Income Tax Appellate Tribunal - Delhi
Rollatainers Limited.,, New Delhi vs Department Of Income Tax on 25 November, 2008
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH 'F' DELHI
BEFORE SHRI A.D. JAIN AND SHRI K.G. BANSAL
ITA No. 3800(Del)/2009
Assessment year: 2006-07
Addl. Commissioner of Income M/s Rollatainers Limited,
Tax, Range-15, Vs. 13/6, Mathura Road, Faridabad.
New Delhi. (Haryana)
(Appellant) (Respondent)
Appellant by : Shri Rananjay Singh, CIT, DR
Respondent by: Shri Ajay Vohra, Advocate,
Shri Gaurav Jain, &
Ms. Janpriya Roop Rai, C.A.
ORDER
PER K.G. BANSAL : AM This appeal of the revenue emanates from the order of the CIT(Appeals)-XVIII, New Delhi, passed on 17.06.2009 in Appeal No. 0122/08-09, pertaining to assessment year 2006-07. The assessment order was framed by the Additional Commissioner of Income-tax, Range-15, New Delhi, on 29.12.2008, under the provision of section 143(3) of the Income-tax Act, 1961. The revenue has taken two substantive grounds in the appeal, which read as overleaf:- 2 ITA No. 3800(Del)/2009
1. "On the facts and in the circumstances of the case as well as in law, the ld. CIT(A) has erred in deleting the addition of Rs.
1,01,40,554/- and Rs. 1,07,00,000/- made by the AO u/s 41(1) on account of advance from customer and securities deposits respectively.
2. On the facts and in the circumstances of the case as well as in law, the ld. CIT(A) has erred in directing to reduce the amount of Rs. 9,41,86,658/- and Rs. 4,07,65,542/- from taxable income accepting the assessee's version that it was wrongly credited to P & L account without calling for a report from A.O as required under rule 46A of the IT Rules, nor the CIT(A) has himself verified the claims of the assessee. As per details on page 20 of the CIT(A)'s order, total amount credited to the income on account of waiver is only Rs. 10,89,07,907/- where as the CIT(A) has allowed a relief of Rs. 13,22,52,000/-, which establishes that the CIT(A) has not properly verified the issue."
2. In regard to ground no. 1, the ld. DR draws our attention towards paragraph 3 of the assessment order, in which it is mentioned that the assessee wrote off certain amounts and also wrote back certain amounts to the profit and loss account, resulting into a net credit balance of Rs. 1,01,40,554/-. This amount along and another credit amount of Rs. 1.07 crore, representing security deposits, have been brought to tax. For the sake of ready reference, this paragraph is reproduced below:-
"3. The assessee was requested to furnish the details of balances written off. The assessee filed the details of these balances written off. From the perusal of the details filed, it was 3 ITA No. 3800(Del)/2009 observed that the assessee has written off the un-reconciled balances of various party i.e., although the assessee has written off the outstanding debts in his books of account, it has not written off the advances claimed to be paid to the same parties which were still shown in the balance-sheet as advances received and security deposit. It is worthwhile to mention here that debts can be written off only after the netting of credit and debit in the party account. In other words, only the balance outstanding can be written off against a particular party by the assessee. This has not happened in the case of the assessee. The list of such type of parties are given below:-
Name of Parties Amount Security Advance
HLL Athal 1606585 350000 1096358
HLL Etah Dairy Unit 382306 100000
HLL Etah Tea Unit 1037962 24300
HLL Hide Road 821013 1120511
HLL Salman 7213439 3600000
HLL Tundla 6554190 1800000
HLL Dharwad 1304344 3878205
HLL Export 446170 171308
S. Narederkumar 839540 600000
Shubham Go, Dee 289521 500000
Tata Tea Whitecliff 362620 250000
Weikfeild Prod 255443 100000 200000
Dabur India Ltd. 166 2250000
Freshco. Intt 3494 350000
HLL Delhi 625 110000
Mayfair Exports 14003 788990
Almaty Tea Factory 5047 433279
(Rajasthan)
Kolhapur Zila Sehakari 20484 100000
Sun Tea Fze 935177 2217603
Madhu Gramoudyog Sewa 791483 100000
Sansthan
Madhu Gramoudyog Sewa 125000 200000
4 ITA No. 3800(Del)/2009
Sansthan (DEL AT)
Saga Food Products Ltd. 501064 200000
(Anna Nagar)
Saga Food Products Ltd.( 370843 300000
Kamla Garden)
As per Misc. Balance 238,80,519 10,700,000 10,140,554
Written-off
The assessee was requested to explain as to why these advances should not be added back to the income of the assessee under section 41(1) of the I.T. Act. The assessee could not give satisfactory reply. In the absence of any satisfactory reply, advances and security deposits of the above mentioned parties of Rs. 1,01,40,554/- and Rs. 1,07,00,000/- respectively are being added back u/s 41(1) of the I.T.Act."
2.1 Thereafter, he draws our attention towards the order of ld. CIT(Appeals). After hearing the assessee, the ld. CIT(Appeals) returned a finding that the AO committed mistakes in arriving at correct facts. The correct position is that - (i) the assessee has written off outstanding against sale of packing material, (ii) it received security deposits against machines given on lease, and (iii) advances were received against orders for sale of machines. In view thereof, it has been concluded that the AO wrongly added amounts representing advances received from customers and security deposits amounting to Rs. 69,45,064/- and Rs. 4,50,000/- respectively. Thereafter, he dealt with outstanding liability of security deposits amounting to Rs. 1.07 crore. 5 ITA No. 3800(Del)/2009 After considering the assessment order and the arguments of the assessee, it is concluded that this amount is not taxable as the liability subsists even in this year. For the sake of ready reference, his findings are reproduced below:-
"I have carefully considered the submissions of the appellant. No adverse finding has been recorded by the assessing officer in respect of transactions against amount of security deposits. On security of the major ledger accounts of the parties against whom security deposits had been received, it is observed that the assessee is continually in receipt of lease rent from most of the parties even during the relevant assessment year. To quote few, the assessee has received lease rent from following parties even as at the end of relevant financial year:
Weikfild Products Co. (I) Ltd.
Madhu Gramoudyog Sewa Sansthan Madhu Gramoudyog Sewa Sansthan Saga Food Products (Kamla Garden) Even where no rent has been received by the appellant during the relevant previous year, it cannot be said that the liability towards refund of such deposits had ceased as at the end of the relevant financial year specially considering that no entries for write back of such liability had been made in the books of account nor such entry could have been passed without taking back possession of such machines during the relevant previous year. Even assuming that no possession of machines can be taken by the appellant, no benefit accrues to the appellant as cost of such machines (being stock-in-trade/trading asset in the appellant's business) will also be required to be written off in the books of account/netted against amount of such security deposits.6 ITA No. 3800(Del)/2009
In view of the above, the addition made by the assessing officer on account of outstanding liabilities towards security deposits aggregating to Rs. 1,07,00,000/- is deleted."
2.2 The ld. DR heavily relies on the order of the AO.
2.3 In reply, the ld. counsel for the assessee draws our attention to pages 5 to 11 of the impugned order, which has already been summarized by us. He also draws our attention to pages 10 to 20 of the paper book, being the details of amounts written off, security deposits and advances. This has been done with a view to impress that there are errors in the factual findings given by the AO. He relies on the order of the ld. CIT(Appeals) that since liabilities remained to be paid and were shown as such in the books of account, the provisions of sections 28(iv) and 41(1) are not applicable in respect of the amount of Rs. 1.07 crore brought to tax by the AO.
3. We have considered the facts of the case and submissions made before us. The amount of Rs. 1.07 crore represents the security deposits received by the assessee in respect of lease of machines manufactured by it. The ld. CIT(Appeals) has fairly pointed out that these liabilities have not ceased to exist u/s 41(1). The assessee has 7 ITA No. 3800(Del)/2009 also not derived any benefit or perquisite in so far as these amounts are concerned from carrying on the business. Consequently, we do not find any error in his order, which requires any interference from us. 3.1 Thus, this ground is dismissed.
4. Ground no. 2 is in regard to waiver of loan amount and interest thereon by the banks and financial institutions after the assessee was declared to be a sick company by the Board for Industrial & Financial Reconstruction ('BIFR' for short) leading to re-structuring of its debt by Corporate Debt Restructuring Cell ('CDRC' for short). The assessee had credited the amount of loan and interest waived to the profit and loss account. However, in the course of hearing the claim was raised by way of a letter dated 25.11.2008 that the assessee inadvertently claimed Rs. 5,46,95,291/- but omitted to claim the balance amount of Rs. 4,07,65,542/-, which may now be granted. This claim was denied on the ground that the assessee has not filed any valid revised return u/s 139(5) claiming this amount.
8 ITA No. 3800(Del)/20094.1 Before the ld. CIT(Appeals), it has been agitated that the assessee had made a claim which was sought to be revised in the course of assessment proceedings. Thus, it is a case of revision of claim and not one of raising a fresh claim. This argument has been accepted by the ld. CIT(Appeals). Coming to the merits, his finding is that interest had not been claimed in any earlier year by the assessee in computation of income because of the provision contained in section 43B to the effect that the deduction shall be allowed on actual payment and not on accrual of the liability. Therefore, he granted further deduction of Rs. 4,07,65,542/-. His finding is contained on page 25, which is reproduced as under:-
"I have considered the submissions of the appellant as well as the relevant annexures of the Tax Audit Report for earlier years. The appellant has not claimed deduction of impugned interest expenditure in the earlier years by virtue of the provisions of section 43B of the Act and for that reason only waiver was made by lenders in the impugned assessment year. Since no deduction was claimed in the earlier years interest waived of cannot be treated as income in the relevant assessment year. In view of the above, the assessing officer is directed to reduce the amount of Rs. 4,07,65,542/- on account of interest waived of during the relevant previous year from taxable income, which was wrongly offered as income in the return of income."9 ITA No. 3800(Del)/2009
4.2 In regard to the amount of loan, his finding is that the amount has not been claimed in the past and, therefore, the same cannot be brought to tax u/s 41(1). His finding is contained on page 23, which is reproduced below:-
"In the decision of Delhi High Court in the case of CIT Vs. Phool Chand Jiwan Ram : 132 ITR 37 and CIT Vs. Tosha International Ltd.: 2008 TIOL 48 HC DEL IT, too, it has been endorsed that waiver of principal amount of loans cannot be deemed as income under section 41(1) of the Act as such waivers do not satisfy the test of that section. In view of the above, the assessing officer is directed to reduce the amount of Rs. 9,14,86,658/- from taxable income of the appellant which was wrongly credited to the profit & loss account."
4.3 Before us, the ld. DR submits that the question here is regarding taxability of the principal amount and interest waived by the banks and financial institutions on account of debt-restructuring of the assessee company. The assessee received these benefits in the course of carrying on the business and, therefore, these amounts are includible in the income of the assessee u/s 28(iv). In the alternative, since these amounts have been written back to profit and loss account, these are taxable u/s 41(1).
10 ITA No. 3800(Del)/20094.4 In reply, the ld. counsel submits that the writing off of the principal amount is a benefit in the capital field and not in the revenue field. In so far as writing off of the interest is concerned, the amount had not been claimed in any previous year because of the provision contained in section 43B. Thus, the condition that "where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee" has not been satisfied. Therefore, it is argued the ld. CIT(Appeals) has rightly granted relief in this matter. 4.5 Coming to the waiver of principal amount of loan is concerned, reliance is placed on the decision of Hon'ble Delhi High Court in the case of CIT Vs. Phool Chand Jiwan Ram (1981) 131 ITR 37. Reliance is also placed on the decision in the case of Velocient Technologies Ltd. Vs. ITO, (2009) 120 TTJ (Del) 659, CIT Vs. Tosha International Ltd. (2009) 176 Taxman 187 (Del), and CIT Vs. Jindal Equipments Leasing & Consultancy Services Ltd. in ITA No. 51 of 2009 and CM No. 15419 dated 23.12.2009. The cases of CIT Vs. T.V. Sundaram Iyengar & Sons Ltd. (1996) 222 ITR 344 (SC), Mahindra And Mahindra Ltd. Vs. CIT (2003) 261 ITR 501 (Bom.), Solid Containers 11 ITA No. 3800(Del)/2009 Ltd. Vs. Deputy CIT And Another (2009) 308 ITR 417 (Bom.) and Jay Engineering Work Ltd. Vs. CIT (2009) 311 ITR299 were also discussed.
5. We have considered the facts of the case and submissions made before us. The facts are that the assessee had raised loans for purchase of capital equipment and working capital from the banks and financial institutions in past. On its debt-restructuring term loan of Rs. 7,09,44,190/- and working capital or cash credit limit loan of Rs. 2,05,42,468/- were waived by them. The question is - whether, any of these two amounts are liable to be taxed u/s 41(1) or section 28(iv) of the Act?
5.1 In the case of Phool Chand Jiwan Ram (supra), the relevant facts are that the assessee had purchased goods in an earlier year from M/s Narsinghdass Banarsidass, the payment in respect of which was made by M/s Janaki Dass Banarsi Dass. The amount was subsequently waived. The case of the revenue was that the amount so paid should be taken towards purchase of cloth and, therefore, it represents a trading liability. The Hon'ble Court came to the conclusion that this conclusion was rather far-fetched. The cloth was purchased from M/s 12 ITA No. 3800(Del)/2009 Narsinghdass Banarsidass and the debt represented a trading debt. However, so far as M/s Janaki Dass Banarsi Dass is concerned, the payment made by it was not for the purpose of purchase of stock-in- trade. Therefore, it was held that the liability was not a trading liability and the amount waived could not be brought to tax in the hands of the assessee. For ready reference, the relevant portion of the judgment is reproduced below:-
"The point that is urged on behalf of the department before us, as was also urged before the Tribunal, was slightly different. It was pointed out that for the period from November 12, 1947, to October 30, 1948, the assessee-firm had purchased cloth worth Rs. 3,75,120/- from a firm in Bombay styled as M/s Narsinghdass Banarsidass. On the last day of the accounting year, i.e., October 30, 1948, this account had been debited with a sum of Rs. 1,80,000/- representing the amount paid to that firm by M/s Janki Dass Banarsi Dass on behalf of the assessee-firm. The argument is that to the extent the account of M/s Janki Dass Banarsi Dass reflects a credit of Rs. 1,80,000/- on account of this cash payment it should also be treated as a payment to M/s Janki Dass Banarsi Dass for the purchase of cloth from the Bombay firm and, therefore, is in effect representing a trading liability of the assessee-firm. We agree with the Tribunal that this construction of the transaction is far- fetched. The purchase of cloth between November 12, 1947, and October 30, 1948, was effected by the assessee from the Bombay firm. The debt owed by the assessee to the Bombay firm was a trading debt and that was no doubt allowed for the purpose of income-tax. However, so far as the account of M/s Janki Dass Banarsi Dass is concerned, the liability of the assessee to this party arose because the 13 ITA No. 3800(Del)/2009 above party had paid a sum of Rs. 1,80,000/- to the Bombay firm on the assessee's account. In other words, vis-à-vis the assessee and M/s Janki Dass Banarsi Dass, this was not a payment made for the purchase of stock-in-trade; it was a credit in respect of an amount borrowed by the assessee from M/s Janki Dass Banarsi Dass in order to discharge its liability to the Bombay firm. The sum of Rs. 1,80,000/- which is reflected in the account of M/s Janki Dass Banarsi Dass could not, therefore, be described as a liability on trading account. As rightly pointed out by the Tribunal, sec. 10(2A) enacts a statutory fiction. The operation of this fiction should be limited to the language of the section. It is only where the assessee has incurred a trading liability and this trading liability has been allowed in earlier years that s. 10(2A) is attracted on the occasion when the trading liability is either remitted or ceased to exist. In our opinion, the Tribunal was right in coming to the conclusion that the sum of Rs. 1,80,000/- did not represent a trading liability owed by the assessee to M/s Janki Dass Banarsi Dass, nor had this amount of liability been allowed as a deduction in earlier assessments."
5.2 In the case of T.V. Sundaram Iyengar & Sons Ltd. (supra), the assessee received deposits in the course of business which were treated as capital receipts. Some deposits were not claimed and some were not returned to the depositors. These were written off to the credit of the profit and loss account. The Hon'ble Court came to the conclusion that the transactions were in the course of business. Although, originally the receipts were capital in nature but this character changed when the amount was credited to profit and loss account. The assessee became 14 ITA No. 3800(Del)/2009 richer by this amount by treating it its own money. Therefore, the receipts were liable to be taxed u/s 28(iv).
5.3 In the case of Mahindra And Mahindra Ltd. (supra), the facts are somewhat more involved in as much as the purchase consideration of the tools was converted into loan, for which the assessee handed over three promissory notes. This company was taken over by another company, which decided to write off the loan as a part of take-over deal, possibly looking to the paucity of foreign exchange in India. One of the questions was whether the amount so written off was income of the assessee u/s 28(iv). The finding of the Hon'ble Court is couched with reservations, but it was finally held that the waiver did not constitute business income. For the sake of ready reference, the relevant portions of the judgment are reproduced below:-
"At the outset, we wish to clarify that this judgment is confined to the facts of this case. This is because the value of any benefit or perquisite arising from business, as contemplated by section 28(iv), could accrue in numerous ways. The income which can be taxed under section 28(iv) must not only be referable to a benefit or perquisite, but it must be arising from business. Secondly, section 28(iv) does not apply to benefit in cash or money (see CIT Vs. Alchemic Pvt. Ltd. [1981] 130 ITR 168 (Guj.)). Applying section 28(iv) to the facts of this case, one finds that on 15 ITA No. 3800(Del)/2009 June 18,1964, the assessee entered into an agreement to purchase toolings from KJC. In 1964-65, India was facing foreign exchange crunch. In the circumstances, around June 7, 1965, the Government of India and the Reserve Bank of India, in this case, approved the arrangement under which KJC (supplier of toolings) was permitted to advance a loan of $ 6,50,000 to the assessee for ten years bearing interest at the rate of 6 per cent, free from income-tax. KJC was later on taken over by AMC and as a part of take-over, AMC agreed to waive the principal amount of the loan and not the interest. In the circumstances, as stated in the above three undisputed facts, the assessee paid interest at
6 per cent per annum for ten years, being the contractual period. According to the Assessing Officer, the loan arose from business dealings. According to the Assessing Officer when AMC waived the loan, the credits became part of business income; that prior to such waiver, the credits represented liability. In the circumstances, the Assessing Officer has taxed such credits as business income.
However, in this connection, there are two important facts which are overlooked by the Assessing Officer. Firstly, the assessee has continued to pay interest at 6 per cent for a period of ten years on the loan amount. In this case, the Assessing Officer has not gone behind the loan agreement. In this case, the approval by the Government of India and the Reserve Bank of India are on record. In this case, the agreement for purchase of toolings was entered into, much prior to the approval of the loan arrangement given by the Reserve Bank of India. Therefore, the loan arrangement, in its entirety, was not obliterated by such waiver. Secondly, in this case we are concerned with the purchase consideration relating to capital asset. The toolings were in the nature of dies. The assessee was a manufacturer of heavy vehicles and jeeps. It required these dies for expansion. Therefore, the import was that of plant and machinery. The consideration paid was for such import. In the circumstances, section 28(iv) is not attracted. Lastly, we may mention that, in this case, AMC agreed to forego the principal amount of loan as a part of take-over arrangement with KJC to which the assessee was not a party. The 16 ITA No. 3800(Del)/2009 waiver of the principal amount was unexpected. In the circumstances, one fails to understand how such waiver would constitute business income."
5.4 Coming to the case of Solid Containers Ltd. (supra), in which the case of T.V. Sundaram Iyengar & Sons Ltd. was referred to, and the case of Mahindra And Mahindra Ltd. was distinguished, it has been mentioned that in the case of Mahindra And Mahindra Ltd., there was a clear finding that the assessee continued to pay interest @ 6% for a period of 10 years and the agreement for purchase of tools was entered into much prior to approval of loan arrangement by the Reserve Bank of India. Therefore, the loan agreement was not entirely obliterated by the waiver. Further, in that case purchase consideration related to a capital asset. In the present case, the loan was taken for trading activity and thus the principle enunciated in the case of T.V. Sundaram Iyengar & Sons Ltd. would be applicable. Similar view was also taken by Hon'ble Madras High Court in the case of Aries Advertising Pvt. Ltd. (2002) 255 ITR 510, in which it was held that because of trading operations, the assessee became richer by the amount which had been transferred to profit & loss account.
17 ITA No. 3800(Del)/20095.5 Coming to the case of Velocient Technologies Ltd. (supra), the facts of the case are that the assessee forfeited a sum of Rs. 10.65 crore, claimed to be a loan from a company called SFT and credited the amount to the reserve and surplus account. That company entered into a joint venture agreement with the assessee under which equity and the aforesaid loan of Rs. 10.65 crore were contributed. The tenure of the loan was five years and no interest was payable for initial period of five years. Thereafter, interest @ 6% was payable. The Tribunal came to the conclusion that the amount was not received in the course of business operation but the same was received even before any business of software development had started. Therefore, it could not be said that the benefit accrued out of ordinary trading transactions. Thus, the matter was decided against the revenue. 5.6 Coming to the case of Tosha International Ltd. (supra), the facts are that the assessee was engaged in manufacturing of black and white picture tubes. It ran into huge losses and ultimately became a sick company and was so registered with the BIFR. Under one time settlement scheme, the banks and financial institutions required the 18 ITA No. 3800(Del)/2009 assessee to pay 60% of the amount towards the principal and waived the entire interest amount. The question before the court was-whether, waiver of the principal amount of about Rs. 10.48 crore, credited to the capital reserve account, constituted income? The court came to the conclusion that the amount is not covered by the provision contained in section 41(1). It was also mentioned that the principles enunciated in the case of Mahindra And Mahindra Ltd. are fully applicable. 5.7 Coming to the case of Jindal Equipment Leasing & Consultancy Services Ltd. (supra), it was mentioned that the income which can be taxed u/s 28(iv) must not only be referable to a benefit or perquisite, it must be arising from business. Consequently, it was held that the amount of about Rs. 1.47 crore written off to the credit of profit and loss account in respect of Jindal Steel & Power Ltd., did not constitute income u/s 28(iv).
5.8 In the case of Jay Engineering Work Ltd. (supra), unclaimed balances of Rs. 1,16,240/- were written off to the credit of P & L account. The Hon'ble Court mentioned that the liability is contractual and not statutory in nature. After considering the case of TVS Iyengar & Sons 19 ITA No. 3800(Del)/2009 Ltd., CIT Vs. Sugauli Sugar Works (P) Ltd. (1999) 236 ITR 518 (SC) and others, it came to the conclusion that the amount represented income as settled in the case of TVS Iyengar & Sons Ltd.
6. We may firstly take up the matter regarding taxability of the loan amount waived by the banks and the financial institutions. The details of the loan have been furnished in two parts, the first being the term- loan and the second being cash-credit limit. The term-loans are as under:-
S.No. Name of Institution Amount (Rs.)
1 Life Insurance Corporation of India 8,925,261.00
2 Unit Trust of India 11,786,334.00
3 General Insurance Company of India 581,955.00
4 The Oriental Insurance Company Ltd. 581,955.00
5 United India Insurance Company Ltd. 581,955.00
6 Federal Bank Limited 2,672,043.00
7 IDBI New Loan 33,852,171.00
8 Canara Bank TL 5,292,000.00
9 WCTL SBI 7,779,126.00
10 WCTL SBM 13,583,693.00
11 ICICI LOAN 7,425,000.00
12 Unit Trust of India 1,455,365.00
Total: 70,944,190.00
20 ITA No. 3800(Del)/2009
6.1 The loan by way of cash-credit limit, written off by the banks
are as under:-
"S.No. Name of Bank Amount(Rs.) Amount (Rs.)
(i) State Bank of India 13,215,818.00
(ii) State Bank of Mysore 18,426,756.00
(iii) Canara Bank 28,893,320.00
Total: 60,535,894.00
Less: Waiver of interest debited during
the year 20,457,235.00
Less: Waiver of interest pertaining to
previous years 19,536,191.00 39,993,426.00
Waiver of Principal amount 20,542,468.00"
6.2 In so far as term-loans are concerned, it is clear that these were
taken for purchase of capital assets from time to time. The facts of the case of Velocient Technologies Ltd. (supra) are somewhat different as in that case the assessee had received equity contribution and loan from a foreign collaborator for setting up joint venture agreement. The same was received even before the business was started. Therefore, the ratio of that case is not applicable to the facts of this case, as in this case loans have been received from time to time. The facts of the case of Tosha International Ltd., decided by the jurisdictional High Court, are quite similar to the facts of this case. In this case, that assessee ran 21 ITA No. 3800(Del)/2009 into huge losses and was declared to be a sick company. Under one- time settlement scheme, the banks required the assessee to pay 60% of the amount due towards principal and waived the entire interest payment. It was the case of the revenue that the assessee had derived benefit by way of depreciation. The ld. CIT(A) deleted the addition, which was upheld by the Tribunal by making the following observations:-
"As per our considered view, for attracting the provisions of section 41(1), the first requisite condition to be satisfied is that the assessee should have got deduction or benefit of allowance in respect of loss, expenditure or trading liability incurred by it and subsequently during any previous year, the assessee should have received any amount in respect of such loss, expenditure or trading liability by way of remission or cessation thereof. The remission would become income only if the assessee has claimed deduction in respect of expenditure or trading liability. In Mahindra & Mahindra Ltd. Vs. CIT [ 2003] 261 ITR 501, Hon'ble High Court of Bombay held that no allowance or deduction having been allowed in respect of loan taken by assessee for purchase of capital assets, section 41(1) was not attracted to remission of principal amount of loan. In the instant case, the assessee has not got any deduction on account of acquisition of capital assets as the same has been reflected in the balance sheet and not in the P & L account, and also the remission of the principal amount of loan so obtained from the bank and financial institution had not been claimed as expenditure or trading liability in any of the earlier previous year. So far as waiver of interest is concerned, the assessee-company itself has treated the same either as income or has not claimed the 22 ITA No. 3800(Del)/2009 same as expenditure in the computation of income filed before the lower authorities."
6.3 The Hon'ble High Court upheld this order by mentioning that the decision was based on correct appreciation of law and the principles enunciated in Mahindra & Mahindra Ltd were fully applicable. From this decision, it is clear that the provision of section 41(1) is not applicable in respect of a loan. The Tribunal deleted the addition by applying the provision contained in the aforesaid section. However, the provision contained in section 28(iv) was not considered by the Tribunal. This provision was considered in the case of Mahindra & Mahindra Ltd. The relevant portion of the judgment in that case has already been reproduced by us. It has also been mentioned that that decision is couched in a cautious language and the facts are somewhat more complicated. Therefore, we will not like to base our decision on that judgment particularly because the Hon'ble Court itself mentioned that this judgment is confined to the facts of this case. Coming to the case of aforesaid Jindal Equipment, the facts are that the assessee reflected a loan of Rs. 6,80,31,189/- payable to JSPL. Out of this, JSPL wrote off a sum of Rs. 1,46,53,065/- in its books. The AO treated this amount as the income of the assessee on the premise that liability to this extent 23 ITA No. 3800(Del)/2009 ceased to exist and the assessee stood to gain this amount. The amount was assessed u/s 41(1). The CIT(Appeals) also considered the provision of section 28(i) and upheld the addition. The Tribunal deleted the addition by stating that the amount was never claimed as deduction in the past and, therefore, the provision contained in section 41(1) was not applicable. The Hon'ble High Court considered the aforesaid provision and the provisions contained in section 28(iv) also. The finding of the court is that the benefit must not arise in cash and the benefit or perquisite must arise in the course of business. On the facts, it has been held that looking to nature of business, the amount constituted capital receipt. On analyzing the facts of our case in so far as term-loans are concerned, we find that those were raised for purchase of machinery and plant with stipulation to pay interest. These monies did not come in possession of the assessee on account of any trading transaction. In other words, the receipts were capital in nature, being loan payable over a period of time along with interest. Therefore, it cannot be said that on writing off of the loans, any benefit or perquisite arises to the assessee in the revenue field. If any benefit etc. arises, it is in the capital field as held in the case of Jindal Equipments Leasing & Consultancy Services Ltd.
24 ITA No. 3800(Del)/2009
7. The position in case of loans written off in cash-credit account is somewhat different as the loans were received for carrying out day-to-day operations of the assessee. The decision of Hon'ble Bombay High Court in the case of Solid Containers Ltd. supports the revenue. In that case, the AO had made addition on the ground that the credit balance written back to profit & loss account is a benefit directly arising out of business activities. This finding was rejected by the Tribunal. The detailed facts are that the assessee had taken a loan of Rs. 6,86,071/- from M/s P.S.Jain Motors, which was written back to profit & loss account on the basis of consent terms arrived at between them. It was claimed that the receipt is capital in nature. The Hon'ble Court considered the decision in the case of T.V. Sundaram Iyengar & Sons Ltd., Mahindra & Mahindra Ltd. and found that no support could be derived by the assessee from the latter decision. It was mentioned that the money was received by the assessee in the course of carrying on business. At the time of receipt it was treated as a deposit and, thus, the receipt was of capital nature. However, by efflux of time, the money became assessee's own money. The money was taken to profit and loss account. Therefore, the character of the receipt changed when the amount 25 ITA No. 3800(Del)/2009 was credited to profit and loss account as there was no explanation as to why somebody else's money was taken to profit and loss account. The Hon'ble Court noted that similar view was taken in the case of Aries Advertising Pvt. Ltd. by Hon'ble Madras High Court. Coming to the facts of this case, the assessee obtained cash credit limits from State Bank of India, State Bank of Mysore and Canara Bank for its business operations. These monies were used for daily operations. The principal amount to the extent of about Rs 2.05 crore has now been written off to the credit of profit and loss account. If we apply the ratio of the decision of Hon'ble Bombay and Madras High Court, the character of receipts changes when the amounts are credited to profit and loss account. This benefit arises in the business operations of the assessee as the monies have been borrowed for day-to-day operations. However, the case of the ld. counsel is that the decision of Hon'ble Delhi High Court is different from the decision of Bombay & Madras High Courts in this matter. In this connection, the case of Phool Chand Jiwan Ram has been cited. In that case, the creditor had paid the liability of the assessee arising on account of purchase of cloth. This liability was written off. The decision of Hon'ble Delhi High Court is that the liability was not for purchase of cloth but it was an amount 26 ITA No. 3800(Del)/2009 borrowed from M/s Janaki Dass Banarsi Dass. This liability was not a trading liability as the two transactions were separate and independent. It may be mentioned in the first place that the decision was rendered under the old Act and much prior to rendering the decision in the case of T.V. Sundram Iyengar & Sons Ltd. To our mind, the aforesaid decision of the Hon'ble Supreme Court unsettles some of the earlier decisions to the effect that the character of a receipt is once and for all decided at the time it was obtained. It has been held that the character may change subsequently when the amount is credited to profit and loss account, more so when it is a benefit received in the course of carrying on the business. Therefore, the facts of the case, to our mind, come nearer to the facts of the case of T.V. Sundaram Iyengar & Sons Ltd. rather than Phool Chand Jiwan Ram. We have already mentioned that the decision in the case of Mahindra & Mahindra Ltd. is confined to peculiar facts of that case. In the case of Velocient Technologies Ltd., the benefit was received at a time when business was not even commenced. From the decision in the case of Tosha International Ltd., it is not clear whether any amount of loan was outstanding in respect of cash-credit account also. In that case the amount was directly credited to capital reserve account and not to profit and loss account. 27 ITA No. 3800(Del)/2009 In regard to term-loan, we have already granted relief to the assessee notwithstanding the argument of the revenue that depreciation was allowed in past on the machinery and plant. The facts of this case are also distinguishable. In the case of Jindal Equipments Leasing & Consultancy Services Ltd., the background facts leading to loan of about Rs. 6.8 crore are not available. Only a part of the loan was written off by the creditor in its books of account. Thus, it has not been demonstrated before us that in that case the loan was taken in the course of business for carrying out business operations. Thus, we finally find that the facts of the case are closer to the facts of the case of Solid Containers Ltd. and there is no decision to the contrary from the jurisdictional High Court as contended. On the other hand, the decision in the case of Jay Engineering Works (supra), decided by the jurisdictional High Courts, supports the case of the revenue. Further, the benefit is in the revenue field as the monies have been borrowed for day-to-day operations and not for purchases of machinery, thus, the loans are for the circulating capital and not the fixed capital. The liability is also contractual in nature. Therefore, respectfully following these decisions, it is held that the amount of Rs. 2,05,42,468/- written off by the banks in cash-credit accounts constitute the income of the assessee. 28 ITA No. 3800(Del)/2009
8. Coming to the issue of taxability of interest waived by the banks and financial institutions, there is a clear finding by the ld. CIT(Appeals) that these amounts were not claimed in the past by the assessee by way of deduction. Therefore, the requirement of section 41(1) to the effect that "where a deduction has been made in the assessment of any year in respect of expenditure incurred by the assessee" has not been satisfied. The amount was otherwise debited to profit and loss account earlier and has been credited to profit and loss account now. Thus, there is no benefit to the assessee as the debits and the credit get netted to a zero sum. Therefore, the provision contained in section 28(iv) is also not applicable. Thus, the issue has to be decided in favour of the assessee and against the revenue.
9. We find that there may be some error in computation of this amount, as mentioned in the grounds of appeal. The ld. CIT(Appeals) has furnished the net effect of the waiver of loan and interest on page 20 of his order, according to which balances amounting to Rs. 11,53,72,340/- have been written off, but miscellaneous income account has been credited with Rs. 10,89,07,907/-. The ld. CIT(Appeals) has granted the 29 ITA No. 3800(Del)/2009 relief amounting to Rs. 13,22,52,000/-, an amount different from the amount credited to profit and loss account as well as the amount of balances written off. Therefore, the AO may ascertain the exact amount written off by the assessee by way of term-loan, cash-credit limit and the interest. Thereafter, he may give effect to this order as mentioned above.
10. In the result, the appeal is partly allowed.
This order was pronounced in the open court on 11th of June, 2010.
Sd/- sd/-
(A.D. Jain) (K.G.Bansal)
Judicial Member Accountant Member
Date of order: 11th June, 2010.
SP Satia
Copy of the order forwarded to:-
1. M/s Rollatainers Ltd., Faridabad.
2. Additional CIT, Range-15, New Delhi.
3. CIT(A)
4. CIT
5. The DR, ITAT, New Delhi. Assistant Registrar.