(212.6 KiB, 1,093 DLs)

Assessee has to prove “bad debt” even under new s. 36 (1) (vii)

The assessee wrote off an amount as a “bad debt” in its accounts and claimed a deduction u/s 36 (1) (vii). The AO asked the assessee to furnish information as to the names and addresses of the debtors, copies of ledger accounts and efforts made to realize these dues. On failure by the assessee to furnish the information, the claim was disallowed on the ground that the onus to prove that the debt was a bad debt was on the assessee which had not been discharged. This stand was confirmed by the CIT (A). On appeal, the Tribunal decided in favour of the assessee by relying on Oman International Bank 100 ITD 285 (Mum) (SB) where it had been held that after the amendment of s. 36(1)(vii) w.e.f. 1.4.1989, it was not obligatory on the part of the assessee to prove that the debt written of was indeed a bad debt. On appeal by the Revenue, HELD reversing the Tribunal:

(i) The effect of the amendment to s. 36 (1) (vii) is that it is not necessary for the assessee to establish that the debt had become bad in the previous year and mere writing of the debt as irrecoverable is sufficient. However, the said entry of write off of the bad debt in the books of accounts is not conclusive and the AO is not precluded from making inquiries as to whether the entries are genuine and not imaginary or fanciful. The AO has the power u/s 143(2) to see that the entries are not mere paper work or fake.

(ii) However, at the same time, the wisdom of the assessee cannot be questioned and no demonstrative or infallible proof of bad debt having become bad is required. Commercial expediency is to be seen from the point of view of assessee depending on nature of transaction, capacity of debtor etc.

(iii) This interpretation harmonizes S. 143 (2) with s. 36(1)(vii) so that the assessees are enabled to get deduction of their bad debts while at the same time the AO is authorized to see that the provisions of the Act are not flouted by any means.

(144.0 KiB, 1,678 DLs)

Deletion of 2nd Proviso to S. 43B operates retrospectively

S. 43B (b) provides that any sum payable by way of contribution to a provident fund etc shall be allowed as a deduction only in the year of payment. The second proviso to s. 43B provided that the sums referred to in s. 43B (b) would not be allowed as a deduction unless the sum had been paid on or before the due date. The said second proviso was omitted by the Finance Act, 2003 w.e.f. 1.4.2004. Simultaneously, the benefit of the first proviso, which provides that even sums paid beyond the previous year but before the due date of filing the return shall be allowed as a deduction, was extended to s. 43B (b). The question arose whether the deletion of the said second proviso and amendment of the first proviso was retrospective or prospective. HELD upholding the claim of the assessee that the deletion had retrospective effect:

(i) The deletion of the second proviso to s. 43B, and the amendment to the first proviso, by the Finance Act, 2003 was to overcome implementation problems. Consequently, the amendments, though made applicable by Parliament only with effect from 1.4.2004, were curative in nature and would apply retrospectively w.e.f. 1.4.1988.

(ii) In Allied Motors 224 ITR 677 it was held that even though the first proviso to s. 43B was inserted w.e.f 1.4.1988, it operated retrospectively from 1.4.1984.It was held that when a proviso is inserted to remedy unintended consequences and to make the section workable it could be read retrospective in operation. This principle applies to the deletion of the second proviso as well.

(iii) if the contention of the Department that the deletion of the second proviso is prospective is accepted, there will be hardship and invidious discrimination because assessee who have paid the contributions after the due date will be denied deduction for all times while a defaulter who pays the contribution after 1st April, 2004 would get the benefit of deduction under s. 43-B.

(iv) Though Parliament has explicitly stated that the amendment will operate w.e.f. 1.4.2004, as a principle of construction the intention should be determined from the language used by the Legislature and if strict literal construction leads to an absurd result, i.e., a result not intended to be sub-served by the object of the legislation, then if another construction should be preferred.

(159.2 KiB, 1,400 DLs)

No capital gains in a business reorganization if consideration not determinable. Transfer pricing law does not apply if there is no income

The applicant, a USA company, held shares in an Indian company. As part of a bankruptcy reorganization process, the shares in the Indian company together with other non-Indian assets & liabilities were transferred to other USA companies. The liabilities taken over were more than the assets. The agreement provided that the transfer of the shares was without consideration. The AAR had to consider (i) whether the liabilities of the transferor taken over by the transferee could be said to be “consideration” for transfer of the Indian shares so as to make it chargeable to capital gains and (ii) whether even if there was no chargeable ‘capital gains’, the applicant could be assessed on an ‘arms length” basis under the transfer pricing provisions. HELD answering both questions in favour of the applicant:

(i) The effect of B. C. Srinivasa Setty 128 ITR 294 (SC) is that ss. 45 & 48 are an integrated code and must be read together. If there is no ‘consideration’ u/s 48 there can be no capital gains u/s 45. The ‘profit or gain’ or ‘the full value of the consideration’ envisaged by ss. 45 & 48 is not something which remains ambivalent or indefinite or indeterminable and cannot be arrived at on notional or hypothetical basis. It must be a distinctly and clearly identifiable component of the transaction. It cannot be implied or assumed;

(ii) The liabilities of the applicant taken over as a part of reorganization cannot be treated as consideration nor can it adopted as a measure of consideration for the transfer of shares. The parties did not intend that a specified extent of liabilities taken over should be treated as consideration for the transfer of shares. One cannot find consideration for the transfer by means of conjectures and assumptions. When entire assets and liabilities are taken over in order to reorganize the business, it is difficult to envisage that a proportion of liabilities constitutes consideration for a particular transfer. No commercial or accountancy principle supports such inference. It is difficult if not impossible to predicate that a given part of the liabilities represents the consideration for transfer and such consideration has been passed on to the transferor. One has to consider the entire purpose and substratum of reorganization and cannot import artificial notions of consideration. Accordingly, the take over of liabilities under the reorganization plan cannot be treated as consideration for the transfer of the Indian company shares by the applicant;

(iii) The argument of the Revenue that the transfer pricing provisions will apply even if there is no income is not acceptable. S. 92 is not an independent charging provision but deals with “Computation of income from international transactions”. It provides that “any income arising from an international transaction shall be computed having regard to the arm’s length price”. The expression ‘income arising’ postulates that the income has arisen under the substantive charging provisions of the Act. S. 92 is not intended to bring in a new head of income or to charge tax on income which is not otherwise chargeable under the Act.

(123.4 KiB, 719 DLs)

Debatable issues are not “mistakes apparent from the record” u/s 154

The assessee filed a revision petition u/s 264 in which it claimed that the subsidy received by it from the government was a capital receipt and not chargeable to tax in view of P.J. Chemicals Ltd 210 ITR 830 (SC). The Petition was allowed by the CIT. Subsequently, the Supreme Court held in Sahney Steel and Press Works 228 ITR 253 that the subsidy received by that assessee was a revenue receipt. Pursuant to this judgement, the CIT passed a rectification order u/s 154 by which he held that the subsidy was a revenue receipt. The assessee challenged the said order by a writ petition before the Madras High Court which was dismissed. On appeal by the assessee, HELD allowing the appeal:

The case was a classic one of change of opinion. The question whether a subsidy is capital or revenue depends on the facts of the case. S. 154 can only apply to a “mistake apparent from the record”. A “rectifiable mistake” is a mistake which is obvious and not something which has to be established by a long drawn process of reasoning or where two opinions are possible. A decision on a debatable point of law cannot be treated as a “mistake apparent from the record”.