M/s Solid Containers Ltd., Mumbai v. Deputy Commissioner of Income Tax (2008) - Scope of S. 41(1) IT Act

BRIEF: This case deals with the definition of the term “profits chargeable to tax” as given in the provisions of Sec. 41 (1) of the Income Tax Act, 1961.

DATE OF JUDGMENT: 29th August, 2008.

JUDGE: A.P. Deshpande.

PARTIES:

• M/s Solid Containers Ltd., Mumbai (Plaintiff)
• Deputy Commissioner of Income Tax (Respondent)

SUMMARY

The following judgment deals with the provisions of Sec. 41(1) of Income Tax Act, 1961, in addition to the provisions of Sec. 28(iv) of the act, which deal with the definition of the term “profits chargeable to tax” and whether or not loan waiver can be taxed.

OVERVIEW

1. An amount of Rs. 6,86,071/- was borrowed as a loan by the assessee (appellant) during the preceding year for business motives which was later reciprocated due to the agreement between M/s. P.S. Jain Motors on the one side and the Assessee on the other.
2. The assessee maintained that the loan received was the capital receipt and it does not comply under Sec. 41(1) of the Income Tax Act, 1961 as it cannot be claimed as deduction from the net income or taxable income as expenditure.
3. This contention was repudiated by the Assessing Officer based on the factors that the credit balance reciprocated or returned back is nothing but the remuneration of the assessee in the view of the factor that it is again directly emanates out of the business pursuit of the assessee and was accountable to tax under Sec. 28 of the act.
4. This order was appealed against, which was partly permitted by the Commissioner. Indignant from the order of appeal by the Commissioner of Income Tax, an additional appeal was put forward to the Income Tax Appellate Tribunal.

ISSUES

The following were the issues analyzed by the High Court:

• Whether the money transmitted to a profit and loss account in case of waiver or renunciation of loan taken by the assessee for the purpose of business motives assessable as business remuneration under Sec. 41(1) of the Income Tax Act, 1961.
• Whether or not loan waiver can be taxed as per the provisions of Sec. 28(iv) of the Income Tax Act, 1961.

IMPORTANT PROVISIONS

Income Tax Act, 1961:

• Sec 41(1): Taxation of any amount benefit which was obtained by a person with respect to any loss, expenditure or trading liability incurred in any earlier assessment years.
• 28(iv): Taxation of loan waiver.

ANALYSIS OF THE JUDGMENT

1. The assessee made a contention that the loan borrowed was a capital receipt, despite it had rendered the interest on the said loan as its revenue by attributing the same to its profit and loss account and it does not comply under Sec. 41(1) of the Income Tax Act, 1961 and thus it cannot be claimed as deduction from, net income or taxable income, and thus perpetuated the addition of Rs. 6,86,071.
2. The counsel appearing for the appellant argued that the impugned order suffers from error of law as well as of appreciation of facts. The counsel for the appellant further quoted the judgment given in the case of Mahindra & Mahindra v. Commissioner of Income Tax[1], which stated that, Sec. 28(iv) was not attracted and even provisions of Sec. 41(1) of the Act could not be applied to treat the same as business income of the assessee liable to tax.
3. The learned counsel appearing in behalf of the appeal made by the appellant contended that the question in order deteriorates from fallacy of law as well as reviewing the facts.
4. The Assessing Officer repudiated this contention based on the factors that the credit balance reciprocated or returned back is nothing but the remuneration of the assessee in the view of the factor that it is again directly emanates out of the business pursuit of the assessee and was accountable to tax under Sec. 28 of the act.
5. As regards to the addition of Rs. 6,86,071/-, the amount was directly attributed to the reserves account by the assessee company deeming it as capital receipt. It was asserted by the counsel for the appellant that the amount was not considered to profit under section 41(1) of the Income Tax Act,1961.
6. The Assessee claimed that the said loan was the capital receipt and had not been claimed as deduction from the taxable income as expenses and therefore, did not come under section 41(1).
7. As stated by the counsel, this amount cannot be demanded under the provisions of the section 28 of the act as the amount obtained is neither a revenue receipt nor revenue account.
8. This contention was rejected by the Assessing Officer on the ground that credit balance returned back is the income of the Assessee in view of the fact that it is again directly arising out of the business activity of the Assess and was liable to tax under Sec. 28 of the Act.
9. The court observed that in this present case, for carrying out the business, the assessee borrowed money. Though it was considered as deposit and at the time when it was received it was of capital receipt nature, by the inflow of time the money has changed to become the assessee’s own money.
10. The court further observed that the assessee had regarded the money as their own money and has considered the amount to its profit and loss account.
11. The court concluded by stating that there is no proper elucidation given by the assessee as to why the surplus or excess money was considered under profit and loss account even though it was borrowed from someone else.

CONCLUSION

The crux of the case is the analysis of the provisions of Sec. 41(1) of the Income Tax Act, 1961, which covers the provision regarding taxation of benefits from waiver of loans/payables and cessation of liability.

The court, in the present case, decided that though the amount was borrowed by the assessee for business motive and eventually upon repudiation the amount was kept on by the assessee in the business. Thus, the amount turned out to be assessee’s income and was assessable and the appeal made by the assessee was dismissed by the High Court. In view of this case, the High Court referred to the decision made by the Honourable Supreme Court in the case CIT vs T.V. Sundaram Iyengar and Sons Ltd,[2] where the SC had decreed that “if the amount borrowed during the course of trade or business agreements, despite its non-taxable during the year because of the capital nature of the receipt, the character of the amount differs when it becomes assessee’s own money, due to constraint or any other statutory or contractual rights. Where the assessee acquired amount during the course of trading transactions, the sum amount of such positive credit balances which was restrained by the limitations and which were acknowledged by the assessee to the profit and loss account were to be evaluated as assessee’s income”.

From the above settled point of view of law and the facts of the case, it is considered that no question of law much less than substantial question of law results for deliberation in the present case. In the present case, the money was received by the assessee in course of carrying on his business. Although it was treated as deposit and was of capital nature, at the point of time it was received, by efflux of time the money has become the assessee' s own money.

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