THE ITO, WARD-2(1)(4),, AHMEDABAD vs. MEDICAL TECHNOLOGIES PVT. LTD.,, AHMEDABAD

ITA No.: 3328/Ahd/16 Assessment year: 2013-14 Page 1 of 11 IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD “B” BENCH, AHMEDABAD

[Coram: Justice P P Bhatt (President) and Pramod Kumar (Vice President)] ITA No.: 3328/Ahd/16 Assessment year: 2013-14

Income Tax Officer ………………….……Appellant Ward 2 (1)(4), Ahmedabad

Vs Medical Technologies Limited ……………..…........Respondent (now merged with Pintops Enterprises Pvt Ltd) Sydney House, Premchandnagar Road, Bodakdev, Ahmedabad – 380054 [PAN : AABCM 0639 H]

Appearances by Mudit Nagpal for the appellant Tushar Hemani & PB Parmar for the respondent

Date of concluding the hearing : June 03, 2019 Date of pronouncement : June 03, 2019

O R D E R Per Bench :

ITA No.: 3328/Ahd/16 Assessment year: 2013-14 Page 2 of 11 could not be brought to tax. He was, however, of the view that “this is a cessation of liability squarely covered by the provisions of Section 41(1) of the Act”. The arguments put forth by the assessee regarding in this regard and in response to show cause notice, requiring the assessee as to why the said receipt not be brought to tax, were rejected by the Assessing Officer. He was of the view that the credit being routed through the profit and loss account shows its revenue character, and that, in any other case, it could have been directly credited to capital reserve. The AO also noticed that the monies borrowed from Matrix Logistics were used in buying shares which shows its advantage in the revenue field. The AO further noted that it is not proved that the monies borrowed were used for acquisition of capital assets, and as such, it could not be treated as capital receipt. He thus proceeded to bring the amount of Rs 4,42,95,650 to tax. Aggrieved, assessee carried the matter in appeal before the CIT(A) who deleted the said addition and observed as follows:

“I have carefully considered the facts of the case, the assessment order and the written submission of the appellant. The AO has made the addition of Rs.4,42,95,650/- being the amount of unsecured interest free loans taken from M/s. Matrix Logistics Pvt. Ltd. invoking the provisions of Section 41(1) of the Act for the reason that the same has been written off in the profit and loss account but not offered the same for taxation in the computation of income.

2.4. It has been noticed that the appellant company has the main objects for carrying out business of providing technological support services and the business of manufacture and trading of medical equipments but from A.Yrs.2009-10 to 2013-14 onwards the appellant did not have any business activities and therefore no business income had been offered for taxation in the returns of income filed for the respective years. During the year the appellant had shown the income from dividend at Rs.93,06,240/- and interest income on FDRs with Bank of Rs. 15,15,954/- which were taxable under the head of income from other sources. The AO alleged that the appellant has not started its regular business mentioned in its objects as per the Memorandum of Association but it was engaged in business of purchase and sale of shares of the group company and investment in mutual funds. Therefore the business of the assessee was to be considered as regular business of share trading and till the date the assessee has not conducted any other business. The appellant has the investment in shares and therefore the investment in shares can only be treated as stock in trade and any amount which is obtained as unsecured loans used for purchases of shares was not a capital receipt but was to be treated as revenue receipts. The AO made the addition on the plea that since the amount written off which was not payable to Matrix Logistics Pvt. Ltd. has been credited in the profit and loss account therefore it was clearly a taxable item in the hands of the appellant. As per the AO this loan received from the aforesaid party was used for the purpose of its regular business of share trading and therefore it was a trading liability arid not a capital liability"' However, thereafter the AO hold that even if he hold that Section 41(1) of the Act is not applicable. Section 28(iv) is clearly applicable. And if Section 28(iv] of the I.T. Act is not applicable then Section 41(1) of the Act is clearly applicable. The detailed discussion in this regard is made in para-3.2 to 3.9 of the assessment order. 2.5. On the other side, the appellant claimed that the said amount was the capital receipts. It has objected to the AO's observation that the appellant did not carry out

ITA No.: 3328/Ahd/16 Assessment year: 2013-14 Page 3 of 11 any business activities as per the main objects of the Memorandum of Association and in support the details of its nature of income offered in the preceding years submitted and the same are reproduced as under:- Summary of Business Transactions as per Profit and Loss A/c. Rupees F.Y. Consumption / Sale of goods Income from Purchase of goods consulting Fees 2000-01 190,581,976 241,981,841 — 2001-02 269,062,228 238,043,115 — 2002-03 55,783,696 66,210,287 — 2003-04 1,608,659 2,248,668 — 2004-05 1,203,152 1,565,360 — 2005-06 467,491 415,800 10,494,200 2006-07 122,480 143,640 — 2007-08 64,804 68,040 — 2008-09 — — — 2009-10 — — 2010-11 __ — — 2011-12 — — — 2012-13 — _ —

Summary of other Income F. Y. Dividend Interest Profit / Loss on sale of investment 2000-01 49,401 10,324,006 171,705 2001-02 300 2,458,183 — 2002-03 303 113,797 — 2003-04 350 841 — 2004-05 600 — — 2005-06 — 95,642 2,352,854 2006-07 4,653,720 13,956 — 2007-08 4,690,400 189,002 -324207 2008-09 9,307,140 — __ 2009-10 2,482,564 533,026 1 ,675,000 2010-11 9,006,240 -4434600 2011-12 9,306,240 159,006 — 2012-13 9,306,240 1,515,954 —

2.6. The above nature of income was verifiable from the profit and loss account and balance sheet submitted by the appellant to the department. As can be noticed from the above that the appellant did not have any business income from A.Y. 2009-10 onwards till the year under consideration because of absence of any business activity carried out within the meaning of section 28 of the Act so there is no question of computation of income from business and accordingly the taxation of the unsecured loan written off under the head of income from business is not correct.

ITA No.: 3328/Ahd/16 Assessment year: 2013-14 Page 4 of 11 2.7. The AO's observation in this regard that the appellant had the share trading business was factually incorrect. It has been submitted that in appellant's own case in the preceding years, the scrutiny assessment u/s.143(3) have been finalized and the business activity of the appellant as providing technological support services and manufacturing and trading of medical equipments have been accepted without any dispute.

2.8. The appellant also objected to the invocation of the provisions of Section 41(1) of the Act as no condition of the said section has been complied with before applying the same. It has been submitted that the provisions of Section 41 (1) conies into play when the deduction in respect of such liability has been allowed as a trading loss, expenditure or trading liability in earlier years as against the income of the appellant. Since In the instant case no such deduction of the unsecured loans from Matrix Logistics Pvt. Ltd. has been allowed, therefore, the condition of Section 41(1) has not been fulfilled so as to invoke the same in the case of the appellant. It has been contended by the appellant that this loan was interest free and unsecured and obtained and applied for the purpose of acquiring the capital assets by way of investment in shares. Thereafter this amount has been consistently shown as unsecured loan in the balance sheet as and such outstanding amount in the year under consideration was written off in the books of accounts and corresponding accounting entries were passed. Since the amount of loan written off credited to the profit and loss account was capital in nature and therefore the same has not been included in the return of income for the year under consideration. The argument made by the appellant in this regard was relevant and have the weight for the reason that no such expenditure in respect- of the unsecured loan has been claimed as deduction by the appellant in the profit and loss account of the year under consideration or of the preceding years. In this regard reliance has been placed on the judgement of Hon'ble Gujarat nigh Court in the case of CIT Vs. Chetan Chemicals Pvt. Ltd. 267 ITR 770 whereby it has been held that benefit arising as a result of remission of unsecured loans was not taxable u/s.41(1) of the Act as admittedly there had been no allowance or deduction of the loans in any of the preceding years. It has further been held by the Hon'ble Court that if the appellant is not in the business of obtaining and giving the loans, remission of the loans by the creditor of the company is not taxable u/s.28(iv) of the I.T. Act. Thus this decision is squarely applicable on the facts of the appellant's case. On going through the facts, it has been noticed that undisputedly the appellant was not in the business of obtaining and giving loans and since no allowance or deduction of the loan has been granted in any of the preceding years, therefore, the provisions of Section 41 (1) of the Act is also not applicable. In view of the aforesaid decision and discussion, the provisions of Section 28(iv) as well the basic condition of Section 41 (1) does not get fulfilled.

2.9. It has also been argued that that the unsecured loans so written off was utilized for the purpose of acquisition of investment by way of shares and the appellant did not carry out any trading activity of shares, therefore, it was not the regular business activity of the appellant and hence the same cannot be held to be the business income u/s.28(iv) of the I.T. Act. It has also been argued that the capital gain arises only when there is a transfer of the capital asset by the assessee. But the unsecured loan from the aforesaid party was a liability and not the capital asset. Further there was

ITA No.: 3328/Ahd/16 Assessment year: 2013-14 Page 5 of 11 no transfer of any capital asset therefore the question of any capital gain does not arise. Just because there was no capital gain it does not automatically follow that the receipt should be treated as the revenue income. Since there was no obligation to pay the loan on account of write off, the character of the amount in question does not change into a revenue receipt as the unsecured loan was utilized for the purpose of acquisition of capital asset. When a loan which is capital in nature has been written off the nature of receipts does not change and it remain capital only. The appellant has relied upon the judgement of Hon'ble Bombay High Court In the case of Mahindra & Mahindra Vs.CIT, 261 ITR 501 wherein it has been held that loan taken for acquiring capital assets when waived by the lender, either in whole or in part the amount of loan waive cannot be taxed as income since it does not have any semblance of revenue nature. Since in the instant case the unsecured loan taken by the appellant was for Ihe purpose investment in shares and such investment has been shown in the balance sheet and the appellant did not have any business of trading of shares, therefore, the investment was the capital in nature and hence the waiver of unsecured loans utilized for such capital investment is not the revenue receipts in view of the judgement discussed above. The argument of the appellant in this regard has the substance and same is accepted.

2.10. The appellant's further plea that all the credits made to the profit and loss account do not construed income chargeable to tax at all the times. The credits made to the profit and loss account which are not of revenue nature but capital in nature are to be excluded from the computation of total income. The computation of income has to be made in accordance to the provisions of Income-tax Act. As per the provisions of Section-4 the income tax is chargeable in respect of income of the relevant previous year. But the amount that has been written off does not form a revenue receipt, hence it does not go to income of the assessee within the meaning and scope of Section 2(24)(xvi)(i) of the I.T. Act. In this regard the appellant has relied upon the judgement of Hon'ble Supreme Court in the case of Kedarnath Jute Manufacturing Co. 82 ITR 3A3 and Satlaj Cotton Mills Ltd. Vs. CJT, 116 ITR 1 whereby it has been held that the accounting entries made in the books of accounts are not decisive in arriving at the conclusion as the taxability of a particular receipt. The receipt would become chargeable to fax only if it is a revenue receipt and falls within the definition of the term income as per Section 2(24) (xvi) (I) of the I.T. Act. Since the unsecured loan written off did not fall under the scope of income as per the aforesaid provision, therefore, merely the written off of the unsecured liability in the profit and loss account as taken place in the year under consideration would not automatically be treated as income of the appellant. Since the amount was not chargeable u/s.4 or Section 5 of the Act for which every person is liable to pay the taxes and also in absence of any demonstration that the written off of the loans was the income as per the Section 2(24)(i)to(x), the same cannot be liable to be chargeable as revenue receipts in the hands of the appellant. This contention of the appellant is also found correct and accepted in view of the judgements of Hon'ble Supreme Court cited above.

2.11. The appellant has also given the detailed submission with the rebuttal of the various judgements cited by the AO in the show cause notice during the course of assessment proceedings which has been reproduced in the assessment order itself.

ITA No.: 3328/Ahd/16 Assessment year: 2013-14 Page 6 of 11 Hence, applicability of the decisions on which AO relied does not support the observations of the AO.

2.12. The appellant has relied upon the judgement of Hon'ble Supreme Court In the case of Bombay Steam Navigation Co. Pvt. Ltd. 56 ITR 52 whereby it has been held that tax was payable u/s.10(1) of I.T. Act, 1922 which was corresponding to Section 28 of I.T. Act, 1961 by an assesses on its profits derived in the business carried on by him. If no business at all is carried on in that year liability to pay tax does not arise u/s. 10(1) of the Act, 1922 corresponding to Section 28 of I.T. Act, 1961. Following the ratio laid down by the Hon'ble Apex Court, no business income can be taxed in the year under consideration due to absence of any business activities having carried out in the year under consideration by the appellant. Thus, the judgement of Hon'ble Supreme Court is squarely applicable over the facts of the case. The reliance in this regard is also placed on the Supreme Court judgment In the case of New Savan Sugar & Gur Refining Co. Ltd. Vs. CIT (1969) 74 ITR 7 and Serial Ram Doongarmal Vs. CIT (1961) 42 ITR 392. As a matter of fact, the appellant had only earned the income from dividend and interest on FD which were taxable under the head of income from other source and no business income has been offered by the appellant.

2.13. It has also been noticed that the provisions of Section 28(iv) of the I.T. Act are also applicable only when the tax payer has carried on business during the year under consideration. Since the appellant has not carried out any business activities nor entered into any transactions of income earning activity, therefore the section does not have its applicability upon the appellant. Further for computing the income under the head income from business the condition precedent is that the income has been derived from carrying on of business and therefore carrying on businesses is a primary condition for computation of income from business. Further submitted that the provisions of Section 28(iv) of the Act are in respect of benefits of perquisites which are in kind and is not with respect to the benefits or perquisites in cash. The writing off of a loan is not a perquisite or benefit in kind but is a benefit in cash. Therefore, Section 28(iv) is not applicable to any benefit that has arisen as a result of writing off of the loan. Thus in absence of any business having been carried out by the appellant from A.Y. 2009-10 and onwards including the year under consideration the taxability of income under the head of business by the AO is found not correct.

In this regard reliance has been placed on the judgement of Hon'ble Bombay High court in the case of Mahindra & Mahindra Ltd. Vs. CIT (supra) whereby it has been held that waiver of loan and interest by the bank is not taxable u/s.28(iv) as the perquisite or the benefit was not in kind but in cash. Further Hon'ble Madras High Court In the case of Iskraemeco Gegent Ltd. Vs. CIT 331 ITR 317 has held that Section 28(iv) speaks the benefit or perquisite received in kind and it does not have any application to any transaction which involves money. The written off of a loan is a transaction which involves of money and no benefit in kind as such. This view is also supported by Hon'ble Gujarat High Court in the case of CIT Vs. Alchemic Pvt. Ltd., 130 ITR 166.

2.14. The appellant has also objected to the AO's observation that there is no object clause in the Memorandum of Association of Company which authorizes the company

ITA No.: 3328/Ahd/16 Assessment year: 2013-14 Page 7 of 11 to carry out the business of trading in shares. Therefore, the appellant has never carried out business of trading in shares. Thus the AO has not established with any basis or from the memorandum of Association to hold his observation that the appellant company was engaged in the business of trading of shares. In fact the appellant was engaged in the business of providing technological support services and the business of manufacture and trading of medical equipments which the AO himself has noted in Column No. 9 of the table at first page of the assessment order itself.

2.15. In fact the appellant had made the investment in shares and was treated as long term investment only in the balance sheets of the preceding years and not as stock-in- trade. Accordingly, on sale of these shares the income derived was offered as capital gain u/s.45 of I.T. Act and the same has been taxed and accepted as such by the AO which itself proves the contention of the appellant of having no trading activities of shares. It is apparent from the copy of return of income for A. Y. 2006-07 that the appellant has shown the long term capital gain on sale of shares at Rs.4,39,46,908/- under the head of income from long term capital gain and the AO has accepted the same as long term capital gain in the assessment completed u/s. 143(3) of the I. T. Act on 01/12/2008. Thus, the AOs observation that the appellant was engaged in trading of shares does not get established from the history of the appellant itself.

2.16. It is an emerging fact that even if any benefit or perquisite as arisen to the appellant as a result of writing off of the loan the same cannot be equated as a benefit arising from the business. The written off of the loan has nothing to do with the business of the appellant because loan was not obtained for the purpose of business or not obtained in the normal course of business but was obtained for the specific purpose of acquisition of investment in shares being capital assets. Consequently, the written off of the loan which does not have connection with the business activity cannot be said to be the business profits.

2.17. It has also been noticed that in respect of the outstanding loans from Matrix Logistics Ltd. of Rs. 11,07,39,123/- as on 01/04/2012, the loans to the extent of Rs.6,64,43,474/- has been written off by the appellant on 31/03/2012 and the balance outstanding loan of Rs.4,42,95,649/- has been written off on 31/03/2013 in the P & L Account of the assessment year 2012-13 & 2013-14 respectively. However, the AO on the one hand has accepted the written off of the unsecured loans in A, Y. 2012-13 as capital receipts and no such addition u/s. 41(1) / 28(iv) has been made in the assessment completed u/s. 143(3) of the I. T. Act on 09/03/2015. But in the assessment of A. Y. 2013-14, taking a different view without any basis and difference on facts, the addition for the written off of the unsecured loans has been made. It amply proves that the AO has taken dual stand in his approach on the issue and once it has accepted the same as capital receipts in A. Y. 2012-13, then without any reasons the same could not have been held to be revenue receipts in A. Y. 2013-14.

2.18. In view of the aforesaid discussion, it has been noticed that the provisions of Section 41 (1) and 28(iv) of the Act are not applicable over the facts of the case in view of the facts as well as various judgements of Hon'ble Courts. Since the unsecured loans were in the nature of capital and not the trading liability and more

ITA No.: 3328/Ahd/16 Assessment year: 2013-14 Page 8 of 11 so no deduction thereof has been claimed in the profit arid loss account of the appellant in the year under consideration or any of the preceding years, therefore,. Section 41(1) of the I.T. Act is not applicable. Similarly Section 28(iv) is also not applicable as the appellant did not have any business activities in the year under consideration moreover the appellant did not derive any benefit in kind. The written off of the unsecured loans is also not the income in any of the clauses to Section 2(24) of the I.T. Act. Even the unsecured loans have been utilized for the purpose of investment in shares which was not the regular business activities of the appellant. These shares have been shown as long term investment in the balance sheet of the appellant in the preceding years and on sale of such shares the long term capital gain has been offered u/s.45 of I.T. Act which has not been disputed by the AO. Thus the nature of unsecured loans were not of trading liability but on account of capital. Therefore, the written off of the unsecured loan was capital receipts in the hands of the appellant which was not liable for taxation. Thus the addition made by the AO in this regard is found not accepted and hence the same is deleted.”

ITA No.: 3328/Ahd/16 Assessment year: 2013-14 Page 9 of 11

partly waiver i.e., waiver of part of the principal or interest repayable, or a complete waiver of both the loan as well as interest amounts. Hence, waiver of loan by the creditor results in the debtor having extra cash in his hand. It is receipt in the hands of the debtor/assessee. The short but cogent issue in the instant case arises whether waiver of loan by the creditor is taxable as a perquisite under Section 28 (iv) of the IT Act or taxable as a remission of liability under Section 41 (1) of the IT Act.

'28. Profits and gains of business or profession.— The following income shall be chargeable to income-tax under the head "Profits and gains of business profession",—

** ** ** (iv) the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession;

** ** **' 13. On a plain reading of Section 28 (iv) of the IT Act, prima facie, it appears that for the applicability of the said provision, the income which can be taxed shall arise from the business or profession. Also, in order to invoke the provision of Section 28 (iv) of the IT Act, the benefit which is received has to be in some other form rather than in the shape of money. In the present case, it is a matter of record that the amount of Rs. 57,74,064/- is having received as cash receipt due to the waiver of loan. Therefore, the very first condition of Section 28 (iv) of the IT Act which says any benefit or perquisite arising from the business shall be in the form of benefit or perquisite other than in the shape of money, is not satisfied in the present case. Hence, in our view, in no circumstances, it can be said that the amount of Rs 57,74,064/- can be taxed under the provisions of Section 28 (iv) of the IT Act.

"41. Profits chargeable to tax.- (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 assessee (hereinafter referred to as the first-mentioned person) and subsequently during any previous year,-

(a) the first-mentioned person has obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtained by such person or the value of benefit accruing to him shall be deemed to be profits and gains of business or profession and accordingly chargeable to income-tax as the income of that previous year,

ITA No.: 3328/Ahd/16 Assessment year: 2013-14 Page 10 of 11

whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not; or

** ** **" 15. On a perusal of the said provision, it is evident that it is a sine qua non that there should be an allowance or deduction claimed by the assessee in any assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee. Then, subsequently, during any previous year, if the creditor remits or waives any such liability, then the assessee is liable to pay tax under Section 41 of the IT Act. The objective behind this Section is simple. It is made to ensure that the assessee does not get away with a double benefit once by way of deduction and another by not being taxed on the benefit received by him in the later year with reference to deduction allowed earlier in case of remission of such liability. It is undisputed fact that the Respondent had been paying interest at 6 % per annum to the KJC as per the contract but the assessee never claimed deduction for payment of interest under Section 36 (1) (iii) of the IT Act. In the case at hand, learned CIT (A) relied upon Section 41 (1) of the IT Act and held that the Respondent had received amortization benefit. Amortization is an accounting term that refers to the process of allocating the cost of an asset over a period of time, hence, it is nothing else than depreciation. Depreciation is a reduction in the value of an asset over time, in particular, to wear and tear. Therefore, the deduction claimed by the Respondent in previous assessment years was due to the deprecation of the machine and not on the interest paid by it.

(a) Section 28(iv) of the IT Act does not apply on the present case since the receipts of Rs 57,74,064/- are in the nature of cash or money.

(b) Section 41(1) of the IT Act does not apply since waiver of loan does not amount to cessation of trading liability. It is a matter of record that the Respondent has not claimed any deduction under Section 36 (1) (iii) of the IT Act qua the payment of interest in any previous year.

ITA No.: 3328/Ahd/16 Assessment year: 2013-14 Page 11 of 11

Sd/- Sd/- Justice P P Bhatt Pramod Kumar (President) (Vice President) Ahmedabad, dated the 3rd day of June, 2019

Copies to: (1) The appellant (2) The respondent (3) CIT (4) CIT(A) (5) DR (6) Guard File By order True Copy Assistant/Deputy Registrar Income Tax Appellate Tribunal Ahmedabad benches, Ahmedabad