ATCOM TECHNOLOGIES LIMITED ,MUMBAI vs. DCIT, CIRCLE 6(1)(2), MUMBAI

This appeal by the assessee is directed against the order dated 11.12.2025 passed by the learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi ["learned CIT(A)"], under section 250 of the Income-tax Act, 1961 ["the Act"], arising from the assessment order dated 15.03.2024 passed under section 143(3) read with section 144B of the Act for the assessment year 2022-23.

The assessee has raised the following grounds of appeal:

Brief facts of the case are that the assessee filed its return of income for the year under consideration on 29.09.2022 declaring a loss of Rs.8,40,072/-. During scrutiny assessment, the Assessing Officer noticed that the balance sheet disclosed a loan payable to IFCI of Rs.24,22,93,441/- and interest payable thereon of Rs.11,20,01,579/-. The loan had been assigned by IFCI to CFM Asset Reconstruction Private Limited. Taking note of the assignment at a substantial discount and the fact that the assessee had stopped providing interest after the loan became a non-performing asset, the Assessing Officer held that the interest liability had ceased and added Rs.11,20,01,579/- under section 41(1) of the Act. Since the assessee had no revenue from operations during the year, the Assessing Officer further held that the assets were not put to use and disallowed depreciation of Rs.18,15,713/-. The assessment was accordingly completed at a total income of Rs.11,29,77,220/-. 4. On appeal, the learned CIT(A) sustained both additions. As regards section 41(1), the learned CIT(A) held that the assignment of the loan at a substantial haircut and its long outstanding character established cessation of the interest liability. In respect of depreciation, the learned CIT(A) held that the assessee had not shown revenue from operations for a long period and that the assets had been seized and not put to use during the relevant previous year. 5. Before us, the learned Authorised Representative submitted that the interest expenditure comprising the impugned liability had been 2 added back under section 43B of the Act in assessment years 2003-04 and 2004-05, as it had not been paid. Thus, no allowance or deduction in respect of the said liability was ever granted and a further addition under section 41(1) would amount to taxing the same amount twice. He further submitted that the loan as well as the interest liability continues to appear in the balance sheet and has not been written back. Neither The assignee has not waived the liability and no one-time settlement has been accepted. Therefore, there is neither remission nor cessation of liability. Reliance was placed, inter alia, on the judgment of the Hon'ble Supreme Court in CIT v. Sugauli Sugar Works (P.) Ltd. [1999] 236 ITR 518 (SC). On depreciation, he submitted that the relevant block consists of a building which continues to exist and remains owned by the assessee. The building was merely mortgaged; it was neither sealed nor taken out of the block. Accordingly, depreciation could not be denied merely because there was no revenue from operations during the year. 6. Per contra, the learned Departmental Representative supported the orders of the authorities below. He submitted that the assignment of the debt at a substantial haircut demonstrated that the liability was no longer payable in its original form and that section 41(1) was rightly invoked. On depreciation, he submitted that, in the absence of business receipts and actual use of the asset during the year, the disallowance was justified. 7. We have heard the rival submissions and perused the material available on record. Section 41(1) can be invoked only where an allowance or deduction has been made in an earlier assessment in respect of a loss, expenditure or trading liability and, subsequently, the assessee obtains an amount or a benefit in respect thereof by way of remission or cessation. Both statutory conditions must be satisfied. In 3 the present case, the assessee placed before the learned CIT(A) the computations for assessment years 2003-04 and 2004-05 to demonstrate that the unpaid interest was disallowed under section 43B of the Act. This factual assertion has neither been controverted by the Assessing Officer nor displaced by the learned CIT(A). Once the corresponding expenditure was not allowed as a deduction, the foundational condition of section 41(1) fails. Taxing the very same liability again under section 41(1) would result in an impermissible double addition.

Even otherwise, the second condition of remission or cessation is not fulfilled. The liability of Rs.11,20,01,579/- continued to be disclosed in the balance sheet as at 31.03.2022 and, as demonstrated before the learned CIT(A), also in the succeeding balance sheets as at 31.03.2023 and 31.03.2024. It has not been written back by the assessee. There is no material showing that the asset reconstruction company waived the interest, entered into a concluded settlement with the assessee, or otherwise discharged it. The assignment of a debt by a lender to an asset reconstruction company at a discounted value is a transaction between the transferor and the assignee. Without anything further, it neither extinguishes the borrower's liability nor confers upon the borrower a benefit by way of remission or cessation. 9. In CIT v. Sugauli Sugar Works (P.) Ltd. (supra), the Hon'ble Supreme Court explained the essential requirement of section 41(1) in the following terms: "Thus, the obtaining by the assessee of a benefit by virtue of remission or cessation is sine qua non for the application of this section. The mere fact that the assessee has made an entry of transfer in his accounts unilaterally will not enable the Department to say that section 41 would

The Hon'ble Supreme Court further held that even whether a liability had become barred by limitation could not be decided in the absence of the creditor, since circumstances may permit enforcement after expiry of the normal limitation period. In the case before us, the assessee has not even passed a unilateral write-back entry; it continues to acknowledge the liability. The ratio therefore applies with greater force. 11. The decisions relied upon by the learned CIT(A) do not advance the case of the Revenue. In Jay Engineering Works Ltd. v. CIT [2009] 314 ITR 299 (Delhi) and Solid Containers Ltd. v. DCIT [2009] 178 Taxman 192 (Bom.), the liabilities or loans had been written back by the assessees. Likewise, CIT v. T.V. Sundaram Iyengar & Sons Ltd. [1996] 222 ITR 344 (SC) concerned amounts received in the course of business which, by lapse of time and their treatment by the assessee, had become the assessee's own money. Here, there is no write-back, waiver, settlement, discharge or appropriation of the lender's money by the assessee. Those authorities are therefore distinguishable on facts. We accordingly hold that section 41(1) has no application and direct the Assessing Officer to delete the addition of Rs.11,20,01,579/-. Ground No.1 is allowed. 12. Coming to depreciation, the asset on which depreciation of Rs.18,15,713/- was claimed is a building forming part of the existing block of assets. The assessee continues to own the building and it has neither been sold nor discarded nor otherwise ceased to form part of the block. The specific submission that the building was only mortgaged and was neither sealed nor taken over so as to make it unavailable for business has not been rebutted by any material. A mortgage creates a 5 security interest; it does not, by itself, divest the mortgagor of ownership or establish that the building has ceased to be available for use. Further, absence of revenue from operations during a particular year is not, by itself, a statutory ground to deny depreciation. Once the business is not shown to have been permanently closed and the building continues in the block and remains available for business use, depreciation on the written down value of the block cannot be denied merely for want of business receipts. The contrary finding of the learned CIT(A), based on the premise that the asset stood seized, is unsupported by the record brought before us. We therefore direct the Assessing Officer to allow depreciation of Rs.18,15,713/-. Ground No.2 is allowed. 13. Ground No.3 is general in nature and does not require separate adjudication. 14. In the result, the appeal filed by the assessee is allowed.