Income Tax Appellate Tribunal - Delhi
Deputy Commissioner Of Income Tax vs Tosha International Ltd. on 31 July, 2007
Equivalent citations: (2008)116TTJ(DELHI)941
ORDER
R.C. Sharma, A.M.
1. This is an appeal filed by the Revenue against the order of CIT(A) dt. 6th Aug., 2004 for the asst. yr. 2001-02, in the matter of orders passed under Section 143(3) of the IT Act, 1961 wherein following grounds of appeal have been raised:
1. On the facts and in the circumstances of the case, the learned CIT(A) has erred in deleting the addition of Rs. 10,47,93,857 made on account of gains arising on account of cessation of liabilities as the assessee has gained from the waiver of principal amount.
2. Rival contentions have been heard and record perused. Facts in brief are that the assessee was engaged in manufacturing of black and while picture tube. Due to depression in the market and colour picture tube taking over the black and white picture tube demand was considerably reduced. Accordingly, the assessee company was running in huge losses and was also having accumulated losses exceeding its capital and reserve. It has become a sick company and was registered with BIFR. The assessee after it being declared a sick unit sorted out its repayments position with the financial institution and the bank. Under one time settlement scheme the financial institutions and banks asked the assessee to pay 60 per cent of the principal's dues and waived of the interest payment. The assessee owed the financial institutions and banks the following amount of interest:
Financial institutions Rs. 18,36,92,066.90
Banks Rs. 8,33,04,297.74
----------------------
Rs. 26,69,96,364.64
----------------------
Under Section 43B, interest debited to P&L a/c but not paid in case of financial institutions was not claimed and allowed as expenditure. The assessee had not claimed these expenses though debited to the P&L a/c in the computation of income and consequently waiver of interest amounting to Rs. 18,36,92,066.90 cannot be treated as income. As regarding waiver of bank interest, the same has been treated as income by the assessee and claimed as such in the computation of income filed. The AO has accepted the contention of the assessee as far as the waiver of interest is concerned. His only objection was that there has been also a waiver of principal amount as well and the resultant waiver amounts to Rs. 10,47,93,857 which the assessee has directly credited to capital reserve account. The AO further observed that the assessee had borrowed from financial institutions against working capital and against term loans. These borrowed monies were utilized for the working capital or indirectly the benefit would have translated into the trading results of the company. The assessee definitely gained in the trading activity on the basis of these loans. Secondly, the assessee when bought assets consisting of plant and machinery, buildings other assets, it derived a benefit on the head of depreciation. It clearly indicates that the assessee has been deriving benefit on the basis of either depreciation or utilizing the working capital, which would have been a part of the earlier year's income, and returns filed, accordingly. Now these loans have ceased to exist and assessee has credited the receipts of these monies to the capital reserve account. It means that when the assessee will sell the stocks for which he had borrowed these monies, he would be gaining indirectly. On the other hand also, the assessee when sells any of the assets, they would be on the book value and he would have enjoyed complete depreciation benefits whereas he would have actually gained on account of remission of principal amount. As per AO, remission on account of cessation of liability, which the assessee has been utilizing for the benefit of his business, has to be treated as income and no rebate on account of capital receipt or the receipt not covered under Section 41 is to be allowed. Thus, the AO added Rs. 10.47 crores in the income of the assessee.
3. By the impugned order, CIT(A) deleted the addition by observing that remission of principal amount of loan does not amount to income under Section 41(1) nor under Section 28(iv) nor under Section 2(24) of the IT Act, 1961.
4. Aggrieved by the above order of the CIT(A), 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 law cited by learned Authorised 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 waiver of principal amount, the assessee has directly credited the same to capital reserve account. The AO 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(l)/28(iv)/2(24) of the IT 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. v. CIT Hon'ble High Court of Bombay, held that no allowance or deduction having been allowed in respect of loan taken by assessee for purchase of capital assets, Section 41(1) was not attracted to remission of principal amount of loan. In the instant case, the assessee has not got any deduction on account of acquisition of capital assets as the same has been reflected in the balance sheet and not in the P&L a/c, 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 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 under Section 2(24) speaks as to what are the items to be included under the definition of income. It includes profits 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 sum chargeable under Clauses (iiia), (iiib), (iiic), (iv) and (v) of Section 28, capital gains under Section 45, profit and gains of business in accordance with Section 44, winnings 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.
5. In view of the above, we do not find any infirmity in the order of the CIT(A) for deleting the addition made on account of waiver of principal amount of loan.
In the result, the appeal of the Revenue is dismissed.