9911796707
TMI Blog2014 (10) TMI 464X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in the business of manufacture and trade of synthetic yarn and freight forwarding. The assessee had filed its return of income for the assessment year under dispute on 30.9.2008 and, subsequently, revised its return of income on 2.3.2010 declaring a 'Nil' income. The assessee's return of income was originally processed u/s 143(1) of the act and, subsequently, subjected to scrutiny. During the course of assessment proceedings, the assessee had submitted that it had borrowed loans from various financial institutions to purchase capital assets prior to 1999. According to the assessee, when it ran into losses and upon its net worth was being fully eroded, it became sick as per the provisions of Sick Industrial Companies (Special Provisions) Act, 1985 [SICA]. In the meanwhile, the assessee was served a Notice u/s 13(2) of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 [SARFAESI] from Stressed Assets Stabilization Fund [SASF] (a financial trust that had taken over the loans advanced by IDBI Bank Limited] who was authorised to act for self and on behalf of all secured lenders of the assessee The SASF took over physical possessio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se Department which was lying with them as security for amounts of kist due to the State. The Hon'ble supreme Court reversing the decision of the High Court held 'what was sold at the auction was the immoveable property belonging to the assessee and the price realised, therefore, belonged to the assessee. From that price, the State deducted its dues towards kist. Capital gains have to be computed on the full price (less admissible deductions). In the case of the appellant, during the year under consideration, the property/assets of the appellant company have been sold for a certain consideration, in return the appellant has received as benefit the waiver of the entire loan outstanding in its books amounting to Rs. 97.42 crores. Thus, the full value of consideration for the appellant is Rs. 97.42 crores. Since the WDV of the assets as per the books of the appellant company was Rs. 11.23 crore, the decision of the assessing officer to charge short term capital gains of Rs. 61.73 crores is upheld." Set off of brought forward unabsorbed deprecation: Extensively quoting the assessee's claim and also extracting the operational portion of the findings of the Hon'ble Mumbai Tribunal (SB ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee. The learned AR had also disputed the stand of the CIT (A) to place reliance on the Supreme Court's judgment (supra) to justify her action as the issue before the Hon'ble Court was on a different footing. With regard to the denial of benefit of set off of brought forward unabsorbed depreciation from the AYs 1997-98 to 2001-02 by the CIT (A) and erroneously upholding the addition of Rs. 51.21 crores made by the AO, it was the stand of the learned AR that the CIT (A) had grossly ignored the fact that once the Circular No.14 of 2001 clarified that the restriction of 8 years for carry forward and set off of unabsorbed depreciation had been dispensed with, the unabsorbed deprecation from AYs 1997-98 up-to the AY 2001-02 got carried forward to the AY 2002-03 and became part thereof and has, thus, overlooked the fact that the accumulated depreciation came to be governed by the provisions of s. 32(2) as amended by Finance Act, 2001 and this was available for carry forward and set off against the profits and gains of subsequent years without any limit whatsoever. To strengthen his submission on both the issues, the learned AR had placed strong reliance, among others, on the following cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere actions otherwise statutorily permitted to be taken by the secured lenders to prevent frittering away of value in the mortgaged assets. Section 13 (2) of SARFAESI subscribes that 'Where any borrower who is under a liability to a secured creditor under a security agreement makes any default in repayment of secured debt or any instalment thereof, and his account in respect of such debt is classified by the secured creditor as non-performing asset, then, the secured creditor may require the borrower by notice in writing to discharge in full his liabilities to the secured creditor within sixty days from the date of notice failing which the secured creditor shall be entitled to exercise all or any of the rights under sub- section (4)." Thus, the requirement for the secured lenders is to issue notice to the borrower for repayment of dues before taking over possession, but not for taking over ownership, of the mortgaged assets. On receipt of such a notice for repayment, the borrower is placed under restraint from dealing with mortgaged assets in any manner whatsoever and on failure of the borrower to discharge his/its liability within the time provided in the said notice, the rights v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed above, there is a conceptual distinction between securities by which the creditor obtains ownership of or interest in the property concerned (mortgages) and securities where the creditor obtains neither an interest in nor possession of the property but the property is appropriated to the satisfaction of the debt (charges). Basically, the NPA Act deals with the former type of securities under which the secured creditor, namely, the bank/FI obtains interest in the property concerned. It is for this reason that the NPA Act ousts the intervention of the courts/tribunals..............." Further it was held by the Hon'ble Supreme Court as follows - "...............Therefore, it cannot be said that if possession is taken before confirmation of sale, the rights of the borrower to get the dispute adjudicated upon is defeated by the authorised officer taking possession. As stated above, the NPA Act provides for recovery of possession by non-adjudicatory process, therefore, to say that the rights of the borrower would be defeated without adjudication would be erroneous. Rule 8, undoubtedly, refers to sale of immovable secured asset. However, Rule 8(4) indicates that where possession is t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ference, the High Court held that by the mortgage an interest was created in favour of the State and when the property was sold by auction its value had to be reduced to the extent of the interest created in favour of the State. On appeal, the Hon'ble Supreme Court had held as under: "4............................................................................................................ ....................................................................................We are of the view that the Tribunal and the High Court were in error. What was sold by the State at the auction was the immovable property that belonged to the assessee. The price that was realised therefor belonged to the assessee. From out of that price, the State deducted its due towards 'kist' and interest due from the assessee and paid over the balance to him. The capital gain that the assessee made was on the immovable property that belonged to him. Therefore, it is on the full rice realised [less admitted deductions] that the capital gain and the tax thereon has to be computed... ..." 7.1.7. The claim of the present assessee under consideration is that taking over of assets does not amount to 'transfe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he secured creditor and the residue of the money so received shall be paid to the person entitled thereto in accordance with his rights and interests. (8) If the dues of the secured creditor together with all costs, charges and expenses incurred by him are tendered to the secured creditor at any time before the date fixed for sale or transfer, the secured asset shall not be sold or transferred by the secured creditor, and no further step shall be taken by him for transfer or sale of that secured asset." 7.1.10. Based on the above referred provisions of SARFAESI Act, the following points emerge, namely: (i) For enforcement of security interest, the secured lender take the possession of the assets after serving notices under sections 13(2) and 13(4) of SARFAESI Act; (ii) The second lender then takes steps to sell the assets so possessed. However, the secured lender, at no stage, does acquire any title over the assets, but, merely holds it till its dues are settled either by the borrower before the date of sale or transfer or from the sale proceeds of the assets; (iii) Costs incurred by the secured lender in connection with the sale of the secured assets can be recovered from the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed. For the above proposition, we would like to refer to the judicial precedents on the issue as under: (i) Mahindra and Mahindra Ltd v. CIT (2003) 261 ITR 0501 (Bom) : The assessee manufactured jeeps. In June, 1964, it entered into an agreement with an American company which agreed to sell to the assessee dies, welding equipment and die models tooling for production of special types of jeeps by the assessee in India. The price of the tooling was agreed at $ 6,50,000 c.i.f., Bombay. The import of the tooling was approved by GOI. Since the assessee could not secure foreign exchange, the American company agreed to provide a loan of the said amount repayable after ten years in instalments with interest at 6%. Approval of the GOI, the assessee had received the loan amount. In February, 1976, the American Company was taken over and as a term thereof, it had been agreed to waive the principal amount of loan advanced to the assessee and to cancel the promissory notes as and when they matured. In its return of income for the AY 1976-77, the assessee had shown an amount of Rs. 57.74 lakhs as cessation of its liability towards the American Company. However, the AO took a stand that with th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with the BIFR. Under the one time settlement scheme, the FIs and banks required the assessee to pay 60% of the amount due towards principal and waived the entire interest payment. There was no dispute with regard to waiver of interest payment, but, the AO took an objection in respect to the waiver of the principal amount of Rs. 10.47 crores which the assessee had directly credited to the Capital Reserve Account. According to the AO, 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 and since the loans ceased to exist, this amounted to cessation of liability and, therefore, it has to be treated as an income. When the issue finally placed before the Hon'ble High Court for its ruling, the Hon'ble Court had held as under: "4. We see no reason to interfere with the conclusions of the Tribunal as the same have been rendered on a correct appreciation of law. The principles enunciated in Mahindra and Mahindra Limited v. CIT 261 ITR 501 (Bom) are fully applicable and we see no reason to take a different view." Denial of the benefit of set off of brought forward unabsorbed depreci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th s. 32(2) of the Act as amended by the Finance Act, 2001 and not by s. 32(2) of the Act as it stood before the said amendment. Thus, the provisions of s. 32(2) of the Act as amended by the Finance Act, 2001 would allow the unabsorbed depreciation allowance pertaining to the AYs 1997-98, 1998-99, 1999-2000 and 2000-01 to be carried forward for set off indefinitely. As such, the assessee company is entitled to set off of brought forward unabsorbed deprecation for the AYs 1997-98 to 2001-02. 8.2.1. Moreover, the legal position as prevails in the case of the assessee company is that the provision relating to allowing set off of unabsorbed depreciation u/s 32(2) of the Act as amended by the Finance Act, 1996 provides that the current depreciation becomes eligible for set off against the business income and against income under any other head. The carry forward time is also restricted to eight assessment years succeeding the AY in which it was first computed. Further, the aforesaid changed law was applicable up-to the AY 2001-02. The second proviso which later became the proviso to s. 32 (2) of the Act provides that the time limit of eight assessment years specified in sub-clause (b) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ars or it would be governed by Section 32 as amended by Finance Act 2001? The reason given by the Assessing Officer under section 147 is that Section 32(2) of the Act was amended by Finance Act No. 2 of 1996 w.e.f. A.Y. 1997-98 and the unabsorbed depreciation for the A.Y. 1997-98 could be carried forward up to the maximum period of 8 years from the year in which it was first computed. According to the Assessing Officer, 8 years expired in the A.Y. 2005-06 and only till then, the assessee was eligible to claim unabsorbed depreciation of A.Y. 1997-98 for being carried forward and set off against the income for the A.Y. 2005-06. But the assessee was not entitled for unabsorbed depreciation of Rs. 43,60,22,158/- for A.Y. 1997- 98, which was not eligible for being carried forward and set off against the income for the A.Y. 2006-07. 31. Prior to the Finance Act No. 2 of 1996 the unabsorbed depreciation for any year was allowed to be carry forward indefinitely and by a deeming fiction became allowance of the immediately succeeding year. The Finance Act No. 2 of 1996 restricted the carry forward of unabsorbed depreciation and set-off in a limit of 8 years, from the A.Y. 1997-98. Circular ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll not apply in case of a company for the assessment year beginning with the assessment year relevant to the previous year in which the said company has become a sick industrial company under sub-section (1) of section 17 of the Sick Industrial Company (Special Provisions) Act, 1985 (1 of 1986) and ending with the assessment year relevant to the previous year in which the entire net worth of such company becomes equal to or exceeds the accumulated losses. Explanation - For the purposes of this clause, 'net worth' shall have the meaning assigned to it in clause (ga) of sub-section (1) of section 3 of the Sick Industrial Companies (Special Provisions) Act, 1985." 34. The aforesaid provision was introduced by Finance (No. 2) Act, 1996 and further amended by the Finance Act, 2000. The provision introduced by Finance (No. 2) Act was clarified by the Finance Minister to be applicable with prospective effect. 35. Section 32(2) of the Act was amended by Finance Act, 2001 and the provision so amended reads as under:- "Where, in the assessment of the assessee, full effect cannot be given to any allowance under sub-section (1) in any previous year, owing to there being no profits or gains ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 03 and subsequent years. This means that any unabsorbed depreciation available to an assessee on 1st day of April, 2002 (A.Y. 2002-03) will be dealt with in accordance with the provisions of section 32(2) as amended by Finance Act, 2001 and not by the provisions of section 32(2) as it stood before the said amendment. Had the intention of the Legislature been to allow the unabsorbed depreciation allowance worked out in A.Y. 1997-98 only for eight subsequent assessment years even after the amendment of section 32(2) by Finance Act, 2001 it would have incorporated a provision to that effect. However, it does not contain any such provision. Hence keeping in view the purpose of amendment of section 32(2) of the Act, a purposive and harmonious interpretation has to be taken. While construing taxing statutes, rule of strict interpretation has to be applied, giving fair and reasonable construction to the language of the section without leaning to the side of assessee or the revenue. But if the legislature fails to express clearly and the assessee becomes entitled for a benefit within the ambit of the section by the clear words used in the section, the benefit accruing to the assessee canno ..... X X X X Extracts X X X X X X X X Extracts X X X X
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