2008 (8) TMI 402 - AT - Income Tax

Summary

Issues Involved:
1. Addition of Rs. 10.65 crores under the head "Profits and gains of business or profession" under Section 28 of the IT Act.
2. Nature of the Rs. 10.65 crores received by the assessee: whether it was a capital receipt or a trade advance.
3. Applicability of the Supreme Court decision in the case of CIT vs. T.V. Sundaram Iyengar & Sons Ltd. to the present case.

Issue-wise Detailed Analysis:

1. Addition of Rs. 10.65 crores under "Profits and gains of business or profession" under Section 28 of the IT Act:
The AO noticed that the assessee company had forfeited a sum of Rs. 10.65 crores, claimed to be a loan from M/s Soufintrade Co. Ltd. (SFT), and credited it to its reserves and surplus account. The AO treated this amount as business income under Section 28 of the IT Act, arguing that it had acquired the nature of trade surplus over time. The assessee contended that it was a capital receipt, and the liability did not cease to exist by unilateral forfeiture. The CIT(A) upheld the AO's decision, treating the amount as trade advances and income upon forfeiture, relying on the Supreme Court decision in the case of CIT vs. T.V. Sundaram Iyengar & Sons Ltd. The Tribunal, however, reversed this decision, concluding that the amount was not received in the course of trading transactions and thus could not be treated as income under Section 28.

2. Nature of the Rs. 10.65 crores received by the assessee:
The AO argued that the Rs. 10.65 crores was a trade advance, not a simple loan transaction, citing the absence of interest and the lack of equity participation by SFT. The CIT(A) agreed, noting that the joint venture never materialized and the amount was not used for setting up a software development unit but was invested in another group concern. The Tribunal, however, found that the amount was received as a loan for setting up a software development facility, as evidenced by approvals from the Government of India and RBI. The Tribunal concluded that the amount was not received in the course of trading transactions, and thus, the forfeiture did not transform it into taxable income.

3. Applicability of the Supreme Court decision in CIT vs. T.V. Sundaram Iyengar & Sons Ltd.:
The AO and CIT(A) relied on the Supreme Court decision in CIT vs. T.V. Sundaram Iyengar & Sons Ltd., where unclaimed credit balances from trade transactions were treated as income when transferred to the profit and loss account. The Tribunal, however, distinguished this case, noting that the primary requirement for applying this principle is that the amount must be received in the course of trading transactions. Since the Rs. 10.65 crores was received as a loan for setting up a business and not from trading transactions, the Tribunal held that the Supreme Court decision did not apply. The Tribunal emphasized that the primary condition of the money being received in the course of trading transactions was not satisfied in this case.

Conclusion:
The Tribunal concluded that the Rs. 10.65 crores received by the assessee was a loan for setting up a software development facility and not a trade advance. The forfeiture of this amount did not transform it into taxable income under Section 28 of the IT Act. The Tribunal reversed the orders of the AO and CIT(A), deleting the addition of Rs. 10.65 crores and allowing the appeal filed by the assessee.