TMI Blog2021 (3) TMI 365X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 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 the assessee, the actual amount of refund when received will have to be treated as the amount obtained in the previous year of receipt and not prior to that. The amount paid by the assessee as TDS comes back to the assessee only when the TDS is refunded. The amount obtained by the assessee under Section 41(1) (a) is thus the actual amount obtained. Since we have held that the amount obtained ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al amount of ₹ 30,68,152/- which is the net amount that has accrued to the assessee after paying an amount of ₹ 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 ₹ 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 amount of ₹ 13,65,060/- was paid towards TDS payable on the royalty amount and a further amount of ₹ 9,38,438/- towards interest, as per orders issued under Section 201(1A) of the Act. Thus, a total amount of ₹ 23,03,498/- was paid by the assessee towards tax and interest due to the department against the deduction claimed towards royalty payable to the foreign collaborator. In the AY 1995-96, the amount claimed as deduction for the AY 1990-91, excluding TDS and interest paid, was written back by the assessee i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere 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 deducting the tax. He further submitted that Section 41(1) is a deeming provision, which makes the amount, as contemplated under the said provision, if received by the assessee, be deemed to be the profit and gains of business and chargeable to income tax in the manner contemplated therein. 9. While considering the above controversy, it is necessary to refer to Section 41(1)(a) of the Act, which is extracted below: 41. Profits chargeable to tax.- (1) Where an allowance or deduc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowed 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 the amount recouped. 14. Though a legal fiction must be given full effect to it should not be extended beyond the purpose for which it is created. As held in Bengal Immunity Co. Ltd. v. State of Bihar (AIR 1955 SC 661) and in Maganlal v. Jaiswal Industries [(1989) 4 SCC 344], legal fictions are created only for some definite purpose and it must be limited to the purpose for which it was created and should not be extended beyond that legitimate fie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the assessee, the actual amount of refund when received will have to be treated as the amount obtained in the previous year of receipt and not prior to that. 19. The above concept can be illustrated as follows; if an assessee deducts ₹ 10,000/- as an expenditure in 1990-91 for which ₹ 1,000/- was paid as TDS. Subsequently, due to cessation of the liability, the assessee writes back ₹ 9000/- in 1995-96 and applies for a re ..... X X X X Extracts X X X X X X X X Extracts X X X X
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