2020 (10) TMI 1184 - AT - Income Tax

Characterization of income - Capital or revenue receipt - disallowance received by the appellant from Dubai Almn. Company Ltd. towards advance against equity by treating the same as revenue in nature only on the ground that the appellant has credited the same to P L account - HELD THAT - At the time of receipt of money and at the time of written back the amount received from DUBAL it was revenue receipt and it never took the character of capital receipt as DUBAL took exit from the joint venture agreement before financial closure of the project and DUBAL did not claim or exercise any right or privilege against the assessee company regarding impugned amount. The impugned amount written back to the statement of profit and loss account of the assessee is the amount funded additionally by DUBAL and same was never converted into equity shares upon occurrence of the financial closure of the project and thus the impugned amount has been written back to the statement of profit and loss account by the assessee company is a revenue receipt and the liability against the assessee company stood ceased when the amount was written off by DUBAL without any claim in future. No hesitation to hold that the addition made by the AO and confirmed by the ld. CIT(A) is correct and sustainable. Before we record our final findings and logical conclusion on the issue we also feel it necessary and appropriate to consider the ratio of decisions relied upon by the assessee. Section 41(1) of the IT Act particularly deals with the remission of trading liability whereas in that case waiver of loan amounts to cessation of liability other than trading liability. In the case before us the amount was written off by DUBAL and same was written back by the assessee to the statement of profit and loss account as an extraordinary item. In the case of JSW Steel Limited 2017 (4) TMI 47 - ITAT MUMBAI the issue before the Tribunal was whether the ld. CIT(A) erred in not reducing the net profit being waiver of dues while computing the book profits under section 115JB wherein the Tribunal held that the capital surplus on account of waiver of dues neither is taxable nor can be included in computation of book profit u/s. 115JB. This decision has also no application in the case at hand having distinguishable facts and circumstances. - Decided against assessee.

Summary

Issues Involved:
1. Whether the CIT(A) erred in not adjudicating the ground that the appellant has not commenced commercial operations.
2. Whether the CIT(A) erred in confirming the disallowance of Rs. 1,33,97,073/- received by the appellant from Dubai Aluminium Company Ltd. by treating it as revenue in nature.

Issue-wise Detailed Analysis:

1. Commercial Operations:
The appellant argued that the CIT(A) failed to appreciate that the entire income and expenses for the year under consideration should be treated as capital in nature since the appellant had not commenced commercial operations. The appellant contended that the amount received from Dubai Aluminium Company Ltd. (DUBAL) should be considered a capital receipt and not revenue. The Assessing Officer (AO) observed that the appellant had shown total income of Rs. 1,33,97,073/- after adding back pre-operative expenses of Rs. 4,88,603/-. The appellant reduced the same amount, treating it as "capital receipt writes back of advance against equity," and declared total income at Rs. Nil. The AO required the appellant to substantiate their claim, which was furnished. The AO concluded that the amount was revenue receipt and brought it to tax, which was upheld in the first appeal.

2. Disallowance of Rs. 1,33,97,073/-:
The appellant received Rs. 1,33,97,073/- from DUBAL as an advance against equity, which was written back to the profit and loss account as an extraordinary item for the year 2012-13. The AO treated this amount as revenue receipt, which was confirmed by the CIT(A). The appellant argued that the amount was a capital receipt and not taxable. The appellant relied on the judgment of the Hon'ble Bombay High Court in the case of Pr. CIT vs. SAICOM Ltd., which held that section 41(1) does not apply since the waiver of loan does not amount to cessation of trading liability. The appellant also referred to the order of the Mumbai ITAT in the case of JSW Steel Ltd. vs. ACIT, which held that capital surplus on account of waiver of dues is neither taxable nor can be included in the computation of book profit u/s. 115JB.

The Department Representative (DR) argued that the case laws relied upon by the appellant were not applicable to the present case. The DR submitted that the authorities below had considered the entire facts and circumstances and held that the amount received from DUBAL was taxable as revenue receipts. The DR pointed out that the amount was used by the appellant for serving social needs around the project site and carrying out certain technical studies and was spent on revenue expenses. The appellant credited the amount of advance in its profit and loss account as income and deducted it from the total income to avoid tax payment.

The Tribunal observed that the amount received from DUBAL was to be converted into equity shares upon the financial closure of the project. However, DUBAL exited the joint venture agreement and wrote off the amount, which was written back to the profit and loss account by the appellant. The Tribunal concluded that the amount was revenue receipt and not capital receipt, as it was initially given for revenue expenses and was never converted into equity shares. The Tribunal held that the addition made by the AO and confirmed by the CIT(A) was correct and sustainable.

The Tribunal also considered the case laws relied upon by the appellant and found that they were not applicable to the present case due to distinguishable facts and circumstances. The appeal was dismissed, and the ground of appeal taken by the appellant was rejected.

Conclusion:
The appeal of the assessee was dismissed, and the addition of Rs. 1,33,97,073/- as revenue receipt was upheld. The Tribunal held that the amount was revenue receipt and not capital receipt, as it was initially given for revenue expenses and was never converted into equity shares. The case laws relied upon by the appellant were found to be not applicable to the present case.