2010 (9) TMI 751 - AT - Income Tax

Stay Application - Scrutiny - Disallowance - whether the remission of liability i.e. 2 crores written off by TATA SSL on the supplies of plant and machinery under dispute is falls into the category of income within in the purview of section 41 1 of the Act or not - The purpose of having Section 41(2) as a provision in addition to Section 41(1) is implied that the depreciation is neither a loss nor expenditure nor a trading liability referred to in Section 41(1) of the Act - assessee company had obtained the benefit of depreciation in the earlier years even on this amount of 2 crores - After reducing the said amount of depreciation granted earlier from the amount of 2 crores balance amount is to be reduced from the closing written down value of the block of assets - it is well within the powers of this Tribunal to consider any disallowance/addition that may be warranted under any other provision of the Income-tax Act while giving relief to the assessee in the context of addition made under S.41 of the Act Regarding addition of 28, 12, 500 - The only contention of the learned counsel for the assessee is that prior to the amendment the sum received on key man insurance policy was exempt under section 10(10D) of the Act - Hence the explanation inserted by the Finance (No.2) Act 1996 with effect from 1-10-1996 to provide that any sum received under key man insurance policy shall not be exempt from tax is only clarificatory in nature - Appeal is disposed of

Summary

Issues Involved:
1. Addition of Rs. 2 crores towards remission of liability incurred on the purchase of capital goods.
2. Addition of Rs. 28,12,500 received on the maturity of Keyman Insurance Policy.

Issue-wise Detailed Analysis:

1. Addition of Rs. 2 Crores Towards Remission of Liability Incurred on Purchase of Capital Goods:
The core issue is whether the remission of liability of Rs. 2 crores, written off by M/s Tata SSL Ltd. on the supplies of plant and machinery, falls within the purview of Section 41(1) of the Income-tax Act. The assessing officer treated the sum as income under Section 41(1), arguing that the depreciation allowed in earlier years should be added back. The CIT (A) confirmed this addition.

The assessee contended that the remission of liability is a capital receipt and not taxable under Section 41(1), as it pertains to capital goods. The defense cited the reversal of the Bombay High Court judgment in Nectar Beverages Private Limited vs. DCIT by the Supreme Court, arguing that the depreciation benefit obtained earlier cannot be termed as an allowance or expenditure under Section 41(1).

The Tribunal held that Section 41(1) applies to trading liabilities and not to depreciation benefits, which are not considered an allowance or expenditure. Therefore, the remission of liability on capital goods does not fall under Section 41(1). However, the Tribunal noted that the depreciation claimed on Rs. 2 crores in earlier years should be withdrawn and added back under Section 28(iv) to prevent double benefits. The Tribunal directed the assessing officer to adjust the closing written down value of the block of assets accordingly.

2. Addition of Rs. 28,12,500 Received on Maturity of Keyman Insurance Policy:
The second issue is the taxability of Rs. 28,12,500 received by the assessee on the maturity of a Keyman Insurance Policy. The assessing officer added this amount to the income, and the CIT (A) upheld the addition under Section 28(iv), stating that any sum received under such a policy is taxable under the head 'profits and gains of business or profession.'

The assessee argued that sums received under Keyman Insurance Policies taken before 1-10-1996 were exempt under Section 10(10D). However, the Tribunal found no merit in this argument, citing Circular No.762 dated 18-2-1998, which clarified that the amendment was only to remove doubts about the taxability of such income. The Tribunal upheld the lower authorities' decision to tax the sum received under the Keyman Insurance Policy.

Conclusion:
The appeal was partly allowed, with the Tribunal directing the withdrawal of depreciation benefits claimed on the Rs. 2 crores remission and adjusting the block of assets' written down value. The addition of Rs. 28,12,500 received on the Keyman Insurance Policy was upheld as taxable income. The Stay Application by the assessee was dismissed as in-fructuous.