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Income Tax Appellate Tribunal, “C’’ BENCH: BANGALORE
Before: SHRI N.V. VASUDEVAN & SHRI CHANDRA POOJARI
PER CHANDRA POOJARI, ACCOUNTANT MEMBER:
This appeal by the assessee is directed against the order of Ld. CIT(A)-3, Bengaluru dated 28.2.2018 for the assessment year 2006-07. The grounds raised by the assessee are as under: 1. The CIT(A) erred in passing the impugned order in the manner which he did. 2. The CIT(A) erred in not following the principles laid down by the Gujarat high Court in the case of CIT Vs Chetan Chemicals Private Limited 139 Taxman 301 (Guj ) and ought to have allowed the matter in full.
ITA No.1317/Bang/2018 M/s. I.G. Petrochemicals Ltd., Bangalore
Page 2 of 10 3. On the facts and in the circumstances of the case the CIT (Appeals) ought to have followed the principles laid down by the Jurisdictional High Court decisions in the case of CIT vs Compaq Electric Limited (204 Taxman 58 KAR) and CIT Vs Industrial credit and Development syndicate Limited (285 ITR 310 (Kar ). 4. On the facts and circumstances of the case The Learned CIT (Appeals ) ought to have appreciated that the Judgment of the Hon'ble Supreme Court in the case of T.V.Sundaram Iyengar and sons Limited reported in 222 ITR 344 had no application to the case of the 'Appellant and the Bombay High court in the case of Solid Containers Limited (308 ITR 417) was distinguishable and accordingly ought to have refrained from relying on these judgments.
Without prejudices the addition as made by the Assessing Authority is excessive, arbitrary 86 unreasonable 86 ought to be reduced substantially. 6. For these and other grounds that may be argued at the time of hearing of the appeal the Appellant prays that the appeal may be allowed.
The facts of the case are that The grounds of appeal 2 to 4 are argumentative in nature and relate to the common issue of addition of Rs.1,45,22,33,521/- made by the AO by holding that the principal amount of loan/borrowings taken by the assessee from banks and which were waived off by the banks, was income of the assessee. In brief, the assessment in the case of assessee was finalized by the AO under Section 143(3) of the Act on 20.02.2008. Later on the assessment order was held by Commissioner of Income Tax to be erroneous and prejudicial to the interest of the revenue and accordingly the same was set aside vide order under Section 263 of the Act dated 21.02.2009. The AO was directed to make fresh assessment in view of the observations of the CIT in his order under Section 263 of the Act. This order was challenged by the assessee before ITAT. However, the appeal of the assessee in ITA Nos.403 & 404/Bang/2010 was dismissed by ITAT vide its order dt 07.03.2011. A fresh assessment order was passed by the A.O. and the income of the assessee was computed after taking into consideration the principal amounts of
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Page 3 of 10 loan/borrowings waived off by the Banks as income of the assessee for the year under consideration.
During appellate proceedings the assessee has made detailed written submissions which are in substance same as made before the AO. One of the main contentions of the assessee is that the action of the CIT in passing an order under Section 263 of the Act was without any merit. However this submission of the assessee does not deserve any consideration as the appeal against the order under Section 263 lies before ITAT and the ITAT has already decided the appeal in this case against the assessee.
On perusal of the submissions of the assessee the Ld. CIT(A) has stated that Section 2 (24) of the Act provides the definition of income. Section 2(24)(vd) read along with section 28(iv) of the Income Tax Act, 1961 states that the value of any benefit, whether that can be converted into money or not, arising from a business activity or a profession, is taxable in the hands of the recipient as his business income. Therefore, the value of any such benefit will be treated as `Profits and Gains of Business or Profession'. The reliance of the assessee on Chetan Chemicals(Supra) is misplaced as the said decision was rendered on different facts as in the said case the AO had invoked provisions of Section 41(1) of the Act to treat the amount of loan waived off as income of the assessee on identical facts, as in the case under consideration, in the case of Commissioner of Income-tax, Chennai v. Ramaniyam Homes (P) Ltd. (2016) 68 taxmann.com 289 (Madras). Further, he observed that the HC relied upon the decision of Hon’ble Supreme Court in the case of TV Sundaram Iyengar & Sons
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Page 4 of 10 Ltd. (supra) and the decision of Bombay High Court in the case of Solid Containers Ltd. (supra) and differed from a co-ordinate bench ruling in Iskraemeco Regent Ltd v. CIT (2011) 196 Taxmann 103 on the issue of taxability of waiver of loan taken for acquiring a capital asset, and held that waiver of principal portion of such loan would also fall within the purview of section 28(iv) of the Act and hence taxable as revenue receipt. The Hon’ble High Court thus rejected the argument that use of borrowed funds for capital purposes or revenue purposes would determine the taxability of the waiver.
We have heard the rival submissions and perused the materials available on record. The Ld. A.R. submitted that the issue is fairly covered by the earlier order of the Tribunal in ITA No.140/Bang/2020 dated 27.12.2021, wherein it was held as under:
“11. We have heard both the parties and perused the material on record. In this case, the AO invoked the provisions of section 41(1) of the Act on the reason of principal loan written back by applying the ratio laid down in the case of T.V. Sundaram Iyengar and Sons Ltd. (supra). The AO observed that assessee had not offered the principal amount of loan of Rs.28,69,99,731 from banks which were waived by the concerned banks and were credited to P&L account as income of previous year relevant to AY 2005-06. 12. Let us examine the provisions of section 41(1) of the Act which reads as follows:- “S. 41(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 incometax as the income of that previous year, 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
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Page 5 of 10 (b) the successor in business has obtained, whether in cash or in any other manner whatsoever, any amount in respect of which loss or expenditure was incurred by the first mentioned person or some benefit in respect of the trading liability referred to in clause (a) by way of remission or cessation thereof, the amount obtained by the successor in business or the value of benefit accruing to the successor in business shall be deemed to be profits and gains of the business or profession, and accordingly chargeable to incometax as the income of that previous year.” 13. U/s. 41(1), unless the allowance or deduction has been made in earlier years in respect of loss, expenditure, trading liability, there can be no addition u/s. 41(1). The Supreme Court in the case of Saraswathi Industrial Syndicate v. CIT, 186 ITR 278 (SC) held that in order to attract the provisions of section 41(1) for enforcing the tax liability, the identity of the assessee in the earlier year in which deduction was granted in relation to the trading liability and in the subsequent year which the benefit is derived must be the same. If there is any change in the identity of the assessee, there would be no tax liability u/s 41. If the assessee to whom the trading liability may have been allowed as business deduction in the earlier year ceases to be in existence or if the assessee has changed on account of death of earlier assessee, the benefit received in subsequent year cannot be treated as income received by the assessee. 14. The Madras High Court in the case of Narayanan Chettiar Industries v. ITO, 277 ITR 426 (Mad) held that in respect of remission of liability, no addition can be made unless an allowance or deduction is allowed to the assessee in the previous year. After noting these facts, it was observed that from the records it was not clear whether any allowance or deduction was allowed to the assessee in the previous year. Hence the issue was remitted to be examined by the AO. 15. The Delhi High Court in CIT v. Tosha International Ltd. (331 ITR 440) (Bom) followed the judgment of Bombay High Court in the case of Mahindra & Mahindra Ltd. v. CIT, 261 ITR 501 (Bom) and held that the amount of loan and interest due by the assessee to banks and financial institutions having never been claimed by the assessee as deduction, waiver of interest or part of principal amount by banks/financial institutions did not give rise to income chargeable to tax u/s. 41(1) of the Act. Being so, the assessee’s loan which was availed for acquiring capital asset and the assessee never claimed it as a deduction from taxable income in earlier year and waiver of that loan by bank was not taxable u/s. 41(1) of the Act. Even otherwise, the same amount cannot be taxed u/s. 28(1)(iv) of the Act. 16 In CIT v. Dholgiri Industries (P) Ltd., 266 CTR 111 (MP), assessee had entered into one-time settlement (OTS) with Dena Bank for the loan outstanding against it. Dena Bank waived the amount of Rs. 88.39 lacs and interest to the extent of Rs. 31.18 lacs out of total outstanding which was Rs. 289.58 lacs as on 31st March, 2006. Such OTS was subject to condition that payment of 25 per cent of the compromise amount will be made by the respondent upto 31st Aug., 2006 and the balance amount of Rs. 148.75 lacs will be paid in 36 months' instalments commencing from September, 2006. The AO treated the component principal
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Page 6 of 10 amount of Rs. 88.39 lacs, which was waived as income in the hands of the assessee by holding that the assessee has earned this waived amount, and as such brought this amount for tax. To this, the High Court held, AO committed an error in treating amount waived by Bank to be amount earned by assessee. Principal amount of loan being never claimed by assessee as its expenditure, its waiver would not amount to income of assessee. 17. Similar view was taken in the case of CIT v. Compac Electric Ltd. 79 CCH 746 (Kar) wherein it was held that for the application of s. 41(1), the condition precedent is that there should be an allowance or deduction in the 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 u/s. 41. The whole object is to avoid double benefit to the assessee. In the instant case, the amount claimed as capital receipt is in respect to which there was no allowance or deduction claimed by the assessee for the previous year. Therefore, when his credit has waived the repayment of the said amount, it amounts to a capital receipt and not a revenue receipt. As the assessee did not have the benefit of any allowance or deduction in respect of the said amount, s. 41 is not attracted. 18. The ld. AR submitted before us that the CIT categorically recorded in page 18 of his order that interest paid on loan is already offered to tax in the year of waiver and the contention of the AR is that is that this was not accounted by the AO either in the assessment order or the remand report dated 26.8.2019. 19. We have carefully gone through the judgment in the case of T.V. Sundaram Iyengar & Sons Limited (supra) wherein it was held as under:- “The assessee had received deposits in the course of its business which were originally treated as capital receipts. Some of the deposits were neither claimed by nor returned to the depositors. There is no dispute that the deposits were received in the course of the carrying on of the business of the assessee. The amounts were not in the nature of security deposits held by the assessee for performance of contract by its constituents. As it appears from the facts of the case, the amounts were depleted by adjustments made from time to time. The amounts were not given and retained as security to be retained till the fulfilment of the contract. There is no finding to that effect. The deposits were taken in the course of the trade and adjustments were made against these deposits in the course of trade. The unclaimed surplus retained by the assessee will be its trade receipt. The assessee itself treated the amount as its trade receipt by bringing it to its P&L a/c. If a commonsense view of the matter is taken, the assessee, because of the trading operation, had become richer by the amount which it transferred to its P&L a/c. The moneys had arisen out of ordinary trading transactions. Although the amounts received originally were not of income nature, the amounts remained with the assessee for a long period unclaimed by the trade parties. By lapse of time, the claim of the deposit became time-barred and the amount attained a totally different quality. It became a definite
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Page 7 of 10 trade surplus. Where a new asset came into being automatically by operation of law, commonsense demanded that the amount should be entered in the P&L a/c for the year and be treated as taxable income. In other words, the principle appears to be that if an amount is received in the course of trading transaction, even though it is not taxable in the year of receipt as being of revenue character, the amount changes its character when the amount becomes the assessee's own money because of limitation or by any other statutory or contractual right. When such a thing happens, commonsense demands that the amount should be treated as income of the assessee. ” 20. As seen from the above judgment in the case of T.V. Sundaram Iyengar & Sons Limited (supra), the amounts were received in the course of carrying on business of assessee and adjustments were made against these deposits in the course of trade, as such it was observed by the Apex Court that unclaimed surplus returned by the assessee will be its trade receipt. Further, the assessee itself treated the amount as its trade receipt and because of trading operation, the assessee has become richer which it transferred to its P&L account. The money had arisen out of ordinary trading transaction. However, in the present case, the principal portion of the loan which was received by the assessee in the capital field is not in the course of trading activity and it is not a surplus from trade so as to tax it. Being so, with regard to the principal term loan portion, it is a capital receipt only and waiver of the same is not taxable. We place reliance on the decision of the Supreme Court in the case of CIT v. Mahindra & Mahindra Ltd., 404 ITR 1 (SC) where the Supreme Court held as follows:- “Held, dismissing the appeals, (i) that prima facie, for the applicability of section 28(iv) of the Act, , the income must arise from the business or profession. And the benefit which is received has to be in some other form rather than in the shape of money. The amount of Rs.57,74,064 was a cash receipt due to the waiver of loan. Therefore, the very first condition of section 28(iv) was not satisfied and the amount of Rs.57,74,064 could not be taxed under the provisions of section 28(iv) of the Act. (ii) That for the applicability of section 41(1) of the Act, 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. The assessee had been paying interest at 6 per cent per annum to the K in terms of the contract but never claimed deduction for payment of interest under section 36(1)(iii) of the Act. The deduction claimed by the assessee in previous assessment years was due to the deprecation of the machine and not on the interest paid by it. Moreover, the purchase effected from the K was in respect of plant, machinery and tooling equipment which were capital assets of the assessee. The purchase amount had not been debited to the trading account or to the profit and loss account in any of
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Page 8 of 10 the assessment years. There is a difference between 'trading liability' and 'other liability'. Section 41(1) of the Act whereas in the instant case, waiver of loan amounted to cessation of a liability other than a trading liability. Hence, the case of the assessee would fall under section 41(1) of the Act. The term "loan" generally refers to borrowing something, especially a sum of cash that is to be paid back along with the interest decided mutually by the parties. In other terms, the debtor is under a liability to pay back the principal amount along with the agreed rate of interest within a stipulated time. The creditor or his successor may exercise the "right of waiver" unilaterally to absolve the debtor from his liability to repay. After such exercise, the debtor is deemed to be absolved from the liability of repayment of loan subject to the conditions of waiver. The waiver may be a part 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.” 21. However, with regard to the interest portion, if it allowed as deduction in any earlier year on waiver of the same has to be considered as a trade receipt. The AO is required to verify with regard to interest waiver, if any, and if it is allowed as deduction in any earlier assessment year, then only the waiver can be treated as revenue receipt liable to tax. With these observations, we remit the issue with regard to interest waiver only to the file of the AO for reconsideration. 22. In the result, the appeal of the revenue is partly allowed for statistical purposes.” 6. We have carefully gone through the above order of the Tribunal. In that order, the Tribunal specifically observed in para 20 that “However, in the present case, the principal portion of the loan which was received by the assessee in the capital field is not in the course of trading activity and it is not a surplus from trade so as to tax it. Being so, with regard to the principal term loan portion, it is a capital receipt only and waiver of the same is not taxable.” Further, it was observed by the Tribunal in para 21 that “However, with regard to the interest portion, if it allowed as deduction in any earlier year on waiver of the same has to be considered as a trade receipt. The AO is required to verify with regard to interest waiver, if any, and if it is allowed as deduction in any earlier assessment year, then only the waiver can be
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Page 9 of 10 treated as revenue receipt liable to tax. With these observations, we remit the issue with regard to interest waiver only to the file of the AO for reconsideration.”
Being so, in our opinion, the Tribunal has given a finding that principal term loan portion is being a capital receipt and waiver of that portion would not amount to income either u/s 28(iv) or u/s 41(1) of the Act. Further, the expenditure, which was not allowed as a deduction in earlier year and waiver of the same cannot be treated as revenue receipt. To that extent, we have no hesitation in agreeing with the contentions of the Ld. A.R. In our opinion, so far as the term loans were concerned, these were taken by the assessee for the purpose of capital assets from time to time. With regard to this loan, the amount did not come into the possession of the assessee on account of any trading transaction; the receipts were capital in nature being loan repayable over a period of time along with interest. Therefore, on waiver of this term loan, no benefit or perquisites arose to the assessee in the revenue field. On the other hand, it is a capital receipt. Thus, the waiver of the term loan cannot be treated as income of the assessee. However, waiver of overdraft, letter of credit, pre-shipment advance, export bills, benefit had arisen to the assessee. These loans were received in the course of carrying on business of the assessee even if it was treated as loan at the time of receipt of said loan and waiver of said amount will result in revenue receipt and to be liable for tax. Since it was the money had been borrowed for day-to- day affairs and not for purchase any capital assets, the said loan were not term loan taken for the acquisition or purchase of capital assets. On the other hand, it is used as a circulating capital not as a fixed capital and the money was used in ordinary course of business in carrying the day-to-day affairs of the assessee. Being so, writing off the over draft cash credit, letter of credit, pre-shipment advance and export bills, etc. which was received for carrying out the day-to-day operation of the assessee and
ITA No.1317/Bang/2018 M/s. I.G. Petrochemicals Ltd., Bangalore Page 10 of 10 waiver of the same to be treated as income of the assessee u/s 28(iv) of the Act. Similarly, interest waiver, if any and if it is allowed as a deduction in any earlier assessment years, then only the waiver of such interest could be treated as revenue receipt liable to tax u/s 41(1) of the Act. With this observation, we remit this issue in dispute to the file of AO for reconsideration.
In the result, the appeal filed by the assessee is partly allowed for statistical purposes.
Order pronounced in the open court on 21st Jan, 2022.
Sd/- Sd/- (N.V. Vasudevan) (Chandra Poojari) Vice President Accountant Member
Bangalore, Dated 21st Jan, 2022. VG/SPS
Copy to: 1. The Applicant 2. The Respondent 3. The CIT 4. The CIT(A) 5. The DR, ITAT, Bangalore. 6. Guard file By order
Asst. Registrar, ITAT, Bangalore.