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Income Tax Appellate Tribunal, “B” BENCH : BANGALORE
Before: SHRI N.V. VASUDEVAN & SHRI CHANDRA POOJARI
Date of hearing : 28.10.2021 Date of Pronouncement : 10.11.2021 O R D E R
Per N.V. Vasudevan, Vice President
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’.
Page 2 of 7 However in the computation of total income the same was excluded. The AO added the same on the ground that it was a case of remission or cessation of liability and therefore had to be regarded as income under section 41(1) of the Income Tax Act, 1961 (Act).
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:
“I have considered the grounds and written submissions of the AR. The liability written off amounting to Rs 99.51,823/- that has been credited to the P&L account this year was shown in the Page 3 of 7 preceding year i.e., in the year ended 31-03-2015 as ECB loan from SKIP TROTTER under long term borrowings in the balance sheet. The business in relation to which this loan was taken has been discontinued this year. As per notes to the accounts for this year, at 2.19, it is stated that the company has, during the year. decided to discontinue its operations and divest its business to M/s Rollon Hydraulics Private Limited. Accordingly, the company has received a net consideration of Rs 6.26 crores Rollon Hydraulics Private Limited against the sale of business. Loss on sale of this business has been separately shown in the P&L account. The assets and liabilities pertaining to the discontinued business are reported as below in the said notes: As at 31 March, As at 31 March, 2016 2015 Particulars Tangible assets 6,98,38,022 1ong term loans and advances 10,000 49,38,755 inventories - 2,13,55,927 - Trade receivable. 1,10,43,780 Cash and cash equivalents 31,58,768 75,91,658 1,68,57,922 Short-terra loans and advances 8.58,564 1 40,37,332 Total Assets 13,16,26,064 - 6,49,07,860 Long term borrowings 91,29,816 Deferred tax liabilities (Nee - 4,17,605 Long-term Provision 6,01,110 Short-term borrowings Trade payables 98.38.990 Other current liabilities 22,04,445 1,34,73,7661 - 22,67,287 Short-term provisions Total Liabilities 22,04,445 10,06,36,434 18,22,887 3,09,89,629
The above liability due to SKIP TROTTER of Rs 99,51,823/- was shown as part of long term borrowings of Rs 6.49,07.860/- as on 31-03-2015. The appellant has shown no evidence to state that the said liability was capital liability. So, a natural presumption arises that the said liability written off is incurred in relation to acquiring inventories and other current assets of the discontinued business. Therefore, such liability
Page 4 of 7 written off has to be treated as covered u/s 41(1). Secondly. it is noted that the liability written off in the course of reorganization of appellant's business is a benefit arising from business which is covered u/s 28(iv). Thus, I am convinced that the AO has rightly added back Rs.99,51,823/- and uphold the addition. The grounds are therefore rejected.
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.
1.The amount of the Loan is USD 750000 2.The Rate of interest is 4% PA payable annually. 3.The period of the loan is 3 years from the date it is received by the borrower. 4.The purpose of the loan is to utilize the proceeds for the purchase of capital equipments for the borrowers new plant coming up at no 271/272 Peenya Industrial Area, Bangalore 560058 5.The loan has to be repaid on demand after the expiry of period mentioned in clause no 3 above.
Page 5 of 7 6.The loan has to be repaid in USD in which currency it is received. 7.The loan cannot be repaid within a period of 3 years”
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.
Page 7 of 7 8. In the result, appeal by the assessee is treated as allowed for statistical purposes.
Pronounced in the open court on the date mentioned on the caption page.