COMMISSIONER OF INCOME TAX Vs. COMPAQ ELECTRIC LTD

JUDGEMENT

(1.) The revenue has preferred this appeal challenging the order passed by the Income Tax Appellate Tribunal, Bangalore Bench-A, which has declined to interfere with the order passed by the Appellate Commissioner, who treated the waiver of the loan liability of the assessee as a capital receipt and not a revenue receipt, and consequently, there is no liability to pay tax under the Act. The assessee-company was engaged in the business of manufacture and sale of halogen lamps. It filed its return of income declaring a loss of Rs. 1,72,71,763 for the assessment year 2003-04. The case was taken up to scrutinize the assessment under section 143(3) of the income-tax Act (for short hereinafter referred to as the Act) for determining the loss at Rs. 1,72,71,763. Thereafter, an order came to be passed on 4-1-2008 for reopening the assessment. Notice was issued under section 148 of the Act. The reasons assigned for reopening was that the assessee had written back unsecured loan of Rs. 2,94,81,265 which had not been offered as income for the relevant assessment year. The amount written back is essentially an unsecured loan, which is in the nature of capital receipt resulting in liability and it is not a trading liability, against any supplies or expenditure which are in the nature of current liability. Therefore, the assessee contended that it was not taxable under section 41(1) of the Act. He further contended that the assessee had claimed an amount of Rs. 2,64,74,072 as extra-ordinary income in its profit and loss account, and the same is not taxable in the computation of income as it is capital in nature. Explaining the nature of the receipt, the assessee submitted that the assessee-company was a wholly owned subsidiary company of Dr. Reddys Laboratories Limited and it was manufacturing and trading in halogen lamps, and was established as a 100% EOU. The assessee was eligible for deduction under section 10B of the Act on its profits earned from export, but as it was incurring losses due to various business factors it was not in a position to claim such benefit up to the current assessment year. Therefore, they did not claim the benefit by giving a notice along with me computation. In view of huge losses suffered by the company, operations of the company had been funded by way of unsecured loans from DRL from year to year and such loans accumulated to about Rs. 11,64,74,072 during the years. In view of the mounting losses and doubtful viable operations, the assessee-company proposed, and DRL accepted a request to agree for conversion of the unsecured loan party into equity share capital and waive the balance as not recoverable. Accordingly, the assessee-company converted unsecured loan into equity to the extent of Rs. 9.00 crores and wrote back the balance amount of Rs. 2,64,74,072 as not payable. However, the assessing authority was not satisfied with the explanation, and held that these loans were received during the course of assessees business with DRL, and that the liability of the assessee is a trading liability and held that section 41(1) of the Act is attracted and tax is leviable. Aggrieved by the said order, the assessee preferred an appeal to the Commissioner of Income Tax (Appeals). Relying on the judgment of the Apex Court in the case of CIT v. T. V. Sundaram Iyengar, the Appellate Commissioner accepted the case of the assessee by holding that the amount representing waiver constitutes capital receipt, and therefore, not liable to tax, and allowed the appeal. Aggrieved by the same, the revenue preferred an appeal to the Tribunal. The Tribunal after hearing both the parties held that the only issue before them is whether the waiver of the unsecured loan by DRL is a capital receipt or a revenue receipt. After taking notice of the decision relied on by both the parties, it held that, if a capital liability has been discharged or reduced, the courts have held that the same, is not taxable as the income of the assessee, but it is a capital receipt and not taxable as such. Therefore, the loan liability of the assessee has been waived and therefore, the gain is nothing but a capital receipt. Therefore, the Tribunal declined to interfere with the well-considered order passed by the Appellate Commissioner. Aggrieved by the said order, the revenue is in appeal.

(2.) The learned counsel for the revenue assailing the impugned order contends that Explanation 1 to section 41 makes it clear that the expression loss or expenditure or some benefit in respect of any such trading liability by way of remission or cessation thereof shall include the remission or cessation of any liability by a unilateral act by the first mentioned person under clause (a), or the successor in business under clause (b) of that sub-section, by way of writing off such liability in his accounts.

(3.) In the instant case, the creditor has written off such liability, and therefore, the said amount in the case of the assessee constitutes revenue income and therefore, it is taxable under section 41(1) of the Act.