ITO, NEW DELHI vs. M/S. M.J. INTERNATIONAL PVT. LTD., UTTAR PRADESH

PER KULDIP SINGH, JUDICIAL MEMBER : Present cross appeals filed by the assessee as well as by the

revenue are being disposed off by way of composite order to avoid

repetition of discussion.

referred to as ‘the Revenue’), by filing the present appeals being

ITA Nos.6191/Del/2012 & 6192/Del/2012, sought to set aside the

impugned orders both dated 10.09.2012 passed by Ld. CIT

(Appeals)-IX, New Delhi qua the Assessment Year 2009-10 on the

identical grounds except the difference of amount of addition inter

alia that :-

3 ITA Nos.6191 & 6192/Del./2012 ITA Nos.6296, 6297 & 6298/Del./2012

“1. Whether on the facts and in the circumstances of the case, Learn CIT(A)-IX has erred in restricting the addition u/s 41(1) of the Act on account of waiver of working capital loan (to Rs.2,32,37,364/- as against Rs.4,02,76,413/- and Rs.3,11,37,526/- as against Rs.4,15,65,691/- in ITA Nos.6191/Del/2012 & 6192/Del/2012 respectively) worked out by the A.O. 2. Whether the Ld.CIT(A) erred in restricting the disallowance by merely stating that there was a mistake in computation of disallowance, without examining and appreciating that the disallowance was computed by the A. a. after detailed discussion and reasoning given in the assessment order. 3. Whether the Ld.CIT(A) erred in restricting the disallowance without pointing out the alleged mistake in computation of disallowance by the A.O. in the assessment order. 4. Whether the Ld.CIT(A) erred in accepting the contention of the assessee about mistake in computation without affording any opportunity to the A.O. to explain the same.”

M.J. Global Pvt. Ltd. (hereinafter referred to as ‘the assessee’), by

filing the present appeals being ITA No.6296/Del/2012 and

6298/Del/2012 respectively, sought to set aside the impugned

orders both dated 10.09.2012 passed by Ld. CIT (Appeals)-IX,

New Delhi qua the Assessment Year 2009-10 on the identical

grounds except the difference of amount of addition inter alia

that:-

“1. The orders passed by the Ld. AO and CIT (A) are erroneous and bad in law. 2. That the Ld. CIT (A) erred in not appreciating or considering the cases of the jurisdictional High Court, titled CIT v Siel Holding Limited [207 Taxman 6 (Delhi)(Mag.)], CIT v Vardhman Overseas Ltd. [343 ITR 408 (Delhi)] and CIT vs.

4 ITA Nos.6191 & 6192/Del./2012 ITA Nos.6296, 6297 & 6298/Del./2012

Phool Chand Jivan Ram [131 ITR 37 (Delhi)] which are squarely applicable to the present case. 3. That the judgment, relied upon by the Ld. A.O and CIT (A), in the sincere belief of the appellant, lacks precedential value and hence, cannot be relied on in the present case. 4. The Ld. CIT (A) erred in restricting the addition made by the A.O (of Rs.4,15,65,691/- to 2,32,37,364/- and Rs.4,99,23,273/- to Rs.1,17,85,880/-), without appreciating the fact that the provisions of section 41 (1) of the Income Tax Act, 1961 are not attracted to the facts of the case and that the entire basis of the addition is illegal, arbitrary and misconceived. 5. The Appellant was entitled to consequential relief as regards the appropriate adjustment against brought forward losses which was denied to it by the Ld. CIT (A). 6. The Ld. A.O. wrongly initiated penalty proceedings against the Appellant and the Ld. CIT (A) erred in refusing to delete the penalty proceedings. The Appellant submits that initiation of the penalty proceedings is totally unwarranted in the facts and circumstances of the present case.”

referred to as ‘the assessee’), by filing the present appeal being

ITA No.6297/Del/2012, sought to set aside the impugned order

dated 10.09.2012 passed by Ld. CIT (Appeals)-IX, New Delhi qua

the Assessment Year 2009-10 on the grounds inter alia that :-

““1. The orders passed by the Ld. AO and CIT (A) are erroneous and bad in law. 2. That the Ld. CIT (A) erred in not appreciating or considering the cases of the jurisdictional High Court, titled CIT v Siel Holding Limited [207 Taxman 6 (Delhi)(Mag.)], CIT v Vardhman Overseas Ltd. [343 ITR 408 (Delhi)] and CIT vs. Phool Chand Jivan Ram [131 ITR 37 (Delhi)] which are squarely applicable to the present case. 3. That the judgment, relied upon by the Ld. A.O and CIT (A), in the sincere belief of the appellant, lacks precedential value and hence, cannot be relied on in the present case.

5 ITA Nos.6191 & 6192/Del./2012 ITA Nos.6296, 6297 & 6298/Del./2012

controversy at hand are : Assessee is into the business of

manufacturing of corrugated boxes, printing & packaging and

allied job works. In M/s. M.J. International Private Ltd., M/s. MJ

Global Private Ltd. and M/s. MJ Enterprises Private Limited

belonging to same promoter have availed of loans from Canara

Bank which became Non-Performing Assets (NPA) in the year

2003 for and during AY 2009-10, aforesaid loans were subjected to

one time settlement. One time settlement of due liability of MJ

Group is extracted for ready perusal as under :-

6 ITA Nos.6191 & 6192/Del./2012 ITA Nos.6296, 6297 & 6298/Del./2012

DETAILS OF ONE TIME SETTLEMENT OF DUE LIABILITIES WITH CANARA BANK OF MJ GROUP Company Loan for Value of Value of Total Total loan Settlement Waiver Name plant & book debts/ Dyes, working amount machinery/ SSB/ ILC negatives capital loan Building / positives Other fixed and assets machinery/ motor tools separate parts though of capital nature but shown in stock statement for arriving drawing power M J 57,049,719 532,488 30,251,340 30,783,828 87,833,547 22,000,000 65,833,547 Internationa l Pvt. Ltd. M J 80,153,000 2,741,501 22,028,772 24,770,273 104,923,273 55,000,000 49,923,273 Global Pvt. Ltd. M J 29,584,985 11,482,438 30,178,671 41,661,109 71,246,094 18,000,000 53,246,094 Enterprises Pvt. Ltd.

account of one time settlement is taxable under section 41(1) of the

Income-tax Act, 1961 in the hands of the assessee and taken the

view that waiver of term loan for acquisition of capital assets does

not come under the purview of section 41(1) of the Income-tax

Act, 1961 (for short ‘the Act’) whereas waiver of working capital

loan is remission of liability covered under the provisions of

section 41(1) of the Act. Consequently, loan amount of

7 ITA Nos.6191 & 6192/Del./2012 ITA Nos.6296, 6297 & 6298/Del./2012 Rs.5,56,17,916/- in AY 2009-10 respectively being working capital

loan has been subjected to tax under the provisions contained under

section 41(1) of the act and made addition thereof to the total

income of the assessee.

contained under section 14A made disallowance of Rs.2,02,436/-.

appeals who has partly allowed the appeals. Feeling aggrieved, the

assessee as well as the Revenue have come up before the Tribunal

by way of filing the present appeals.

parties to the appeal, gone through the documents relied upon and

orders passed by the revenue authorities below in the light of the

facts and circumstances of the case.

GROUND NO.1 OF ITA NOS.6296/DEL/2012, 6297/DEL/2012 & 6298/DEL/2012 (ASSESSEE’S APPEAL)

6298/del/2012 of assessee’s appeal is general in nature, hence

needs not adjudication.

8 ITA Nos.6191 & 6192/Del./2012 ITA Nos.6296, 6297 & 6298/Del./2012 GROUNDS NO.2, 3, 4 & 5 OF ITA NOS.6296/DEL/2012 & 6298/DEL/2012 (ASSESSEE’S APPEAL)

GROUNDS NO.2, 3, 4 & 6 OF ITA NOS. 6297/DEL/2012 (ASSESSEE’S APPEAL)

AND GROUNDS NO.1, 2, 3 & 4 OF ITA NOS.6191/DEL/2012 & 6192/DEL/2012 (REVENUE’S APPEAL)

and in case of MJ Enterprises Private Limited, the Revenue has

challenged the relief given by the ld. CIT (A) by restricting the

addition from Rs.4,02,76,413/- to Rs.2,32,37,364/- and

Rs.4,15,65,691/- to Rs.3,11,37,526/- in cases of MJ International

Private Ltd. and MJ Enterprises Private Ltd. respectively under

section 41(1) of the Act. Ld. DR for the Revenue also filed written

submissions dated 17.04.2018 which has been made part of the

judicial record. However, at the time of argument, the ld. DR for

the Revenue stated that on receipt of report given by AO as to the

computation of disallowance under section 41(1) of the Act, the

Revenue has left with no grievance. In the circumstances,

Revenue’s appeals being ITA Nos.6191/Del/2012 & 6192/del/2012

stand dismissed.

Bank which became NPA in the year 2003-04 and the assessee has

9 ITA Nos.6191 & 6192/Del./2012 ITA Nos.6296, 6297 & 6298/Del./2012 opted for one time settlement. It is also not in dispute that the AO

has accepted the waiver of term loan availed of for acquisition of

capital asset not covered under section 41(1) of the Act. It is also

not in dispute that AO has subjected waiver of loan taken by the

assessee for working capital under section 41(1) of the Act.

the case, the sole question arises for determination in this case is :-

“as to whether waiver of loan availed of by the assessee for working capital falls within the purview of section 41(1) of the Act.

Rs.8,78,33,547/- was settled for Rs.2,20,00,000/- with net waiver

amount of Rs.6,58,33,547/- as detailed at page 2 of the assessment

order. It is the case of the assessee that the working capital loan is

stated at Rs.3,07,83,828/- and given its break up as under :-

Value of book debts / SSB / ILC 5,32,488/- Value of dyes, negatives, positives and machinery / motor tools spare parts though of capital nature but shown in stock statement for arranging drawing power 3,02,51,340/- Total 3,07,83,828/-

and machinery tools are of capital in nature and as such, the

10 ITA Nos.6191 & 6192/Del./2012 ITA Nos.6296, 6297 & 6298/Del./2012

working capital loan and waiver thereof also amounted to

remission of the term loan and as such not chargeable to tax under

section 41(1) of the Act.

rendered by Hon’ble Supreme Court in case cited as CIT vs.

Mahindra and Mahindra Ltd. – Civil Appeal Nos.6949-6950 of

2006 order dated 24.04.2018 further contended that the AO has

wrongly treated the proportionate amount of entire working capital

loan of Rs.3,07,83,828/- as taxable under section 41(1) of the Act

whereas out of the said loan, Rs.3,02,51,340/- is on account of loan

of capital nature to which provisions of section 41(1) of the Act are

not applicable.

Ltd. (supra) decided the identical issue in favour of the assessee

wherein following questions of law were framed :-

“5. The short point for consideration before this Court is whether in the present facts and circumstances of the case the sum of Rs.57,74,064/- due by the Respondent to Kaiser Jeep Corporation which later on waived off by the lender constitute taxable income of the Respondent or not?” “14) Another important issue which arises is the applicability of the Section 41 (1) of the IT Act. The said provision is re- produced as under: “41. Profits chargeable to tax.- (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

11 ITA Nos.6191 & 6192/Del./2012 ITA Nos.6296, 6297 & 6298/Del./2012

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 byway 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 xxx”

favour of the assessee by returning following findings :-

“13) On a plain reading of Section 28 (iv) of the IT Act, prima facie, it appears that for the applicability of the said provision, the income which can be taxed shall arise from the business or profession. Also, in order to invoke the provision of Section 28 (iv) of the IT Act, the benefit which is received has to be in some other form rather than in the shape of money. In the present case, it is a matter of record that the amount of Rs.57,74,064/- is having received as cash receipt due to the waiver of loan. Therefore, the very first condition of Section 28 (iv) of the IT Act which says any benefit or perquisite arising from the business shall be in the form of benefit or perquisite other than in the shape of money, is not satisfied in the present case. Hence, in our view, in no circumstances, it can be said that the amount of Rs 57,74,064/- can be taxed under the provisions of Section 28 (iv) of the IT Act.

14) Another important issue which arises is the applicability of the Section 41 (1) of the IT Act. The said provision is re- produced as under: “41. Profits chargeable to tax.- (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,-

12 ITA Nos.6191 & 6192/Del./2012 ITA Nos.6296, 6297 & 6298/Del./2012

(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 byway 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 x x x”

15) On a perusal of the said provision, it is evident that 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 of the IT Act. The objective behind this Section is simple. It is made to ensure that the assessee does not get away with a double benefit once by way of deduction and another by not being taxed on the benefit received by him in the later year with reference to deduction allowed earlier in case of remission of such liability. It is undisputed fact that the Respondent had been paying interest at 6 % per annum to the KJC as per the contract but the assessee never claimed deduction for payment of interest under Section 36 (1) (iii) of the IT Act. In the case at hand, learned CIT (A) relied upon Section 41 (1) of the IT Act and held that the Respondent had received amortization benefit. Amortization is an accounting term that refers to the process of allocating the cost of an asset over a period of time, hence, it is nothing else than depreciation. Depreciation is a reduction in the value of an asset over time, in particular, to wear and tear. Therefore, the deduction claimed by the Respondent in previous assessment years was due to the deprecation of the machine and not on the interest paid by it.

16) Moreover, the purchase effected from the Kaiser Jeep Corporation is in respect of plant, machinery and tooling equipments which are capital assets of the Respondent. It is important to note that the said purchase amount had not been debited to the trading account or to the profit or loss account in any of the assessment years. Here, we deem it proper to mention that there is difference between ‘trading liability’ and ‘other liability’. Section 41 (1) of the IT Act particularly deals with the remission of trading liability. Whereas in the instant case, waiver

13 ITA Nos.6191 & 6192/Del./2012 ITA Nos.6296, 6297 & 6298/Del./2012

of loan amounts to cessation of liability other than trading liability. Hence, we find no force in the argument of the Revenue that the case of the Respondent would fall under Section 41 (1) of the IT Act. 17) To sum up, we are not inclined to interfere with the judgment and order passed by the High court in view of the following reasons: (a) Section 28(iv) of the IT Act does not apply on the present case since the receipts of Rs 57,74,064/- are in the nature of cash or money. (b) Section 41(1) of the IT Act does not apply since waiver of loan does not amount to cessation of trading liability. It is a matter of record that the Respondent has not claimed any deduction under Section36 (1) (iii) of the IT Act qua the payment of interest in any previous year. 18) In view of above discussion, we are of the considered view that these appeals are devoid of merits and deserve to be dismissed.”

Mahindra Ltd. (supra) as culled out by the Hon’ble Apex Court,

we are of the considered view that section 41(1) of the Act

specifically deals with the remission of trading liability, whereas in

the instant case, assessee claimed that the AO has considered entire

working capital loan of Rs.3,07,83,828/- to work out the

proportionate amount to be taxable under section 41(1) of the Act

whereas out of working capital loan of Rs.3,07,83,828/-, loan of

Rs.3,02,51,340/- represents loan of capital nature being the values

of dyes, negatives, positives and machinery / motor tools spare

parts though of capital nature but shown in stock statement for

14 ITA Nos.6191 & 6192/Del./2012 ITA Nos.6296, 6297 & 6298/Del./2012 arranging drawing power and the working capital loan works out to

be Rs.3,91,113/- only as per following calculation :-

A Term Loan for acquisition 8,73,01,059 of capital goods B Working capital loan 5,32,488 C Total Loan A + B 8,78,33,547 D Waiver amount of loan 6,58,33,547 Hence total waiver attributable to 5,32,488 x working capital loan 6,58,33,547 / 8,78,33,547 = 3,99,113/-

the addition under section 41(1) of the Act at Rs.2,32,37,364/- as

against Rs.4,02,76,413/- made by the AO on account of mistake in

computation of disallowance by the AO. So, we are of the

considered view that entire working loan of Rs.3,07,83,828/-

cannot be subjected to tax under section 41(1) of the Act rather

loan of Rs.3,02,51,340/- is to be treated as loan of capital nature to

which provisions contained under section 41(1) are not applicable

as per ratio of the judgment of Mahindra and Mahindra Ltd.

(supra). So, AO is directed to verify the calculation given by the

assessee and to tax the waiver attributable to the working capital

loan of Rs.3,91,113/- only as per the calculation given by the

assessee. Consequently, Grounds No.2, 3, 4 & 5 of ITA

15 ITA Nos.6191 & 6192/Del./2012 ITA Nos.6296, 6297 & 6298/Del./2012 Nos.6296/Del/ 2012 & 6298/Del/2012 and Grounds No.2, 3, 4 &

6 of ITA No. 6297/Del/2012 raised by the assessees in AY 2009-

10 are determined in favour of the assessee.

GROUND NO.5 OF ITA NO.6297/DEL/2012 (ASSESSEE’S APPEAL)

read with Rule 8D of the Income-tax Rules, 1962 (for short ‘the

Rules) made a disallowance of Rs.2,02,436/- which has also been

confirmed by the ld. CIT (A).

received any dividend income or exempt income during the year

under assessment, no disallowance can be made and relied upon

the decision rendered by the Hon’ble Supreme Court in the case of

CIT (Central)-1 vs. M/s. Chettinad Logistics Pvt. Ltd. vide SLP

No.15631/2018 dated 02.07.2018 and Hon’ble Delhi High Court

in CIT vs. Holcim India Pvt. Ltd. in ITA Nos. 486/2014 &

299/2014 dated 17.10.2014.

Ltd. (supra) has dismissed the SLP filed by the Revenue against the

order of Hon’ble Madras High Court, ratio of which is that, “where

there is no exempt income forming part of the total income of the

16 ITA Nos.6191 & 6192/Del./2012 ITA Nos.6296, 6297 & 6298/Del./2012 assessee during the year under assessment, no disallowance can be

made u/s 14A of the Act.”

and Hon’ble Supreme Court in Godrej & Boyce Manufacturing

Company Ltd. vs. DCIT – 394 ITR 449 (SC) has held that, “when

the assessee has not earned dividend income forming part of the

total income during the year under assessment, section 14A read

with Rule 8D is not attracted.” So, following the law laid down by

Hon’ble Supreme Court and Hon’ble High Courts, we are of the

considered view that when undisputedly assessee has not earned

any exempt income/dividend income during the year under

assessment, no disallowance u/s 14A can be made. Consequently,

Ground No.5 of ITA No.6297/Del/2012 raised by the assessee in

AY 2009-10 are determined in favour of the assessee.

GROUNDS NO.6 OF ITA NOS.6296/DEL/2012 & 6298/DEL/2012 (ASSESSEE’S APPEAL) AND GROUND NO.7 OF 6297/DEL/2012 (ASSESSEE’S APPEAL)

and Ground No.7 of ITA No. 6297/Del/2012 raised by the

assessees in AY 2009-10 8 being premature needs no specific

findings.

17 ITA Nos.6191 & 6192/Del./2012 ITA Nos.6296, 6297 & 6298/Del./2012 23. Resultantly, ITA Nos.6191/Del/2012 & 6192/Del/2012 filed

by the Revenue are dismissed whereas ITA Nos.6296/Del/2012,

6297/Del/2012 & 6298/Del/2012 filed by the assessees are

allowed. Order pronounced in open court on this 29th day of March, 2019.

Sd/- sd/- (R.K. PANDA) (KULDIP SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated the 29th day of March, 2019 TS Copy forwarded to: 1.Appellant 2.Respondent 3.CIT 4.CIT(A)-IX, New Delhi. 5.CIT(ITAT), New Delhi. AR, ITAT NEW DELHI.