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TMI Blog2021 (3) TMI 365X X X X Extracts X X X X X X X X Extracts X X X X ..... case was the Tribunal right in holding that the assessee is not entitled to deduction of the tax and interest amounting to Rs. 23,03,498/- paid by the assessee from out of the gross royalty amount of Rs. 53,71,650/- credited to the account of the foreign collaborator in 1990 and written back in the previous year relevant to the assessment year 1995-96? 3. Whether, on the facts and circumstances of the case should not the Tribunal have held that the cessation of liability and value of benefit that accrued to the assessee is only the differential amount of Rs. 30,68,152/- which is the net amount that has accrued to the assessee after paying an amount of Rs. 23,03,498/- to the Income Tax Department towards tax and interest on behalf of the foreign collaborator?" 2. The issue relates to the assessment year 1995-96. However, the sequence of events that led to the present reference has its genesis in the assessment year (for short AY) 1990-91. The assessee claimed a deduction of Rs. 53,71,650/-, for the AY 1990-91 as an expenditure, being royalty payable to a foreign collaborator. Though deduction was allowed, the amount was not actually remitted outside India. In the meantime, an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted that the profits chargeable to tax as per Section 41(1)(a) of the Act ought to be the amount after deducting the tax and interest already paid to the department, as per the orders issued under Section 201 of the Act and not the entire amount inclusive of the tax and interest. He submitted that a contrary interpretation, if adopted, in the instant case, would cause great hardship and prejudice to the assessee including double taxation. It was also contended that when there is a doubt as to whether it is the net amount or the gross amount of the ceased liability that should be treated as the amount obtained under Section 41(1)(a) of the Act, section 143(1)(a) of the Act will have no application, as the question falls within the realm of a debatable issue. According to the learned counsel for the assessee, an issue, which is debatable or has two possible views, could not be the subject matter of a summary adjustment under Section 143(1)(a) of the Act. 8. Learned Senior Counsel for the department, on the other hand, submitted that the amount contemplated under Section 41(1) (a) is inclusive of the tax since income tax is always levied on the amount received without deductin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Haryana Co-operative Sugar Mills Ltd. [1985) 154 ITR 751] and Polyflex (India) Pvt. Ltd. v. CIT [(2002) 257 ITR 343]. 12. A glance at the history of Section 41 will reveal the purpose behind the enactment of this provision. Section 41(1) of the 1961 Act corresponds to Section 10(2)(A) of the Income Tax Act of 1922. In the decision in British Mexican Petroleum Co. Ltd. v. Jackson (1932) 16 TC 570 (HL), it was held that once a loss or expenditure is allowed as a deduction or as a trading liability, recoupment of the loss or expenditure or remission of the trading liability would be a capital receipt and not a business receipt. By virtue of the fiction enacted under Section 41(1) of the 1963 Act, the difficulty created by the decision in British Mexican Petroleum case was overcome. The provision now by a legal fiction makes the amount so received to be treated as profits and gains includable in the total income of the assessee for the previous year in which such recoupment is obtained. 13. The purpose behind creating a fiction under Section 41(1) (a) of the Act is to tax the amount, earlier deducted but subsequently received back, to the extent recouped. It is a measure of taxing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore an entry made in one previous year as an allowance or deduction towards "loss", "expenditure" or "trading liability" when written back in a subsequent previous year, on account of the cessation of such liability, becomes taxable as profit or gains of business. But the tax liability should be commensurate to the actual amount received or the value of benefit accrued to the assessee in that financial year and not on the unrecovered amount or unacknowledged benefit by the assessee. The unrecovered amount becomes taxable only in the previous year when it is recovered or actually obtained. 18. The amounts paid as tax has not been obtained in 1995- 96 as the same had not been refunded. Until the amount of TDS is refunded, that amount cannot be treated as amount obtained by the assessee. The amount of TDS and interest can be deemed to be profits and gains and chargeable to tax only on refund. Until actual receipt, it is not "amount obtained" and cannot be deemed to be profits and gains from business. In other words, if it is assumed that the TDS paid by the assessee, for the royalty payable, is ordered to be refunded due to the cessation of liability and the refund is received by th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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