1986 (2) TMI 131 - AT - Income Tax

Summary

Issues Involved:
1. Whether the amount of Rs. 1,12,961.80 waived by Andhra Bank should be considered as deemed income under Section 41(1) of the IT Act for the assessment year 1978-79.
2. Whether the amount of Rs. 1,12,961.80 can be considered as income under Section 28(iv) of the IT Act.
3. Whether the disallowance of Rs. 4,698 towards car expenses and Rs. 345 towards depreciation of the car was justified.

Detailed Analysis:

1. Deemed Income under Section 41(1) of the IT Act:
The primary issue is whether the amount of Rs. 1,12,961.80 waived by Andhra Bank should be considered as deemed income under Section 41(1) of the IT Act for the assessment year 1978-79. The facts reveal that the assessee firm, engaged in shipping and clearing business, had an outstanding amount of Rs. 2,87,909 with Andhra Bank. The bank filed a suit for recovery, which was later settled outside the court for Rs. 1,75,000, waiving the remaining Rs. 1,12,961.80. The Income Tax Officer (ITO) added this waived amount as deemed income under Section 41(1), arguing that the amount written off should be considered as interest payable by the firm to the bank.

The CIT(A) upheld this view, relying on the Delhi High Court's decision in International Imex Agents P. Ltd. vs. CIT and the Supreme Court's ruling in Rajputana Trading Co. Ltd. vs. CIT, which treated the remission as trading liability. However, the Tribunal disagreed, noting that neither the principal nor the interest components of the waived amount were clearly identified. The Tribunal emphasized that the burden of proof to establish the link between the earlier allowed deduction and the subsequent remission lay with the Department, citing the Delhi High Court's decision in Steel and General Mills Co. Ltd. vs. CIT. The Tribunal concluded that the amount of Rs. 1,12,961.80 could not be considered as deemed income under Section 41(1) due to the lack of clear identification of the waived components.

2. Income under Section 28(iv) of the IT Act:
The Departmental representative argued that the waived amount should be considered as income under Section 28(iv) of the IT Act, which includes the value of any benefit or perquisite arising from business. However, the Tribunal rejected this argument, stating that the waiver of the bank's claim could not be considered a benefit arising from the assessee's business activities. The Tribunal emphasized that evasion of debts was not part of the assessee's business, and thus, the waived amount could not be taxed under Section 28(iv).

3. Disallowance of Car Expenses and Depreciation:
The final issue was the disallowance of Rs. 4,698 towards car expenses and Rs. 345 towards depreciation of the car. The ITO disallowed 1/4th of the total car expenses and depreciation, which was upheld by the CIT(A). The Tribunal noted that in the preceding assessment year, a similar disallowance was made without any appeal. Given the consistency in the disallowance and the absence of any change in circumstances, the Tribunal confirmed the disallowance for the current assessment year.

Conclusion:
The Tribunal allowed the appeal partly, concluding that the amount of Rs. 1,12,961.80 could not be considered as deemed income under Section 41(1) or as income under Section 28(iv) of the IT Act. However, the disallowance of car expenses and depreciation was upheld.