TMI Blog2006 (3) TMI 204X X X X Extracts X X X X X X X X Extracts X X X X ..... the value of the benefit accruing to the assessee can be deemed to be the profits and gains of business or profession and can be brought to tax as income of the previous year in which such amount or benefit is obtained. We find that the NCDs were issued to raise a capital of the assessee before commencement of the business and whatever earnest money or advance was received on account of issuance of NCDs, was kept in separate account and was shown as loan liability upon the assessee and this liability was never debited to the profit and loss account nor was its deduction claimed in the relevant assessment year. Since, the NCDs were issued in order to borrow the funds to raise the capital, the amount received in lieu thereof has assumed the character of capital receipt if at all not treated to be a loan liability, inasmuch as issuance of NCDs was not a business of the assessee. Thus, the earnest money or an advance amount received on account issuance of NCDs, if forfeited on account of nonpayment of call money, the loan liability would only convert into a capital receipt. It would not assume a character of revenue receipt or business receipt because NCDs were not issued in the cours ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... akhs. 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 sources. 3. The assessee has filed appeal before the CIT(A) with the submissions that it is settled position of law that by charging provisions of sections 4 and 5, the general liability to tax is imposed upon income but the Income-tax Act does not provide that whatever is received by the person must be regarded as income chargeable to tax. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 can only be ceased if it has been debited to the profit and loss account in the earlier years as a loss or expenditure or trading liabilities. Unless and until that liability debited to the profit and loss account in the earlier years it cannot become an income of the assessee on its cessation in view of the provisions of section 41(1) of the Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rfeited 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 assessee on account of default of nonpayment of a call money. It is also to be examined as to what would be a character of the entire amount received on account of issuance of NCDs if call money is paid in time, whether it would be a capital or revenue receipt? Before dwelling upon the issue, we have to examine the various judgments referred to by the parties ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 liability which is incurred by the assessee, and subsequently during any previous year the assessee obtains, whether in cash or in any other manner, any amount in respect of such trading liability by way of remission or cessation of such liability. In that case, either the amount obtained by the assessee or the value of the benefit accruing to the assessee can be deemed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y 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 prices. The expenses towards purchases had already been incurred and there was no remission from the side of the said sellers of securities, etc., in favour of the assessee out of such purchase prices. The transactions between the assessee and DB (apart from those relating to direct purchases and sales of shares and securities between the two parties) were mostly of the nature of l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld 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 transitions between the assessee and DB even apart from DB acting as banker of the assessee the total expenses on interest on overdraft, guarantee, commission, bank charges, etc. came to Rs. 6,89,28,002 out of which only Rs. 1,85,60,598 constituted interest on overdraft account. It was not understood as to what happened to the other expenses aggregating Rs. 5,03,67,404 also incurred by the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me-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 be treated to be an income under section 41(1) of the Act. If that liability was not allowed or its deduction was not granted in earlier years it would not assume a character of income chargeable to tax in this year by virtue of section 41(1) of the Act. The facts of instant case are examined in the light of proposition of law laid down in the aforesaid cases and we would find that the NCD ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
