TMI Blog2009 (8) TMI 836X X X X Extracts X X X X X X X X Extracts X X X X ..... tilised 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, b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessing Officer, without providing the appellant an opportunity to explain the same. The Learned Commissioner of Income-tax (Appeals) has himself admitted that the appellant is engaged in Investment in Shares and Securities (generating Capital Gain) and that the Liability is a Loan Liability." 3. Briefly stated, during the course of assessment proceedings the Assessing Officer noticed that the assessee has shown a closing balance of unsecured loans of Rs. 82,91,076 taken from holding company M/s. P.H. Capital Limited. The Assessing Officer noticed that the holding company has written off the entire amount as irrecoverable from the assessee, however, the assessee has not written back the said amount as cessation of liability under section 41(1) of the Act. 4. The assessee explained that it had taken an unsecured loan of Rs. 82,91,076 from its holding company and due to the losses, the loan could not be repaid. The holding company has written off the advance as unrecoverable whereas the company has not taken any action in this regard and ultimately the company has applied to the Registrar of Companies to have the company s name struck off under section 560 of Companies Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount in the books of account, and ultimately the company was disallowed. The learned counsel relied upon the following case laws for the propositions that the amount cannot be brought to tax under section 28: ( i ) APR Ltd. v. Dy. CIT [2003] 87 ITD 618 (Hyd.) wherein it was held as under: "In the instant case, the loan had not been received in the course of a trading transaction. It had been received as a loan in the context of an order of BIFR, as a measure of restructuring the finances of the assessee-company. It was totally different from an amount received in the course of a trading transaction. The fact that there is a difference between an amount received in the course of a trading transaction and other deposit or loan was evident from the decision of the Apex Court in the case of K.M.S. Lakshmanier Sons v. CIT [1953] 23 ITR 202, where trade advances were not treated as loans, whereas security deposits were treated as loans. The loan does not lose its capital nature, even when it is renounced by the lender and become the money of the assessee. The mere fact of its transfer to the profit and loss account does not invest it with a revenue character." ( ii ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ceived in the relevant previous year. These two conditions must, co-exist so that the receipt can be brought to tax. In the instant case, the share application monies were not received during the previous year relevant to the assessment year 2001-02. Admittedly, they were received partly in the previous year ended 31-3-1996 and partly in the previous year ended 31-3-1997. What provoked the Assessing Officer to treat the share application monies as having been received in the relevant previous year was the fact that the foreign company wrote a letter to the assessee waiving the monies on 24-10-2000, which date fell within the said previous year. The waiver could not be construed as actual receipt of the monies during the relevant year. Even assuming for the sake of argument that the waiver amounted to constructive receipt of the share application monies during the relevant previous year, such money could not be treated as income. The monies were received by the assessee towards issue of shares. If the project undertaken had taken off and had proceeded as per the assessee s plans, there could be no doubt that the company would have become operational and, therefore, the share appli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not envisaged as income. Now, coming to specific provisions of sub-section ( iv ) of section 28, it is also in connection with the value of any benefit or perquisite arising from business, which means that such benefit or perquisite should be in the nature of income from the very beginning or it must have characteristics of income before it becomes chargeable at a later stage, if the original transaction is completed as designed. No material had been brought on record to show that the loan agreement provided for such wavier at subsequent stages. Hence, this receipt could not be construed as a benefit within the meaning of section 28( iv ). Further, the words benefit or perquisite have been used in this sub-section, which have to be read together and would draw colour from each other. Normally, the term perquisite denotes meeting out of an obligation of one person by another person either directly or indirectly or provision of some facility or amenity by one person to another person and from the very beginning, the person providing such facilities or concessions knows that whatever is being done is irretrievable to him as it has been granted to a person as a privilege or righ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in treating this receipt as a revenue receipt." ( vi ) ITO v. Ahuja Graphic Machinery (P.) Ltd. [2007] 109 ITD 71 (Mum.) (TM) wherein it was held as under: "Clause ( iv ) was inserted in section 28 by the Finance Act, 1964 with effect from 1-4-1964. The value of any benefit or perquisite arising from business or the exercise of a profession is chargeable to income-tax as part of the income from business/profession under this section and it is deemed to be income under section 2(24). This clause does not apply to the receipts in cash. The sum credited by the assessee to the profit and loss account of the unclaimed advances received from customers and unclaimed excess commission received and unclaimed collections from principals are assessable under section 28( iv ), since the said sums have close and direct nexus with the assessee s business and have the result of not only reducing the assessee s trade liabilities and enhancing its profits, but also increasing its capital. In other words, to apply these provisions, the assessee should have appropriated the sums in question to its profit and loss account. In the instant case, the assessee had not appropriated any sums to i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. We are not sure how the provisions of section 28 will apply. It is the contention of the assessee that the assessee has not done any trading activity nor shown any income as business income on the investments made. The findings of the CIT(A) that the amount was received in the course of its business is against his findings given while considering the addition under section 41(1). ..... X X X X Extracts X X X X X X X X Extracts X X X X
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