1990 (2) TMI 93 - AT - Income Tax

Accounting Year, Certain Assets, Deemed Profit, Equity Shares, General Reserve, High Court, Manufacture And Sale, Public Limited Company, Written Down Value

Summary

Issues Involved:
1. Disallowance of contribution to Molasses & Alcohol Reserve Fund.
2. Disallowance of bad debts written off during the year.
3. Inclusion of a sum under Section 41(2) of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Disallowance of Contribution to Molasses & Alcohol Reserve Fund:
The appellant, a public limited company engaged in the manufacture of sugar, contested the disallowance of Rs. 5,02,620 towards the Molasses & Alcohol Reserve Fund. The CIT (Appeals) had previously ruled against the appellant for the assessment years 1979-80 and 1980-81. The Tribunal upheld the CIT (Appeals)'s decision, rejecting the first ground of appeal.

2. Disallowance of Bad Debts Written Off:
The appellant claimed a deduction of Rs. 24,003 as bad debts, which was disallowed by the ITO due to lack of evidence. The CIT (Appeals) confirmed this disallowance. During the hearing, the appellant argued that these amounts were "left over advances" to transport operators who had abandoned their contracts. The Tribunal found merit in this argument, noting that the revenue authorities had not appreciated this aspect. The Tribunal set aside the CIT (Appeals)'s order on this issue and directed the ITO to reconsider the admissibility of the deduction as a trading loss. This ground was treated as allowed.

3. Inclusion of Sum Under Section 41(2) of the IT Act:
The main issue was the inclusion of Rs. 26,93,099 under Section 41(2) of the Income Tax Act. The appellant had transferred its unit, Berar Oil Industries, to Akola Oil Industries Ltd. (AOIL) as per a scheme approved by the Bombay High Court. The ITO considered this a sale, assessing a profit of Rs. 26,93,099 under Section 41(2). The CIT (Appeals) upheld this, stating that there was consideration involved as AOIL had issued shares to the shareholders of the appellant company.

The appellant argued that there was no sale or consideration within the meaning of Section 41(2). They contended that the transaction was a scheme of arrangement approved by the High Court, not a sale, and no cash consideration was involved. The Tribunal agreed with the appellant, stating that there was neither a sale nor an exchange, and no consideration was paid to the appellant company. The Tribunal held that the transaction did not fall within the purview of Section 41(2) and reversed the CIT (Appeals)'s decision. This ground of appeal was allowed.

Conclusion:
The appeal by the assessee was allowed in part. The Tribunal upheld the disallowance of the contribution to the Molasses & Alcohol Reserve Fund but allowed the reconsideration of the bad debts as a trading loss. The Tribunal also ruled that the inclusion of the sum under Section 41(2) was incorrect, reversing the CIT (Appeals)'s decision on this issue.