TMI Blog2010 (11) TMI 43X X X X Extracts X X X X X X X X Extracts X X X X ..... the character of the income and therefore, it is not assessable to tax. In other words, only an income as defined under Section 2(24) alone can be made assessable to tax. It is a well established principle of law that all receipts are not income and therefore liable to be taxed. A receipt cannot be taxed unless it is a revenue receipt. Hence in view of the admitted fact the receipt involved in the present case is a capital receipt it cannot be taxed. Further Section 37(1) of the Income Tax Act specifically deals with the capital expenditure which cannot be allowed in computing income. - Question of law answered in favor of assessee - 812 of 2010 - - - Dated:- 23-11-2010 - F.M. Ibrahim Kalifulla and M.M. Sundresh, JJ N.K. Poddar Sr. Counsel for P. Rajkumar for the Appellant K. Subramaniam Sr. Standing Counsel for Income Tax Department for the Respondent JUDGEMENT This appeal has been preferred by the assessee, challenging the order of the Income Tax Appellate Tribunal, "B" Bench, Chennai, dated 26.03.2010, in ITA No.1901/Mds/2009 for the assessment year 2001-02, confirming the order passed by the Commissioner of Income Tax (Appeals) which in turn has confirmed t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve reasons for its affirmation of the views of the lower tax authorities?" 2. Facts in brief:- 2.1. The asessee has been engaged in the business of development, manufacturing and marketing of Electro-Mechanical and Static Energy Meters. For the purchase of capital assets both by way of import as well as in the local market, as also fund based and non-fund based credit facility, through cash credit account, for import of capital assets as well as for meeting the working capital requirements, a term loan was provided by the State Bank of India, Commercial Branch, Trichy. 2.2. In view of the loss suffered, the assessee went before the Board for Industrial and Financial Reconstruction (BIFR). In case No.77 of 1992, the BIFR has held that the assessee was a sick Industrial Company. The BIFR in pursuant to the said conclusion, sanctioned a scheme for revival/rehabilitation. The State Bank of India has waived the outstanding due of principle amount of Rs.5 crores and the interest outstanding for another sum of Rs.2 crores. The assessee did not pay the interest for the preceded three years to the assessment year and has paid a sum of Rs.5 crores from the date of receipt of the loan. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... raising the above mentioned substantial questions of law. 3. Heard Shri. N.K. Poddar, learned Senior Counsel for Shri. P. Rajkumar appearing for the appellant/assesee and Shri. K. Subramaniam, learned Senior Standing Counsel appearing for the respondent/revenue. 4. Submissions of the Assessee:- 4.1. Shri. N.K. Poddar, learned senior counsel appearing for the assessee submitted that it is not in dispute that the assessee had obtained loan from the State Bank of India for the purchase of fixed assets. The assets purchased by the assessee both within the country and outside the country are admittedly capital assets. The term loan amount is completely utilised towards the purchase of capital assets. Therefore the transaction between the assessee and the Bank is a pure loan transaction and the same can never be termed as a trading transaction. 4.2. Further, in as much as the loan was obtained for the purchase of capital assets, the same would only amount to a capital receipt and not revenue receipt. The assessee has been doing the business in manufacturing and marketing of Electro-Mechanical and Static Energy Meters and it is not involved in any business involving the transacti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , a waiver made for the said amount would not constitute a business. Therefore, based upon the above said judgment, the learned senior counsel submitted that in view of the admitted position that there is no dispute regarding the genuineness of the transaction between the assessee and the State Bank of India being a transaction of loan for the purpose of capital assets, the waiver made for the part of the said sum cannot be made exigible to tax. 4.7. The further submission of the learned senior counsel of the petitioner is to the effect that the reasoning of the authorities that, Section 28(iv) of the Income Tax Act would be applicable to a money transaction is totally misconceived and contrary to the provision itself. The learned senior counsel submitted that Section 28(iv) provides for chargeablity of profits and gains of business or profession with relation to the value of any benefit or perquisite arising out of business or the exercise of profession and therefore the same would not include the money transaction. It is the specific case of the learned senior counsel that a reading of Section 28(iv) of the Income Tax Act would make it clear that it would cover only transaction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng on this Court, the same may be taken as part of his arguments in support of his contentions. The learned senior counsel submitted that in as much as the Tribunals/High Courts in the various parts of the country have taken the similar view, the same view will have to be adopted in the present case on hand as well. 4.11. Finally, the learned senior counsel submitted that the authorities committed an error by holding against the assessee by making reliance upon the judgment of the Honourable Apex Court in COMMISSIONER OF INCOME TAX v. SUNDARAM IYENGAR (T.V.) AND SONS LTD. [(1996) 222 ITR 344] without applying their mind to the facts of the case as well as the facts involved therein. The said orders passed by the authorities would amount to non-application of mind and therefore, they are arbitrary in nature. The learned senior counsel made reliance upon the judgment of the Honourable Apex Court rendered in COMMISSIONER OF CENTRAL EXCISE, BANGALORE v. SRIKUMAR AGENCIES and OTHERS [(2009) 1 SCC 469] and submitted that a judgment cannot be read as a statute and has to be made applicable to the facts and consideration of each case and the ratio laid down therein will have to be applie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r it has been used for the purchase of capital assets or revenue receipts is immaterial. The assessee having become richer by the settlement, the said transaction would par take the character of the income assessable to tax. Even assuming an amount is utilised towards the capital assets, it would take the character of a revenue receipt, subsequently. The learned senior standing counsel has also made reliance upon Section 36(1)(iii) of the Income Tax Act dealing with the deduction for interest of the borrowal. According to the learned senior standing counsel, the borrowal and waiver are in the course of business during which the benefit accrues to the assessee is taxable. If the amount received in pursuant to a business or a contractual liability, then it is taxable as income. 5.4. The learned Senior Standing Counsel made reliance upon the judgment of the Division Bench of the Delhi High Court in JAY ENGINEERING WORKS LTD. v. COMMISSIONER OF INCOME-TAX [(2009) 311 ITR 299]. The learned senior standing counsel sought to distinguish the judgment relied upon on behalf of the assessee by submitting that the facts involved in those cases are different and that some of the judgments hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransaction and the amount borrowed has been utilised towards the purchase of the capital assets. The assessee has relied upon the various judgments of this Honourable High Court, Supreme Court and High Court of Bombay, Gujarat and Delhi apart from the orders passed by the various Tribunals and contended that the ratio laid down by COMMISSIONER OF INCOME TAX v. SUNDARAM IYENGAR (T.V.) AND SONS LTD. [[1996] 222 ITR 344] does not apply to the facts of the case as held in those judgments. A detailed written submissions have also been made along with the grounds of the appeal. A similar exercise has also been done by the assessee before the Tribunal. However, both the Commissioner of Income Tax (Appeals) and the Tribunal have rejected the appeals filed by the assessee by merely following the judgment of the Honourable Apex Court in COMMISSIONER OF INCOME TAX v. SUNDARAM IYENGAR (T.V.) AND SONS LTD. [[1996] 222 ITR 344] referred supra. Therefore, with these admitted facts, the substantial questions of law raised in this appeal will have to be considered. 10. A perusal of the definition of Section 2(24) of the Income Tax Act, which defines "income" would include the value of any benefit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thereof" shall include the remission or cessation of any liability by a unilateral act by the first mentioned person under clause (a) or the successor in business under clause (b) of that sub-section by way of writing off such liability in his accounts.] [Explanation 2]:- For the purposes of this sub-section, "successor in business" means,- (i) where there has been an amalgamation of a company with another company, the amalgamated company; (ii) where the first-mentioned person is succeeded by any other person in that business or profession, the other person; (iii) where a firm carrying on a business or profession is succeeded by another firm, the other firm; (iv) where there has been a demerger, the resulting company." 13. Necessity for a reasoned order: 13.1. Shri. N.K. Poddar, learned senior counsel appearing for the assessee submitted that when the assessee has pleaded specifically in the grounds of appeal as well as through the written submissions that the ratio laid down in COMMISSIONER OF INCOME TAX v. SUNDARAM IYENGAR (T.V.) AND SONS LTD. [[1996] 222 ITR 344] is not applicable to the facts on hand, the authorities below have committed an error in merely foll ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore the court and also as an essential requisite of the principles of nature justice. "The giving of reasons for a decision is an essential attribute of judicial and judicious disposal of a matter before courts, and which is the only indication to know about the manner and quality of exercise undertaken, as also the fact that the court concerned had really applied its mind." (Vide State of Orissa v. Dhaniram Luhar and State of Rajasthan v. Sohan Lal) 41. Reason is the heartbeat of every conclusion. It introduces clarity in an order and without the same, it becomes lifeless. Reasons substitute subjectively by objectivity. Absence of reasons renders the order indefensible/unsustainable particularly when the order is subject to further challenge before a higher forum. (Vide Raj Kishore Jha v. State of Bihar, SCC p.527, para 19, (2003) 11 SCC 519; Vishnu Dev Sharma v. State of U.P. (2008) 3 SCC 172, SAIL v. STO (2008) 9 SCC 407, State of Uttaranchal v. Sunil Kumar Singh Negi (2008) 11 SCC 205, U.P. SRTC v. Jagdish Prasad Gupta (2009) 12 SCC 609, Ram Phal v. State of Haryana (2009) 3 SCC 258, Mohd.Yusuf v. Faij Mohammad (2009) 3 SCC 513 and State of H.P. v. Sada Ram. (2009) 4 SCC 422 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... statute and that too taken out of their context. These observations must be read in the context in which they appear to have been stated. Judgments of Courts are not to be construed as statutes. To interpret words, phrases and provisions of a statute, it may become necessary for judges to embark into lengthy discussions but the discussion is meant to explain and not to define. Judges interpret statutes, they do not interpret judgments. They interpret words of statutes; their words are not to be interpreted as statutes." 17. Therefore, applying the above said ratio laid down therein, we are of the firm view that the authorities below have committed an error in merely lying upon the judgment rendered in COMMISSIONER OF INCOME TAX v. SUNDARAM IYENGAR (T.V.) AND SONS LTD. [[1996] 222 ITR 344] without applying the facts involved therein, vis-a-vis the facts involved in the present appeal. 18. Applicability of the ratio laid down by the SUNDARAM IYENGAR (T.V.) AND SONS LTD.:- 18.1. In as much as both the Commissioner of the Income Tax (Appeals) and the Tribunal have dismissed the appeals filed by the assessee, placing reliance only upon the judgment rendered in COMMISSIONER OF INCO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... held that when in the course of a trading transaction, the assessee becomes entitled to the money such an amount would become a taxable income at the hands of the assessee. 22. In the present case on hand, admittedly the assessee was not trading in money transactions. A grant of loan by a Bank cannot be termed as a trading transaction and it cannot also be construed in the course of business. Indisputably, the assessee obtained the loan for the purpose of investing in its capital assets. A part of this loan amount along with this interest was waived by way of an agreement between the parties. Therefore, the facts involved in the present case are totally different in the facts involved in COMMISSIONER OF INCOME TAX v. SUNDARAM IYENGAR (T.V.) AND SONS LTD. [[1996] 222 ITR 344]. In the said case, admittedly there was a trading transaction whereas, in the present case it is not so. What has been done in the present case is a mere waiver of loan. It is only a mere waiver which has been effected by the bank in favour of the assesee. There is no change of character with regard to the original receipt which was capital in nature into that of a trading transaction. It is further seen tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n waiving it was retained in business by the assessee. In the said judgment, the Division Bench of the Bombay High Court has distinguished the earlier judgment of the said High Court rendered in MAHINDRA and MAHINDRA LTD. v. COMMISSIONER OF INCOME TAX [(2003) 261 ITR 501]. The said judgment rendered in [(2003) 261 ITR 501] which is similar to the present case on hand was distinguished by the Bombay High Court in view of the finding that there is a trading transaction and the money received was used towards a business transaction and accordingly the ratio laid down in COMMISSIONER OF INCOME TAX v. SUNDARAM IYENGAR (T.V.) AND SONS LTD. [[1996] 222 ITR 344] was followed. 26. Therefore, the above said facts would indicate that the ratio laid down in COMMISSIONER OF INCOME TAX v. SUNDARAM IYENGAR (T.V.) AND SONS LTD. [[1996] 222 ITR 344] has no application at all to the facts and circumstances of the present case on hand. Hence, we are of the view that the authorities below have wrongly applied the ratio laid down in COMMISSIONER OF INCOME TAX v. SUNDARAM IYENGAR (T.V.) AND SONS LTD. [[1996] 222 ITR 344] and therefore, the orders passed by them cannot be sustained. 27. Applicability ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of India, in this case, approved the arrangement under which KJC (supplier of toolings) was permitted to advance a loan of $ 6,50,000 to the assessee for ten years bearing interest at the rate of 6 per cent., free from income-tax. KJC was later on taken over by AMC and as a part of take-over, AMC agreed to waive the principal amount of the loan and not the interest. In the circumstances, as stated in the above three undisputed facts, the assessee paid interest at 6 percent, per annum, for ten years, being the contractual period. According to the Assessing Officer, the loan arose from business dealings. According to the Assessing Officer when AMC waived the loan, the credits became part of business income; that prior to such waiver, the credits represented liability. In the circumstances, the Assessing Officer has taxed such credits as business income. However, in this connection, there are two important facts which are overlooked by the Assessing Officer. Firstly, the assessee has continued to pay interest at 6 per cent, for a period of ten years on the loan amount. In this case, the Assessing Officer has not gone behind the loan agreement. In this case, the approval by the Govern ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss or the exercise of a profession." It is obvious that if what is received either by way of benefit or perquisite is money, there is no question of considering the value of such monetary benefit or perquisite under cl.(iv) and including the value of such benefit or perquisite under the head "Profits and gains of business or profession". It is only if the benefit or the perquisite is not in cash or money but is non-monetary benefit or non-monetary perquisite that the question of including the value of such benefit or perquisite would ever arise. Under these circumstances, the Tribunal was right in rejecting the contention urged on behalf of the revenue that the amount of Rs.15,964 should be brought to tax as value of any benefit or perquisite within the meaning of s.28(iv). The Tribunal doubted whether the amount of Rs.15,964/- was any benefit-"It may or may not be a benefit". Another question is whether the phrase "whether convertible into money or not" would normally mean something else than money. In our opinion, the conclusion of the Tribunal that s.28(iv) would not apply when the amount received is cash or is considered in terms of money, is correct, and the provisions of s. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t that the loan was used to buy toolings on which assessee got depreciation allowance of Rs.27,29,585 and, therefore, the amount of Rs.27,29,585 should be set off against Rs.57,74,064. We do not find any merit in this argument. The Department's case is that the assessee got remission of Rs.57,74,064. Remission for depreciation is not in issue before us. The only argument of the Department throughout has been that the waiver constituted remission of Rs.57,74,064. In the circumstances, we cannot direct set off of Rs.27,29,585 against Rs.57,74,064. It is important to bear in mind that before section 41(1) came to be enacted, various judgments as reported in Mohsin Rehman Penkar v. CIT [1948] 16 ITR 183 (Bom) and Orient Corporation v. CIT [1950] 18 ITR 28 (Bom) had laid down that remission was not income and in order to get over those judgments section 41(1) came to be enacted. In the case of CIT v. Phool Chand Jiwan Ram [1981] 131 ITR 37 (Delhi), the assessee-firm had purchased goods. They had also obtained loans from a party, accounts were settled and the balance was credited to the partners' account. It was held by the Delhi High Court that the amount referable to loans was not a tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3. The ITO treated the aforesaid remission of loans as a benefit accruing to the company during the course of its business activity and brought to tax the same by invoking provisions of section 28(iv) of the Act. The CIT(A) confirmed the assessment order and the assessee approached the Tribunal. The Tribunal for the reasons recorded in its order held that the remission of unsecured loans could not be subjected to tax by invoking provisions of section 28(iv) r/w section 41(1) of the Act. 4. We have heard Mr.Akil Kureshi, learned standing counsel appearing on behalf of the applicant-Revenue. Though served, none appears on behalf of the respondent-assessee. At the time of hearing, Mr.Kureshi invited our attention to provisions of section 41(1) of the Act and contended that this was a liability insofar as the assessee-company was concerned and such liability had been remitted by the creditors of the company, and thus a benefit had been obtained by the assessee-company which was liable to payment of tax under section 41(1) r/w section 28(iv) of the Act. 5. Section 41(1) as was applicable for the assessment year under consideration reads as under: "(1) Whether an allowance or deduc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ness." 32. Therefore, we are of the considered view that Section 41(1) has no application at all to the present case on hand which is also not the case of the revenue as well. 33. Applicability of Section 28(i), 36(i) (iii) of the Income Tax Act, 1961:- 33.1. Shri. K. Subramaniam, learned senior standing counsel appearing for the revenue submitted that the facts involved in the present case would come under the purview of Section 28(i) of the Act. The said contention in our considered view cannot be accepted for the simple reason that it is not the case of the Assessing Officer as well as the other authorities that the present case would come under the purview of Section 28(i) of the Act. As observed above that the authorities proceeded only on the footing of Section 28(iv) of the Act would be applicable. Further Section 2(24) of the Income Tax Act defines "income". While defining "profit and gains" it refers to the transactions involved under Section 28(iv) of the Act. Therefore, in as much as the provision contained under Section 28(i) having been not defined as income under Section 2(24) of the Act, the same would not par take the character of the income and therefore, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t by trading the money as its own without any explanation then the same would become an income. As discussed above, the said judgment also is not applicable. The judgment relied upon by the revenue in SAHNEY STEEL and PRESS WORKS LTD. v. COMMISSIONER OF INCOME-TAX [(1997) 228 ITR 253], only helps the case of the assessee, in as much as it was held therein that the character of the subsidy in the hands of the waiver, whether revenue or capital will have to be determined, having regard to the purpose for which is given. In as much as that it is not in dispute in the present case on hand that the purpose of loan is towards the purchase of capital asset, the said judgment would only help the case of the assessee. 38. In VINOD BEHARI JAIN v. INCOME-TAX OFFICER [(2008) 306 ITR 392], the Honourable Apex Court was pleased to hold that in order to find out the character of the receipt in the assessee the purpose of the grant will have to be seen. By applying the purpose test, it was held that the object of the grant will have to be seen. Therefore, by applying the principle laid down by the Honourable Apex Court the object of the transaction namely the loan transaction is towards the purc ..... X X X X Extracts X X X X X X X X Extracts X X X X
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