52. CIT-LTU vs. Reliance Industries Ltd.;
[2019] 102 taxmann.com 142 (Bom) Date of order: 15th January, 2019
Section 37 (1) and 41 (1) – A. Business expenditure – Allowability of
(Illegal payment) – Where assessee had purchased oil from Iraq and payments
were made by an agent, there being no evidence to suggest that assessee had
made any illegal commission payment to Oil Market Organisation of Iraqi
Government as alleged in Volckar Committee Report, Tribunal’s order allowing
payment for purchase of oil was to be upheld
The assessee claimed deduction towards the
payment for purchase of oil. The Assessing Officer’s case was that assessee had
paid illegal commission for purchase of such oil to State Oil Marketing
Organisation and therefore, such expenditure was not allowable.
The Commissioner (Appeals), while reversing
the disallowance made by the Assessing Officer, observed that there was no
evidence that the assessee had paid any such illegal commission. He noted that
except for the Volcker Committee Report, there was no other evidence for making
such addition. He noted that even in the said report, there was no finding that
the assessee had made illegal payment and it appeared that the payments were
made by an agent and there was no evidence to suggest that the assessee had
made any illegal commission payment to Iraq Government. The Tribunal confirmed
the view of Commissioner (Appeals).
On appeal by the Revenue, the Bombay High
Court upheld the decision of the Tribunal and held as under:
“The entire issue is based on appreciation
of materials on record and is a factual issue. No question of law arises.”
B. Deemed income u/s. 41(1) – Remission or
cessation of trading liability (Claim for deduction) – Where on account of
attack on World Trade Centre, financial market, collapsed and market value of
bonds issued by assessee was brought down below their face value and, hence,
assessee purchased its own bonds and extinguished them, profit gained in
buy-back process could not be taxable u/s. 41(1) as assessee had not claimed
deduction of trading liability in any earlier year
The assessee had issued foreign currency
bonds in the years 1996 and 1997. On account of the attack on World Trade
Centre at USA on 11/09/2001, 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 a value
less than the face value. The assessee purchased such bonds and extinguished
them. In the process of buy back, the assessee gained a sum of Rs. 38.80 crore.
The Assessing Officer treated such amount assessable to tax in terms of section
41(1).
The Commissioner (Appeals) and the Tribunal,
however, deleted the same. The Tribunal in its detail discussion came to the
conclusion that the liability arising out of the issuance of bonds was not a
trading liability and therefore, section 41(1) would have no applicability.
On appeal by the Revenue, the Bombay High
Court upheld the decision of the Tribunal and held as under:
“i) There
is no error in the view taken by the Tribunal. Sub-section (1) of section 41 provides
that 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, such liability ceases, the
same would be treated as the assessee’s income chargeable to tax as income for
previous year under which subject extinguishment took place. The foremost
requirement for applicability of sub-section (1) of section 41, therefore, is
that the assessee has claimed any allowance or deduction which has been granted
in any year in respect of any loss, expenditure or trading liability. In the
present case, the revenue has not established these basic facts. In other
words, it is not even 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) to section 41.
ii) 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 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 under section 41.
This question, therefore, does not require any consideration.”
