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Transworld Garnet India Pvt. Ltd. Versus Assistant Commissioner of Income Tax

2017 (8) TMI 620 - MADRAS HIGH COURT

Addition u/s 41 - conversion of advance into capital - advance was received under FDI - nexus with an allowance or deduction for any previous year as a claim of loss, expenditure, or trading liability - Profits chargeable to tax - Held that:- the nexus has not been established in the present case. - Since the tribunal nonetheless decides the issue against the assessee relying on the judgment of the Supreme Court in the Case of T.V.Sundaram Iyengar, [1996 (9) TMI 1 - SUPREME Court], we adver .....

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antly, not been claimed in the previous years. This pre-condition to the application of section 41(1) has not been satisfied in the instant case. The case of T.V.Sundaram Iyengar turned on two facts distinguishable from the present case that the deposits received from the customers had remained unclaimed and become barred by limitation and that TVS itself, treated the money as its own, crediting it to the Profit and Loss account. No reference is made to section 41(1) or the compliance of the con .....

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Mr.K. Sureshskumar JUDGMENT ( Judgment of this Court was delivered by Anita Sumanth, J. ) This appeal comes to us at the instance of the assessee raising the following two substantial questions of law for adjudication in respect of A Y 2000-01. Whether the circumstances contemplated under section 41(1) of the Income Tax Act, exists so as to enable the income tax authorities to include ₹ 10,77,49,601/- as income in the assessment year 2000-01? Whether the Tribunal is correct in proceeding .....

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Advances had also been received from WGI towards business needs and the advances were to be adjusted against future supplies of garnet to WGI. 3. The prevailing foreign direct investment policy imposed a cap of 74% in the mining sector. For the balance, individuals were approached. The business of the appellant had not taken off as expected on account of various logistic and administrative reasons and the appellant had been incurring huge losses. The private sources that had been approached for .....

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was of the view that the provisions of section 41(1) of the Act relating to cessation of liability were attracted and that the amount of ₹ 10,77,49,601/- was liable to be brought to tax as income. An assessment was thus completed in terms of section 143(3) read with section 147 of the Income Tax Act, (in short, Act), by order dated 11.3.2004. The officer, without any discussion whatsoever, brought to tax the amount of liability foregone observing that the aforesaid amount ought to have bee .....

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ation by a resident to the extent of the balance 26%. The resident investor imposed as a condition that the extent of loss that had been incurred be neutralized by further investment by the foreign party. Accordingly WGI had instructed the assessee to convert the advances made by them to capital and credit the same to reserves. The appellant thus claimed that the amount was a capital receipt not liable to tax. 6. The CIT(A), vide order dated 24.11.2004, examined the claim in the light of the pro .....

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evious year, which fact had not been established in the present case. He noted that there was no nexus between the allowance/reduction in the previous years and the amount in question to invoke the provisions of section 41(1). He thus concurred with the submission of the assessee that the amount of ₹ 10.77 crores constitued a capital receipt. 8. The matter travelled in appeal to the Income tax Appellate tribunal (in short, tribunal) which, dismissed the ground of appeal relying upon the ju .....

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only an application that would not change the nature of the taxability of the amount at a stage anterior thereto. The assessee challenges the aforesaid conclusion of the tribunal before us. 9. We have heard the submissions of Mr.R.Venkataraman, learned Senior Counsel for Mr.Srinath Sridevan for the appellant and Mr.Swaminathan, learned counsel on behalf of the Revenue. 10. The provisions of section 41(1) of the Act, the interpretation of which is in issue before us, is extracted below for ease .....

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ty by way of remission or cessation thereof, the amount obtained by such person or the value of benefit accruing to him shall be deemed to be profits and gains of business or profession and accordingly chargeable to income-tax as the income of that previous year, whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not; or 11. At the outset, we may state that the facts of the matter are not in dispute. The findings of the .....

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background of the admitted facts as we have noticed in the preceding paragraph. In order for the provisions of Section 41(1) to stand attracted, the benefit obtained by the assessee in the relevant year should have a direct nexus with an allowance or deduction for any previous year as a claim of loss, expenditure, or trading liability which has not been established in the present case. Since the tribunal nonetheless decides the issue against the assessee relying on the judgment of the Supreme C .....

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any sort and more importantly, not been claimed in the previous years. This pre-condition to the application of section 41(1) of the Act has not been satisfied in the instant case. The case of T.V.Sundaram Iyengar turned on two facts distinguishable from the present case that the deposits received from the customers had remained unclaimed and become barred by limitation and that TVS itself, treated the money as its own, crediting it to the Profit and Loss account. No reference is made to sectio .....

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ia Tea Company (254 ITR 434), decided a matter relating to the write back by an assessee in its accounts, of a provision made for the earlier years towards purchase tax liability. The Bench, after considering the circumstances contemplated by Section 41(1) concluded that the following points are critical in the event the provisions of section 41(1) are to apply and state thus at page 437 of the judgement: The question is whether the circumstances contemplated by section 41(1) exist so as to enab .....

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