Income Tax Appellate Tribunal - Cochin
The Dcit, Circle-1, Thiruvalla, ... vs M/S.Fudge Industries P. Ltd, ... on 25 May, 2018
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IN THE INCOME TAX APPELLATE TRIBUNAL
COCHIN BENCH, COCHIN
BEFORE S/SHRI CHANDRA POOJARI, AM & GEORGE GEORGE K., JM
I.T.A. No.455/Coch/2016
Assessment Year : 2005-06
The Deputy Commissioner of Vs. M/s. Fuddge Industries P.
Income-tax, Circle-1, Ltd.,
Thiruvalla Puthussery Church Building,
Njaliakuzhy, Vakathanam
P.O.,
Changanassery.
[PAN:AADFK 7323F]
(Revenue-Appellant) (Assessee-Respondent)
Revenue by Shri A. Dhanaraj, Sr. DR
Assessee by Shri Anil D. Nair, Adv.
Date of hearing 23/05/2018
Date of pronouncement 25/05/2018
ORDER
Per CHANDRA POOJARI, ACCOUNTANT MEMBER:
This appeal filed by the Revenue is directed against the order of the Commissioner of Income Tax(Appeals), Kottayam dated 19/07/2016 and pertains to the assessment year 2005-06.
2. The grievance of the Revenue in this appeal is against the deletion of the addition of Rs.98,58,000/- with regard to the waiver of unsecured loans.
I.T.A. No.455/C/2016
3. The facts of the case are that the assessee-company was taken over by Shri O.V. George, the present managing director on 20-11-2004 based on an MOU at a total cost of Rs.100 lakhs. As per the clauses of MOU, unsecured loans were not taken over by the present management. While preparing the Profit & Loss account and the balance sheet of the company, the assessee had written back an amount of Rs.44.18 lakhs as credit in the said account to reduce the loss to that extent and in order to create a better presentation of the financial statements of the company for the particular year. Also a sum of Rs.54.39 lakhs was directly credited to the reconstruction account and shown as reserve and surplus, with a view to present a better picture of the balance sheet. The assessee had not received any business benefit in the said adjustments of accounts. The debts were the amount of advances provided by the erstwhile promoters/directors for investment in capital assets. The Assessing Officer had added these amounts to the income of assessee, following the decision rendered by the Supreme Court in the case of vs. T.V.Sundaram Iyengar and Sons Ltd. (222 ITR 344).
4. The Ld. CIT(A) observed that the amount of Rs.98.88 lakhs was written off on account of waiver of claims by the erstwhile promoters/directors and had been written back netting the amounts to the debit balance in the Profit and Loss account to the extent of Rs.44.18 lakhs and balance Rs.54.39 lakhs had been 2 I.T.A. No.455/C/2016 transferred to reconstruction account. According to the CIT(A) , this was done in order to present a better and positive picture of the financial statement of the assessee-company, in order to secure loans from financial institutions and cannot be treated as income of the assessee-company. Therefore, the addition made by the Assessing Officer was deleted.
5. Against this the Revenue is in appeal before us. The Ld. DR submitted that the assessee itself admitted before the Assessing Officer that the erstwhile promoters of the company waived their claims of unsecured loans to the extent of Rs.98.58 lakhs, out of which Rs.44.18 lakhs was credited to the P&L account and the balance was taken to Reserve & Surplus in the balance sheet. The Ld. DR submitted that the Assessing Officer had rightly placed reliance on the decision of the Supreme Court in the case of CIT vs. T.V. Sundaram Iyengar and Sons Ltd. (222 ITR 344) to treat the waived amount as income of the assessee. The Ld. DR submitted that the decision of the Supreme Court in the case of CIT vs. India Discount Company Ltd. (75 ITR 191) relied upon by the CIT(A) is distinguishable on facts, because in that case, the court held that a receipt erroneously credited to Profit & Loss account cannot become income, whereas in the instant case, amounts were rightly credited, and the assessee-company became richer by the waived amount transferred/credited to its financial statements.
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I.T.A. No.455/C/2016
5. On the other hand, the Ld. AR relied on the judgment of the Supreme Court in the case of Polyflex India (P) Ltd. vs. CIT (257 ITR 343) wherein it was held for invoking the provisions of section 41(1) of the Act, the following conditions should be fulfilled:
i) obtained any amount in respect of such loss or expenditure or
ii) obtained any benefit in respect of such trading liability by way of remission or cessation thereof.
5.1 According to the Ld. AR, in the instant case, the assessee has not derived any benefit in respect of such impugned loan in any earlier assessment year. It is not a trading liability, on the other hand it is a capital receipt.
6. We have considered the rival submissions. A perusal of the provisions of section 41(1) of the Act clearly shows that the opening words are "where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee and subsequently during any previous year,...." Thus for the purpose of invoking the provisions of section 41(1) it is an absolute condition that the said amount must have been claimed as a deduction during any of the assessment years earlier. In the present case, that primary condition is absent. The assessee has not made such a claim of expenditure during any of the earlier years nor is it the claim of the Revenue that the assessee has made such a claim during any of the earlier 4 I.T.A. No.455/C/2016 assessment years. Once it is noticed that the amount has not been claimed as deduction or expenditure in any of the earlier years, the provisions of section 41(1) cannot be invoked to bring to tax the said amount which has been waived by erstwhile promoter. In the circumstances, we are of the view that the addition made by the Assessing Officer has no leg to stand. As such, the deletion of the addition by the CIT(A) is liable to be confirmed. 6.1 Further the judgment of the Supreme Court in the case of CIT vs. T.V. Sundaram Iyengar & Sons Ltd. (supra) cannot be applied to the facts of the present case. In that case, the assessee received deposits in the course of his business which was treated as capital receipt. Some of the deposits were neither claimed by nor returned to the depositors. There is no dispute that the deposits were received in the course of carrying on the business of the assessee. The amounts were depleted by adjustments made from time to time. The amounts were not given and retained as security to be retained till the fulfillment of the contract. There was no finding to this effect. The unclaimed surplus retained by the assessee would be its trade receipt. The assessee itself treated the amount as its trade receipt by bringing it to its profit and loss account. Since it was received in the course of trading operations, the amount was treated as income of the assessee but in the present case, the facts are entirely different. It is a capital receipt. The loan being a capital receipt from erstwhile promoter, it 5 I.T.A. No.455/C/2016 cannot be a revenue receipt on waiver of the same. Being so, there is no question of invoking the provisions of section 41(1) of the Act. The addition made by the Assessing Officer is not justified and the same is deleted by the CIT(A).
6.2 Further, we make it clear that even if the assessee has credited the waiver of any portion of loan to Profit & Loss account, it cannot be considered as income of the assessee. It is inappropriate to say that the assessee was debarred from claiming the same as not income either u/s. 28(iv) or 41(1) of the I.T. Act. In our opinion if the assessee under some misapprehension or mistake made an entry in the Profit & Loss account and credited the said waiver of the loan to the Profit & Loss account and although under the law, it cannot be treated as income of the assessee, the assessee will not lose the right of claiming that it is not the income of the assessee. Whether the assessee is entitled to a particular deduction or not, will depend on the provisions of law relating thereto and not on the view which the assessee might take of his rights nor can the existence or absence of entries in the Profit & Loss account be decisive or conclusive in the matter as held by the Supreme Court in the case of CIT vs. Kedarnath Jute Mfg. Co. Ltd. (82 ITR 363). In our opinion, the CIT(A) is justified in deleting the addition made on this count. This ground of appeal of the Revenue is dismissed.
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I.T.A. No.455/C/2016
7. In the result, the appeal filed by the Revenue is dismissed.
Order pronounced in the open Court on this 25th May, 2018.
sd/- sd/- (GEORGE GEORGE K.) (CHANDRA POOJARI) JUDICIAL MEMBER ACCOUNTANT MEMBER Place: Dated: 25th May, 2018 GJ Copy to:
1. M/s. Fuddge Industries P. Ltd., Puthussery Church Building, Njaliakuzhy, Vakathanam P.O., Changanassery.
2. The Deputy Commissioner of Income Tax, Circle-1, Thiruvalla.
3. The Commissioner of Income-tax(Appeals), Kottayam.
4. The Pr. Commissioner of Income-tax, Kottayam.
5. D.R., I.T.A.T., Cochin Bench, Cochin.
6. Guard File.
By Order (ASSISTANT REGISTRAR) I.T.A.T., Cochin 7