Loss suffered by assessee due to exchange rate fluctuation allowed deduction in earlier year constituted profit chargeable to tax under s. 41(1) in the assessment year relevant to the previous year in which the same was reimbursed by the Government.

The hire purchase agreement specifically provides that the hirer (the small scale entrepreneurs) will pay the additional rupees cost because of exchange variation. When the assessee has received reimbursement of the losses from the Government, that reimbursement constituted its income under s. 41. By whatever name it is called, either subsidy or bounty, the object being to reimburse the losses, it was the amount received in the assessee’s course of business and, therefore, taxable. Sec. 41(1) (of Income Tax Act, 1961) seeks to bring to tax, the sums which have been allowed as deductions, in respect of loss or expenditure or trading liability if in subsequent years events have so taken place that there was reimbursement of loss and expenditure in any manner whatsoever. In the present case, the assessee has received cash in respect of loss or expenditure incurred by it and was allowed to it as an allowance or deduction in the earlier years. The reimbursement has nothing to do with the trading liability because in the transaction, there was no trading liability incurred by the assessee Corporation vis-a-vis this amount was concerned. Under these circumstances, it cannot be said that the assessee Corporation incurred a trading liability with the German party and this amount has been rightly brought to tax under s. 41.— CIT vs. Ruby Rubber Works Ltd. (1989) 78 CTR (Ker)(FB) 75 : (1989) 178 ITR 181 (Ker)(FB) and CIT vs. Kanyakumari District Co-operative Spinning Mills Ltd. (2003) 182 CTR (Mad) 151 : (2003) 264 ITR 684 (Mad) distinguished; Polyflex (India) (P) Ltd. vs. CIT (2002) 177 CTR (SC) 93 : (2002) 257 ITR 343 (SC) relied on. (Paras 9 & 11)