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TMI Blog2006 (3) TMI 90X X X X Extracts X X X X X X X X Extracts X X X X ..... erred to as "the Tribunal") has referred the following question of law for our opinion under section 256(1) of the Income-tax Act (for short hereinafter referred to a "the Act"): "Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is right in holding that although the assessee is a financial company dealing in shares, etc., the transactions of purchase of its own debentures through its nominees did not represent transactions involving its stock-in-trade and accordingly, in holding that the surplus arising from issue and repurchase of the debentures merely represented a capital receipt not subject to tax?" The facts leading to this reference are as under: The assessee-company is engaged in the business of acting as a finance company dealing, inter alia, in securities, debentures, shares, etc. and also granting loans and advances to other parties. In the year 1973, the assessee-company had issued a large number of debentures of Rs. 10 each at par. These debentures were redeemable during the accounting years corresponding to the assessment years 1984-85, 1985-86 and 1986-87 at the rate of 30 per cent., 30 per cent, and 40 per cent., res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any revenue gain. The gain is merely of the nature of capital receipt. Though the assessee might have credited the surplus amount to its profit and kiss account for the three years, if the Department wanted to stick to its version that the gain out of the transaction arose from repurchase of debentures, such gain should have been assessed to tax actually in the years of repurchase. Therefore, the Tribunal held that the surplus amounts were not chargeable to tax either as revenue profits or even as capital gain. It is against this order of the Tribunal, as stated earlier, at the instance of the Revenue, the aforesaid question of law is referred for our opinion. Sri M.V. Seshachala, learned counsel appearing for the Revenue submitted that admittedly the assessee was carrying on the business of purchase and sale of debentures and they have lent money through a nominee to purchase their own debentures for which their nominee has paid interest to them and therefore, the benefit accrued to the assessee by discharging the liability of the debentures at a lower rate is a benefit accrued to them is in the nature of a trading receipt and liable to tax. Relying upon section 28(iv) of the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... harges its security. Discharging the liability to the debenture-holder who has sold his debentures and since a company cannot be its own debtor, in effect such purchase amounts to repayment of the loan. In so far as the word "income" under the Income-tax Act is concerned, it is defined under section 2(24), which reads as under: "2(24) 'income' includes- (i) profits and gains; (ii) dividend; (iia) voluntary contributions received by a trust created wholly or partly for charitable or religious purposes or by an institution established wholly or partly for such purposes or by an association or institution referred to in clause (21) or clause (23), or by a fund or trust or institution referred to in sub-clause (iv) or sub-clause (v) of clause (23C) of section 10." The term "income" starts with the word "includes" in the definition clause. Therefore, the list is inclusive and not exhaustive. The purpose of the inclusive definition is not to limit the meaning, but to widen its net. Though the inclusive definition adds several artificial categories to the concept of income but, on that account, the expression income does not lose its natural connotation. Income is a word, diff ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erriding title, then there is no income to the assessee. (6) The conduct of the parties in treating the income in a particular manner is material evidence of the fact whether income has accrued or not. (7) Mere improbability of recovery, where the conduct of the assessee is unequivocal, cannot be treated as evidence of the fact that income has not resulted or accrued to the assessee. After debiting the debtor's account and not reversing that entry-but taking the interest merely in suspense account cannot be such evidence to show that no real income has accrued to the assessee or been treated as such by the assessee. (8) The concept of real income is certainly applicable in judging whether there has been income or not but, in every case, it must be applied with care and within well-recognised limits." Again the Supreme Court in the case of CIT v. T.V. Sundaram Iyengar and Sons Ltd. [1996] 222 ITR 344 after reviewing the entire case law on the point has approved the principle of law stated in Morely (H.M. Inspector of Taxes) v. Tattersall [1939] 7 ITR 316 (CA) where it was laid down that the taxability of a receipt was fixed with reference to its character at the moment it was re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s or profession and accordingly chargeable to income-tax as the income of that previous year, whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not; or (b) the successor in business has obtained, whether in cash or in any other manner whatsoever, any amount in respect of which loss or expenditure was incurred by the first-mentioned person or some benefit in respect of the trading liability referred to in clause (a) by way of remission or cessation thereof, the amount obtained by the successor in business or the value of benefit accruing to the successor in business shall be deemed to be profits and gains of the business or profession, and accordingly chargeable to income-tax as the income of that previous years." This provision was also the subject-matter of interpretation by various courts. The Bombay High Court in the case of Mahindra and Mahindra Ltd. v. CIT reported in [2003] 261 ITR 501 was dealing with a case where the assessee had borrowed a loan and paid interest at the rate of 6 per cent, per annum for 10 years being the period of contract and he never got deduction for payment of interest un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s account. No benefit in cash as such had arisen to the assessee during the year under consideration, The benefit received by the assessee by appropriation of this amount to its profit and loss account is definitely a benefit convertible into money. Section 28(iv) of the Act will squarely apply to such benefit. Therefore, it is clear that in the aforesaid case the assessee had really received those amounts which were not claimed back by the persons who paid it and when the said amounts were so not claimed back, it was the benefit received by the assessee by appropriation of the said amount in its profit and loss account to the extent of the aforesaid amount was trading receipt and therefore, rightly includible in the income of the assessee. The said case has no application to the facts of this case as the amount involved in this case is not an amount received by the assessee or the amount coming into the nets of the assessee and as such the said judgment has no application. In the instant case, admittedly the assessee had issued debentures which are redeemable after a period of ten years at the face value thereof. Though the debenture-holders sold the debentures before the stip ..... X X X X Extracts X X X X X X X X Extracts X X X X
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