NATIONAL SMALL INDUSTRIES CORPORATION LIMITED v. INSPECTING ASSISTANT COMMISSIONER
[Citation -1986-LL-1120-7]

Citation 1986-LL-1120-7
Appellant Name NATIONAL SMALL INDUSTRIES CORPORATION LIMITED
Respondent Name INSPECTING ASSISTANT COMMISSIONER
Court ITAT
Relevant Act Income-tax
Date of Order 20/11/1986
Judgment View Judgment
Keyword Tags profits and gains of business or profession • value of any benefit or perquisite • small scale entrepreneurs • 100 per cent subsidiary • contribution of capital • remission or cessation • industrial development • business of export • subsidiary company • commitment charge • consolidated fund • trading liability • trading activity • rate of interest • revenue account • revenue receipt • capital account • cash assistance • holding company • business loss • cash payment • revenue loss
Bot Summary: The board of the assessee-corporation desired that the loss on account of adverse fluctuations of rates of exchange should neither be borne by the assessee- corporation nor by the small scale entrepreneurs, i.e., the hirer of the machinery because the purpose of the assessee constitution was not only financial but also social and economic by creation of increased potential of employment opportunities by the expansion of the small scale sector. The assessee kly relied upon a decision of the Delhi High Court in the case of Handicrafts Handloom Export Corpn. The Delhi High Court decision on which great reliance was placed by Shri Ganeshan, in our opinion, becomes inapplicable because in that case the assessee was a 100 per cent subsidiary of State Trading Corpn. There the Delhi High Court pointed out that there was a basic difference between grants made by a Government or from public funds generally to the assessees in a particular line of business or trade with a view to helping them in the trade or to supplement their general revenues or trading receipts and not earmarked for any specific or particular purpose and a case of a private party agreeing to make good the losses incurred by an assessee on account of a mutual relationship subsisting between them. 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. Now coming to section 41 it says: Where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee, and subsequently during any previous year the assessee has obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or sum benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtained by him or the value of benefit accruing to him, shall be deemed to be profits and gains of business 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. The expression ' some benefit in respect of such trading liability by way of remission or cessation thereof ' applies only to a benefit being obtained by the cessation of a trading liability which was spoken of earlier but the benefit by remission or cessation does not or need not refer to the loss or expenditure incurred by the assessee and allowed as a deduction.


assessee in this appeal is corporation incorporated in 1955 pursuant to resolution of Government of India dated 7-6-1954 with main object of assisting and nurturing small scale sector industries in country. main function of this corporation is to provide finance to small scale industrial units. assessee-corporation is to import machinery from abroad on credit and sell such machinery on hire-purchase basis to small scale entrepreneurs. 2. In aid of this project Government of India concluded agreement with Government of Federal Republic of Germany on 25-7-1969 whereunder Government of Federal Republic of Germany agreed to assist by providing economic aid. Guided by this desire and on proposal of Government of India assessee-corporation is to obtain loan of 5 lakh Dm. from Government of Federal Republic of Germany. agreement dated 21-4-1970 was entered into, under which company called KFW of West Germany was to advance this money to assessee-corporation known under loan agreement as development bank. There are several conditions laid down under that agreement providing for purpose for which loan was to be utilised, eligibility of small scale entrepreneurs, terms and conditions of hire- purchase operations, restrictions upon use of loan amount, method of reimbursement as well as method of disbursement, commitment charges, interest, etc. Under article 3 of agreement assessee-corporation shall pay commitment charge on loan amounts not yet disbursed under respective projects calculated from day of KFW's approval on respective projects. loan should also bear interest at 51 per cent per annum. That article also provided instalments and repayments starting from 31-12-1978 ending with 30-6-2000. If repayments were not to be in time rate of interest on arrears is to be increased by 2 per cent. Under this agreement machineries were to be imported and they were being sold to small scale entrepreneurs in country but owing to fluctuations in exchange rates assessee-corporation was always incurring losses. Such losses amounted to substantial sums of about Rs. 2.73 crores over period of 7 years commencing from assessment year 1973-74. question then arose as to who should bear this loss on account of exchange variation. board of assessee-corporation desired that loss on account of adverse fluctuations of rates of exchange should neither be borne by assessee- corporation nor by small scale entrepreneurs, i.e., hirer of machinery because purpose of assessee constitution was not only financial but also social and economic by creation of increased potential of employment opportunities by expansion of small scale sector. board of assessee-corporation, therefore, desired to represent to Government to bear these losses. Then after good deal of discussions at level of Ministers and concerned departments, Secretary to Government of India, Ministry of Finance, in Department of Economic Affairs in his letter dated 30- 9-1978 addressed to Secretary, Department of Industrial Development agreed that Government would bear these exchange losses and as consequence neither assessee-corporation nor entrepreneurs would be asked to bear exchange losses and that periodical exchange rate losses suffered by assessee-corporation would be reimbursed by Government. As consequence of this decision of Government assessee- corporation received sum of Rs. 272.94 lakhs in assessment year under appeal from Government by way of reimbursement of these exchange losses. assessee-corporation claimed that this sum received by way of recoupment was not part of assessee's trading receipts while ITO took different opinion. view taken by IAC was simply this. losses suffered by assessee in past on account of exchange fluctuations was-claimed by it as expenditure and same was allowed as deduction in computing its income. When assessee received reimbursement of those losses from Government, that reimbursement constituted its income under section 41 of Income-tax Act, 1961 (' Act ') although no reference to section 41 was made by IAC in his order. By whatever name it is called either subsidy or bounty, object being to reimburse losses, it was amount received in assessee's course of business and, therefore, taxable. On this view this amount was included as part of income of assessee. 3. assessee then appealed to 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 bounty received from Government on capital account and, therefore, not taxable. Commissioner (Appeals) in detailed order rejected assessee's contentions. He justified inclusion of this sum as part of assessee's income on two counts; one was based upon section 28(iv) of Act and other was section 41. assessee kly relied upon decision of Delhi High Court in case of Handicrafts & Handloom Export Corpn. of India v. CIT [1983] 140 ITR 532. But in opinion of Commissioner (Appeals) this case was not at all applicable. It was against this decision that present appeal is filed before Tribunal. 4. Shri Ganeshan, learned chartered accountant appearing for assessee after narrating facts of case starting from incorporation of assessee-corporation till this amount was received, submitted that case w s clearly covered by decision of Delhi High Court in case of Handicrafts & Handloom Export Corpn. of India and, therefore, Commissioner (Appeals)'s view was incorrect. He also submitted that facts of this case were akin to facts of case before House of Lords in case of Seaharn Harbour Dock Co. v. Crook (Inspector of Taxes) [1931] 16 TC 333, which was referred to in Delhi High Court decision. In order to show that section 28(iv) does not apply to cash payments received, he placed k reliance upon another Delhi High Court decision in case of Instalment Supply (P.) Ltd. v. CIT [1984] 1 49 ITR 457. Then he submitted that this being amount received on capital account, object being to help small scale sector in country assessee-corporation did not receive it as part of its trading activity and having regard to object with which amount was paid, namely, helping small scale industrial sector, it must be held that whole amount was not taxable contrary to view taken by Commissioner (Appeals). Insofar as taxability under section 41 is concerned, learned chartered accountant pointed out that for that section to apply there must be cessation or remission of trading liability. As in this case there was no such cessation or remission of trading liability but only cash payment, that section became totally inapplicable. He further pointed out that again for that section to apply, cessation or remission of trading liability must be from German party and since German party in this case did not remit any trading liability, that section was not attracted. That is how argument is proceeded to press upon view that this sum was not at all taxable. However, his main thrust was Delhi High Court decision in cast of Handicrafts & Handloom Export Corpn. of India. But departmental representative Smt. Sushma Trivedi supported order of Commissioner (Appeals). She pointed out that even if it is held that section 28(iv) was not applicable, this was case to which section 41 clearly applied because loss of exchange rate fluctuation having been allowed as deduction in 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 trading liability or that liability should have been remitted or ceased or that cessation or remission must come from German party inasmuch as, section 41 does not speak as to from which source reimbursement or remission or cessation of liability was to come. All that section says is that there should be receipt of cash in respect of loss incurred in earlier years and allowed as deduction, in subsequent years or cessation or remission of trading liability allowed as deduction in earlier years in respect of which assessee got benefit by way of remission or cessation regardless of fact as to source from which benefit emanated or cash came. She also relied upon decision of Supreme Court in case of Bengal Textiles Association v. CIT [1960] 39 ITR 723. Lastly she pointed out that when loss incurred on account of exchange rate fluctuation was debited to trading and profit and loss account, assessee was treating loss as business loss and when reimbursement was received from Government, to remove that dent amount so received became taxable. It is no argument, according to her, to say that amount was received on capital account because whatever might have been object with which Government of India resolved to bear loss by reimbursing to assessee-corporation, so far as assessee- corporation is concerned, it received it by way of reimbursement and it is that nature that is relevant for our present purpose and not object with which Government reimbursed. 5. We have carefully considered arguments both for and against, perused documents as well as case-law relied upon and we felt no difficulty in agreeing with view expressed by Commissioner (Appeals) that this amount in question was taxable under section 41. facts recounted earlier would show that assessee-corporation received this amount by whatever name Government chose to give it, to meet losses that assessee-corporation incurred on account of fluctuation in exchange rates. There is no gainsaying of this fact. If amount so received was on revenue account, it becomes taxable directly. If amount was received on capital account, it does not become taxable. When loss on account of fluctuation on exchange rates was claimed as revenue deduction and was allowed as such, it must be held as held rightly by Commissioner (Appeals) that dealings that assessee had vis-a-vis small scale entrepreneurs and West German company was on revenue account. business that assessee- corporation was carrying on was that of financing. assessee-corporation receives money from party in Germany, either in cash or in kind, passes it on to small scale entrepreneurs in our country, realises money from them and repays to party in West Germany. Because of staggering of repayments, there was fluctuation in exchange rates and it was as consequence of that assessee-corporation has to pay more rupees to purchase same amount of marks, which resulted in loss and that loss having been claimed as revenue loss, it cannot be said that operations were not on revenue account. Having settled issue that operations were on revenue account, then money that assessee received by way of recoupment of losses must also be held to be on revenue account. It may be that Government of India with view to provide employment, with view to industrialise country and with view to encouragement to small scale sector might have agreed to bear loss so that neither assessee-corporation nor small scale sector groan under burden of this loss, i.e., motivating factor for Government of India to interfere and that was also in public interest. But that is not germane insofar as determination of taxability of this sum is concerned vis-a-vis Act. Insofar as Act is concerned, this is receipt. 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. receipt which is on capital account will not be taxable under Act except as capital gains. revenue receipt is taxable. We have endeavoured above to show that this receipt was not on capital account because this was not given by Government to assessee-corporation as part of its capital but only as by way of reimbursement of loss that it incurred though in ultimate analysis it can be said that it was by way of capital contribution. 6. Delhi High Court decision on which great reliance was placed by Shri Ganeshan, in our opinion, becomes inapplicable because in that case assessee was 100 per cent subsidiary of State Trading Corpn. assessee- company incurred loss in its business of export of handloom. STC which was 100 per cent holding company of assessee-company agreed to recoup loss by giving cash assistance. Delhi High Court rightly held that cash assistance was not part of trading receipts of assessee-company there. There Delhi High Court pointed out that there was basic difference between grants made by Government or from public funds generally to assessees in particular line of business or trade with view to helping them in trade or to supplement their general revenues or trading receipts and not earmarked for any specific or particular purpose and case of private party agreeing to make good losses incurred by assessee on account of mutual relationship subsisting between them. former are to be treated as trading receipts because they reached trader in his capacity as such and are made in order to assist him in carrying on of trade. latter are in nature of gifts or voluntary payments motivated by personal relationship and not stemming from any business considerations. This is what Justice Ranganathan observed, who spoke for Court in that case. If we apply this principle to facts of case here, first of all unlike in that case, assessee-corporation here though owned by Government of India did not have relationship of holding company of subsidiary company in sense that income of subsidiary company as well as its assets and liabilities become part of holding company. revenues of assessee-corporation before us do not form part of revenues of Government of India, i.e., Consolidated Fund of India. assessee-corporation is separate corporation juristic entity liable to income-tax separately. This is major distinguishing feature between that case and case before us. 100 per cent subsidiary company and holding company are one and same. Secondly, funds that Government of India gave to assessee-corporation here was with view to help assessee-corporation in its trade to supplement its general revenues and not earmarked for any specific or particular capital purpose. finding given by Delhi High Court in that case was that recoupment of losses was by way of contribution of capital which was not case here. Because of fact that before Delhi High Court assessee was 100 per cent subsidiary of STC, holding company, Delhi High Court could give most apt example of likening it to father agreeing to recoup losses incurred by his son in past by pointing out that amount given by father would be in nature of gifts or voluntary payments motivated by affection or personal relationship and not stemming from any business considerations. That is not so in case before us. We are, therefore, of opinion that principle laid down by Delhi High Court in case of Handicrafts & Handloom Export Corpn. of India does not apply to facts of this case nor 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 allowance or deduction has been made in assessment for any year in respect of loss, expenditure or trading liability incurred by assessee, and subsequently during any previous year assessee has obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or sum benefit in respect of such trading liability by way of remission or cessation thereof, amount obtained by him or value of benefit accruing to him, shall be deemed to be profits and gains of business or profession and accordingly chargeable to income-tax as income of that previous year, whether business or profession in respect of which allowance or deduction has been made is in existence in that year or not." This section seeks to bring to tax sums that were once allowed as deductions in respect of loss or expenditure or trading liability if in subsequent years events have so taken place that there was reimbursement of loss or expenditure in any manner whatsoever or trading liability ceased or remitted. That was why section says that loss, expenditure or trading liability incurred by assessee and subsequently during any previous year assessee has obtained whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure, that amount so obtained shall be deemed to be profits and gains of business or profession and chargeable to tax as income of that previous year. In this case undoubtedly assessee received cash in respect of loss or expenditure incurred by assessee and was allowed to it as allowance or deduction in earlier years. What Shri Ganeshan points out that this particular part of section does not apply but only that portion which speaks of remission or cessation of trading liability whereby benefit should accrue to assessee. expression ' some benefit in respect of such trading liability by way of remission or cessation thereof ' applies only to benefit being obtained by cessation of trading liability which was spoken of earlier but benefit by remission or cessation does not or need not refer to loss or expenditure incurred by assessee and allowed as deduction. Simply put this section speaks of three categories of allowance or deduction which could have been allowed. One is by way of loss, other is by way of expenditure and third is by way of trading liability incurred. If loss or expenditure can be made good by reimbursement in cash or in any other manner, trading liability can only be extinguished by creditor either by way of remission or cessation. Only then benefit accrues. It is amount of that benefit that was sought to be taxed as income. Therefore, remission or cessation of trading liability stands on different footing quite apart from loss or expenditure. Here assessee incurred loss on account of fluctuation in exchange rates. That loss was allowed to assessee as deduction over period of assessment years amounting to Rs. 272 lakhs. It was that amount that was reimbursed to assessee by way of cash. Therefore, reimbursement has nothing to do with trading liability much less with remission or cessation thereof because in this transaction there was no trading liability incurred by assessee-corporation vis-a-vis this amount was concerned. It is difficult to accept that assessee-corporation incurred trading liability with German party. We are not in this case concerned with that trading liability that assessee-corporation incurred with German party. trading liability continued to subsist. That was neither remitted nor ceased. That should not, therefore, be confused with reimbursement of losses that assessee-corporation incurred in respect of which cash amount was received which was more or less equal to loss claimed and allowed in earlier years. We are, therefore, of opinion that this amount has been rightly brought to tax under section 41. 8. We are, however, unable to agree with Commissioner (Appeals) that this amount could be brought to tax under section 28(iv). For that section to operate, there must be benefit or perquisite received in course of business or exercise of profession. section reads: " following income shall be chargeable to income-tax under head ' Profits and gains of business or profession ',--- (i) to (iii) ** ** ** (iv) value of any benefit or perquisite, whether convertible into money or not, arising from business or exercise of profession ." This, therefore, postulates that some benefit or perquisite otherwise than in cash must be received, which could be valued in terms of money having nexus with business carried on by assessee or exercise of profession. Here assessee received cash. That cannot be said to be benefit or perquisite within meaning of section 28(iv). words ' benefit or perquisite ' were also used elsewhere in Act more particularly in section 40A. Delhi High Court in case of Instalment Supply (P.) Ltd. pointed out that those expressions do not relate to cash payments. Therefore, cash payments received cannot be treated as benefit or perquisite. Here we agree with submission made on behalf of assessee by Shri Ganeshan and hold that Commissioner (Appeals) was not correct in his view. We do not wish to dwell on this point because we are upholding view taken by Commissioner (Appeals) on other account, namely, applicability of section 41. In view that we are taking we found it not necessary to refer to other case-laws relied upon before us because they are referred to in support of particular proposition of law taken up but not directly on question whether section 41 would apply or not. 9. There are three other grounds in grounds of appeal, namely, grounds 5 to 7 which were not pressed before us at time of bearing. These grounds are, therefore, dismissed and views taken by Commissioner (Appeals) on those counts are confirmed. 10. In result, appeal is dismissed. *** NATIONAL SMALL INDUSTRIES CORPORATION LIMITED v. INSPECTING ASSISTANT COMMISSIONER
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