2021 (3) TMI 365 - HC - Income Tax

Addition u/s 41(1) - amount ceased to be a liability - Debatable issue - amount paid by the assessee towards tax and interest due to the department against the deduction claimed towards royalty payable to the foreign collaborator - HELD THAT - The amount deducted in 1990-91 as an expenditure consisted of an element of tax being TDS. The words employed in Section 41(1)(a) are amount obtained by such person or the value of benefits accruing to him . The amount obtained can only mean the actual amount obtained. The fiction created under the provision cannot be expanded to even include amounts that may be obtained in the future. The legal fiction is intended to deem the actual amount obtained as profits and gains from business and to tax the said actual amount. Section 41(1) employs, on the one hand, words such as allowance or deduction and on the other hand loss , expenditure , or trading liability - Tax liability should be commensurate to the actual amount received or the value of benefit accrued to the assessee in that financial year and not on the unrecovered amount or unacknowledged benefit by the assessee. The unrecovered amount becomes taxable only in the previous year when it is recovered or actually obtained. The amounts paid as tax has not been obtained in 1995- 96 as the same had not been refunded. Until the amount of TDS is refunded, that amount cannot be treated as amount obtained by the assessee. The amount of TDS and interest can be deemed to be profits and gains and chargeable to tax only on refund. Until actual receipt, it is not amount obtained and cannot be deemed to be profits and gains from business. In other words, if it is assumed that the TDS paid by the assessee, for the royalty payable, is ordered to be refunded due to the cessation of liability and the refund is received by the assessee, the actual amount of refund when received will have to be treated as the amount obtained in the previous year of receipt and not prior to that. The amount paid by the assessee as TDS comes back to the assessee only when the TDS is refunded. The amount obtained by the assessee under Section 41(1) (a) is thus the actual amount obtained. Since we have held that the amount obtained under Section 41(1) shall be the actual amount obtained by the assessee exclusive of the tax paid and not refunded, the contention regarding whether the issue is a debatable one or not, does not strictly arise. However, for the purpose of complete appreciation, it is necessary to deal with the said contention also. Interpretation of the words employed in Section 41(1) required a deeper analysis and whether the section contemplates the net amount or the gross amount, was certainly a matter of debate. It cannot be held that the question raised by the assessee was a non-debatable issue. In the said circumstances, we are of the view that the First Appellate Authority was correct while the Tribunal erred in coming to the conclusion that the issue was not a debatable one. - Decided in favour of assessee.

Issues Involved:
1. Whether the amount that has ceased to be a liability under Section 41(1) of the Income Tax Act to be assessed as income is ?53,71,650/- or ?30,68,152/- is not a debatable issue and can be the subject matter of adjustment under Section 143(1)(a) of the Income Tax Act.
2. Whether the assessee is entitled to deduction of the tax and interest amounting to ?23,03,498/- paid by the assessee from out of the gross royalty amount of ?53,71,650/- credited to the account of the foreign collaborator in 1990 and written back in the previous year relevant to the assessment year 1995-96.
3. Whether the cessation of liability and value of benefit that accrued to the assessee is only the differential amount of ?30,68,152/- which is the net amount that has accrued to the assessee after paying an amount of ?23,03,498/- to the Income Tax Department towards tax and interest on behalf of the foreign collaborator.

Detailed Analysis:

Issue 1: Amount to be Assessed as Income and Debatable Issue under Section 143(1)(a)
The primary issue is whether the amount that ceased to be a liability and should be assessed as income under Section 41(1) of the Income Tax Act is ?53,71,650/- or ?30,68,152/-. The Tribunal had held that the entire amount of ?53,71,650/- should be treated as deemed profit under Section 41(1)(a) of the Act, and the amount paid towards tax and interest was not liable to be deducted. The First Appellate Authority, however, held that this was a debatable issue and could not be the subject matter of adjustment under Section 143(1)(a), and thus deleted the addition directed by the Assessing Officer.

Issue 2: Deduction of Tax and Interest Paid
The assessee had paid ?13,65,060/- towards TDS and ?9,38,438/- towards interest, totaling ?23,03,498/-, against the deduction claimed towards royalty payable to a foreign collaborator. The contention was whether this amount paid could be deducted from the gross royalty amount when assessing the income under Section 41(1). The Tribunal held that the deduction for tax and interest already paid was inadmissible. However, the court noted that the amount obtained under Section 41(1) should be the actual amount received, excluding the tax and interest paid, as these amounts had not been refunded and thus were not "obtained" by the assessee.

Issue 3: Net Amount Accrued to the Assessee
The court observed that the amount deducted in 1990-91 as an expenditure included an element of tax being TDS. The legal fiction created under Section 41(1)(a) should be limited to the actual amount obtained by the assessee. Until the amount of TDS is refunded, it cannot be treated as an amount obtained by the assessee. Thus, the net amount of ?30,68,152/-, which is the actual amount obtained after excluding the tax and interest paid, should be considered the deemed profit under Section 41(1) for the assessment year 1995-96.

Conclusion:
The court held that the amount to be assessed as income under Section 41(1) should be the actual amount obtained by the assessee, exclusive of the tax paid and not refunded. It was also determined that the issue was indeed debatable, and thus, the First Appellate Authority was correct in its decision, while the Tribunal erred in concluding that the issue was not debatable. Consequently, the questions of law raised by the assessee were answered in the affirmative, against the revenue, and in favor of the assessee. The reference was ordered accordingly.

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