2013 (7) TMI 777 - HC - Income Tax

Application of Section 41(1) - Interest free unsecured loan from Government - Tribunal deleted addition on account of capital receipt - Held that - no claim of loss expenditure of trade liability was made by the assessee in respect of the loan granted by the State Government. Therefore, question of considering the said loan cannot be considered as revenue receipt - the conversion of the loan given by the State Government into non refundable interest free unsecured loan was on capital account - when the loan was granted, it was of capital account. By converting it into non refundable interest free unsecured loan, it remain part of the capital account as appears from the balance-sheet of the assessee. The assessee has merely changed the description of the loan as per the direction of the State Government and no way it has treated it as a revenue receipt in its books of account - present case is regarding the conversion of the capital of one amount to another amount. So, conversion cannot be taxed, only when specifically provided in a book of statute, but there is no provision in the Act that on conversion of one capital from another capital will be treated as revenue receipt - Decided against Revenue.

Summary

Issues:
Applicability of Section 41(1) of the Income Tax Act, 1961 on conversion of loan into non refundable interest free unsecured loan.

Analysis:
The case involved an appeal by the Department against the judgment of the Income Tax Appellate Tribunal regarding the treatment of a loan converted into a non refundable interest free unsecured loan by a State Industrial Investment Corporation. The Department argued that the conversion should be treated as a revenue receipt under Section 41(1) of the Act, as it was a cessation/remission of trading liability. The Department contended that the intention of the assessee was to include the loan amount in the profit & loss account, making it taxable. However, the assessee's counsel argued that the conversion was not taxable under Section 41(1) as it was a remission or cessation of trade liability, relying on relevant case law.

Upon review, the Court found that no claim of loss expenditure or trade liability was made by the assessee regarding the loan granted by the State Government. Therefore, the conversion of the loan into a non refundable interest free unsecured loan was considered to be on capital account, not a revenue receipt. The Court noted that the conversion did not change the nature of the amount from capital to revenue, as it remained part of the capital account in the balance-sheet of the assessee. Additionally, since the State Government was the sole shareholder of the assessee-company, the conversion was seen as a change in capital rather than a taxable event under Section 41(1) of the Act.

Ultimately, the Court upheld the Tribunal's decision, ruling in favor of the assessee and against the revenue. The appeal filed by the Department was dismissed, emphasizing that the conversion of the loan did not trigger tax liability under Section 41(1) of the Income Tax Act, 1961.