Income Tax Appellate Tribunal - Mumbai
Rama Pulp & Paper Ltd, Mumbai vs Department Of Income Tax on 22 February, 2011
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI ' D ' BENCH
MUMBAI BENCHES, MUMBAI
BEFORE SHRI VIJAY PAL RAO, JM & SHRI RAJENDRA, AM
ITA No. 3573/Mum/2011(Asst Year 2007-08)
The Asst Commr,. Of Income Tax Vs Rama Pulp & Paper Ltd
1(13), Mumbai 1 Chateau ?Windsor
86 Veer Nariman Road
Churchgate
Mumbai 400 020
(Appellant ) (Respondent )
PAN No. AAAACR7243K
Assessee by Sh N R Agarwal
Revenue by Sh Abhinay Kumbhar
Dt.of hearing 12th March 2013
Dt of pronouncement 26 MAR 2013
ORDER
PER VIJAY PAL RAO, JM
This appeal by the revenue is directed against the order dated 22.2.2011 of the Commissioner of Income Tax(Appeals) for the Assessment Year 2007-08.
2 The revenue has raised the following ground in this appeal:
"Whether on the facts and circumstances of the case and in law the Commissioner of Income Tax(Appeals) erred in deleting the disallowance of term loan waiver amounting to ` 1,74,13,729/-
The Commissioner of Income Tax(Appeals) has further erred in overlooking the fact that the term loan was taken as working capital and hence the same is connected with business activity of the assessee. The waiver of such loan result into a taxable business profit.
3 The brief facts leading to the controversy are that the assessee company became sick industrial undertaking and was taken over by Board for Industrial and Financial Reconstruction (BIFR) on 27th Sept 2000. Under the scheme of rehabilitation/reconstruction framed by the BIFR on 22.3.2007 the liability in respect of loans taken by the assessee from State Bank of India, Corporation Bank and IDBI 2 ITA No. 3573/M/2011. .
was waived in the settlement with these banks and as a result of which a total amount of ` 1,74,13,829/- stood waived. The Assessing Officer has brought the said amount of ` 1,74,13,729/- to tax by holding that the assessee derived a benefit by way of one time settlement and the liability of the assessee is no more payable by the assessee. The Assessing Officer has placed reliance upon the decision of the Hon'ble jurisdictional High Court in the case of Solid Containers Ltd. v. Deputy Commissioner of Income-tax reported in 308 ITR 417. The assessee challenged the action of the Assessing Officer before the Commissioner of Income Tax(Appeals) and contended that the amount of loan is of the nature of capital to the extent to the principle amount of loan. As far as the interest element is concerned, in the settlement under consideration, the interest has no role to play. Since the interest was already written ff and the outstanding amount of loan has waived under the scheme of BIFR is the principle amount lone. Thus, the assessee argued before the CIT(A) that there is no question of taxability of the amount in question. The Commissioner of Income Tax(Appeals) accepted the contention of the assessee and held that what can be taxed in such a situation is the interest element contained in the amount written off provided that interest has been claimed and allowed as deduction in the earlier assessment year. Accordingly, the addition made by the Assessing Officer has been deleted by the Commissioner of Income Tax (Appeals).
4 Before us, the ld DR has contended that the loan was taken for working capital. Therefore, it cannot be said that it is capital in nature. He has relied upon the order of the Assessing Officer and submitted that the decision in the case of Solid Containers Ltd. (supra) is applicable in the facts of the case.
3 ITA No. 3573/M/2011..
4.1 On the other hand, the ld AR of the assessee has submitted that as far as the interest is concerned, the assessee did not claim the interest on the loan as the same was shown outstanding in the balance sheet. Thus, when no deduction was claimed or allowed in the earlier year regarding the interest element, then there is no question of taxability of the interest element in the amount written off. The ld AR has further submitted that the amount of loan has been settled under the scheme of reconstruction of sick industry as per the order of the BIFR and therefore, it cannot be treated as a trading liability incurred by the assessee, which was subsequently waived or remissioned and benefit was taken by the assessee by way of remission or cessation. In support of his contention, he has relied upon the following decisions:
i) Commissioner of Income-tax v. Shree Pipes Limited ( 301 ITR 240)
ii) Commissioner of Income-tax v. Tosha International Ltd.( 331 ITR 440) 4.2 The ld AR has also relied upon the decision of the coordinate Bench of this Tribunal in the case of M/s King Prawns Ltd in ITA No.60/Mum/2010 vide order dated 14.12. 2010 and submitted that the Tribunal in the said case after considering the decision of the Hon'ble Jurisdiction High Court in the case of Solid Containers Ltd.
(supra) as well as the decision of the Hon'ble Supreme Court in the case of Commissioner of Income-tax v. Sundaram Iyengar (T.V.) and Sons Ltd. reported in 222 ITR 344 has held that the reduction of liability on account of term loan and other loan payable to the bank under one time settlement scheme does not result into the income to the assessee either u/s 28(i) or u/s 28(iv) or u/s 40(1) of the I T Act.
5 We have heard the rival submissions and carefully perused the relevant material on record. There is no dispute that the liability of the loan taken from the bank was reduced under the one time waiver as per the rehabilitation scheme of 4 ITA No. 3573/M/2011. .
BIFR. The revenue has not disputed this fact that there is no element of interest in the amount waived under the BIFR scheme.
5.1 It is pertinent to note that it is not the case of remission or cessation of trading liability; but this is a case where the liability of loan taken from the banks was reduced as per the settlement arrived at during the proceedings of the Board of Industrial and Financial Reconstruction (BIFR) for the purpose of rehabilitation and reconstruction of the assessee which was a sick industrial undertaking. Therefore, there is no question of any enjoyment of loan benefits of reduction of the said liability in the ordinary business or trading activity by the assessee; but it was only in the process of survival/revival of the assessee and to prevent the permanent closure of the business of the assessee company. In the case of Shree Pipes Limited, the Hon'ble Rajasthan High Court while dealing an identical question in paras 32 to 52 has held as under:
32 Now, we may consider question No. 1.
33 We have already noticed the provisions of section 41(1) above while considering question No. 2 which related to waiver or liability by the order of the BIFR, therefore, waiver was not disputed in the order. The fact remains regarding the question of remission or cessation of liability. Apparently, on the plain reading of section 41(1) the term "remission" relates to any overt or specified act attributed to the creditor to forgo his right of recovery from the debtor ; on the other hand, cessation of liability may be on account of agreement or by operation of law which may have effect of extinguishing the liability. The other necessary element of operating section 41(1) is that the assessee must actually receive the cash or a benefit equal in terms of money in respect of a claim to allowance or deduction of such sum which has earlier been admitted while computing his total income of any earlier year.
34 The expression "remission" has been defined in Black's Law Dictionary to mean "a release or extinguishment of a debt". It is conventional. When it is expressly granted to the debtor by a creditor having capacity to alienate ; or tacit, when the creditor voluntarily surrenders to his debtor the original title, under private signature constituting the obligation.
35 In the ordinary dictionary meaning "remission" is relation to the liability of payment has been stated in Random House Dictionary to mean relinquishment of payment obligation.5 ITA No. 3573/M/2011.
.
36 Apparently, the act of remission is attributed to the creditor and it cannot be unilaterally attributed to the debtor himself declaring that he will not pay. As noticed above, remission is by an overt or specific act and conduct of the creditor by which liability of the debtor is extinguished.
Apparently in the present case there is no material which suggests any act or omission on the part of the creditor which results in extinguishment of the liability of the assessee on his account. Writing off such liability in the books of account made by a debtor only conveys the intention of the assessee not to pay. However, the intention of the debtor about not discharging his liabilities does not extinguish or cause cessation of his liability to discharge his debt so as to hold that he has by manifesting his intention has obtained some benefit in cash or benefit equivalent to that.
37 The Revenue has relied on the circumstances, as stated by the Incometax Officer, that claims have not been filed before the BIFR by the creditor. But it has not been brought to the notice that any provision exists under the Sick Industrial Companies (Special Provisions) Act, 1985, which requires the creditor of the sick industrial company to lodge their claims before the BIFR and if such claims are not filed before the BIFR, the same stand extinguished. As a matter of fact, the object of the Sick Industrial Companies (Special Provisions) Act, 1985, is to explore the possibility of rehabilitation of sick industrial undertaking for its financial vitality. If it is considered possible the BIFR may sanction scheme that may be proposed by the reviving agency. While the matter is pending before the BIFR certain rights of creditors remains suspended. But no provision has been brought to our notice which envisages extinguishment of existing right except to the extent they become part of package under the sanctioned scheme.
38 It is significant to notice that in case BIFR comes to the conclusion that the company is not capable of revival or the scheme sanctioned for its revival fails, it does not result automatic closure or winding of the company and extinguishment of all liabilities of the company but the BIFR is authorised to recommend winding of the company through the procedure under the Companies Act. In that event if winding up order is made by the order of the company court, on an application being made to it in accordance with the provisions of the Companies Act, it is only after rules are made by the competent court and the official liquidator or provisional official liquidator as appointed that the claims of the outstandings against the sick company are required to be lodged before the official liquidator after creditors are invited to do so and they are dealt with under the Companies Act. But that stage has not at all reached. This is only to demonstrate the outstanding against the company before the BIFR does not extinguish or cease to exist merely because the creditors have not approached the BIFR. Hence, the Income- tax Officer and the Commissioner of Income-tax (Appeals) have taken into consideration wholly irrelevant circumstance that the creditors have not approached the BIFR.
39 The aforesaid conclusion is in consonance with the decision of the Supreme Court in the case of CIT v. Sugauli Sugar Works P. Ltd. [1999] 236 ITR
518. It was a case in which the assessee has unilaterally transferred certain amount out of suspense account running from 1946-47 to 1948-49 to the 6 ITA No. 3573/M/2011. .
capital reserve account. Excluding the amount which has been refunded by the assessee remaining capital reserve by the assessee was included in the income of the assessee by the Assessing Officer which was affirmed by the Commissioner of Income-tax. The Tribunal accepted the contention of the assessee and held that its unilateral entry in accounts transferring the amount to the capital reserve account would not bring the matter within the scope of section 41(1) of the Income-tax Act, 1961, and it neither results in remission nor in cessation of liability. The Revenue had contended that since the amount so transferred had become barred by limitation and recovery proceedings could not have been initiated by the creditors, the action of the assessee in transferring the amount from suspense account to capital reserve fund resulted in it becoming trading surplus in his hands. Consequently, it was liable to be included as income in computing taxable income of the assessee under section 41(1) of the Income-tax Act, 1961.
40 The Supreme Court rejected the contention of the Revenue while upholding the order of the High Court by laying down the ratio that obtaining any amount or a benefit by virtue of remission or cessation is a sine qua non for the application of section 41(1). The mere fact that the assessee has made an entry of transfer in his account unilaterally will not enable the Department to say that section 41(1) would apply and the amount should be included in the total income of the assessee.
41 In coming to its conclusion the court relied on the larger Bench decision of the Gujarat High Court in the case of CIT v. Rashmi Trading [1976] 103 ITR 312 that the only meaning that can be attached to the words "obtained", whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure incurred in any previous year clearly refer to the actual receiving of the cash or benefit equivalent to that amount. The amount may be actually received or it may be adjusted by way of an adjustment entry or a credit note or in any other form when the cash or the equivalent of cash can be said to have been received by the assessee. But it must be the obtaining of the actual amount which is contemplated by the Legislature when it used the words "has obtained", whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure in the past. As rightly observed by the Division Bench in the context in which these words occur, no other meaning is possible.
42 On the other hand, it disapproved the decision of the Bombay High Court in CIT v. Bennett Coleman and Co. Ltd. [1993] 201 ITR 1021 (relied on by the Revenue in this case also) and also held that the principle enunciated in Bombay Dyeing and Manufacturing Co. Ltd. v. State of Bombay AIR 1958 SC 328 ; ; [1958] SCR 1122 is well applicable under section 41(1) of the Income- tax Act, 1961. It is held that the principle that "expiry of the period of limitation prescribed under the Limitation Act could not extinguish the debt but it would only prevent the creditor from enforcing the debt" has been well-settled.
43 It is enough to refer to the decision of this court in Bombay Dyeing and Manufacturing Co. Ltd. v. State of Bombay AIR 1958 SC 328 ; [1958] SCR 1122. If that principle is applied, it is clear that mere entry in the books of account of the debtor made unilaterally without any act on the part of the creditor 7 ITA No. 3573/M/2011. .
will not enable the debtor to say that the liability has come to an end. Apart from that that will not by itself confer any benefit on the debtor as contemplated by the section.
44 Thus, the Supreme Court affirmatively stated that in order to operate section 41(1) of the Act as existed before the insertion of the Explanation, unilaterally in the books of account by transfer of certain amount liability in the profit and loss account neither availed of the benefit seized nor remission or cessation of liability. Trading liability incurred by the assessee to make room invoking section 41(1) of the Income-tax Act, 1961.
45 This principle was reiterated and restated in a subsequent decision in the case of Chief CIT v. Kesaria Tea Co. Ltd. [2002] 254 ITR 434 (SC). It was a case in which the assessee engaged in a business of tea, spices, etc., had made a provision for purchase tax liability and necessary adjustment were made in the books of account. On that premises it was contended by the Revenue that the fact that the assessee itself took steps to write off the liability on account of purchase tax by making necessary adjustment in the books, which itself was indicative of the fact the liability ceased for all practical purposes and, therefore, the addition of the amount deeming the same as income of the year 1985-86 under section 41(1). But, what the assessee has done is not conclusive. As observed by the Tribunal, a unilateral action on the part of the assessee by way of writing off the liability in the accounts does not necessarily mean that the liability ceased in the eye of law. In fact, this is the view taken by this court in CIT v. Sugauli Sugar Works P. Ltd. [1999] 236 ITR 518 (SC).
46 In coming to this conclusion the court said that Explanation 1 to section 41(1) was inserted with effect from April 1, 1997, to section 41(1) and was not retrospective in operation and did not govern assessments prior to the assessment year 1997-98.
47 Coming to the decision of the Supreme Court in CIT v. T. V. Sundaram Iyengar and Sons [1996] 222 ITR 344 it may be stated that the said case related to the money received in past by the assessee but was appropriated for his own use during the previous year relevant to the assessment year in question. Such amount when originally received were capital receipts and not liable to be taxed as income. The question did not relate to making of any allowance or deduction claimed by the assessee. The court considered the matter as a case of appropriation of money during the year for own use resulting in change in nature of receipt from capital to revenue and becoming a trading surplus. The question about remission or cessation of liability allowed to be adjusted or deducted from income was not the question before the Supreme Court.
48 Though, the decisions of the Supreme Court in CIT v. T. V. Sundaram Iyengar and Sons [1996] 222 ITR 344 was not noticed in CIT v. Sugauli Sugar Works P. Ltd. [1999] 236 ITR 518, but in the later decision the Supreme Court in Chief CIT v. Kesaria Tea Co. Ltd. [2002] 254 ITR 434, which is also of a three- judge Bench decision, referred to in CIT v. T. V. Sundaram Iyengar and Sons [1996] 222 ITR 344 and distinguished the same while considering the provisions 8 ITA No. 3573/M/2011. .
of section 41(1) of the Act and followed its earlier decision in CIT v. Sugauli Sugar Works P. Ltd. [1999] 236 ITR 518.
49 In view of the clear pronouncement of the Supreme Court decision on the contrary, we need not refer to other judgments cited by learned counsel for the assessee or the Revenue from the different High Courts anterior to the decision of the Supreme Court.
50 However, it would be apposite to notice the decision of the Madras High Court in CIT v. Aries Advertising P. Ltd. [2002] 255 ITR 510. It was a case in which the assessee had unilaterally written back in his profit and loss account, the unclaimed balance stating credit in his account. The Revenue has sought to add the unclaimed amount so written off in his profit and loss account as income of the previous year relevant to the assessment year in question by invoking section 41(1) of the Act of 1961. It was urged before the Madras High Court, by the Revenue and sustained by the Madras High Court, inter alia, on the ground that although, the amounts received originally were not income in nature, the amounts remained with the assessee for a long period unclaimed by the trade parties. By lapse of time, the claim of the depositors became time-barred and the amount attains a totally different quality. It becomes a definite trade surplus.
51 The assessee itself treated the money as its own money and took the amount to its profit and loss account. The amounts were assessable in the hands of the assessee. Suffice it to say that the Madras High Court relied on the decision of CIT v. T. V. Sundaram Iyengar and Sons [1996] 222 ITR 344 (SC) and upheld the contention. However, the decision of the Supreme Court in CIT v. Sugauli Sugar Works P. Ltd. [1999] 236 ITR 518 was not brought to the notice of the Madras High Court which was a later decision and the ratio of which fully governs the case nor the decision of the Supreme Court in Chief CIT v. Kesaria Tea Co. Ltd. [2002] 254 ITR 434 in which T. V. Sundaram was distinguished and it was held that section 41(1) of the Income-tax Act in like circumstances cannot be invoked. Therefore, in view of the two Supreme Court decisions clearly clinching the issue in one of which earlier decision in CIT v. T. V. Sundaram Iyengar and Sons [1996] 222 ITR 344 was referred to and distinguished with utmost respect, we are unable to agree with the conclusion reached by the Madras High Court in the case of CIT v. Aries Advertising P. Ltd. [2002] 255 ITR 510.
52 The Tribunal, in our opinion was right in holding that section 41(1) cannot be invoked in respect of the amount which the assessee paid as commission and written off in the books of account of the profit and loss account.
5.2 As it is clear from the decision of the Hon'ble Rajasthan High Court that the decision in the case of Sundaram Iyengar (T.V.) and Sons Ltd. (supra) was 9 ITA No. 3573/M/2011. .
considered and it was found that in the facts of the case, the said decision cannot be applied.
5.3 In the case of Tosha International Ltd (supra), the Hon'ble Delhi High Court has also taken a similar view in para 3 & 4 as under:
"3 The Revenue went in appeal before the Tribunal against the order of the Commissioner of Income-tax (Appeals) with regard to the deletion of the said sum of Rs. 10.47 crores. We note that the Tribunal has examined the case in detail and particularly from the standpoint of the provisions of section 41(1) of the said Act. The Tribunal has observed as under :
"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 and Mahindra Ltd. v. CIT [2003] 261 ITR 501 (Bom), held that no allowance or deduction having been allowed in respect of the loan taken by the 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 profit and loss account, and also the remission of the principal amount of loan so obtained from the bank and financial institutions had not been claimed as expenditure or trading liability in any of the earlier previous years. So far as waiver of interest is concerned, the assesseecompany 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."
4 We see no reason to interfere with the conclusions of the Tribunal as the same have been rendered on a correct appreciation of law. The principles enunciated in Mahindra and Mahindra Ltd. v. CIT [2003] 261 ITR 501 (Bom) are fully applicable and we see no reason to take a different view."
5.4 We further note that the coordinate Bench of this Tribunal in the case of M/s King Prawns Ltd (supra) after considering the decisions in the case of Solid 10 ITA No. 3573/M/2011. .
Containers Ltd. (supra) as well as in the case of Sundaram Iyengar (T.V.) and Sons Ltd. (supra) has taken a view in paras 13 and 14 as under:
"13. Coming to section 28(i), it is a general section, and all receipts cannot be considered as profits and gain of business. If that was the case, there was no necessity of incorporating section 28(iv), section 41(1) etc. When a receipt does not fall under any of the specific sub-section, it cannot by default be brought under the general section. In any event, it is a remission of a capital liability and hence not income, much less a revenue receipt.
14 In view of the above discussion, we hold that the reduction of the liability on account of term loan and other loans payable to the bank under one time settlement scheme, does not result into income to the assessee either u/s 28(i) or u/s 28(iv) or u/s 41(1) of the I T Act, 1961. Accordingly, ground nos 1 to 3 of the assessee's appeal are allowed."
6 In view of the above discussion as well as the in the facts and circumstances of the case, we are of the view that the liability was reduced only under the scheme of BIFR and the assessee has not enjoyed any actual benefit of remission of liability in the nature of trading. Therefore, in view of the above decisions, we do not find any error or illegality in the order of the Commissioner of Income Tax(Appeals), qua the same is upheld.
7 In the result, the appeal filed by the revenue is dismissed.
Order Pronouncement in the Open Court on this 26th day of MAR 2013 Sd/- Sd/-
( RAJENDRA ) ( VIJAY PAL RAO )
Accountant Member Judicial Member
Place: Mumbai : Dated: 26 MAR 2013
Raj*
11
ITA No. 3573/M/2011.
.
Copy forwarded to:
1 Appellant
2 Respondent
3 CIT
4 CIT(A)
5 DR
/TRUE COPY/
BY ORDER
Dy /AR, ITAT, Mumbai