Skip to main content

Blog # 2. Waiver of interest is income in the hands of Assessee

When the assessee is allowed the benefit of the accumulated losses, while computing those loses, the income which accrued to it had to be adjusted and only thereafter net losses could have been allowed to be set off by the assessee company, said the Bench.
Supreme Court of India in M/s McDowell v. CIT Karnataka held that to ascertain the actual accumulated loses to be set off in the hands of the assesssee first adjust the income that is accruing to it on account of waiver of interest by financial institutions.
The Bench of Justices AK Sikri and Ashok Bhushan was considering an appeal against the Judgment of Karnataka High Court whereby the appeal of Commissioner of Income Tax (Revenue) was allowed setting aside the order to the Income Tax Appellate Tribunal(ITAT) which had granted the benefit of provisions of Section 72A of the Income Tax Act, 1961 to the appellant-assessee.
In the instant matter, M/s Hindustan Polymers Ltd. (HPL) had become a sick industrial company and was amalgamated with appellant-assesssee company i.e. M/s McDowell and Company Ltd. Since HPL was a sick industrial undertaking it owed a lot of money to banks and financial institutions. The interest was claimed as expenditure by HPL in its return and by the virtue of section 72A of the Income Tax Act, assessee was allowed to carry forward and set off accumulated loses and unabsorbed depreciation allowances of HPL in the event of amalgamation.
After the scheme of amalgamation, banks and financial institutions which have advanced loans to HPL agreed to waive off interest which had accrued prior to 01.04.1977.
Since this interest was waived off it became income in the hands of HPL as per section 41(1) of the Income Tax Act, 1961. The assessee has claimed a set off of the accumulated loses which it had taken over from HPL.  After the amalgamation it was observed that the income which has accrued under section 41 (1) of the Act has not been set off against the accumulated loses. The assessing officer adjusted this income against the losses. On an appeal to ITAT by the assessee it was held that the aforesaid income under section 41(1) is not in the hands of the assessee rather it is the income of HPL and since HPL is a separate entity, assessee is not liable to pay any tax on this income.
However, the Supreme Court held that since the assessee has taken over HPL and HPL has ceased to exist as a legal entity, the income tax will be payable in the hands of the assessee. When the assessee is allowed the benefit of the accumulated loses, while computing those loses, the income which accrued to it had to be adjusted and only thereafter net loses could have been allowed to be set off by the assessee company. Assessee cannot take the advantage of the accumulated loses and refuse to account for income accrued under section 41(1) of the Act.


  1. Very accommodating post. This is my first time visiting here. I found such an enormous number of fascinating stuff in your blog especially its trade. Genuinely its exceptional article. Keep it up. Ontario Trillium Benefit


Post a Comment

Popular posts from this blog

Blog # 26. Concept of Real Income under the Income Tax Act, 1961

  What is Income ? Before understanding the concept of Real Income, it shall be important to go through the the term “Income” and “Real”. Income is defined under S.2(24) of the Income Tax Act, 1961(Hereinafter referred as “the Act”). The definition as provided under the Act is an inclusive definition so as to cover up all the usual as well as unusual items, however it certainly does not define it in a way that we can be said it to be precise. The same can be understood by various Judge Made Laws. The first and the lead amongst them is a Privy Council Judgment in the case of Kamakshya Narain   Singh CIT 11 ITR 513 (PC)         Facts The assesse was a “Raja” gave mining lease and He received payments by way of royalty for coal mines leased out to various lessees. The case of the Assessee was that this royalty income received by the Assessee was nothing but the recoupment of the resources which shall be exhausted by the end of the lease and thus the same was not income bu

Blog # 20. S.53A of the Transfer of Property Act, 1882 and Related Laws

Section 53A of the Transfer of Property Act. 1882 is as under :- “53A. Part performance. – Where any person contracts to transfer for consideration any immovable property by writing signed by him or on his behalf from which the terms necessary to constitute the transfer can be ascertained with reasonable certainty, and the transferee has, in part performance of the contract, taken possession of the property or any pat thereof, or the transferee, being already in possession, continues in possession in part performance of the contract and has done some act in furtherance of the contract, and the transferee has performed or is willing to perform his part of the contract, then, notwithstanding that [***] where there is an instrument of transfer, that the transfer has not been completed in the manner prescribed therefor by the law for the time being in force, the transferor or any person claiming under him shall be debarred from enforcing against the transferee and persons

Blog # 28. Principles of Natural Justice In Indian Constitution

In The Constitution of India, nowhere the expression Natural Justice is used. However, golden thread of natural justice sagaciously passed through the body of Indian constitution. Preamble of the constitution includes the words, ‘Justice Social, Economic and political’ liberty of thought, belief, worship... And equality of status and of opportunity, which not only ensures  fairness in social and economical activities of the people but also acts as shield to individuals liberty against the arbitrary action which is the base for principles of Natural Justice. Apart from preamble Art 14 ensures equality before law and equal protection of law to the citizen of India. Art 14 which strike at the root of arbitrariness and Art 21 guarantees right to life and liberty which is the fundamental provision to protect liberty and ensure life with dignity. Art 22 guarantees natural justice and provision of fair hearing to the arrested person. Directive principles of state Policy specially Art 39-A tak