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Mukund Limited Vs. ITO-3(2)(2) 4

5. The assessee being aggrieved with the order of the CIT(A) has carried the matter in appeal before us. The Ld. Authorised Representative (for short ‗A.R') of the assessee Shri Arvind Sonde, Senior Counsel, at the very outset assailed the declining on the part of the lower authorities to exclude the amount of principal and interest of Rs. 162,30,33,516/- that was waived under OTS by the lender banks and was credited in the ‗Profit & loss account' of the assessee, while computing the ‗book profit' u/s 115JB of the Act. It was submitted by the Ld. A.R that the assessee company had in its revised return of income categorically claimed that the waiver of principal and interest amount under OTS with lenders amounting to Rs. 162,30,33,516/- was not liable to be included in the total income for the purpose of computing the ‗book profit' as per Sec. 115JB of the Act. In support of his aforesaid contention the Ld. A.R drew our attention to the statement of revised computation of ‗book profit' as per Sec. 115JB of the Act at Page 19 of the assesses ‗Paper book' (for short ‗APB'). It was further submitted by the Ld. A.R that the crediting of the amount of OTS had to be read along with the qualification of the auditors in their audit report. It was the contention of the Ld. A.R that as per the judgement of the Hon'ble Supreme Court in the case of Apollo Tyres Ltd. Vs. CIT (2002) 255 ITR 273 (SC), the qualification by the auditors that the amount had wrongly been credited in the profit and loss account was to be duly considered while computing the ‗book profit' as per the MAT provisions u/s 115JB of the Act. The Ld. A.R submitted that the assessee company was a potentially sick industrial company under the Sick Industrial Companies (special provisions) Act, 1985. The Ld. A.R drawing our attention to Page 7 of the ‗Annual report' of the assessee company for the year 2003-04 submitted, that in terms of Financial Restructuring Package approved by the CDR cell the banks and financial institutions had rescheduled and converted the outstanding interest into ‗Funded Interest Term Loan' and also reduced the rate of interest to 10.50 p.a. The Ld. A.R drew our attention to Page 21 of the ‗Annual report'. It was submitted by the Ld. A.R that the auditors had at Page 21-Para 3(iv) categorically stated that the balance sheet, profit and loss Mukund Limited Vs. ITO-3(2)(2) 5 account and the cash flow statement dealt with by the report were subject to the reservations expressed in Paras 3 (vi)(9) and (11), and complied with the accounting standards referred to Sub Sec.3(c) of Sub Sec. 211 of the Companies Act, 1956. The ld. A.R took us through Para 3 (vi)(9) and (11) of the ‗Annual report', which revealed that the auditors had specifically stated that pursuant to OTS made with the lenders resulting in waiver of principal and interest, the same had been credited by the company to the ‗Profit and loss account' prior to the fulfilment of the conditions of the settlement. The auditors had further stated that taking of such credit which had not yet ‗accrued' to the company had translated the loss to the extent of Rs. 162,30,33,516/- into profit and the same had an equivalent effect to the reserves and surpluses of the company. The Ld. A.R further took us through the ‗Auditing and Assurance Standard (AAS) 28' published in the Chartered Accountants journal, 2003. It was submitted by him that at Para 29 it was provided that an unqualified opinion should be expressed when the auditor concludes that the financial statements give true and fair view in accordance with the financial reporting framework used for the preparation and presentation of the financial statements. The Ld. A.R further drew our attention to Para 31 of the ‗AAS' which contemplated the circumstances where an auditor's report is considered to be modified. The Ld. A.R taking support of Para 37 of the ‗AAS' submitted, that an auditor may not be able to express an unqualified opinion where there is a disagreement with the management regarding the acceptability of the accounting policies selected, the method of their application or the adequacy of financial statement disclosures, which in the auditors judgment would have a material bearing on the financial statements. It was submitted by the Ld. A.R that as per Para 38 of the ‗AAS' a qualified opinion should be expressed as being ―subject to‖ or ―except for‖ the effects of the matter to which the qualification relates. In the backdrop of the aforesaid deliberations, it was submitted by the Ld. A.R that the case of the assessee was clearly subjected to the qualifications by the auditors in the audit report. The Ld. A.R in order to fortify his contention that the auditors had qualified the audit report in the case of the present assessee, therein drew our attention to Page 27 of the Mukund Limited Vs. ITO-3(2)(2) 6 ‗Annual report'. It was submitted by the Ld. A.R that the waiver of Rs. 162,30,33,516/- under OTS with the lenders, and shown as income in the profit and loss account for the year ended 31.03.2004 was categorically qualified by ‗Notes' forming part of the accounts i.e Notes B 9(e) to (j). The Ld. A.R took us though the said notes Notes B 9(e) to (j) at Pages 52-53 of the ‗Annual report'. The Ld. A.R submitted that although the OTS of the assessee with the respective banks was subject to the approval of the monitoring committee overseeing the restructuring package finalized by the CDR cell, and provided for reinstatement of all the rights of the bank in case of default in payment of a certain stipulated amount in terms of the settlement, however the assessee company expecting that the conditions regulating the OTS would be settled before the due date, had thus considered it appropriate to take credit of the said amount of waiver. Further, the current years interest charges were also reversed by the assessee. The Ld. A.R further drew our attention to the revised computation of income that was filed by the assessee and submitted that the waiver of principal and interest amount of Rs. 162,30,33,516/- under OTS with lenders was excluded from the total income of the assessee for computing the ‗book profit' u/s 115JB of the Act. The Ld. A.R further brought to our notice the bifurcated details as regards the waivers under OTS with the different lenders at Page 30 of the ‗APB'.

6. The Ld. AR took us through the observations of the CIT(A) in context of the issue under consideration. It was submitted by the Ld. A.R that by virtue of sub-section (6) of Sec. 211 of the Companies Act,1956 the reference to the balance sheet or the profit & loss account of a company shall include the ‗Notes' to the accounts giving information required under the said Act. In support of his aforesaid contention the Ld. A.R relied on the judgment of the Hon'ble High Court of Delhi in the case of CIT Vs. Sain Processing and Waiving Mills (P) Ltd. (2010) 325 ITR 565 (Del). The Ld. AR taking us through the facts of the aforementioned case submitted, that the assessee in the case before the Hon'ble High Court had not charged current year ‗depreciation' in its profit and loss account which was prepared in the form Mukund Limited Vs. ITO-3(2)(2) 7 prescribed i.e Part II and III of Schedule VI of the Companies Act,1956, but had disclosed the fact along with the quantum of current year depreciation computed in accordance with Sec.205(2) of the Companies Act,1956 as per the mandate of Clause 3(iv) of Part II of Schedule VI to the Companies Act,1956 by way of a ‗Note' to the accounts. It was submitted by the ld. A.R, that the Hon'ble High Court observed that as long as the depreciation which was though not charged to the profit & loss account was disclosed in the ‗Notes' of the accounts, it would come within the expression of the ‗shown' in the profit and loss account, as the notes to the accounts, form part of the profit & loss account by virtue of sub-sec (6) of Sec. 211 of the Companies Act, 1956. In the back drop of the aforesaid observations, it was held by the High Court that though the current year depreciation had not been debited by the assessee to the profit and loss account, however, as the ‗notes' to accounts formed part of the accounts, thus the same would in no way deprive the assessee of its claim for deduction of the same from the ‗net profit' for arriving at the figure of ‗book profit' under Sec. 115JB of the Act. The ld. A.R taking support of the aforesaid judicial pronouncement submitted, that as long as the disclosure is made by the assessee in the ‗notes' to the accounts, the same would form part of the profit and loss account by virtue of sub-sec. (6) of Sec. 211 of the Companies Act, 1956. The Ld. A.R further relied on the order of the ITAT, Pune Bench ‗A' in the case of K.K Nag Ltd. Vs. Addl. CIT, Range-9, Pune [(2012) 52 SOT 381 (Pune)]. It was submitted by the Ld. A.R that the Tribunal in the aforementioned case had observed that in view of Sec. 211 of the Companies Act,1956 the net profit as shown in the profit and loss account for the purpose of Explanation 1 of the second proviso to Sec. 115JB was to be understood with reference to the ‗Notes' to accounts accompanying the annual accounts. It was observed by the Tribunal that where the incremental liability towards leave encashment had not been debited by the assessee to its profit and loss account, but was disclosed in the ‗Notes' to accounts, the same would have to be deducted while determining the ‗book profit' u/s 115JB of the Act. The Ld. A.R further relied on the order of the ITAT, Mumbai ―J‖, Mumbai in the case of M/s. JSW Steel Limited Vs. ACIT, Mukund Limited Vs. ITO-3(2)(2) 8 Circle-11(5), Bangalore (ITA No. 923/Bang/2009; dated 13.01.2017). It was submitted by the Ld. A.R that in the aforementioned case wherein a similar issue was involved the assessee had entered into a Financial Restructuring Package i.e ‗Corporate Debt Restructuring Package' (for short ‗CDR') in respect of loans taken from various Indian and foreign financial institutions. The assessee in the said case had entered into an agreement to settle the dues, pursuant to which principal and interest payable were reworked and part of the same amounting to Rs. 390,76,03,999/- was waived. Accordingly, the entire sum of Rs. 390,76,03,999/- was credited by the assessee to its profit and loss account as an exceptional item on account of waiver of the principal and interest payable thereon, with a specific note in the accounts that the exceptional item represented waiver of dues on settlement with certain lenders and since the principal amount of borrowing of Rs. 228.46 crore was utilized to pay purchase price of the plant and machinery imported by the assessee for setting up steel plants, therefore, it amounted to a capital surplus and was not a trading liability. It was submitted by the Ld. A.R that the Tribunal after deliberating at length on the issue under consideration had concluded that as the assessee company was in receipt of a ‗capital receipt' which was not chargeable to tax at all, that is, it does not fall within any of the charging section or can be classified under any heads of income under the Income-tax Act, then the same cannot be treated as part of the net profit as per the profit & loss account or reckoned as ‗working result' of the company of the relevant previous year and consequently, cannot be held to be taxable as ‗book profit' under MAT in terms of Sec. 11JB. On the basis of its aforesaid observations, the Tribunal had in the aforesaid case concluded that the capital surplus on waiver of dues is neither taxable nor can be included in the computation of the ‗book profit' under Sec. 115JB of the Act. On the basis of the aforesaid submissions it was averred by the Ld. A.R that the amount of Rs. 162,30,33,516/- waived in respect of principal and interest under OTS with the lenders was rightly excluded by the assessee company for the purpose of computing the ‗book profit' u/s 115JB of the Act.

[Explanation 1.--For the purposes of this sub-section, the expression "loss or expenditure or some benefit in respect of any such trading liability by way of remission or cessation thereof" shall include the remission or cessation of any liability by a unilateral act by the first mentioned person under clause (a) or the successor in business under clause (b) of that sub-section by way of writing off such liability in his accounts.]"

Thus, where an assessee had obtained some benefit by way of remission or cessation of a ‗trading liability' in respect of which an allowance or deduction has been made in the assessment for any year, the same shall be chargeable to tax as per Sec. 41(1) under the normal provisions of the Act. However, a similar treatment cannot be accorded for bringing to tax a remission or cessation of a liability arising on a capital account under the aforesaid statutory provision. We find that the issue that as to whether the waiver of a loan by a creditor is taxable either as a perquisite under Sec. 28(iv) of the IT Act or as a remission of liability under Sec. 41(1) of the IT Mukund Limited Vs. ITO-3(2)(2) 13 Act, had recently been deliberated upon by the Hon'ble Supreme Court in the case of Commissioner of Income-tax Vs. Mahindra and Mahindra Ltd. [Civil Appeal No. 6949-6950 of 2004; dated24.04.2018]. Insofar the provisions of Sec. 28(iv) were concerned, it was observed by the Hon'ble Apex Court that as a cash receipt was involved in the waiver of loan, therefore, the very first condition envisaged in the said statutory provision that the benefit or perquisite arising from the business shall be in the form of a benefit or perquisite other than in the shape of money was not satisfied. In the backdrop of the aforesaid observations it was held by the Hon'ble Apex Court that the waiver of loan would not fall within the realm of the provisions of Sec. 28(iv) of the IT Act. Further, the Hon'ble Apex court deliberating on the scope and gamut of Sec. 41(1) of the IT Act observed that the same particularly dealt with the remission of a ‗trading liability'. The Hon'ble Apex Court taking cognizance of the difference between a ‗trading liability' and ‗other liability' concluded that as neither the waiver of the loan did amount to cessation of a ‗trading liability' nor the assessee had claimed any deduction under Sec. 36(1)(iii) of the IT Act qua the payment of interest in any previous year, therefore, the same could not be brought to tax under Sec. 41(1) of the Act. We are of the considered view that after the judgment of the Hon'ble Apex Court in the case of Mahindra and Mahindra Ltd. (supra) the issue that the waiver of a loan by a creditor on a capital account cannot be brought to tax either under Sec. 28(iv) or Sec. 41(1) is no more res integra. However, we may herein observe that the aforesaid view had been arrived at by the Hon'ble Apex court in context of waiver of a loan that was taken by the assessee on capital account and no part of the interest expenditure pertaining to the same was claimed as a deduction under Sec. 36(1)(iii) of the IT Act. It is the contention of the ld. A.R that as the waiver of the principal amount of loan of Rs. 113,22,84,679/- is in the nature of a ‗Capital receipt', therefore, the exclusion of the same by the assessee in its ‗computation of income' under the normal provisions of the IT Act had been accepted by the revenue. The ld. A.R in order to fortify his aforesaid contention had drawn our attention to the ‗computation of income' which revealed that the assessee had excluded the waiver of the principal amount under OTS of Rs. 113,22,84,679/- from Mukund Limited Vs. ITO-3(2)(2) 14 its total income. Further, a perusal of the assessment order reveals that the A.O had not drawn any adverse inferences as regards exclusion of the waiver of principal amount of loan of Rs. 113,22,84,679/- by the assessee while computing its income under the normal provisions, and as such it can safely be gathered that the same had been accepted by him.

―12. In our view, the aforesaid parity of reasoning is squarely applicable in the present situation also, inasmuch as the provisions of section 115J of the Act and 115JB of the Act which are before us, are pari materia in so far as it relates to the obligation on a corporate assessee to prepare its Profit & Loss account for the relevant previous year in accordance with the provisions of Part II & III of Schedule VI to Companies Act, 1956. Therefore, having regard to the aforesaid parity of reasoning, once it is clear that the information towards incremental liability of leave encashment, which has not been provided in the Profit & Loss account, is otherwise disclosed in the Notes to the accounts, it would clearly fall within the ambit of Explanation 1 to the second Proviso to section 115JB of the Act which defines "book profits" to mean "net profit" as "shown" in the Profit & Loss account for the relevant previous year prepared under sub-section (2) of section 115JB of the Act. Notably, sub-section (2) of section 115JB of the Act imposes an obligation on every assessee to prepare a Profit & Loss account in the relevant previous year in accordance with the provisions of Part II & III to Schedule VI of Companies Act, 1956. At this stage, it would also be pertinent to emphasis the provisions of sub-section (6) of section 211 of the Companies Act, which were referred to by the Hon'ble Delhi High Court in the aforesaid judgment. Subsection (6) of section 211 provides that any reference to a Balance Sheet or Profit & Loss account shall include any Notes thereon giving information required by this Act or is allowed by this Act to be so given. Therefore, in view of the aforesaid statutory provision contained in Companies Act 1956, the impact is that the net profit as shown in the Profit & Loss account for the purposes of Explanation 1 to the second Proviso to section 115JB of the Act is to be understood with reference to the Notes to accounts accompanying the annual accounts also. In this view of the matter, the use of the expression 'net profit' in Explanation 1 to the second Proviso to section 115JB of the Act makes it clear that the impugned incremental liability towards leave encashment not debited to the Profit & Loss account but otherwise disclosed in the Notes to Accounts will have to be taken into Mukund Limited Vs. ITO-3(2)(2) 17 account while determining the "book profits" under section 115JB of the Act. In other words, the liability of Rs 8,35,447/- towards leave encashment has to be considered to determine net profit as the information was disclosed in the Notes appended to accounts, which have been held to be part of the accounts of the assessee company. Therefore, we find ample force in the plea of the assessee which, in our opinion, is allowable having regard to the parity of reasoning laid down by the Hon'ble Delhi High Court in the case of Sain Processing & Weaving Mills P. Ltd (supra).‖ We thus in the backdrop of our aforesaid deliberations on the facts and the settled position of law, are of the considered view that the A.O while determining the ‗book profit' under Sec. 115JB had erred in failing to consider the ‗notes' to the accounts, wherein it was clearly mentioned by the auditors that by crediting the benefit of the amount of ‗waiver of loan' which had not yet ‗accrued' to the company the loss to the extent of Rs. 162,30,33,516/- was translated into profit and the same had an equivalent effect to the reserves and surpluses of the company. In our considered view, now when the auditors of the assessee company had disclosed all the particulars and had qualified the crediting of the amount of Rs. 162,30,33,516/- in the profit & loss account by way of ‗notes' to the accounts, therefore, it was obligatory on the part of the A.O to have considered the same while determining the ‗book profit' under Sec. 115JB of the IT Act. We are unable to persuade ourselves to subscribe to the reading of the profit & loss account in isolation by the A.O, de hors qualification of the same by way of ‗notes' of the auditors to the financial statements. We thus in all fairness are of the considered view that as the A.O had failed to consider the crediting of the waiver of the loan of Rs. 162,30,33,516/- in the profit & loss account in the backdrop of the qualification of the auditors by way of ‗notes' to the accounts in context of the same, therefore, the matter requires to be restored to his file for fresh adjudication. The A.O shall in the course of the ‗set aside' proceedings readjudicate the claim of the assessee that the waiver of loan of Rs. 162,30,33,516/- was not liable to be included while determining the ‗book profit' under Sec. 115JB of the IT Act after taking cognizance of the aforesaid qualifications of the auditors. Needless to say, the A.O shall in the course of the set aside proceedings afford a reasonable opportunity of being heard to the assessee, who shall remain at a Mukund Limited Vs. ITO-3(2)(2) 18 liberty to substantiate its claim before him. The Ground of appeal No. 1 is allowed for statistical purposes.