INCOME TAX ACT, 1961

--Business income--Profit chargeable to tax under section 41(1)Loan liability credited in capital reserve account--During the course of its business activity, assessee-company took advances from 'B' subsequently 'B' approached assessee to clear its dues as it had immediate business obligation. Assessee paid Rs. 85 lakhs against total outstanding dues Rs. 1,20,67,817 and balance amount of Rs. 35,67,817 was waived by 'B'. this amount was credited by the assessee in capital reserve. The assessing officer held that assessee was involved in financial activity and during its business activity and initial it was a capital in nature but when it was waived it became assessee's taxable income, accordingly he taxed the same. Commissioner (Appeals) reversed order of assessing officer. Held: Where there was no remission or cessation of liability the assessee had thus not obtained any benefit under section 41(1). On waiver of loan liability credited by assessee under capital reserve account in its books of account he same would be a capital receipt that could not be treated as remission o cessation of liability and consequently to benefit could be said to have arises to assessee.

Provisions contained in section 41(1) do not make any distinction between any contractual trading liability or any statutory trading liability. Even if any statutory liability is remitted or ceased of, or any amount, whether in cash or in any other manner has been obtained in respect of the expenditure incurred by way of statutory liability, the same would be deemed to be the profit and gains of the business of the assessee and would accordingly be chargeable to income-tax as the income of that year in which such benefit or amount is obtained. [Para 32] Since the balance amount of Rs. 35,67,817 was waived by M/s B the assessee credited this amount into capital reserve account as capital reserve not subject to tax. In the light of the above facts, there is no dispute that the advance received by the assessee from M/s B has not been allowed as a deduction in any of the previous financial year. Thus it is a case of loan liability and not trading liability. [Para 33] It is settled law that if the loan was taken for acquiring the capital asset, waiver thereof would not amount to any income exigible to tax. On the other hand, if this loan was for trading purpose and was treated as such from the very beginning in the books of account, the waiver thereof may result in the income more so when it was transferred to Profit and Loss Account. [Para 34] It is also settled law that when the question is whether a receipt of money is taxable or not or whether certain deductions from that receipt are permissible in law or not, the question has to be decided according to the principles of law and not in accordance with accountancy practice. [Para 35] Waiver of loan liability credited by the assessee under capital reserve account in its books of account is a capital receipt and cannot be deemed as remission or cessation of liability and consequently no benefit has arisen to the assessee in terms of section 41(1), therefore, while upholding the order passed by the Commissioner (Appeals) on this account, reject the ground taken by the revenue. [Para 38]