TMI Blog2011 (2) TMI 12X X X X Extracts X X X X X X X X Extracts X X X X ..... This is nothing but change of stand. Income u/s 28(iv) - perquisites - a subsequent event has the effect of changing the nature and character of loan, a capital receipt into a trading receipt - Tribunal has reached a finding of fact that the amount of loan was not used in financing business. - Decided in favor of revenue - ITA No.1623 of 2010 with ITA No.503 of 2010 - - - Dated:- 18-2-2011 - MR. JUSTICE A.K. SIKRI, MR. JUSTICE M.L. MEHTA, JJ. For Appellant : Mr. Satyen Sethi with Mr. Arta Trana Panda, Advocates. For Respondent : Mr. Kamal Sawhney, Sr. Standing Counsel. A.K. SIKRI, J. 1. Having regard to the commonality in the legal question which arises for consideration in these two appeals, they were heard on the same, one after the other. At the same time, after stating the legal principle which is involved, we will take up the appeals separately applying principles to the situation appearing in each of the case. ITA No.1623 of 2010 2. The issue in this case relates to the treatment which is to be given to the extent of amount of loan and interest waived by the financing institutions from where the loan was taken. The appellant is the assessee compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oan was taken for the purpose of business and one time settlement was an integral part of the business. 4. A perusal of the definition of Section 2(24) of the Act, which defines "income" would include the value of any benefit or perquisite, whether convertible into money or not, that would arise from the business. In order to appreciate the issue involved, it is relevant to extract the necessary provisions of the Act. 2(24)"income" includes-(i)profits and gains; (vd)the value of any benefit or perquisite taxable under Clause (iv) of Section 28; 5. Section 28(iv) of the Act, comes under the heading "Profit and Gains of business or profession" and the same is extracted herein: 28(iv)the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession. 6. Similarly, Section 41(1) of the Act deals with "profits chargeable to tax" and the same is extracted herein: 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 previ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... filed by the Revenue, the Income Tax Appellate Tribunal (hereinafter referred to as the Tribunal‟) by its impugned order dated 30.04.2010 reversed the order of the CIT (A) for the following reasons: (a) Since the Tribunal in the case of Tosha International Ltd. (supra) proceeded to decide the issue on the premise that loan was utilized to acquire capital assets, decision of the Tribunal as upheld by this Court would apply to the cases where the loan obtained is utilized for acquiring capital assets. (b) In the case of Mahindra Mahindra Ltd. Vs. Commissioner of Income Tax [261 ITR 501(Bom.)], loan was to purchase plant and machinery dies, tools, etc., i.e., capital assets. It was on these facts that waiver of principal amount of loan was held to be neither covered by Section 28(iv) nor Section 41 (1) of the Act. (c) In the case of Tosha International Ltd. (supra), neither the Tribunal nor this Court considered the issue from the stand point of principal laid down by the Supreme Court in the case of Commissioner of Income Tax Vs. T.V. Sundaram Iyengar and Sons Ltd. [(1966) 222 ITR 344. (d) In Solid Containers Ltd. Vs. Deputy Commissioner of Income Tax [(200 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the charge of income tax is upon the total income of the previous year . The term income‟ is defined under Section 2(24) of the Act. In general, all receipts of revenue nature, unless specifically exempted are chargeable to tax. Loan taken is not normally a kind of receipt which will be treated as income. However, when a part of that loan is waived by the creditor, some benefit accrues to the assessee. Question is what would be the character of waiver of part of loan at the hands of the assessee? Waiver definitely gives some benefit to the assessee. Whether it is to be treated as capital receipt? If it is so, then only capital gain tax would be chargeable under Section 45 of the Act. Or else, whether remission of loan is no income at all? 12. In this context, Section 41(1) read with Section 59 of the Act would become relevant and these provisions have been brought within the sweep of taxation even the remission of debt/liability as income of the order in remission or such waiver amounts to provide or gains of business or provision liable to be taxed under Section 28 of the Act. Answer to these questions is provided in the case law cited by the parties. 13. Since t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransactions of the sale of liquor in bottles. When they were paid, they were the money of the assessee and remained thereafter the money of the assessee. They were the assessee‟s trading receipts . In the process, the Court exhaustively discussed and examined the principles laid down by the House of Lords in the case of Morley (Inspector of Taxes) Vs. Tattersall [1939] 7 ITR 316 (CA) that the taxability of a receipt was fixed with reference to its character at the moment, it was received and that merely because the recipient treated it subsequently in his income account as his own did not alter that character. The Court noted that Tattersall (supra) was explained and distinguished in Jay s The Jewellers Ltd. Vs. IRC (1947) 29 TC 247 (KB). In this case, the assessee was carrying on business of pawn brokers. Depending upon the amount involved, on the expiry specified period, the article pledged became the property of the assessee. The question was whether the amount received in excess of debt due on sale of articles pledged was assessable profit. Considering the issue, the Court held:- The true accountancy view would, I think, demand that these sums should be treated as paid i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -sense way of dealing with the amounts. 15. The ratio of the decision of T.V. Sundaram Iyengar and Sons Ltd. (supra) is that the proposition enunciated in Tattersall (supra) that the quality and nature of a receipt for income tax purposes is fixed once and for all, when the receipt is received and that subsequent operation can change its nature, is not absolute and that in given cases by reason of subsequent events, the amounts which initially were not received as trading receipts may be regarded as business income. 16. T.V. Sundaram Iyengar and Sons Ltd. (supra) case was decided by Three Member Bench. It would be of interest to point out that barely a month ago, the Supreme Court had delivered another judgment on identical issue in the case of Commissioner of Income Tax Vs. Karam Chand Thapar and Others [222 ITR 112]. Two Hon‟ble Judges who constituted the said Bench were the Members of the Bench which had rendered the decision in T.V. Sundaram Iyengar and Sons Ltd. (supra). 17. This issue cropped up again in the Supreme Court in the case of The Travencore Rubber Tea Co. Ltd. v. C.I.T., Trivandrum [243 ITR 158]. Analyzing these judgments, the Court reiterated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee company had incurred huge loss as a result, it became sick company and got itself registered by BIFR. Under one time settlement scheme, the banks and financial institutions agreed for payment of 60% of amount due towards principal and waived entire interest amount. The A.O. opined that since the loans ceased to exist, it amounted to cessation of liability, and therefore, it had to be treated as income. The CIT (A), however, deleted the addition by observing that remission of principal amount of loan did neither amount to income under Section 41(1) nor under Section 28(iv) of the Act and nor under Section 2(24) of the said Act. The appeal of the Revenue was dismissed by the Tribunal holding that the remission would become income under Section 40(1) only if the assessee claimed deduction in respect of expenditure or trading liability. Since in that case remission of principal amount of loan so obtained from bank and financial institutions had not been claimed as expenditure or trading liability in any of earlier previous years, waiver thereof would not result in income and was a capital receipt. This Court dismissed the appeal of the Revenue in limine accepting the afor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t has held that a debt forgiven cannot be treated as income. The relevant portion is extracted herein: It is settled law that a debt forgiven cannot be treated as income. The question as to whether a remission of debt would constitute income was considered in British Mexican Petroleum Co. Ltd. v. Jackson [1932] 16TC 570 (HL). The Assessee in that case entered into a contract with an oil producing company for the purchase of petroleum over a period of years. The unpaid price of the oil supplied was debited in the accounts. In view of the adverse effect of a business slump on the Assessee-company, the petroleum producing company accepted payment of a part of the debt and released the Assessee-company from its liability to pay the balance which was due. The House of Lords held that the amount remitted could not be included as a revenue receipt. Lord Macmillan observed (p.593): I cannot see how the extent to which the debt is forgiven can become a credit item in the trading account for the period within which the concession is made. 24. It is a well established principle of law that, every deposit of money would not constitute a trading receipt. Broadly speaking even though a receipt m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AMC waived the loan, the credits became part of business income; that prior to such waiver, the credits represented liability. In the circumstances, the Assessing Officer has taxed such credits as business income. However, in this connection, there are two important facts which are overlooked by the Assessing Officer. Firstly, the Assessee has continued to pay interest at 6 per cent, for a period of ten years on the loan amount. In this case, the Assessing Officer has not gone behind the loan agreement. In this case, the approval by the Government of India and the Reserve Bank of India are on record. In this case, the agreement for purchase of toolings was entered into, much prior to the approval of the loan arrangement given by the Reserve Bank of India. Therefore, the loan arrangement, in its entirety, was not obliterated by such waiver. Secondly, in this case we are concerned with the purchase consideration relating to capital asset. 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 ci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 501, wherein it has been held as follows: Alternatively, it was argued on behalf of the Department that in this case waiver constituted remission of trading liability and, therefore, Section 41(1) stood attracted. We do not find any merit in this argument. Firstly, in the present case, the prerequisite of Section 41(1) is not applicable. 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. In this case, the Assessee has not obtained such allowance or deduction in respect of expenditure or trading liability. It is not disputed that the Assessee has paid interest at 6 per cent, over a period of ten years to KJC Rs. 57,74,064. In respect of that interest, the Assessee never got deduction under Section 36(1)(iii) or Section 37. In the circumstances, Section 41(1) of the Act was not applicable. Secondly, even assuming for the sake of argument that the Assessee had got deduction on allowance even then Section 41(1) was not applicable because such deduction was not in respect of loss, expenditure or trading liability. In order to get over this alternat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this loan was for trading purpose and was treated as such from the very beginning in the books of account, as per Sundaram Iyengar (T.V.) and Songs Ltd. (supra), the waiver thereof may result in the income moreso when it was transferred to Profit and Loss account. 24. The Tribunal in the impugned judgment has rightly appreciated this ratio/principle of law from the aforesaid judgments, as is clear from the reading of Para 21 of the impugned order: 21. In the light of the above decision of Hon'ble Bombay High Court in the case of Mahindra Mahindra Ltd. (supra), it is clear that in the case where capital assets are acquired by obtaining a loan, and subsequently, the loan amount is waived by the other party, the principal amount of loan waived by the other party cannot be brought to tax under Section 28(iv) of the Act or under Section 41(1) of the Act. 25. However, in the present case, the Tribunal finds that nothing was brought on record to show that the loan taken by the assessee from the bank in Cash Credit Account, CTL and WCTL Account was utilized for the purpose of acquiring capital assets. On the contrary, material available on record including the Notes to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e for which the loan amount was utilized. The Assessing Officer shall provide reasonable opportunity of being heard to the Assessee. Be it mentioned here that in case the Assessee fails to produce or furnish details or particulars about the purpose for which the loan amount was utilized, the Assessing Officer shall draw adverse inference against the Assessee, and shall decide the issue in the light of the fact that the loan amount was obtained by the Assessee in Cash Credit account, CTL and WCTL account by way of hypothecation of finished, semi-finished goods, book debts, receivable claims, securities, rights by way of first charge implying thereby that the amount was utilized for the purpose of business or trading activity of the Assessee. We order accordingly. 26. It is clear from the above that the Tribunal has rightly culled out the principle laid down from the various judgments and has rather given an opportunity to the assessee to prove its case before the AO. In these circumstances, there is no reason or occasion for the assessee to feel aggrieved by the order and prefer this appeal. 27. We, accordingly, dismiss this appeal holding that no substantial question of la ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness of purchase and sale of shares. It is also engaged into taking business loans and further profits done to the parties. While holding that the amount of loan was utilized for its financing business, following discussion of the CIT (A) in this behalf is apt to take note of: 4.3 Further in Schedule H of the Return Form giving General Information about the assessee, the nature of business shown at S No 15 is loans investment The specific fact that loan was taken by the company for its financing business is admitted by the appellant in no uncertain terms by giving following note below the statement of income: The investment made for long term with a policy of investment being made out of funds available from share capital/profit. Borrowings have been made for other business activities viz. lending, share trading etc. Hence interest cost is incurred to earn interest/profit. The company therefore, claimed as allowable cost against profit. 4.4 Therefore, it is proved beyond doubt (or rather admitted by the appellant itself) that it is a finance company which is doing the business of investment, trading or shares and giving taking of loans. It is clearly admitted that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting capital in the business of the assessee. If assessee was not required to repay this loan as trading receipt then it would be treated as an income of the assessee. From the balance sheet as on 31.3.1993, we find that this amount was not used in the financing business. It was used in the long term investment made in share. As far as doubting genuineness of the loan is concerned, the AO himself accepted it in 1997-98 while passing the assessment u/s 143 ( ) (sic.). This year also he did not raise such doubt. Thus there was no sufficient material with Ld. CIT (A) to express his apprehension on the genuineness of this loan transaction. Since the amount was not used in servicing alleged money lending business, it cannot be treated as part of circulating capital and to be treated as trading receipt. In view of the above discussion, we allow the ground raised by Assessee and direct the AO not to treat this sum of Rs.25 lacs as income of the Assessee. 36. It was also explained by the learned counsel for the assessee, during the arguments, that not only waiver of loans would not constitute income applying the judgment of the Bombay High Court in Mahindra Mahindra Ltd.(supra), the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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