TMI Blog1995 (12) TMI 71X X X X Extracts X X X X X X X X Extracts X X X X ..... of section 40A(8) of the Income-tax Act, 1961, were not applicable in respect of interest payments of ₹ 1,73,002, ₹ 2,87,000 and ₹ 1,49,127 on the ground that the interest payments were not interest payments on deposits received ? 2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that an amount of ₹ 8,56,440 credited to the capital reserve account by the assessee-company in respect of the provisions for contractual liability taken over by the assessee-company was not chargeable to tax under section 41(1), 176(3A) or 28(iv) of the Income-tax Act, 1961 ? The assessee is a private limited company. It was incorporated in the year 1973. Its business is that of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... liabilities of the old firm taken over with effect from January 1, 1976, on its becoming the sole proprietor of the business of the dissolved firm. The claim of the assessee was negatived by the authorities below. However, on appeal, the Income-tax Appellate Tribunal ( the Tribunal ) accepted the contention of the assessee and held that payment of interest amount ing to ₹ 1,73,002 on the liabilities of the business of the erstwhile firm which had been taken over by the assessee, could not be held to be expenditure by way of interest in respect of deposits received by it and hence, section 40A(8) of the Act was not applicable. According to the Tribunal, this expenditure was on account of interest in respect of legal obligations to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... firm as on December 31, 1975. In terms of a consent decree, Worli Chemicals Works Pvt. Ltd. (Wockhardt) agreed not to enforce its demand for ₹ 23,980 against the assessee-company. Both the above provisions and liability were included in the liabilities taken over by the assessee-company. The liabilities in respect of these two amounts thus having ceased, the assessee-company transferred the above amounts, in all amounting to ₹ 8,56,440, initially to the profit and loss account and thereafter to its capital reserve account. The Income-tax Officer applied the provisions of section 41(1) of the Act and included the said amounts in the income of the assessee. This order was confirmed on appeal. However, on further appeal, the In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fall under any of the clauses thereof. The admitted position in the present case is that these amounts do not fall in any of the exclusionary clauses. In such a situation, the amounts in question, lying in deposit with the assessee-company on which interest had been paid by it, evidently fall within the meaning of section 40A(8) and hence interest paid thereon would fall within the purview of section 40A(8) of the Act. The method or manner in which the amounts came to be received by the assessee, in our opinion, has no relevance for the purpose of deciding whether the particular amounts belonging to others and lying with the assessee on which interest was also paid by the assessee, would fall within the expression deposit . We have deal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e High Court, the liability of the assessee-company to pay excise duty ceased to exist and so far as the liability to pay the sum of ₹ 23,980 to Wockardt Chemicals Works Pvt. Ltd. is concerned, again the admitted factual position is that this liability came to an and during the relevant previous year as a result of the consent decree passed by the court. That being so, in our opinion, section 41(1) of the Act is clearly attracted. Section 41(1) provides : 41. Profits chargeable to tax.--(1) Where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee, and subsequently during any previous year the assessee has obtained, whether in cash or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct, which was inserted by the Taxation Laws (Amendment) Act, 1975, with effect from April 1, 1976. It reads : (3A) Where any business is discontinued in any year, any sum received after the discontinuance shall be deemed to be the income of the recipient and charged to tax accordingly in the year of receipt, if such sum would have been included in the total income of the person who carried on the business had such sum been received before such discontinuance. This sub-section thus provides that any sum received after discontinuance of a business is to be treated as income of the recipient in the year of receipt, as if it would have been included in the total income of the person who carried on the business, had it been received be ..... X X X X Extracts X X X X X X X X Extracts X X X X
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