TMI Blog2019 (8) TMI 455X X X X Extracts X X X X X X X X Extracts X X X X ..... enclature and consequently the question of treating the same as profit and gain would not arise. The decision in Auto Kashyap India (P) Ltd [ 2010 (4) TMI 53 - DELHI HIGH COURT] is applicable in full force to the assessee's case. As decided in M/S INDO WIDECOM INTERNATIONAL LTD. [ 2017 (12) TMI 678 - ALLAHABAD HIGH COURT] the fact that the assessee adjusted subsequent sales to the holding company with share application money then held that Section 41 would not be applicable. By virtue of the Government Order in G.O.No.18 dated 07.03.2001 where the Government converted the existing Government loans, advances and interest outstanding into equity share capital, the assessee company had discharged its interest liability in the sense that instead of making payment in cash, it issued share capital to Government. Consequently Section 41(1) not stand attracted to the case of the assessee. Therefore, the finding rendered by the Tribunal is perfectly valid. Taxability of conversion of the loan and unpaid interest into share capital u/s 28(i) - whether the Revenue could be permitted to raise alternate submission at this juncture, for the first time, without even raising a sup ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the transport services, which were previously run by the Tamil Nadu State Government. The State Government treated a part of the net worth of the undertaking as its share capital and the balance was treated as loan, on which, the assessee was claiming interest payable year after year and the same was allowed as deduction under Section 37 of the Act. The Government of Tamil Nadu took a decision and issued G.O.(Ms).No.18 dated 07.03.2001 converting the interest outstanding of ₹ 8264.17 lakhs payable by the assessee company on 31.10.2000 into equity shares. The question posed by the Assessing Officer was as to whether the sum of ₹ 8264.17 lakhs was assessable under Section 41(1) of the Act. The assessee's explanation was that as the liability to pay interest was converted into another liability namely share capital, there was no cessation of liability. The Assessing Officer did not agree with the stand taken by the assessee that the State Government upon converting the loan as well as the unpaid interest liability into share capital would result in cessation of liability of the assessee. Further, the Assessing Officer held that the expenditure in the earlier year whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dated 07.03.2001 and that the provisions of Section 41(1) of the Act were not attracted. Accordingly, the Tribunal allowed the appeal filed by the assessee, set aside the order of the CIT(A) and remitted the matter to the Assessing Officer for verification of the actual figures in the light of the observation made by the Tribunal that conversion into share capital had to be treated as proper discharge of interest payments and that the provisions of Section 41(1) of the Act were not attracted. The Revenue is before us challenging the order passed by the Tribunal and the appeal has been admitted on the above mentioned substantial question of law. 9. Mr.Karthik Ranganathan, learned Senior Standing Counsel appearing for the appellant/Revenue contended that the assessee is a wholly owned 100% Government undertaking and obtained various loans from the Government and the interest was not paid to the Government, yet, deduction was claimed by the assessee from year to year. Subsequently, the Government took a decision and all the outstanding liability was converted into equity shares, thereby, the Government took a risk by deducting the equity shares instea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he CIT(A) and to answer the substantial question of law in favour of the Revenue. 15. Mr.A.S.Sriraman, learned counsel appearing for the respondent/assessee submitted that the Tribunal rendered a clear finding that the assessee discharged its interest liability, that instead of making the payment in cash, it had issued share capital to the Government as per G.O.(Ms)No.18 dated 07.03.2001 and that the provisions of Section 41(1) of the Act were not attracted. Further, it is submitted that Section 28 of the Act could never be applied to the facts of the present case. That apart, such a plea was never raised at any earlier point of time. It is further submitted that the change of nomenclature in the balance sheet would not amount to cessation of liability, but it was a case of discharge of liability as rightly held by the Tribunal. Learned counsel distinguishes the decisions in the case of Compaq Electric Ltd and Pradeshiya Industrial Investment Corporation U.P. (PICUP) . Learned counsel has also drawn our attention to G.O.(Ms) No.18 dated 07.03.2001 and the decisions in the case of CIT Vs. Auto Kashyap India (P) Ltd [ reported in ( 2001) 330 ITR 0435 (De ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Section 41(1)(a) of the Act stand attracted to the assessee's case and the Tribunal erroneously reversed the order passed by the CIT(A). Referring to the decision in Compaq Electric Ltd. , it is submitted that interpretation given by the CIT(A) needs to be sustained. Alternatively, it is submitted that Section 28(iv) of the Act would stand attracted and this being a question of law, the assessee should be permitted to raise the same as has been held in the case of Jindal Equipments Leasing Consultancy Services Ltd. 20. The first aspect, which we have to steer clear is as to whether there has been cessation of liability or it is a case of discharge of liability. 21. We have perused the Government Order in G.O.(Ms) No.18 dated 07.03.2001. The Government issued the said order for restructuring the transport undertakings by converting existing Government loans and advances and interest outstanding as equity share capital. The respondent corporation is one among the 20 State Government Corporations, to which, the said Government Order was made applicable. The Government, under the said order, converted existing Governme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rent parties, on credit, in his own name and an amount was payable to Mr.Parmanand Kashyap for the purchase made by him for the assessee company. The outstanding credit balance was shown in the books of accounts of the assessee company under the sub-head other supplier of the mainhead sundry creditors . Since the purchases were being handled by Mr.Parmanand Kashyap, the assessee decided to make the matter simple by transferring the credit balance to Mr.Parmanand Kashyap and consequently, the nomenclature of the outstanding balance was changed from other suppliers to Mr.Parmanand Kashyap in the audited financial statement of the said assessee company. The Assessing Officer was of the view that the transfer of the account of sundry creditors by way of book entry in the name of Mr.Parmanand Kashyap constituted cessation of liability, which is taxable under Section 41 of the Act. While, the matter was pending before the CIT(A), Mr.Parmanand Kashyap died. Consequently, the CIT(A) was of the view that the liability had ceased to exist. However, it did not say that mere transfer by way of book entry amounted to cessation of liability of the assessee. When the matter was carried on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the liability, as the case may be. 8. Mere change of nomenclature in the books of account without anything more brings no benefit to the assessee and its liability to pay to the creditor does not get extinguished merely by change of nomenclature or by change of the sub-head under which the liability is shown in the account books of the assessee. What is relevant is that the liability of the assessee to pay the amount of ₹ 11,81,045 to its creditor(s) did not come to any end merely on account of the aforesaid change in the sub-head under which the liability was shown in the account books. Transfer of liability from one sub-head to another does not absolve the assessee of its obligation to pay that amount. There is no cessation of liability in such a case and the company still remains liable to its assessee (sic-creditor). It cannot be said that the creditors of the assessee would not have been able to recover the aforesaid amount from it merely on account of a change made in the sub-head under which the liability was shown in the account books of the assessee company. The company was liable to pay for the purchases made on its behalf and for its benefit an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... continued to remain liable even after change of entries in the books of account, no benefit would accrue to the assessee company merely on account of change of nomenclature and consequently the question of treating the same as profit and gain would not arise. The decision in Auto Kashyap India (P) Ltd is applicable in full force to the assessee's case. 26. In the decision in the case of Indo Widecom International Ltd case, the assessee received ₹ 1 crore by way of share application money from its holding company, continued to retain the money without allotment of any shares being made by it. Subsequently, the assessee made sales to the holding company and the assessee adjusted the amount as against the said sales made to the holding company and made book entries to transfer the amount to the general account under a narration 'share application money transfer' and adjusted the share application money to the sale price realisable from the holding company. The question was whether the same would amount to cessation or remission of liability as contemplated under Section 41 of the Act. The Court answered the question in the negative and held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rightly pointed out by the learned counsel for the assessee, the issue in the case of Compaq Electric Ltd., did not pertain to converting an unsecured loan into equity share capital and it pertains to the balance amount, which was written off as not payable. This is clear from a reading of paragraph 2 of the order, wherein the Court noted that the assessee is a wholly owned subsidiary company of M/s. Dr.Reddy's Laboratories Limited (DRL) and in view of huge losses suffered by the assessee company, the operations of the company had been funded by way of unsecured loans by M/s.DRL from year to year and the loan accumulated to about ₹ 11.64 Crores during the year. The assessee therein proposed and M/s.DRL accepted the request for conversion of the unsecured loan partly into equity share capital and waive the balance as not recoverable. Accordingly, the assessee company converted unsecured loan into equity share capital to the extent of ₹ 9 Crores and wrote back the balance amount of ₹ 2.64 Crores as not payable. This amount of ₹ 2.64 Crores was the subject matter in this decision. In the said decision, the question was whether there was remission or ce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ised by it before the Court. Considering the facts of the case and the fact that the Revenue sought for amendment of the grounds, the prayer was allowed. To be noted that in the said decision, the Assessing Officer made an addition in terms of Section 41(1) of the Act read with Section 28(i) of the Act. The question was as to whether Section 28(i) of the Act would be applicable or whether Section 28(iv) of the Act would be applicable. So far as the applicability of Section 41(1) of the Act, the Revenue conceded before the Tribunal that it would not apply, but wanted to sustain the addition by relying Section 28(iv) of the Act. Considering the facts of the case, that amendment petition was allowed by the Court on the ground that it was a pure question of law. 34. In our considered view, this decision will, in no manner, render assistance to the Revenue's case. They would be entitled to raise an alternate plea when Section 28(iv) of the Act stands attracted. Such a belated plea without amendment of the ground and raising the same for the first time before this Court during the course of argument cannot be permitted. Therefore, we reject the alter ..... X X X X Extracts X X X X X X X X Extracts X X X X
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