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Income Tax Appellate Tribunal, “D” Bench, Mumbai
Before: Shri Shamim Yahya (AM) & Shri Ravish Sood (JM)
O R D E R Per Shamim Yahya (AM) :- These are appeals by the revenue directed against the respective orders of learned commission of income tax appeals for assessment years 2010-11 and 2011-12.
2. Since the issues involved are common and connected and these appeals were heard together these are being consolidated and disposed of by this common order.
3. Grounds of appeal assessment year 2010-11 :-
1. "Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in not considering the fact that the amount of disallowance u/s 14A has to be computed as per Rule 8D when the computation of the assessee was not found to be correct and as held in the order of the Hon'ble High Court in the case of M/s Godrej & Boyce Mfg. Co. Ltd." 2. "Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition of Rs. 11,10,70,860/-made on account of waiver of principal loan by financial institutions, without appreciating the fact that waiver of loan taken for acquiring capital assets is 2 M/s. Rama Phosphates Ltd.
to be treated as income as held in the order of Hon'ble High Court in the case of Solid Containers Ld Vs. DCIT (2O09) (308 ITR 417)."
4. Grounds of appeal
assessment year 2011-12 :- 1. "Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in not considering the fact that the amount of disallowance u/s 14A has to be computed as per Rule 8D when the computation of the assessee was not found to be correct and as held in the order of the Hon'ble High Court in the case of M/s Godrej & Boyce Mfg. Co. Ltd.
2. "Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition of Rs 3,51,00,000/-made on account of waiver of principal loan by financial institutions, without appreciating the fact that waiver of loan taken for acquiring capital assets is to be treated as income as held in the order of Hon'ble High Court in the case of Solid Containers Ld Vs. DCIT (2009) (3O8 ITR 417).
3. "Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition of Rs 3,46,273/- as bogus purchase as the director of M/s MaaChamunda Sales Pvt. Ltd. has confirmed by filing affidavit before the Sales Tax Department that he had not done any actual purchase/sales & only bills was issued without actual delivery of the material."
5. One common issue raised in these appeals relates to disallowance on account of invoking the provisions of section 14 A.
At the outset it transpires that the issue involved is covered in favour of the assessee as the assessee has not earned any exempt income. Reference in this regard may be decision of honourable Supreme Court in the case of Maxopp Investment Ltd vs CIT, New Delhi the Hon. Supreme Court in Civil Appeal 104-109 of 2015 dated 12.02.2018.
Another common issue raised is treatment of waiver of the amount of principal loan for working capital.
The issue involved here is treatment of principal amount of working capital loan waived by the central bank and IDBI Bank as the income of the assessee. For treating these waivers as income of the assessee the assessing officer has relied upon the decision of honourable jurisdictional High Court in the case of solid containers limited (308 ITR 417).
3 M/s. Rama Phosphates Ltd.
Upon assessee’s appeal learned commission of income tax appeals deleted the addition by placing reliance upon the CIT(A) order for assessment year 2009-10. The learned CIT(A) quoted the following from that order:-
"I have also perused the decision of IT AT Mumbai Bench in the matter of Cipla Investments Ltd. and also of Hon'ble Madras High Court in the case of Iskraemeco Regent Ltd. which holds similar view as held in "Mahindra & Mahindra Ltd." (supra). Hence, on a consideration of the facts involved and applying the legal principle discussed above, I am of the view that the plea of the appellant in the case of waiver of principal amount of debentures of UTI (Rs.7,45,64,838/-) is a Capital surplus arising out of waiver of principal liability is a capital receipt and therefore not income. Accordingly this ground of appeal is allowed."
Against the above order revenue is in appeal before us. We have heard both the Counsel and perused the records.
Learned departmental representative submitted that the issue involved is squarely covered in favour of the revenue by the decision of the honourable Abex court in the case of Mahindra and Mahindra. Learned departmental representative submitted that the said honourable Supreme Court decision had expounded that when the loan was granted for working capital finance purposes the waiver of the same becomes the income of the assessee as revenue income. He submitted that it is only the loan meant for capital asset acquisition, the waiver of the same was under the capital field. Learned departmental representative submitted that in the present case the bank loans were for working capital finance hence the waiver of the same has rightly been treated as the income of the assessee by the Assessing Officer.
Per Contra learned counsel of the assessee submitted that the provisions of section 41(1) are not applicable here in as much as no allowance or deduction has been claimed by the assessee in the past in respect of the bank loan. He further submitted that following case laws supports the proposition canvassed by him. CIT Vs. Compaq Electric Ltd. (101 Taxmann.com 400)(SC) CIT Vs. Reliance Industries Ltd. (102 Taxmann.com 142) (Bombay) ITO Vs. Wasan Exports (P) Ltd. (106 Taxmnn.com 21)(Del)
4 M/s. Rama Phosphates Ltd.
Upon careful consideration we find that the assessing officer in this case has placed reliance upon honourable jurisdictional High Court decision in the case of solid containers Ltd. (supra). In this decision Hon'ble Jurisdictional High Court has held as under :-
In order to examine whether any substantial question of law arises in the present appeal or not, reference to basic facts may be necessary. The Assessee-appellant had taken a loan of Rs.6,86,071/- during the previous year for business purposes which was returned back, as a result of consent terms arrived at between M/s. P.S. Jain Motors on the one hand and the Assessee on the other. The Assessee claimed that the said loan was the capital receipt and has not been claimed as deduction from the taxable income as expenses and therefore, did not come under section 41(1).
As already noticed, this contention was rejected by the Assessing Officer on the ground that credit balance returned back is the income of the Assessee in view of the fact that it is again directly arising out of the business activity of the Assess and was liable to tax under section 28 of the Act. The order was appealed against. Commissioner partially allowed the appeal. Aggrieved from the order of the Income Tax Commissioner (Appeals), further appeal was preferred before the Income Tax Appellate Tribunal which again allowed the appeal on other counts but on the above issue and while relying upon the judgment of the Supreme Court in the case of Commissioner of Income Tax, Madurai v. T.V. Sundaram Iyengar and Sons Ltd., (1996) 6 SCC 294, sustained the view taken by the Commissioner. The Tribunal held as under:
"8. We have carefully considered the submissions made by the rival parties. The assessee company had taken certain loan from M/s. P.S. Jain Motors. This amount was payable to them with interest of Rs.2,83,819/-. The party filed a suit for recovery and thereafter the assessee company filed counter-claims and the matter was settled out of the court whereby the assessee company was not to pay any amount. The assessee company credited to the profit and loss account the interest amount and offered the same for taxation. With regard to the addition of Rs.6,86,071/-, the assessee company directly credited the amount to the reserves account considering the same as capital receipt. It was claimed by the learned counsel that the amount was not a deemed profit under section 41(1) of the Act. According to the learned counsel, this amount cannot be charged even under the provisions of section 28 of the Act as the amount earned is neither a revenue receipt nor intended for revenue account. In this connection, we would like to refer to the decision of the Honourable Supreme Court in the case of CIT vs. T.V. Sundaram Iyengar and Sons Ltd. (1996), 222 ITR 344 wherein the Honourable Supreme Court has laid down that "If the amount is received in the course of trading transactions, even though it is not taxable in the year of receipt as being of capital character, the amount changes its 5 M/s. Rama Phosphates Ltd. character when the amount becomes the assessee's own money because of limitation or by any other statutory or contractual right. Where the assessee received deposits in the course of trading transactions, the amount of such credit balances which were barred by limitations and which were written back by the assessee to the profit and loss account were to be assessed as the assessee' s income". In view of the above decisions of the Apex Court and also keeping in view the provisions of Section 28(iv) of the Act, we find full justification for making the addition of Rs.6,86,071/-. Accordingly, the findings of the learned CIT (A) are upheld." It is worthwhile to refer to observation of Apex Court in T.V. Sundaram (supra).
22. The principle laid down by Atkinson, J. applies in full force to the facts of this case. If a common sense view of the matter is taken, the assessee, because of the trading operation, had become richer by the amount which it transferred to its profit and loss account. The moneys had arisen out of ordinary trading transactions. Although the amounts received originally were not of income nature, the amounts remained with the assessee for a long period unclaimed by the trade parties. By lapse of time, the claim of the deposit became time- barred and the amount attained a totally different quality. It became a definite trade surplus.
Atkinson, J. pointed out that in Tattersall case no trading asset was created. Mere change of method of bookkeeping had taken place. But, where a new asset came into being automatically by operation of law, common sense demanded that the amount should be entered in the profit and loss account for the year and be treated as taxable income. In other words, the principle appears to be that if an amount is received in course of a trading transaction, even though it is not taxable in the year of receipt as being of revenue character, the amount changes its character when the amount becomes the assessee's own money because of limitation or by any other statutory or contractual right. When such a thing happens, common sense demands that the amount should be treated as income of the assessee.
In the present case, the money was received by the assessee in course of carrying on his business. Although it was treated as deposit and was of capital nature, at the point of time it was received, by efflux of time the money has become the assessee's own money. What remains after adjustment of the deposits has not been claimed by the customers. The claims of the customers have become barred by limitation. The assessee itself has treated the money as its own money and taken the amount to its profit and loss account. There is no explanation from the assessee why the surplus money was taken to its profit and loss account even if it was somebody else' s money. In fact, as Atkinson, J. pointed out that what the assessee did was the common sense way of dealing with the amounts."
6 M/s. Rama Phosphates Ltd.
The present appellant can hardly drive any advantage from the case of Mahindra & Mahindra Ltd. (supra). As in that case, a clear finding was recorded that the Assessee continued to pay interest at the rate of 6% for a period of 10 years and the agreement for purchase of toolings was entered into much prior to the approval of loan arrangement given by the reserve Bank of India. Therefore, the loan agreement, in its entirety, was not obliterated by such waiver.
Secondly, the purchase consideration related to capital assets. The toolings were in the nature of dies and the Assessee was a manufacturer of heavy vehicles. The import was that of plant and machinery and the waiver could not constitute business. The facts of the present case are entirely different in as much as it was a loan taken for trading activity and ultimately, upon waiver the amount was retained in business by the Assessee. Thus, the principle stated by the Supreme Court in the case of T.V. Sundaram Iyengar & Sons Ltd. (supra) would be squarely applicable to the facts of the present case. The amount which initially did not fall within the scope of the provisions rendering it liable to tax subsequently have become the Assessee' s income being part of the trading of the Assessee. Similar view was also taken by a Bench of Madras High Court in the case of Commissioner of Income tax v. Aries Advertising Pvt. Ltd., 2002 (255) ITR 510. The court took the view that the Assessee because of trading operation became richer by the amount which had been transferred and/or retained in the Profit and Loss Account of the Assessee.
In view of the above settled position of law and the facts of the present case, we are of the considered view that no question of law much less substantial question of law arises for consideration in the present appeal. Appeal dismissed in limine.
14. We note that in the above said decision honourable jurisdictional High Court has placed reliance upon the decision of honourable Apex court in the case of T.V. Sundaram Iyengar & Sons Ltd. (supra) which was rendered by the larger bench comprising 3 of their Lordships.
We further note that honourable of Apex court in the case of content Electric Ltd supra has dismissed the SLP against the order of Hon'ble Karnataka high court. In that case in view of losses suffered by assessee- company the operations of the company were funded by way of unsecured loans from DRL from year to year. During the year under consideration part of the unsecured loan was converted into equity share capital and balance was waived. The assessing officer held that the provisions of section 41(1) attracted in respect of the unsecured loan written off. However the honourable High
7 M/s. Rama Phosphates Ltd.
Court held that in view of fact that in respect of the amount in question there was no allowance or deduction claimed by assessee in previous years, when creditor waived for payment of said loan it amounted to capital receipt not liable to tax. While dismissing the special leave petition the honourable Supreme Court observed that “not only there is no tax effect, the matter is also covered against the petitioners as per the judgement of this court in the case of Commissioner versus mind and Mahindra Ltd.”
Honourable jurisdictional High Court in the case of CIT versus Reliance industries Ltd (supra) was dealing with the situation when assessee issued foreign currency bonds in the year 1996-97 and later on assessee purchased bonds from the market and extinguishes them. In this process of buyback there was gain of Rs. 38.80 crores. The assessing officer treated such amount as assessee liable to tax under section 41(1). The honourable jurisdictional High Court in this regard held as under :-
There is no error in the view taken by the Tribunal. Sub-section (1) of section 41 provides that 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 and subsequently, during any previous year, such liability ceases, the same would be treated as the assessee's income chargeable to tax as income for previous year under which subject extinguishment took place. The foremost requirement for applicability of sub- section (1) of section 41, therefore, is that the assessee has claimed any allowance or deduction which has been granted in any year in respect of any loss, expenditure or trading liability. In the present case, the revenue has not established these basic facts. In other words, it is not even the case of the revenue that in the process of issuing the bonds, the assessee had claimed deduction of any trading liability in any year. Any extinguishment of such liability would not give rise to applicability of sub-section (1) to section 41. [Para 6] For applicability of section 41(1), it is a sine qua non that there should be an allowance or deduction claimed by the assessee in any assessment 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. This question, therefore, does not require any consideration. (para7)
Thus we note that in this case Hon'ble Jurisdictional High Court has noted that it was not established that assessee has claimed any allowance or 8 M/s. Rama Phosphates Ltd.
deduction in any earlier years in respect of any loan expenditure or trading liability.
We note that honourable Apex court in the case of Mahindra and Mahindra while upholding the view that provisions of section 41(1) are not applicable in case of waiver of liability incurred in respect of purchase of capital asset has observed as under :-
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 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.
From the above it is clear that honourable Supreme Court has found it important to note that the purchases in that case had not been debited to the trading account or to the profit and loss account in any of the assessment years. The above is a well considered observation/obiter of the honourable Supreme Court. In the case of Oriental Insurance Co. Vs. Meena Varyal (5 SCC 428), Ho’ble Supreme Court has held that an obiter dictum of Supreme Court is binding upon subordinate courts in absence of direct pronouncement on that question by Supreme Court. When we examine the present case on the touchstone of above said case laws, we find that in the present case the loan which has been waived is a working capital loan. A working capital loan is a loan that is taken to finance a company’s everyday operations. These loans are not used to buy long-term assets or investments and are, instead, used to provide the working capital that covers the company short-term operational needs. Those needs can include costs such as payroll, rent and rates payments stop in this way working capital loans are simply corporate that borrowings that are used by a company to finance its daily operations. If the working capital loan is used to finance working capital requirements, the bank finance
9 M/s. Rama Phosphates Ltd. used results in debit to the trading and profit & loss account for the concerned trading/working goods and services. In that case waiver of bank loan will not result in capital gain rather the provision of section 41(1) will be applicable. In this view of the matter in our considered opinion it is imperative that there is a finding as to what purposes the working capital loan has been utilised. In this regard learned Counsel of the assessee has submitted that part of the working capital loan has been utilized for acquisition of capital goods. We find that in this regard there is no clear cut finding by the assessing officer. In the case of Kapurchand Shrimal (72 ITR 623), honourable Apex Court has expounded that it is the duty of the appellate authority to correct the error in the orders of the authorities below and remit the matter for reconsideration with or without direction unless prohibited by law.
In the present case accordingly we remit the issue to the file of assessing officer. The assessing officer is directed to give a finding on the utilisation of the working capital loan which has been waived by the bank and thereafter decide as per law. We find that exactly the above direction was given by the ITAT in the case of Wasan Exports (P) Ltd. (supra) :-
We have considered the rival submission and perused the material available on record. Section 41(1) of the Income Tax Act, 1961 provides "where an allowance or deduction has been made in the assessment for any year in respect of loss expenditure or trading liability incurred by assessee and subsequently during any previous year (-) the (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 the benefit accruing it 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 amounts or deduction has been made is in existence in that year or not." The Learned Counsel for the Assessee relied upon the decision of the Hon'ble Supreme Court in the case of Mahindra and Mahindra Ltd., (supra) in which the Income Tax Officer after perusal of the return concluded that with the waiver of the loan amount, the credit represented the income and not liability. The assessing officer, therefore, held that a sum of Rs.57,74,064/- was taxable under section 28 of the Income Tax Act. The point for consideration before the Hon'ble Supreme Court was that "Whether in the present facts and circumstances of the case, the sum of Rs.57,74,064/- due by the respondent to Keiser Jeep Corporation which later on waived-off by the lender constitute taxable income of the respondent or not 10 M/s. Rama Phosphates Ltd.
?. The Hon'ble Supreme Court after considering the issue in detail held that "in such circumstances, Section 28(iv) of the Income Tax Act is not applicable." The Ld. CIT(A) also in the present case held that "Section 28(iv) is not attracted in the present case". The Hon'ble Supreme Court in the case of Mahindra and Mahindra Ltd., (supra) also held that "Section 41(1) of the Income Tax Act does not apply since waiver of loan does not amount to cessation of trading liability. It is a matter on record that the respondent has not claimed any under section 36(1)(iii) of the Income Tax Act qua the payment of interest in any previous year". In the present case, the authorities below have not given any finding of fact whether the whole amount of loan had been utilised either for the purpose of acquiring a capital asset or for the purpose of business activity or trading activity. There is also no finding of fact whether assessee had claimed any deduction in respect of interest on loan in earlier years. This matter requires finding of fact in the light of Judgment of Hon'ble Supreme Court in the case of Mahindra and Mahindra Ltd., (supra). Learned Counsel for the Assessee, therefore, rightly contended that matter may be remitted back to the file of assessing officer for reconsideration of the issue as per Law. In view of the above discussion, we set aside the orders of the authorities below and restore the matter in issue to the file of assessing officer with a direction to re-decide the issue strictly in accordance with Law, by giving reasonable, sufficient opportunity of being heard to the assessee. In the result, this ground of appeal of assessee is allowed for statistical purposes.”
Accordingly the issue is remitted to the file of Assessing Officer with the above direction. Needless to add the assessee should be given adequate opportunity of being heard.
In the result, appeals filed by the Revenue are allowed for statistical purposes.
Order has been pronounced in the Court on 16.9.2019.