TMI Blog2008 (1) TMI 386X X X X Extracts X X X X X X X X Extracts X X X X ..... . SAIYED JJ. R K. Patel with B. D. Karia for the assessee. Manish R. Bhatt for the Department. JUDGMENT The judgment of the court was delivered by D. A. MEHTA J. - This reference in fact encompasses two cross-references: one by the assessee (R.A.No.381/AHD/1993) and another by the Revenue (R. A. No. 413 and 414/AHD/1993). 2. The question, at the instance of the assessee, has been referred by the Income-tax Appellate Tribunal, Ahmedabad Bench "B" under section 256(1) of the Income-tax Act, 1961 (the Act): "Whether, on the facts and in the circumstances of the case, the Tribunal was justified in confirming the disallowance of guarantee commission of Rs. 3,16,668?" 3. The said reference is for the assessment year 1978-79, the relevant accounting period being year ended on June 30, 1977. 4. In the Revenue's reference the Tribunal has referred the following two questions, which are identical in nature, except for the amounts involved for the two assessment years, namely, the assessment years 1978-79 and 1979-80: "For the assessment year 1978-79: Whether the Appellate Tribunal is right in law and on facts in deleting the addition of Rs. 32,50,557 ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erest. In reply to the show-cause notice the assessee explained, vide letter (page 379) of the paper book that the amount was not of the character of income or deemed income and that it had nothing to do with the trading activities of the assessee. It was submitted that the amount represented capital receipt and was not liable to tax. The Income-tax Officer rejected the submissions of the assessee and observed that the assessee had acquired going concerns and had transferred the same within a period of four months with effect from July 1, 1977, and the profit arising on the reduction of liabilities was thus trading profit which was liable to tax as business income of the assessee. He, therefore, assessed the amount of Rs. 32,50,557 as the assessee's income. In the alternative, he held that the said amount was liable to tax as capital gain arising to the assessee on short-term basis. 7.2 The details of commutation charges were as under: Name of the investment company Liability as on 30 th June 1977 (Rs.) Commutation charges at the discounting rate of 12 per cent. (Rs.) Amount payable in lump sum on demand (Rs.) Kailash Inv. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee and accordingly deleted the addition of said amount." 8. Mr. M. R. Bhatt, learned senior standing counsel, assailed the impugned order of the Tribunal dated April 16, 1993, by submitting that the Tribunal had failed to appreciate that the transaction in question was falling within the provisions of section 28(i) as well as section 28(iv) of the Act and, hence, even if the Tribunal had come to the conclusion that there are no profits and gains in the business which was carried on by the assessee at any time during the previous year, at least the surplus in question was to be treated as the benefit arising from the business. That the question raised by the Tribunal was wide enough to take within its sweep both section 28(i) and section 28(iv) of the Act and the Revenue should not be precluded from raising the said contention. It was submitted that for constituting business even one solitary transaction was sufficient, however, in the present case, when both the years were taken into consideration together there were series of transactions involving a systematic activity constituting business. It was further contended that the Tribunal had also failed to take into consider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Ltd. and Karamchand Premchand Pvt. Ltd., the original vendee and the vendor respectively. The assessee company reworked the terms of the agreement by mutual consent, and commuted the liabilities by applying discounting the rate of 12 per cent. on the outstanding amount and credited the difference to the capital reserve of the assessee-company. As a result of the modification of the agreement the amount which was payable in five equal instalments to the four investment companies became payable on demand with interest at the stipulated rate. 11. In the hands of Kailash Investment Pvt. Ltd., one of the investment companies, who was to receive the sale consideration from the assessee, the amount in question was claimed as business loss for the very same assessment year, i.e., the assessment year 1978-79. Alternatively, the commutation charges of Rs.12,01,782 were claimed as a deduction under section 57(iii) of the Act. The second alternative claim was that the amount represented capital loss under section 45 of the Act. This court in the reported decision in the case of Kailash Investments P. Ltd. [2006] 281 ITR 92 has recorded the facts as under (page 95): "The assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt to the rate of interest chargeable by bankers on working capital to SCPL from time to time. The assessee became entitled to interest from the date of such conversion on the balance outstanding. Accordingly, as on June 30, 1977, an amount of Rs.12,01,782 was commuted being the discount and the assessee claimed the said amount as a deductible expenditure of the year under consideration." 12. Thereafter, the following finding was recorded (page 98): "The facts as recorded hereinbefore make it amply clear that the assessee-company was to receive call money towards shares issued to KPPL. KPPL got substituted by SCPL and the period over which the call money liability was to be discharged got extended over a period of eight years. Thereafter, three annual instalments were received and then the terms of payment underwent change once again, where-under the assessee-company agreed to forgo the sum of Rs.12,01,782. However, the basic fact that the moneys were receivable against shares issued to KPPL remained as it is without any change or modification. The only change that kept on taking place from time to time was in relation to the terms of payment, including the payer and the peri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssor company, namely, Sarabhai Chemicals Pvt. Ltd., the liability in question had been treated as capital liability as accepted by the Commissioner (Appeals) and, therefore, the said liability would not be of the nature of business income in the hands of the assessee when the liability was in relation to the same transaction of purchase and sale. The Tribunal has also not accepted the stand of the Revenue that the transaction was between the assessee and its subsidiary, namely, the assessee purchased the industrial unit from Sarabhai Chemicals Pvt. Ltd., of which the assessee was wholly owned subsidiary and the unit had been transferred to Ambalal Sarabhai Enterprise Pvt. Ltd., which was another subsidiary of Sarabhai Chemicals Pvt. Ltd., because the properties were transferred under an agreement of purchase which was legally permissible and the circumstances of the transaction being between different subsidiaries was of no relevance. The Tribunal has also noted that though the Commissioner (Appeals) was of the opinion that the transactions constituted a scheme of tax planning once the Revenue had treated the transactions as real transactions, the legal consequence of such transact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of industrial undertakings loses sight of this basic issue, namely, that the transaction in question had its genesis in shares issued and outstanding call monies payable for shares issued. Hence, in any view of the matter, even the provisions of section 28(iv) of the Act cannot be pressed into service by the Revenue in the present case. 16. In the case of CIT v. Bhavnagar Bone and Fertiliser Co. Ltd. [1987] 166 ITR 316 (Guj) the facts were (page 319): "One Jodhpur Bone and Fertiliser Company, a partnership firm (hereinafter referred to as the 'firm') carried on business at Jodhpur. The partners of the firm are directors of the assessee-company which is a private limited company. The firm was having a current account with the assessee-company. The firm sold its entire plant, machinery, furniture, etc., to M/s. P. Lenier and Sons Ltd., London, on March 20, 1950. As a result of the sale, the firm had to wind up its business activities and the only activity which it carried on thereafter was realisation of debts and payments of various expenses. On March 31, 1957, there was a credit balance of Rs. 3,82,905 in the firm's account in the books of the assessee-company. Initiall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e company. The amount of Rs. 3,82,905 was not received by the assessee-company as a result of any business transaction or transaction with the firm. As rightly observed by the Tribunal, this amount had no connection or nexus with the business of the assessee-company. It did not represent the value of any benefit or perquisite arising from the business of the assessee-company. This amount, therefore, would not partake of the character of income. We broadly agree with the reasoning and conclusion reached by the Tribunal and confirm its view that the amount of Rs. 3,82,905 was not includible in the total income of the assessee-company under section 28(iv) of the Act." 18. Hence, for invoking section 28(iv) of the Act the prerequisite conditions are : (a) the benefit/perquisite must arise from the business of an assessee; (b) there must be a nexus or connection between the business of an assessee and the benefit / perquisite sought to be taxed. In the present case, both the conditions are absent. 19. In the aforesaid facts and circumstances of the case, the Tribunal was justified in holding that the profits arising on reduction of liabilities was not trading profits liable to b ..... X X X X Extracts X X X X X X X X Extracts X X X X
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