TMI Blog2014 (1) TMI 1840X X X X Extracts X X X X X X X X Extracts X X X X ..... ar terms in Form No. 3CM which has been prescribed under the Income-tax Rule, 1962. We concur with the finding of the Ld. CIT(A) that if the approval is not in prescribed Form No. 3CM is not a serious discrepancy which should result in disallowance of the deduction to the assessee u/s. 35(2AB) of the Act. In this case, it is not disputed that the assessee has applied to the competent authority for getting the approval/recognition and only after the verification of all the details the Prescribed Authority have issued the approval letter. In our opinion, the Ld. CIT(A) has rightly allowed the claim of the assessee Addition of write-off of interest portion of amount waived by Banks - Held that:- Though we agree with the CIT(A) that if the assessee has not claimed the deduction in respect of above amount, the same cannot be disallowed u/s. 43B nor the addition u/s. 41(1) can be made as the said amount of the interest has never been claimed as an expenditure. At the same time we find that there is a contradiction in the fact noted by the Assessing Officer as well as the Ld. CIT(A). We, therefore, for the limited purpose of the verification, remit this issue to the file of the Assessi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee has written back ₹ 13,00,10,550/-. The assessee stated before the Assessing Officer that based on the settlement, the applied interest and the principal amount were written back by the assessee in the books of account as under: (a). The Principal waiver written back of ₹ 13,00,10,550/- (b). Interest waiver written back of ₹ 5,81,69,874/- 5. The assessee further stated before the Assessing Officer that no allowance or deduction was made in the assessment for any year in respect of principal loan amount and thus the same is not liable to be included as income. More so the said principal amount was never debited to the profit and loss account of the assessee company. The assessee also took stand that the grant of loan by the Bank cannot be termed as trading transactions as construed in the business world. Even if the principal amount of the loan is waived but there is no change of character of the said amount which is capital in nature and not a trading transaction. The Assessing Officer has narrated the facts of the case and its brief history in the assessment order which are as under: 5. i. The parent company (Nath Seeds Limited) was incorp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... duction, processing and marketing of hybrid seeds of different crops at Aurangabad, Maharashtra and various other locations. viii. The applicant company by virtue of this scheme is entering into an arrangement with the secured creditors including debenture holders. The Board of Directors of the applicant company has approved the scheme at their meeting held on 30th January, 2009 and recommended the same for the approval of the equity shareholders and secured creditors including debenture holders. ix. Background to the Scheme of arrangement/rational/objects for the scheme. a) During 1999-2002 the company suffered financial setback. Company product portfolio mainly comprised of cotton seeds. Large quantities of seeds were carried over resulting into blockage of working capital and consequent losses. During the same period the company incurred substantial expenditure in successfully developing Bt. Cotton seeds technology. The effort of the company in reducing cost, diversifying product portfolio, accompanied with increased adaption of hybrid seeds by the farming community are showing positive results. b) Asset reconstruction company (India) Ltd. (Arcil) has taken over the deb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd favour. The Ld. CIT(A) put his stamp of approval on the addition made by the Assessing Officer even though he gave the relief to the assessee in respect of the amount waived towards the term loan. The operative part of the finding of the Ld. CIT(A) is as under: 8.5.4. In view of the above legal propositions, I proceed to decide Ground Nos. 4 5. In respect of waiver of cash credit loan in the case of the appellant it has been observed that the A.O. has held that the said loan has been utilized for trading purpose and the appellant has not rebutted this fact claimed by the A.O. The appellant has simply claimed that the cash credit facility granted by the bank is not trading activity and the outstanding balance of cash credit account is not trading liability referred to in section 41(1) of the Act. It has been observed from the various decisions relied on by the A.O. and the appellant that in the cases where the loan has been obtained and utilized for trading activity i.e. for regular business of the assessee and not for acquiring capital asset, the said liability is to be treated as trading liability and the waiver of such loan shall be liable to tax u/s 41(1) or 28 of the Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the assessee. Accordingly, the ground taken by the assessee is dismissed. 8. In the result, the assessee s appeal is dismissed. 9. Now we take up the Revenue s appeal being ITA No. 417/PN/2012. The Revenue has taken following grounds in the appeal: 1. Whether in the facts and circumstances of the case, the Ld. CIT(A) was right in deleting the addition on account of section 35(2AB) even though, the assessee has not approved by prescribed authority in the Form No. 3CM. 2. Whether in the facts and circumstances of the case, the Ld. CIT(A) was right in deleting the addition on account of waiver of interest on loan even though the assessee has claimed the same as expenditure in earlier years. 3. Whether on the facts and in the circumstances of the case the Ld. CIT(A) was right in deleting the addition on account of principle amount of waiver of loan even though it is covered u/s. 41 (1) and finding of Hon'ble Apex Court. 10. So far as Ground No. 1 is concerned, it is in respect of deduction claimed made by the assessee u/s. 35(2AB) of the Act. The facts which are revealed from the record as under. During the course of assessment proceedings, the Assessing Offi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so incurred. . (4) The prescribed authority shall submit its report in relation to the approval of the said facility to the Director General in such form and within such time as may be prescribed. The Prescribed Authority referred to in the above section is Secretary, Department of Scientific Industrial Research, Government of India. 5.2.2. The letter of recognition/approval issued by the Prescribed Authority to the appellant vide letter dated 01/09/2006 is reproduced below This has reference to your application for recognition of your In-House R D unit(s) by the Department of Scientific and Industrial Research. This is to inform you that it has been decided to accord recognition to the In-House R D unit(s) of your firm at Nath House, Nath Road, Aurangabad upto 31.03.2009. Subsequently, the Prescribed Authority has given renewal of recognition of In-house R D Unit vide letter dated 16/06/2009 upto 31/03/2012. 5.2.3. The contents of prescribed form No.3CM read as under - FORM NO. 3CM Order of approval of In-house Research and Development facility under section 35(2AB) of the Income-tax Act, 1961 1. Name, Address and PAN of the company. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ard the parties and also perused the reasons given by the Ld. CIT(A). The only reservation of the Assessing Officer was in respect of the form in which the Prescribed Authority has given the recognition which in this case is Secretary, Department of Scientific Industrial Research, Government of India. The assessee filed the copy of the approval received from the competent authority. It is true that it is not in clear terms in Form No. 3CM which has been prescribed under the Income-tax Rule, 1962. We concur with the finding of the Ld. CIT(A) that if the approval is not in prescribed Form No. 3CM is not a serious discrepancy which should result in disallowance of the deduction to the assessee u/s. 35(2AB) of the Act. In this case, it is not disputed that the assessee has applied to the competent authority for getting the approval/recognition and only after the verification of all the details the Prescribed Authority have issued the approval letter. In our opinion, the Ld. CIT(A) has rightly allowed the claim of the assessee and no interference is called for in the findings of the Ld. CIT(A). Accordingly, Ground No. 1 is dismissed. 13. The Ground No. 2 is concerned, it is in re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the verification, remit this issue to the file of the Assessing Officer whether the assessee has claimed deduction in respect of the element of the amount of the interest waived in one time settlement. The Assessing Officer is directed to verify the record for the A.Ys. 2004-05, 2005-06 and 2006-07 and if the assessee has not claimed any deduction then no addition should be made and if the assessee has claimed the deduction in the profit and loss account then to that extent only the addition should be made. The Assessing Officer should give opportunity to the assessee to represent his case before arriving at a final conclusion. Accordingly, Ground No. 2 is allowed for the statistical purposes. 14. Ground No. 3 is in respect of the addition made by the Assessing Officer towards waiver of the principal amount of the loan which the assessee had claimed towards the capital account which was to the extent of ₹ 11,72,56,695/- and this issue is discussed by the Assessing Officer in Para No. 7 of the assessment order. The Ld. CIT(A) deleted the addition and operative part of the finding of the Ld. CIT(A) is as under: 8.5. I have carefully considered the facts of the case and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d as capital receipt initially. (2) Solid Containers Ltd. Vs. DCIT 308 ITR 417 (Bom.): In this case, the assessee has taken loan from M/s Jain Motors of ₹ 6,86,071/- for business purposes and interest on the said loan was payable to the extent of ₹ 2,83,819/-. The loan was undisputedly taken for trading activity. The party filed a suit for recovery and assessee company filed counter claims and the matter was settled out of the Court whereby the assessee company was not to pay any amount. The assessee company has credited the amount of ₹ 6,86,071/- to the reserve account considering the same to be the capital receipt. The assessee company has claimed the waiver of loan is not liable to tax under the provisions of section 28 or 41(1). In support of this contention, the assess has relied on the decision in the case of Mahindra Mahindra Ltd. Vs. CIT [2003] 261 ITR 501 (Bom.). The Hon'ble Bombay High Court has held that in the case if Mahindfa Mahindra Ltd., the loan was for capital assets i.e. plant machinery and dies used in manufacturing of vehicles and hence in the said case the Hon'ble Bombay High Court has held that waiver of the loan amount coul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... count of scrap sale of bottles and crates on which 100% depreciation was availed is trading receipt which constituted profit chargeable to tax u/s 41(1) of the Act. 8.5.2. The brief facts of the cases and ratio laid down by the major decisions relied on by the appellant are noted as under (1) Mahindra Mahindra Ltd, vs. CIT (2003) 182 CTR (Bom) 34 : (2003) 261 ITR 501 (Bom) In this case the assessee company has obtained loan which has been utilized to acquire capital asset i.e. machinery/dies used in manufacturing activity. The principal amount loan of ₹ 57,74,064/- has been waived. The appellant has claimed depreciation of ₹ 27,29,585/- on the said machinery/dies. It has been argued by the Department that on waiver of the loan the assessee has realized benefit of waiver of its liability which is taxable u/s 28(iv)/41(l) of the Act. Alternatively, it was argued that the loan was used for buying toolings on which assessee got depreciation allowance of ₹ 27,29,585/- and therefore the amount of ₹ 27,29,585/- should be set off against ₹ 757,T4,064/-. The Hon'ble Bombay High Court has held that unless the deduction is allowed in the earlie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the. same has been reflected' in the balance sheet and not in the P L a/c, and also the remission of the principal amount of loan so obtained from the bank and financial institution had not been claimed as expenditure or trading liability in any of the earlier previous year. So far as waiver of interest is concerned, the assessee company itself has treated the same either as income or has not claimed the same as expenditure in the computation of income filed before the lower authorities. We see no reason to interfere with the Tribunal as the same have been rendered on a correct appreciation of law. The principles enunciated in Mahindra Mahindra Ltd. vs. CIT (2003) 182 CTR (Born) 34 : (2003) 261 ITR 501, are fully applicable and we see no reason to take a different view . (3) Iskraemeco Regent Ltd. Vs. CIT (2011*) 331 ITR 317 (Mad) In this case, the State Bank of India has waived principal amount of outstanding loan on one time settlement to the extent of ₹ 5,07,78,410/- and interest outstanding ₹ 2,02,60,247/-. The A.O., CIT(A) and Hon'ble ITAT have rejected the contention of the appellant that no income could be resulted on waiver of principal amo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 'ble Apex Court in the said judgement has clearly held that when in the course of trading transaction, the assessee becomes entitled to the money such an amount would become a taxable income at the hands of the assessee. The Hon'ble Madras High Court observed that in the case before it the assessee was not trading in money transactions and a grant of loan by a bank cannot be termed as trading transaction and it cannot also be construed in the course of business. Indisputably, the assessee obtained loan for the purpose of investing in its capital assets and the said loan has been waived by the bank. The Hon'ble Madras High Court has held that therefore, the facts involved in the present case are totally different in the facts involved in CIT Vs. T.V. Sundaram lyengar Sons Ltd. (1996) 222 ITR 344 (SC). In the said case, admittedly there was trading transaction whereas in the present case it is not so. There is no change in the character with regard to the original receipt which was capital in nature into that of a trading transaction. The Hon'ble Court has further seen that there is marked difference between loan and a security deposit. The Hon'ble Madras High C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent as the first Appellate Authority and CEGATE Hon'ble High Court has decided the appeals in favour of the assessee. Against the said decisions, Excise Department has preferred appeal and hence the appellant claimed that the issue was pending determination by Hon'ble Supreme Court. It was undisputed fact in the said case that the receipt of Excise Refund is trading receipt; the issue raised by the appellant is that in view of appeal of the Excise Department pending in Supreme Court, the refund of Excise Duty has not reached finality and hence section 41(1) is not applicable. (6) The facts of the case decided by Nectar Beverages Pvt. Ltd. Vs. DCIT (Supra) are totally different. In the said case, the assessee is engaged in the business of soft drinks and the assessee has received sale proceeds of scrap of bottles and crates on which the appellant has claimed 100% depreciation. The said receipt on account of scrap is held to be trading receipt liable to tax. 8.5.4 In view of the above legal propositions, I proceed to decide Ground Nos.4 5. In respect of waiver of cash credit loan in the case of the appellant it has been observed that the A.O. has held that the said ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 28 of the Act do not become applicable and the waiver of the term loan cannot be taxed under the said sections. In view of the above facts and discussion and respectfully following the ratio laid down by the above referred decisions, I am of the considered view that the A.O. is not justified in making addition of ₹ 11,72,56,695/- on account of waiver of term loan which has been utilized for acquiring capital assets. The addition of ₹ 11,72,56,695/- is, therefore, deleted. Ground No.5 stands allowed . 15. We have heard the parties. We find that the Ld. CIT(A) has discussed the relevant precedents on this issue. Admittedly, there is no dispute about the fact that the said amount pertains to the term loan. In this respect we may like to referred to the decision of the Hon'ble High Court of Bombay in the case of CIT-3, Mumbai Vs. M/s. Xylon Holdings Pvt. Ltd., Income Tax Appeal No. 3704 of 2010 judgment dated 13-09- 2012. The Hon'ble High Court has considered all the relevant decisions on this issue and held as under: 8) We have considered the submissions. The issue arising in this case stand covered by the decision of this Court in the matter of Mahind ..... X X X X Extracts X X X X X X X X Extracts X X X X
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