By K. B. Bhujle
Advocate
Transworld Garnet India Pvt. Ltd. vs.
CIT; 397 ITR 233 (Mad):
The shareholding in the assessee-company was
held to the extent of 74 percent, by a company T which in turn was wholly held
by W, Canada. The assessee was set up completely with the investment from the
parent company W. Advances were also
received from W towards business needs and the advances were to be adjusted against
future supplies of garnet to W. Due to various logistic and administrative
reasons, the assessee incurred losses. The private sources that were approached
for their participation in the equity insisted upon equal investment to be made
by the foreign company W in order to dilute the losses incurred, as a
pre-condition to their investment. Accordingly, W directed the assessee to
convert the advances made by it into capital, which was complied with by the
assessee. It transferred the amount to general reserve.
The Assessing Officer was of the view that
the amount ought to have been taken to the profit and loss account instead of
the general reserve. He held that the provisions of section 41(1) of the
Income-tax Act, 1961 relating to cessation of liability were attracted and that
the amount was liable to be brought to tax. Accordingly, he passed an order
u/s. 143(3) r.w.s.147 assessing that as income. The Commissioner (Appeals)
accepted the assessee’s submission that the amount constituted a capital
receipt. He recorded a finding to the effect that the conversion of the
advances resulted in wiping out of the losses and paved the way for the entry
of the resident participant. He also held that the provisions of section 41(1)
were attracted only in a situation where the amount in question, in respect of
which liability had ceased, had been claimed as an allowance or a deduction in
any previous year, which fact had not been established in the assessee’s case.
He further held that there was no nexus
between the allowance/deduction in the previous years and the amount in
question to invoke section 41(1). The Appellate Tribunal held that the amounts
were originally received as advances against the supply of garnet and
subsequently, the claim over the amount partook of the character of a revenue
receipt. It further held that the subsequent transfer of the amounts to general
reserve constituted only an application, that would not change the nature of the taxability of the amounts at a stage anterior thereto.
On appeal by the assessee, the Madras High
Court reversed the decision of the Tribunal and held as under:
“i) In order for the
provisions of section 41(1) to be attracted, the benefit obtained by the
assessee in the relevant year should have a direct nexus with an allowance or
deduction for any previous year as a claim of loss, expenditure or trading
liability which has not been established in the assessee’s case.
ii) The findings of the
Commissioner (Appeals) were based upon the financials as well as all the
relevant documents. He also found that there was nothing on record to lead to
the conclusion that the advances from W had been claimed as an allowance or
deduction in any previous year. The circumstances in which the infusion of
capital was made and the findings that related thereto were undisputed. The
amount though received as advances for the supply of garnet had remained static
without depletion of any sort.
iii) The entire amount had
been converted to shareholding and consequently, benefit could be said to have
accrued to the assessee only in the capital field. The substantial questions of
law are answered in favour of the assessee and the appeal allowed.”
