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Income Tax Appellate Tribunal, “ SMC ” BENCH, AHMEDABAD
Before: SHRI PRAMOD KUMAR&
आदेश / O R D E R PER Ms. MADHUMITA ROY - JM: Being aggrieved by and/or dissatisfied with the order dated 28.11.2017 passed by the Commissioner of Income Tax(Appeals)-1, Ahmedabad [Ld.CIT(A) in short] for Assessment Year (AY) 2013-14 arising out of the assessment order dated 03.03.2016 passed by the ITO-
ITA No.180/Ahd/2018 Aadinath Ornaments Pvt.Ltd. vs. ITO Asst.Year – 2013-14 - 2 - 1(1)(1) Ahmedabad, the instant appeal has been filed before us by the assessee with the following grounds:-
The learned Commissioner of Income Tax (Appeals) has erred in confirming the addition of Rs.2,12,14,441/- made by the Assessing Officer being principal amount of bank loan waived by the bank holding that the loan taken by the assessee was a liability and the same has ceased to be a liability when the bank has agreed for settlement by reducing the actual amount of loan. Thus the assessee got the benefit of cessation of liability under the provisions of Sec.41(1) of the I.T.Act, 1961.
The learned Commissioner of Income Tax (Appeals) has erred in observing that the utilization of loan is paramount and there has been failure to demonstrate the non-acquisition of Capital Asset from the loan waived.
The brief facts of the case is this that the assessee has taken a loan from the OBC Bank and the total outstanding amount including principal amount and interest was Rs.12,41,86,740/-. The Bank has settled the outstanding arrears for Rs.9,22,00,000/-. The assessee has been given a concession of Rs.3,19,86,740/- (Rs.12,41,86,740 – Rs.9,22,00,000). The concession amount Rs.3,19,86,740/- comprises of interest of
ITA No.180/Ahd/2018 Aadinath Ornaments Pvt.Ltd. vs. ITO Asst.Year – 2013-14 - 3 - Rs.1,08,72,299/- and principal amount of Rs.2,12,14,441/-. The assessee has shown the waiver of interest as interest income and the waiver of principal amount has directly being credited in the balance-sheet as reserve and surplus.
During assessment proceeding, show cause notice dated 21.01.2016 issued to the assessee asking explanation as to why the amount shown in the reserve and surplus amounting to Rs.2,12,14,441/- should not be considered as the income of the assessee. In reply to that the assessee made the following submission:-
"1. Copy of account showing total payment of Rs.9.22 crores towards outstanding loan which had become NPA is attached herewith.
At the outset it is submitted that the assessee company has made payment of Rs.3.00 crores on 01.01.2011 i.e. relevant to A.Y. 2011-12. As a consequence of which the penal interest charged earlier came to be reversed and we were given credit thereof. The credit of interest granted was Rs.18,38,714/-. This can be verified with the copy of the bank statement as well as copy of account enclosed for F.Y. 2010-11. Therefore, there is no effect in the overall profit/loss since the interest charged has been subsequently reversed within the same year and no deduction has been claimed thereof. Thereafter, the interest was charged for the month of February and March, 2011 amounting to Rs.6,25,591/-
ITA No.180/Ahd/2018 Aadinath Ornaments Pvt.Ltd. vs. ITO Asst.Year – 2013-14 - 4 - & 6,99,891/- respectively totalling to Rs.13,25,4827-. This has been claimed by way of deduction.
2.1. Furthermore, further interest charged for A.Y. 2012-13 was Rs.17,41,620/- and for A.Y. 2013-14 was Rs.77,05,197/-. Therefore, the total interest claimed for the various years is as under: Asst.Year Amount Remarks
2011-12 13,25,482 The amount has been claimed by way of deduction
2012-13 17,41,620 The amount has been claimed by way of deduction in the books of accounts and disallowed u/s.43B while filing the return of income.
2013-14 77,05,197 The amount has been claimed by way of deduction.
At this stage attention is invited to the Profit & Loss account filed with your good office earlier. The assessee company has declared interest income of Rs.1,07,72,299 (13,25,482 + 17,41,620 + 77,05,197) and after netting of the interest expenses of Rs.77,05,197/- has shown net interest income of Rs.30,67,103/-. Since the assessee company has disallowed the interest expenses of Rs.17,41,620/- u/s.438 of the Act while filing the return of income
ITA No.180/Ahd/2018 Aadinath Ornaments Pvt.Ltd. vs. ITO Asst.Year – 2013-14 - 5 - for A.Y. 2012-13 and not claimed the same by way of deduction appropriate adjustment of the same has been made in the computation accompanying the return of income and the same has been claimed by way of deduction of Rs.17,41,620/- while filing the return of income for A.Y. 2013-14 to avoid double addition of the same interest amount of A.Y. 2012-13. Computation and acknowledgement of the return of the income for A.Y. 2012-13 is enclosed from where this fact of disallowance of the interest of Rs.17,41,620/- can be verified out of the total interest disallowance made of Rs.21,73,904/-.
2.2. It is with this background that the facts of the case have to be appreciated. The total outstanding balance with regards the loan including both the principal amount and outstanding interest was Rs.12,41,86,740/-. The bank has settled the outstanding arrears for Rs.9,22,00,000/-. Therefore, the concession granted is Rs.3,19,86,740/- (12,41,86,740 - 9,22,00,000). Since the interest component comprises of Rs.1,07,72,299 as explained above, the balance portion comprises of the principal amount i.e. 2,12,14,441 (3,19,86,740 – 1,07,72,299).
ITA No.180/Ahd/2018 Aadinath Ornaments Pvt.Ltd. vs. ITO Asst.Year – 2013-14 - 6 - 2.3. We are once again furnishing the copy of OBC Bank account for AYs 2011-12, 2012-13 & 2013-14 which shall self explain the above issue."
The reply given by the assessee was not convincing to the Assessing Officer (AO) in as much as the inadmissibility of the amount directly shown in the reserve and surplus without showing it as the income for the year under consideration. The AO observed that though the concession on account of interest received by the assessee has shown as interest income but the concession received in principal amount has been directly taken to capital reserve account to Rs.2,12,14,441/- not offered for taxation purposes. The AO further added that the loan taken by the assessee was a liability and the same has ceased to be a liability when the bank has agreed for settlement by reducing the actual amount of loan and thereby the assessee got the benefit of cessation of liability to the tune of Rs.2,12,14,441/- under the provision of section 41(1) of the IT Act, 1961. And therefore the AO made addition of the said amount of Rs.2,12,14,441/- to the income of the assessee.
The learned CIT(A) confirmed the order passed by the AO and dismissed the appeal preferred by the assessee.
ITA No.180/Ahd/2018 Aadinath Ornaments Pvt.Ltd. vs. ITO Asst.Year – 2013-14 - 7 - 6. The Ld.AR relied upon the submissions made by the assessee before the Ld.AO as well as the Ld.CIT(A). He has also relied upon the judgements which we propose to discuss hereinbelow. The Ld.AR also contended that both the Ld.AO and the Ld.CIT(A) have wrongly drawn conclusion in holding that the principal amount of Rs.2,12,14,441/- is liable to be added u/s.41(1) of the Act. On the other hand, the Ld.DR vehemently objected and prayed for confirmation of the order passed by the Ld.CIT(A).
We have heard the rival contentions made by the parties, perused the relevant materials on record.
The provision of section 41(1) of the Act is reproduced herein below for ready reference:
“Section 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 income-tax 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 (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
ITA No.180/Ahd/2018 Aadinath Ornaments Pvt.Ltd. vs. ITO Asst.Year – 2013-14 - 8 -
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 income-tax as the income of that previous year. [Explanation 1.—For the purposes of this sub-section, the expression "loss or expenditure or some benefit in respect of any such trading liability by way of remission or cessation thereof" shall include the remission or cessation of any liability by a unilateral act by the first mentioned person under clause (a) or the successor in business under clause (b) of that sub-section by way of writing off such liability in his accounts.] [Explanation 2].—For the purposes of this sub-section, "successor in business" means,— (i) where there has been an amalgamation of a company with another company, the amalgamated company; (ii) where the first-mentioned person is succeeded by any other person in that business or profession, the other person; (iii) where a firm carrying on a business or profession is succeeded by another firm, the other firm;] [(iv) where there has been a demerger, the resulting company.]”
The following conditions need to be satisfied in order to make an addition under section 41(1) of the Act:
(i) The assessee should have claimed any allowance or deduction in the earlier year.
(ii) Such deduction should be in respect of the loss, expenditure or trading liability incurred by the assessee.
ITA No.180/Ahd/2018 Aadinath Ornaments Pvt.Ltd. vs. ITO Asst.Year – 2013-14 - 9 - (ii) In the relevant previous year the assessee should have obtained either in cash or otherwise any benefit of any amount in respect to such loss or expenditure or such trading liability which would constitute remission or cessation of the said amount. The benefit so accrued by the assessee would be deemed to be the profit of the previous year.
Therefore, it has become clear that the for the purpose of taxing any income the assessee should have claimed the expenditure which would be in the nature of reduction or allowance. Obtaining loan does not amount to any claim of reduction or expenditure on the part of the assessee. The interest accruing on such loan would constitute expenditure as claimed by the assessee by way of deduction and offered to tax. The assessee in this particular case has been given a concession amount of Rs.3,19,86,740/- comprises of interest of Rs.1,07,72,299/- and principal amount of Rs.2,12,14,441/-. The interest amount of Rs.1,07,72,299/- was debited to Profit & Loss account and the principal amount of Rs.2,12,14,441/- was shown as outstanding liabilities and therefore not debited to the Profit & Loss account which is now being written back and for which no benefit had been taken and has shown as revenue and surplus and therefore not liable to tax.
ITA No.180/Ahd/2018 Aadinath Ornaments Pvt.Ltd. vs. ITO Asst.Year – 2013-14 - 10 - 8. The learned advocate appearing for the assessee relied upon the judgment of Hon’ble Gujarat High Court in the case of Gujarat State Fertilizers & Chemicals Ltd. (2013) 217 Taxman 343 (Guj.) where it is held the principal amount of loan waived could not be taxed u/s.41(1) of the Act if there had been no allowance or deduction in any preceding year. The Ld.AR also relied upon the judgement of Hon’ble Delhi High Court in the case of CIT vs. Tosha International Ltd. 331 ITR (2011)440 (Delhi). In the said case, the assessee offered the interest amount of Rs. 1,07,72,299/- to tax and the principal amount shown as outstanding liabilities and written back and no benefit as allowance or deduction was claimed by the assessee in any preceding year in respect of that principal amount which is identical to the judgement cited above which is applicable to the instant case.
Furthermore, in the case of Jt.CIT vs. Bisani Zinc Ltd. (2004) 88 TTJ (Cal.) 346 following observations were made:-
“10. The above legal provision makes it clear that where a person has obtained, in any manner whatsoever, any amount, in respect of inter alia an expenditure, 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 the business, provided such an expenditure has been allowed as
ITA No.180/Ahd/2018 Aadinath Ornaments Pvt.Ltd. vs. ITO Asst.Year – 2013-14 - 11 - a deduction in any year. It is a sine qua non, for bringing a remission or cessation of liability to tax under section 41(1), that "an allowance or deduction has been made in the assessment for any year" for loss, expenditure or trading liability in respect of which such remission or cessation has been made. A fortiorari, if an expenditure, for whatever reasons, has not been allowed as a deduction in any previous year and the liability in respect of such expenditure ceases in the current previous year, such a cessation of liability, in our considered view, cannot be brought to tax in the current previous year. We are further of the considered view that the reason of such an expenditure not being allowed as a deduction is not material. Clearly, section 41(1) seeks to reverse the undue benefit of deduction given to the assessee in respect of a liability which eventually turns out to be non-existent but when no such benefit of deduction is anyway made available to the assessee, there cannot be any question of reversal of such a non-existent or undue benefit of deduction. We are, therefore, of the considered view that deduction in respect of disputed amount of Rs.58,80,502 never having been allowed by the Assessing Officer, cessation of liability of this amount cannot result in any tax liability in the hands of the assessee.”
ITA No.180/Ahd/2018 Aadinath Ornaments Pvt.Ltd. vs. ITO Asst.Year – 2013-14 - 12 - The ratio laid down in the said judgement is squarely applicable to the instant case. Taking into consideration the entire aspect of the matter and the ratio of the judgement discussed hereinabove, we hold that the order passed by the CIT(A) cannot sustain and we therefore set aside the same and allow the appeal preferred by the assessee.
In the result, appeal of the assessee is allowed. This Order pronounced in Open Court on 11/ 05/2018
Sd /- Sd/- (�मोद कुमार) (सु�ी मधु�मता रॉय) लेखा सद�य �या�यक सद�य ( PRAMOD KUMAR ) ( Ms. MADHUMITA ROY ) ACCOUNTANT MEMBER JUDICIAL MEMBER Ahmedabad; Dated 11/ 05/2018 ट�.सी.नायर, व.�न.स./T.C. NAIR, Sr. PS
आदेश क� ��त�ल�प अ�े�षत/Copy of the Order forwarded to : 1. अपीलाथ� / The Appellant 2. ��यथ� / The Respondent. 3. संबं�धत आयकर आयु�त / Concerned CIT 4. आयकर आयु�त(अपील) / The CIT(A)-1, Ahmedabad �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, अहमदाबाद / DR, ITAT, Ahmedabad 5. 6. गाड� फाईल / Guard file. आदेशानुसार/ BY ORDER, स�या�पत ��त //True Copy// उप/सहायक पंजीकार (Dy./Asstt.Registrar) आयकर अपील�य अ�धकरण, अहमदाबाद / ITAT, Ahmedabad