Income Tax Appellate Tribunal - Mumbai
Pal Credit & Capital Ltd., Mumbai vs Assessee on 19 December, 2012
आयकर अपीलीय अिधकरण,
अिधकरण मुंबई Ûयायपीठ ''सी ' मुंबई ।
IN THE INCOME TAX APPELLATE TRIBUNAL " C " BENCH, MUMBAI
सव[ौी एच.एल. कावा[ अÚय¢ एवं नरे Ûि कुमार ǒबãलैáया, लेखा सदःय के सम¢
BEFORE SHRI H.L. KARWA, PRESIDENT AND SHRI N.K. BILLAIYA, AM
आयकर अपील सं./I.T.A. No. 2302/Mum/2012
िनधा[रण वष[ / Assessment Year : 2007-08
(िनधा[
M/s. Pal Credit & Capital Ltd., The DCIT, Range-8,
rd
Amarsons Bhavan, 3 Floor, बनाम/
बनाम Aayakar Bhavan,
Shri Vile Parle, Vs. Mumbai-400 020
KVO Seva Sangh,
68, Misquitta Street,
Opp. Railway Crossing,
Vile Parle (E),
Mumbai-400 057
ःथायी ले खा सं . /जीआइआर सं . /PAN/GIR No. AAACP 4600N
(अपीलाथȸ /Appellant) .. (ू×यथȸ / Respondent)
अपीलाथȸ ओर से/ Appellant by: Shri Jayesh Dadia
ू×यथȸ कȧ ओर से/Respondent by Shri Girija Dayal
सुनवाई कȧ तारȣख / Date of Hearing :19 .12.2012
घोषणा कȧ तारȣख /Date of Pronouncement :31.12.2012
आदे श / O R D E R
PER N.K. BILLAIYA, AM:
This appeal by the assessee is directed against the order of the Ld. CIT-8, Mumbai dt.5.3.2012 passed u/s. 263 of the Act pertaining to A.Y. 2007-08.
2 ITA No.2302/M/20122. The assessee has challenged the correctness of the order alleging that the CIT has erred in law and on the facts of the case in invoking provisions of Section 263 of the I.T. Act. By doing so, the CIT erred in directing the AO to treat waiver of principal amount of loan as income and further erred in directing the AO to recast the audited accounts for the purpose of calculating MAT.
3. Briefly stated the facts of the case are that the assessment u/s. 143(3) of the Act was done by the AO vide order dt. 30.11.2009. Subsequently invoking the powers vested upon him u/s. 263 of the Act. The CIT issued show cause notice dt. 7.2.2011 stating that the assessee has received one time waiver of principal amount of loan from various banks amounting to Rs. 423.45 lakhs which was supposed to be taxed u/s. 41(1) of the Act in view of the decision of the Hon'ble Bombay High Court in the case of Solid Containers Ltd. Vs DCIT 308 ITR 417, which has rendered the assessment order not only erroneous but also pre-judicial to the interest of the Revenue. The CIT further issued a show cause notice dt. 18.5.2011 reiterating that due to non taxability of the principal amount of loan waived the assessment order is erroneous and prejudicial to the interest of the Revenue.
3.1 Replying to the first notice dt. 7.2.2011, the assessee explained that the waiver of principal amount of term loan cannot be brought to tax as per the decision of the Tribunal in assessee's own case for A.Y. 2001-02. It was further explained that the ratio laid down by the Hon'ble Bombay High Court in the case of Solid Containers Ltd. (supra) do not apply on the facts of the case inasmuch as the principal amount of bank loans is not in the nature of trading liability u/s. 41(1) of the Act. An amount can be brought to tax only if the said amount was claimed as deduction in earlier years and there is a remission of trading liability. To support, the 3 ITA No.2302/M/2012 assessee relied upon the decision of the Hon'ble Bombay High Court in the case of Mahindra & Mahindra Ltd. 261 ITR501. The assessee claimed that the CIT should not interfere with the assessment order only because another view is possible. For this proposition, reliance was placed on the decision of the Hon'ble Supreme Court in the case of Green World Corpn. 314 ITR 81. The Ld. CIT further issued notice dt. 12.7.2011 asking the assessee to furnish all necessary documentary evidences in support of its claim that the ratio of the decision of the Hon'ble Bombay High Court in the case of Mahindra & Mahindra (supra) is applicable. The Ld. CIT further in the same notice stated that as the receipts on account of one time settlement of the bank has not been considered by the assessee for computation of book profit u/s. 115JB, the assessment is erroneous and prejudicial to the interest of the Revenue.
3.2. The assessee filed a detailed reply dt. 2.2.2012 covering the contention of the CIT as raised in all the three notices taken together. It was explained that all the necessary and relevant details have been filed at the time of assessment. Further, the accounts have been prepared in accordance with part II and III of Schedule-VI to the Companies Act. The audited accounts have been certified by the auditors and the same are in accordance with Schedule-VI of the Companies Act. The accounts have also been approved by the shareholders in the General Body Meeting and also been approved by the Registrar of Companies. Under these circumstances, the audited accounts cannot be disturbed or recast as the Act has not given any power to the AO to recast the audited accounts. For this proposition, the assessee relied upon the decision of the Hon'ble Supreme Court in the case of Apollo Tyres Ltd. 255 ITR 273.
4. After considering the detailed submissions of the assessee the CIT came to the conclusion that there is no doubt that the assessee has 4 ITA No.2302/M/2012 received waiver of one time settlement of principal amount of Rs. 423.45 lakhs from various financial institutions. This shows that the amount of Rs. 423.45 lakhs has crystallized by way of cessation of liability, which is covered by the definition of profit/benefits within the meaning of Sec. 28(iv) r.w. section 41(1) of the Act. The CIT further relied upon the decision of Hon'ble Supreme Court in the case of CIT Vs T.V. Sundaram Iyengar & Sons Ltd. 222 ITR 344. The CIT further relied upon the decision of the Solid Containers Ltd. (supra) distinguishing it from the decision of Mahindra & Mahindra (supra). Accordingly, the Ld. CIT held as under:
"Hence, if the loans were taken for the purpose of circulating capital, upon waiver thereof, the loans would be liable to be treated as the assessee's income. Therefore, the AO is directed to ascertain the purpose and utilization of the waived loans and treat them as the assessee's income in terms of the decision of the Hon'ble Bombay High Court in Solid Containers Ltd.
The AO is further directed to ascertain whether the waived loans were taken by the assessee for acquisition of depreciable capital assets for the purpose of its business and if so, the AO is directed to withdraw depreciation to the extent of the principal amounts of waived loans in terms of S. 43(1) r.w. Explanation 10 thereof which was inserted in the I.T. Act, 1961 by Finance (No.2) Act, 1998 w.e.f. 1.4.1999, thereby rendering the decision of Mahindra & Mahindra Ltd. which pertains to A.Y. 1976077, as inapplicable.
Alternatively, even if the assessee's contention that it utilized the loans for acquiring fixed assets is accepted, then also the assessee cannot escape from the provisions of Sec. 28(iv) r.w.s. 29/41(1)/43(1) of the Act for the reason that the assessee has claimed deduction in earlier years in the form of depreciation on fixed assets acquired out of the impugned loans. Thus, since the impugned loans have been utilized by the assessee for the purpose of business and the assessee has been allowed deduction in the form of depreciation in respect of assets purchased out of the borrowed funds, the assessee cannot take the plea that no 5 ITA No.2302/M/2012 deduction was given to it in respect of the principal amounts in earlier years. Accordingly, the amount of Rs. 423.45 lakhs is liable to be added to the income of the assessee under the provisions of Sec. 28(iv) of the Act as well as by applying the provisions of Sec. 41(1) of the Act. However, it is evident that the AO had not examined the receipt of One time settlement of Principal amount of loan in the light of the provisions of Sec. 28(iv) as well as section 41(1)/43(1) of the Act, which has rendered the assessment order erroneous and has caused prejudice to the interest of Revenue. The AO is accordingly directed to treat the amount of Rs. 423.45 lakhs received as one-time waiver of loan in terms of the directions given hereinabove."
Finally the Ld. CIT set aside the assessment order dt. 30.11.2009 to be reframed as per the directions given.
5. Aggrieved by this finding of CIT, the assessee is before us. The Ld. Counsel for the assessee strongly submitted that the CIT has grossly erred in invoking Section 263 on the facts of the case. Firstly because on given facts two views are possible therefore if the AO has accepted one view, the CIT cannot direct the AO to follow another view by invoking powers vested on him u/s. 263 of the Act. The Ld. Counsel further argued that even on merit, the decision relied upon by the CIT do not apply on facts of the case. The Ld. Counsel pleaded that the directions given by CIT may be suitably modified while deciding the issue on merit. The Ld. Counsel further submitted that application of Sec. 115JB is unwarranted on the treatment of the waiver of principal amount of loan.
6. Per contra, the Ld. Departmental Representative strongly placed reliance on the order of CIT and argued that the directions issued by CIT are in line with the decisions relied upon by him therefore, there is no error or flaw in the order u/s. 263 of the Act.
7. We have considered the rival submissions and perused the orders and the decisions relied upon by both the sides. It is not in dispute that 6 ITA No.2302/M/2012 the CIT has invoked the powers u/s. 263 because according to his view, the onetime waiver of principal amount of loan from various banks amounting to Rs. 423.45 lakhs ought to have been taxed u/s. 41(1) of the Act. To substantiate his view the CIT relied upon the decision of Solid Containers (supra). On a careful perusal of the decision of the Hon'ble Bombay High Court in the case of Solid Containers Ltd. (supra), we find that in that case the assessee has taken loan for the purpose of business in the form of circulating capital and on waiver of the said loan, it has been held that the same was taxable u/s. 41(1) of the Act since the amount was taken in the course of trading transaction. We also find that in the said decision, the Hon'ble Bombay High Court has considered the decision of Mahindra & Mahindra (supra) and has made an observation that in the case of Mahindra & Mahindra, the loan was taken for the purchase of plant and machinery and therefore the waiver could not constitute business. The Court observed that the facts of the present case (Solid Containers) 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. On that note the Hon'ble Jurisdictional High Court finally concluded that the principle stated by the Hon'ble Supreme Court in the case of T.V. Sundaram Iyengar would be squarely applicable to the facts of the present case.
7.1. We find that the decision of the Hon'ble Jurisdictional High Court relied upon by the CIT is more in favour of the assessee than to the Revenue inasmuch as in the present case, it is the claim of the assessee that the loan was taken for the purchase of capital asset and therefore any waiver of principal amount would not constitute a trading receipt. We also find support from the decision of the Hon'ble Bombay High Court in 7 ITA No.2302/M/2012 the case of CIT Vs Xylon Holdings Pvt. Ltd. in ITA No. 3704 of 2010 wherein the Hon'ble Jurisdictional High Court held as under:
"We have considered the submissions. The issue arising in this case stand covered by the decision of this Court in the matter of Mahindra & Mahindra (supra). The decision of this Court in the matter of Solid Containers (supra) is on completely different facts and inapplicable to this case. In the matter of Solid Containers (supra), the assessee therein had taken a loan for business purpose. In view of the consent terms arrived at, the amount of loan taken was waived by the lender. The case of the assessee therein was that the loan was a capital receipt and has not been claimed as deduction from the taxable income in the earlier years and would not come within the purview of Section 41(1) of the Act. However, this Court by placing reliance upon the decision of the Apex Court in the matter of CIT Vs T.V. Sundaram Iyengar and Sons Ltd. 222 ITR 344 held that the loan was received by the assessee for carrying on its business and therefore, not a loan taken for the purchase of capital assets. Consequently, the decision of this Court in the matter of Mahindra & Mahindra Ltd. (supra) was distinguished as in the said case the loan was taken for the purchase of capital assets and not for trading activities as in the case of Solid Containers Ltd. (supra). In view of the above, the decision of this Court in the matter of Solid Containers Ltd (supra) will have no application to the facts of the present case and the matter stands covered by the decision of this Court in the matter of Mahindra & Mahindra Ltd. (supra). The alternative submission that the amount of loan written off would be taxable u/s. 28(iv) of the Act also came up for consideration before this Court in the matter of Mahindra & Mahindra Ltd (supra) and it was held therein that Section 28(iv) of the Act would apply only when a benefit or perquisite is received in kind and has no application where benefit is received in cash or money.
In view of the issue arising in this appeal being covered by the decision of this Court in the matter of Mahindra & Mahindra Ltd. (supra), no substantial question of law arises and both the questions are dismissed."8 ITA No.2302/M/2012
8. Considering the above decisions, in our considerate view the directions of the CIT deserves to be modified and accordingly modifying the directions of the CIT, we restore this issue back to the file of the AO. The AO is directed to verify whether the assessee has borrowed loan for the purchase of capital asset and the assessee is directed to furnish all necessary details/documents to substantiate its claim.
9. Further coming to the second issue relating to the computation of book profit for the purpose of MAT on account of the waiver of principal amount of loan, we do not find any merit in the directions of CIT inasmuch as book profit under provisions of Sec. 115JB has to be computed on the basis of net profit disclosed as per profit and loss account prepared under provisions of Part-II & III of Schedule-VI of Companies Act and laid before company at its Annual General Meeting in accordance with provisions of Sec. 210 of Companies Act, 1956. On identical facts, the Tribunal in the case of ITO Vs Galaxy Saws (P) Ltd. 132 ITD 236 has held as follows:
"We also note from the provisions of Explanation 1 to section 115JB(2) that amount carried to any reserve by whatever name called has to be added to the net profit if the amount had been debited to the profit and loss account. In this case the revaluation reserve had been directly taken to the balance sheet and not debited to the profit and loss account and therefore the amount could not be added under clause (b) of Explanation 1 to section 115JB(2). It is also pertinent to note that clause (iia) was inserted to the Explanation 1 with effect from 1-4-2007 in which it was provided that amount of depreciation debited to the profit and loss account excluding the depreciation on account of revaluation of assets has to be reduced from the net profit. Thus the Legislature though it fit to exclude the depreciation on account of revaluation of assets from the amount to be 9 ITA No.2302/M/2012 reduced from the net profit but there were no similar provision inserted for addition of revaluation reserve to the net profit even if the same was not debited to the profit and loss account. This shows that the Legislature had consciously not made any provision for addition on account of revaluation reserve taken to the balance sheet.
In view of the foregoing discussion and for the reasons given earlier we are of the considered opinion that no addition could be made to the net profit on account of revaluation reserve directly taken to the balance sheet while computing the book profit. We accordingly see no infirmity in the order of CIT(A) deleting the addition made by the Assessing Officer and the same is upheld."
Respectfully following the decision of the Tribunal, the directions issued by the CIT on this count is quashed.
10. In the result, the appeal filed by the assessee is partly allowed for statistical purposes.
पǐरणामतः िनधा[ǐरती कȧ अपीलɅ सांÉयकȧय उƧे ँय केिलए आंिशक ःवीकृ त कȧ जाती है ।
Order pronounced in the open court on 31.12.2012 आदे श कȧ धोषणा खुले Ûयायालय मɅ Ǒदनांकः 31.12.2012 को कȧ गई ।
Sd/- Sd/-
(H.L. KARWA) (N.K. BILLAIYA)
अÚय¢ /PRESIDENT लेखा सदःय / ACCOUNTANT MEMBER
मुंबई Mumbai; Ǒदनांक Dated 31.12.2012
व.िन.स./ RJ , Sr. PS
10 ITA No.2302/M/2012
आदे श कȧ ूितिलǒप अमेǒषत/Copy of the Order forwarded to :
1. अपीलाथȸ / The Appellant
2. ू×यथȸ / The Respondent.
3. आयकर आयुƠ(अपील) / The CIT(A)-
4. आयकर आयुƠ / CIT
5. ǒवभागीय ूितिनिध, आयकर अपीलीय अिधकरण, मुंबई / DR, ITAT, Mumbai
6. गाड[ फाईल / Guard file.
आदे शानुसार/ BY ORDER, स×याǒपत ूित //True Copy// उप/सहायक पंजीकार Dy./Asstt. Registrar) यकर अपीलीय अिधकरण, मुंबई / ITAT, Mumbai