INCOME TAX ACT, 1961

Section 263 Section 41(1)

Revision under section 263 - Erroneous and prejudicial order - Addition under section 41(1) on account of remission/cessation of trading liability -

CIT invoked jurisdiction under section 263 on the ground that assessee assigned its receivables and bank liabilities to a special purpose vehicle (SPV), i.e., Unique Receivable Management Private Ltd. (URMPL) under tripartite agreement dated 28-6-2006 which was between the assessee, URMPL and consortium of 12 banks who had advanced finances to assessee company. The bank had first and prior charge on the receivables of assessee. During revision proceedings under section 263, the appropriate authority noted that total receivable as per accounts were Rs.93.45 crores, whereas bank liabilities were Rs.89.86 crores. The differential amount of Rs.3.59 crores was shown as receivable in the books of account but did not consider whether this differential amount of Rs.3.59 crores would be in the nature of income or not. It was also observed that though receivables assigned by assessee to URMPL were Rs.89.86 crores, however, URMPL was to make payment of Rs.43 crores only to the consortium of banks, resulting into remission of liability in the hands of the assessee. AO failed to consider this aspect of the matter. Accordingly, assessment was set aside with a direction to AO to redo the assessment. Held: As per terms of Tripartite Agreement, assessee hived-off hire purchase and leasing business to SPV and assigned corresponding receivables together with the connected bank liabilities to the SPV at book value. Pertinently, assessee transferred receivable of Rs.93.45 crores together with bank liability of Rs.89.86 crores at Book Value. The excess amount as received by the assessee over and above WDV of the asset had been offered as well as accepted as short-term capital gain. Thought Bank Liabilities were crystalized at Rs.43 Crores, however, SPV was obligated to repay any amount received by it over and above Rs.43 crores. Therefore, it would not be correct to say that bank liabilities were ultimately settled at Rs.43 crores and the balance amount was waived off. Therefore, section 41(1) could not be held to be applicable in such a case in the hands of assessee. Accordingly, order of CIT was not sustainable.

REFERRED :

FAVOUR : In assessee's favour.

A.Y. : 2006-07

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