More on write-back of Loans and Section 41(1)

Dear Pramod Ji,

That's one way to look at it. I had thought along these lines too,but couldn't bring myself to conclude that a working capital loanwritten back won't be hit by Section 41. I understand we made thefull payment to the supplier of goods. But did my liability onaccount of purchase of those goods cease? No, it did not. When Imade out a cheque to the supplier of goods (or shares, which is thestock-in-trade in your case), what I effectively did was replace onetrading liability with another trading liability. So after thesupplier's account got squared up, the entry in the books thatremained was Purchases debit; Bank credit. The liability to thesupplier of goods was my primary liability and the liability to thebank is my secondary liability. Till the time I do not pay to thebank there has been no outflow of any resources controlled by me.But I am able to charge Purchases to my revenue account and claimthose as expenditure—the accrual method of accounting permits me todo that.What you're saying is since the primary liability to the supplier ofgoods is discharged, there's no question now of its cessation orremission. So Section 41 can't be brought into action in such acase. But if we really go by the spirit of Section 41—allowingexpenditure only to the extent there's been an outflow of cash orother resources and not allowing expenditure to the extent it wasa "freebie"—it's difficult to draw the conclusion that once theprimary liability to the supplier of goods is discharged, Section 41ceases to be applicable.Section 41(1) speaks of "obtaining any benefit, whether in cash orin any other manner whatsoever" in respect of a loss or expenditurealready claimed as a deduction in an earlier year. Isn't the waiverof a trade loan tantamount to "obtaining any benefit"? The bankmerely acted as our agent when it honored the cheque we drew upon it—it stepped in to clear my dues to the supplier on the understandingthat I shall have that debit adjusted through credit by way ofdeposit of sale proceeds with the bank. When I didn't do that andgot myself absolved of my liability to pay to the bank, how can Isay that I haven't "obtained any benefit" in respect of theexpenditure that the bank paid on my behalf?When you say "never a claim for loan is allowed", you're looking atonly the credit aspect of the transaction. How do we claima "deduction" for a loan anyway? Obviously it's the debit aspect ofthe transaction that we have to look into. The bank certainly is asource for funds, but it's difficult to ignore the clear nexus thissource of finance has with the payments made on account of purchasesMay be you're right; may be I am wrong. But as I understand Section41(1), the above is what I feel. Of course if I was practicallyhandling this case, I would argue the case before the AO exactly inthe manner that you do here! And your argument that we can'tinterpret the words "trading liability" u/s 41(1) in so wildlyliberal a manner as to go after the ultimate source of funds itselfdoes have a lot of weight. Admittedly, this issue doesn't concern mein the same manner it concerns you.Regarding the unilateral write back of the liability, I don't thinkany case law would bail us out any longer after the insertion ofExplanation 1 to Section 41(1). A person writes a liability backafter he's decided not to pay it. Now when it comes to paying tax onit, he can't contend that although the debt he owed has become time-barred, the creditor can still recover the amount from him and theliability therefore hasn't ceased. Unilateral write-back wouldinvoke Section 41(1), the debt being time-barred notwithstanding.I had brought up Section 56 just to make the discussion academicallyinteresting. It won't apply to cases where the sums of money havebeen received before 01.09.2004.Thanks,CA Sanjeev Bedi--- In

ICAI_CIRC_MEERUT_CA@yahoogroups.com, PRAMOD GOENKA wrote:>>> Dear Sanjeev bhai>> Thanks a lot for the detailed reply. I wish to clarify and discussa few points.>> 1. It is true that the broker used the loans to purchase shares onhis own account. However, never a claim for a loan is allowed, whatis allowed is a claim for purchases. The source of funds is, to me,totally irrelevant. Had the purchase price not been paid finally,there would have been a case under section 41. But that is not thecase here. The purchase price has been paid to the opposite partiesand it is not being wirtten back. What is being written back is theloan that was taken to purchase the shares. Interest has been paidand claimed on these loans. Probably in the case cited by you, sincethe purchase was confined to fixed assets, the assessee had astronger case and it did not argue and distinguish between thepayment of purchase price and repayment of loan, since in any event,no deduction was taken even for the purchases made. In my case, Ifeel, we can plead that the deduction has never been claimed for theloan, what has been claimed is the purchase price, which is notbeing remitted. Please think over this aspect once again.>> 2. In case you have any case law to support the contention thattime-barring, and consequent unilateral write back is not aremission as contemplated by section 41 of IT Act, please pass it on.>> 3. Section 56, in its preset form, probably applies to moniesreceived after 2004. In this case, all the monies were actuallyreceived before 2001. Please confirm in that case if the sectionwill apply.>> Thanks and regards;>> CA. Pramod Goenka