2012 (12) TMI 133 - HC - Income Tax

Deemed income u/s 41(1) - transfer of Rs. 1,32,88,530/- from the share application account to the capital reserve account - Assessee is an investment company mainly into the business of purchase and sale of shares. It is also engaged into taking business loans and further financing done to the parties. - held that - The share application amount was treated as a capital receipt; and likewise the amount of Rs. 45,41,542/- was shown as liability towards purchase of capital assets. Having regard to the law declared in HHEC, consequently it never changed its character when it was eventually transferred to the capital reserve in 2006-07 when the conversion took place 6-7 years later. The period of time when the amounts were held by the assessee in its books also factually eliminated the suspicion that the amounts were given as grants or aid. Whether the assessee claimed any depreciation in respect of the second amount i.e. Rs. 45,41,542/-. There is no observation or finding on the part of the assessing officer. If such is actually the position those amounts allowed as depreciation are liable to be added back. For these reasons the matter is remanded, restricted to the second question, for determination as to whether any amount was allowed as depreciation by the assessee towards goods it imported from its holding company - appeal is partly allowed in the above terms in terms.

Summary

Issues:
1. Whether the Tribunal erred in deleting additions made by the Assessing Officer under Section 28(iv) of the Act on account of write back of share application money?
2. Whether the ITAT erred in deleting the addition made by the Assessing Officer under Section 41(1) of the Act on account of write back of a loan?

Issue 1:
The appellant, a subsidiary of a US company, received share application money and imported goods from its holding company. The Board of Directors waived the obligation to issue shares and repay the outstanding liability, transferring the amounts to the capital reserve account. The Assessing Officer taxed the sum under Section 28(iv) as a business receipt, but the Commissioner of Appeals and ITAT ruled in favor of the assessee. The ITAT held that the liability incurred was on capital account, not due to trading operations. The Tribunal found no infirmity in the order of the Commissioner in deleting the addition under Section 41(1) as the amounts were on capital liability, not trading liability. The appellant argued that the nature of the receipt, being originally capital, did not change upon conversion, citing relevant case laws.

Issue 2:
The Assessing Officer taxed the transfer of share application money under Section 28(iv). The Revenue contended that the amount received was taxable income, relying on the extensive definition of "income" in Section 2(24) and relevant case law. The appellant argued that the Tribunal correctly applied principles, supported by case laws, emphasizing that the amounts were always treated as capital and not for trading purposes. The Court referred to a previous decision involving a similar scenario and held that the amounts were never received for trading purposes, maintaining their character as capital receipts even upon transfer to the capital reserve years later.

The Court's detailed analysis involved examining the purpose for which the amounts were received and held, distinguishing between trading and capital assets. The judgment highlighted the importance of the original intention behind the receipt of funds and the treatment in the books of accounts. The Court remanded a specific aspect of the case for further determination regarding depreciation claimed by the assessee. Ultimately, the appeal was partly allowed based on the above considerations.