Income – Business income – Section 41 of ITA, 1961 – Remission or cessation of trading liability – Condition precedent for application of section 41 – Assessee must have obtained benefit in respect of liability – Mere change of name in books of accounts not sufficient – Interest liability of State Government undertaking on government loans converted by order of State Government into equity share capital – No cessation of liability – Section 41 not applicable

5. CIT vs. Metropolitan
Transport Corporation (Chennai) Ltd.

[2020] 421 ITR 307 (Mad.)

Date of order: 9^th
July, 2019

A.Y.: 2001-02

Income – Business income –
Section 41 of ITA, 1961 – Remission or cessation of trading liability –
Condition precedent for application of section 41 – Assessee must have obtained
benefit in respect of liability – Mere change of name in books of accounts not
sufficient – Interest liability of State Government undertaking on government
loans converted by order of State Government into equity share capital – No
cessation of liability – Section 41 not applicable

The assessee was a wholly-owned
Tamil Nadu Government undertaking, operating transport services. The assessee
had taken over the assets and liabilities of the transport services, which were
previously run by the Tamil Nadu State Government. The State Government treated
a part of the net worth of the undertaking as its share capital and the balance
as loan, on which the assessee claimed and was allowed interest payable year
after year as deduction u/s 37 of the Income-tax Act, 1961. The Government of
Tamil Nadu took a decision and issued G.O. (Ms). No. 18, dated 7^th
March, 2001 converting the interest outstanding of Rs. 8,264.17 lakhs payable
by the assessee company on 31^st October, 2000 into equity shares.
The A.O. held that the sum of Rs. 8,264.17 lakhs was assessable u/s 41(1) of
the Act.

The Tribunal held that the amount
was not assessable u/s 41.

On appeal by the Revenue, the
Madras High Court upheld the decision of the Tribunal and held as under:

‘i)    It is a prerequisite condition before having recourse to section
41 of the Income-tax Act, 1961 that the assessee must have either obtained the
amount in respect of the loss, expenditure or trading liability incurred
earlier by it, or it should have received any benefit in respect of such
trading liability by way of remission or cessation thereof. The objective is to
tax the amount or benefit received by the assessee, thereby making him pay back
the benefit availed of earlier by him by way of claiming loss, expenditure or
liability in respect of that amount. Remission is a positive conduct on the
part of the creditor. Mere change of nomenclature in the books of accounts
without anything more brings no benefit to the assessee and its liability to
pay to the creditor does not get extinguished. The treatment given in
accounting entries does not give rise to a taxable event. To invoke section 41
of the Act, the initial burden is on the Revenue to establish cessation or
remission of liability.

ii)    When there was no writing off of liabilities and only the
sub-head under which the liability was shown in the account books of the
assessee was changed, there could be no cessation of liability. When the
assessee company was liable to pay and it continued to remain liable even after
change of entries in the books of accounts, no benefit would accrue to the
assessee company merely on account of change of nomenclature, and consequently
the question of treating it as profit and gain would not arise.