2014 (10) TMI 706 - HC - Income Tax

Sum received as written off amount Cessation of liability or not - Whether the Tribunal was correct in holding that the sum received by the assessee as fixed deposit during the earlier AY was written off by forfeiture during the current AY under a settlement resulted in cessation of a liability in the ordinary course of the business of the assessee resulting in income liable to tax Held that - As decided in ISKRAEMECO REGENT LTD. Vs COMMISSIONER OF INCOME TAX 2010 (11) TMI 43 - Madras High Court - The assessee received the deposits which were repayable with interest - The assessee sustained loss in the business - They framed a scheme of compromise/arrangement - During the course of such a claim before the High Court, the assessee entered into an arrangement with the depositors who were willing to receive a portion of the amount deposited by them towards settlement of their claim - Therefore, those depositors were paid a portion of the money which they had deposited - With such payment, the entire liability to pay the amount received stood extinguished. By extinguishment of the liability, the assessee did not receive any amount either by forfeiture or by discount and it is a case of sheer inability to pay the amount received by way of deposits - though such rebate or remission has benefitted the assessee insofar as discharging his liability to the depositor, in reality it did not result in any income at the hands of the assessee unless there is accrual or receipt of income by the assessee, it would not constitute income for the purpose of levy of tax - The income to be taxed under the Act should be real income and not fictional one - the tribunal was justified in holding that the balance amount of deposit which was not repaid under the arrangement, did not constitute an income and therefore, the assessee is not liable to pay any tax under the context Decided against revenue.

Summary

Issues:
1. Interpretation of tax liability on fixed deposit written off during the current assessment year under a settlement.
2. Taxability of the forfeited portion of fixed deposit in the hands of the assessee.

Issue 1:
The case involved determining whether the sum of a fixed deposit received by the assessee during an earlier assessment year, written off during the current assessment year under a settlement, resulted in cessation of a liability and constituted income liable to tax. The assessee, a non-banking financial company, discontinued accepting deposits due to business losses. A compromise arrangement was framed under the Companies Act, where depositors agreed to forego part of their deposits. The assessing authority treated the unpaid capital sum as forfeited, taxable income. The tribunal, citing precedent, ruled that as the amount was never charged to the Profit & Loss Account, tax liability wasn't reduced, and Section 41(1) applied only when reducing tax liability. The tribunal set aside lower authorities' orders, holding the balance amount of deposit not taxable.

Issue 2:
The second issue revolved around the taxability of the forfeited portion of the fixed deposit in the hands of the assessee. The revenue contended that the unrepaid portion of the deposit constituted income and was taxable. Conversely, the assessee argued that the settlement with depositors did not result in income as it was a discharge of liability due to business losses. The court analyzed previous judgments and distinguished cases where forfeited amounts were held taxable. The court emphasized that for income to be taxable, there must be a real accrual or receipt, not a fictional one. As the balance amount of deposit not repaid did not result in actual income for the assessee, the tribunal's decision to not tax it was upheld. The court dismissed the appeals, ruling in favor of the assessee.

In conclusion, the court's judgment clarified the tax treatment of forfeited portions of fixed deposits under settlements, emphasizing the distinction between real income and fictional income for tax purposes. The decision provided a nuanced interpretation of tax liability in such scenarios, ensuring a fair and accurate application of tax laws.