Income Tax Appellate Tribunal - Kolkata
Ifb Securities Ltd. vs Income Tax Officer on 10 February, 2006
Equivalent citations: (2006)101TTJ(KOL)829
ORDER
Jugal Kishore, A.M.
1. This appeal preferred by the assessee is directed against the order passed by the learned CIT(A)~VI, Kolkata, dt. 26th Oct., 2004 for the asst. yr. 2001-02 on the following grounds:
(i) For that the learned CIT(A) erred in upholding the order of the AO, treating Rs. 3,52,46,000 on account of outstanding interest as income under Section 41(1) and treating Rs. 1,67,55,000 on account of write back of liability of principal sum as income holding the same as trading receipt.
(ii) For that the learned CIT(A) erred in confirming the action of the AO in treating Rs. 5.20 crores as deemed profit under Section 41(1)/trading receipt under the IT Act.
2. Brief facts relating to this case are that the assessee-company had obtained unsecured loan during the earlier years from IFB Industries Ltd. and had provided for interest thereon and the total amount of such unsecured loan together with interest accrued thereon as on 31st March, 2000 was Rs. 8,81,97,482 which comprised of principal loan amount of Rs. 5.20 crores and the balance amount of Rs. 3,61,97,482 represented unpaid but accrued interest thereon.
3. Since the assessee-company had been consistently incurring operating losses since the year 1995-96 and had accumulated losses to the extent of Rs. 6,80,97,003 along with preliminary expenses of Rs. 42,62,447 against a share capital of Rs. 9,99,80,000 thereby erasing the paid-up capital of the assessee-company by more than 70 per cent, the lender company M/s IFB Industries Ltd. (in short IFBI) vide an agreement dt. 9th Aug., 2000 assigned its unsecured loan together with interest due from the assessee-company to Nurpur Gases Ltd. (in short NGL). After such assignment of unsecured loan by IFBI, M/s NGL approached the assessee-company for a compromise and settlement of the dues which finalized on 10th Nov., 2000. The said compromise and one-time settlement finalised between the assessee-company and M/s NGL stipulated that the assessee-company shall pay a sum of Rs. 352.45 lakhs only towards outstanding interest of Rs. 3,61,97,482 and M/s NGL shall waive the entire principal amount of loan of Rs. 5.20 crores and the balance outstanding interest of Rs. 9,52,482 and the entire dues of Rs. 881.97 lakhs shall stand discharged and liquidated.
4. As a result of the aforesaid compromise, the assessee-company liquidated the entire unsecured loan from the balance sheet as at 31st March, 2001 and transferred to capital reserve in the balance sheet the waived principal amount of loan of Rs. 5.20 crores and credited the unpaid interest amount of Rs. 9,52,482 to its P&L a/c for the year under consideration.
5. The AO during the course of assessment proceedings has not accepted the above mode of settlement by the assessee and has observed that payment by the assessee should first be apportioned against principal amount and has thereafter reducing the payment from principal amount has treated the balance principal amount of Rs. 1.68 crores together with interest of Rs. 3.52 crores, as income of the. assessee by invoking the provisions of Section 41(1) of the IT Act, 1961 and has accordingly taxed the aforesaid amount.
6. The assessee has strongly assailed the order of AO before the learned CIT(A) and has submitted that the action of AO in invoking the provision under Section 41(1) was not correct as the assessee had not claimed the unsecured loan of Rs. 5.20 crores either as an expenditure, loss or trading liability in the earlier year's assessment and, therefore, the provision of Section 41(1) has no application. The assessee has further submitted that since the interest liability of Rs. 9,52,482 was not paid by the assessee as a result of the compromise and waiver, the assessee had itself offered the aforesaid amount of Rs. 9,52,482 for tax and had credited the same to the P&L a/c. The assessee has also relied on various decisions of Tribunals and Courts in support of its contention that the provisions of Section 41(1) do not apply where no allowance or deduction has been granted to the assessee in an earlier assessment year. The assessee has further submitted before the learned CIT(A) that the entire compromise between the assessee-company and M/s NGL is duly supported by a bona fide agreement between them wherein both have specifically agreed vide Clause 1(a) at p. 3 of the agreement that the entire payment of Rs. 352.45 lakhs being made by the assessee to M/s NGL is on account of outstanding interest payment only and nothing else. The assessee further contended before the learned CIT(A) that the AO while making the addition has basically doubted the compromise between the assessee-company and M/s NGL observing that the same has been made just to accommodate the assessee. The assessee contended that the legality of the position would have not been different at all even if the assessee-company would have entered into compromise/settlement with IFBI. It was, therefore, pleaded by the assessee before the. CIT(A) that the entire waiver of unsecured loan of Rs. 5.20 crores was an item of capital receipt which was not liable to tax under Section 41(1) of the IT Act, 1961. The assessee also submitted the opinion report from M/s Price Water House & Co. before the CIT(A) in support of its above contention.
7. The learned CIT(A) after considering the above submission of the assessee and the opinion report of M/s Price Water House & Co. has observed that the above submission of the assessee and the opinion basically relates to a situation where one-time settlement had been made between the two parties, i.e., loan debtors and creditors and relates to outstanding principal loan amount including interest which had been written off from the accounts of both the parties involved in the settlement, whereas in the present case, a third party i.e. M/s Nurpur Gases Ltd. is involved in the settlement and the loan amount including accrued interest had been assigned to Nurpur Gases Ltd. in accordance with the agreement and, therefore, the outstanding loan amount including interest had not ceased to exist except in the accounts of the assessee as the loan amount has got a new destination. The learned CIT(A) has further held that the plea of the assessee for apportioning the payment firstly with the interest is not acceptable because the IFB Industries had never foregone its principal or interest amount. The learned CIT(A) has also observed that since the assessee-company (had) straightway written off the debt and transferred the balance amount to the capital reserve, the assessee-company had obtained some benefit in respect of its liability to pay outstanding interest by way of cessation thereof and as per Expln. 1 to Section 41(1), remission or cessation for this purpose includes unilateral act of the assessee by way of writing off such liability in its books of account. The learned CIT(A) has accordingly held that the sum of Rs. 361.97 lakhs minus Rs. 9.51 lakhs, i.e., Rs. 352.46 lakhs has rightly been added back to the assessee's total income under Section 41(1) of the IT Act and has further upheld the order of AO that the payment made by the assessee-company should first be reduced from the principal amount and the balance amount should be treated as deemed profit under Section 41(1) as trading receipt of the assessee. The learned CIT(A), therefore, has confirmed the addition of Rs. 5.20 crores made by AO as deemed profit under Section 41(1).
8. The assessee is aggrieved with such order of learned CIT(A) and has now come in appeal before us.
9. In appeal before us, the learned Counsel for the assessee while assailing the order of AO and CIT(A) has submitted that both AO and CIT(A) while upholding the addition have ignored the fact that the assessee had made correct disclosure of the principal amount of loan and interest thereon. It was pointed out by the learned Counsel for the assessee that since the loan outstanding with M/s IFBI was transferred to M/s NGL at a discount of 30 per cent and thereafter M/s NGL has entered into a bona fide settlement agreement with the assessee by waiving the principal amount and partly waiving the interest outstanding, the action of learned CIT(A) in upholding the action of AO by first adjusting the payment towards the principal amount is highly unjustified and against the terms of settlement agreement between the parties.
10. The learned Counsel for the assessee has stated that M/s NGL has agreed to accept a sum of Rs. 352.45 lakhs towards one-time settlement of the entirety of such loan and interest as per Clause 1 Sub-section (a) of the settlement agreement between the assessee and M/s NGL. It was further contended by the learned Authorised Representative that above clause clearly speaks about the fact that such payment of Rs. 352.45 lakhs will be adjusted towards outstanding interest and, therefore, the action of AO and learned CIT(A) in first adjusting the payment towards the principal amount is without any basis and against the contents of settlement agreement between the parties. The learned Counsel for the assessee has also filed paper book wherein the balance sheet of the assessee-company, deed of agreement between the assessee and M/s NGL and other document has been filed.
11. The learned Counsel for the assessee has vehemently argued that once the agreement is on record, the action of AO and CIT(A) while taking a different view without disputing the agreement between the parties is not correct. It has been contended by the learned Counsel that the agreement has to be accepted in entirely and not in part. The learned Counsel has further drawn the attention of this Bench at p. 37 of the paper book wherein M/s IFBI has written to the assessee regarding the settlement of dues and confirming the same. It has been argued by the learned Counsel that once the agreement has not been disputed and the assessee has entered the relevant entries in the books of account as per the deed of agreement, it is not justified on the part of Revenue to dispute such agreement between the parties and thereafter making disallowance on some other ground only on the basis of assumption and surmises. In support of his contention, he has relied on the judgment of Tribunal, Mumbai Bench in case of Amitabh Bachchan v. Dy. CIT (2005) 97 TTJ (Mumbai) 516, wherein it was held that Revenue cannot assess more than real income in respect of transaction entered into by the parties. Relying on the para 10 of the above order, the learned Counsel has submitted that Revenue cannot blow both hot and cold while considering the assessee's agreement with M/s NGL. The learned Counsel for the assessee has, therefore, submitted that it was not justified on the part of the Revenue to take a contrary stand in relation to the assessee's agreement with M/s NGL without disputing and doubting the genuineness of such agreement.
12. The learned Counsel for the assessee has further relied on the decision of the Hon'ble Calcutta High Court in case of CIT v. Modest Enterprises Ltd. , wherein it was held that the assessee-company had an option to allocate the amount received back from the debtors either towards the capital or towards the interest. The learned Counsel has submitted that the facts involved in the present case are similar to one which were disposed of by the Hon'ble Calcutta High Court in case of Modest Enterprises Ltd. (supra). As in this case also, both the assessee and the lender M/s NGL had agreed to allocate the payment towards outstanding interest. The learned Counsel further submitted that identical decisions were taken by the Hon'ble Allahabad High Court in case of Ramji Lal Rais v. ITO (1963) 49 ITR 167 (All) and by the Hon'ble Calcutta High Court in case of Gopi Ram Govinda Ram, In re (1936) 4 ITR 157 (Cal).
13. The learned Counsel for the assessee has thereafter contended that waiver of loan by the creditors cannot be taxed under Section 41(1) of the Act as the same is outside the scope of this section. The learned Counsel has submitted that remission of liability in case of loan cannot be taxed in the hands of the assessee as evident from the plain reading of the said section and as also decided by this Tribunal in case of Nisha Singhania and Ors. v. ITO in ITA No. 538/Kol/2001, dt. 28th Jan., 2005. The learned Counsel has pleaded that though the assessee has cited various judgments before the learned CIT(A). Same have been rejected by CIT(A) holding that waiver of loan by M/s NGL is trading receipt in the hands of the assessee which is liable to be taxed under Section 41(1). It has been vehemently argued by the learned Counsel that there cannot be any trading receipt on account of waiver of loan, hence finding of AO and learned CIT(A) while assuming the above waiver of loan as trading receipt in the hands of the assessee is wrong. In support of his contention, he has relied on the decision of the Hon'ble Bombay High Court in case of CIT v. Mahindra & Mahindra , wherein it was held that receipt is not taxable if it is referable to fixed capital. He has also relied on the decision of the Hon'ble Delhi High Court in case of D.L.F. Housing & Construction (P) Ltd. v. CIT (1982) 29 CTR (Del) 199 : (1982) 141 ITR 806 (Del) wherein it was held that income does not include fixed capital or realizing of fixed capital by turning it into some other form of capital or money. The learned Counsel has also relied on the judgment of the Hon'ble Gujarat High Court reported in the case of CIT v. Bhavnagar Bone Fertilizers Co. Ltd. , wherein it was held that credit balance on transfer of capital reserve account is not a benefit arising to assessee from business and hence cannot be assessable as income from business. The learned Counsel has also rebutted the observation of learned CIT(A) that whole exercise was done by the assessee, M/s IFBI and M/s NGL for inflating market value of shares and has contended that the learned CIT(A) while giving such finding was not justified as the same was not based on any material available on record and was rather not at all related to the issue involved in this case.
14. Concluding his argument, the learned Counsel for the assessee has vehemently argued that since the entire transactions were duly disclosed by the assessee in its books of account as per settlement deed entered by the assessee with M/s NGL and such settlement agreement has not been disputed by the Revenue at any stage, the action of AO and learned CIT(A) in making addition only on mere presumption and assumption and without appreciating the clause of settlement agreement between the parties is not justified and, therefore, the addition confirmed by the learned CIT(A) is liable to be deleted.
15. In his rival submission, the learned Departmental Representative for the Revenue has relied heavily on the order of AO and CIT(A). It has been submitted by the learned Departmental Representative that it was not always necessary that the assessee (has) to get benefit by way of cash for application of the provisions of Section 41(1) of the Act and since the loan owed by the assessee to M/s NGL was a trading liability which was written back in the year under consideration. Application of the provision of Section 41(1) was perfectly justified. In support of his argument, he has relied on the following judgments:
(i) In case of Express Newspapers (P) Ltd. v. CIT ;
(ii) In case of CIT v. Manohar Bandhu ;
(iii) In case of CIT v. T.V. Sundaram Iyengar & Sons Ltd. ;
(iv) In case of CIT v. Aries Advertising (P) Ltd. .
It has, therefore, been submitted by the learned Departmental Representative that the order of learned CIT(A) be upheld.
16. In his rejoinder, the learned Counsel for the assessee has submitted that the case laws relied by the learned Departmental Representative are not identical to the fact involved in this case. It has further been submitted by the learned Counsel for the assessee that so far as the trading transaction is concerned, the same may be the trading transaction for M/s NGL but certainly not for the assessee.
17. We have given our careful consideration to the rival submission made before us and have perused the orders of tax authorities. We have also considered the case laws cited by both the parties and paper book filed before us. In this instant case, the Revenue has added a sum of Rs. 5.20 crores on account of waiver of loan by the lender under Section 41(1) of the Act. The learned CIT(A) while sustaining the addition has upheld the order of AO that the payment by the assessee to the lender M/s NGL should first be apportioned against the outstanding principal and balance principal amount together with interest should be added under Section 41(1) of the Act and has, therefore, confirmed the addition of Rs. 5.20 crores in the hands of the assessee. The assessee on the other hand has disputed the order of Revenue contending that the payment by the assessee was first to be apportioned against the outstanding interest as per Clause (1)(a) of the settlement agreement between the assessee and M/s NGL which is available at p. 41 of the paper book which is reproduced hereunder for the sake of clarity:
The parties confirm that the entirety of the said dues which was approximately Rs. 881.97 lakhs only stands discharged and liquidated by way of NGL waiving the entirety of the principal amount of Rs. 520 lakhs only and accepting payment of Rs. 352.45 lakhs only towards outstanding interest.
As observed above, the Revenue has treated the above settlement as not tenable and has added Rs. 520 lakhs to be taxed under Section 41(1) presuming that payment of loan to the extent of Rs. 352 lakhs by the assessee was first to be apportioned against the principal amount, and, therefore, the balance outstanding principal amount along with interest thereon was to be taxed under Section 41 (1) of the Act.
18. We have also considered the fact that the AO and learned CIT(A) while holding that payment first to be apportioned against the outstanding principal amount, has not rebutted or disputed the genuineness of the agreement which clearly lays down that the payment by the assessee was first to be apportioned against the outstanding interest and the assessee has accordingly offered the balance interest amount for taxation and has transferred the entire principal amount of loan to the capital reserve being out of the purview of the Section 41(1). Since the learned CIT(A) has treated the waiver of principal loan amount as trading recerpt, we first deal with this issue and for the facility of reference reproduce hereunder the provisions of Section 41(1).
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 (hereinafter referred to as the first-mentioned person) and subsequently during any previous year,--
(a) the first-mentioned person has obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtained by such person or the value of benefit accruing to him shall be deemed to be profits and gains of business or profession and accordingly chargeable to income-tax as the income of that previous year, whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not; or
(b) the successor in business has obtained, whether in cash or in any other manner whatsoever, any amount in respect of which loss or expenditure was incurred by the first-mentioned person or some benefit in respect of the trading liability referred to in Clause (a) by way of remission or cessation thereof, the amount obtained by the successor in business or the value of benefit accruing to the successor in business shall be deemed to be profits and gains of the business or profession, and accordingly chargeable to income-tax as the income of that previous year.
19. From the above definition of Section 41(1), it is well evident that the principal loan amount cannot be taken under the purview of above section as also held by this Tribunal in the case of Nisha Singhania (supra) relied by the learned Authorised Representative wherein this Tribunal by relying (on) the order of the Hon'ble Gujarat High Court in case of CIT v. Chetan Chemicals (P) Ltd. (2004) 188 CTR (Guj; 572 : (2004) 267ITR 770 (Guj) and the order of co-ordinate Bench in case of Jt. CIT v. Bmani Zinc Ltd. (2004) 88 TTJ (Cal) 346 : (2003) 84 ITD 691 (Cal) has held that loan cannot be added under Section 41(1) of the Act. The relevant observation of the co-ordinate Bench in case of Binani Zinc Ltd. (supra) is reproduced hereunder:
Where a person has obtained, in any manner whatsoever, any amount in respect of Inter alia, an expenditure by way of remission or cessation thereof, the amount obtained by such person or the value of benefit accruing to him shall be deemed to be profits and gains of the business. Provided such an expenditure has been allowed as a deduction in any year. It is a sine qua non for bringing a remission or cessation of liability to tax under Section 41(1), that 'an allowance or deduction has been made in the assessment for any year' for loss, expenditure or trading liability in respect of which such remission or cessation has been made. A fortiorari, if an expenditure, for whatever reason, has not been allowed as a deduction in any previous year and the liability in respect of such expenditure ceases in the current previous year, such a cessation of liability cannot be brought to tax in the current previous year.
20. Again coming to the action of AO in first apportioning the payment towards outstanding principal amount, we find that the above action of AO was not tenable as the assessee in this case has apportioned the payment towards outstanding interest as per the settlement deed with M/s NGL. Since such payments were allocated towards the interest as per settlement deed entered between the parties, in our considered opinion, the case law of jurisdictional High Court relied by the learned Counsel for the assessee in case of Modest Enterprises (supra) is squarely applicable wherein it was held by their Lordships as under:
The assessee-company had an option to allocate the amount received back from the debtors either towards the capital or towards' the interest. In this case, it was allocated towards the capital. It is not the case that the law does not permit such adjustment when the amount is received from the debtors towards the capital and the creditors also want to do so. It is only where neither the debtor nor the creditor makes any appropriation either to capital or interest, that it would be open to the Revenue to treat the payment as applicable to outstanding interest. This is the settled position of law in case of CIT v. Maharajadhiraja Kameshwar Singh of Darbhanga (1933) 1 ITR 94 (PC). In the instant case, the payment is not an open one and the assessee as the creditor had appropriated it to principal, leaving no room for controversy. The principle laid down by the judicial committee has been explained and reiterated by the Supreme Court in CIT v. T. S. PL. P. Chidambaram Chettiar .
Apart from above, we also find that the identical case came before the Hon'ble Calcutta High Court in case of Gopiram Gobindram (supra) wherein it was held as under:
Where interest is outstanding on a principal sum due and the creditor receives an open payment from the debtor without any appropriation of the payment as between capital and interest by either debtor or creditor, the presumption is that the payment is attributable, in the first instance towards the outstanding interest.
Apart from above two cases, we find that in case of Ramji Lal (supra), the Hon'ble Allahabad High Court held that though under the general law of appropriation if a creditor has not appropriated a particular payment against principal or interest, it is open to him to appropriate it either towards principal or interest.
21. We also find that the case law relied by the learned Departmental Representative for the Revenue is not identical to the facts of the case involved in the present case. As in the case of Express Newspapers (P) Ltd. (supra) relied by the learned Departmental Representative for the Revenue, the assessee had made excess provision on account of interest payable which was found at the lower side at the time of settlement of accounts, which was considered taxable under Section 41(1), whereas in case of Manohar Bandhu (supra), the assessee owed Rs. 51,130 to the commission agent through whom it purchased goods and after the discontinuance of the service of such commission agent, settlement was made at Rs. 16,000 against outstanding of Rs. 51,130 and the balance amount was added under Section 41(1). We find that this case also relates to an expenditure earlier debited by the assessee in P&L a/c. The case law relied by learned Departmental Representative in case of T.V. Sundaram Iyengar & Sons Ltd. (supra) also, the assessee itself had treated the money as its own money and taken the amount to its P&L a/c. Whereas in the case of Aries Advertising (P) Ltd. (supra), the assessee itself treated the money as its own money and took the amount to its P&L a/c.
22. On the other hand, we find that the case laws relied by the assessee are identical to the case of the assessee and the waiver of principal amount cannot be held as trading liability to be added under Section 41(1) as held by this Tribunal in case of Nisha Singhania (supra) and since the assessee has recorded entries in its books of account as per settlement deed entered by him with M/s NGL and such settlement deed has not been disputed by the Revenue and the addition has been made by the AO on mere suspicion and without bringing any material, evidence on record to controvert such settlement deed entered by the assessee with M/s NGL, the above action of learned CIT(A) in confirming the addition of Rs. 520 lakhs was unjustified, since the assessee in this case has disclosed all the relevant facts and material available on record and has accordingly maintained the books of account as per agreement and the objection raised by the AO and CIT(A) on such agreement between the parties considering the same as a tool of tax evasion was not at all justified as the assessee is at liberty to manage its affairs in a manner of tax planning and if the tax planning is lawful then it would be incorrect to allege the deliberate intention and device of the income, as also observed by the Hon'ble Calcutta High Court in case of Modest Enterprises (supra) vide para 9 of its order.
23. We, therefore, after perusing the facts, considering the argument and also after going through the various decisions of Tribunals and High Courts including that of Hon'ble Calcutta High Court find that there is no dispute to the fact that the assessee has passed various entries in its books of account as per settlement agreement entered with M/s NGL and since this Tribunal in case of Nisha Singhania (supra) and Binani Zinc Ltd. (supra) has already held that unsecured loan cannot be taxed as trading receipt under Section 41(1) and the action of assessee in first apportioning the payment towards outstanding interest has also been justified by the Calcutta High Court in case of Gopiram Gobindram (supra). In our considered opinion, the action of learned CIT(A) in ignoring the above settlement agreement and thereafter upholding the action of AO in first apportioning the payment towards principal amount and thereafter adding the entire balance principal amount and the outstanding interest amount under Section 41(1) of the Act was not justified, keeping in view of the fact that the assessee has rightly offered the unpaid outstanding interest for taxation by crediting the same in its P&L a/c and by transferring the waived principal amount to general reserve as per settlement agreement and since the waiver of principal amount does not come under the purview of Section 41(1) as held by this Tribunal in above two cases, in our considered opinion, the action of AO and CIT(A) in making addition of Rs..520 lakhs in the hands of the assessee was not justified. We, therefore, delete such addition made by the AO and confirmed by CIT(A) and accept the ground raised by the assessee in this regard.
24. In the result, the appeal filed by the assessee is allowed.