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TMI Blog2006 (8) TMI 274X X X X Extracts X X X X X X X X Extracts X X X X ..... ved by his estate and the waiver was duly approved by the RBI. Upon enquiry why this loan should not be treated as income within the purview of section 41(1) of the Act, the assessee filed a copy of the settlement executed into between the assessee-company and the estate of the late Mr. D.A. Butler dated June 26, 2000, and submitted that the waiver of loan by a foreign shareholder cannot be taxed under the provisions of section 41(1) of the Act. It was contended that it was not a case of recoupment in the subsequent years of losses or expenditure allowed in an earlier year from the recovery of bad debts allowed in the earlier year. After considering the submissions, the Assessing Officer was of the view that this sum was in the nature of casual and non-recurring income as it had all the characters of such nature. He further observed that liability to repay the loan was ceased on account of deed of agreement executed and it has become final and has not been subjected to any appeal and there is no revival of the liability in future. Hence, this is nothing but a windfall to the company and it is to be treated as casual and non-recurring income. The definition of income is an inclusive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... received by an assessee being of capital nature could not be taxed in the hands of the donee and that is why the Board has already issued a Circular No. 158 dated December 27, 1974 ([1975] 98 ITR (St.) 97). He brought to our attention paragraph 2 of the circular, which reads as under: "2. Receipts which are of a casual and non-recurring nature will be liable to income-tax only if they can properly be characterised as "income" either in its general connotation or within the extended meaning given to the term by the Income-tax Act. Hence, gifts of a purely personal nature will not be chargeable to income-tax, except when they can be regarded as an addition to the salary or when they arise from the exercise of a profession or vocation." Then he referred to the decision of the Supreme Court in the case of P. Krishna Menon v. CIT [1959] 35 ITR 48 relied on by the Assessing Officer and pointed out that the decision is clearly distinguishable. In that case, the assessee after retirement from the Government service, spent his time in studying and teaching Vedanta philosophy. One of his disciples used to come from England at regular intervals and used to stay with the assessee for few m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. v. CIT [2001] 249 ITR 265, which has been affirmed by the Supreme Court in the case of CIT v. D.P. Sandu Bros. Chembur P. Ltd. [2005] 273 ITR 1 where it was held that capital receipts normally will not fall under the concept of casual income under section 10(3) because under section 2(24) defining income, only capital gains arising on transfer of asset are to be charged under the head "Capital gains". Since the receipt in the present case is of capital nature right at the time of receipt of loan and no transfer is involved, therefore same could not have been treated as casual income and charged to tax and thus addition was not justified. On the other hand, the learned Departmental representative while strongly supporting the orders of the lower authorities submitted that income has been defined under section 2(24) in inclusive manner and whatever profits and gains derived by any assessee are to be charged to tax as income. In that sense, even waiver of loan would constitute as a windfall to the assessee and shall be treated as income. He strongly relied on the decisions of P. Krishna Menon [1959] 35 ITR 48 (SC) and G.R. Karthikeyan [1993] 201 ITR 866 (SC). We have conside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 115JB can be reduced only if the assessee is eligible to deduction under section 80HHC. However, if there are brought forward losses, then they have to be adjusted against the business profits before allowing deduction under section 80HHC in view of the decision of the hon'ble apex court in the case of Motilal Pesticides (I) P. Ltd. v. CIT [2000] 243 ITR 26 as well as CIT v. Kotagiri Industrial Co-operative Tea Factory Ltd. [1997] 224 ITR 604. Once the assessee is not eligible to deduction under section 80HHC, the same cannot be reduced on notional basis from the book profits for the purpose of section 115JB. In these circumstances, we find nothing wrong with the order of the learned Commissioner of Income-tax (Appeals) and confirm the same. In the result, the appeal is partly allowed. N. VIJAYAKUMARAN (Judicial Member).-I have carefully gone through the proposed order of my esteemed Brother, Shri T.R. Sood, Accountant Member but I am unable to persuade myself to agree with the finding recorded by him with regard to the issue of confirmation of addition on account of waiver of loan amounting to Rs. 2,95,06,700. In view of this, I proceed to record my finding on the issue i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 961. Before the learned Commissioner of Income-tax (Appeals) the same contentions were reiterated on behalf of the assessee and the same decisions were pressed into service. However, the learned Commissioner of Income-tax (Appeals) confirmed the addition made by the Assessing Officer by following the decisions of the hon'ble Supreme Court in the cases of P. Krishna Menon [1959] 35 ITR 48 and G.R. Karthikeyan [1993] 201 ITR 866. While dealing with the issue the learned Accountant Member found that the nature of receipt of loan is not a revenue receipt but capital receipt. Therefore, he distinguished the decisions of the hon'ble Supreme Court in P. Krishna Menon [1959] 35 ITR 48 and G.R. Karthikeyan [1993] 201 ITR 866 and came to the conclusion that those decisions are not applicable to the facts of the present assessee's case. Finally, the learned Accountant Member was of the opinion that the waiver of loan amount cannot be treated as casual income under section 10(3) of the Act and therefore, he set aside the orders of the authorities below and deleted the addition in question by following the decision of the Bombay High Court in Cadell Weaving Mill Co. P. Ltd. v. CIT [2001] 24 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rue that levy said that he made the gifts to mark his esteem and affection for the appellant. But such emotions and, therefore, the gifts, were clearly the result of the teaching imparted by the appellant. Mr. Sastri contends that that may be so, but we have no right to follow the successive causes and as a result thereof link the gift with the teaching. An argument of this kind seems to have been advanced in Blakiston v. Cooper (Surveyor of Taxes) [1909] AC 104 (HL). and dealt with by Lord Ashbourne in the following words: 'It was suggested that the offerings were made as personal gifts to the vicar as marks of esteem and respect. Such reasons no doubt played their part in obtaining and increasing the amount of the offerings, but I cannot doubt that they were given to the vicar as vicar and that they formed part of the profits accruing by reason of his office.' We have no doubt in this case that the imparting of the teaching was the causa causans of the making of the gift; it was not merely a causa sine qua non. The payments were repeated and came with the same regularity as Levy's visits to the appellant for receiving instructions in Vedanta. We do not feel impressed by Mr. Sastr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e receipt. Applying the above decision of the hon'ble Supreme Court I am, of the view that this is the income coming within the definition in section 2(24) of the Act and the Assessing Officer has rightly given the statutory exemption under section 10(3) of the Act and treated the balance amount as income of the assessee, The learned Commissioner of Income-tax (Appeals) also on consideration of the facts and circumstances of the case, confirmed the view taken by the Assessing Officer by following the aforesaid two decisions of the hon'ble Supreme Court. The decision of the Supreme Court in D.P. Sandu's case [2005] 273 ITR 1 is distinguishable as that decision is applicable to capital receipts and not to the revenue receipts as in the present case. It is also a settled law that all capital receipts are not taxable unless they are specifically charged to tax. Hence, the decisions relied upon by the learned Accountant Member will not help the assessee so as to reverse the orders of the authorities below. As the facts are not in dispute and the nature of receipt being revenue receipt, the decision of the hon'ble Supreme Court in the cases of P. Krishna Menon [1959] 35 ITR 48 and G.R. K ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iod of 5 years. The repayment period was subsequently rescheduled with necessary approval of the Government of India as per the agreement reached between the parties. The assessee-company, however, could not repay anything out of the said loan to Mr. Butler till the year 1998. In the year 1998, Mr. Butler suddenly passed away and his estate vested with the executors and trustees. Thereafter, the executor of the estate of Mr. Butler entered into a settlement agreement with the assessee-company on June 26, 2000, agreeing, inter alia, for the waiver of the aforesaid loan advanced to the assessee-company. In his return of income filed for the year under consideration, the assessee-company claimed that the waiver of the loan was a capital receipt not chargeable to tax. The Assessing Officer, however, treated the same as a casual and non-recurring income of the assessee-company observing that the said waiver had occurred accidentally without any stipulation, contract, calculation or decision. He held that the said waiver of loan was nothing but a windfall to the assessee-company and the same being in the nature of a casual and non-recurring income, liable to tax in its hands as income go ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Accountant Member thus finally held that the waiver of loan could not be treated as casual income of the assessee under section 10(3). The learned Judicial Member did not agree with the aforesaid view taken by the learned Accountant Member in the proposed order. According to him, the decision of the hon'ble Bombay High Court in the case of Cadell Weaving Mill Co. P. Ltd. v. CIT [2001] 249 ITR 265 relied upon by learned Accountant Member was on the issue of chargeability of capital receipt and the same thus was not related to revenue receipt in the nature of income chargeable to tax within the meaning of section 2(24). He held that the decisions of the hon'ble Supreme Court in the case of P. Krishna Menon v. CIT [1959] 35 ITR 48 and CIT v. G.R. Karthikeyan [1993] 201 ITR 866 (SC) relied upon by the Assessing Officer, on the other hand, were directly applicable to the facts of the present case and relying upon the same, he held that the waiver of loan was revenue receipt constituting "income" within the meaning of definition given in section 2(24), which was chargeable to tax being casual and non-recurring income. On account of the above difference between the two Members, the ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unt and the estate shall fully indemnify Fidelity, Mr. H. Ramachandra Rao and his two sons against any such claim." As is evident from the aforesaid clause of the relevant agreement, the loan advanced by late Mr. Butler was agreed to be waived entirely by the executors and trustees of his estate as per the settlement agreement entered into with the assessee-company and there is no dispute about this factual position. There is also no dispute about the fact that the said loan was availed and actually utilised by the assessee-company for the purpose of purchase of capital assets. The learned Judicial Member held this waiver of loan as a revenue receipt in the hands of the assessee-company relying on the decision of the hon'ble Supreme Court in the case of P. Krishna Menon [1959] 35 ITR 48 and G.R. Karthikeyan [1993] 201 ITR 866 observing that the same were squarely applicable to the facts of the present case. A perusal of these two decisions, however, shows that facts involved therein were entirely different from the facts of the present case. In the case of P. Krishna Menon [1959] 35 ITR 48 a clear nexus was found to be established between the imparting of teaching of Vedanta by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rse of its regular business and same being not capital receipt but revenue receipt, was held to be chargeable to tax by the majority view. It is worthwhile to note here that the hon'ble Justice Bhagavathi dissented from this majority view while holding that the films constituted capital assets of the assessee and the amount received for cancellation of the assessee's right under the agreements in such films being capital assets, was a capital receipt. This decision of the hon'ble Supreme Court thus clearly lays down the proposition that if the compensation received is on account of surrender of capital assets, the same is capital receipt whereas if the amount is received as trading receipt during the regular course of business, it is a revenue receipt. In the present case, the loan in question was availed of by the assessee-company from Mr. Butler admittedly for the purpose of purchase of capital assets and the same was indeed utilised for the said purpose. The availing of the same loan as well as utilisation thereof thus related to the capital structure of the assessee-company and the same in no way was related to its trading affairs. In the case of CIT v. Phool Chand Jiwan Ram ..... X X X X Extracts X X X X X X X X Extracts X X X X
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