2013 (7) TMI 416 - HC - Income Tax

Income u/s 41(1) - Bank waived the interest portion accrued and payable by the assessee - Returns filed for A.Y. in which deduction claimed was held non-est - Tribunal held that since returns were non-est therefore, there could be no addition under Section 41(1) - Held that - For the applicability of Section 41(1) of the Act, the prerequisite condition is that an allowance or deduction has been made in the assessment for any of the years in respect of an expenditure, loss or trading liability incurred by the assessee and subsequently during any previous year, the assessee has received remission or obtained refund of the said amount - Unless the amount had been allowed as a deduction in the earlier years, the question of invoking Section 41(1) does not arise - No interference in Tribunal s order - Following decisions of Tirunelveli Motor Bus Service Co. P. Ltd. Vs. Commissioner of Income Tax, Madras 1970 (8) TMI 2 - SUPREME Court , Narayanan Chettiary Industries v. Income-tax Officer 2005 (7) TMI 71 - MADRAS High Court - Decided against Revenue.

Issues Involved:
1. Whether the Tribunal was right in holding that the claim of deduction of interest in the return, which was allowed to become non est, cannot be treated as disallowance of deduction.
2. Whether the interest waived by the bank for prior periods can be assessed as income due to cessation of liability under Section 41(1) of the Income Tax Act.

Issue 1: Deduction of Interest in Non-Est Return
The Revenue challenged the Tribunal's decision that the claim of deduction of interest in returns, which were allowed to become non est due to non-rectification of defects under Section 139(9), cannot be treated as disallowance of deduction. The Assessing Officer had included the interest waived by Canara Bank as income under Section 41(1) of the Income Tax Act, arguing that the non-response to the notice under Section 139(9) did not negate the claim of deduction. The Tribunal, however, held that since the returns were treated as non-est, there was no allowance or deduction granted, and thus, Section 41(1) could not be invoked.

Issue 2: Assessment of Waived Interest as Income
The Tribunal also ruled that the interest waived by the bank for the assessment years 1994-95 to 1998-99 could not be treated as income under Section 41(1) of the Act, as the returns for those years were treated as non-est. The Revenue argued that the mere entry of the claim in the self-assessment was sufficient to invoke Section 41(1), even without an assessment order. However, the Tribunal and the High Court disagreed, stating that the prerequisite for invoking Section 41(1) is that an allowance or deduction must have been made in the assessment for any year, which was not the case here due to the non-est status of the returns.

Detailed Analysis:

1. Tribunal's Ruling on Non-Est Returns:
The Tribunal's decision was based on the fact that the returns for the years 1994-95 to 1998-99 were treated as non-est due to the assessee's failure to rectify defects under Section 139(9). Consequently, no deductions were actually allowed for those years. The Tribunal held that without an explicit consideration of disallowance, the interest waived could not be added back as income under Section 41(1). The High Court upheld this view, emphasizing that Section 41(1) requires an allowance or deduction to have been made in the assessment, which was not applicable in this case.

2. Waived Interest as Income:
The High Court referred to the Supreme Court's decision in Tirunelveli Motor Bus Services Co. Pvt. Ltd. Vs. CIT, which stated that for Section 10(2A) of the Indian Income Tax Act, 1922 (similar to Section 41(1) of the 1961 Act), the allowance or deduction must be explicitly considered in the assessment order. The High Court concluded that since the returns were non-est, there was no assessment order granting any deduction, and thus, Section 41(1) could not be invoked. The Court also rejected the Revenue's argument that self-assessment under Section 140A could be equated with an assessment by a competent authority.

Conclusion:
The High Court dismissed the Revenue's appeal, confirming the Tribunal's order that the waived interest could not be treated as income under Section 41(1) due to the non-est status of the returns for the relevant years. The Court emphasized the necessity of an explicit allowance or deduction in the assessment for Section 41(1) to apply, which was not present in this case.

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