2008 (8) TMI 156 - HC - Income Tax

Loan taken for trading activity (business purposes) and upon waiver amount retained in business - Assessee claimed that the said loan was the capital receipt and has not been claimed as deduction from the taxable income as expenses and therefore, did not come under section 41(1) - held that amount had become the income of assessee; and hence assessable as business income of assessee appeal of assessee is dismissed

Summary

Issues:
1. Whether the loan amount returned by the Assessee constitutes income under section 41(1) of the Income Tax Act.
2. Whether the loan amount was a capital receipt and not liable to be taxed as business income.

Analysis:
1. The appeal was against the Income Tax Appellate Tribunal's order, which rejected the Assessee's contention that the returned loan amount was a capital receipt and not income under section 41(1). The Assessing Officer added the amount to the Assessee's income, considering it as arising directly from business activity. The Tribunal upheld this addition citing the Supreme Court's decision in CIT v. T.V. Sundaram Iyengar and Sons Ltd., [1996] 222 ITR 344, where it was held that certain amounts, though not taxable initially, change character and become taxable income when they become the assessee's own money due to statutory or contractual rights.

2. The Assessee argued that the loan was a capital receipt and not taxable under section 41(1) or section 28 of the Income Tax Act. However, the Tribunal found justification in adding the amount to the Assessee's income based on the Apex Court's decision and section 28(iv) of the Act. The Tribunal emphasized that the amount, though initially considered capital, became taxable income as it was retained in the business by the Assessee. The Tribunal also referred to the Madras High Court's decision in Commissioner of Income tax v. Aries Advertising Pvt. Ltd., 2002 (255) ITR 510, where a similar view was taken regarding trading operations enriching the Assessee.

3. The Court cited the principle laid down in CIT v. T.V. Sundaram Iyengar and Sons Ltd., [1996] 222 ITR 344, emphasizing that amounts received in the course of trading transactions, even if not initially taxable, change character and become taxable income when they become the assessee's own money due to statutory or contractual rights. The Court highlighted that the Assessee, by retaining the money in the business, treated it as its own money, leading to its classification as taxable income. The Court dismissed the appeal, stating that no substantial question of law arose based on the settled legal position and the facts of the case.

In conclusion, the judgment upheld the addition of the loan amount to the Assessee's income, considering it as arising from business activity and becoming taxable income as per relevant legal provisions and judicial precedents.