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2008 (7) TMI 1025 - AT - Income TaxApplicability of sections 41(1) and 28(iv) - Liability written off - deduction on loss, expenditure or trading liability - loan for meeting the day-to-day requirements of the company - section 41(1) were wrongly invoked - Whether the action of AO, linking the loss of the assessee to the loans given by lender (SDD&CPL) and thereby considering that the amount given by the lender is in respect of the said loss, is correct? - Assessee submitted that he never claimed any deduction or allowance of losses or expenditure involving M/s. SDD & CPL in respect of the amounts written-off - HELD THAT:- We find that the assessee was in huge losses and was in search of incoming group. Such group wanted a Balance Sheet of the company cleared off the liabilities. The SDD & CPL has come to the rescue of the assessee to provide loans and write off the same. In this case, the amount given by SDD & CPL is not a trade deposit and the said amount has not become a definite trade surplus. Further, giving loans and the write off of the same by SDD&CPL happened in the time span of only 5 months. Applying the provisions of section 41(1) to the facts of the instant case, we find that the amount of loan received has no connection to any such allowance or deduction. It is a mere loan unconnected to any allowance or deduction made in the assessee’s assessment. Although it is an undisputed fact that the assessee received benefit by way of remission or cessation of liability, the same is certainly not in respect of any trading liability. We find that the assessee did not receive the said amount in respect of any sales or purchases or other related direct or indirect expenses to qualify for trading activity. The said amount was given by the M/s. SDD&CPL for the purpose of making the assessee-company fit for takeover and for shaping up a presentable Balance Sheet for the incoming group. In this regard, we have also examined if the AO has made out any case against assessee for the proposition that if the amounts given by M/s. SDD&CPL are given to assessee on behalf of other trade debtors in order to be covered by the provisions of section 41(1) of the Act, that is also not the case here. Therefore, The AO action of linking the loss of the assessee to the loans given by lender (SDD&CPL) and thereby considering that the amount given by the lender is in respect of the said loss, is an incorrect finding and the same is not in accordance with section 41(1) of the Act. It is almost a settled law that ‘A debt waived by the creditor cannot be the income of the debtor’ as held in the case of British Mexican Petroleum Co. Ltd. v. Jackson and affirmed in the case of CIT v. P. Ganesa Chettiar [1979 (6) TMI 5 - MADRAS HIGH COURT]. Hence, the transaction between assessee and SDD & CPL are aimed at making the company eligible for take over by the income group and are consequential to the contractual agreement. The transactions in the books of account are not found bogus or collusive by the AO. The loans has nothing to do with the assessee’s claims of deduction or allowances in that assessment as assessee within the meaning of section 41(1) as held by the co-ordinate Bench in the case of Jahangir Gullabbhai [2007 (12) TMI 316 - ITAT MUMBAI]. Further, the provisions of section 28(iv) of the Act does not come to the rescue of the revenue in the view of the co-ordinate Bench decision in the case of Hellios Food Improvers (P.) Ltd. [2007 (2) TMI 348 - ITAT MUMBAI]. Therefore, assessee’s ground is allowed.
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