By Kishor Karia, Chartered Accountant, Atul Jasani, Advocate
16. Business Income – Section 28(iv) of the Act
does not apply to a case where the receipt is in the nature of cash or money –
Section 41(1) of the Act does not apply in case of a waiver of loan as it does
not amount to cessation of trading liability.
The Commissioner
vs. Mahindra and Mahindra Ltd.
(2018) 404
ITR 1 (SC)
The Respondent [assessee],
way back, decided to expand its jeep product line by including FC-150 and
FC-170 models. For this purpose, on 18.06.1964, it entered into an agreement
with Kaiser Jeep Corporation (for short ‘the KJC’) based in America wherein KJC
agreed to sell the dies, welding equipments and die models to the Assessee. The
final price of the tooling and other equipments was agreed at $6,50,000
including cost, insurance and freight (CIF). Meanwhile, the Respondent took all
the requisite approvals from the concerned Government Departments. The said
toolings and other equipments were supplied by the Kaiser Jeep Corporation
through its subsidiary Kaiser Jeep International Corporation (KJIC).
However, for the
procurement of the said toolings and other equipments, the KJC agreed to
provide loan to the Respondent at the rate of 6% interest repayable after 10
years in installments. For this purpose, the Respondent addressed a letter dated
07.06.1965 to the Reserve Bank of India (RBI) for the approval of the said loan
agreement. The RBI and the concerned Ministry approved the said loan agreement.
Later on, it was informed
to the Respondent that the American Motor Corporation (AMC) had taken over the
KJC and also agreed to waive the principal amount of loan advanced by the KJC
to the Respondent and to cancel the promissory notes as and when they got
matured. The same was communicated to the Respondent vide letter dated
17.02.1976.
On 30.06.1976 the
Respondent filed its return for the assessment year 1976-77 and shown Rs.
57,74,064/- as cessation of its liability towards the American Motor
Corporation. After perusal of the return, the Income Tax Officer (ITO)
concluded that with the waiver of the loan amount, the credit represented
income and not a liability. Accordingly, the ITO, vide order dated 03.09.1979,
held that the sum of Rs. 57,74,064/- was taxable u/s. 28 of the Act.
Being dissatisfied, the
Respondent preferred an appeal before the Commissioner of Income Tax (Appeals).
After perusal of the matter, learned CIT (Appeals), vide order dated
23.03.1981, dismissed the appeal and upheld the order of the ITO with certain
modifications.
Being aggrieved, the
Respondent as well as the Revenue preferred appeals before the Tribunal. The
Tribunal, vide order dated 16.08.1982, set aside the order passed by learned
CIT (Appeals) and decided the case in favour of the Respondent.
Being aggrieved, the
Revenue filed a Reference before the High Court at Bombay. In that Reference,
three applications were filed, one by the Assessee and rest two by the Revenue.
Vide impugned common judgment and order dated 29.01.2003, the High Court confirmed
certain findings of the Tribunal in favour of the Respondent.
On
further appeal filed by the Revenue, the Supreme Court observed that the short
point for consideration before it was whether in the present facts and
circumstances of the case the sum of Rs. 57,74,064/- due by the Respondent to
Kaiser Jeep Corporation which later on waived off by the lender constitute
taxable income of the Respondent or not?
According to the Supreme
Court, the term “loan” generally refers to borrowing something,
especially a sum of cash that is to be paid back along with the interest
decided mutually by the parties. In other terms, the debtor is under a
liability to pay back the principal amount along with the agreed rate of
interest within a stipulated time.
The Supreme Court observed
that it is a well-settled principle that creditor or his successor may exercise
their “Right of Waiver” unilaterally to absolve the debtor from his
liability to repay. After such exercise, the debtor is deemed to be absolved from
the liability of repayment of loan subject to the conditions of waiver. The
waiver may be a partly waiver i.e., waiver of part of the principal or interest
payable, or a complete waiver of both the loan as well as interest amounts.
Hence, waiver of loan by the creditor results in the debtor having extra cash
in his hand. It is receipt in the hands of the debtor/Assessee.
According to the Supreme
Court, the short but cogent issue in the instant case was whether waiver of
loan by the creditor is taxable as a perquisite u/s. 28 (iv) of the Act or
taxable as a remission of liability u/s. 41 (1) of the Act.
The Supreme Court held that
on a plain reading of section 28 (iv) of the Act, prima facie, it
appeared that for the applicability of the said provision, the income which
could be taxed should arise from the business or profession. Also, in order to
invoke the provision of section 28 (iv) of the Act, the benefit which is
received has to be in some other form rather than in the shape of money.
In the present case, it was
a matter of record that the amount of Rs. 57,74,064/- was a cash receipt due to
the waiver of loan. Therefore, the very first condition of section 28 (iv) of
the Act, which says any benefit or perquisite arising from the business shall
be in the form of benefit or perquisite other than in the shape of money, was
not satisfied in the present case. Hence, according to the Supreme Court, in no
circumstances, it could be said that the amount of Rs. 57,74,064/- could be
taxed under the provisions of section 28 (iv) of the Act.
The Supreme Court further
held that on a perusal of the provisions of section 41(1) of the Act, it was
evident that it is a sine qua non that there should be an allowance or
deduction claimed by the Assessee in any assessment for any year in respect of
loss, expenditure or trading liability incurred by the Assessee. Then,
subsequently, during any previous year, if the creditor remits or waives any such
liability, then the Assessee is liable to pay tax u/s. 41 of the Act.
The objective behind this
section was simple. It was made to ensure that the Assessee does not get away
with a double benefit once by way of deduction and another by not being taxed
on the benefit received by him in the later year with reference to deduction
allowed earlier in case of remission of such liability.
It was undisputed fact that
the Respondent had been paying interest at 6% per annum to the KJC as per the
contract, but the Assessee never claimed deduction for payment of interest u/s.
(1) (iii) of the Act. In the case at hand, learned CIT (A) relied upon section
41 (1) of the Act and held that the
Respondent had received amortisation benefit. Amortisation is an accounting
term that refers to the process of allocating the cost of an asset over a
period of time, hence, it is nothing else than depreciation.
Depreciation is a reduction
in the value of an asset over time, in particular, to wear and tear. Therefore,
the deduction claimed by the Respondent in previous assessment years was due to
the deprecation of the machine and not on the interest paid by it.
Moreover, the purchase
effected from the Kaiser Jeep Corporation was in respect of plant, machinery
and tooling equipments which were capital assets of the Respondent. The said
purchase amount had not been debited to the trading account or to the profit or
loss account in any of the assessment years.
There is difference between
‘trading liability’ and ‘other liability’. Section 41 (1) of the Act
particularly deals with the remission of trading liability. Whereas in the
instant case, waiver of loan amounted to cessation of liability other than
trading liability. Hence, according to the Supreme Court, there was no force in
the argument of the Revenue that the case of the Respondent would fall u/s. 41 (1)
of the Act.
The Supreme Court dismissed
the appeal of the Revenue.
17. Reassessment – Section 147 of the Act does
not allow the re-assessment of an income merely because of the fact that the
assessing officer has a change of opinion with regard to the interpretation of
law differently on the facts that were well within his knowledge even at the
time of assessment
Income Tax
Officer vs. TechSpan India Private Ltd. and Ors. (2018) 404 ITR 10 (SC).
TechSpan India Private Ltd.
– the Respondent, was engaged in the business of development and export of
computer softwares and human resource services. It was eligible for deduction
u/s. 10A of the Act.
On 25.10.2001, the
Respondent filed its return of income for the assessment year 2001-02 declaring
a loss of Rs. 3,31,301/-. The Respondent, while filing the return for the
aforementioned period, has declared its income from two sources, namely,
software development and human resource development but claimed expenses
commonly for both. It also claimed deduction under Section 10A of the IT Act
for the income from the software development. The said return was accepted and
accordingly intimated to the Respondent.
The return was selected for
regular assessment under Section 143(3) of the Act and a show cause notice
dated 09.03.2004 was issued to the Respondent to show cause as to why the
expenses claimed with regard to the allocation of common expenses between the
two heads, viz., software development and human resource development do not
reveal any basis for such allocation. The issue was duly contested and decided
vide order dated 29.11.2004 and the proceedings ended with a rectification of
the Assessment Order u/s. 154 of the Act while arriving at an income of Rs. 31,63,570/-
which was fully set-off against the loss brought forward and the income was
assessed as ‘Nil’ for the assessment year 2001-2002.
On 10.02.2005, a Notice was
served upon the Respondent by the Revenue for re-opening the assessment u/s.
148 on the ground that the deduction u/s. 10A of the Act has been allowed in
excess and the income escaped assessment worked out to Rs. 57,36,811/- in the
original assessment. The Respondent filed a detailed reply objecting to the
re-assessment. However, by order dated 17.08.2005, the objections were rejected
and reassessment was approved by the Revenue.
Being aggrieved, the
Respondent challenged the above said show cause notice dated 10.02.2005 as well
as the order dated 17.08.2005 before the High Court. Vide judgement and order
dated 24.02.2006, the High Court set aside the show cause notice dated
10.02.2005 as well as the re-assessment order dated 17.08.2005.
Being aggrieved, the
Revenue has filed this appeal before the Supreme Court.
According to the Supreme Court,
the only point for consideration before it was whether the re-opening of the
completed assessment was justified in the present facts and circumstances of
the case?
The Supreme Court held that
the language of section 147 makes it clear that the assessing officer certainly
has the power to re-assess any income which escaped assessment for any
assessment year subject to the provisions of sections 148 to 153. However, the
use of this power is conditional upon the fact that the assessing officer has some
reason to believe that the income has escaped assessment. The use of the words
‘reason to believe’ in section 147 has to be interpreted schematically as the
liberal interpretation of the word would have the consequence of conferring
arbitrary powers on the assessing officer who may even initiate such
re-assessment proceedings merely on his change of opinion on the basis of same
facts and circumstances which has already been considered by him during the
original assessment proceedings. Such could not be the intention of the
legislature. The said provision was incorporated in the scheme of the Act so as
to empower the Assessing Authorities to re-assess any income on the ground
which was not brought on record during the original proceedings and escaped his
knowledge; and the said fact would have material bearing on the outcome of the
relevant assessment order.
According to the Supreme
Court, section 147 of the Act does not allow the re-assessment of an income
merely because of the fact that the assessing officer has a change of opinion
with regard to the interpretation of law differently on the facts that were
well within his knowledge even at the time of assessment. Doing so would have
the effect of giving the assessing officer the power of review and section 147
confers the power to re-assess and not the power to review.
To check whether it is a
case of change of opinion or not one has to see its meaning in literal as well
as legal terms. The word change of opinion implies formulation of opinion and
then a change thereof. In terms of assessment proceedings, it means formulation
of belief by an assessing officer resulting from what he thinks on a particular
question. It is a result of understanding, experience and reflection.
There is a conceptual difference
between power to review and power to re-assess. The Assessing Officer has no
power to review; he has the power to re-assess. But re-assessment has to be
based on fulfillment of certain pre-condition and if the concept of
“change of opinion” is removed, as contended on behalf of the
Department, then, in the garb of re-opening the assessment, review would take
place.
One must treat the concept
of “change of opinion” as an in-built test to check abuse of power by
the Assessing Officer. Hence, after 1st April, 1989, Assessing
Officer has power to re-open, provided there is “tangible material”
to come to the conclusion that there is escapement of income from assessment.
Reasons must have a live link with the formation of the belief.
Before interfering with the
proposed re-opening of the assessment on the ground that the same is based only
on a change in opinion, the court ought to verify whether the assessment
earlier made has either expressly or by necessary implication expressed an
opinion on a matter which is the basis of the alleged escapement of income that
was taxable. If the assessment order is non-speaking, cryptic or perfunctory in
nature, it may be difficult to attribute to the assessing officer any opinion
on the questions that are raised in the proposed re-assessment proceedings.
Every attempt to bring to
tax, income that has escaped assessment, cannot be absorbed by judicial
intervention on an assumed change of opinion even in cases where the order of
assessment does not address itself to a given aspect sought to be examined in
the re-assessment proceedings.
According to the Supreme
Court, the fact in controversy in this case was with regard to the deduction
u/s. 10A of the IT Act which was allegedly allowed in excess. The show cause
notice dated 10.02.2005 reflected the ground for re-assessment in the present
case, that is, the deduction allowed in excess u/s. 10A and, therefore, the
income had escaped assessment to the tune of Rs. 57,36,811. In the order in
question dated 17.08.2005, the reason purportedly given for rejecting the
objections was that the Assessee was not maintaining any separate books of
accounts for the two categories, i.e., software development and human resource
development, on which it has declared income separately.
However, a bare perusal of
notice dated 09.03.2004 which was issued in the original assessment proceedings u/s. 143 made it clear that
the point on which the re-assessment proceedings were initiated, was well
considered in the original proceedings. In fact, the very basis of issuing the
show cause notice dated 09.03.2004 was that the Assessee was not maintaining
any separate books of account for the said two categories and the details filed
did not reveal proportional allocation of common expenses made to these
categories. Even the said show cause notice suggested how proportional
allocation should be done.
All these things lead to an
unavoidable conclusion that the question as to how and to what extent deduction
should be allowed u/s. 10A of the IT Act was well considered in the original
assessment proceedings itself. Hence, initiation of the re-assessment
proceedings u/s. 147 by issuing a notice u/s. 148 merely because of the fact
that now the Assessing Officer was of the view that the deduction u/s. 10A was
allowed in excess, was based on nothing but a change of opinion on the same
facts and circumstances which were already in his knowledge even during the
original assessment proceedings.
In light of the forgoing
discussion, the Supreme Court held that impugned judgement and order of the
High Court dated 24.02.2006 did not call for any interference. The appeal was
accordingly dismissed with no order as to costs.
