TMI Blog2013 (1) TMI 289X X X X Extracts X X X X X X X X Extracts X X X X ..... ny benefit out of this conversion of one liability to another liability. The ratio laid down in the case of T.V. Sundaram Iengar and Sons [1996 (9) TMI 1 - SUPREME COURT] is not applicable to the facts of the assessee’s case as decision of the Higher Forum cannot be made applicable without discussing the factual position involved - AO has invoked section 28(iv) which covers the benefits in perquisites received in kind and it has no applicability to any transaction which involves money. The loan was taken to invest in the capital asset. There was no waiver of the loan, therefore, conversion of the loan into share capital shall not constitute a trading receipt. As held in the case of CIT vs. Jindal Equipments Leasing and Consultancy Services Ltd. [2009 (12) TMI 364 - DELHI HIGH COURT] to attract the provisions of section 28(iv), the sum in question must be a benefit or perquisite arising in the course of business is of nature, other than cash or money. Keeping these facts in view, no fault in the order of CIT (A). Addition on account of share application money u/s 28 (iv) - CIT(A) deleted the addition - Held that:- The amount of Rs.5,43,50,000/- was pending for allocation of share ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... after making the adjustment for addition of Rs.10,49,29,589/-. The assessee company was incorporated on 15.03.1993 and the aims and objects of the company were to carry on the business of deep sea fishers, fishers, fish-curers, fish salesman, cold storage keepers, warehousemen, ship brokers, ship agents, salvors, wreck removers, etc. etc. and to carry on the business of owning, chartering, running and managing fishing trawlers, ships and other vessels. The assessee company was a joint venture between M/s. Fortune Oceanic Products Ltd., registered in India and M/s. Ookean Ltd., a Government owned trading organization of Estonia (Russia). The company was not doing activities for the last six years due to heavy losses incurred in the past years. The AO made the additions, one on account of loan converted into shares of Rs.4,39,03,750/-; second is share application money of Rs.5,42,50,000/- and third is Rs.67,75,839/- being liabilities converted into share capital and premium. Thus, the income was calculated at Rs.10,49,27,209/- which was adjusted against the brought forward losses and the net loss to be carried forward at Rs.6,32,21,855/-. The issue has been dealt with by the AO in pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s ceased liability of the assessee company as the share premium amount, as per accounting principles, should go to Reserves and Surplus which normally contains Incomes of the assessee and tax u/s 115JB may not be charged. Secondly, the assessee himself has set off the ceased liability amounts with brought forward losses and losses being negative income, can only be set off by incomes. Hence, the assessee has himself indirectly treated the ceased liabilities as income. However, the assessee has set off the brought forward losses below the line of profit and loss account which is not acceptable because in this way the assessee has tried to escape the payment of MAT u/s 115J B of the Income Tax Act. In its reply dated 27.09.2007 the assessee submitted as under:- "As regards your query regarding applicability of Section 41(1), it is submitted that these provisions are not applicable in the case of the assessee company. This Section provides that where an allowance or deduction is granted to the assessee in any previous year in respect of any loss, expenditure or trading liability and subsequently, the assessee receives any amount in respect of such expenditure, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en against a trawler and the same was a trading liability at a point of time. 2. Even in the case of Share Application Money which was pending for allotment for about a decade, it cannot be said that the same is marinating its capital nature. In a Supreme Court decision in the case of CIT Vs TV. Sundaram Iyengar Sons 1996 (222 ITR 344) it was held by the Hon'ble Supreme Court that the advance (part of Balance Sheet) becomes taxable when the customers do not come back either for refund of the advance or for adjustment of the same. The ratio of this judgment show that the nature of even a capital receipt may change its character to revenue with the passage off time it may safely be said that the share application money got changed into revenue receipt. Moreover this is nothing but an income in the form of benefit to the assessee which has arisen from the business of the assessee because the assessee had not to return this money and was subsequently used for the purpose of its business by setting off brought forward losses. The assessee was categorically conveyed that this income is a benefit to the assessee and has arisen from the business of the assessee. Without the busines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ading to the making of the three additions are that, at the close of the preceding year, the following two sums aggregating to Rs.9,81,53,750/- were reflected on the liabilities side of the balance-sheet: a) Share application pending for allotment of Rs.5,42,50,000/-; and b) Other Loans of Rs.4,39,03,750/-. The share application money pending for allotment was received M/s Oakean Ltd, a joint venturer and an existing shareholder of the appellant company. Further, appellant company had purchased a trawler from M/s Oakean Ltd for a sum of Rs.4,26,25,000/-. This was financed by M/s Oakean Limited under a Loan Agreement which carried interest at the rate of 6% per annum. The interest accrued upto 31st March, 1995 was Rs.12,78,750/- and the total amount outstanding and payable to M/s Oakean Limited as on 31.03.1995 and continued to be unchanged till 31.03.2004 was Rs.4,39,03,750/-. In the instant assessment year, M/s Oakean Ltd was allotted shares of face value of Rs.10/- at the premium of Rs.146.51/- per share against total outstanding sum of Rs. Rs.9,81,53,750/-. In other words, 6,27,140 shares were allotted to M/s Oakean Limited and as such, share capital increase b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Chand Jiwan Ram b) 116 TTJ 941 (Del) DCIT vs. Tosha International affirmed in CIT V Tosha International Ltd." "2 The only objection raised by the Assessing Officer is with regard to the waiver of the principal amount to the extent of Rs.10,47,93,857/- which the assessee had directly credited to the Capital Reserve Account. According to the Assessing Officer the assessee had derived benefit on the basis of either depreciation or utilizing the working capital which would have formed part of the earlier year's income. According to the Assessing Officer since the loans ceased to exist, this amounted to cessation of liability and, therefore, it has to be treated as an income. Consequently, the Assessing Officer added the said sum of Rs.10.47 crores in the income of the assessee. The Commissioner of Income Tax (Appeals) deleted the addition by observing that the remission of the principal amount of loan did not amount to income under Section 41(1) nor under Section 28 (iv) nor under Section 2(24) of the Income Tax Act, 1961 (hereinafter referred to as the said Act). 3. The revenue went in appeal before the Tribunal against the order of the Commissioner of Income Tax (A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yegar reported in 222 ITR 344 has held as under : "23. In the context of waiver of loan amount, what follows from the reading of the aforesaid judgment is that the answer would depend upon the purpose for which the said loan was taken. If the loan was taken for acquiring the capital asset, waiver thereof would not amount to any income exigible to tax. On the other hand, if 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 more so 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 and 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 unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... full or in part by lender, no doubt, results into discharge of loan liability is not perceived as income and generally such remission results into re-statement on the value of assets and accumulated losses or creation of capital reserve. In the present case also the assessee has created capital reserve which itself is indicative of nature of this amount even at the time of such a write off as being of capital nature." In the instant case, firstly there is no waiver of loan but conversion of loan into capital which cannot be held to be income of the appellant company. Secondly, loan had been utilized for purchase of capital assets, therefore, in view of the binding precedent stated above, there is no income earned by the appellant which is exigible to tax. 8.6 Lastly, as regards, sundry creditors, it is seen that, essential preconditions for invoking section 41(1) of the Act are two fold, namely: a) That in any earlier year allowance or deduction has been made in respect of trading liability incurred by the assessee; b) Subsequently, benefit is obtained in respect of such trading liability by way of remission or cessation of such liability. In the inst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the basis of some underlying motive supposedly resulting in some economic detriment or prejudice to the national interests, as perceived by the respondents." In view of the above discussion, all the three additions aggregating to Rs.10,49,29,589/- are deleted and, Grounds no.1 to 3 are allowed. 4. Against this order of CIT (A), the revenue is in appeal before us by taking the following grounds of appeal :- 1. "On the facts and circumstances of the case and in law the order of the Ld. CIT(A) is wrong, perverse, illegal and against the provisions of law which is liable to be set aside." 2. "On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition of Rs.4,39,03,750/- made on account of waived loan u/s 28(iv) of the LT. Act, 1961 ignoring that : a) The said loan amount was outstanding for about a decade no confirmation was filed for the same despite repeated requests. b) The said loan amount was not advanced in normal course of business was given against a trawler the same was a trading liability at one point of time. c) The said benefit was squarely covered under provisions of sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee company formed joint venture vide agreement dated 27.08.1993. This joint venture company purchased a trawler from M/s. Oakean Limited for a sum of Rs.4,26,25,000/-. This was financed by M/s. Oakean Limited under a loan agreement. This loan was carried interest @ 6%. The accrued interest up to 31.03.1995 was of Rs.12,78,750/-. Thus, the outstanding amount payable to M/s. Oakean Limited was of Rs.4,39,03,750/- as on 31.03.1995. This remained unchanged up to 31.03.2004. It was agreed between the parties that in the event of non-payment of loan, the joint venture partner shall have right to get the shares for the outstanding amount in its favour. Since the business incurred heavy losses, hence the company was unable to pay the loan. The trawler which was acquired by the assessee was registered in assessee s name and used for business in the deep sea fishing. The shares of the face value of Rs.10 with a premium of Rs.146.51 per share were issued in the name of M/s. Oakean Limited for the loan amount outstanding. Thus, by issuing the shares, the loan account was squared up. The AO wrongly treated the transaction covered by the provisions of section 28(1)(iv) of the Act. The AO was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e amount as its trade receipt by bringing it to its profit loss account. The Hon ble Supreme Court held that money was received by assessee in the course of carrying on his business. Although these deposits were of capital nature at the point of time when these were received, but by efflux of time the money has become the assessee s own money. What remains after adjustment of these deposits have not claimed by the customers. The claims of customers have become barred by limitation. The assessee itself has treated the money as its own money and taken the amount to its profit loss account. There is no explanation from the assessee why these surplus deposits were taken to its profit loss account, even if it is somebody else s money. In such a situation, Hon ble Supreme Court held such amount to be taxable. While in assessee s case the loan was taken from M/s. Oakean Limited. M/s. Oakean Limited was joint venture partner. The AO himself has recorded that the amount was not given in normal course of business. This amount was for the purchase of capital asset (trawler). This asset was capitalized in assessee s books. The unpaid purchase price of the capital asset in the form of loa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the course of business is of nature, other than cash or money. The Tribunal has held that the sum written off by J did not constitute income in the hands of the assessee. On the facts of this case and particularly having regard to the nature of business only, it would constitute a capital receipt. The sum could not be taxed. Ld. AR also submitted that the ld. DR s reliance on the amendment in section 2(24) is also of no help as the provision of section 2(24)(iv) has been inserted by the Finance Act, 2012 w.e.f. 1.4.2013 only. The ld. AR also submitted that even this amount cannot be added u/s 41(1) as this amount has never been claimed for allowance or deduction. Therefore, the benefit is not obtained in respect of any such trading liability by way of estimation or cessation thereof during the year under consideration. The assessee has not obtained any benefit in the past years also. The ld. AR also submitted that the loan amount was not received during the trading operation. It was on capital account. Ld. AR pleaded that in such a situation, the ratio of Hon ble Supreme Court has relied upon by the AO is not applicable and the CIT (A) has rightly deleted the addition. 9. After ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd Sons, cited supra. The ld. DR also submitted that this amount was outstanding for allotment for about a decade and it cannot be said that same was maintaining its nature as capital. She also pleaded that these benefits as arisen to the assessee in the course of business are squarely covered under the provisions of section 28(iv) of Income-tax Act, 1961. 12. On the other hand, ld. AR submitted that on 31.03.2004, the assessee company was having paid up capital of Rs.6,33,00,700/-. The amount of Rs.5,42,50,000- was pending for allotment of shares from M/s. Ookean Ltd. since financial year ending 31.3.1995. In the year under consideration, the assessee company has allotted shares to M/s. Ookean Ltd. of the face value of Rs.10 per share at a premium of Rs.146.51. This amount was never carried to the profit loss account. The total authorized capital of the assessee was only Rs.7 crores and during the year, 6,69,930 equity shares of the face value of Rs.10 were allotted against the outstanding share application money. Since the shares were allotted to M/s. Ookean Ltd. for this amount, this will not fall under section 28 (iv) of the Act or it also does not fall u/s 41(1) of the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted in 154 ITR 148. 19. On the other hand, ld. AR submitted that reliance placed by the revenue on the case of Mcdowell Co., cited supra, has been considered by Hon ble Apex Court in the case of Azadi Bachao Andolan vs. UOI reported in 263 ITR 706 wherein the Hon ble Court has held that if the court finds that notwithstanding a series of legal steps taken by an assessee, the intended legal result has not been achieved, the court might be justified in overlooking the intermediate steps, but it would not be permissible for the court to treat the intermediate legal steps as non est based upon some hypothetical assessment of the real motive of the assessee. Hon ble Supreme Court also held that the Courts must dealt with what is tangible in an objective manner and cannot afford to chase a will of the wisp. He finally relied on the order of CIT (A). 20. We have heard both the sides. The issue regarding the applicability of the ratio of decision of Hon'ble Supreme Court in the case of Mcdowell Company, cited supra, has not been considered by the Assessing Officer although penalty proceedings u/s 271(1)(c) were initiated. Further, the decision of Hon'ble Supreme Court in the case o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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