1. This is an appeal of the revenue for the assessment year 1977-78.
The revenue is aggrieved with the order of the Commissiener (Appeals) deleting an amount of Rs. 3,77,230 from the total income of the assessee-firm treating it as non-taxable income. The assessee is taxed in the status of URF and its accounting period relevant to the assessment year ended on 31-3-1977. As found by the ITO, the firm came into existence by a deed dated 7-4-1975 and the business of the firm was of financing. The firm invited deposits exceeding Rs. 19 lakhs on or about 31-3-1976, i.e., the end of the preceding accounting year. It advanced the moneys to the relatives or associates of the partners and also for the personal purposes of the partners. In the accounting year beginning from 1-4-1976 under consideration it was noticed that 115 depositors or creditors accepted lesser amounts than the amounts deposited and gave a remission aggregating in all to Rs. 3,77,230. The ITO in para 7 of his order also mentions that the remission was a result of final settlement between the depositors and the assessee. The ITO held that the money so forgone represents nothing but benefit obtained by the firm from carrying on the business, more particularly so because the business of the firm is of financing. He ultimately held that the remission of debt by certain creditors constituted advantage to the firm and that advantage had direct nexus with the business of the firm and the amount of remission constituted income of the assessee and he relied upon Section 28(iv) of the Income-tax Act, 1961 ('the Act') and the ratio of the Delhi High Court decision in the case of K.S. Malik v. CIT  124 ITR 522.
2. The assessee went in appeal and the Commissioner (Appeals) held that the benefit derived by the assessee by the remission was not taxable under Section 28(iv) and it was undoubtedly on capital account and a debt forgone could not become a credit item in the trading account. He further observed that in the case of money-lender also remission of debt by creditors was always on capital account and he referred to an observation in the Delhi High Court decision to the effect that remission of a debt by a creditor would not result in creation of income in the hands of the debtor. The revenue is in appeal against the order of the Commissioner (Appeals).
The learned departmental representative referred to the relevant paras in the assessment order and vehemently contended that Section 28(iv) applied in this case and the Delhi High Court in K.S. Malik's case (supra) has considered similar language used in Section 2(6C)(iii) of the Indian Income-tax Act, 1922 (now Section 2(24)(iv) of the Income-tax Act, 1961) as is used in Section 28(iv) of the Act. He invited attention to the observations in para 2 of the Delhi High Court judgment at page 526 about the manner in which the language of Section 28(iv) is to be interpreted and taking clue from the reasoning of the Delhi High Court, he argued that the assessee got a pecuniary benefit when creditors remitted the amount and that benefit arose from their extinguishing the assessee's liability and in a sense extinguishment of liability owed by the assessee to its depositors was a profit. It was his further contention that this being so, there was no benefit in terms of money derived by the assessee and that a liability relating to money was not money itself. In this way, he tried to argue that his case was not affected by the Gujarat High Court ruling in CIT v.Alchemic (P.) Ltd.  130 ITR 168. He went on to say that the benefit in this case had a direct nexus with the assessee's business and it sprang from it. It was also pointed out that the benefit derived by the assessee was legal and authorised as the depositors as a result of settlement accepted part payment and wrote off the balance and the assessee could plead the fact of settlement as its defence if the depositors any time asked for the return of money written off and, therefore, the arrangement was one which was consciously or voluntarily arrived at.
3. On the other hand, Shri K.C. Patel, the learned counsel of the assessee, contended that the assessment year 1977-78 was the second year of the existence of the assessee partnership and the business of financing carried on by it stopped-after the first year and no business was carried on in the accounting period 1-4-1976 to 31-3-1977 relevant to assessment year 1977-78. He invited attention to the finding of the Commissioner (Appeals) in para 3 of his order that the business was in weak condition and was stopped from 31-3-1977. He also pointed out that the ITO had noted the assessee's admission that there was no business activity in the accounting period in para 12 of his order and acting on that admission, disallowed expenditure claimed under various heads and, thereafter, he computed the income in para 13 after disallowing such expenditure. He pointed out that the assessee has allowed this finding of the ITO about no business activity to become final and the undisputed case is that there was no business activity in the accounting year. In view of this, it was Shri Patel's contention that Section 28(iv) on the facts of the case had no application as no business was carried on by the assessee in the assessment year 1977-78.
The second line of reasoning was that Section 28(iv) would not apply where the remissions received by the assessee are in the form of cash or money and this argument was based on the Gujarat High Court decision in the case of Alchemic (P.) Ltd. (supra). He submitted that this was a case of composition of money deposits between depositors and an insolvent debtor who obtained a settlement whereby 70 per cent of the debt was agreed to be written off and 30 per cent was paid in cash. He invited attention to the accounts of depositors on pages 5 to 12 of his paper book and stated that the amounts paid and remitted were mentioned in cash and, therefore, the transaction related to cash or money. He heavily relied on the observation of the Gujarat High Court approving the decision of the Tribunal at page 173 to the effect that Section 28(iv) would not apply when the amount received is cash or is considered in terms of money. Shri Patel submitted that this was at least a case where amounts remitted were clearly considered in terms of money.
4. We have carefully considered the submissions of both the sides and gone through the two authorities ; one is the authority of the Gujarat High Court which is of a binding character. In our opinion, both the contentions of Shri K.C. Patel are well founded and these go to support the relief given by the Commissioner (Appeals).
5. We may now quote the two relevant provisions of Section 2(24)(va) and Section 28(iv) of the Act which read as under : (yd) the value of any benefit or perquisite taxable under Clause (iv) of Section 28 ; (iv) the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession.
Section 2(24)(va) relies on Section 28(iv). It is true that the language in Section 28(iv) is similar in some part to that used in Section 2(24)(iv) corresponding to Section 2(6C)(iii) of the 1922 Act which came to be considered by the Delhi High Court in the case of K.S.Malik (supra). But first we will deal with the different language used in Section 28(iv) which has a connection with the first contention of Shri K.C. Patel. Section 28(iv) brings to tax the value of any benefit or perquisite, whether convertible into money or not, arising from business. It will be relevant to find out whether there was any business carried on by the assessee" during the accounting period as pointed out by Shri Patel. It is undisputed position now that no business activity was carried on by the assessee in the accounting period. In support of this submission, he has relied upon the observations in the orders of the ITO and the Commissioner (Appeals).
On account of this factual position, it becomes clear that Section 28(iv) will have no applicability and hence the conclusion of the Commissioner (Appeals) about deleting the addition of Rs. 3,77,230 is sustainable.
6. We may as well deal with the second contention of Shri Patel which is, in our opinion, also supported by the decision of the Gujarat High Court in the case of Alchemic (P.) Ltd. (supra). The Gujarat High Court has clearly held that Section 28(iv) would not apply when the amount received is cash or is considered in terms of money. The assessee undisputedly was carrying on business of financing and was receiving deposits from various parties. The deposits were undisputedly in terms of cash or money and the part remission of amount is also described in terms of money and the balance amount is further paid in cash. This kind of transaction, in our view, is in respect of an amount considered in terms of money in the least. The Delhi High Court in the case of K.S. Malik (supra), in our opinion, will not support the revenue in view of the Gujarat High Court authority.
7. We may also like to mention one argument about Section 28(iv) being not applicable in respect of amounts received in cash or considered in terms of money. The existence of the words 'the value' shows that the benefit or perquisite referred to in Section 28(iv) is not measurable in terms of cash or capable of consideration in terms of money. The use of those words is thus in harmony with the further words 'whether convertible into money or not'. It is noticed from the Delhi High Court decision itself that the Madras High Court also took the view that money transactions would not be covered by provisions drafted in the same fashion as Section 28(iv) of the Act.
8. For the reasons given above, we uphold the conclusion of the Commissioner (Appeals) and dismiss the appeal of the revenue.