Income Tax Appellate Tribunal - Chandigarh
Vardhman Threads Ltd., Chandigarh vs Department Of Income Tax on 18 December, 2006
IN THE INCOME TAX APPELLATE TRIBUNAL
CHANDIG ARH BENCH 'B', CHANDIG ARH
BEFORE SHRI T.R. SOOD, ACCOUNTANT MEMBER AND
Ms. SUSHMA CHOWLA, JUDICI AL MEMBER
ITA No. 265/Chd/2007
Assessment Year : 2003-04
A.C.I.T. Circle 2(1) Vs. Vardhman Threads Ltd.
Chandigarh SCO 1-2-3, Sector 17
Chandigarh
(Appellant) (Respondent)
Appellant by Shri Amarveer Singh
Respondent by: S/Shri G.N. Gupta & Shivneet Jain
Date of hearing 18.11.2013
Date of Pronouncement 23.12.2013
O R D E R
PER T.R.SOOD, A.M
This appeal is directed against the order dated 18.12.2006 of the ld. CIT(A), Chandigarh.
2 In this appeal the Revenue has raised following grounds.
" 1. O n th e fac ts a nd c i r c ums t anc es of t h e c as e an d i n l aw , t h e l d. C.I .T . ( Ap p e als ) i n A pp e a l N o. 2 39 / P/ 0 5- 0 6 , t hr ou g h or d er da t ed 18 . 12 .2 0 06 , h as er r e d i n de l et i n g / a ll o w in g t he f o l lo w in g :
( i) A dd i ti o n of Rs . 1, 3 4, 2 4, 3 19 /- m ad e o n ac c o un t of inc o me ac c r u a l s ho w n as l oa n wr i tt en bac k .
( i i) A dd i ti o n o f Rs . 1 ,7 3 ,7 83 /- m a de o n ac c o un t of s t oc k d is c r ep a nc y . ( i i i) A dd i ti o n of Rs . 3 2, 2 90 /- m ad e on ac c o u nt o f f i n is h e d g o od s s up p l ie d as fr e e s a mp l es .
( iv ) A l lo w in g r e l i ef o f Rs . 2, 7 0, 26 2 /- on ac c o u nt o f de d uc t i o n u/s 8 0I B of t h e I nc o me- t ax Ac t , 1 9 61 .
(v) A l lo w in g r e l i ef o f Rs . 6, 31 , 07 3/ - on ac c o un t of d e du c t i on u /s 80 HH C o f th e I nc o m e- tax Ac t , 19 6 1.
2. It is pr ay ed t ha t th e o r de r of th e l d. C IT( A) be c a nc e ll e d an d t ha t of as s es s i ng o ff ic er b e r es to r e d.
3 1(i) After hearing both the parties we find that during assessment proceedings the AO noticed that the assessee has shown income of Rs. 1,34,24,390/- under the head "loan written back". However, this amount was reduced from the net profit 2 while determining the assessable income by giving following note:
" 2. 1( i) " Dur i n g t he y e ar , C om p any h as wr i tt e n bac k a s um o f Rs . 1, 3 4, 24 , 31 9 b e i ng th e am o un t o f l o an pay a b le t o M/s B ar b o ur C a mp b e l l Tex t i l es L td . ( BCT L) as th e s a m e h as be e n w a iv e d by B C TL. T h e c om p any f or m er ly k no wn as Ba r b o ur V ar dh ma n T hr e a ds Lt d. ( B V TL) w as a j o in t v e nt ur e b et w e en BC TL an d Ma h av i r Sp i nn i n g Mi l ls L td . ( MS ML ) . Th e c om p any w as r e g u lar s u p p li er o f its p r od uc ts t o B CT L. I n or der t o c at er th e a dd i ti o na l r eq u ir em e nt o f BC TL , th e Co m pa ny at t he i ns t a nc e of B CT L ex p an d ed i ts pr o d uc t i o n c a p ac ity wh ic h w as par t ly f u n de d by BC TL t hr o u gh a n i nt er es t fr ee l o an of P o u n ds St er l in g 22 6 5 00 . H ow ev er th e s a i d ar r a ng e m en t of s u p p ly to B CTL was dis c o nt i n ue d as BCT L wi t hdr e w fr o m t h e j o i n t v e nt ur e. O n a bov e d is en g ag e me n t, BCT L agr e e d to r ec e iv e P o un ds 3 1, 7 50 i n fu l l a nd f in a l s e tt l e me n t o f th e a bov e me n ti o n ed l o an a n d w a iv e d of f th e b a la nc e am o un t o f Po u n ds 1, 9 4, 7 50 , k ee p i ng i n m in d t he d if f ic u l ty t o b e f ac ed b y th e Co m p any i n s er v ic in g th e l o an , w h ic h was ear l i er t o b e p a id ou t of ear n i ng fr o m ma ter i a ls ex p or te d by C o mp a ny to B CT L. T h e s ai d l oa n w as for ex pa ns i on o f p l an t be i n g of per m an e nt a nd c ap i ta l n a tur e a n d was a n a pp ar at us t o ear n en d ur in g b e ne f its ov e r a lo n g p er io d o f t i me . Th er ef or e, t h e w a iv er of l oa n by M/s B CT L is a c a pi t al r ec e i pt a n d has n ot b e en i nc l u de d i n tax a bl e i nc o me o f t he Co m pa ny . "
In support of the above claim the assessee placed reliance on the following decisions:
2. 2 Th e as s es s e e has c it e d t h e fo l l ow i ng C as e L aws i n s u pp or ts of i ts v i ew :-
i) Hos h ia r p ur E l ec tr ic Su pp ly C o. Lt d. Vs . C IT( 19 6 1) 4 1 ITR 60 8( SC ) i i) K et te l ew e l l B u ll e n & C o. L t d. Vs . CI T( 1 9 64 ) 5 3 ITR 26 1( SC ) i i i) Tir u ne lv e li Mo tor B us S er v ic es C o. ( P) L td . Vs . C IT( 19 7 0) 78 IT R 55( S C) iv ) CIT Vs . Bar i u m Ch e m i c a ls Lt d. ( 19 8 7) 1 68 I TR 1 64( A P)
v) B om b ay Bur m ah Tr a d i ng Cor p or at i on Lt d. Vs . CI T ( 1 9 71) 8 1IT R 77 7( B om .) v i) As hok En g g. C o. Vs . I TO ( 1 9 90) 3 1T TJ 1 ( Hy d) .
4 The assessee was further asked to furnish details of this transaction in response the assessee field following details:
" i) Th e as s es s ee 's p ar e nt c o mp a ny M/s Ma hav ir S p i nn i ng Mi l ls L im i te d ( MS ML ) ha d e nt er ed i n to a j o i n t v e n tur e w it h M/ s B ar b o ur Ca m pb e l l T ex t i l e L im i t ed ( BCT L) t o f or m a c om p any c a l l e d M/s B ar b o ur V ar d h ma n Th r e a ds L i mi t ed ( B VT L) . Th is c om p any ha d i n it i a l s har e c ap i ta l o f Rs . 8 Cr or e s i n t h e f or m of 8 0 la k h s har es of Rs . 1 0/ - e ac h .
Th is ar r an g em e nt w a s ar r iv ed pr i or t o t he pr ev i ous y e ar 2 0 02- 0 3, r e lev a nt t o th e A. Y. 20 03- 0 4 i .e . i n F. Y. 19 9 8 - 99 .
i i) O n 3 1. 3. 2 00 0 , M/s BC TL d ec id e d to w i th dr a w its e lf fr o m M/s B VT L dec i d ed t o w it hdr a w its e lf fr o m M/s B VTL b ec a us e of s o m e b us in es s r e la te d is s ues . Th is h as h a pp e ne d b ec a us e of a n ot h er b us in es s v en t ur e of M/s B CT L w it h a f o r e ig n c om p any w her e b y it wo u l d n o lo n ge r b uy t he pr o d uc ts o f M/s B VT L. Th er ef or e , it n e go t ia t ed w it h th e p ar e nt c o mp a ny of M/s B VT L i. e. M/s MS ML r e g ar di n g w it hd r aw a l of its inv es tm e nt .
3i i i) Pr i or o f 3 1 .3 .2 0 00 , 5 0% s ha r es of M/s B V TL w er e h e l d by M/s BC TL . Re m a in i n g 5 0 % s h ar es w er e he l d by M/s MS ML an d i ts pr o mo t er , S h. S. P. O s wa l .
iv ) S ubs e qu e nt t o t h e d i s en g ag e m en t o f M/s BC TL , t he s h ar es he l d by M/s B CT L wr e p ur c has e d by M/s MS ML ( 75 % o f s h ar es ) a n d t he ba l a nc e by M/s V SG M L( a G r o up c o mp a ny o f S h. S. P . O s w a l) . T h us , as st on 1 A pr i l, 20 0 0, t h e e nt ir e C a pi t al h ol d i ng of M/s BC TL i n M/ s B VT L c am e i n t he ha n ds of t he pr o m ot er gr o up o f t he as s es s e e.
v) Th e n a me o f M/s B V TL was c h an g ed t o M/s V ar dh m an Th r e a d s L im i te d ( pr es e nt as s es s e e) w. e. f. 2 7. 0 6. 2 00 0. S u bs e q ue n tl y , t he c om p os it i on o f t h e B o ar d o f Di r ec tor s o f th e as s es s e e c o mp a ny w as als o c ha n ge d w . e. f. 24 . 08 . 20 0 0. T h e D ir ec t or s of M/s BC TL n am e ly , S h . Tu d o Dav is , Sh . Cer i Mar c J o nes a n d Sh . A l ex A tk ins o n c eas e d t o b e a Dir ec tor s of t he as s es s ee c om p any w . e. f. t h i s d at e .
v i) In t he me a nt i me , v i d e l et ter d a te d 2 8. 1 0. 19 9 8 ( i .e . n th e b e gi n n in g of t h e j oi n v e nt ur e m e nt i on e d a bov e) M/s B CTL ex pr es s ed its r ea d in es s to p ar t f i na nc e t h e p r op os e d ex p ans i o n of c a pac i ty o f M/s BV TL, by mak i n g a n i nt er es t fr e e a dv an c es of P o un ds 2, 2 6, 50 0 wh ic h was me a nt for s e tt i n g u p ad d it i o n a l pr o d uc t i o n fac i l ity . It w as a ls o c onv ey ed by M/s BC TL t ha t t h e a dv a nc e a m o un t may b e r ep ay e d du r i n g t h e p er i o d o f S ix y ear s i n q uar te r ly i ns t a ll m e nts of P o un ds 95 00 s t ar t i ng fr o m 3 0. 0 6 .9 9. It was f ur th er me n ti o ne d t ha t t he to t al a mo u nt may b e r e pa ir e d n ot la t er th a n 31 . 12 .2 0 05 .
v i i) B as e d u p on th is le tt e r , M/s B VT L c ar r i e d ou t ex p ans i on of th e pr o j ec t . T ot a l p l a nt an d mac h i ner y t o t h e t un e of Rs . 1, 5 6, 1 2, 6 45 /- ( P ou n d 2 ,2 6 ,5 0 0 x 68 . 93) was pu r c h as ed by M/s B VTL . T his p ur c h as e of mac h i ner y w as e nt ir e ly f i n anc e d by M/s B CT L. T he d u e c l a im o f de pr ec ia t io n h as a ls o be en m ad e by t h e as s es s e e c o m pa ny o n t his mac h i ner y . A t t h e s a me t i me , th is a m ou nt h as b e e n s h o wn as a no n i nt er es t be ar i ng l oa n r a is e d f r o m M/s B CT L, i n t he b ook s o f as s es s e e c om p any .
v i i i) S ubs e qu e nt ly , v i d e l et ter da t ed 01 . 03 .2 0 01 , M/s BCT L has s t a te d th at n o p ay me nt of t he l o a n w h ic h w as r e pay a bl e i n 2 4 e qu a l i ns t a ll m e nts w .e .f . 3 0. 0 6. 19 9 9 h as b e en ma d e. I t h as b e en fur th e r c onv ey ed i n t h is l e tt e r th at k ee p i ng i n m i n d t he d if f ic u l ti es t o m a in ta i n th e f ur t h er r e l at i o ns h i p a nd th e f ac t th a t th e as s es s ee c o mp a ny w i l l f ac e d if fic u lty i n s e r v i n g t h e l o a n, it h as b e en de c i de d t h at po r t i on of t he l o an no t d ue f or r e p ay me nt w ou l d b e wa iv e d of f. It h as a ls o be e n s ta t e d th a t M/s B CT L w o u ld a gr ee t o w a iv e o ff t he ba l a nc e a m ou nt o f P ou n ds 1, 9 4, 75 0 , i f an a mo un t of P ou n ds 3 1 ,7 5 0 is p a id by th e as s es s e e c om p any to M/s B CT L . Th is a m o un t o f P o un ds 3 1, 7 50 has s u bs e q ue n tly be e n p ai d , af te r th e a ppr ov a l of R B I v i de le t ter d a te d 3 1. 0 5. 2 00 2.
ix ) Th us , a n as s es s ee has ef fec t iv e ly ga i ne d a n a mo u nt of Rs . 1, 3 4, 24 , 31 9/ - ( P ou n ds 1 ,9 4, 7 50 ) dur i n g th e F Y 20 0 2- 0 3 , on ac c o un t of wa iv er of l oa n by M/s BC TL . "
On the basis of above the details and chain of events the Assessing Officer concluded that he assessee became owner of the machinery acquired from time to time when this loan was advanced by BCTL. The assessee has claimed depreciation on these assets from year to year. Therefore, the assessee has got double benefit in the sense that on one hand the assessee has claimed depreciation and on the other hand, loan was waived. According to him whole chain of events was arranged 4 in such a way that that the assessee would ultimately escape the taxes. Assessing Officer further found that the case laws cited by the assessee were distinguishable. He ultimately held that the arrangement was contrived and therefore, same was assessed as income of the assessee as income from "other sources".
5 On appeal before the ld. CIT(A) it was mainly contended that it was a case of waiver of loan which was taken for acquiring capital assets and therefore, receipt at the time of receiving was in nature of capital receipt and the same cannot be subjected to tax.
6 The ld. CIT(A) found force in the same and observed that the transaction into which the assessee had entered falls squarely within the ambit of category of transactions in the nature of capital field and therefore, same were not taxable.
7 Before us the ld. DR for the revenue carried us through the facts as noted by the Assessing Officer and submitted that the assessee had got benefit of depreciation and therefore, this amount was taxable. In this regard he relied on the order of Hon'ble Delhi High Court in case of Logitronics P Ltd. Vs. CIT, 333 ITR 386 (Delhi).
8 On the other hand, the ld. counsel of the assessee strongly supported the impugned order and emphasized that when the loan was taken the receipt was of capital nature and therefore, same cannot be taxed now. In this regard he strongly relied on the decision of Hon'ble Bombay High Court in case of Mahindra and Mahindra Ltd. Vs. CIT, 261 ITR 501(Bombay). He further submitted that the assessee has not received any cash therefore, same cannot be taxed even u/s 28(iv) as "benefit by perquisite arising f rom business" and in this regard he strongly relied on the decision of Hon'ble Gujarat High Court in case of CIT V. Alchemic Pvt Ltd. 130 ITR 168 (Gujarat).
59 W e have heard the rival submissions carefully. Nature of transaction has been summarized by the ld. CIT(A) correctly at page 5 & 6 of his order which is as under:
" i) Th e as s es s ee 's p ar e nt c o mp a ny M/s Ma hav ir S p i nn i ng Mi l ls L im i te d( MS ML) ha d en t er e d in to a jo i nt v en tur e w i th M/s B ar b o ur Ca m pb e l l T ex t i l e L im i t ed ( BCT L) t o f or m a c om p any c a l l e d M/s B ar b o ur V ar d h ma n Th r e a ds L i mi t ed ( B VT L) . Th is c om p any ha d i n it i a l s har e c ap i ta l o f Rs . 8 Cr or e s i n t h e f or m of 8 0 la k h s har es of Rs . 1 0/ - e ac h .
Th is ar r an g em e nt w a s ar r iv ed pr i or t o t he pr ev i ous y e ar 2 0 02- 0 3, r e lev a nt t o th e A. Y. 20 03- 0 4 i .e . i n F. Y. 19 9 8 - 99 .
i i) O n 3 1. 3. 2 00 0 , M/s BC TL d ec id e d to w i th dr a w its e lf fr o m M/s B VT L bec a us e o f s o m e b us i nes s r e l at e d is s u es . T h is h as ha p pe n ed b ec aus e of an o th er b us in es s v e n t ur e of M/s B CT L w it h a for e i gn c om p any w h er e by it wo u ld no lo n ge r buy t he pr o d uc ts o f M/s B VT L. T he r e fo r e , i t ne g ot i at e d wi t h t h e par e nt c o mp a ny of M/s B VT L i .e . M/s MS ML r e gar d i ng wi t hdr a wa l o f i ts i nv es tm e nt .
i i i) Pr i or o f 3 1 .0 3. 2 00 0 , 50 % s h ar es of M/s B VT L w er e h e l d by M/ s BC TL . Re m a in i n g 5 0 % s h ar es w er e he l d by M/s MS ML an d i ts pr o mo t er , S h. S. P. O s wa l .
iv ) S ubs e qu e nt t o t h e d i s en g ag e m en t o f M/s BC TL , t he s h ar es he l d by M/s BC TL w er e p ur c h as e d by M/s MS ML ( 75 % o f s h ar es ) an d t he ba l a nc e by M/s V S G ML ( a G r ou p c o mp a ny of S h. S . P. O s w a l) . T hus , as st on 1 A pr i l, 20 0 0, t h e e nt ir e C a pi t al h ol d i ng of M/s BC TL i n M/ s B VT L c am e i n t he ha n ds of t he pr o m ot er gr o up o f t he as s es s e e.
v) Th e n a me o f M/s B V TL was c h an g ed t o M/s V ar dh m an Th r e a d s L im i te d ( pr es e n t as s es s e e) w. e .f 2 7. 0 6. 2 00 0. S u bs eq u en t l y , t h e c om p os it i on o f t h e B o ar d o f Di r ec tor s o f th e as s es s e e c o mp a ny w as als o c ha n ge d w . e. f. 24 . 08 . 20 0 0. T h e D ir ec t or s of M/s BC TL n am e ly , S h . Tu d o Dav is , Sh . Cer i Mar c J o nes a n d Sh . A l ex A tk ins o n c eas e d t o b e a Dir ec tor s of t he as s es s ee c om p any w . e. f t h i s d at e .
v i) In t h e m ea nt i m e, v i de le tt er d a te d 2 8. 10 . 19 9 8 ( i .e . i n t he be g i nn i ng o f t h e j o i nt v en t ur e m en t io n e d a b ov e) M/ s BCT L ex pr e s s ed i ts r ea d i nes s t o p ar t f in anc e th e pr o p os e d e x pa ns i on of c a pac i ty of M/s B VT L, by mak i ng a n i nt er es t fr e e a dv a nc e s of P ou n ds 2 ,2 6 ,5 0 0 wh ic h was m e an t for s e tt i n g up a d d it i on a l pr od uc t i on f ac i li ty . I t wa s a ls o c onv ey ed by M/ s BCT L t h at th e a dv a nc e a mo u nt m ay be r e pa y e d d ur i ng th e per i o d o f Six y e ar s i n q u ar t er ly ins ta l l m en ts of P ou n ds 9 5 00 s tar t in g fr o m 3 0 .0 6. 9 9. I t w as fur t h er m e nt i on e d th at t h e to t al a mo u nt may be r ep a ir ed no t l at er t ha n 3 1. 1 2. 2 00 5.
v i i) B as e d u p on th is le tt e r , M/s B VT L c ar r i e d ou t ex p ans i on of th e pr o j ec t . T ot a l p l a nt an d mac h i ner y t o t h e t un e of Rs . 1, 5 6, 1 2, 6 45 /- ( P ou n d 2 ,2 6 ,5 0 0 x 68 . 93) was pu r c h as ed by M/s B VTL . T his p ur c h as e of mac h i ner y w as e nt ir e ly f i n anc e d by M/s B CT L. T he d u e c l a im o f de pr ec ia t io n h as a ls o be en m ad e by t h e as s es s e e c o m pa ny o n t his mac h i ner y . A t t h e s a me t i me , th is a m ou nt h as b e e n s h o wn as a no n i nt er es t be ar i ng l oa n r a is e d f r o m M/s B CT L, i n t he b ook s o f as s es s e e c om p any .
v i i i) S ubs e qu e nt ly , v id e l et ter da t ed 1 . 03 .0 1 , M/s BCT L h as s t at e d th at n o p ay me nt of t he l o a n w h ic h w as r e pay a bl e i n 2 4 e qu a l i ns t a ll m e nts w. e. f 3 0 .0 6. 1 99 9 h as be e n ma d e. I t h as b e en fur th er c onv ey ed i n t h is l e tt e r th at k ee p i ng i n m i n d t he d if f ic u l ti es t o m a in ta i n th e f ur t h er r e l at i o ns h i p a nd th e f ac t th a t th e as s es s ee c o mp a ny w i l l f ac e d if fic u lty i n s e r v i n g t h e l o a n, it h as b e en de c i de d t h at po r t i on of t he l o an no t d ue f or r e p ay me nt w ou l d b e wa iv e d of f. It h as a ls o be e n s ta t e d th a t M/s B CT L w o u ld a gr ee t o w a iv e o ff t he ba l a nc e a m ou nt o f P ou n ds 1, 9 4, 75 0 , i f an a mo un t of P ou n ds 3 1 ,7 5 0 is p a id by th e as s es s e e c om p any to M/s B CT L . Th is a m o un t o f P o un ds 3 1, 7 50 has s u bs e q ue n tly be e n p ai d , af te r th e a ppr ov a l of R B I v i de le t ter d a te d 3 1. 0 5. 2 00 2.
6ix ) Th us , a n as s es s ee has ef fec t iv e ly ga i ne d a n a mo u nt of Rs . 1, 3 4, 24 , 31 9/ - ( P ou n ds 1 ,9 4, 7 50 ) dur i n g th e F Y 20 0 2- 0 3 , on ac c o un t of wa iv er of l oa n by M/s BC TL . "
The above clearly show that when the loan was taken by the assessee-company it was in the nature of capital receipt because the loan was used for acquisition of assets for expansion of the capacity. Therefore, later on when such loan is waived the nature of receipt cannot be changed into revenue receipt. In the similar circumstances, the Hon'ble Bombay High Court in case of Mahindra and Mahindra Ltd Vs. CIT (supra) has decided the issue in favour of assessee. In that case the assessee was in the business of manufacturing of Jeeps. In June 1964 it entered into an agreement with an American company which agreed to sell to the assessee dies, welding equipment and die models toolings for production of special types of jeeps by the assessee in India. The price of the toolings was agreed at Pounds 6,50,000 c.i.f., Bombay. The import of the toolings was approved by the Government of India. Since the assessee could not secure foreign exchange, the American company agreed to provide a loan of an amount of Pound 6,50,000 repayable after ten years in installments with interest at 6 percent free of income-tax. Consequently, in terms of the approval granted by the Central Government, the assessee received the loan for securing the toolings from the American company for which the assessee gave three promissory notes dated Sept 16, 1965, Oct 28,1965 and Nov 19,1965 in all for Pound 6,50,000. Accordingly, the toolings were supplied by the American company. In February 1976, the American company was taken over and as a term thereof it had been agreed to waive the principal amount of loan advanced to the assessee and to cancel the promissory notes as and when they matured. The assessee filed its return for the Assessment year 1976-77. In Part III of the return, the assessee showed an amount of Rs. 57,74,064 as cessation of its liability towards the American company. The Income-tax Officer came to the conclusion that with the waiver of the loan the credits represented income and not a liability. Accordingly, the Assessing Officer held that the sum of Rs. 57,74,064 was 7 taxable u/s 28 of the Income Tax Act, 1961. The Commissioner (Appeals) held that the sum of Rs. 57,74,064 was taxable as income u/s 28(iv) of the Act as such benefit was obtained in the course of business and the monetary value of that benefit was income. Alternatively, the Commissioner (Appeals) took the view that the waiver of the loan amount of Rs. 57,74,064 amounted to remission of trading liability and, consequently, the said amount was taxable u/s 41(1). According to the Tribunal, section 28(iv) was not applicable because benefit of waiver was not received by the assessee in kind. The Tribunal further took the view that even section 41(1) of the Act was not applicable becaue there was no cessation of trading liability.
In above facts it was held as under:
"Held (i) that there were two important facts which had been overlooked by the Assessing Officer. Firstly, the assessee continued to pay interest at 6 per cent for a period of ten years on the loan amount. The agreement for purchase of tooling was entered into much prior to the approval of the loan arrangement given by the Reserve Bank of India. Therefore, the loan agreement, in its entirely was not obliterated by such waiver. Secondly the purchase consideration related to capital to capital assets. The toolings were in the nature of dies. The assessee was a manufacturer of heavy vehicles and jeeps. It required these dies for expansion. Therefore, the import was that of plant and machinery. The consideration paid was for such import. In the circumstances, section 28(iv) was not attracted. Lastly the pri9ncipal amount of loan had been forgone as a part of takeover arrangement to which the assessee was not a party. The waiver of the principal amount was unexpected. In the circumstances, such waiver would not constitute business income.
(ii) That in order to apply section 41(1), an assessee should have obtained a deduction in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee. The assessee had not obtained such allowance or deduction in respect of expenditure or trading liability. The assessee had paid interest at 6 per cent over a period of ten years on Rs. 57,74,064. In respect of that interest, the assessee never got deduction u/s 36(1)(iii) or section 37. In the circumstances, section 41(1) of the Act was not applicable. Secondly, even assuming that the assessee had got deduction on allowance section 41(1) was not applicable because such deduction was not in respect of loss, expenditure or trading liability. Lastly the toolings constituted capital asset and not stock-in-trade.
Therefore, taking into account all the above facts, section 41(1) of the Act was not applicable.
From above it is clear even if the loan was taken for acquisition of capital assets i.e. in the nature of capital field then upon waiver same cannot be taxed.
810 As far as decision of Hon'ble Delhi High Court in case of of Logitronics P Ltd. Vs. CIT is concerned, in that case at page 386 it was observed as under:
"Under a one-time settlement with the bank, the assessee discharged Rs. 1,85,00,000 against the principal amount of loan of Rs. 4,76,92,213 and the remaining sum of Rs. 1,90,42,295 was waived. The Assessing Officer taxed the principal amount of loan waived as income. The Commissioner (Appeals) deleted the addition holding that the provisions of section 2(24), 28(i),(iv) and 41(1) were not applicable and the Assessing Officer was not justified in making the addition of Rs. 2,91,42,213 being the principal amount of loan waived. The Tribunal reversed the order of the Commissioner (Appeals).
On above facts it was held as under:
"Held - dismissing the appeal that the Tribunal had found that nothing was brought on record to show that the loan taken by the assessee from the bank was utilized for the purse of acquiring capital assets. On the contrary, the material on record indicated that the assessee had obtained the loan or credit facility by way of hypothecation of finished goods, semi finished goods, raw material, book debts, receivable claims, securities and rights by way of first charge which indicated that the assessee had obtained the loan facility for its business activity or trading operations. On the question whether the whole amount of the loan had been utilized either for the purpose of acquiring a capital asset or for the purpose of business activity or trading activity the Tribunal remitted the matter to the Assessing Officer for fresh adjudication. The judgments and had given an opportunity to the assessee to prove its case before the Assessing Officer. Therefore, there was no reason or occasion for the assessee to feel aggrieved by the order of the Tribunal."
From above it becomes clear that in the above case waiver of loan was held to be taxable because the Tribunal has clearly found that no material was brought on record to show that the loan taken by the assessee from the bank, was used for the acquisition of capital assets. Rather the record indicated that loan was taken by hypothecating finished stock. Thus it is clear the loan was in the nature of revenue and it was held to be taxable and therefore, the facts of this case are totally distinguishable. The facts in case before us are similar to the facts in case of Mahindra & Mahindra Vs. CIT (supra) and therefore, following the decision of Mahindra & Mahindra Vs. CIT (supra) we confirm the order of the ld. CIT(A).
11 1(ii) After hearing both the parties we find that during assessment proceedings the AO noticed that in the tax audit report the auditor has pointed out certain shortage in raw material finished goods. The assessee was asked to furnish 9 explanation. It was stated that total shortages in raw material and finished good was only 13 kg and 407 Kg which was which was found during physical verification of stock. The shortage was negligible. However, the Assessing Officer did not find force in the same and added the amount on account of these shortages to the income of the assessee.
12 On appeal, it was submitted that shortage on account of raw material was because of wastage and shortages on account of finished goods was due to the reason that some of the yarn was sent to the Laboratory for testing the strength of yarn before the clearance from the factory. Some shortage was due to reduction in weight because of evaporation of the moisture in the yarn. The ld. CIT(A) found force in the submissions and deleted the addition.
13 Before us, the ld. DR for the revenue strongly supported the order of the Assessing Officer and on the other hand, the ld. counsel of the assessee supported the impugned order.
14 After considering the rival submissions we find that shortage is very negligible and it is 0.007% in case of raw material and the same has occurred due to wastage. The assessee has also given the justification for shortage on account of finished goods which has been rightly accepted by the ld. CIT(A). Therefore, we find nothing wrong in the order of the ld. CIT(A) and confirm the same.
15 1(iii) After hearing both the parties we find that during assessment proceedings the AO noticed that the assessee has issued 93.4 kg of industrial sewing threads as samples to various parties. Upon enquiries it was submitted that these samples were given to various customers to promote the product and the value of the same has been reduced from the closing stock. However, the Assessing Officer noted that perusal of closing stock details, both valuewise and quantitatively, did not make clear that how this amount has been reduced, therefore, he made an addition of Rs. 32,290/- to the income of the assessee.
1016 On appeal this addition was deleted by the ld. CIT(A).
17 Both the parties were heard.
18 After considering the rival submissions we find force in the submissions of the ld. counsel of the assessee when the assessee is manufacturing huge quantity of sewing thread, it is customary that some of the samples may be distributed for promotion of the product. Therefore, we find nothing wrong with the order of the Ld. CIT(A) and confirm the same.
19 1(iv) After hearing both the parties we find that during assessment proceedings the AO noticed that the assessee has claimed deduction u/s 80IB amounting to Rs. 1,38,22,970/-. This amount included following amounts under the head "other incomes".
S l. No He a d Am ou nt ( Rs .)
1 In ter es t r ec ei v e d 1, 5 0, 93 2
2 Cl a im s r ec ei v e d 84 , 75 3
3 Pr o v is i o ns n o lo n g er r eq u ir ed wr it e n 78 1 ,7 2 0
bac k
4 M is c . R ec e i p ts 85 , 24 8
T ota l 2, 4 61 ,6 5 3
According to him these amounts were derived from industrial undertaking and therefore, he relied on the decision in the case of Cambay Electric Supply Industrial Company Ltd. Vs. CIT, 113 ITR 84 (S.C) as well as in case of Pandian Chemicals Ltd. Vs. CIT, 262 ITR 278 (S.C) and did not allow deduction to the above extent.
20 On appeal the ld. CIT(A) discussed the issue in detail and ultimately directed the Assessing Officer to include these items in the profit for computing deduction u/s 80IB as under:
"The Assessing Officer is directed to include interest from customers of Rs. 34,400/- claim received Rs. 84,753/- and provisions no longer required written back Rs. 7,81,720/- in the profits and gains derived from the undertaking for the purpose of section 80IB and exclude the remaining receipts."
21 Before us, the ld. DR for the revenue strongly supported the order of Assessing Officer and he also relied on the 11 decision of Hon'ble Punjab & Haryana High Court in case of CIT V. Khemka Container (P) Ltd. 275 ITR 559 PH).
22 On the other hand, the ld. counsel of the assessee referred to the details of various items which have been disputed by the Revenue which consist of interest from customers amounting to Rs. 34,400/- claims Rs. 84,753/- (including receipt for Insurance claim of DG Set amounting to Rs. 24,420/-) and rest of the items are on account of various provisions which are written back during the year. As far as interest from customers, is concerned, he submitted that it is a part of income as held by Hon'ble Gujarat High Court in case of Nirma Industries Ltd. Vs. DCIT, 283 ITR 402 (Gujarat). Insurance claim was also credited because it was excess of claim over W .D.V of DG Set therefore, same should be treated as profit. Claim of writing back of various provisions are on account of revenue nature and should be treated as profits only.
23 After considering the rival submissions we find force in the submissions of the ld. counsel of the assessee in respect of interest on customers. Hon'ble Gujarat High Court in case of Nirma Industries Ltd. Vs. DCIT(supra) has clearly held that interest from customers would constitute income for the purpose of computing deduction u/s 80IB and therefore, to this extent there is nothing wrong with the order of the ld. CIT(A).
24 As far as claims are concerned, there is force in the submissions of the ld. DR. Hon'ble Punjab & Haryana High Court in case of CIT Vs. Khemka Container (P) Ltd. (supra) has clearly observed that insurance receipt in respect of raw material destroyed in the fire cannot be treated as income for deduction u/s 80IB. It was further observed that only profit part of the receipt has to be ignored for computing deduction. In case before us the assessee has received excess claim in respect of DG Set from the insurance which is of capital nature. Therefore, case of the assessee is much worse than the case of CIT Vs. Khemka Container (P) Ltd. (supra) whether claim was on account of revenue item. Therefore, receipt of 12 claim from insurance company against DG Set cannot be taken as part of the profit for the purpose of computing deduction u/s 80IB. No details have been filed in respect of other claims, therefore, same would also not to be treated as part of the profits for computing the deduction u/s 80iB and to this extent, we set aside the order of the Ld. CIT(A) and restore that of the Assessing Officer.
25 As far as the issue regarding writing back of various provisions is concerned, the details are not available before us. But if the claims have been written back on revenue side then the same has to be included in the profits because excess revenue expenditure would have reduced the profits in the earlier year which has to be restored in this year. At the same time if the provisions of written back relates to the capital asset then same cannot be included in the profits for computing deduction u/s 80IB. Therefore, we set aside the order of the Ld. CIT(A) and remit this matter back to the file of Assessing Officer for fresh examination and to include the amounts written back in the profits if they relate to revenue nature.
26 1(iv) After hearing both the parties we find that during assessment proceedings the AO noticed that the assessee has claimed deduction u/s 80HHC. Profit for this purpose was arrived at without reducing the amount of deduction under sub- section (9) of Section 80IA. Therefore, he recalculated the deduction.
27 On appeal the issue was discussed in detail by the ld. CIT(A) and it was held that the Assessing Officer is not justified in excluding the deduction allowable u/s 80IB (10) from eligible profits for computing deduction u/s 80HHC.
28 Before us, the ld. DR for the revenue strongly relied on the order of Special Bench in case of A.C.I.T. Vs. Hindustan Mint & Agro Products (P) Ltd, 119 ITD 107 (Delhi)(S.B).
29 On the other hand, the ld. counsel of the assessee relied on the decision of CIT and another Vs. Millipore India P. Ltd, 341 ITR 219 (Kar).
1330 W e have heard the rival submissions carefully and find that this issue has been considered by larger Bench (consisting of Five members of the Tribunal) in case of A.C.I.T. Vs. Hindustan Mint & Agro Products (P) Ltd (supra) and head note reads as under:
"Section 80IA of Income Tax Act - Deductions - Profits and gains from Industrial undertaking, etc. after certain dates/infrastructure undertakings - Assessment year 1998-99, 2001-02, 2003-04 and 2004-05 - Whether decision of Madras High Court in case of SCM Creations Vs. Asstt CIT (2008) 304 ITR 319 is not an authority for proposition as to how provisions of section 80IA(9) made applicable with effect from Assessment year 1999-2000 are to be applied and it does not impliedly overrule decision of Special Bench of Tribunal in case of Asstt CIT Vs. Rogini Garments (2007) 108 ITD 49 (Chennai) - Held, Yes - Whether restriction contained in section 80IA or 80IB not to allow repeated deduction is applicable to same profit -Held, yes - Whether if profits are derived from separate undertakings, restriction contained in above provision would not be applicable - Held, yes."
Following the above we decide this issue against the assessee because there is mandatory provision of Section 80IA(9) which makes it clear that deduction u/s 80IA has to be reduced for computing deduction under other provisions of the Act. Recently this issue has been discussed by Hon'ble Punjab & Haryana High Court in case of M/s Broadway Overseas Limited, Suranussi Vs. CIT, ITA No. 234 of 2009 (O&M) dated 22.11.2013 in detail. After detailed discussion and following the decision of Coordinate Bench it was observed that deduction u/s 80HHC is to be granted only after reducing the deduction to the extent already allowed u/s 80IB. Therefore, following these decisions, we set aside the order of the Ld. CIT(A) and restore that of the Assessing Officer.
31 In the result, appeal of the revenue is partly allowed.
Order pronounced in the open court on 23.12.2013 Sd/- Sd/-
(SUSHMA CHOWLA) (T.R. SOOD)
JUDICI AL MEMBER ACCOUNTANT MEMBER
Dated : 23.12.2013
SURESH
Copy to: The Appellant/The Respondent/The CIT/The CIT(A)/The DR 14