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TMI Blog2010 (12) TMI 876X X X X Extracts X X X X X X X X Extracts X X X X ..... been made by the Assessing Officer, for the reason that the assessee has not claimed the interest as expenditure in the earlier years. Aggrieved, the assessee carried the matter in appeal. The first appellate authority for various reasons given in his order dismissed the appeal of the assessee. Further aggrieved, the assessee is in second appeal before us. The assessee has raised following grounds:- "1. The learned CIT(A) - 20 erred in law and on facts in confirming the addition of Rs.2,75,07,148.00 on account of loan waiver by bank. 2. The learned CIT(A) - 20 erred in law and on facts in confirming the said waiver of loan by bank as trading receipt and treating the same as income u/s.41(1) of the Act. 3. The learned CIT(A) - 20 erred in law and on facts in confirming that the said waiver of loan was also covered under the provisions of sec.28 of the Act. 4. The learned CIT(A) - 20 erred in law and on facts in confirming the addition of Rs.1,13,39,531.00 being disallowance of business expenditure incurred by the appellant company during the previous year 2003-04. 5. The learned CIT(A) - 20 erred in law and on facts in not appreciating the fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .02 lakhs and export packing credit and cash credit of Rs.46.05 lakhs. He submitted that the Assessing Officer was wrong in placing reliance on the decision of the Hon'ble Supreme Court in the case of CIT vs. T.V.Sundaram Iyengar and Sons [222 ITR 344 (SC)]. In that case the assessee has received deposits in the course of trading transactions and the assessee had treated them as capital receipt and not offered them to tax in the earlier years. Subsequently when the assessee forfeited the deposits on the ground that they were barred by limitation and had suo motto written back to its profit and loss account, the Hon'ble Supreme Court had held, that it became business income u/s.28 of the Act. He submitted that the facts of the assessee's case are entirely different as it had borrowed money from the bank in the form of term loan and working capital loan and the loans were naturally of capital nature and also even after its waiver the nature of the loans did not change. He relied on the decision of the Bangalore bench of the Tribunal in the case of Comfund Financial Services (I) Ltd. vs. DCIT [(1998) 67 ITD (Bang.) 304] wherein it has been held that the remission of loan by the bank c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the relief. He relied on the decision of the Hon'ble Bombay High Court in the case of Hindustan Chemical Works Ltd. vs. CIT [124 ITR 561 (Bom.)] for the proposition that regular business expenditure incurred during the temporary suspension of business are allowable expenditure. 6. The learned Departmental Representative, Shri S.K.Pahwa, on the other hand, relied heavily on the order of the CIT(A) and specifically drew the attention of the Bench at page 5. He submitted that the CIT(A) has agreed with the contention of the assessee that the A.O. has wrongly applied section 41(1) and provisions of section 28(iv) and at the same time he held that the waiver of loan is taxable u/s.28(i). He took this Bench through the order of the Hon'ble Bombay High Court in Solid Containers Ltd. (supra) and submitted that in that case the assessee had taken loan of Rs.6,86,071 during the previous year for business purposes which was written back as a result of consent terms arrived at between M/s.P.S.Jain Motors on the on hand and the assessee on the other, and in such a situation the Hon'ble High Court applied the decision of the Hon'ble Supreme Court in the case of T.V.Sundaram Iyengar a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces, section 28(iv) was not attracted. Lastly, the principal amount of loan had been forgone as a part of takeover arrangement to which the assessee was not a party. The waiver of the principal amount was unexpected. In the circumstances, such waiver would not constitute business income. (ii) That 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. The assessee had not obtained such allowance or deduction in respect of expenditure or trading liability. The assessee had paid interest at 6 per cent over a period of ten years on 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 that the assessee had got deduction on allowance section 41(1) was not applicable because such deduction was not in respect of loss, expenditure or trading liability. Lastly the toolings constituted capital assets and not stock-in-trade. Therefore, taking into account all the above facts, section 41(1) of the Act was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 28(iv) [Para 23] For the purpose of section 28(iv), the loan waiver amount credited by the assessee in its general reserve account was covered by the judgment of the Bombay High Court in the case of Mahindra and Mahindra Ltd. (supra) and, therefore, the said waiver amount could not be held as taxable [Para 29] The Supreme Court in the case of Polyflex (India) (P.) Ltd. v. CIT [2002] 257 ITR 343/124 Taxman 374 has examined the constitution of section 41(1). The Court has pointed out that section 41(1) consists of two main ingredients: (a) loss or expenditure and (b) trading liability. The two ingredients of section 41(1) have to be read independently. As the first ingredient relates to loss or expenditure and the second ingredient relates to remission or cessation of trading liability, the Court has categorically ruled that the words Remission or cessation thereof' shall apply only to a trading liability. [Para 30] There was no doubt that the term loans availed by the assessee from three banks were not in nature of trading liability but were in nature of capital liability. Therefore, waiver of loan liability was not waiver of any trading liability. The waiver ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arch, 2006, the assessee had income from sale to the extent of Rs.27.68 lakhs and other income to the tune of Rs.23.71 lakhs. This is clear from the annual accounts of the assessee and the returns filed by it. When the assessee filed returns of income before the department, wherein it is clear that the assessee had revived its business, the Revenue cannot overlook the evidences and hold that the business can never be revived. The following finding of the learned CIT(A) at para 3.3.3, that : "No material has been placed before me to show that there is any scope of revival of these businesses. There is complete breakdown of the business of the appellant. There cannot be any question of allowing the impugned expenses.", in our considered opinion, is against the facts of the case. 16. In view of the facts and circumstances as well as the factual position of the case, we have to necessarily allow the claim of the assessee by applying the decision of the jurisdictional High Court in Hindustan Chemical Works vs. CIT [124 ITR 561 (Bom.)]. In that case the facts as recorded by the Tribunal were that the assessee had complete breakdown of business and it was merely not a case of lull ..... X X X X Extracts X X X X X X X X Extracts X X X X
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