46. CIT vs. Reliance Industries Ltd. [2020] 423 ITR 236 (Bom.) Date of order: 15th January, 2019
Deemed income – Section 41(1) of ITA, 1961 – Remission or cessation of trading liability – Condition precedent for application of section 41(1) – Deduction must have been claimed for the liability – Gains on repurchase of debenture bonds – Not assessable u/s 41(1)
The assessee had issued foreign currency bonds in the years 1996 and 1997 carrying a coupon rate of interest ranging between 10 and 11% and having a maturity period of 30 to 100 years. The interest was payable half-yearly. According to the assessee, on account of the attack on the World Trade Centre in the USA on 11th September, 2001, the financial market collapsed and the investors of debentures and bonds started selling them which, in turn, brought down the market price of such bonds and debentures which were traded in the market at less than the face value. The assessee, therefore, purchased such bonds and debentures from the market and extinguished them. In the process of buyback, the assessee gained a sum of Rs. 38.80 crores. The A.O. treated this as assessable to tax in terms of section 41(1) and made addition accordingly.
The Commissioner (Appeals) deleted the addition. The Tribunal confirmed the decision of the Commissioner (Appeals).
On appeal by the Revenue, the Bombay High Court upheld the decision of the Tribunal and held as under:
‘i) For applicability of section 41(1), it is a sine qua non that there should be an allowance or deduction claimed by the assessee in any assessment year in respect of loss, expenditure or trading liability incurred. Then, subsequently, during any previous year, if the creditor remits or waives any such liability, the assessee is liable to pay tax u/s 41(1).
ii) It was not the case of the Revenue that in the process of issuing the bonds the assessee had claimed deduction of any trading liability in any year. Any extinguishment of such liability would not give rise to applicability of sub-section (1) of section 41.’