9911796707
TMI Blog1986 (11) TMI 97X X X X Extracts X X X X X X X X Extracts X X X X ..... to obtain a loan of 5 lakh Dm. from the Government of Federal Republic of Germany. An agreement dated21-4-1970was entered into, under which a company called KFW of West Germany was to advance this money to the assessee-corporation known under the loan agreement as development bank. There are several conditions laid down under that agreement providing for the purpose for which the loan was to be utilised, the eligibility of the small scale entrepreneurs, terms and conditions of the hire-purchase operations, the restrictions upon the use of the loan amount, the method of reimbursement as well as the method of disbursement, the commitment charges, interest, etc. Under article 3 of the agreement the assessee-corporation shall pay a commitment charge on the loan amounts not yet disbursed under the respective projects calculated from the day of KFW's approval on the respective projects. The loan should also bear interest at 51 per cent per annum. That article also provided the instalments and repayments starting from31-12-1978ending with30-6-2000. If the repayments were not to be in time the rate of interest on arrears is to be increased by 2 per cent. Under this agreement machineries we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was made by the IAC in his order. By whatever name it is called either subsidy or bounty, the object being to reimburse the losses, it was the amount received in the assessee's course of business and, therefore, taxable. On this view this amount was included as part of the income of the assessee. 3. The assessee then appealed to the Commissioner (Appeals) and raised two contentions ; one was that this was not taxable much less under section 41 and secondly its nature was that of a bounty received from the Government on capital account and, therefore, not taxable. The Commissioner (Appeals) in a detailed order rejected the assessee's contentions. He justified the inclusion of this sum as part of the assessee's income on two counts ; one was based upon section 28(iv) of the Act and the other was section 41. The assessee strongly relied upon a decision of the Delhi High Court in the case of Handicrafts & Handloom Export Corpn. ofIndiav. CIT [1983] 140 ITR 532. But in the opinion of the Commissioner (Appeals) this case was not at all applicable. It was against this decision that the present appeal is filed before the Tribunal. 4. Shri Ganeshan, the learned chartered accountant appea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earlier years, any reimbursement of that loss received In cash became clearly taxable under section 41 and it is no argument to say that there should be a trading liability or that liability should have been remitted or ceased or that the cessation or remission must come from the German party inasmuch as, section 41 does not speak as to from which source the reimbursement or the remission or the cessation of the liability was to come. All that section says is that there should be a receipt of cash in respect of the loss incurred in the earlier years and allowed as a deduction, in subsequent years or a cessation or remission of a trading liability allowed as a deduction in the earlier years in respect of which the assessee got benefit by way of remission or cessation regardless of the fact as to the source from which the benefit emanated or the cash came. She also relied upon the decision of the Supreme Court in the case of Bengal Textiles Association v. CIT [1960] 39 ITR 723. Lastly she pointed out that when the loss incurred on account of exchange rate fluctuation was debited to the trading and profit and loss account, the assessee was treating the loss as a business loss and whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o be on revenue account. It may be that the Government of India with a view to provide employment, with a view to industrialise the country and with a view to encouragement to small scale sector might have agreed to bear the loss so that neither the assessee-corporation nor the small scale sector groan under the burden of this loss, i.e., the motivating factor for the Government of India to interfere and that was also in public interest. But that is not germane insofar as the determination of the taxability of this sum is concerned vis-a-vis the Act. Insofar as the Act is concerned, this is a receipt. A receipt can be on capital account or on revenue account or by way of loan also. Though it can be argued that loan comes under capital account. A receipt which is on capital account will not be taxable under the Act except as capital gains. A revenue receipt is taxable. We have endeavoured above to show that this receipt was not on capital account because this was not given by the Government to the assessee-corporation as part of its capital but only as by way of reimbursement of the loss that it incurred though in the ultimate analysis it can be said that it was by way of capital co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evenues and not earmarked for any specific or particular capital purpose. The finding given by the Delhi High Court in that case was that the recoupment of losses was by way of contribution of capital which was not the case here. Because of the fact that before the Delhi High Court the assessee was 100 per cent subsidiary of the STC, the holding company, the Delhi High Court could give a most apt example of likening it to a father agreeing to recoup the losses incurred by his son in the past by pointing out that the amount given by the father would be in the nature of gifts or voluntary payments motivated by affection or personal relationship and not stemming from any business considerations. That is not so in the case before us. We are, therefore, of the opinion that the principle laid down by the Delhi High Court in the case of Handicrafts & Handloom Export Corpn. ofIndiadoes not apply to the facts of this case nor the earlier decision in Addl. CIT v. Handicrafts & Handloom Export Corpn. [1982] 133 ITR 590 (Delhi). 7. Now coming to section 41 it says : " (1) Where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enditure can be made good by reimbursement in cash or in any other manner, the trading liability can only be extinguished by the creditor either by way of remission or cessation. Only then a benefit accrues. It is the amount of that benefit that was sought to be taxed as income. Therefore, the remission or cessation of a trading liability stands on a different footing quite apart from the loss or expenditure. Here the assessee incurred the loss on account of fluctuation in exchange rates. That loss was allowed to the assessee as a deduction over a period of assessment years amounting to Rs. 272 lakhs. It was that amount that was reimbursed to the assessee by way of cash. Therefore, the reimbursement has nothing to do with the trading liability much less with the remission or cessation thereof because in this transaction there was no trading liability incurred by the assessee-corporation vis-a-vis this amount was concerned. It is difficult to accept that the assessee-corporation incurred a trading liability with the German party. We are not in this case concerned with that trading liability that the assessee-corporation incurred with German party. The trading liability continued to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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