Income Tax Appellate Tribunal - Delhi
Logitronics Pvt. Ltd.,, New Delhi vs Department Of Income Tax
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH `D': NEW DELHI
BEFORE SHRI C.L.SETHI, JM & SHRI SHAMIM YAHYA, AM
I.T. A. No.4716/Del of 2009
Assessment Year: 2006-07
Dy. Commr. of Income-tax, M/s Logitronics P. Ltd.,
Circle 4(1), New Delhi. vs 1745, Hardayal Street, Cheera
Khana, Nai Sarak, Delhi.
Appellant Respondent
Appellant by: Smt. Kavita Bhatnagar
Respondent by: Shri Anil Kumar Sujanti
ORDER
PER C.L. SETHI, JM:
In this appeal field by the revenue against the order dated 23.10.09 passed by the learned CIT(A) in the matter on an assessment made u/s 143(3) of the Income-tax Act, 1961("the Act") for the Asstt. Year 2006-07, a solitary ground raised by the revenue is as under:
"On the facts and in the circumstances of the case and in law, the ld. CIT(A) has erred in deleting the addition of Rs.2,91,42,213/- made by the AO treating the sum waived by the bank on final settlement as revenue receipts as against the capital receipts accounted for by the assessee."2
2. Relevant facts giving rise to the issue in hand are, in brief, stated as under:
3. The assessee filed its return of income on 21.1.2006 declaring total income at Rs.1,52,99,616/-. The case was selected for scrutiny, and, accordingly, notices u/s 143(2) and 142(1) of the Act were issued, which were complied with by the assessee. Various details required by the AO were furnished during the course of assessment proceedings. In the course of assessment proceedings, it was noticed by the AO that assessee has appended a note to the accounts in Schedule XV, Part B, which reads as under:
" The company has sold/agreed to sell during the year its entire fixed assets comprising, leasehold land, building and electric installation therein and has realized a sum of Rs.1.85 crores from sale and advance and has paid the said sum to State bank of India to settle the entire outstanding principal amount of Rs.4,76,42,213/- under the one time settlement with the said bank. The company has created the capital reserve of Rs.2,91,42,213/- for the balance outstanding principal amount not to be paid by the company under the settlement with the said bank. The company has written back outstanding provision for bank interest of Rs.1,90,42,295/- in the books now not liable to be paid by the company under the settlement with the said bank to profit and loss account and shown under Provision for Bank interest written back respectively. The company has further created "Capital Reserve" of Rs.1,60,55,232.95 out of the 3 amount realized in excess of original cost on sale of leasehold land."
During the course of assessment proceedings, the assessee's representative explained before the AO that one time settlement with State Bank of India by paying Rs.1.85 crores against the entire outstanding principal amount of Rs.4,76,92,213/- was made, and the company has written back the outstanding provision for bank interest amounting to Rs.1,90,42,295/- to the Profit and loss account and offered the same as income. However, the principal amount of loan waived by the Bank to the extent of Rs.2,91,42,213/- was not taken to the Profit & Loss Account but was taken directly to the balance sheet by creating a capital reserve. The principal outstanding loan amount of Rs.4,76,42,213/- was settled for Rs.1.85 crores, and the balance outstanding principal amount of Rs.2,91,42,212/- has been written off by the bank after accepting the payment of Rs.1.85 crores against total outstanding principal amount of Rs.4,76,42,213/-. It was claimed by the assessee that this principal amount written off by the bank does not fall within the ambit of "cessation of liabilities" as contemplated u/s 41 of the Act and, therefore, it was not chargeable to tax in the hands of the assessee. In support thereof, the assessee relied upon the decision of Hon'ble High Court of Delhi in the case of CIT vs Tosha International Ltd. (2009) 176 4 Taxman 187 (Del), and the decision of Hon'ble Bombay High Court in the case of Mahindra & Mahindra Ltd. vs CIT, 261 ITR 501 (Bom).
4. The submissions of the assessee were considered and examined by the AO. It was stated by the AO that the basic line of argument put forward by the assessee was that Section 41(1) of the Act covers only such liabilities, which have been allowed or deducted in earlier years as expenditure or trading liability, and when such a liability is written off, it is chargeable to tax as income u/s 41(1) of the Act. The assessee's argument was that since no allowance or deduction was made in the assessment for any year in respect of principal amount of loan obtained by the assessee from Bank, the principal amount of loan written off by the bank is not covered by Section 41(1) of the Act, the same is thus not liable to be included as income in the hands of the assessee u/s 41(1) of the Act. This line of the argument advanced by the learned counsel for the assessee before the AO has been accepted by the AO, who observed that this version of the learned counsel is quite acceptable in the light of the decision of Hon'ble Delhi High Curt in the case of CIT vs Tosha International Ltd. (supra). However, the AO proceeded further to state that the matter does not end there but the next question to be decided is as to whether the above principal amount written off by the Bank is otherwise assessable as income in the hands of the 5 assessee under the provisions of Income-tax Act. In this respect, the AO examined the definition of "income" given in Section 2(24) of the Act and hold that in case any benefit arises to the assessee by way of waiver of loan taken by the assessee, the same shall be treated to be the income chargeable to tax under the Act notwithstanding the fact that the item may not be covered by the provisions of Section 41(1) of the Act. The AO further hold that since this loan amount was related to the business of the assessee, the same would be assessable under the head "business". He, therefore, brought the said amount of Rs.2,91,42,213/- to tax as income includible in the assessee's total income.
5. Being aggrieved, the assessee preferred an appeal before the learned CIT(A).
6. Before the learned CIT(A), the assessee contended that the assessee company availed loan facility from State Bank of India, which was categorized as NPA by the said Bank during the year 2000, and the Bank then referred the matter to Debts Recovery Tribunal. On the approval of compromise offer of the company, the assessee paid Rs.1.85 crores to State Bank of India to settle the entire outstanding principal amount of Rs.4,76,42,213/- under the one time settlement and consequently, assessee credited to the capital reserve the sum of Rs.2,91,42,213/-, being the balance 6 outstanding principal amount of loan waived by the Bank during the current year. The assessee further submitted that such waiver of the principle amount of loan is not in the nature of remission or cessation of trading liability and, therefore, the said waiver does not have the character of income within the meaning of Section 41(1) of the Act. The decisions of Hon'ble Delhi High Court in the case of CIT vs Tosha International Ltd. (supra) and the decision of Hon'ble Bombay High Court in the case of Mahindra & Mahindra Ltd. vs CIT (supra) were relied upon. It was further pointed out that the Hon'ble High Court of Delhi in the case of CIT vs Tosha International Ltd. (supra), has noted the facts recorded by the Tribunal in its order, and then hold that the principle enunciated in Mahindra & Mahindra Ltd. vs CIT (supra) are fully applicable to that case. The assessee invited the attention to the findings and observations recorded by the Tribunal in para 4 of its order in the case of Tosha International Ltd. (supra). It was further contended by the assessee that the principal amount of loan waived is neither taxable u/s 41(1) nor u/s 28(iv) or 2(24) of the Act.
7. After considering the AO's order and the assessee's submissions, the CIT(A) decided this issue in favour of the assessee by holding that the provisions of Section 2(24) or Section 28(i) or 28(iv) and Section 41(1) are not applicable to the present case. The CIT(A) has applied the decision of 7 Hon'ble Madras High Court in the case of CIT vs P. Ganesa Chettiar (1979) 133 ITR 103(Mad) as well as the decision of Hon'ble Delhi High Court in the case of CIT vs Tosha International Ltd. (supra) and decision of Hon'ble Bombay High Court in the case of Mahindra & Mahindra Ltd. vs CIT, (supra). For ready reference, the CIT(A)'s order is extracted here as under:
"3.1 I have carefully considered the written and oral submissions made on behalf of the appellant, the findings of the AO and the facts on record. I have also gone through the case laws - CIT vs P. Ganesa Chettiar (1979) 133 ITR 103(Mad), Mahindra & Mahindra Ltd. vs CIT, and the decision of Hon'ble Delhi High Court dated 23.9.2008 in the case of CIT vs Tosha International Ltd. relied upon by the appellant during the appellate proceedings before the undersigned. It has been gathered that the decision of the jurisdictional High Court of Delhi in the case of Tosha International Ltd. (supra) has been reported in 176 Taxman 187 (Del). The relevant portion of the said judgment in the case of Tosha International Ltd.(supra) is extracted below for ready reference:
"Para 2,3,4 of the judgment of Hon'ble Delhi High Court in the case of Tosha International Ltd. (supra) has been reproduced here by the CIT(A)."
(supplied by us) 3.2 After having considered the facts of the case of the appellant, I am of the view that ratio decidendi of the above cited judgments is applicable to identical facts of the case of the appellant. Under the circumstances stated above, I 8 am of the considered view that the provisions of Section 2(24), Section 28(i) or 28(iv) and Section 41(1) are not applicable to the instant case.
Accordingly, it is held that the Assessing Officer was not justified in making the addition of Rs.2,91,42,213/- being waiver of principal amount of loan which was credited to capital reserve and the addition made by the Assessing Officer is not sustainable in law. Therefore, it is deleted. As a result, ground No. 1 & 2 are allowed."
8. Being aggrieved, the revenue is in appeal before us.
9. The learned DR has submitted that in so far as the question as to whether the principal amount of bank loan waived by the bank is includible as income under the provisions of Section 41(1) of the Act, the AO has accepted the assessee's contention that this item is not covered by the provisions of Section 41(1) of the Act inasmuch as it was neither allowed or deducted as expenses or trading liability in earlier years. Therefore, the dispute in this case is not with regard to the applicability of Section 41 of the Act. He further submitted that in this case, the assessee has obtained bank loan to be utilized in its business, and subsequently, the bank loan to the extent of Rs.2,91,42,212/- has been waived by the bank implying thereby that the assessee has become richer by this amount in the course of carrying on its business and, therefore, in the light of the decision of Hon'ble apex court in the case of CIT vs T.V. Sundaram Iyengar & Sons Ltd, 220 ITR 344 (SC), this amount is liable to be included as income of the assessee 9 notwithstanding the fact that this amount was not includible in the income at the time when it was received.
10. The learned counsel for the assessee, on the other hand, supported the order of CIT(A) to contend that in the light of the decisions of jurisdictional High Court of Delhi in the case of CIT vs Tosha International ltd. (supra) and Hon'ble Bombay High Court in the case of Mahindra & Mahindra Ltd. vs CIT (supra), the principal amount of loan waived by the bank cannot be treated to be income of the assessee either within the meaning of Section 41(1) of the Act or otherwise within the meaning of Section 28(iv) or Section 28(i) or Section 2(24) of the Act. He further submitted that the principal amount of loan waived by the bank is also not liable to be taxed in the light of the decision of Hon'ble Madras High Court in the case of CIT vs. P. Ganesa Chettiar (supra). The learned counsel for the assessee also relied upon the decision of Hon'ble Delhi High Court in the case of CIT vs Phool Chand Jivan Ram 131 ITR 37. He further submitted that the decisions of Hon'ble Supreme Court in the case of T.V. Sundaram Iyengar & Sons (supra) is also not applicable to the present case inasmuch as the transaction between the assessee and the bank was not in the nature of any trading transaction, but the loan was obtained for the purpose of business de- hors trading transaction carried out by the assessee. He, therefore, submitted 10 that since the transaction between the assessee and the bank is not connected or related to any trading activity of the business of the assessee, the principal laid down by the Hon'ble Supreme Court in the case of T.V. Sundaram Iyengar & Sons (supra) cannot be applied to the present case so as to treat the principal amount of Rs.2,91,42,213/- waived by the bank as income of the assessee even in common sense of the term.
11. In the course of hearing, the learned counsel for the assessee was invited to clarify about the nature and the purpose for which the loan was taken by the assessee from the bank. In respect thereto, the assessee submitted before us a copy of settlement letter dated 9.2.2005 issued by the bank whereby the principal amount of loan was settled on compromise at Rs.1.85 crores. He further invited our attention to the audit report for the year ended on 31st March, 2006 along with notes to the accounts. In the course of hearing, attention of the learned counsel for the assessee as well as of the DR was also invited to the recent decision of Hon'ble High Court of Bombay in the case of Solid Containers Ltd. vs DCIT (2009) 178 Taxman 192 (Bom) : (2009) 308 ITR 417 (Bom) where the decision of Hon'ble Supreme Court in the case of CIT vs T.V. Sundaram Iyengar & Sons (supra), decision of Hon'ble Bombay High Court in the case of Mahindra & Mahindra vs CIT (supra) and the decision of Hon'ble Madras High Court in 11 the case of CIT vs Aries Advertising P. Ltd. (2002) 255 ITR 510 were referred to and considered. At this stage, the learned counsel for the assessee reiterated his contention that inasmuch as the transaction of loan in question is not connected or related to, or, was not made in the course of, any trading activity of the assessee, the decision of Hon'ble Supreme Court in the case of T.V. Sundaram Iyengar & Sons (supra) and the decision of High Court of Bombay in the case of Solid Containers Ltd. (supra) would not be applicable to the present case.
12. We have considered the rival contentions of both the parties. We have also gone through the orders of authorities below and deliberated upon the various decisions cited by the learned authorized representatives for both the parties.
13. In the present case, it is not in dispute that the assessee had taken or obtained loan from the State Bank of India, and later, as a result of compromise between the assessee and State Bank of India, the outstanding liability of Rs.1,90,42,295/- towards interest payable on loan amount was waived, and since the assessee had obtained a deduction on account of interest payable on loan amount in the assessment of earlier years, the assessee credited the said amount of interest of Rs.1,90,42,295/- to the profit and loss account and also included the same in the total income shown by 12 the assessee in the return of income filed by it. Thus, there is no dispute with regard to the waiver of interest includible in the total income of the assessee for the year under consideration. However, a dispute has arisen between the department and the assessee with regard to waiver of the principal amount to the extent of Rs.2,91,42,213/-. The entire outstanding principal amount of Rs.4,76,42,213/- was settled at Rs.1.85 crores giving a benefit of Rs.2,91,42,213/- to the assessee by way of waiver. Now, the question arises whether the waiver of the principal amount to the extent of Rs.2,91,42,213/-, which has been credited to the capital reserve account, is an income chargeable to tax under the Act. According to the AO, the assessee had derived benefit by way of waiver of loan in the course of carrying on business activity and, therefore, the amount to the extent it is waived by the bank, is includible in the assessee's hands as Business income. From the order of the AO, it is clear that no dispute has been raised by the AO with regard to the contention of the assessee that the remission of the principal amount of loan is not hit by Section 41(1) of the Act. In other words, no dispute has been raised by the AO against the assessee's claim that the principal amount waived by the bank is not to be treated as income of the assessee within the meaning of Section 41(1) of the Act. In this situation, the question now arises as to whether the waiver of the principal 13 amount to the extent of Rs.2,91,42,213/- can be treated as business income in view of the principle laid down by the Hon'ble Supreme Court in the case of T.V. Sundaram Iyengar & Sons (supra). In order to decide the question as to whether the decision of Hon'ble Supreme Court in the case of T.V. Sundaram Iyengar & Sons (supra) is applicable to the present case, we deem it necessary on our part to dwell upon the facts of the present case, particularly to find out the nature and purpose for which the loan was taken and utilized.
14. We have perused the audit report along with auditors' notes to the accounts. In annexure referred to in para 3 of the auditor's report the auditor has stated under Item No.(xi) as under:
"In our opinion and accounting to the information and explanations given by the company, the company has defaulted in repayment of following dues of bank upto 31.3.1998 and thereafter no provision of interest is made on the said dues and has settled the said dues by making payment of Rs.1.85 crore as per one time settlement arrived at with the bank during the year Period Amount of Default Remarks 1998 to 2005 Rs.2,79,42,213.00 for C/C SBI 1998 to 2005 Rs.1,19,00,000.00 for CTL SBI 1998 to 2005 Rs. 78,00,000.00 for WCIL SBI 1998 to 2005 Rs.1,90,42,295.00 for interest"
In item No.16 of Annexure, the auditor has stated as under: 14
"In our opinion, the term loans outstanding at the beginning of the year have been applied for the purpose for which loans were raised."
In the schedule of secured loans, the nature and purpose of loan and the security placed against loan are described as under:
Secured loans State Bank of India, Noida (secured against the hypothecation of finished goods, semi finished goods, raw material book debts, receivable claims, securities rights by way of first charge, mortgage of building and plant and machinery by way of second charge and personal guarantee of Directors):
a) In cash credit account 27942213.00
b) C.T.L. State Bank of India 11900000.00
c) W.C.T.L. State Bank of India 7800000.00
47642213.00
___________"
In the notes to the accounts (Schedule XV), under item B, it has been stated as under:
"(B) The company has sold/agreed to sell during the year its entire fixed assets comprising leasehold land, building and electric installation 15 therein and has realized a sum ofRs.1.85 crores from sale and advance and has paid the said sum to State Bank of India to settle the entire outstanding principal amount of Rs.47642213.00 under the one time settlement with the said bank. The company has created the Capital Reserve of Rs.29142213/-
for the balance outstanding principal amount not to be paid by the company under the settlement with the said bank. The company has written back outstanding provision for bank interest of Rs.19042295/- in the books now not liable to be paid by the company under the settlement with the said bank to profit and loss account and shown under provision for bank interest written back respectively. The company has further created capital reserve of Rs.16055282.00 out of the amount realized in excess of original cost on sale of leasehold land."
From the aforesaid details and notes furnished by the assessee and its auditor, it is seen that total principal amount of loan was outstanding in the following accounts :-
a) In cash credit account 27942213.00
b) C.T.L. State Bank of India 11900000.00
c) W.C.T.L. State Bank of India 7800000.00
In these details mentioned above, it is also stated that the loan amount was utilized or applied for the purpose for which loans were raised and the loan was secured against hypothecation of finished goods and semi finished 16 goods, raw materials, book debts, receivable claims, securities rights and other rights by way of first charge.
15. At this stage, we proceed to first consider the facts of the case and the context in which the decision in the case of CIT vs Tosha International Ltd. (supra), Mahindra & Mahindra Ltd. vs CIT (supra), Solid Containers Ltd. vs DCIT (supra) came to be rendered.
16. In the case of CIT vs Tosha International Ltd. (supra), the facts noted by the Tribunal and by the Hon'ble High Court are that the assessee was engaged in the manufacturing of black and white picture tubes. The assessee company ran into huge losses and ultimately, it became a sick company and registered under BIFR. Under the one time settlement scheme, the financial institutions and banks required the assessee to pay 60% of the amount due towards principal and waived the entire interest payment. The only objection raised by the AO was with regard to the principal amount to the extent of Rs.10,47,93,857/-, which the assessee had directly credited to the capital reserve account. According to the AO, since the loan ceased to exist, it amounted to cessation of liability and, therefore, it has to be treated as an income. The AO further observed that the assessee had borrowed amount from financial institutions against working capital and against term loans, and these borrowed monies were utilized for the working capital or 17 indirectly the benefit would have translated into the trading results of the company. According to the AO, the assessee definitely gained in the trading activity on the basis of these loans, and, secondly, the assessee when bought assets consisting of plant and machinery, buildings and other assets, it derived benefit of depreciation. The AO observed that it clearly indicates that the assessee has been deriving benefit on the basis of either depreciation or utilizing the working capital in earlier years. The CIT(A) deleted the addition by observing that the remission of the principal amount of loan did not amount to income u/s 41(1) nor u/s 28(iv) nor u/s 2(24) of the Act. On further appeal by the revenue, the Tribunal upheld the order of learned CIT(A). The relevant para 4 of the Tribunal's order runs as under:
"Aggrieved by the above order of the Commissioner (Appeals), the revenue is in further appeal before us. We have considered the rival contentions carefully, gone through the orders of the authorities below and also deliberated on the case laws cited by learned Authorized Representative in support of the provisions that waiver of principal amount of loan is not income. We found from the record that assessee being a sick company, not in a position to repay the loan, the financial institution and banks have waived the interest and a part of principal amount. So far as waiver of interest is concerned, the assessee either has not claimed the expenditure of interest which was waived or has shown the same as income. However, in respect of the 18 waiver of principal amount, the assessee has directly credited the same to capital reserve account. The assessing officer has no dispute with regard to waiver of interest, however, he has treated the waiver of principal amount as income of the assessee, after discussing the provisions of Section 41(1)/28(iv)/2(24) of the Income-tax Act, 1961. 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 (Bom) 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 asset as the same has been reflected in the balance sheet and not in the Profit & Loss 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 same as expenditure in the computation of income filed before the lower authorities. The provision of 19 Section 28(iv) applies to the value of benefit or perquisites whether convertible into money or not, arising from business, but does not apply for benefit received in cash or money; as held in Mahindra & Mahindra Ltd. (supra), the waiver of principal amount of loan also does not come under the definition of income as contained under section 2(24) of the Act. The definition of income as contained u/s 2(24) speaks as to what are the items to be included under the definition of income. It includes profit and gains, dividend, voluntary contribution received by a trust, value of any perquisite or profit in lieu of salary, special allowance or benefit granted to the assessee to meet his personal expenses, benefit or perquisite of directors, any such chargeable under clauses (iiia) (iiib) (iiic) (iv) and (v) of Section 28, capital gains u/s 45, profit and gains of business in accordance with section 44, winning from lotteries, races, etc., and any sum received by the assessee from his employee as contribution to any provident fund so set up. Waiver of principal amount of tax by no stretch of imagination can be treated as income within the meaning of section 2(24) of the Act."
17. The Hon'ble High Court has observed in para 3 of their order that Tribunal had examined the case in detail and particularly from the standpoint of the provisions of Section 41(1) of the Act. The Hon'ble High Court then reproduced the Tribunal's observations and decision with regard to the applicability of Section 41(1) of the Act to that case in para 3 of their order as under:-
20
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 (Bom) 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 asset as the same has been reflected in the balance sheet and not in the Profit & Loss 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 same as expenditure in the computation of income filed before the lower authorities.
Thereafter, their Lordships in para 4 of their order held that they did not see any reason to interfere with the conclusions of the Tribunal as the same have been rendered on a correct appreciation of law, and the principles enunciated 21 in Mahindra & Mahidnra Ltd. vs CIT (2003) 261 ITR 501 (Bom) are fully applicable and they saw no reason to take a different view.
18. On reading the above-referred Tribunal's order, we find that the Tribunal has held that 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 Tribunal further observed that the remission would become income only if the assessee has claimed deduction in respect of expenditure or trading liability. Then, the Hon'ble Tribunal referred to the decision of Hon'ble Bombay High Court in the case of Mahindra & Mahindra Ltd. vs CIT (supra) where Hon'ble Bombay High Court held that any disallowance or deduction having been allowed in respect of loan taken by the assessee for purchase of capital asset, Section 41(1) was not attracted to remission of principal amount of loan. In that case, the Tribunal further found that the assessee did not get any deduction on account of acquisition of capital asset as the same was reflected in the balance sheet and not in the profit and loss account, and, also the remission of the principal amount of loan so obtained 22 from the bank and financial institution had not been claimed as expenditure or trading liability in any of the earlier previous years. The Tribunal further observed that provisions of Section 28(iv) would apply to the value of benefit or perquisites whether convertible into money or not, arising from business but does not apply for benefit received in cash or money as so held in Mahindra & Mahidnra Ltd. vs CIT (supra). The Tribunal further held that the waiver of principal amount of loan also does not come under the definition of 'income' as contained in Section 2(24) of the Act, and as such waiver of principal amount by no stretch of imagination can be treated as income within the meaning of Section 2(24) of the Act. However, it seems that while deciding the issue, the Hon'ble High Court has only considered the issue from the standpoint of Section 41(1) of the Act as would be clear from the order itself. From the decision of Tribunal as well as of Hon'ble High Court in the case of CIT vs Tosha International Ltd. (supra), it is clear that the principle laid down by Hon'ble Supreme Court in the case of CIT vs T.V. Sundaram Iyengar & Sons (supra) was not referred to nor considered in that case. In other words, the issue involved in that case was not considered from the standpoint of the principle laid down by the Hon'ble Supreme Court in the case of CIT vs T.V. Sundaram Iyengar (supra). In so far as the assessee's contention raised in the instant case before us that Section 41(1) is 23 not applicable to the present case, we find that the AO himself has accepted this proposition and has not made the addition by invoking the provisions of Section 41(1) of the Act. With regard to the applicability of Section 28(iv) of the Act, there is no dispute as to the proposition that provisions of Section 28(iv) applies to the value of benefit or perquisites whether convertible into money or not, arising from business, but does not apply to any benefit received in cash or money as was held by Hon'ble Bombay High Court in the case of Mahindra & Mahindra Ltd. vs. CIT (supra) approving the interpretation in this regard given by the Gujarat High Court in the case of CIT vs Alchemic Pvt. Ltd. (1981) 130 ITR 168 (Gujarat), which has been approved in CIT vs New India Industries Ltd. (1993) 201 ITR 208 (Guj):
(1993) 203 ITR 933 (Guj) : (1994) 207 ITR 1010 (Guj). Therefore, we hold that the present case is also not covered by the provisions of Section 28(iv) of the Act. In the case of CIT vs. Tosha International ltd. (supra), the Tribunal further held that waiver of principal amount of loan also does not come under the definition of income as contained u/s 2(24) of the Act as the definition of income as contained u/s 2(24) speaks as to what are the items to be included under the definition of income, which includes profit and gains, dividend, voluntary contribution received by a trust, value of any perquisite or benefit in lieu of salary or specifically granted to the assessee to meet his 24 personal expenses, benefit or perquisite or any sum chargeable under clauses (iiia), (iiib), (iiic), (iv) and (v) of Section 28, capital gains chargeable u/s 45, profit and gains of business in accordance with Section 44, winning from lotteries, races etc., and any sum received by the assessee from his employer as contribution to any provident fund set up. However, the Tribunal in that case has not considered the issue from the standpoint of the principle laid down by the Hon'ble Supreme Court in the case of CIT vs T.V. Sundaram Iyengar & Sons (supra).
19. While deciding the issue, the Tribunal in the case of CIT vs Tosha International ltd. (supra) has recorded a finding of fact that in that case the assessee has not got any deduction on account of acquisition of capital assets as the same was reflected in the balance sheet and not in the profit and loss account, and also the remission of principal amount of loan so obtained from the bank was not claimed as an expenditure or trading liability in any of the earlier previous years. It is thus seen that the Tribunal in that case proceeded to decide the case in the light of the fact that the assessee had acquired capital assets and has applied the decision of Hon'ble Bombay High Court in the case of Mahindra & Mahindra Ltd. vs. CIT (supra). Therefore, the decision of Tribunal in the case of Tosha International Ltd. vs CIT as upheld 25 by the Hon'ble High Court of Delhi would apply to the cases where the loan obtained by the assessee is utilized for acquiring capital assets.
20. Now, we shall come to the decision of the Hon'ble Bombay High Court in the case of Mahindra & Mahindra Ltd. vs CIT (supra). In that case, the assessee was engaged in the business of manufacturing jeeps. In June, 1964, the assessee entered into an agreement with an American company, which agreed to sell to the assessee dies, welding equipments and die models, tooling for production of special type of jeeps by the assessee in India. The price of the tooling was agreed at US $6,50,000 c.i.f. Bombay. Since the assessee could not secure foreign exchange, the American company agreed to provide a loan of US $ 6,50,000/- repayable after 10 years in installment with interest @ 6% free of income-tax. Consequently, the assessee received loan for securing the tooling from the American company. Subsequently, the American company was taken over in 1996 and in turn thereof, it had agreed to waive the principal amount of loan advanced to the assessee. The AO held that on the waiver of the loan, the credits represented income. He, therefore, held that the amount was taxable u/s 28 of the Act. The CIT(A) held that the same was taxable as income u/s 28(iv) of the Act as such benefit by way of waiver of loan was obtained in the course of business and the monetary value of that benefit was income. 26 According to the Tribunal, Section 28(iv) was not applicable because benefit of waiver was not received by the assessee in cash. The Tribunal further took the view that even Section 41(1) of the Act was not applicable because there was no cessation of any trading liability. On reference, the Hon'ble High Court held that there were two important facts, which had been overlooked by the AO. One of such important fact referred to by the High Court was that the purchase consideration was related to capital asset. The tooling were in the nature of dies. The assessee was manufacturer of heavy vehicles and jeeps. It required these dies for expansions. Therefore, the import was that of plant and machinery. The consideration paid was for such import of plant and machinery, i.e., capital assets. In these circumstances, it was held that Section 28(iv) was not attracted. The Hon'ble High Court further found that the principal amount of loan had been foregone as a part of take over arrangement, to which the assessee was not a party, and the waiver of principal amount was unexpected, and in the circumstances, such waiver would not constitute business income. The Hon'ble High Court further held that in order to apply Section 41(1), the assessee should have obtained a deduction in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee. The assessee had not obtained such allowance or deduction in respect of 27 expenditure or trading liability. In the circumstances, it was held that Section 41(1) of the Act was not applicable. The Hon'ble High Court further hold that even assuming that the assessee had got deduction of allowance, Section 41(1) was not applicable because such deduction was not in respect of loss, expenditure or trading liability. It was lastly held that the tooling constitutes capital asset and not stock-in-trade. From the said decision, it is evident that the loan was obtained for payment of consideration for import of plant and machinery, which constitute capital asset and not stock-in-trade. In other words, the loan obtained by the assessee was utilized for the acquisition of capital asset and not for acquiring or purchasing any stock-in-trade or not for the purpose of any trading activity. In the light of these facts, the Hon'ble Bombay High Court held that the waiver of the principal amount of loan is neither an income u/s 28(iv) nor u/s 41(1) of the Act.
21. In the light of the above decision of Hon'ble Bombay High Court in the case of Mahindra & Mahindra Ltd. vs CIT (supra), it is clear that in the case where capital assets are acquired by obtaining a loan, and subsequently, the loan amount is waived by the other party, the principal amount of loan waived by the other party cannot be brought to tax u/s 28(iv) of the Act or u/s 41(1) of the Act.
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22. The decision of Hon'ble Supreme Court in the case of CIT vs. T.V. Sundaram Iyengar & Sons (supra) and Hon'ble Bombay High Court in the case of Mahindra & Mahindra Ltd. vs CIT (supra) and Hon'ble Madras High Court in the case of CIT vs Aries Advertising P. Ltd. (supra) had been referred to by the Hon'ble High Court of Bombay in the case of Solid Containers Ltd. vs DCIT (supra). In that case, the assessee had taken a loan of Rs.6,86,071/- for business purposes, which was written back, as a result of consent terms arrived at between M/s P.C. Jain Motors, on the one hand, and the assessee, on the other. Assessee claimed that the said loan was the capital receipt and has not been claimed as deduction from the taxable income as expenses and, therefore, did not come u/s 41(1) of the Act. The credit balance written back was treated by the AO to be the income of the assessee u/s 28 of the Act in view of the fact that the credit balance was directly arising out of the business activity. The assessee, relying upon the judgment of Hon'ble Bombay High Court in the case of Mahindra & Mahindra Ltd. (supra) contended that in relation to the transaction in question, Section 28(iv) was not attracted and even provisions of Section 41(1) of the Act could not be applied to treat the same as business income of the assessee liable to tax.
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23. On an appeal, CIT(A) upheld the AO's action. On further appeal before the Tribunal, the Tribunal sustained the view taken by the Commissioner relying upon the judgment of the Hon'ble Supreme Court in the case of CIT vs T.V. Sundaram Iyengar & Sons Ltd. (supra). The Tribunal observed that Hon'ble Supreme Court in the case of CIT vs T.V. Sundaram Iyengar held that if the amount is received in the course of trading transactions, even though it is not taxable in the year of receipt, as being of capital character, the amount changes its character when the amount becomes assessee's own money because of limitation or by any other statutory or contractual right. Where the assessee received deposits in the course of trading transactions, the amount of such credit balances, which were barred by limitation and which were returned back by the assessee to the profit and loss account, were to be assessed as the assessee's income. On further appeal before the Hon'ble High Court, the Hon'ble High Court held that the assessee can hardly derive any advantage from the case of Mahindra & Mahindra Ltd. vs CIT (supra) as in that case, a clear finding was recorded that the purchase consideration was related to capital assets; the toolings were in the nature of dies and the assessee was a manufacturer of heavy vehicles; the import was that of plant and machinery and the waiver could not constitute business. The Hon'ble High Court further observed that 30 the facts of the case in the case of Solid Containers Ltd. (supra) were entirely different inasmuch as it was a loan taken for trading activity and ultimately, upon waiver, the amount was retained in the business by the assessee. Thus, the Hon'ble Bombay High Court in that case of Solid Containers Ltd. vs DCIT (supra) held that the principle stated by the Supreme Court in the case of T.V. Sundaram Iyengar & Sons (supra) would be squarely applicable to the facts of that case and, therefore, the amount, which was initially did not fall within the scope of the provisions rendering it liable to tax, subsequently have become the assessee's income being part of the trading of the assessee. The Hon'ble Bombay High Court in this case has also observed that a similar view was also taken by the Bench of Hon'ble Madras High Court in the case of CIT vs Aries Advertising P. Ltd. (supra) where the Court took the view that the assessee because of trading operation became richer by the amount, which had been transferred and/or retained in the profit and loss account of the assessee. The following observation of Hon'ble Apex Court in T.V. Sundaram Iyengar & Sons Ltd.'s case has been noted by Hon'ble Bombay High Court in the case of Solid Containers ltd. vs DCIT (Bom) :
"22. The principle laid down by Atkinson J. applies in full force to the facts of this case. If a common sense view of the matter is taken, the assessee because of the trading operation had become richer by the amount, which is transferred 31 to its profit and loss account. The moneys had arisen out of ordinary trading transactions. Although the amounts received originally were not of income nature, the amounts remained with the assessee for a long period unclaimed by the trade parties. By lapse of time, the claim of deposit became time barred and the amount attained a totally different quality. It became a definite trade surplus, Atkinson J. pointed out that in Morley's case (supra) no trading asset was created. Mere change of method of book-keeping had taken place, But, where a new asset came into being automatically by operation of law, common sense demanded that the amount should be entered in the profit and loss account for the year and be treated as taxable income. In other words, the principle appears to be that if an amount is received in course of a trading transaction, even though it is not taxable in the year of receipt as being of revenue character, the amount changes its character when the amount becomes if assesee's own money because of limitation or by any other statutory or contractual right. When such a thing happens, common sense demands that the amount should be treated as income of the assessee.
23. In the present case, the money was received by the assessee in course of carrying on his business. Although it was treated as deposit and was of capital nature, at eh point of time, it was received by efflux of time the money has become the assessee's own money. What remains after adjustment of the deposits had not been claimed by the customers. The claims of the customers have become barred by limitation. The assessee itself has treated the money as its own money and taken the amount to its profit and loss account. There is no explanation from the assessee why the surplus money was taken to its profit and loss account even if it was somebody else's money. In fact, as 32 Atkinson J. pointed out that what the assessee did was the common sense way of dealing with the amounts."
The operative portion of decision in the case of Solid Containers Ltd. vs DCIT (supra) is as under:
"3. The present appellant can hardly drive any advantage from the case of Mahindra & Mahindra Ltd. (upra). As in that case, a clear finding was recorded that the assessee continued to pay interest at the rate of 6 per cent for a period of 10 years and the agreement for purchase of toolings was entered into much prior to the approval of loan arrangement given by the Reserve Bank of India. Therefore, the loan agreement, in its entirely, was not obliterated by such waiver. Secondly, the purchase consideration related to capital assets. The toolings were in the nature of dies and the assessee was a manufacturer of heavy vehicles. The import was that of plant and machinery and the waiver could not constitute business. The facts of the present case are entirely different inasmuch as it was a loan taken for trading activity and ultimately, upon waiver the amount was retained in business by the assessee. Thus, the principle stated by the Supreme Court in the case of T.V. Sundaram Iyengar & Sons ltd. (supra) would be squarely applicable to the facts of the present case. The amount which initially did not fall within the scope of the provisions rendering it liable to tax subsequently have become the assessee's income being part of the trading of the assessee.
Similar view was also taken by a Bench of Madras High Court in the case of CIT vs Aries Advertising (P) Ltd. (2002) 255 ITR 510. The court took the view that the assessee because of 33 trading operation became richer by the amount which had been transferred and or retained in the Profit and Loss Account of the assessee."
24. In the case of CIT vs Aries Advertising P. Ltd., 255 ITR 510 (Mad), an amount of Rs.1,77,886/-, being the balance due to Printers; Block Makers and Souvenir publishers by the erstwhile firm of an outstanding more than three years had been transferred to general reserve since these amounts had remained unclaimed for a long period of time. It was held by the Hon'ble High Court that in the case of unclaimed balance written back, if a common sense view of the matter is taken, the assessee, because of the trading operation, becomes richer by the amount, which it has transferred to its general reserve account. The money had arisen out of ordinary trading transactions. Although the amounts received originally were not of income nature, but subsequently, it becomes the assessee's income when the amount was written off in the accounts. In this case, the Hon'ble Madras High Court has also observed that once the assessee transferred any amount to the general reserve, it treated the same as the profit. In this connection, reference was made to the decision of Hon'ble apex court in the case of Wazir Sultan Tobacco Ltd. (1981) 132 ITR 559, where it has been held that a reserve is appropriation of profits.
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25. In the light of the discussion made above, and following the decision of Hon'ble Bombay High Court in the case of Solid Containers Ltd. vs DCIT (supra) where the principle enunciated by the Hon'ble Supreme Court in the case of CIT vs T.V. Sundaram Iyengar & Sons Ltd. (supra) has been applied, we held that the principal amount of loan, which is taken for the purpose of business or trading activity, on its waiver by the creditor, would constitute income chargeable to tax under the Act. However, if the loan is utilized for the purpose of acquiring any capital asset, the same, on its waiver, would not constitute income chargeable to tax as held by Hon'ble Bombay High Court in the case of Mahindra & Mahindra Ltd. vs CIT (supra) and Hon'ble Delhi High Court in the case of CIT vs. Tosha International Ltd. (supra) either under section 41(1) or 28(iv) or 2(24) of the Act.
26. Further, the assessee can hardly drive any advantage from the decisions in the case of (i) CIT vs. P. Ganesha Chettiar, 133 ITR 103 (Mad) and (ii) CIT vs Phool chand Jiwan Ram, 131 ITR 37 (Del) inasmuch as these two decisions have been rendered in altogether a different context. In the case of CIT vs. Phool Chand Jiwan Ram (supra), the issue was decided from the standpoint of Section 10(2A) of Indian Income-tax Act, 1999 (Section 41(1) of Income-tax Act, 1961) in respect of remission of trading liability of 35 a firm credited to partner's account. In the case of CIT vs. P. Ganesha Chettiar (supra), the issue was with regard to the waiver of amount standing outstanding in the partner's account on the dissolution of firm. Moreover, the decision of Hon'ble Supreme Court in the case of CIT vs T.V. Sundaram Iyengar Ltd. (supra) was not available at that relevant point of time. Thus, the above two referred decisions are of no assistance to the assessee's case.
27. Having said so, we now revert back to the facts of the present case. In the instant case, the assessee has not brought any material or evidences on record to show that the loan taken by the assessee from bank in Cash Credit account, CTL account and WCTL account was utilized for the purpose of acquiring any capital asset. On the other hand, the material available on record including the Notes to the Accounts indicates that the assessee has obtained the loan or credit facility by way of hypothecation of finished goods, semi finished goods, raw material, book debts, receivable claims, securities, and rights by way of first charge, which indicates that the assessee have obtained the loan facility for its business activity or trading operations. However, this aspect of the matter, whether the whole of the loan amount has been utilized either for the purpose of acquiring capital asset or for the purpose of business activity or trading activity, has not been looked into or 36 examined by the authorities below nor the assessee has established that the loan amount was utilized only for the purpose of acquiring capital asset. The assessee has merely relied upon the decision of Hon'ble Delhi High Court in the case of CIT vs. Tosha International Ltd. (supra), and the decision of Hon'ble Bombay High Court in the case of Mahindra & Mahidnra Ltd. vs CIT (supra) without giving details about the purpose for which the loan amount was utilized. The learned CIT(A) has decided the matter by relying upon the aforesaid two decisions i.e. decision of Delhi High Court in the case of Tosha International Ltd. (supra) and decision of Bombay High Court in the case of Mahindra & Mahindra Ltd. vs CIT (supra) besides the decision of Hon'ble Madras High Court in the case of CIT vs P. Ganesha Chettiar (1979) 133 ITR 103(Mad), without examining and appreciating the nature and purpose for which the loan was taken. We, therefore, restore this issue back to the file of the AO for his fresh adjudication with a direction to the assessee to furnish all the details and particulars of loan, and the purpose for which the loan taken from Bank was utilized. All these information are within the control and specific knowledge of the assessee and, therefore, it would be the duty of the assessee to prove and establish that the amount of loan taken from the Bank was utilized for the purpose of acquiring capital assets in case the assessee wants to have the 37 benefit of decision of Hon'ble Delhi High Court in the case of Tosha International Ltd. (supra) as well as the decision of Hon'ble Bombay High Court in the case of Mahindra & Mahindra Ltd. vs CIT (supra). If on an enquiry and verification, it transpires that the assessee has utilized the loan for the purpose of its business activity or trading activity, the amount of loan to the extent it has been waived by the bank shall be deemed to be the assessee's income chargeable to tax as per the decision of Hon'ble Bombay High Court in the case of Solid Containers Ltd. vs DCIT (supra), where the principle laid down by the Hon'ble Supreme Court in the case of CIT vs T.V. Sundaram Iyengar & Sons Ltd. (supra) has been applied and followed. In the present case, the total amount of loan payable by the assessee was Rs.4,76,42,213/-, which was settled at Rs.1.85 crores giving benefit of Rs.2,91,42,213/- to the assessee by way of waiver. Therefore, the proportionate amount of loan waived by the bank shall be worked out by the Assessing Officer with reference to the purpose for which the loan amount was utilized. The AO shall provide reasonable opportunity of being heard to the assessee. Be it mentioned here that in case the assessee fails to produce or furnish details or particulars about the purpose for which the loan amount was utilized, the AO shall draw adverse inference against the assessee, and shall decide the issue in the light of the fact that the loan amount was 38 obtained by the assessee in Cash Credit account, CTL and WCTL account by way of hypothecation of finished, semi finished goods, book debts, receivable claims, securities, rights by way of first charge implying thereby that the amount was utilized for the purpose of business or trading activity of the assessee. We order accordingly.
28. In the result, this appeal filed by the revenue is treated to be allowed for a statistical purpose in the manner as indicated above.
29. This decision was pronounced in the Open Court on 30th April, 2010.
(SHAMIM YAHYA) (C.L. SETHI)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated: 30th April , 2010
Vijay
Copy to:
1. Appellant.
2. Respondent.
3. CIT
4. CIT(A)-VII, New Delhi
5. DR Assistant Registrar