Case: M/S. Solid Containers Limited Vs. The Deputy Commissioner of Incometax &amp; Another

t had taken a loan of Rs.6,86,071/during the previous year for business purposes which was returned back, as a result of consent terms arrived at between M/s. P.S. Jain Motors on the one hand and the Assessee on the other. The Assessee claimed that the said loan was the capital receipt and has not been claimed as deduction from the taxable income as expenses and therefore, did not come under section 41(1). As already noticed, this contention was rejected by the Assessing Officer on the ground that credit balance returned back is the income of the Assessee in view of the fact that it is again directly arising out of the business activity of the Assess and was liable to tax under section 28 of the Act. The order was appealed against. Commissioner partially allowed the appeal. Aggrieved from the order of the Income Tax Commissioner (Appeals), further appeal was preferred before the Income Tax Appellate Tribunal which again allowed the appeal on other counts but on the above issue and while relying upon the judgment of the Supreme Court in the case of Commissioner of Income Tax, Madurai v. T.V. Sundaram Iyengar and Sons Ltd., (1996) 6 SCC 294  ), sustained the view taken by the Commissioner. The Tribunal held as under: 8. We have carefully considered the submissions made by the rival parties. The assessee company had taken certain loan from M/s. P.S. Jain Motors. This amount was payable to them with interest of Rs.2,83,819/. The party filed a suit for recovery and thereafter the assessee company filed counterclaims and the matter was settled out of the court whereby the assessee company was not to pay any amount. The assessee company credited to the profit and loss account the interest amount and offered the same for taxation. With regard to the addition of Rs.6,86,071/, the assessee company directly credited the amount to the reserves account considering the same as capital receipt. It was claimed by the learned counsel that the amount was not a deemed profit under section 41(1) of the Act. According to the learned counsel, this amount cannot be charged even under the provisions of section 28 of the Act as the amount earned is neither a revenue receipt nor intended for revenue account. In this connection, we would like to refer to the decision of the Honourable Supreme Court in the case of CIT vs. T.V. Sundaram Iyengar and Sons Ltd. (1996), 222 ITR 344)   wherein the Honourable Supreme Court has laid down that If the amount is received in the course of trading transactions, even though it is not taxable in the year of receipt as being of capital character, the amount changes its character when the amount becomes the assessees own money because of limitation or by any other statutory or contractual right. Where the assessee received deposits in the course of trading transactions, the amount of such credit balances which were barred by limitations and which were written back by the assessee to the profit and loss account were to be assessed as the assessees income. In view of the above decisions of the Apex Court and also keeping in view the provisions of Section 28(iv) of the Act, we find full justification for making the addition of Rs.6,86,071/. Accordingly, the findings of the learned CIT (A) are upheld. It is worthwhile to refer to observation of Apex Court in T.V. Sundaram (supra).

Court's reasoning:
3. The present appellant can hardly drive any advantage from the case of MahindraMahindra Ltd. (supra). As in that case, a clear finding was recorded that the Assessee continued to pay interest at the rate of 6% for a period of 10 years and the agreement for purchase of toolings was entered into much prior to the approval of loan arrangement given by the reserve Bank of India. Therefore, the loan agreement, in its entirety, was not obliterated by such waiver. Secondly, the purchase consideration related to capital assets. The toolings were in the nature of dies and the Assessee was a manufacturer of heavy vehicles. The import was that of plant and machinery and the waiver could not constitute business. The facts of the present case are entirely different in as much as it was a loan taken for trading activity and ultimately, upon waiver the amount was retained in business by the Assessee. Thus, the principle stated by the Supreme Court in the case of T.V. Sundaram AyengarSons Ltd. (supra) would be squarely applicable to the facts of the present case. The amount which initially did not fall within the scope of the provisions rendering it liable to tax subsequently have become the Assessees income being part of the trading of the Assessee. Similar view was also taken by a Bench of Madras High Court in the case of Commissioner of Income tax v. Aries Advertising Pvt. Ltd., 2002 (255) ITR 510). The court took the view that the Assessee because of trading operation became richer by the amount, which had been transferred and/or retained in the Profit and Loss Account of the Assessee.