The Commissioner of Income Tax vs Manipal Finance Corporation Ltd.

N. Kumar, J.—As common questions of law are involved in both these appeals, they are taken up for consideration together and disposed of by this common order.

The substantial questions of law which arises for consideration in both the appeals are as under:

(i) In ITA 795/2008

"Whether the Tribunal was correct in holding that the sum of Rs. 1,78,12,000/- received by the assessee as fixed deposit during the earlier assessment year was written off during the current assessment year under a settlement resulted in cessation of a liability in the ordinary course of the business of the assessee resulting in income liable to tax?"

(ii) In ITA 794/2008

"Whether the second Appellate Tribunal was right in holding that a sum of Rs. 2,75,76,000/- received by the assessee as fixed deposit during the earlier assessment year was written off by forfeiture during the current assessment year under a settlement resulted in cessation of a liability in the ordinary course of the business of the assessee resulting in income liable to tax in view of decision of Apex Court in the case of Commissioner of Income Tax, Madras Vs. Lakshmi Vilas Bank Ltd., Karur, ".

The assesses is a non-banking financial company which was carrying on the business of accepting deposits from the public and carried on the activity of hire purchase, leasing of machinery, vehicles etc. with effect from 01.07.2002. Due to loss in the business, the assessee discontinued the business of accepting deposits from the public. The assessee company framed a scheme of compromise arrangement under section 391 of the Companies Act and placed the same before the Hon''ble High Court of Karnataka for its consideration. Under the scheme of compromise and arrangement, the assessee undertook to repay the deposits within a period of 5 years and interest as well within a period of 6 years. During the pendency of the matter before the Hon''ble High Court, the assessee with the consent of the parties came to a settlement. The effect of the said settlement was that individual depositors would forego their interest as well as part of the principal amount deposited with the assessee and would accept the lesser amount in final settlement of their claim. The difference in the principal amount i.e., the amount received minus the amount repaid to the depositor was taken as capital receipt and the unpaid interest that was credited was written back or offered as exceptional income. The assessing authority held this unpaid capital sum of deposits is nothing but the forfeited portion of the fixed deposit which was accepted by the assessee during the course of his business since forfeited amount is not payable to any of the persons and the assessee has become the owner of such amount, the same is taxable in the hands of the assessee. Receiving the deposit is the business of the assessee. Till the deposit is repaid, it will remain as liability and once part of the deposit only is repaid in full settlement, the balance amount which is forfeited by the assessee is nothing but a revenue receipt as it is accepted by the assessee during the regular course of banking business which is no longer required to be repaid. Therefore, the said amount was treated as income and tax was levied. Aggrieved by the said order, the assessee preferred an appeal to the Commissioner of Income Tax (Appeals), Mangalore-Goa. The appeal came to be dismissed.

Aggrieved by the said order, the assessee preferred an appeal to the tribunal. The tribunal relying on the Judgment of the Bombay High Court in the case of Mahindra and Mahindra Ltd. Vs. Commissioner of Income Tax, held the balance amount of deposit which could not be paid by the assessee to the depositors was never a charge to the Profit & Loss Account and thereby, at no point the tax liability, if any, of the earlier years was reduced. What was borrowed by the assessee was a capital asset repayable as such it could be repaid in view of the circumstances in which the assessee was placed. Section 41(1) of the Act would get attracted only when there is an amount that is charged to the Profit & Loss Account reducing the tax liability of any earlier years and therefore, the claim of the assessee was upheld and the orders passed by the lower authorities was set-aside. Aggrieved by the said order, the revenue is in appeal.

Learned counsel for the revenue assailing the impugned orders contends the assessee has received the entire amount by way of deposit. While settling the claim of the depositors, the entire amount is not repaid. That portion of the amount which was not repaid, continued to remain with the assessee and therefore, the said amount constitutes the income in the hands of the assessee and is liable to tax. Therefore, he submits the order passed by the tribunal is illegal and requires to be set-aside and the orders passed by the lower authorities requires to be restored.

Per contra, learned counsel appearing for the assessees submitted in the facts of the case, the assessee sustained loss in business, the assessee was unable to repay the amount received as deposit. Therefore, a settlement was arrived at wherein the depositors agreed to receive reduced amount in discharge of the liability and therefore, what was not paid to him is not the amount which is either forfeited by the assessee or is available at his hands to be charged as income under the Act. He relies on the Judgment of this Court and various other High Courts in support of his contention and submits the order passed by the tribunal is valid and do not call for interference.

This Court had an occasion to consider Section 2(24) of the Income Tax Act which defines what an ''income'' is as well also Section 41(1) of the Act in the case of Commissioner of Income Tax Vs. Industrial Credit and Development Syndicate Ltd., . After referring to the Judgment of the Apex Court in the case of Commissioner of Income Tax, Bombay North Vs. Chamanlal Mangaldas and Co., , Commissioner of Income Tax, Amritsar Vs. Shiv Prakash Janak Raj and Co. Pvt. Ltd. and Others, , Morvi Industries Ltd. Vs. Commissioner of Income Tax (Central) Calcutta, and Commissioner of Income Tax, Madurai Vs. T.V. Sundaram Iyengar and Sons Ltd., , this Court has held as under:

From the foregoing what emerges is that income-tax is a levy on income. The IT Act takes into account two points of time at which the liability to tax is attracted, viz., the accrual of the income or its receipt. It is the income which has really accrued or arisen to the assessee that is taxable Whether the income has really accrued or arisen to the assessee must be judged in the light of the reality of the situation. Income is what comes in from outside. Given its ordinary and natural meaning, the word income will take in any monetary return "coming in". When in reality there is neither accrual nor receipt of income by the assessee, even though an entry to that effect might, in certain circumstances have been made in the books of account, it would not constitute income for the purpose of levy of tax. In other words, income means real income and not fictional one. This involves really two aspects. One is that the receipt should connote a real or tangible coming and not something notional or fictional. A rebate obtained by the purchaser or remission of debt by a creditor would not result in the creation of income in the hands of the purchaser or debtor. As in those instances the assessee does not receive any income to his nets though by such rebate or remission he is benefited to the extent of the rebate or remission.

Similar view has been taken by the Madras High Court in the case of Iskraemeco Regent Limited (Originally Seahorse Industries Ltd. and Subsequently Iskraemeco Seahorse Ltd.) Vs. The Commissioner of Income Tax, , Bombay High Court in the case of Commissioner of Income Tax Vs. Xylon Holdings Pvt. Ltd. ( (2013) 90 DTR (Bom) 205).

As against this, the revenue relied on the Judgment of the Apex Court in the case of Commissioner of Income Tax, Madras Vs. Lakshmi Vilas Bank Ltd., Karur, .

That was a case where the bank had purchased the securities at face value. This cost cannot be anything less than the price which was actually paid by the bank. The bank would have handed over the securities to the constituents if he had not defaulted. In that case, the bank would have been entitled only to the brokerage. Since the Company defaulted, the deposit amount was forfeited and the end result of the transaction was that the bank became full owner of the securities and the amount lying in deposit with it became its own money. The forfeited amount became the bank''s income made in the course of its banking business and had to be assessed accordingly in the year in which it became the bank''s money. In that context, it was held after its forfeiture, the deposited amount became the property of the bank. The money that was utilized for the purchase of the security was the bank''s money and therefore, it was held when the deposit became the money of the bank, it is liable to tax, as in reality the bank received the said amount by way of forfeiture.

Similarly, in the case of Commissioner of Income Tax, Madurai Vs. T.V. Sundaram Iyengar and Sons Ltd., the money was received by the assessee in the course of carrying on his business although it was treated as deposit and was of capital nature, at the point of time it was received by efflux of time the money has become the assessee''s own money. What remains after adjustment of the deposits has not been claimed by the customers. The claims of the customers have become barred by limitation. The assessee itself has treated the money as its own money and taken the amount to its profit and loss account. There was no explanation from the assessee while the surplus money was taken to its Profit and Loss Account even if it was somebody else''s money. In that context, it was held when the claim of the customer became time barred and when the assessee treated it as its money and taken it to the Profit and Loss Account, it is an income earned by the assessee in the course of its business and therefore, it was taxable. Therefore, the aforesaid two judgments of the Apex Court has no application to the facts of this case.

In the instant case, no-doubt the assessee received the deposits. The deposits were repayable with interest. The assessee sustained loss in the business. They framed a scheme of compromise/arrangement. During the course of such a claim before the High Court, the assessee entered into an arrangement with the depositors who were willing to receive a portion of the amount deposited by them towards settlement of their claim. Therefore, those depositors were paid a portion of the money which they had deposited. With such payment, the entire liability to pay the amount received stood extinguished. However, by such extinguishment of the liability, the assessee did not receive any amount either by forfeiture or by discount and it is a case of sheer inability to pay the amount received by way of deposits. Under those circumstances, though such rebate or remission has benefited the assessee insofar as discharging his liability to the depositor, in reality it did not result in any income at the hands of the assessee unless there is accrual or receipt of income by the assessee, it would not constitute income for the purpose of levy of tax. The income to be taxed under the Act should be real income and not fictional one. Therefore, the tribunal was justified in holding that the balance amount of deposit which was not repaid under the arrangement, did not constitute an income and therefore, the assessee is not liable to pay any tax under the said context. Therefore, the substantial questions of law is answered in favour of the assessee and against the revenue.

We do not see any merit in these appeals. Accordingly, appeals are dismissed.