2006 (3) TMI 90 - HC - Income Tax

Surplus arising from issue and repurchase of the debentures - Whether, Tribunal is right in holding that although the assessee is a financial company dealing in shares, etc., the transactions of purchase of its own debentures through its nominees did not represent transactions involving its stock-in-trade and accordingly, in holding that the surplus arising from issue and repurchase of the debentures merely represented a capital receipt not subject to tax? - Having regard to the reality of the situation, as the assessee has not derived any income, he is entitled not to treat it as an income. Therefore, the Tribunal was fully justified in its conclusion that the said surplus amount reflected in the balance-sheet cannot be treated as an income of the assessee.

Summary

Issues Involved:
1. Whether the surplus arising from the issue and repurchase of debentures represents a capital receipt not subject to tax.
2. Whether the surplus amount constitutes income under the Income-tax Act.

Issue-Wise Detailed Analysis:

1. Whether the surplus arising from the issue and repurchase of debentures represents a capital receipt not subject to tax:

The assessee-company, engaged in the business of dealing in securities, debentures, shares, etc., issued debentures in 1973, redeemable during the accounting years corresponding to the assessment years 1984-85, 1985-86, and 1986-87. During the redemption period, the company purchased some of these debentures through a nominee at a price lower than the face value. The difference between the face value and the purchase price was credited as surplus in the profit and loss account. The Assessing Officer included these amounts as revenue receipts within the business income, whereas the appellate authority upheld this view, considering the transactions as business transactions on the revenue side. However, the Tribunal held that the debentures could not be considered part of the company's stock-in-trade, and the repurchase of debentures did not constitute a business transaction. The Tribunal concluded that the surplus was a capital receipt and not subject to tax.

2. Whether the surplus amount constitutes income under the Income-tax Act:

The court examined the definition of "income" under section 2(24) of the Income-tax Act, which includes profits and gains, dividends, and other specified categories. The court emphasized that income should be construed in its natural import and not as a fictional or notional concept. The Supreme Court's interpretations in cases like CIT v. Chamanlal Mangaldas and Co. and CIT v. Shiv Prakash Janak Raj and Co. P. Ltd. were cited to underline that income must have a real accrual or receipt. The court noted that remission of debt or rebate does not create income in the hands of the debtor. The Revenue's reliance on section 41(1) of the Act was also discussed, which pertains to the remission or cessation of trading liability. However, the court found that this provision was not applicable as the surplus in question did not arise from any trading liability but from the redemption of debentures at a lower price.

The court concluded that the assessee did not receive any real income from the transaction, as it merely discharged its liability at a lesser amount. The surplus amount shown in the profit and loss account was not actual income but a reflection of reduced liability. The Tribunal's decision that the surplus amount could not be treated as income was upheld. The court answered the question in the affirmative, favoring the assessee and against the Revenue.

Conclusion:

The court held that the surplus arising from the issue and repurchase of debentures represented a capital receipt and was not subject to tax. The surplus amount did not constitute income under the Income-tax Act, as it was not a real accrual or receipt of income but merely a reduction in liability. The Tribunal's decision was affirmed, and the reference was disposed of in favor of the assessee.