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Income Tax Appellate Tribunal, ‘D’ BENCH, CHENNAI
Before: SHRI G. MANJUNATHA & SHRI ANIKESH BANERJEE
This appeal filed by the assessee is directed against order of the learned Commissioner of Income Tax (Appeals), Puducherry, dated 28.01.2019 and pertains to assessment year 2015-16.
The assessee has raised following grounds of appeal:-
“1. The order passed by the Learned Assessing Officer is contrary to the facts, law and circumstances of the case and the principles of natural justice and is therefore unsustainable.
2. The Id AO erred in the ad hoc addition of income of Rs. 3,39,77,243/-.
3. This ground of appeal is about deleting the addition made on account of waive off of the Loan outstanding for capital liability during the relevant year amounting to Rs.3,39,77,243/- as stated in the assessment order by invoking provision of Sec 28 and Sec 41(1)of the Income Tax Act 1961.
The Ld. AO had construed that all the cessation of liability claimed by the appellant company into the trading receipts without applying the provision of taxation of book profits of the Income tax Act 1961.
The Learned AO had interpreted the provision of Sec 28 and Sec 41(1) Income Tax act 1961 without applying the test of trading activities as envisaged by the statute governing the taxation of revenue receipts.
The learned Assessing Officer grossly erred in ignoring several reasonable, plausible objections which had material bearing on the impugned case, ignoring the same is unjustified, bad in law, is in utter violation of principles of natural justice and ought to have been considered.
7. For that the Ld. Assessing Officer has failed to appreciate the fact that the amount of loan has been settled under the scheme of reconstruction of sick industry as per the order of the BIFR and therefore, it cannot be treated as a deemed income u/s. 41 of the Income tax Act 1961.
8. For that in view of the facts and in the circumstances of the case the AO is wholly unjustified in charging interest u/s 234B for which your petitioner denies its liability and in view of the facts and in the circumstances of the case it may kindly be held accordingly.”
Brief facts of the case are that the assessee company had filed its return of income for the assessment year 2015-16 on 31.10.2015 declaring total income of Rs. Nil. The assessee company was a sick company as declared by the Board for Industrial & Financial Reconstruction (BIFR) vide its order dated 04.05.1999. As per order of the BIFR dated 17.05.2012, it has allowed certain relief and concession in respect of various liabilities. During the financial year relevant to assessment year 2015-16, the assessee company has credited its profit & loss account a sum of Rs.3,39,77,245/- towards remission of capital liability, however, excluded the sum from profits / income in the statement of total income. The relevant details of reliefs and concessions allowed by BIFR in their order dated 17.05.2012 and consequent directions to the income tax authorities in terms of section 41(1) , section 79, section 80 r.w.s 139(3), section 43B, section 72(3) and section 115JB of the Income Tax Act, 1961 are as under:-
“10.1.3 From Hire Purchase & Lease Creditors: (a) Out of eleven hire purchase and leasing creditors, the company has already settled and paid dues of two creditors, viz. MIs Sundaram Financial Services (Rs. 1.45 lakhs) and M/s India Equipment Leasing Ltd. (Rs.0.93 lakhs).
(b) Remaining nine such creditors to accept 10% of the principal outstanding of their dues as full and final settlement as per the following details:(In Lakhs)
(c) The respective amounts shall be paid in five equal annual instalments on interest free basis after a moratorium of one year, i.e. first instalment shall be paid on 31.03.2012 and subsequent instalments shall be paid after interval of one year. (d) After payment of the settlement amount in full, the said parties shall not have any claim over the assets leased or given on H.P. to the sick company and ownership over the said assets shall be transferred to the sick company.
10.2 From Income Tax Authorities (CBDT) To exempt the company from the applicability of provision of sections 41(1), Section 79, Section 80 read with section 139(3), Section 43B, Section 72(3) and Section 1I5JB of the Income Tax Act, 1961.
10.7 From Unsecured/Sundry Creditors
The unsecured liabilities shall be paid only at 10% of the principal amount, over a period of five years on interest free basis. All the penal interest, damages, penalties charged or chargeable on the same and balance of the principal amount shall be waived.”
From the order of the BIFR, it is noticed that the assessee company was given relief from payment of 90% of principal component owing to loan and other creditors. Further, the BIFR has also directed the income-tax department to exempt the assessee company from application of provisions of section 41(1) of the Income Tax Act, 1961. The Assessing Officer, however, was not convinced with the explanation furnished by the assessee according to him, although, BIFR had granted relief of 90% with respect to secured and unsecured creditors and also granted relief as per section 41(1) of the Income Tax Act, 1961, but the Directorate of Income Tax (Recovery) had passed an order and rejected and not approved any relief to the assessee in terms of scheme sanctioned by the BIFR. Therefore, the Assessing Officer invoked provisions of section 41(1) of the Act, and assessed remission of liability under the provisions of section 41(1) of the Income Tax Act, 1961. The Assessing Officer, while doing so, has relied upon the decision of the Hon'ble Supreme Court in the case of CIT Vs TVS Sundaram Iyengar & Sons and stated that even remission of capital liability would become income of the assessee, when it becomes assessee’s own money.
4. Being aggrieved by the assessment order, the assessee preferred an appeal before the learned CIT(A). Before the learned CIT(A), the assessee has reiterated its submissions made before the Assessing Officer and submitted that remission of capital liability by virtue of scheme sanctioned by the BIFR cannot be brought to tax u/s.41(1) of the Income Tax Act, 1961, because the BIFR has granted immunity from taxation by specific direction in their order. The learned CIT(A), after considering relevant submissions and also taken note of provisions of section 41(1) r.w.s 2(24) of the Income Tax Act, 1961, opined that order of the BIFR is not explicit and thus, Directorate of Income Tax (Recovery) has rejected claim of the assessee and therefore, the Assessing Officer is right in bringing to tax cessation of liability u/s.41(1) of the Income Tax Act, 1961. The relevant findings of the learned CIT(A) are as under:-
“5.4 In appeal, the AR of the appellant was asked to submit necessary evidences in support of the claim and the Grounds of Appeal by posting the case for hearings on 19/9/2018, 4/10/2018, 13/11/2018, and 8/11/2018. None of these dates, the AR of the appellant could prove with evidence the claim of the appellant. The AR was asked to give detailed reply on a) the quantification of remission of capital liability, b) nature of the transaction (trading or capital), c) the confirmations related to transactions with the financial institutions who failed to respond the queries raided under section 133(6), d) correct address of the institutions, e) details of transactions and the 1) the reasons for inapplicability of case laws relied by the AO.
5.5 The AR of the appellant did not give any of the details. AR merely quoted the BIFR order (mentioned in the Assessment Order) without giving arty details about the transactions on which addition has been made. DIT recovery has passed on order (as mentioned in the Assessment Order) that the competent authority has not approved the order of BIFR Court dated 17/5/2012. It is mentioned that the ‘case is treated as processed and the file has been closed”. In the absence of any details as requested, it is not possible to verify the claim of the appellant. The order of the BIFR court is not explicit on the above and the communication from the DIT (Recovery) indicates that the same has not been accepted. Even otherwise, in order to apply the directions, if any, of the BIFR court, one has to look into its applicability by examining the transactions/ liability. For doing that, the appellant was asked to submit details and the same were not provided, independent inquiries carried out by the AO also did not fetch any results to accept the claim of appellant. This was pointed out to the AR of the appellant during various hearings and no details were provided on the specific queries made during appeal proceedings. The case laws relied on by the appellant are not related the facts of the case. On the contrary, the decision of Supreme Court in the case of M/s. T V Sundaram lyengar & Sons, as cited by AO, is applicable to the given facts.
5.6 in the above facts and circumstances, I confirm the order of Assessing officer, who, on the basis of available records, rightly disallowed Rs.3,39,77,243/-.”
5. The learned A.R for the assessee submitted that the learned CIT(A) erred in confirming additions made by the Assessing Officer towards cessation of capital liability in terms of scheme sanctioned by the BIFR without appreciating fact that order passed by the BIFR is binding on the Assessing Officer and thus, once there is specific direction from the BIFR for excluding relief granted to the liability u/s.41(1) of the Act, the Assessing Officer has erred in invoking provisions of section 41 (1) of the Act to bring into taxation of cessation of liability. The learned A.R further submitted that even otherwise, amount credited to profit & loss account on account of remission of liability is not taxable u/s.41(1), because out of total relief and concession allowed by the BIFR a sum of Rs.2,55,53,342/- pertains to various unsecured loans taken by the assessee from financial institutions for purchase of assets and consequently, cessation of liability by the financial institutions became capital account and same cannot be brought to tax u/s.41(1) of the Income Tax Act, 1961. The learned A.R further submitted that as regards a sum of Rs.84,23,901/- remission allowed by the BIFR, those advances are taken from customers for purchase of assets and not for business purposes. Therefore, once liability is on account of capital account, then remission of said liability cannot be brought to tax u/s.41(1) of the Income Tax Act, 1961. In this regard, the learned A.R for the assessee has filed paper book, which contains loan agreements with financial institutions and also confirmation from the parties to prove that advances were taken for purchase of assets. The assessee had also relied upon decision of the ITAT., Pune Bench in the case of Kirloskar Oil Engines Ltd. Vs. DCIT in dated 27.06.2012 and also decision of the Hon'ble Supreme Court in the case of CIT Vs. Mahindra & Mahindra Ltd, (2018) 404 ITR 1(SC).
6. The learned DR, on the other hand, strongly supporting order of the learned CIT(A), submitted that scheme sanctioned by the BIFR has not been approved by the Directorate of Income Tax (Recovery), in terms of section 41(1) of the Income Tax Act, 1961, and thus, the Assessing Officer has very rightly brought to tax cessation of liability u/s.41(1) of the Income Tax Act, 1961. The learned CIT(A), after considering relevant facts, has rightly sustained additions made by the Assessing Officer and their orders should be upheld.
We have heard both the parties, perused material available on record and gone through orders of the authorities below. The assessee is a sick company under Sick Industrial Companies (Special Provisions) Act. The BIFR vide its order dated 04.05.1999 declared the company as sick industry.
Further, the BIFR has allowed certain reliefs and concessions vide its order dated 17.05.2012, as per which, the Board has granted 90% relief with respect to secured and unsecured to creditors and also granted relief under the provisions of Income Tax Act, 1961. Therefore, from the order of the BIFR, it is very clear that reliefs and concessions allowed towards repayment of liability cannot be brought to tax u/s.41(1) of the Income Tax Act, 1961. Further, as per the provisions of section 32 of Sick Industrial Companies Act, 1985, order of the BIFR is binding on the Assessing Officer, because once there is direction, it overrides all other provisions, including provisions of Income Tax Act, 1961. In this case, there is a specific direction from the BIFR to the income-tax department to allow immunity from the provisions of section 41(1) and other relevant provisions of the Income Tax Act, 1961. Therefore, we are of the considered view that once there is immunity from the provisions of section 41(1) of the Income Tax Act, 1961, whatever amount credited to profit & loss account on account of remission / cessation of liability, then same cannot be brought to tax u/s.41(1) of the Income Tax Act, 1961. This view is fortified by the decision of the ITAT., Pune Bench in the case of M/s.Kriloskar Oil Engines Ltd. in where the Tribunal, after considering relevant facts has held that directions given by the BIFR is binding on the Assessing Officer and thus, remission / cessation of liability cannot be brought to tax u/s.41(1) of the Income Tax Act, 1961.
Be that as it may, but fact remains that since the Assessing Officer has invoked provisions of section 41(1) of the Income Tax Act, 1961, and assessed cessation of liability u/s.41(1) of the Income Tax Act, 1961, the issue needs to be decided in light of provisions of section 41(1) of the Income Tax Act, 1961 and relevant provisions are read as under:-
“Profits chargeable to tax. 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 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;”
A plain reading of section 41(1) of the Income Tax Act, 1961, it is very clear that in order to bring any sum u/s.41(1), the first condition should be deduction has been allowed towards any expenditure or trading liability and subsequently, during any previous year, the assessee has obtained whether in cash or in any other manner, 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, then 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.
In this case, if you go through nature of liability on which relief availed by the assessee by the order of BIFR, all those loans are taken from financial institutions for acquiring capital asset. Further, from the observation of the Assessing Officer it can be summarized that out of Rs.3,39,77,243/-, remission of Rs.2,55,53,342/- was pertaining to unsecured loans from financial institutions and balance sum of Rs.84,23,901/- was in respect of advances. Insofar as remission of unsecured loans from financial institutions amounting to Rs.2,55,53,342/-, the BIFR in its order has given categorical finding that Rs.2,84,70,132/- represents outstanding principal relating to hire purchase and loans, accordingly, directed respective financial institutions to transfer ownership of assets acquired under hire purchase to the assessee company upon payment of 10% of outstanding amount. Therefore, from the findings of the BIFR, it is clear that a sum of Rs.2,55,53,342/- pertains to remission of unsecured loans taken from financial institutions was utilized for acquiring capital asset and thus, remission of such liability would be in the nature of capital receipts and cannot be brought to tax u/s.41(1) of the Income Tax Act, 1961. Further, the assessee has disclosed those unsecured loans in its balance sheet since 2008 onwards, and this disclosure establishes fact that the assessee company never claimed deduction in respect of principal component of loan waived by the financial institutions. We further noted that the assessee had also filed copies of loan agreement and sanction letters from various financial institutions and from perusal of sanction letters, it is noticed that the assessee had availed loans for purchase of various plant & machinery. Therefore, from the above, it is very clear that amount credited to profit & loss account towards remission of liability by the order of BIFR is capital liability and thus, remission of such liability cannot be brought to tax u/s.41(1) of the Income Tax Act, 1961. This legal principle is supported by the decision of the Hon'ble Supreme Court in the case of CIT Vs Mahindra & Mahindra Ltd (2018) 404 ITR 1 (SC), where it has been considered an identical issue and held that waiver of loan for acquiring capital assets cannot be treated as remission of trading liability and brought to tax u/s.41(1) of the Income Tax Act, 1961 or u/s.28(iv) of the Income Tax Act, 1961. Therefore, we are of the considered view that the Assessing Officer has erred in assessing cessation of liability towards unsecured loans availed from financial institutions in terms of order of the BIFR u/s.41(1) of the Income Tax Act, 1961. Hence, we direct the Assessing Officer to delete additions made towards remission/ cessation of liability u/s.41(1) of the Act to the extent of Rs.2,55,53,342/-.
Now, coming to liability pertains to advance from customers and loan from others. The assessee had availed advance from customers and loans from others to the tune of Rs.92,52,501/-. The BIFR in their order has given relief to the extent of 90% which comes to Rs.84,23,901/-. It was argument of the assessee before the Assessing Officer as well as before us that advances from customers represent amount received towards proposed sale of capital asset and thus, same cannot be brought to tax u/s.41(1) of the Income Tax Act, 1961. We have gone through reasons given by the learned A.R for the assessee in light of financial statements filed for relevant assessment year and we find that the assessee has disclosed advance from customers and further, the assessee never claimed any deduction in the earlier years. Further, the assessee had entered into MoU with M/s.Pioneer Embroideries Ltd. to sell its assets for lump sum consideration. Therefore, from the above, what we could notice is that liabilities mentioned in Table 2 of the assessment order, except fixed deposits are capital advances. However, facts with regard to nature of advances and purpose of taking such advances are not clear from details filed by the assessee, Although, the assessee has filed MoU with M/s. Pioneer Embroideries Ltd., but based on said MoU alone, it cannot be decided that liabilities are in the nature of capital liability, which is outside scope of section 41(1) of the Income Tax Act, 1961. Therefore, we are of the considered view that remission of liability to the extent of Rs.84,23,901/- pertains to advance received from customers and loan from others needs verification from the Assessing Officer. Therefore, we set aside this aspect to the file of the Assessing Officer and direct the Assessing Officer to re-examine the issue in light of various details filed by the assessee and also obtain confirmation from parties regarding nature of liability. In case, parties confirm fact that advances are for sale of assets, then the Assessing Officer is directed to delete additions made towards remission/cessation of liability u/s.14(1) of the Income Tax Act, 1961.
In the result, appeal filed by the assessee is treated as allowed for statistical purposes.