid up capital of Rs. 70 lacs. The Department of Economic Affairs, Ministry of Finance, Government of India vide its letter dt. 29th Oct., 1992 has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ey have made a reference to the correspondence made by the assessee company with SFT in its letter dt. 23rd June, 1993 which reads as under: "You will appreciate that the project was put together based on your assurance about the buy, back and assured market concept. However, due to your failure to provide us software development opportunities we have landed ourselves in a situation whereby we may have to incur heavy loss during the current year and coming year, as we are constrained to look to other untapped markets namely USA and far east. We, therefore, once again request you to kindly get us some valuable contracts from your associates and acquaintances. This way at least we will be able to sustain ourselves and your efforts will help us to make this project a grand success." 39. From the said letter of the assessee company, what is emerging to us is that the liability or responsibility undertaken by SFT to set up software development facility in India, to provide technical assistance and to procure the orders from the parties abroad and to assure market concept were not fulfilled by SFT, due to which the assessee found itself unable to sustain in business of software deve ..... X X X X Extracts X X X X X X X X Extracts X X X X
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