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Income Tax Appellate Tribunal, ‘C’ BENCH: CHENNAI
Before: SHRI MANJUNATHA. G & SHRI MANOMOHAN DAS
PER MANOMOHAN DAS, J.M: This appeal by the assessee is directed against the order of the learned Commissioner of Income Tax (Appeals) , National Faceless Appeal Centre, Delhi [CIT(A)] dated 22-02-2023 and pertains to the Assessment Year [AY] 2013-14.
The grounds of the assessee are as under: “A. The order passed by the NFAC under Sec.250 of the I.T. Act is wrong, contrary to law and opposed to the facts and circumstances of the case.
2 -: B. The NFAC is wrong in its conclusion that the appellant has failed to furnish details of the funds borrowed and the corresponding assets purchased to authenticate the claim that the amounts borrowed from creditors have been utilised for acquiring fixed assets. In so concluding, the NFAC has failed to note and appreciate that the loan transactions are more than 25 years old and further the appellant was under the control of the Official Liquidator from 2000 to 2012 and all the books of accounts, records, etc. which were taken possession by the Official Liquidator were not returned in full at the time of revival which was the reason why the appellant could not furnish the details of the borrowings.
C. The NFAC ought to have seen that the Scheme of Arrangement for revival of the appellant as sanctioned by the Hon'ble High Court contained the list of other creditors and the details of funds borrowed which was inclusive of the corporate loans obtained from the eight companies. The NFAC also failed to consider the statement filed containing the details of the said corporate loans availed, the amount outstanding, bonds allotted and the amount written back as per scheme of revival.
D. The NFAC is also wrong in holding that the appellant failed to establish the link between the funds borrowed and the utilisation of the same for acquisition of assets. In holding so, the NFAC ought to have appreciated the fact that in the balance sheet for the financial year 1997-98 (last year before winding up) under `Schedule `E' - Fixed Assets' there is a declaration to the effect that the total cost of fixed assets as on 30.09.1998 includes Rs.63,92,19,336/- representing the cost of assets leased out which is proof of the fact that the funds borrowed had been utilised for acquiring the assets. Similarly the NFAC has failed to note and consider the fact that the appellant has not claimed any deductions for the funds borrowed in the earlier year (1997-98) which is also a pointer to the fact that the loans are not for working capital purposes.
E. The NFAC ought to have seen that write back of long term borrowings cannot be assessed to tax under Sec.41 (1) of the I.T. Act since the same had not been debited to the profit & loss account of the earlier year (1997-98) and by the write back there is no remission or cessation of trading liabilities. The Hon'ble Supreme Court in the case of CIT vs Mahindra and Mahindra reported in 404 ITR 1 (SC) has held that Sec.41(1) of the I.T. Act does not apply if the waiver of loan does not amount to cessation of trading liability.
F. The NFAC ought to have seen that Sec.41 (1) of the I.T. Act applies when a trading liability was allowed as a deduction in an earlier year and the assessee has obtained a benefit in respect of such trading liability in a later year by way of remission/cessation of liability. The principle behind being that the assessee does not get away with a double benefit once by way of deduction in the earlier
3 -: assessment year and again by not being taxed in the later year with reference to the tax liability allowed as deduction. G. The NFAC has failed to see that on the subject non-corporate loans had not been debited to the profit & loss account in the earlier year and the appellant had also not claimed any deduction in the earlier assessment year (1997-98). Further it is clear from the balance sheet for 1997-98 under Schedule 'E' - Fixed Assets' wherein there is a declaration that the total cost of fixed assets as on 30.09.1998 includes Rs.63,92,19,336/- representing the cost of assets leased out and represents the link or nexus between the loans taken which were written back and their utilisation. Therefore the surplus amount of Rs.3,37,11,000/- written back represents capital receipts and cannot be brought to tax under Sec.41(1) of the I.T. Act. H. For all the above stated reasons, the appellant prays that this Hon'ble Tribunal may be pleased to set aside the order dated 22.02.2023 passed by the NFAC in DIN & Order No. ITBA/NFAC/S/ 250/2022-23/1050025780(1) for the assessment year 2013-14 and render justice. I. The appellant reserves its right to raise additional grounds if any at the time of hearing of the appeal.”
The facts of the case are that the assessee is a public limited company and engaged in the business of leasing immovable properties. The assessee earlier known as M/s MCC Finance Limited had obtained unsecured long term borrowings (corporate loans) amounting to Rs. 5.62 crores. The assessee went into liquidation and by an order dated 21-08-2000 was provisionally ordered to be wound up by the Hon’ble High Court and subsequently by an order dated 03- 08-2001 final winding up order was passed and the assessee was under the management and control of the Official Liquidator. The assessee was revived by a scheme of Arrangement approved by the Hon’ble High Court by order dated 18-10-2012 after which the name of 4 -: the assessee was changed to M/s Mercantile Ventures Limited. As per the scheme of the Arrangement approved by the Hon’ble High Court, the creditors were to be offered an option either to choose convertible bonds to the extent of 40% of the balance due or equity shares of Rs. 10/- each at a premium of Rs. 15/- per share for the total outstanding.
The creditors from whom corporate loansamounting to Rs. 5.62 crores were obtained had opted for allotment of convertible bonds to the extent of 40% of the balance and the remaining amount of Rs. 337.1 lakhs after allotment of convertible bonds were written back in the accounts as surplus on write backs. The assessee had claimed this amount of Rs. 337.11 lakhs on write back of amounts due to creditors as capital receipts in computation of income filed with return of income.
The ld. AO observed that the surplus on write back of liabilities is revenue receipts and hence taxable.
Aggrieved, the assessee preferred an appeal and by the order dated 19-09-2017, the CIT(Appeals-8) Chennai, confirmed the observation of the ld. AO.
Both the assessee and the Department proceeded on appeal before Hon’ble ITAT, however, the Department’s appeal was dismissed due to low tax effect. However, the assessee’s appeal was adjudicated in CO No. 43/Chny/2018 dated 27-10-2020 and the issue
5 -: of taxation of the liability that ceased to exist of Rs. 337.11 lakhs was set aside to the file of the learned Assessing Officer [AO] to examine as to whether the said loans were acquired to create capital assets accounted as fixed assets in the balance sheet of the company or otherwise.
The ld. AO considered the matter afresh on the direction of the ITAT vide order dated 30-09-2021 by treating the amount of Rs. 3,37,11,000/- being surplus written back as taxable receipts u/s 41(1).
Being aggrieved, the assessee preferred appeal before the ld. CIT(A). However, the ld. CIT(A) vide order dated 22-02-2023 dismissed the appeal of the assessee. Being aggrieved, the assessee filed the present appeal before the Tribunal.
8. Heard representatives of both the parties and perused the materials on record. The Ld. AR reiterated the stands taken before the ld. CIT(A). The Ld. AR submitted that the assessee had utilised the long term borrowings for acquiring capital assets. On the other hand, the Ld. DR supports the order of the lower authorities.
The ld. CIT(A) after considering the case of the assessee vide order dated 22-02-2023 observed as under:
6 -: “7.7 In the proceedings before me, the appellant provided the list of creditor parties who had opted for bonds and the balance in the books after allotment of bonds as per the scheme which were written back to the profit & loss account. The appellant was specifically informed vide notice dated 01/02/2023 that Hon. ITAT had required it to demonstrate that amount of Rs.3,37,11,000 written back represents capital receipt by establishing the nexus between relevant funds borrowed from specific creditors which as claimed by it were used to create assets which were accounted as Fixed assets in Balance sheet. Though list of creditors at time of revival with amounts written back for each were provided, appellant was also requested to produce details of the loans taken from the specified creditors whose amounts were written back as well as any other evidence to establish the capital nature of the surplus Rs.3,37,11,000 written back. However, other than the above creditors' list and copy of the financials of MCC Finance Limited for the period ended 30-09- 1998, no other evidence has been produced. Despite sufficient opportunity the link between the funds borrowed from the above creditors and the utilisation of the same for acquisition of fixed assets has not been established in any way by the appellant. A foot note in the schedule to fixed assets stating the "total, cost as on 30-09-1998 includes Rs.63,92,19,336 representing the cost of assets leased out" which is relied on by the appellant cannot serve as sufficient proof as there is no nexus established at all between the loans taken which were written back, and their utilisation. 7.8 In view of the failure of the appellant assessee to furnish details of the funds borrowed and the corresponding assets purchased or any other information to authenticate the claim that amounts borrowed from creditors as per list given (reproduced in para 6.2 of this order) have been utilised for acquiring fixed assets, there is no recourse left to the undersigned except to conclude that the appellant has been unable to establish that the surplus Rs.3,37,11,000 written back represents capital receipts. Hence the AO's action in assessing the same u/s 41(1) is uphold and the appellant's grounds 1 to 6 as reframed In Paragraph 7.1 above, are dismissed.
In respect of ground 7 regarding allowing the losses of A.Y 2013- 14 to be carried forward to subsequent assessment years, as the same is consequential to the decision on the preceding grounds of appeal
, AQ is directed to allow the same as per law.
9. In the result, the appeal is dismissed.”
We carefully considered the case of the assessee. We observe that the outstanding borrowings to the tune of Rs. 337.11 lakhs is not remained as loan to the assessee. The assessee need not repay this 7 -: amount of Rs. 337.11 lakhs to the creditors. The liability to repay the borrowed amount by the assessee has been ceased due to write back/ waiver of the liability to repay.
We observe that the assessee was required to establish the nexus between the borrowed funds and the fixed assets which were given on lease. However, the assessee failed to establish the details of the loans which was taken from the specified creditors and used the same for acquisition of fixed assets.
In view of the failure by the assessee to establish that the write back loans were used for acquiring the fixed assets, it is our considered opinion that the appeal of the assessee must fail. Accordingly, we decide the appeal against the assessee.
In the result, the appeal of the assessee is dismissed. Order pronounced on 08th December, 2023.