TMI Blog2010 (6) TMI 784X X X X Extracts X X X X X X X X Extracts X X X X ..... erred in directing to reduce the amount of ₹ 9,41,86,658/- and ₹ 4,07,65,542/- from taxable income accepting the assessee s version that it was wrongly credited to P L account without calling for a report from A.O as required under rule 46A of the IT Rules, nor the CIT(A) has himself verified the claims of the assessee. As per details on page 20 of the CIT(A) s order, total amount credited to the income on account of waiver is only ₹ 10,89,07,907/- where as the CIT(A) has allowed a relief of ₹ 13,22,52,000/-, which establishes that the CIT(A) has not properly verified the issue. 2. In regard to ground no. 1, the ld. DR draws our attention towards paragraph 3 of the assessment order, in which it is mentioned that the assessee wrote off certain amounts and also wrote back certain amounts to the profit and loss account, resulting into a net credit balance of ₹ 1,01,40,554/-. This amount along and another credit amount of ₹ 1.07 crore, representing security deposits, have been brought to tax. For the sake of ready reference, this paragraph is reproduced below:- 3. The assessee was requested to furnish the details of balances written off. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Mayfair Exports 14003 - 788990 Almaty Tea Factory (Rajasthan) 5047 - 433279 Kolhapur Zila Sehakari 20484 100000 Sun Tea Fze 935177 - 2217603 Madhu Gramoudyog Sewa Sansthan 791483 100000 Madhu Gramoudyog Sewa 125000 200000 Sansthan (DEL AT) Saga Food Products Ltd. (Anna Nagar) 501064 200000 Saga Food Products Ltd.(Kamla Garden) 370843 300000 As per Misc. Balance Written-off 238,80,519 10,700,000 10,140,554 The assessee was requested to explain as to why these advances should not be added ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assed without taking back possession of such machines during the relevant previous year. Even assuming that no possession of machines can be taken by the appellant, no benefit accrues to the appellant as cost of such machines (being stock-in-trade/trading asset in the appellant s business) will also be required to be written off in the books of account/netted against amount of such security deposits. In view of the above, the addition made by the assessing officer on account of outstanding liabilities towards security deposits aggregating to ₹ 1,07,00,000/- is deleted. 2.2 The ld. DR heavily relies on the order of the AO. 2.3 In reply, the ld. counsel for the assessee draws our attention to pages 5 to 11 of the impugned order, which has already been summarized by us. He also draws our attention to pages 10 to 20 of the paper book, being the details of amounts written off, security deposits and advances. This has been done with a view to impress that there are errors in the factual findings given by the AO. He relies on the order of the ld. CIT(Appeals) that since liabilities remained to be paid and were shown as such in the books of account, the provisions of sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of impugned interest expenditure in the earlier years by virtue of the provisions of section 43B of the Act and for that reason only waiver was made by lenders in the impugned assessment year. Since no deduction was claimed in the earlier years interest waived of cannot be treated as income in the relevant assessment year. In view of the above, the assessing officer is directed to reduce the amount of ₹ 4,07,65,542/- on account of interest waived of during the relevant previous year from taxable income, which was wrongly offered as income in the return of income. 4.2 In regard to the amount of loan, his finding is that the amount has not been claimed in the past and, therefore, the same cannot be brought to tax u/s 41(1). His finding is contained on page 23, which is reproduced below:- In the decision of Delhi High Court in the case of CIT Vs. Phool Chand Jiwan Ram : 132 ITR 37 and CIT Vs. Tosha International Ltd.: 2008 TIOL 48 HC DEL IT, too, it has been endorsed that waiver of principal amount of loans cannot be deemed as income under section 41(1) of the Act as such waivers do not satisfy the test of that section. In view of the above, the assessing officer is d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ₹ 2,05,42,468/- were waived by them. The question is whether, any of these two amounts are liable to be taxed u/s 41(1) or section 28(iv) of the Act? 5.1 In the case of Phool Chand Jiwan Ram (supra), the relevant facts are that the assessee had purchased goods in an earlier year from M/s Narsinghdass Banarsidass, the payment in respect of which was made by M/s Janaki Dass Banarsi Dass. The amount was subsequently waived. The case of the revenue was that the amount so paid should be taken towards purchase of cloth and, therefore, it represents a trading liability. The Hon ble Court came to the conclusion that this conclusion was rather far-fetched. The cloth was purchased from M/s Narsinghdass Banarsidass and the debt represented a trading debt. However, so far as M/s Janaki Dass Banarsi Dass is concerned, the payment made by it was not for the purpose of purchase of stock-intrade. Therefore, it was held that the liability was not a trading liability and the amount waived could not be brought to tax in the hands of the assessee. For ready reference, the relevant portion of the judgment is reproduced below:- The point that is urged on behalf of the department before u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding liability owed by the assessee to M/s Janki Dass Banarsi Dass, nor had this amount of liability been allowed as a deduction in earlier assessments. 5.2 In the case of T.V. Sundaram Iyengar Sons Ltd. (supra), the assessee received deposits in the course of business which were treated as capital receipts. Some deposits were not claimed and some were not returned to the depositors. These were written off to the credit of the profit and loss account. The Hon ble Court came to the conclusion that the transactions were in the course of business. Although, originally the receipts were capital in nature but this character changed when the amount was credited to profit and loss account. The assessee became richer by this amount by treating it its own money. Therefore, the receipts were liable to be taxed u/s 28(iv). 5.3 In the case of Mahindra And Mahindra Ltd. (supra), the facts are somewhat more involved in as much as the purchase consideration of the tools was converted into loan, for which the assessee handed over three promissory notes. This company was taken over by another company, which decided to write off the loan as a part of take-over deal, possibly looking to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 circumstances, section 28(iv) is not attracted. Lastly, we may mention that, in this case, AMC agreed to forego the principal amount of loan as a part of take-over arrangement with KJC to which the assessee was not a party. The waiver of the principal amount was unexpected. In the circumstances, one fails to understand how such waiver would constitute business income. 5.4 Coming to the case of Solid Containers Ltd. (supra), in which the case of T.V. Sundaram Iyengar Sons Ltd. was referred to, and the case of Mahindra And Mahindra Ltd. was distinguished, it has been me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ount is not covered by the provision contained in section 41(1). It was also mentioned that the principles enunciated in the case of Mahindra And Mahindra Ltd. are fully applicable. 5.7 Coming to the case of Jindal Equipment Leasing Consultancy Services Ltd. (supra), it was mentioned that the income which can be taxed u/s 28(iv) must not only be referable to a benefit or perquisite, it must be arising from business. Consequently, it was held that the amount of about ₹ 1.47 crore written off to the credit of profit and loss account in respect of Jindal Steel Power Ltd., did not constitute income u/s 28(iv). 5.8 In the case of Jay Engineering Work Ltd. (supra), unclaimed balances of ₹ 1,16,240/- were written off to the credit of P L account. The Hon ble Court mentioned that the liability is contractual and not statutory in nature. After considering the case of TVS Iyengar Sons Ltd., CIT Vs. Sugauli Sugar Works (P) Ltd. (1999) 236 ITR 518 (SC) and others, it came to the conclusion that the amount represented income as settled in the case of TVS Iyengar Sons Ltd. 6. We may firstly take up the matter regarding taxability of the loan amount waived by the ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Waiver of Principal amount 20,542,468.00 6.2 In so far as term-loans are concerned, it is clear that these were taken for purchase of capital assets from time to time. The facts of the case of Velocient Technologies Ltd. (supra) are somewhat different as in that case the assessee had received equity contribution and loan from a foreign collaborator for setting up joint venture agreement. The same was received even before the business was started. Therefore, the ratio of that case is not applicable to the facts of this case, as in this case loans have been received from time to time. The facts of the case of Tosha International Ltd., decided by the jurisdictional High Court, are quite similar to the facts of this case. In this case, that assessee ran into huge losses and was declared to be a sick company. Under onetime settlement scheme, the banks required the assessee to pay 60% of the amount due towards principal and waived the entire interest payment. It was the case of the revenue that the assessee had derived benefit by way of depreciation. The ld. CIT(A) deleted the addition, which was upheld by the Tribunal by making ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s judgment is confined to the facts of this case. Coming to the case of aforesaid Jindal Equipment, the facts are that the assessee reflected a loan of ₹ 6,80,31,189/- payable to JSPL. Out of this, JSPL wrote off a sum of ₹ 1,46,53,065/- in its books. The AO treated this amount as the income of the assessee on the premise that liability to this extent ceased to exist and the assessee stood to gain this amount. The amount was assessed u/s 41(1). The CIT(Appeals) also considered the provision of section 28(i) and upheld the addition. The Tribunal deleted the addition by stating that the amount was never claimed as deduction in the past and, therefore, the provision contained in section 41(1) was not applicable. The Hon ble High Court considered the aforesaid provision and the provisions contained in section 28(iv) also. The finding of the court is that the benefit must not arise in cash and the benefit or perquisite must arise in the course of business. On the facts, it has been held that looking to nature of business, the amount constituted capital receipt. On analyzing the facts of our case in so far as term-loans are concerned, we find that those were raised for purcha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5 crore has now been written off to the credit of profit and loss account. If we apply the ratio of the decision of Hon ble Bombay and Madras High Court, the character of receipts changes when the amounts are credited to profit and loss account. This benefit arises in the business operations of the assessee as the monies have been borrowed for day-to-day operations. However, the case of the ld. counsel is that the decision of Hon ble Delhi High Court is different from the decision of Bombay Madras High Courts in this matter. In this connection, the case of Phool Chand Jiwan Ram has been cited. In that case, the creditor had paid the liability of the assessee arising on account of purchase of cloth. This liability was written off. The decision of Hon ble Delhi High Court is that the liability was not for purchase of cloth but it was an amount borrowed from M/s Janaki Dass Banarsi Dass. This liability was not a trading liability as the two transactions were separate and independent. It may be mentioned in the first place that the decision was rendered under the old Act and much prior to rendering the decision in the case of T.V. Sundram Iyengar Sons Ltd. To our mind, the aforesai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in cash-credit accounts constitute the income of the assessee. 8. Coming to the issue of taxability of interest waived by the banks and financial institutions, there is a clear finding by the ld. CIT(Appeals) that these amounts were not claimed in the past by the assessee by way of deduction. Therefore, the requirement of section 41(1) to the effect that where a deduction has been made in the assessment of any year in respect of expenditure incurred by the assessee has not been satisfied. The amount was otherwise debited to profit and loss account earlier and has been credited to profit and loss account now. Thus, there is no benefit to the assessee as the debits and the credit get netted to a zero sum. Therefore, the provision contained in section 28(iv) is also not applicable. Thus, the issue has to be decided in favour of the assessee and against the revenue. 9. We find that there may be some error in computation of this amount, as mentioned in the grounds of appeal. The ld. CIT(Appeals) has furnished the net effect of the waiver of loan and interest on page 20 of his order, according to which balances amounting to ₹ 11,53,72,340/- have been written off, but misce ..... X X X X Extracts X X X X X X X X Extracts X X X X
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