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Commissioner of Income Tax, Delhi And Others Versus M/s. Velocient Technologies Ltd. And Others

2015 (5) TMI 552 - DELHI HIGH COURT

Reopening of assessment - Held that:- As far as the assessee’s complaint of not being made aware of the “reasons to believe” or opinion for reassessment is concerned, the argument proceeds on a misconception. The Act does not stipulate furnishing of reasons to the assessee; this condition was superadded, when the assessee, seeks such opinion and wishes to represent against it, after furnishing his/her returns upon the receipt of notice, by virtue of the order of the Supreme Court in GKN Drivesha .....

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to loan - ITAT made addition in the hands of the assessee and not a trade advance and consequently its forfeiture did not constitute income chargeable to tax - Held that:- In the present case, the facts reveal that the assessee no doubt was able to secure the clearances of the Department of Economic Affairs as well as the Reserve Bank of India (RBI) towards its software technology project. These were based upon its assertion that Russian joint venture partners were involved. Likewise, the Depart .....

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ever revealed. Those two companies’ shareholding pattern, trading or manufacturing activities, decision of Board of Directors was kept in the dark. In short, the assessee made no attempt to reveal the true identity of these two concerns. Furthermore, the credibility of these transactions too stood undermined from the very beginning considering that COPL’s role vis-a-vis SFT was never explained. It was not SFT which gave the money to the assessee. Therefore, the onus to prove that the amounts cam .....

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Mere change of character of the amounts in the books of the assessee is undeterminative as to whether it can be brought to tax under Section 41(1)? - Held that:- By no stretch of imagination could the initial amount of ₹ 10.65 crores have been treated as loss, expenditure or trade liability incurred during the previous year. No doubt, the circumstances whereby the assessee forfeited the amounts raised certain suspicions. As explained earlier, those suspicions led to the reopening o .....

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ct compulsion dictated by law, i.e. their inclusion for the later year. In the present case, the amounts were never treated as trading receipts but as unsecured loans - no doubt for the purpose of establishing or furthering a business, yet they were loans and not trading receipts or loss from expenditure - the other instances attracting Section 41(1). 31. For AY 1996-97, independent of the findings with respect to treatment for earlier year as unaccounted receipt under Section 68, given the phra .....

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Bhat 1. The following questions of law arise in these three appeals: (a) Whether the Income Tax Appellate Tribunal was correct both on facts and in law in upholding the assumption of jurisdiciton by the Assesing Officer to frame an assessment by taking recourse to the provisions of Section 147 of the Income Tax Act, 1961? (AY 1993-94 - ITA 1406/2006) (b) Whether the Income Tax Appellate Tribunal was correct both on facts and in law in deleting the addition of ₹ 10.65 crores made on account .....

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ffice at D-5, Kalindi, New Delhi and M/s. Sovfin-trade Overseas Ltd. (hereafter SFT , a Company in the erstwhile USSR), entered into an agreement on 14-11-1991 to form a joint venture (JV) company called M/s. Eurolink Overseas (P.) Ltd. The purpose of the joint venture was production and development of computer software in India with equity participation of ₹ 70 lakhs, by both companies. M/s. Eurolink Overseas (P) Ltd s name was later changed to M/s. Velocient Technologies (P.) Ltd, the as .....

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ferred from the books of COPL to Eurolink Overseas Private Ltd during FY 1992-93. The money was advanced by the Russian company for setting up of software development facility in India. According to the terms of the agreement, the Russian company was required to help the proposed joint venture company to: (a) set-up software development facility in India, (b) provide technical assistance, i.e., to depute their experts to help the Indian company in day-to-day operation, (c) procure the orders fro .....

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ar) the AO noticed the following facts: (i) The agreement was made in November, 1991 to form the Joint Venture company, M/s. Eurolink Overseas Private Ltd. However, M/s. Eurolink Overseas Private Ltd. had already been incorporated in July 1991, i.e., even before the agreement was made. (ii) SFT never contributed any equity capital in the assessee-company. The Indian partner, i.e., COPL also contributed only ₹ 2,000 towards the equity capital of the assessee-company as against the amount of .....

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er group concern, namely, M/s. Milestone Leasing & Finance (P.) Ltd. in the form of share capital. 5. A letter was written by the assessee-company on 23-6-1993. 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 .....

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essee-company had also made export sales to SFT, the Russian company, indicative of trading transactions between the two companies. SFT however, did not respond to the letters of the assessee-company. The assessee stated that there was no communication from the side of SFT after the date of forfeiture of the loan. In view of these facts, the AO asked the assessee to explain why it should not be treated as business income under Section 28 of the Act since the alleged loan was in the nature of tra .....

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interest was payable on the loan amount and that since SFT had not participated in the assessee s equity capital it (SFT) would not have derived any benefit by granting any interest-free loan. It was held that there was no interest or business expediency of advancing such huge interest-free loan to the assessee. The AO s view was that the only plausible explanation for advancing such huge amount to the assessee was that M/s. SFT gave the amount as advance for development and purchase of softwar .....

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und of denial of proper opportunity). 7. During the pendency of the later assessment (AY 1996-97), in the light of the materials including correspondence between SFT and COPL the fact that SFT did not object or protest against forfeiture of liability - especially in the light of the statement of assessee s director Shri Nalin Aggarwal, a notice under Sections 147/148 was issued to the assessee, proposing to re-open the assessment for AY 1993-94. The assessee objected. In the re-assessment order .....

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s address in the reassessment proceedings. The sum of ₹ 10.65 crores was received by COPL; the circumstances under which it was credited to the assessee were not established satisfactorily. It was therefore held that the amount was an unexplained receipt; the AO added it for AY 1993-94 and brought it to tax under Section 68 of the Income Tax Act, 1961 ( Act ). 8. The regular assessment for AY 1996-97 and re-assessment order for AY 1993-94 were challenged before the Commissioner (Appeals) - .....

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1996-97. The assessee is aggrieved - not by the ITAT s findings on the merits, but rather for its upholding the re-opening of assessment (for AY 1993-94). ITA Nos. 1406/2006 & ITA 983/2006 9. The revenue argues that in the facts of this case, the AO was justified in invoking Section 68 of the Act. Here, it is urged that the re-opening of the assessment was warranted, despite the fact that the earlier assessment was completed under Section 143 (3). Counsel submitted that the assessee never f .....

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ere was no equity payment in hard currency; thirdly, SFT - again contrary to the approval given by the Union Government, nowhere indicated that the remittance was for purposes of loan. Thirdly, the Reserve Bank s approval letter had directed the assessee to give details of utilization and the necessary details within a specified period, which was not followed; fourthly, equity infusion had not taken place by any of the parties, and certainly not to the extent of ₹ 70 lakhs by the two parti .....

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s year, may be charged to tax as the assessee s income for that previous year if the explanation offered by him or her about the nature and source thereof is, in the opinion of the Assessing Officer, unsatisfactory. In such a case there is, prima facie, evidence against the assessee, viz., the receipt of money, and if he fails to rebut it, the said evidence being unrebutted, can be used against him by holding that it was a receipt of an income nature. He also submitted that the conditions for sa .....

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the creditworthiness of the party had been placed. Consequently, the ITAT fell into error in holding that Section 68 did not apply. 11. The revenue points out that Diwakar Engineers Ltd. v. ITO [2010] 329 ITR 28 (Delhi) and Video Electronics v Joint Commissioner of Income Tax 2013 (353) ITR 073 are authorities for the proposition that material discerned by the assessing officer during the course of proceeding for subsequent years can be relevant and their sufficiency or adequacy (for completion .....

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ating to the loan from the Calcutta Company and which he failed to draw at that time. Acquiring fresh information, specific in nature and reliable in character, relating to the concluded assessment which goes to expose the falsity of the statement made by the assessee at the time of original assessment is different from drawing a fresh inference from the some facts and material which was available which the I.T.O. at the time of original assessment proceedings. The two situations are distinct an .....

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received under Section 68 because the so-called foreign investor did not respond to any queries and no attempt or effort was made to secure its presence or view. Contending that reliance on the clearances received by other statutory authorities did not amount to establishing the genuineness or creditworthiness of the investor, counsel submitted that the infusion of a huge amount as loan on the one hand, not using it for the purpose declared in the first instance, and not complying with the join .....

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e original assessment was completed in scrutiny proceedings; reliance was placed on the materials furnished by the assessee, including the clearances obtained from the statutory authorities for the purpose of the foreign company s joint venture, in the form of Reserve Bank clearance, approval by the authorities administering the laws relating to foreign exchange, etc. The money had been remitted through banking channels. All these were known; if there was anything wanting, it was not on the part .....

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was any omission or failure to make a full and true disclosure. The assessing officer had to make the necessary inferences (which too had been done at the original stage when a searching scrutiny was resorted to) but no further duty was cast on the assessee. 14. Learned counsel relied on Income Tax Officer v Lakhmani Mewal Dass (1976) 103 ITR 437 (SC) where the Supreme Court held that: the reasons for the formation of the belief must have a rational connection with or relevant bearing on the fo .....

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that of the Income-tax Officer on the point as to whether action should be initiated for reopening assessment. At the same time we have to bear in mind that it is not any and every material, howsoever vague and indefinite or distant, remote and far-fetched, which would warrant the formation of the belief relating to escapement of the income of the assessee from assessment. The fact that the words "definite information" which were there in section 34 of the Act of 1922, at one time bef .....

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"reason to suspect". The reopening of the assessment after the lapse of many years is a serious matter. The Act, no doubt, contemplates the reopening of the assessment if grounds exist for believing that income of the assessee has escaped assessment. The underlying reason for that is that instances of concealed income or other income escaping assessment in a large number of cases come to the notice of the income-tax authorities after the assessment has been completed. The provisions o .....

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e assessee from assessment because of the latter's failure or omission to disclose fully and truly all material facts was missing in the case. In any event, the link was too tenuous to provide a legally sound basis for reopening the assessment. 15. The assessee s counsel argued that in the circumstances, the addition on the ground of unexplained income was unsustainable. He relied on the joint venture agreement dated 14-11-1991; MOU of the same date, copy of foreign collaboration approval by .....

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, in the form of airway bills, whenever goods were consigned abroad too were relied upon. Since all the amounts were received through normal banking channels and in support of the transaction, fortunately there was extensive material establishing its genuineness, the addition under Section 68 based on a later unrelated event, i.e premature forfeiture of the loan, was not justified. 16. Learned counsel relied on the documents placed on record of the assessment proceedings and the appeal before th .....

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15-06-1992. It was submitted that the AO's queries dated 29-06-1995 showed that the precise question as to the unsecured loan was the subject matter of scrutiny; for this the assessee had furnished all relevant particulars in a letter dated 22-08-1995. Apart from RBI approval for the foreign exchange transaction, the Department of Electronics clearance through letter dated 24-12-1991 was also shown. The details of remittances received towards the loan, on various dates, i.e 20-11-1991 and 2 .....

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and licenses have been obtained for setting up of the Project from concerned authorities." Also, the lower authorities erred in holding that the amount deserved to be brought to tax, on the merits. The ITAT's order, however is sound, as it held that the addition could not have been made on the merits. Analysis & Findings 17. The AO, framed the original order, under Section 143 (3) after observing as follows: "M/s SFT agreed to grant loan to the joint venture, called Eurolink b .....

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about the reasons and that even otherwise, there was no failure to disclose material facts in the first instance, which could have led to a valid re-opening of the assessment for the year. On merits too, the assessee contends that there is no valid basis for holding that the source of the funds was unknown, or doubting the credibility of the source. It is argued that the assessee cannot be placed in an impossible situation of having to prove or establish the source of the source as has been done .....

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be disclosure of the "true" and "full" facts in the case and the I.T.O. would have the jurisdiction to reopen the concluded assessment in such a case. That decision had taken note of Lakhmani Mewal Dass and Calcutta Discount (supra). This court also notes that the subsequent ruling of a three judge bench of the Supreme Court in Commissioner of Income Tax v Kelvinator India Ltd (2010) 320 ITR 561 (SC) crystallizes the acceptable standard for upholding a reassessment notice (un .....

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d to establish the truthfulness of its claim of the receipt of loan of ₹ 10.65 crores despite being afforded specific opportunities. The CIT (A) also in his order has not commented on the veracity of the evidence furnished by the assessee in this regard…the assessee was not able to accurately and specifically establish the fact that this money indeed belonged to the Russian Company nor the reason for the unilateral forfeiture as discussed in the earlier paras. Now, these facts facia .....

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ial facts also relates to the stage of the assessment proceedings and that there can be omission and failure on the part of the assessee to disclose material facts fully and truly during the course of the assessment proceedings. 20. As far as the assessee s complaint of not being made aware of the reasons to believe or opinion for reassessment is concerned, the argument proceeds on a misconception. The Act does not stipulate furnishing of reasons to the assessee; this condition was superadded, w .....

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hanabhai P. Patel AIR 1987 SC 1378: Section 34, conferred jurisdiction on the Income-tax Officer to reopen an assessment subject to service of notice within the prescribed period. Therefore, service of notice within limitation was the foundation of jurisdiction. The same view has been taken by this Court in Janni v. Indu Prasad Bhat, 72 ITR 595 as also in C.I.T. v. Robert, 48 ITR 177. The High Court in our opinion went wrong in relying upon the ratio of 53 ITR 100 in disposing of the case in han .....

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e prescribed limitation has lapsed. Section 148(1) provides for service of notice as a condition precedent to making the order of assessment. Once a notice is issued within the period of limitations, jurisdiction becomes vested in the Income-tax Officer to proceed to reassess. The mandate of section 148(1) is that reassessment shall not be made until there has been service. The requirement of issue of notice is satisfied when a notice is actually issued. In this case, admittedly, the notice was .....

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appeal is allowed and the order of the High Court is vacated. Thus, we are of the opinion that the assessee s arugments with respect to justification for re-opening of assessemnt in this case are unmerited. The question of law argued by it in that context is answered against it. ITA No. 1406/2006 consequently fails. 21. The next question concerns the merits of the addition of ₹ 10.65 crores made during reassessment proceedings. The AO s order was upheld by the CIT (A) and disturbed by the .....

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tutory bodies and authorities, based on the Joint Venture agreement dated 14-11-1991 between COPL and SFT, the preconditions for use of such amount were never fulfilled. Thus, the assessee was already incorporated before the date of that agreement - in fact, in July, 1991. It had a subscribed share capital of ₹ 2,000/- and the agreement provisions requiring infusion of ₹ 70 lakh share capital by the Russian company were in fact never fulfilled. Also, significantly the assessee never .....

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AO had made furhter inquiries during the assessment and after due satisfaction, held that the amount could not be taxed. The reassessment proceedings and addition was nothing but an impermissible review of the previous AO s order framing the assessement for the year. 22. This court notices that according to the material furnished by the assessee: (i) The original intent between COPL and SFT in 1990 was that the former or a new entity would be set up for implementing a project whereby ₹ 6.3 .....

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link. SFT could unilaterally withdraw the credit after 5 years. (iv) The assessee contended that SFT pre-empted all Central Government approvals by remitting ₹ 35 lakhs towards equity and ₹ 10.30 crores as loan on 20-11-1991 and subsequent dates. This was followed by another agreement for repayment with interest @ 6 % per annum. (v) On 15-06-1992, the Secretariat for Industrial Approval, Union Finance Ministry approved foreign collaboration subject to condition that equity contribute .....

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not revealed was how, with the limited RBI approval on 17-01-1991 for a term loan to be kept in a separate account from which there could be withdrawal after specific approval, the arrangement could be transformed into one where the amount was received not by the assessee, but by COPL which handed it over to the assessee. 24. In the original assessment proceedings, the returns filed included a confirmation from COPL for the money received as advance towards share application money (in respect of .....

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istry of Finance s approval dated 29.10.1992, permitting the loan for ₹ 10.65 crores was made part of the record. In the letter dated 29.09.1994, the assessee s auditor stated that the said amount was received from a foreign company pursuant to agreement for setting-up joint venture project in India for export of computer software and that necessary permissions and licenses had been obtained. 25. In the course of assessment proceedings, the assessee was asked to provide details of unsecure .....

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primarily advanced the money - through COPL. Furthermore, the identity of COPL too was never revealed. Only four documents were relied upon in connection with these entities - three of them dated 14.11.1991 in the form of inter se agreements between the two and a Resolution of the same date, i.e. 14.11,1991. The loan letter by COPL was in respect of the sum of ₹ 19.5 lakhs remitted by it. Whether these two entities were actually controlled by the erstwhile Government of USSR or were estab .....

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ould not name M/s Eurolink Overseas Private Ltd (an existing and incorporated company) as the recipient, was never explained. The materials on record and submissions made, both in the course of assessment and re-assessment proceedings, do not, in any way satisfactorily explain the identities of these Russian companies and whether they genuinely lent monies as claimed by the assessee. 26. The Supreme Court s ruling in CIT v. Lovely Exports 2010 (14) SCC 761 affirms the ruling of this Court that t .....

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roject. These were based upon its assertion that Russian joint venture partners were involved. Likewise, the Department of Economic Affairs appear to have approved the setting-up of the project. Nevertheless, such clearances did not in any way undermine or displace the onus which it continued to labour under, to primarily satisfy the revenue that the amounts came from a genuine party. There were no particulars with respect to SFT or COPL, the documents incorporating these entities or even descri .....

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explained. It was not SFT which gave the money to the assessee. Therefore, the onus to prove that the amounts came from credible sources and creditworthiness of the entity or the source, was never discharged. 27. In view of the above reasons, this Court is of the opinion that the findings recorded by the AO and the CIT(A) were sound and based upon a correct appraisal of the entirety of the circumstances. The ITAT fell into error in not following the established principles governing the law of S .....

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sessee declared - in its return dated 30.11.1996, a loss of ₹ 22,04,997/-. Scrutiny assessment was completed on 30.03.1999, after adding ₹ 10,65,00,599/-. The assessee s appeal was allowed and the matter was remitted by the CIT(A) directing AO to grant sufficient opportunity (to the assessee). In the assessment subsequently completed on 28.03.2002, the AO noticed the previous facts leading to the advancement of the amount, the change of name of M/s. Euro Link Private Limited to M/s. .....

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n another concern, M/s. Milestone Leasing and Finance Company. Doubting the forfeiture claimed by the assessee, the AO observed that in fact he never responded to the letters and was consequently asked why such forfeiture should not be treated as business expenditure under Section 28. The assessee relied upon the Supreme Court s ruling in T.V. Sundaram Iyengar v. CIT 1996 (222) ITR 324, to say that where in the books, the assessee claims a trading receipt, its subsequent conversion is impermissi .....

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der Section 41(1) on the ground that it had never been allowed as deduction or allowance in the earlier year which was a pre-condition for application of that provision. After discussing various decisions, rendered prior to T.V. Sundaram Iyengar (supra), the ITAT held that the principle which emerged was that the amount received by assessee as part of its trading operations or transactions though it is not taxable in the year of receipt being a revenue character it would undergo a change in char .....

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the assessee and transferred to the reserve account. On an application made by the assessee company, the Department of Economic Affairs (ECB Division), Ministry of Finance, Govt. of India has intimated the assessee that his department has no comment with regard to the grant of permission to forfeit the loan amount and the assessee was advised to take up the matter with RBI accordingly. 38. It has been noted by the AO that the joint venture agreement was entered into November, 1991 though the ass .....

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ed on the business of software development and the money received towards alleged loan of ₹ 10.65 crore was not utilized for the purpose of software development of India. The AO and the CIT(A) has treated the alleged loan amount as a trade advance, and, in this connection, they made a reference to the correspondence made by the assessee company with SFT in its letter dated 23-06-1993..... XXXXXXX XXXXXX XXXXXX .............The crux of the requirement to treat the alleged loan as assessee s .....

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eceived in this course of any trading transaction, or as the money arising out of ordinary trading transactions. In the light of the above, the contention of the department that the assessee had received the sum of ₹ 10.65 crore as a trade advance in the course of trading transactions is rejected. The loan so received by the assessee was for the purpose of setting up a business of software development in India and was not at all related or connected to any trading transactions of the asses .....

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ited by the assessee by transferring the same to its reserve and surplus account with satisfying the primary and basic condition that the money when it was received was received in the course of trading transaction or the money had arisen out of the ordinary trading transactions of the assessee company, the same cannot be considered to be income of the assessee chargeable to tax under the Act on its forfeiture. In the instant case, as observed above, the basic and primary requirement that the su .....

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amounts claimed one way or the other in the previous years as the assessee s income, and bring it to tax, relates to deductions made for any year in respect of loss, expenditure or trading loss . The second important aspect is that the mere change of character of the amounts in the books of the assessee is undeterminative as to whether it can be brought to tax under Section 41(1). T.V. Sundaram (supra) was a case where unclaimed sundry balances lying with the assessee could have been treated as .....

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