TMI ROLLON ENGINEERING PRIVATE LIMITED,BANGALORE vs. ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE- 7(1)(1), BANGALORE

This is an appeal by the assessee against the order dated 31.01.2020 of CIT(A), Bengaluru, relating to Assessment Year 2016-17.

The only issue that arises for consideration in this appeal is as to whether the Revenue authorities were justified in bringing to tax a sum of Rs.99,51,823/- by invoking the provisions of section 41(1) of the Income Tax Act, 1961 (hereinafter called ‘the Act’). The facts and circumstances under which the aforesaid addition made by the AO was that the assessee company which is engaged in the manufacture of engineering products filed the return of income for the Assessment year 2016-17 declaring a loss of Rs.1,51,62,161/-. In the financials of the assessee, a sum of Rs.99,51,823/- was shown as income with the description ‘liability no longer payable’.

Before CIT(A), the assessee pointed out that during the year under consideration, the assessee, through the order of Hon'ble National Company Law Tribunal, got amalgamated with its holding company called Rollon Hydraulics Pvt.Ltd. The amalgamation was effective from 1st April 2016. In view of the amalgamation, the financials were prepared as of 31st March 2016 and entire Profit & Loss account was prepared as per the Companies Act requirement and taking note of discontinuance of operation, which has been disclosed in the notes forming part of the account as Item No.2.19. As per the terms of amalgamation, its group companies due of Rs.99,51,823/- was reversed to Profit & Loss account as liability no longer payable. This amount is External Credit Borrowings (ECBO from its original promoters SKIP TROTTER. According to the Assessee, the loan amount was towards capital account and not on account of any Revenue Expenditure. The liability so written off as no longer payable was reduced from the loss and a total loss of Rs.1,51,62,161/- was declared in the return of income. The Assessee contended that section 41(1) of the Act, is not applicable as the Assessee did not have the benefit of claiming the sum which was written off as liability in computing total income of any earlier year.

The CIT(A) however did not agree with the submissions made by the assessee and made the following observations:

Aggrieved by the order of the CIT(A), assessee has preferred the present appeal before the Tribunal. Learned Counsel for the assessee filed before us a copy of the agreement dated 19.05.2008 between the assessee and trotter manufacturing company represented by Mr. Skip Trotter whereby Skip Trotter agreed to lend to the assessee US$ 750000 for investing in capital items for its project at Peenya Industrial Area, Bengaluru. The terms of the agreement reads as follows: “Whereas the Borrower has approached the Lender and has expressed his needs for funds for investing in the capital items for its project at no 272,peenya Industrial Area Bangalore 560058 and Lender has agreed to lend on the following terms and conditions. This agreement now witnessth as follows.

In respect of the above said borrowing, the assesse has also been granted approval of the Reserve Bank of India vide letter dated 03.06.2008. This approval , a copy of which is at page 3 of the assessee’s Paper Book shows that the loan has been approved by the Reserve Bank of India. The Auditor’s Report for the accounting year ending 31.03.2009 shows that the sum of US$ 750000 is shown as liability in Balance Sheet and correspondingly represents additions to plant and machinery. These documents are very vital for the purpose of deciding the question whether the waiver of the liability in question is on account of capital account or current account. In this regard, the legal position is that section 41(1) of the Act is attracted only when the sum in question is allowed as a deduction to an assessee in any previous year. If the liability is on account of capital account, this condition may not be satisfied. The Hon’ble Supreme Court in the case of CIT Vs. Mahindra and Mahindra Ltd., 404 ITR 1 (SC) held that waiver of loan for acquiring capital asset does not amount to cessation of trading liability and therefore the provisions of section 41(1) of the Act are not attracted. In our opinion, in the light of the documents filed by the assessee before us, viz., the loan agreement dated 19.05.2008, approval of the RBI dated 03.06.2008 and financials for the accounting year 31.03.2009. The issue should be adjudicated afresh by the AO and we therefore set aside the order of CIT(A) and remand the issue to the AO for verification of factual aspect with regard to the nature of liability which stood waived as to whether they are capital account or current account. The documents filed before us are admitted as additional evidence and should be considered by Page 6 of 7 the AO in set aside proceedings. The AO should afford opportunity of being heard to the assessee in the set aside proceedings.

On the question whether Sec.28(iv) of the Act will apply to the facts of the case, we find that the Hyderabad Bench of ITAT in the case of Income- tax Officer Vs Tini Pharma Ltd. order dated 23/05/2018 for AY 2007-08 has taken the view that the said provisions will not be applicable in such cases. In the said case, the assessee company got waiver of the loan amount of Rs. 4,78,30,167/- from the Catholic Syrian bank, which was transferred to capital reserve in its books of account. The AO treated the said amount as trading receipt and brought it to tax u/s 41(1) of the Act. The CIT(A) directed the AO to delete the same as it is not income chargeable to tax which is capital in nature. ITAT upheld the decision of CIT(A) following the judgment in the case of CIT Vs. Graham Firth Steel Products (I) Ltd., [2017] 85 taxmann.com 110 (Bombay), CIT Vs Santogen Silk Mills Ltd [2015]57 taxmann.com 208 (Bombay) and CIT Vs. Xylon Holdings (P) Ltd., [2012] 26 Taxmann.com 333 (Bom.). The alternative submission that the amount of loan written off would be taxable under Section 28(iv) of the Act was also rejected following the decision in the case of Mahindra & Mahindra Ltd. (261 ITR 501 (Bom) wherein it was held that Section 28(iv) of the Act would apply only when a benefit or perquisite is received in kind and has no application where benefit is received in cash or money.