1997 (9) TMI 143 - AT - Income Tax

Summary

Issues Involved:
1. Treatment of the amount remitted by Deutsche Bank (DB) to the assessee.
2. Treatment of compensation paid for settlement/cancellation of contracts.
3. Applicability of section 41(1) and section 28(iv) of the Income-tax Act.
4. Classification of transactions as speculative under section 43(5) of the Income-tax Act.
5. Legality of ready-forward transactions and applicability of RBI circulars.

Summary:

1. Treatment of the amount remitted by Deutsche Bank (DB) to the assessee:
The primary issue was the treatment of Rs. 44,69,88,170 remitted by DB in favor of the assessee. The Assessing Officer (AO) treated this amount as income u/s 41(1) of the IT Act, arguing that the remission of liabilities on this account was taxable since purchases had been claimed as expenditure. The CIT(Appeals) examined the nature of transactions and concluded that the liabilities owed to DB were on account of trading transactions and not due to any borrowal, thus applying section 41(1). However, the Tribunal held that the remission of the principal amount by DB did not constitute income under section 41(1) or section 28(iv) as the transactions were of the nature of banking transactions and not trading liabilities.

2. Treatment of compensation paid for settlement/cancellation of contracts:
The assessee claimed a loss of Rs. 29,36,80,000 towards compensation for settlement/cancellation of securities contracts. The AO disallowed this claim, treating it as speculative loss u/s 43(5) and also as illegal payments. The CIT(Appeals) upheld this view. The Tribunal differentiated between transactions with ANZ Grindlays Bank and Reliance Capital and Finance Trust (RCFT). It held that the payment to ANZ was not speculative as it was towards breach of contract and not a settled contract. However, the payment to RCFT was considered speculative and thus not allowable.

3. Applicability of section 41(1) and section 28(iv) of the Income-tax Act:
The CIT(Appeals) held that the waiver of liability by DB resulted in a benefit assessable under section 41(1) or section 28(iv). The Tribunal disagreed, stating that the remission of loan principal did not constitute income as it was on capital account and not revenue account. The Tribunal further clarified that section 28(iv) did not apply as the benefit did not arise from business activities.

4. Classification of transactions as speculative under section 43(5) of the Income-tax Act:
The Tribunal examined whether the transactions in units of UTI were speculative. It concluded that units of UTI are commodities and thus transactions in them could be speculative. However, it differentiated between the settlement of contracts and breach of contracts, holding that the payment to ANZ was for breach of contract and not speculative, whereas the payment to RCFT was speculative.

5. Legality of ready-forward transactions and applicability of RBI circulars:
The Tribunal considered the RBI circular advising banks against buy-back arrangements. It held that the transactions with ANZ did not constitute a buy-back arrangement as envisaged by RBI and thus were not illegal. However, it upheld that the transactions with RCFT were speculative and thus the related loss was not allowable.

Conclusion:
The appeal was partially allowed. The Tribunal directed that the amount remitted by DB towards principal was not income under section 41(1) or section 28(iv). It allowed the payment of Rs. 96,80,000 to ANZ but disallowed the payment of Rs. 28.40 crores to RCFT as speculative loss. Other grounds raised by the assessee were dismissed.