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2016 (9) TMI 653 - ITAT DELHI

2016 (9) TMI 653 - ITAT DELHI - TMI - Allowable deduction u/s 37 - payment of interest charges - Held that:- It is observed that the terms of agreement have been placed by the assessee wherein the terms of settlement of dues and the payment schedule has been specified. It is observed that the payment made by the assessee is part of the contract / settlement entered into between the assessee and IFCI Ltd. and interest paid from 01.01.2007 till 15.02.2007 is a part of agreement and does not assume .....

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the administration of the business. It cannot be said that the business activities were completely shut down after the lock out that took place at the manufacturing unit in Kerala. It is observed that the reason for not continuing the manufacturing activities was due to power supply being cut by KSEB. Further, there is no material to suggest that the manufacturing operation of the assessee were in a stage of more than that of suspension.Section 36(1)(vii) and 36(2) of the Act require the assesse .....

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Court in the case of TRF Ltd. Vs CIT reported [2010 (2) TMI 211 - SUPREME COURT ]. Thus the disallowance made by the Ld. Assessing Officer stands deleted. - Addition u/s 41 - secured loan from IFCI Ltd - Held that:- Respectfully followings the decision of Hon'ble Jurisdictional High Court in the case of Tosha International Ltd (2007 (7) TMI 346 - ITAT DELHI-F) we are inclined to hold that the waiver of loan does not amount to cessation of liability and cannot be brought to tax by invoking t .....

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39;ble CIT(A) is bad in Law, wrong on facts and against the principles of natural justice. 2(a) The Ld. CIT(A) has grossly erred in confirming the disallowance of interest paid to M/s. IFCI Ltd. amounting to ₹ 1525685/- on the grounds that interest paid is penal in nature. The Ld. CIT(A) has failed to appreciate that the interest has been paid on account of late payment of settlement amount to M/s. IFCI Ltd. and such interest has been paid in the normal course as per terms and conditions o .....

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a sum of ₹ 5076944/- debited under the head 'irrevocable balances written off' on the grounds that the appellant company has not carried out any business during the year. (b) The Ld. CIT(A) has failed to appreciate that even if no purchase I sale has been made during the year but the appellant company during the year under assessment was in the process of settling its liabilities and realizing its assets and therefore it cannot be held that the appellant company has not carried ou .....

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during the year. 4(a) The Ld. CIT(A) has erred in confirming the additions of a sum of ₹ 22,90,00,000/- to the income of the appellant company representing amount of loan waived by M/s. IFCI Ltd. out of term loan taken by the appellant company in earlier years. The Ld. CIT(A) has failed to appreciate that remission of the principal amount of Term loan do not amount to income under sec. 41 (1) or 28(iv) or 2(24) of Income Tax Act. (b) The Ld. CIT(A) has failed to appreciate that the loan w .....

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uded that the loan agreement does not specify that the loan availed from IFCI was utilized for purchase of fixed assets which is against the facts of the case and actually the loan from IFCI was utilized for purchase of fixed assets only as per evidences filed during appellate proceedings. 2. The brief facts of the case are as under: 2.1 The assessee filed its return of income declaring total income of ₹ 25,62,000/- after claiming set off of losses of earlier years amounting to ₹ 38, .....

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nterest charges to the extent of ₹ 15,40,526/-. Ld. A.O. considered the said amount to be penal in nature and made addition of such amount to the total income of the assessee. 4.1 Aggrieved by the disallowance of claim, the assessee preferred appeal before Ld. CIT(A). Before Ld. CIT(A), it was contended that the assessee had received loans from IFCI Ltd. in earlier years of the principal sum amounting to ₹ 39.40 crores, on which interest of ₹ 39.65 crores was outstanding as on .....

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n or before 31.12.2006; iii) balance within a period of 6 months from the date of this letter. 4.2 It has been submitted by the assessee that it had paid an amount of ₹ 8.5 lacs before 31.12.2006 and balance of ₹ 8.5 lacs was paid on 15.02.2007. The assessee has paid interest @ 12.50% from 01.01.2007 till 15.02.2007 as per the terms of agreement entered into between the assessee and IFCI Ltd. Ld. CIT(A) confirmed the addition made by the A.O. by holding as under: On careful examinati .....

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that the terms of agreement have been placed by the assessee at page 26A of the Paper Book filed before us wherein, the terms of settlement of dues and the payment schedule has been specified. It is observed that the payment made by the assessee is part of the contract / settlement entered into between the assessee and IFCI Ltd. and interest paid from 01.01.2007 till 15.02.2007 is a part of agreement and does not assume the nature of penalty. We are, therefore, of the considered opinion that the .....

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off. Ld. A.O. disallowed the claim of the write off so made by the assessee as there was no business carried on by the assessee during the year. 5.1 Aggrieved by the order of Ld. A.O., the assessee preferred appeal before Ld. CIT(A). Ld. CIT(A) upheld the addition ma de by the Assessing Officer by observing as under: 6.3 The facts of the case show that the entire premises was handed over to IFCI and the place was placed under Lock and Key. Under these circumstances it cannot be said that the bu .....

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uld be carried on in the relevant period. The addition made by the Assessing Officer is, therefore, upheld. 5.2 Aggrieved by the order of Ld. CIT(A) the assessee is in appeal before us. 5.3 Ld. A.R. submitted that he assessee is engaged in the business of manufacturing Ferro alloys etc and the manufacturing unit of the assessee was situate at Palakkad, Kerala. It has been submitted by the Ld. A.R. that the assessee was running its manufacturing unit through the power supplied by Kerala State Ele .....

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s under lock out. Due to the lock out situation that existed, the assessee effaced major financial difficulties in terms of loan and liabilities towards IFCI Ltd., as a result of which, the assessee transferred the stock and plant & machinery etc. belonging to the assessee to IFCI Ltd. on as is where is basis. The Ld. A.R. submitted that the sundry debtors which existed in the books of accounts of the assessee were also written off as these were not recoverable from the parties. Ld. A.R. sub .....

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the decision of Hon'ble Chennai High Court in the case of N. Vairaval Chettiyar Vs CIT reported in 72 ITR 114. 5.4 Ld. A.R. further submitted that the assessee, during the year under consideration was maintaining office on which rent mounting to ₹ 6,48,000/- was paid. There were other expenses incurred by the assessee towards postage, telegram, telephone, travel & Conveyance and vehicle running and maintenance expenses etc. The assessee was also incurring legal and professional exp .....

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ties that was carried out by the assessee during the year. 6. On the contrary, Ld. D.R. submitted that for allowing any deduction u/s 28-43 there has to be income that must have been earned during the year under consideration against which the deduction could be claimed. Ld. D.R. submitted that continuing with the manufacturing activities cannot be said to have been established as the assessee has transferred all its assets on as is where is basis to M/s. IFCI Ltd. 7. We have perused the details .....

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that the reason for not continuing the manufacturing activities was due to power supply being cut by KSEB. Further, there is no material to suggest that the manufacturing operation of the assessee were in a stage of more than that of suspension. 7.1 Section 36(1)(vii) and 36(2) of the Act require the assessee to write off the bad debts which are irrecoverable and that it has been considered as income in any of the previous year if it relates to such previous year. The Assessing Officer cannot i .....

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in 323 ITR 397. Respectfully following the ratio laid down in the decisions cited above, the disallowance made by the Ld. Assessing Officer stands deleted. This ground of appeal thus stands allowed. 8. Ground No.4: During the assessment proceedings, Ld. A.O. observed that the assessee has transferred an amount of ₹ 22,90,00,000/- to the capital reserve account for the year under consideration. The assessee has submitted that it had secured loan from IFCI Ltd. in the previous year and the a .....

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eal, Ld. CIT(A) confirmed the addition made by the Ld. A.O. by observing as under: Similarly, in the subject case the loan is secured as first charge against all moveable and immovable assets, present and future, installed or in loose condition. The agreement of loan disbursement at no point specifies that the loan has to be utilized for purchase if fixed assets. Similarly there is no mention of any such condition in the balance sheet for the year. The appellant has not enclosed the Bank Account .....

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l before us now. 8.2 Ld. A.R. submitted that due to heavy losses suffered by the assessee, it was declared sick and had undergone financial difficulties. Ld. A.R. submitted that the amount so transferred to the capital reserve account, did not represent cessation of liability as out of the total principal amount of ₹ 39.49 crores ₹ 16.50 crores were paid. Ld. A.R. submitted that it was only the balance sum of ₹ 22.90 crores that was transferred to the capital reserve being a ca .....

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n of any fixed asset by the assessee. Ld. D.R. emphasized that the loan was taken for trading purposes and thus should not be allowed by placing reliance upon the decision in the case of CIT Vs T V Sundaram Ayangar Sons reported in 222 ITR 344 (S.C.). 8.4 We have perused the details of the orders passed by the authorities below and the arguments advanced by both the parities. We support the contention of the assessee that every receipt in question with the business cannot be said to be a trading .....

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red loan by mortgaging immovable asset purchased in Kerala for setting up of the manufacturing unit. The clause reads as under: 1. Security: (a) The loan shall be secured by a first mortgage and charge on all the immovable and movable asset, present and future, of HEHL in such form as may be required by IFCI (subject to the prior charge on certain specified movables created / to be created in favour of HEHL s Bankers by way of security for borrowings for working capital). 8.5 It is also observed .....

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t waived to the capital reserve account in the balance sheet for the year under consideration treating it as capital in nature as per the terms of the agreement between the parties. 8.7 In our considered view, on the basis of the above factual matrix, the amount referred to as loan obtained by the assessee towards the purchase of capital asset will not partake the character of trading receipt under Section 41(1) of the Act. 8.8 In the present case, the money was received by the assessee in the c .....

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received by the assessee was for the purchase of capital asset. Ld. A.O. has also placed reliance upon the decision of CIT Vs V S Adies Advertisers Pvt. Ltd. reported in 255 ITR 510. A perusal of this judgment, it is observed that the assessee therein had written off claim and credited balances of the supplies during the normal course of its business operation and such credit balance represents money arrived out of normal trade transaction. The facts of this case are also distinguishable for th .....

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