( Expert )
07 May 2009
I do not agree with this treatment. The entire amount not realized by the vendor is a capital receipt in the hands of the assessee and not taxable at all, the reason is that the liability which is extinguished is on capital account and not on account of a trading liability for which the deduction been claimed in the past. Please see the below analysis for the detailed understanding –
Section 2(14) of the Income-tax Act,1961 (the Act) defines Capital Asset to mean property of any kind held by an assessee whether or not connected with his business or profession, but does not include stock in trade, personal effects, agricultural land and certain Bonds issued by the Central Government.
The phrase “property of any kind” as appearing in the aforesaid definition is very wide and means not only corporeal, physical or tangible properties but also includes all kinds of rights / title / interest in any property.
Therefore, in view of the definition prescribed under the Act, any assets on which depreciation is charged qualifies as capital asset within the ambit of Section 2(14) of the Act.
Section 41(1) of the Income tax Act, 1961 (‘the Act’) is material reads under:
“41.(1) Where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee (hereinafter referred to as the first-mentioned person) and subsequently during any previous year,—
(a) the first-mentioned person has obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtained by such person or the value of benefit accruing to him shall be deemed to be profits and gains of business or profession and accordingly chargeable to income-tax as the income of that previous year, whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not; or ………………”
1.2 It is important to note that the following conditions are necessary to attract section 41(1) of the Act:
(a) an allowance or deduction has been made in respect of trading liability incurred by the assessee, and
(b) some benefit in respect of such trading liability by way of remission or cessation thereof has been obtained.
(c) The amount raised by trough a loan against a capital assets and outstanding in the books of accounts is in the nature of loan. The amount of the loan do not constitute trading liability and the same have not been incurred on account of a trading transaction but constitute liability on capital account. Further, no allowance or deduction has been claimed earlier by the querist in respect of such liability while computing its taxable income for any year. The benefit accruing as a result of waiver of loan cannot be said to be on account of a trading liability for which an allowance or deduction had been made. Thus this waiver will not fall as a trading liability within the meaning of section 41(1) of the Act. Accordingly the benefit would not be assessable as income The reference may be drawn in this regard may be made to the decision of the Delhi High Court in the case of CIT, New Delhi vs. Phool Chand Jiwan Ram (1981) 131 ITR 37. The Tribunal, on perusal of the facts, came to the conclusion that out of the total amount of Rs.1,13,828, which was written back, only an amount of Rs.36,647 had been incurred in respect of purchase of stock in trade from M/s Janki Das Banarsi Das and interest paid to such firm on the outstandings and the balance is on account of a loan taken to discharge the liability the assessee. The Tribunal accordingly, upheld the addition only to the extent of Rs.36,647 and deleted the balance addition. On reference to the High Court, The Hon'ble High Court, however, upholding the decision of the Tribunal held that the amount of Rs.1.8 lacs was not a payment made for the purchase of stock in trade. It was a credit in respect of an amount borrowed by the assessee in order to discharge its liability to the Bombay firm. The sum of Rs.1.8 lacs, therefore, could not be described as a liability on trading account.
In a recent decision of the Delhi High Court in the case of CIT v. Tosha International Ltd.:179 Taxman 187 wherein a similar view has been taken. 1.8 The Delhi High Court affirmed the aforesaid finding of the Tribunal and dismissed the appeal filed by the revenue
A similar view has been taken by the Delhi bench of the Tribunal in case of General Industries Corpn. v. ITO: 33 ITD 524 where the Tribunal held that advancement of loan by the creditor to the assessee was distinct and separate from the transaction relating to incurring of expenditure by the assessee with the help of that loan. The Tribunal held that the expenditure was, no doubt allowed in the past as a deduction but no such deduction had been allowed in respect of the loan advanced. The amount of loan written back by the assessee was, therefore, held not to fall within the mischief of section 41(1) of the Act.
This it can be very safely argued that the amount is not taxable at all in the hands of the assessee. The view that in the profit and loss account depreciation has been charged by the assessee hence some benefit has been claimed by the assessee with in the meaning of section 41. This interpretation is also not correct as the charge in profit and loss account is against the the loan , not against the loan.
Hope this calrifies the issues. However a peraonal mail mey be written to me if further calrification is required.