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TMI Blog2006 (3) TMI 204X X X X Extracts X X X X X X X X Extracts X X X X ..... the option of the assessee. On account of forfeiture of debentures, the amount paid earlier on such debentures have been written back. In "Schedule D" of the Audited Accounts, the assessee credited an amount of Rs. 14.19 lakhs being the amount written back on forfeiture of debentures and set it off against the expenditure of Rs. 6,482.59 lakhs. According to the Assessing Officer, though the commercial production had not been commenced by 31-3-1993 the monies were borrowed through non-convertible debentures for the purpose of business. As NCD's holders defaulted in making payment of the call money, they lost the right to retrieve the amount paid and the forfeited NCDs can be re-issued upon the option of the assessee only. Thus, the benefit has been derived by the assessee-company in monetary terms and the same was liable to be taxed as income of the assessee. The Assessing Officer further held following the judgment of the Hon'ble Apex Court in the case of CIT v. T.V. Sundaram Iyengar & Sons Ltd. [1996] 222 ITR 344 that even though it was derived from the course of setting up of business the same do not loose the character of income and is liable to tax as income from other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as required to be paid by a subscriber and in case the subscriber fails to make the payment, the amount so paid as an advance money against the non-convertible debentures would be forfeited by the assessee. Since the assessee has received the advance money on account of issuance of NCDs in order to raise its capital the character of receipt is also of a capital nature. In case the subscribers paid the call money the entire amount goes to the capital account of the assessee. On their default for non-payment of call money the advance money paid by the subscribers is forfeited by the assessee but the nature remains the same as capital receipt. The learned counsel of the assessee further argued the charging sections of Income-tax Act, 1961, are sections 4 and 5 and under these sections only those income can be charged to tax which falls under any head of income. If it does not fall under any prescribed head of income that receipt cannot be subjected to tax. With regard to applicability of the provisions of section 41(1) of the Act, the learned counsel for the assessee has invited our attention to the provisions of section 41(1) of the Act with the submissions that only that liability c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he rival submissions and from the perusal of the record, we find that the assessee has issued 38,00,000 NCDs of Rs. 150 each out of which 62,250 NCDs were forfeited due to non-payment of call money though these forfeited debentures can be re-issued but it can only be done at the option of the assessee. It is also made clear that once this initial payment is forfeited on account of non-payment of call money the subscriber has lost every right to retrieve the amount so paid by it. The forfeited amount of Rs. 14.19 lakhs was credited to the Debentures Account and was adjusted against the expenditure of Rs. 6,482.59 lakhs. It is also admitted fact that commercial production was not commenced during the previous year relevant to the impugned assessment year in question and the money was borrowed through NCDs to raise capital of the assessee. Now, the issue before us is with regard to the character of the borrowed fund through issuance of NCDs whether it was of the capital nature or a revenue receipt? Once it is held that the borrowed funds were received through issue of NCDs to raise the capital, it is of capital nature and its character cannot be changed even if it is forfeited by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the balance amount, the deposits were to be treated as part payment of the price of the securities. But in the interval between the deposit and the due date of the payment of the balance amount, the deposits were to be treated as earnest money liable to be forfeited. In this case the bank bought the securities on p behalf of its constituents in the course of its business and for the purpose of making profits. If the contract was duly executed, the bank would have been entitled to charge brokerage. The entire transaction was a profit making process of the bank. This is not a case of pre-deposit of money for acquisition of licence or business contract which had to be kept deposited with the principal for the entire duration of the period. 9. With regard to the cessation of liability, we have examined the judgment of the Hon'ble Gujarat High Court in the case of Chetan Chemicals (P.) Ltd. in which Their Lordships have held that on a reading of section 41(1) of the Income-tax Act, 1961, it is apparent that before the section can be invoked, an allowance or a deduction has been granted during the course of assessment for any year in respect of loss, expenditure or trading liabi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erest of Rs. 2.6 crores. The assessee treated interest as interest income for the current year but claimed that Rs. 44.7 crores could not be considered as income of the assessee under section 41(1) inasmuch as no deduction had been claimed in respect of this amount in the computation of income in any assessment year. However, the Assessing Officer held that all its security transactions entered into with DB which were towards the purchases made and purchase of securities were claimed as expenditure. Therefore, he treated q the entire amount of Rs. 44.7 crores remitted by DB towards principal as the assessee's income under section 41(1). On appeal, the Commissioner (A) affirmed the order of the Assessing Officer. On second appeal: Held The facts of the case clearly indicted that the assessee had incurred expenses in past or even in this year towards the purchase price of shares and securities brought from other parties and than the payments in that regard were made by the assessee out of us overdraft account with DB. When DB remitted or wanted the principal amount of such loan, it could not be said that any portion of the purchase price was waived by recipients of such pri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase, therefore, the trading transactions of the assessee could neither be equated nor could directly be connected with the liability of assessee towards loan incurred by it from its bank, viz., DB. Therefore, so far as remission of principal amount was concerned, the provisions of section 41(1) would not at all be applicable. The main reason why the provisions of section 28(iv) would not be applicable to the instant case was that the benefit did not arise to the assessee on its revenue account. 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 affect that capital accounts of the assessee and hence, in ordinary sense, such waiver cannot constitute income of the assessee. For the purpose of applicability of section 28(iv) the benefit or perquisite must relate to the revenue account of the assessee. Hence, remission of the liability towards principal amount could not constitute income in the assessee's hands either under section 41(1) or under section 28(iv). Now taking into consideration the different facets of transitio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... epresents the various credits and deposits during the trading with a firm. They remained for a long time to be recovered (even before the limitation period) and thus remained unclaimed. The amounts were then transferred by the assessee-company to the general reserve obviously treating them to be the profits. In that view an amount has to be treated as income of assessee chargeable to income-tax. 14. In the light of the ratio laid down by the Hon'ble Apex Court and the various High Courts in the above mentioned cases, we are of the view that for invoking the provisions of section 41(1) of the Act an allowance or deduction must have been granted during the course of assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee and subsequently during any previous year, the assessee obtains, whether in cash or in any other manner whatsoever or any amount in respect of such trading liability by way of remission or cessation of such liability. Unless and until the liability which has been ceased or remitted during the impugned assessment year, has been debited and claimed to the profit and loss account and allowed in earlier years, it cannot ..... X X X X Extracts X X X X X X X X Extracts X X X X
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