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TMI Blog2003 (1) TMI 71X X X X Extracts X X X X X X X X Extracts X X X X ..... y of depreciation on the cost of machinery and toolings, was taxable under section 41(l) of the Income-tax Act as the cost of the machinery/toolings being forgone by Kaiser Jeep Corporation during the assessment year 1976-77 ? 3. Whether the Tribunal was right in holding that waiver of the loan repayment was not related to stock-in-trade but to capital asset and, therefore, it was not a remission of liability under section 41(1) of the Act ? 4. Whether the Tribunal was right in holding that the amount of Rs. 57,74,064 constituted a benefit of perquisite in cash and, therefore, it did not fall within section 28(iv) of the Income-tax Act ?" Questions Nos. 2, 3 and 4 referred to hereinabove are reframed questions. They have been reframed with the assistance of the learned advocates on both sides. Facts : In this reference, we are concerned with the accounting year ending October 31, 1975, corresponding to the assessment year 1976-77. The assessee, Mahindra and Mahindra Limited, had detailed plans to expand its jeep product line by including FC-150 and FC-170 models. On June 18, 1964, therefore, the assessee entered into an agreement with Kaiser Jeep Corporation situate in Ameri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ference in exchange rate consequent upon devaluation of the rupee in 1966 and customs duty paid on the import of the toolings was treated by the company as current assets and shown under the sub-head "Tools". The cost of the tools was amortised each year based on the number of trucks produced. In the company's accounts for the year ending October 31, 1975, corresponding to the assessment year in question, the tools at their amortised value were transferred to fixed assets as the company treated the tools as capital assets. The assessee had obtained benefit of amortisation for the years ending October 31, 1966, up to October 31, 1974, amounting to Rs. 34,84,269. Out of the total amortised value of Rs. 34,84,269, the proportionate invoice cost amortised over a period of nine years was paid directly out of the loan obtained by the assessee from KJC. On February 17, 1976, the President of KJC informed the assessee that American Motor Corporation had taken over KJC. That, American Motor Corporation (hereinafter referred to for the sake of brevity as "AMC") has agreed to waive the principal amount of loan advanced by KJC to the assessee and to cancel the promissory notes as and when they ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase because, at that time, there was acute shortage of foreign exchange. That the promissory notes were for value received. That the consideration for which promissory notes came to be made was against shipment of goods. Therefore, the Tribunal, on the facts, came to the conclusion that there was one contract of purchase of the tools and that purchase consideration was paid vide promissory notes. The Tribunal further concluded that section 28(iv) of the Act is applicable only to benefits or perquisites received by the assessee in kind. Therefore, according to the Tribunal, in this case, section 28(iv) was not applicable because benefit of waiver was not received by the assessee in kind. The Tribunal further took the view that even section 41(1) of the Act was not applicable because there was no cessation of trading liability. That the assessee had never incurred the trading liability. That the assessee had bought the toolings as capital assets. In the circumstances, section 41(1) of the Act had no application. The Tribunal further took the view that, in the present case, we are concerned with the purchase consideration relating to a capital asset and, therefore, section 28(iv) was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the assessee had not imported trading goods. He contended that the assessee had imported toolings as a part of plant and machinery. That the assessee is a manufacturer of jeeps. That the toolings were dies. That these toolings did not constitute trading goods. That the assessee had not received deduction for Rs. 57,74,064 on import of the equipment. He contended that in order to attract section 41(1) of the Income-tax Act, the first requisite which ought to be satisfied was that the assessee should have got deduction or benefit of allowance in respect of loss, expenditure or trading liability incurred by the assessee and that subsequently during any previous year the assessee receives any amount in respect of such loss, expenditure or trading liability by way of remission or cessation thereof. He contended that in this case in respect of Rs. 57,74,064, the assessee has never received allowance or deduction and, therefore, section 41(1) of the Act was not attracted, That, even assuming for the sake of argument that assessee had received the benefit of deduction or allowance, such deduction was not in respect of any loss, expenditure or trading liability. That under section 41(1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 37 of the Act. These three facts are not disputed by the Department. Therefore, we are required to consider the applicability of the provisions of sections 28(iv) and 41(1) of the Act in the light of the abovementioned three undisputed facts. (A) On section 28(iv) : At the outset, we wish to clarify that this judgment is confined to the facts of this case. This is because the value of any benefit or perquisite arising from business, as contemplated by section 28(iv), could accrue in numerous ways. The income which can be taxed under section 28(iv) must not only be referable to a benefit or perquisite, but it must be arising from business. Secondly, section 28(iv) does not apply to benefits in cash or money (see CIT v. Alchemic Pvt. Ltd. [1981] 130 ITR 168 (Guj)). Applying section 28(iv) to the facts of this case, one finds that on June 18, 1964, the assessee entered into an agreement to purchase toolings from KJC. In 1964-65, India was facing foreign exchange crunch. In the circumstances, around June 7, 1965, the Government of India and the Reserve Bank of India, in this case, approved the arrangement under which KJC (supplier of toolings) was permitted to advance a loan of $ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is not applicable. In order to apply section 41(1), an assessee should have obtained a deduction in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee. In this case, the assessee has not obtained such allowance or deduction in respect of expenditure or trading liability. It is not disputed that the assessee has paid interest at 6 per cent. over a period of ten years to KJC on Rs. 57,74,064. In respect of that interest, the assessee never got deduction under section 36(1)(iii) or section 37. In the circumstances, section 41(l) of the Act was not applicable. Secondly, even assuming for the sake of argument that the assessee had got deduction on allowance even then section 41(1) was not applicable because such deduction was not in respect of loss, expenditure or trading liability. In order to get over this alternative argument, it was argued by the Department 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Department : Reference Application No. 1708 of 1982 filed by Department : The learned advocates on both sides have informed us that the questions falling under Reference Application No. 1708 of 1982 stand covered by various judgments of our court. Accordingly, we answer the following questions. "(i) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the assessee was entitled to deduction of 100 per cent. of the initial contribution made to approved superannuation fund ?" Answer : In view of the judgment of the Supreme Court in the case of CIT v. Sirpur Paper Mills [1999] 237 ITR 41, the abovesaid question No. (i) is answered in the affirmative, i.e., in favour of the assessee and against the Department. "(ii) Whether, on the facts and in the circumstances of the case, expenditure of Rs. 20,000 for supply of tea and soft drink constituted entertainment expenditure under section 37(2B) of the Income-tax Act during the assessment year in question Answer : Since the amount involved is only Rs. 20,000, we do not wish to answer the above said question No. (ii). "(iii) Whether the Tribunal was right in holding that the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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