Income Tax Appellate Tribunal - Hyderabad
Apr Ltd. vs Deputy Commissioner Of Income-Tax on 18 February, 2003
Equivalent citations: [2003]87ITD618(HYD)
ORDER
M.V.R. Prasad, Accountant Member
1. This is an appeal filed by the assessee. It is directed against the order of the CIT, A.P.-I Hyderabad, dated 25-3-1998 passed under Section 263 of the Act, for the assessment year 1994-95.
2. The appellant before us is styled as 'APR Ltd.' and the impugned order of the Commissioner under Section 263 is in the name of M/s. A.P. Rayons Ltd., which appears to stand for Andhra Pradesh Rayons Ltd. We are now passing the present order in the name of Bilt Paper Holdings Ltd., as this is, as on today, the successor company.
3. We find it convenient to give a brief history of the appellant-company, before we turn to the issue raised in the present appeal. Originally, there was a company under the name and style 'AR Packaging Systems Ltd.' and its name was changed in the year of account relevant for assessment year 1992-93 to A & R Bilt Packaging Systems Ltd. There was another company under the name and style of Andhra Pradesh Rayons Ltd., which was incorporated in 1975 and it carried on business of rayon grade, wood pulp. Pursuant to another company, M/s. WIMCO Ltd. selling its shares in A & R Bilt Packaging Systems Ltd. to M/s. Ballarpur Industries Ltd., a company belonging to what is popularly known as Thapar Group, A & R Bilt Packaging Systems Ltd. became a subsidiary of Ballarpur Industries Ltd. (BILT). By its order dated 7-2-1995, Board for Industrial & Financial Reconstruction (BIFR) sanctioned the amalgamation or merger of A & R Bilt Packaging Systems Ltd. with M/s. Andhra Pradesh Rayons Ltd. and consequently the amalgamating company, i.e., A.R. Bilt Packaging Systems Ltd. lost its identity.
4. Andhra Pradesh Rayons Ltd., subsequently changed its name to APR Ltd., vide fresh certificate of incorporation dated 28-8-1995. That is how in the present appeal, which was filed in May, 1998, the appellant is shown as APR Ltd. and not Andhra Pradesh Rayons Ltd. The APR Ltd., again changed its name to BILT Paper Holdings Ltd., vide fresh certificate of incorporation dated 12-1-2001 apparently because of the interests of the Ballarpur Industries Ltd. (shortened to BILT) in the appellant-company. Consequent upon change of name from APR Ltd. to Bilt Paper Holdings Ltd., the said company, viz., Bilt Paper Holdings Ltd., vide its letter dated 18-4-2002 filed before this Tribunal, prayed for amendment of cause-title from M/s. APR Ltd. to M/s. Bilt Paper Holdings Ltd.
The said petition reads as under :
BEFORE THE INCOME TAX APPELLATE TRIBUNAL, BENCH HYDERABAD IN THE MATTER OF INCOME TAX APPEAL NO. 360/HYD/98 Assessment Year 1994-95 APR Limited (now known as Bilt Paper Holdings Limited) 31 -A Sarojini Devi Road, Secundrabad-500 003 Appellant Versus Commissioner of Income Tax, Respondent Hyderabad.
Petition for amendment of the Cause Title The humble petition of the appellant APR Limited now known as Bilt Paper Holdings Ltd. most respectfully :-
SHEWETH
1. That an Income Tax Appeal (ITA No. 360/Hyd/98) has been filed by the appellant company against the order dt. 29-3-1996 of CIT AP-I, Hyderabad.
2. That the said appeal has been listed for hearing before this Hon'ble Income Tax Appellate Tribunal on 1-5-2002.
3. That the name of the appellant company has since been changed to Bill Paper Holdings Limited with effect from 12-1-2002 vide fresh certificate of incorporation issued by Registrar of Companies consequent to change of name.
4. Therefore, the fresh name of the appellant is required to be substituted instead and in place of APR Limited in Income Tax Appeal No. 360/Hyd/98 relating to assessment year 1994-95.
In the premises, the petitioner most respectfully prays that the Hon'ble Income Tax Appellate Tribunal may be pleased to :
(a) substitute the name of the Appellant as Bilt Paper Holdings Ltd. in Income Tax Appeal No. 360/Hyd/98 instead of and in place of APR Limited.
(b) Pass such further and/or other order/orders as this Hon'ble Income Tax Appellate Tribunal may deem fit and proper in the facts and circumstances of the case.
And for this act of kindness the petitioner as in duty bound shall ever pray.
For and on behalf of APR Limited (now known as Bilt Paper Holdings Limited) New Delhi Sd/- April 18th, 2002 (Authorised signatory)
In the light of the above petition, we are passing the present order taking the name of the appellant as 'Bilt Paper Holdings Ltd.'. The learned counsel for the assessee has also clarified that the name of the assessee is shown by the learned Commissioner in his impugned order under Section 263 as A.P. Rayons Ltd., which is a mistake and it should have been correctly shown as 'APR Ltd.', because, as on the date of the order, i.e., 25-3-1998, A.P. Rayons Ltd., which apparently stood for Andhra Pradesh Rayons Ltd., changed its name to APR Ltd.
5. Now, we may turn to the issue on hand. The facts of the case lie in a narrow compass. Swedish company, M/s. Akarlund & Rausing AB was one of the promoters of the AP Packaging Systems Ltd. vide agreement dated 23-4-1991, a copy of which may be seen at pages 33-34 of the appellant's paper-book filed before us, the Swedish company agreed to lend 7-Million Rupees to the promotee company. The said loan was unsecured and did not carry any interest. Relevant clauses and recital of the said agreement read as under-
....
Whereas, the Lender being one of the Promoters of the borrower company vide their letter dated 22-10-1990 have agreed to grant to the borrower an interest free unsecured loan in Swedish Kronor equivalent to Rs. 7.00 Mns. (Rupees Seven Million only) as part of rehabilitation of the Borrower.
Whereas, the Board for Industrial and Financial Reconstruction, a body of Government of India, which is empowered to approve certain relief and measures to sick companies as per the Sick Industrial Companies (Special Provisions) Act, 1985 have approved a financial package prepared by the Industrial Credit & Investment Corporation of India Ltd., a Financial Institution vide their package No. FM/7694 dated 11-1-1991 and Minutes of the joint meeting of the Financial Institutions and Banks vide minutes reference No. FM/8168 dated 1-2-1991.
Whereas the said rehabilitation package also includes the contribution by Promoters M/s. AB Akerlund & Rausing, Sweden giving an interest free unsecured loan in Swedish Kronor equivalent to Rs. 7.00 Mns. (Rupees Seven Million only) to the Barrower.
Whereas, Government of India, Ministry of Finance, Department of Economic Affairs has also approved the said loan of Rs. 7.00 Mns. (Rupees Seven Million only) vide their letter No. 6(46)91-ECB (Loan Reg. No. 1991028) dated 15-4-1991 subject to certain terms and conditions.
Now it is hereby agreed by and between the parties hereto as follows :
1. The Borrower agrees to borrow and the Lender agrees to lend in Swedish Kronor equivalent to Rs. 7.00-Mns.-(Rupees Seven Million only) on the terms and conditions herein specified.
2. The loan shall not carry interest and shall not be secured against any of the assets of the Borrower.
3. The loan shall be repayable by the Borrower after repayment of long-term dues by the Borrower to the financial institutions and banks from whom the Borrower has availed financial assistance and in any case not within a minimum of five years.
4. Their payment of loan by the Borrower shall be subject to the approval of financial institutions from whom the Borrower has availed financial assistance....
This loan of Rs. 70,00,000 was approved by Reserve Bank of India, in its letter dated 18-5-1991 and a copy of the same may be seen at pages 35-36 of the assessee's paper-book. The loan was also approved by the Ministry of Finance of Government of India, vide their letter dated 15-4-1991. A copy of the said letter may be seen in assessee's paper-book at pages 38-39 thereof. The amount was actually received on 31-5-1991 and this is evidenced by a Certificate of Foreign Inland Remittance given by Andhra Bank, dated 3-8-1991 to M/s. A.R. Packaging Systems Ltd. A copy of this certificate may be seen at page-40 of the assessee's paper-book. Subsequently, the loan was increased to Rs. 70,54,725 and this enhancement was approved by the Ministry of Finance of Government of India, vide its letter dated 8-10-199-1. A copy of this letter is filed at page 37 of the assessee's paper-book. Receipt of this unsecured interest free loan of Rs. 70,54,725 has been reflected in the Balance-Sheet of the assessee-company as on 31-3-1992 in Schedule-C thereunder.
6. Vide letter dated 22-3-1993 addressed by the Swedish Company to M/s. Ballarpur Industries Ltd. the former sold its shareholding in A & R Bilt Packaging Ltd. for a nominal purchase price of Rs. 1 enblock to M/ s. Ballarpur Industries Ltd. The Swedish company also agreed inter alia to renounce the loan of Rs. 70,54,725 given by it to M/s. A & R Bilt Packaging Ltd. Clause-4 of the said letter, which is relevant for our purpose reads as under-
4. As at 31-3-1992 the Company, A & R Bilt Packagings Ltd. was in debted for the following secured loan funds-
(a) Term loans from Financial institutions and Banks including :
(1) Foreign Currency Loans (Rupees tied up as of 1-4-1990) Rs.
US Dollars 1,48,802 2,544,533 Swiss Francs 1,08,075 2,232,682 Deutsche Marks 49,892 606,197 Japanese Yen 9,050,833 988,082 (2) Interest accrued and due Rs. 23,922,378 due within one year Rs. 15,731,241 48,517,384
Secured by a first mortgage on all the Company's immovable properties, both present and future and a first charge by way of hypothecation of all the Company's movable assets, save and except book debts but including movable machinery, machinery spares, tools and accessories, both present and future, subject to prior charges created and/or to be created in favour of the Company's Bankers on specified movables for securing borrowings for working capital requirements. The mortgage and charge referred to above shall rank 'pari passu' with the mortgage and charge created and/or to be created in favour of the Company's Bankers.
(b) Cash Credit (including Packing Credit) with Banks secured against hypothecation of all raw materials, stock-in-process, finished goods, stores and spares and book debts (including interest accrued and due Rs. 297,785 (excess over Cash Credit limits Rs. 867,724) 6,654,120
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55,171,504
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The Company has been declared a sick industrial company under the Sick Industrial Companies (Special Provisions), Act, 1985. A rehabilitation Scheme as set out in point 6 of the minutes of the 64th meeting of the Board of Directors of the Company held on 5-9-1991 has been approved by the Board for Industrial and Financial Reconstruction. In terms of the rehabilitation Scheme AB Akerlund & Rausing has provided financial assistance to the Company by way of an interest free unsecured loan amounting to Rs. 70,54,725.
It was agreed that AB Akerlund & Rausing shall renounce any claim for payment of the abovementioned loan. It was further agreed that the Company with the assistance of Ballarpur Industries Ltd. shall continue the negotiations with Financial Institutions and Banks under the rehabilitation Scheme aiming at a final agreement and settlement. AB Akerlund & Rausing shall not bear any responsibility for the outcome of such negotiations.
In consideration of AB Akerlund & Rausing renouncing any claim for repayment of aforementioned sum of Rs. 70,54,725 Ballarpur Industries Ltd. shall hold AB Akerlund & Rausing harmless and indemnified against any further financial liability that may be imposed upon AB Akerlund & Rausing on account of it being a shareholder of the Company. This indemnity shall survive the termination of this agreement in case this agreement is not given effect to in view of any reasons set out in Sections 3 & 5 hereof.
Apart from the renunciation of the loan, the Swedish company also renounced the amounts due to it for the royalty payment of Rs. 13,93,470 and also certain other payments due to it for sale of machinery etc.
7. With the above background in mind, we may not turn to the issue on hand, for the assessment year 1994-95, M/s. APR Ltd., M/s. Andhra Pradesh Rayon Ltd. as the assessee was then styled, filed a return on 28-11-1994, declaring an income of Rs. 1,36,73,777. The return was initially processed under Section 143(1)(a) and finally, the assessment under Section 143(3) was also completed on 29-3-1996 on a total income of Rs. 1,82,46,846. However, neither in the intimation under Section 143(l)(a) nor in the assessment under Section 143(3), the Assessing Officer considered any addition on the basis of renunciation of the loan of Rs. 70,54,725 by the Swedish company.
AB Akerlund & Rausing in favour of the assessee, M/s. A & R Bilt Packaging Ltd., which got merged with Andhra Pradesh Rayon Ltd. as noted above. So, the CIT considered that the said assessment order was erroneous and prejudicial to the interests of the Revenue in the light of the decision of the Supreme Court in the case of CIT v. T.V. Sundaram Iyengar and Sons Ltd. [1996] 222 ITR 344 : 88 Taxman 429. Hence, exercising his powers under Section 263, he set aside the assessment order with a direction to modify the assessment bringing to tax the said amount of Rs. 70,54,725. In this context his remarks are as under-
5.3 As regards the applicability of the decision of the Supreme Court also, the objection of the assessee is not on sound reasoning. The distinction the assessee tried to draw is that in the case decided by the Supreme Court, the unclaimed deposits were received in the course of carrying on of the business, whereas in its own case the amount was received as unsecured loan (but not as a deposit) and that the subsequent renunciation of the unsecured loan by the Swedish Company could not be equated with write-back of unclaimed deposits. I am afraid that the assessee's argument suffers from a fallacy. There is no dispute that the loan was received by the assessee during the course of business and by the renunciation of the same by the Swedish company, the amount became a definite trade surplus. It is useful to refer to the observations of the Supreme Court in this regard :
If an amount is received in the course of 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 the assessee's own money because of limitation owned by any other statutory or contractual right. When such a thing happens, common sense demand that the amount should be treated as income of the assessee.
If a common sense view of the matter were taken, the assessee, because of the trading operation, had become richer by the amount which it transferred to its profit and loss account. The money had arisen out of ordinary trading transaction. 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 the deposit became time-barred and the amount attained a totally different quality. It became a definite trade surplus.
In the instant case, the assessee received the amount as a secured loan and in exercise of the contractual right, the Swedish Company waived repayment of the same. In such an event, the amount which was waived should be treated as income of the assessee.
8. The above order of the Commissioner has been assailed before us. Some of the grounds taken before us in this appeal read as under-
4. It is contended that the transaction of obtaining loan is not a 'trading transaction' and, therefore, the same cannot be considered as income exigible to income-tax and thus the order under Section 263 is wrong, invalid and without jurisdiction.
5. The reliance and application of the ratio laid down by the Hon'ble Supreme Court of India in T.V. Sundaram Iyengar & Sons Ltd. 222 ITR 344, is wrong, erroneous and the said ratio should have been held to be not applicable to the facts and circumstances of the appellant's case.
6. The loan had been obtained by another company and waived by the lender in favour of that another company and the successor company cannot be burdened with tax with regard to such amount as the outstanding loan taken over is capital transaction in the hands of the successor company and, therefore, the inclusion of Rs. 70,54,725 in the total income of the appellant is wrong.
7. The trade advances received by the supplier assessee of some goods had been erroneously equated with the loan obtained by the predecessor company and treated erroneously as chargeable income in the assessment of the successor company and thus the entire order under Section 263 is wrong, invalid, opposed to facts and circumstances of the case and without jurisdiction.
8. Neither the Assessing Officer completing the assessment under Section 143(3) nor the Commissioner of Income Tax has jurisdiction to treat a loan obtained by a predecessor company and waived by the lender in favour of the predecessor company as per the provisions of Section 41(1) of the IT Act withstood during Assessment year 1994-95 and, therefore, the order under Section 263 is wrong in as much as there is no error and prejudice to the interest of Revenue in the order of assessment under Section 143(3) dated 29-3-1996.
9. It is contended that the loan having been waived by the lender on 22-3-1993, prior to amalgamation and thus there is no fact of waiver of any sum by the lender in favour of the appellant and, therefore, the order under Section 263 and the conclusion therein are wrong and erroneous....
9. Reiterating the above grounds, the learned counsel for the assessee explained that the Commissioner seriously erred in applying the decision of the Apex Court in the case of T.V. Sundaram Iyengar& Sons Ltd. (supra) to the renunciation of a loan. It is argued that a loan which is a capital receipt, will not change its character and become a revenue receipt, simply because it is renounced and is written back to the Profit & Loss Account. The Apex Court in the above case was considering an amount received in the course of a trading transaction and their Lordships held that even though it is not taxable in the year of receipt as being of revenue character, the receipt changes its character subsequently, when it becomes assessee's own money for specified reason. For the said decision of the Apex Court to be applicable, the learned counsel for the assessee pleaded, the amount should be or should have been received in the course of a trading transaction. This is the crux of the matter and on this point, it is claimed that the facts of the assessee's case are totally different. The loan of Rs. 70,54,725 was not received in the course of a trading transaction. It was received as a loan and was reflected as a loan in the books of the assessee. When the loan is renounced by the Swedish company, it did not change its character, but remained a capital receipt, notwithstanding its transfer to the credit of the Profit & Loss Account in the books of the assessee. In this context, reliance is placed upon the decision of the Apex Court in the case of K.M.S. Lakshmanier and Sons v. CIT [1953] 23 ITR 202, wherein a distinction was made between advances of monies received towards purchase price and other security deposits received from customers and dealings with them and it was held in the context of Excess Profits Tax Act, 1940, that the former was not borrowed money, whereas the latter was borrowed money. It is also claimed that the amount of loan was originally received by another company, viz., A.R. Packaging Systems Ltd., even though that company stood merged with assessee during the relevant period. The amount received as a capital receipt by another company, does not become a revenue receipt in the hands of the assessee-company and on this basis also, it is claimed that the facts of the present case are distinguishable from the decision of the Apex Court in the case of T.V. Sundaram Iyengar & Sons Ltd. (supra). The learned counsel for the assessee also relied upon the decision of the Bombay High Court in the case of CIT v. Garbriel India Ltd. [1993] 203 ITR 108 : 71 Taxman 585 and also the decision of the Apex Court in Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83 : 109 Taxman 60 and argued that in the light of these decisions, where two views are possible, revisionary powers under Section 263 cannot be exercised and hence, in the present case, the action under Section 263 is not justified.
10. The learned Departmental Representative, on the other hand, argued that no distinction can be made between the trade advance and loan. It is claimed that both are capital receipts and even if neither of them is taxable initially at the time of receipt, they change their character and become revenue receipt, subsequently, when the assessee can claim them as his own in the light of the decision of the Apex Court in the case of T.V. Sundaram Iyengar & Sons Ltd. (supra).
11. We are in agreement with the contentions made out by the learned counsel for the assessee. The learned Commissioner has himself quoted the relevant observations of the Apex Court in the case of T.V. Sundaram Iyengar & Sons Ltd. (supra), which we have reproduced hereinabove. It is clear from the extract of the judgment of the Apex Court that it is applicable only if the amount is received in the course of a trade transaction, even though it is not taxable in the year of receipt. In the present case, the loan of Rs. 70,54,725 has not been received in the course of a trading transaction. It has been received as a loan in the context of an order of BIFR, as a measure of restructuring the finances of the assessee-company. It is totally different from an amount received in the course of a trading transaction. The fact that there is a difference between an amount received in the course of a trading transaction and other deposit or loan is evident from the decision of the Apex Court in the case of K.M.S. Lakshmanier & Sons (supra), where trade advances were not treated as loans, whereas security deposits were treated as loans. The Apex Court also had occasion to discuss a decision of the English Court of Appeal and the relevant portion of the discussion reads as under-
On the other hand, a more recent decision of the English Court of Appeal in Davies v. The Shell Company of China-(22 ITR Suppl. 1), which Mr. Pathak brought to our notice, is more in point. A British company, which sold petroleum products in China through Chinese agents, required the latter to deposit with the company a sum of money in Chinese dollars to be held as security against possible default by the agents in payment for the products consigned to them and to be rapaid when the agency came to an end. These deposits were, during the war, transferred to the United Kingdom for reasons of safety and were there held in sterling. Subsequently, when the Chinese dollar depreciated in relation to sterling, the amounts required to repay the deposits in Chinese dollars were much less than the sums held by the company as the sterling equivalents of the deposits and the question arose whether such deposits were trading receipts or receipts of a capital nature. In holding that they were capital receipts and the profit was therefore a capital gain, Ujenkins, L.J., who delivered the leading judgment, observed:-
If the agent's deposit had in truth been a payment in advance to be applied by the company in discharging the sums from time to time due from the agent in respect of petroleum products transferred to the agent and sold by him the case might well be different and might well fall within the ratio decidendi of Landes Bros. v. Simpson [1934] 19 Tax Cas. 62 and Imperial Tobacco Co., v. Kelley [1943] 25 Tax Cas. 292. But that is not the character of the deposits here in question. The intention manifested by the terms of the agreement is that the deposit should be retained by the company, carrying interest for the benefit of the depositor throughout the terms of the agency. It is to be available during the period of the agency for making good the agent's defaults in the event of any default by him, but otherwise it remains, as I see it, simply as a loan owing by the company to the agent and repayable on the termination of the agency; and I do not see how the fact that the purpose for which it is given is to provide a security against any possible default by the agent can invest it with the character of a trading receipt....
From the above decision of the English Court of Appeal, which is approvingly referred to by the Apex Court in the case of K.M.S. Lakshmanier & Sons (supra), it is evident that there is a clear distinction between a security deposit and a loan and a security deposit cannot be invested with the character of a trading receipt and the same logic is applicable for a loan, like the one under our consideration. The loan does not lose its capital nature, even when it is renounced by the lender and becomes the money of the assessee. The mere fact of its transfer to the Profit & Loss Account does not invest it with a revenue character.
12. We may also refer to the decision of the Apex Court in the case of Travancore Rubber and Tea Co. Ltd. v. CIT [2000] 243 ITR 158 : 109 Taxman 250 wherein it was held that earnest money and advance received from the vendee by a vendor of rubber trees being relatable to the sale of capital assets, had not become revenue receipts in the hands of the vendor, even after their forfeiture in terms of the contract of conveyance. If the expression 'amount received in the course of a trading transaction' included all receipts, as contended by the learned Departmental Representative, the earnest money and advance for the sale of the rubber trees should be revenue receipts when forfeited and that was not the case. In this view of the matter, the contentions of the learned Departmental Representative on this aspect are liable to be rejected.
13. Even on the aspect of jurisdiction, we find merit in the contentions of the learned counsel for the assessee. In the case of Gabriel India Ltd. (supra), Hon'ble Bombay High Court held that the Commissioner cannot revise assessment order merely because he disagrees with the conclusion arrived at by the Assessing Officer. In the case of Malabar Industrial Co. Ltd. (supra), the Apex Court laid down that, where two views are possible and the Income-tax Officer has taken one such view with which the Commissioner does not agree, the assessment cannot be treated as erroneous and prejudicial to the interests of the Revenue, unless the view taken by the Income-tax Officer is unsustainable in law.
14. In any view of the matter, the impugned order of the Commissioner passed under Section 263 of the Act cannot be sustained. We accordingly cancel the same.
15. In the result, assessee's appeal is allowed.