TMI Blog1997 (9) TMI 143X X X X Extracts X X X X X X X X Extracts X X X X ..... essee-company suffered huge losses. It also got involved in the security scam in early 1992 in the above-mentioned process. The affairs of the company were investigated by Janakiraman's Committee Report. The company admitted before the Janakiraman's committee that several irregularities had been committed by it and especially by its officer Ms. Latha Sriram (designated by the assessee-company as dealer). 3. It is an undisputed fact that DB was acting as the manger-banker of the assessee-company. The assessee enjoyed huge overdraft facilities from DB. The major portions of the transactions entered into by the assessee, whether of purchase or sales of shares and securities, were routed through DB only. On account of the huge loss suffered by the company, DB decided to write off a sum of Rs. 47.3 crores due to it from the assessee. This amount is stated to be consisting of Rs. 44,69,88,170 towards the principal and Rs. 2,60,11,830 towards interest. According to the lower authorities, the assessee-company treated the last item of Rs. 2,60,11,830 as its income for the current year. It, however, contended that the other amount of Rs. 44,69,88,170 could not be considered as income of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was Rs. 379.77 crores while that of sales by assessee to DB was Rs. 1086.205 crores. These figures were certainly at variance with the figures stated to have been given to the Assessing Officer by the assessee-company. We also note this variance for which there is no immediate answer before us from the side of the assessee. At the same time again, we are of the opinion that these variations would not effectively alter the situation inasmuch as the CIT(Appeals) himself has accepted the position that the stiles to DB in any case exceeded the purchases from DB, in value. The CIT(Appeals) actually came to the conclusion that there is no question of any portion of the write-off being attributable to the trading transactions between the assessee and DB. 5. The CIT(Appeals) furthermore examined the nature of transactions between the company and DB which, according to him, had the following several facets: "(a) DB was one of the financiers to the appellant. It allowed certain overdraft facilities to the appellant which was increased to Rs. 3 crores and this was continued thereafter. (b) DB acted as banker to the appellant. In this capacity it received BRs and bankers cheques for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of a corresponding portion of the liability of the assessee which was caused by the trading transactions of the assessee. He ultimately held that the entire amount of Rs. 47.70 cores written off by DB constitutes benefit by way of cessation of liability arising from business transactions and hence, is assessable in the hands of the assessee for this year under section 41(1) or under section 28(iv). 9. During the course of the hearing of the appeal before us, Shri Dastur, learned counsel for the assessee has firstly emphasised on the fact that the CIT(Appeals) himself has admitted that so far as direct trading transactions in securities and shares, etc., between the assessee and DB are concerned, the sales by the assessee to DB far exceeded the purchases made by the assessee from DB. Hence, rather DB owed to the assessee on this account and not otherwise. It is thus contended that there is no question of remission of any liability by DB on this account. On the basis of the facts of the case as discussed above, we agree with the contentions of Shri Dastur. This point has been admitted even by the CIT(Appeals) himself. 10. Thereafter, it has been argued that DB acted merely as b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expense should have been allowed in an earlier year and the remission or cessation of the liability must taken place in a later year. The Karnataka High Court merely stated as under: "The purpose of section 41(1) is quite clear. Its idea is to levy tax on any amount received by the assessee subsequently or any benefit received by an assessee during any subsequent year in respect of which he had earlier obtained an allowance or deduction while computing his income." Use of separate expressions for the amount being received by the assessee subsequently or any benefit received by the assessee during any subsequent year shows that the intention of the Karnataka High Court might not have been that it is necessary for the purpose of applicability of sec lion 41(1) that the benefit must come to the assessee in a subsequent year alone. In any case, the CIT(Appeals) himself has admitted that for the purpose of section 41(1), the allowance of expense, loss, etc., must have taken place in a year earlier than the one in which the benefit was ultimately obtained by way of remission, cessation of the liability concerned. At the same time again, he has vehemently argued that if both the ques ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the debt owed by the assessee to a Bombay firm was a trading debt which had been allowed for the purpose of income-tax and hence, the provisions of section 10(2A) of the Income-tax Act, 1922 [corresponding to section 41(1) of the 1961 Act] would apply to that amount. The Delhi High Court, however, also held that so far as the account of a firm M/s. JD was concerned, the liability of the assessee to JD arose because JD had paid a sum of Rs. 1,80,000 to the Bombay firm on the assessee's account; vis-a-vis the assessee and JD, the payment was not made for the purchase of stock-in-trade and it was simply a credit in respect of an amount borrowed by the assessee from JD in order to discharge its liability to the Bombay firm. Shri Dastur has thus strongly argued that inasmuch as the liability of the assessee to DB had not arisen out of any trading operations between the assessee and DB and the assessee merely owed a loan to DB which was waived or remitted, there cannot be any question of applicability of the provisions of section 41(1). 13. The facts of the case clearly indicate that the assessee had incurred expenses in past or even in this year towards the purchase price of shares ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... preme Court in the case of State of Madras v. G.J. Coelho [1964] 53 ITR 186 at page 194 that the liability towards interest payment incurred on loan specifically utilised for acquiring capital assets would also form revenue expense in the hands of the assessee. It is, thus, clear that the loans from credits stand completely on a different footing from the transactions in which the assessee indulged by utilising such loans. In the instant case, therefore, we completely agree with the contention of the assessee that the trading transactions of the assessee can neither be equated nor can directly be connected with the liability of the assessee towards loan incurred by it from its banker, viz, DB. Ultimately therefore, we are of the opinion that so far as remission of principal amounts are concerned, the provisions of section 41(1) would not at all be applicable. 15. As regards the applicability of the provisions of section 28(iv), Shri Dastur has argued in the following lines: (i) No positive benefit accrued to the assessee by way of remission or the liability by the bank. Benefit of the nature of cessation of liabilities is already covered by the provisions of section 41(1). In s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the main reason why the provisions of section 28(iv) would not applicable to the present case is that the benefit did not arise in the instant case to the assessee on its revenue account. As mentioned earlier, the Madras High Court has held in the case of P. Ganesa Chettiar that a debt forgiven or waived cannot constitute income. Even according to general commercial principles and various decisions of different courts, it cannot be said that a waiver of a loan as such constitutes income in the hands of the debtor. Such waiver clearly affects the capital account of the assessee and hence, in ordinary sense, such waiver cannot constitute income of the assessee. Section 28(iv) deals with the extended definition of business income. However, for the purpose of applicability of the same, the benefit or perquisite must relate to the revenue account of the assessee. The learned DR has placed reliance on a judgment of the Delhi High Court in the case of K.S. Malik v. CIT [1980] 124 ITR 522 in this connection. Shri Dastur has however argued that this particular decision has been delivered by the Delhi High Court before so many other decisions had come from different courts including the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -------------------------- Interest on Overdraft 2,57,164 16,38,950 1,66,64,484 Guarantee Commission - 85,050 18,00,000 Bank charges 22,312 1,51,941 74,731 Custodian charges - 10,46,105 7,26,215 Service Charges - - 4,84.23,050 --------- ----------- ------------- 2,79,476 29,22,046 6,57,26,480 ---------------------------------------------------------------- The total amount in this regard for the three years come to Rs. 6,89,28,002 out of which only Rs. 1,85,60,598 constitutes interest on overdraft account. It is stated that the bank remitted the liability of the assessee to the extent of Rs. 44,69,88,170 towards principal and Rs. 2,60,11,830 towards interest. It is not understood as to what exactly happened to the other expenses aggregating Rs. 5,03,67,404 also incurred by the assessee like guarantee commission, bank charges, custodian charges and service charges which also remained as payable to DB. The facts are not at all clear as to whether these expenses were also remitted or not. It is a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Rs. 15 for delivery on 5-5-1992 on a term that the same number of units would be sold back to RCFT before 30-5-1992. (ii) 10 crore units to be purchased from RCFT on a one year ready forward basis with an understanding that the same number of units would be sold back to RCFT on 4-5-1993 at a price of Rs. 15-43. These 20 crore units were utilised by the assessee-company to regularise the earlier over-sold position and as such, the company was unable to meet its obligation on the due dates to resell the units. As a result of negotiations, 2 crore units were re-sold under the first contract and the contract for re-selling the balance 8 crores under the said first contract and 10 crore units under the second contract were terminated and payment of Rs. 28.40 crores (Rs. 4.40 crores for the first contract and Rs. 24 crores for the second contract) were made. It was the plea of the company that the company had to resort to this arrangement as it would have incurred a larger loss had it admitted to purchase of such a larger amount of units in the market at such a short notice and at a far higher price. 20. The company thus tried to argue before the Assessing Officer that the payment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... financial institutions, but that there was no such bar for the assessee. The CIT(Appeals) candidly admitted that he had not seen the observations of the special court in this regard. He, however, discussed thereafter that the Reserve Bank of India, had issued instructions to banks and financial institutions barring them from entering into contracts for purchases and sales of shares without actual delivery of the same and also from entering into ready-forward transactions. He stated thereafter that if any bank entered into such contracts, the contracts would be void being opposed to public policy (vide section 25 of the Indian Contract Act). Any payment effected by the assessee in pursuance of such void contract would, according to the CIT(Appeals), constitute payment without any legal obligation arising from the contract. He finally held that from above considerations it would appear that there is justification in holding that the payment to ANZ was not a case of loss arising on account of valid business transaction. He furthermore added that he was not able to comment on similar lines in respect of the payment to RCFT as it appeared that neither the RCFT nor the assessee was barre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd and the units of UTI on the other in various sections. For example, he has pointed out that the proviso to section 2(42A) takes into consideration stocks and shares and units separately. It is pointed out that similarly in Explanation 1 to section 54E, clause (iii) relates to units whereas clause (v) relates to shares. Similar distinction between the two things has been made in other sections like section 80CC, section 80L [clauses (iv) and (v)], sections 88A, 196A and 196B. Shri Dastur has also relied on a judgment of the Calcutta High Court in the case of CIT v. Nirmal Trading Co. [1971] 82 ITR 782, in which cases it has been held that the right to renounce the allotment of shares is neither a commodity nor shares. Shri Dastur has also brought our notice to the following judgments of different Benches of ITAT wherein it has been held that the units of UTI are not stocks arid shares and hence dealing in the same cannot constitute speculative transactions: (i) Apollo Tyres Ltd. v. Dy. CIT [1992] 43 ITD 464 (Coch.) at pages 467 495. (ii) Unreported order of ITAT, Bombay Bench dated 23-11-1992 in IT Appeal Nos. 8215 and 7981 (Bom.) of 1988 for assessment year 1985-86 in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e further in this connection that the Legislature has not used the expression "commodity and also "stocks and shares". In such a case, it could have been held that the intention of the Legislature was to treat commodity separately from stocks and shares. The learned DR has brought our notice to an English judgment in the case of Imperial Tobacco Co. (of Great Britain and Ireland) Ltd., passed by the High Court of Justice (King's Bench Division) dated 22nd and 25th January, 1943 and by the Court of Appeal dated 8th June, 1943 as reported at 25 T.C. 292. In the said judgment, Lrd Greene, M.R. observed as below: "That being so, what is the true analysis of the position? A manufacturer has provided himself with a commodity, namely, dollars. I call dollars a 'commodity' not for the reason that they are not currency in this country, but because they have a characteristic which is common to other commodities, and is not shared by sterling namely, that their value from day to day varies in terms of sterling, just in the same way as coal, or bricks, or anything else may do." When the Court of Appeal held even dollar which is nothing but a currency also to represent commodity, we find ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to ANZ, on account of breach of and in lieu of performance of the above-mentioned two contracts for purchase and sale. Although the CIT (Appeals) states that even on the day of delivery, i.e., 31-7-1992, there was the atmosphere of non-performance of the contract, we are, however, of the opinion that this fact by itself shows that the breach of the contract actually took place. The detailed correspondences between the two parties, copies of which have been placed before us clearly show that the settlement in this regard was ultimately arrived at on 22-8-1992 only, i.e., quite some time alter the due date for performance of the contracts. Hence, we accept the contention of the assessee that the settlement in this case was of the breach of the contract and hence, the payment made by the assessee partook (sic) of the character of the damages paid by it towards such breach and would not therefore fall within the ambit of section 43(5). However, so far as the transactions with RCFT are concerned, both the contracts for re-sale were terminated in this particular case on 30-5-1992 by way of settlement of the contracts and making payments of the difference of amounts by the assessee. Shri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lower authorities treated the loss incurred by the assessee as merely a speculative loss or illegal in view of the circular issued by the RBI refraining the banks and financial institutions indulging in buy-back arrangement. We have already held that so far as the transactions with ANZ are concerned, the same cannot be: considered as speculative transactions. From the discussions as made above, we cannot also hold that this is a case of a buy-back arrangement of all the units contracted to be sold and purchased as envisaged in the circular of the RBI. Furthermore, the sale price by the bank being higher than the purchase price is also a pointer to considering the transaction to be not exactly of buy-back nature. Again, the banks might have been advised by RBI not to indulge in buy-back arrangement. It is a moot question as to whether the assessee which is neither a bank nor a financial institution can be considered to be suffering from such restrictive instructions of RBI. In any case, whether such instructions of RBI have got the legal effect of rendering any buy-back arrangement indulged in by a bank/financial institution to an illegal transaction, is still an unanswered questio ..... X X X X Extracts X X X X X X X X Extracts X X X X
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