JUDGMENT
D.A. Mehta, J.
1. The Income-tax Appellate Tribunal has referred
the following question at the instance of the revenue for
the opinion of this Court :-
“Whether on the facts and in the circumstances of
the case, the Tribunal is right in holding that
amount of Rs.1,77,052 arising from the remission
in the unsecured liability, is not taxable in the
hands of the assessee ?”
2. The assessee, a private limited Company, was
incorporated in the year 1974-75 as required under the
Companies Act, 1956. Since 1976 the Company was
operating its factory at Nandesari, District Baroda
wherein commercial production of various inorganic
chemicals was being carried on. The assessment year is
1982-83 and the accounting period is the year ended on
30.6.1981. The Company maintained its accounts as per
mercantile system of accounting. In the course of
carrying on its business, the Company had obtained
unsecured loans from various creditors, and in light of
the financial difficulties faced by the Company, the
creditors approached the High Court by filing various
Company Petitions. During the course of those
proceedings, it transpires that, a compromise was reached
between the assessee Company and its creditors wherein as
per the terms of the compromise certain creditors
remitted unsecured loans amounting to Rs.1,77,052/-. At
the same time, interest which had accrued in favour of
the creditors amounting to Rs.2,96,171/- was also
remitted. Such remitted interest was declared by the
assessee as income liable to tax under Section 41(1) of
the Income-tax Act, 1961 (hereinafter referred to as “the
Act”) while filing its return of income, but the
remission of loans amounting to Rs.1,77,052/- was not
returned as income liable to tax.
3. The Income-tax Officer treated the aforesaid
remission of loans as a benefit accruing to the Company
during the course of its business activity and brought to
tax the same by invoking provisions of Section 28(iv) of
the Act. The Commissioner of Income-tax (Appeals)
confirmed the assessment order and the assessee
approached the Tribunal. The Tribunal for the reasons
recorded in its order held that the remission of
unsecured loans could not be subjected to tax by invoking
provisions of Section 28(iv) read with Section 41(1) of
the Act.
4. We have heard Mr Akil Kureshi, learned Standing
Counsel appearing on behalf of the applicant-revenue.
Though served, none appears on behalf of the
respondent-assessee. At the time of hearing, Mr Kureshi
invited our attention to provisions of Section 41(1) of
the Act and contended that this was a liability in so far
as the assessee Company was concerned and such liability
had been remitted by the creditors of the Company, and
thus a benefit had been obtained by the assessee Company
which was liable to payment of tax under Section 41(1)
read with Section 28(iv) of the Act.
5. Section 41(1) as was applicable for the
assessment year under consideration reads as under :-
“(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, and subsequently during any
previous year the assessee has obtained, whether
in cash or in any other manner whatsoever, any
amount is 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 him 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 of profession in respect of which the
allowance or deduction has been made is in
existence in that year or not.”
6. On a reading of the provisions, it is apparent
that before the Section can be invoked, it is necessary
that 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 to
be the profits and gains of a business or profession and
can be brought to tax as income of the previous year in
which such amount or benefit is obtained. In the facts
of the case on hand, without entering into the aspect as
to whether the liability to repay the loans would be a
trading liability or not, it is an admitted position that
there had been no allowance or deduction in any of the
preceding years and hence, there is no question of
applying the provision as such.
7. Section 28 of the Act deals with profits and
gains of business or profession and clause (iv) thereof
says that the value of any benefit or perquisite, whether
convertible into money or not, arising from business or
the exercise of a profession shall be chargeable as
income under the head Profits and Gains of business or
profession. In the facts of the present case, it cannot
be said that the assessee Company was carrying on
business of obtaining loans and that the remission of
such loans by the creditors of the Company was a benefit
arising from such business.
8. In light of the aforesaid legal position, we do
not find any infirmity in the order of the Tribunal. The
Tribunal was right in holding that the amount of
Rs.1,77,052/- arising as a result of remission of
unsecured loans was not taxable in the hands of the
assessee. The question referred to us is, therefore,
answered in the affirmative i.e. in favour of the
assessee and against the revenue.
9. The reference is disposed of accordingly with no
order as to costs.