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TMI Blog2010 (8) TMI 992X X X X Extracts X X X X X X X X Extracts X X X X ..... sum of ₹ 9,69,363/- as bad debts. The AO was of the view that the assessee has not satisfied the conditions laid down under the provisions of section 36(1)(vii) read with sub-section 2 because the assessee did not furnish any evidence to show the nature of debts, the action taken by the assessee for the recovery and the circumstances forced for writing off the such debts. The AO questioned to the assessee as to how the assessee came to the conclusion that the debt became bad as the condition prescribed under section 36(1)(vii) read with section 36(2) are not fulfilled. Accordingly, the AO made the addition to the total income of the assessee of ₹ 9,39,363/-. 4. On appeal, the CIT(A) allowed the claim of the assessee and directed the AO to delete the addition vide impugned order. 5 Before us, the learned DR has submitted that before allowing the claim of the bad debts u/s 36(1)(vii) of the Act the debt should be bad in nature and merely writing off the amount is not sufficient. He has relied upon the order of the Hon. Gujarat High Court in the case of Dhall Enterprises reported in 295 ITR 481 (Guj). The learned DR has further pointed out that before the AO, the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndings by the AO that the decision taken by the assessee is not honest or malafide, the claim cannot be denied. In view of this legal position, we do not find any infirmity in the order of the CIT(A). Accordingly, we dismiss the ground of appeal raised by the revenue. 8. In the result, the appeal of the revenue is dismissed. ITA No. 7302/Mum/2008(by assessee) 9. The assessee has raised various grounds in this appeal. However, the only issue arises for our consideration and adjudication is whether the CIT(A) is justified in confirming the addition of ₹ 1,37,20,000/- as income of the assessee being remission of liability on account of Non-Convertible Debentures (in short NCD) 10. Brief facts of the case are that during the course of assessment proceedings the AO noted that the assessee has claimed deduction of ₹ 1,37,2000/- in the computation of income on account remission of NCDs. The assessee explained before the AO that the company has taken a home loan of ₹ 5 crores from State Bank of India Home Finance Ltd and later on in a settlement issued Zero percent Non Convertible Debentures for face value of ₹ 2,93,00,00/-. However, the assessee could pay only ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8,00,000/- total amounting to ₹ 2,93,00,000/-. To discharge the above liabilities of outstanding of ₹ 2,93,00,000/- the debentures of ₹ 2,93,00,000/- were issued. In the books of account a total liability of ₹ 2,93,00,000/- was disclosed under the head Secured loan in the balance-sheet year after year, which was accepted by the revenue. In the scrutiny assessment for the assessment year 2000-01 onwards till assessment year 2004 05 no part of ₹ 2,93,00,000/- has been claimed by the assessee as deduction in computing the taxable income as no part has been debited to the profit and loss account. The learned AR of the assessee has further contended that ₹ 2,93,00,000/- represents the liability towards principal amount to be payable to the State Bank of India Home Finance Ltd. In the year 2002, once again, the settlement was reached with the State Bank of India Home Finance Ltd and they issued letter dated 1.07.2002 which is placed in the paper book at pages 11 to 13. The liability of Rs,1,45,00,00/- was re-scheduled by the State Bank of India Home Finance Ltd and the Company was liable to pay ₹ 25,00,000/- on or before 31.07.2002 and the balanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s income of the assessee on remission. The learned AR further pointed out that the loan was taken by the assessee for purchase of house property, therefore, the same was for acquiring the capital assets and not utilized for trading purpose of the assessee. He has relied on the following decisions: 1. Polyflex (India) Pvt ltd V/s CIT (257 ITR 343) 2. Mahindra and Mahindra V/s CIT (261 ITR 501) 3. Cipla Investment ltd (33 SOT 317) 4. Helious Food Improvers, Mumbai ITAT (P) Ltd 14 SOT 54 5. Prism Cement (I), Mumbai ITAT(101 ITD 130) 14. On the other hand, the learned DR has submitted that the assessee originally borrowed ₹ 5 crores in the year 1995 which was interest bearing. The assessee made the payment from time to time to State Bank of India Home Finance Ltd till 31.12.1996. Thereafter as per the settlement reached between the assessee and the State Bank of India Home Finance Ltd, the interest portion of ₹ 1,45,00,000/- was converted into NCDs. Similarly, ₹ 148,00,000 recapturing future interest also converted into NCDs. The total loan was converted into NCDs by the assessee of ₹ 2,93,00,000/- comprising two amount of ₹ 1,45,00,000/- being ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 and 12 of the paper book. The contains of the said letter are as under : "DUPLICATE COPY. WITHOUT PREJUDIECE Ho/2002/cr/sb/355 July 01,2002 M/s Lloyds Realty Limited Modern Mills Compound 101, Keshaverao Khare Marg Jacob Circle Mumbai 400001 Kind attn: Shri B L Agarwal (Managing Director) Dear Sir, M/s Lloyds Realty Limited (LRL) Settlement of debenture dues This has a reference to your letter dated April 29,2002 on the captioned subject. In this regard, settlement of dues may be arrived at subject to the following broad terms and conditions: 1. The capitalized portion of the corporate loan of ₹ 500 lacs which has earlier been converted into 0% secured redeemable NCD of ₹ 145 lacs will now be repaid as under : a) ₹ 25 lacs is payable on signing of the settlement terms, on or before July 31,2002; b) balance of ₹ 120 lacs is payable in 24 installments of ₹ 5 lcas each; c) Post dated cheques shall have to be submitted for all the installments; d) All other securities as already created in favour of SBIHF to secure the dues of secured redeemable NCDs of ₹ 293 lacs shall remain in full force and effect; 2. LRL will ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... capital dues was to be considered for cancellation only after receipt /realization of all dues by July 2004 as per the settlement agreed. It is evident that the NCD issued for ₹ 1,45,00,000/- was representing the capitalized portion of the loans and the NCD issued for ₹ 1,48,00,000/- for recapturing future interest on unrealized capitalized dues. The lower authorities have disallowed the claim of the assessee by treating the remission of liability as income of the assessee on the ground that the NCDs issued for ₹ 1,48,00,000/- were against the recapturing future interest. As per the provisions of section 41, the remission or cessation of trading liability which was deducted or made allowance in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee the same shall be chargeable to tax in the year in which the said remission or cessation took place and the assessee obtained the benefit of such remission. The provisions of section 41 are reproduced below : "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 assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gh Court in the case of Solid Containers ltd V/s Dy CIT (supra) relied upon by the DR has observed as under : "The present appellant can hardly derive any advantage from the case of Mahindra and Mahindra Ltd V/s CIT (2003) 261 ITR 501 (Bom). As in that case a clear finding was recorded that the assessee continued to pay interest at the rate of 6% for a period of 10 years and the agreement for purchase of tooling was entered into much prior to the approval of loan arrangement given by the RBI. Therefore, the loan agreement , in is entirely, was not obliterated by such waiver. Secondly, the purchase consideration related to capital assets. The tooling were in the nature of dies and the assessee was a manufacturer of heavy vehicles. The import was that of plant and machinery and the waiver could not constitute business. The fact of the present case are entirely different inasmuch as it was a loan taken for trading activity and ultimately, upon waiver the amount was retained in business by the assessee. Thus, the principle stated by the Supreme Court in the case of T V Sundaram Iyengar and Sons ltd (1996) 222 ITR 344 would be squarely applicable to the facts of the present case. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... venue has not made out the case that the loan was taken for the trading purposes and not for acquiring capital assets/investment then the decision relied upon by the learned DR is not applicable in the case in hand. 20. On the other hand, the decision of a co-ordinate bench of this Tribunal in the case of CIPLA Investment ltd V/s ITO ( supra) this Tribunal has considered the decision of the jurisdictional High Court in the case of Solid Containers ltd V/s Dy CIT (supra) in paragraph 9 has held as under : "9. We have considered the issue. As the facts indicate the holding company has advanced funds to the assessee-company in 1998 which was received as share application money, later on transferred to unsecured loan. The amounts were utilized in investments and the incomes thereon were offered under the head 'capital gains" and not as "business income" As rightly held by the CIT(A), provisions of section 41(1) invoked by the AO does not apply. For attracting the provisions of section 41(1) the first requisite condition to be satisfied is that the assessee should have got the deduction or benefit or allowance in respect of loss, expenditure or trading liability incurred by it and co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was undoubtedly on account of capital nature, its waiver does not have the quality of changing the same into a revenue receipt. In view of these facts and also the various principles laid down in the case law relied upon by the learned counsel, we are of the opinion that the learned CIT(A) erred in treating the amount as taxable income in the hands of the assessee under section 28 of the Act. On the facts of the case, we are of the opinion that the provisions of section 28 does not apply and the amount is not taxable under the provisions of the Act. Accordingly, the assessee's grounds are allowed. Assessing officer is directed to delete the amount" 21. It is pertinent to note that the loan was obtained by the assessee for acquiring the capital assets and no interest was claimed by the assessee in any of the assessment year pertaining to the period for which the outstanding loan amount represents and the debentures were issued against the said loan as well as the recapturing future interest on unrealized capital dues; therefore remission of the amount pertaining to the liability of the NCD would not attract the provisions of section 41(1) because the primary condition that the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X
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