GANESH BENZOPLAST LTD.,MUMBAI vs. PRINCIPAL COMMISSIONER OF INCOME TAX -1, MUMBAI

Per Rajesh Kumar, Accountant Member:

The present appeal has been preferred by the assessee against the order dated 25.03.2019 of the Pr. Commissioner of Income Tax [hereinafter referred to as the Pr. CIT] relevant to assessment year 2009-10.

a) The AO had made meaningful enquiry in all aspects of OTS and treatment in books before making the addition during the assessment u/s 143(3) r.w.s. 147 of the Act, since the reason for that assessment was the same OTS matter.

2 ITA No.2047/M/2019 M/s. Ganesh Benzoplast Ltd. b) Depreciation as per Income tax Act is different from depreciation as per books computed as per Companies Act and both are independent of each other. c) Income tax Act does not require any adjustment to the block of assets on account of cessation of liability due to reversal of loan under OTS for calculating depreciation. d) Waiver of loan is not taxable as a remission of liability under Section 41 (1) of the IT Act since it is capital in nature and not claimed as expenditure any time. Hon'ble Supreme Court in their latest judgement of Mahindra and Mahindra has upheld the same. e) The Assessee is registered under BIFR and the final sanctioned scheme of BIFR was approved by Hon'ble Delhi High court, and due to which there cannot be any Income taxable u/s 41(1) of the IT Act.

The appellant craves leave to add, alter, amend or delete any of the above grounds of appeal.”

3 ITA No.2047/M/2019 M/s. Ganesh Benzoplast Ltd. the Act at 26.02.2004 assessing the loss at Rs.13,15,59,890/-. Thereafter, the AO received information from DGIT investigation, Mumbai that assessee has been given one time settlement (hereinafter called OTS) of Rs.841.05 by Canara Bank. Thereafter, the case of the assessee was reopened on the ground that assessee has no more liability of loan payable to Canara Bank and therefore the amount waived constituted income of the assessee which has not been offered to the income tax and escaped assessment accordingly. The assessment was completed under section 143(3) read with section 147 of the Act on 26.12.2016 determining the total loss at Rs.6,94,63,609/- as against the return loss of Rs.13,09,72,199/- after making addition of Rs.2,92,39,200/- on account of profit resulting from one time settlement with Canara Bank and SBI and Rs.3,22,69,390/- on account of disallowance of expenses claimed under section 43B of the Act. The Ld. Pr. CIT observed from the records relating to the assessments made on 26.12.2016 under section 143(3) read with section 147 of the Act that while completing the assessment, the AO has failed to disallow the depreciation of Rs.58.37 crores on account of decapitalization in consequence of waiver of loans by the banks. The Ld. Pr. CIT observed that since there is a cessation of liability in respect of capitalized interest of Rs.58.37 crores due to OTS, the same amount was required to be reduced from WDV of plant and machinery so as to avoid the excess depreciation on the above amount. The Ld. Pr. CIT came to the conclusion that this has resulted in the under assessment of Rs.58.37 crores by way of allowing irregular and wrong depreciation with consequent short levy of tax of Rs.18.84 crores and accordingly

4 ITA No.2047/M/2019 M/s. Ganesh Benzoplast Ltd. the assessment was proposed to revised by show cause notice issued under section 263 of the Act dated 12.12.2018 calling upon the assessee to show cause as to why the assessment order dated 26.12.2016 should not be revised. The assessee replied the said show cause notice by submitting as under: “Assessee has stated that it is a public limited company and under BIFR since year 2004-05.With regards to disallowing depreciation of Rs. 58.37 crore on account of decapitalisation in consequence to waiver of loan it is submitted that

The income tax depreciation is independent of the Books depreciation which is governed by the Block of Assets method.

"Written down value of the block of assets" is explained in clause*(c) of sub- section* (6) of section 43. Which specifies which are the items to be reduced from the Block of Assets.

(c) in the case of any block of assets, -

(i) in respect of any previous year relevant to the assessment year commencing on the 1st day of April, 1988, the aggregate of the written down values of all the assets falling within that block of assets at the beginning of the previous year and adjusted, -

(A) by the increase by the actual cost of any asset falling within that block, acquired during the previous year;

(B) by the reduction of the moneys payable in respect of any asset falling within that block, which is sold or discarded or demolished or destroyed during that previous year together with the amount of the scrap value, if any, so, however, that the amount of such reduction does not exceed the written down value as so increased; and

(C) in the case of a slump sale, decrease by the actual cost of the asset falling within that block as reduced –

(a) by the amount of depreciation actually allowed to him under this Act or under the corresponding provisions of the Indian Income-tax Act, 1922 (11 of 1922) in respect of any previous year relevant to the assessment year commencing before the 7th day of April 1988; and

(b) by the amount of depreciation that would have been allowable to the assessee for any assessment year commencing on or after the 1st day of April 1988 as if the asset was the only asset in the relevant block of assets,

5 ITA No.2047/M/2019 M/s. Ganesh Benzoplast Ltd. So, however, that the amount of such decrease does not exceed the written down value ;0ther than the above mentioned section only other section which calls for the adjustment in the WDV is section 43A with respect the Foreign Exchange Loss/Gain.

Capitalized interest to fixed assets which later on waived and then decapitalized cannot be treated as waiver of trading liability. Depreciation claimed on such capitalized interest is not any loss or expenditure or some benefit in respect of such trading liability. It's a depreciation allowance for doing the capital expansion and not the depreciation expenses and pertains to Fixed Assets account and not of trading liability at all. Further, the said waivers are waiver of interest which were capitalized, Accordingly, there is no need to reduce the block of fixed assets on account of recapitalization.

Further, the depreciation is an allowance, which is governed by the Income tax Act. A statutory allowance under section 32 is not an expenditure. Hon'ble Supreme Court of India in the matter of Nectar Beverages Pvt. Ltd. Vs. DCIT (2009) 314 ITR 314 CIVIL APPEAL No.5291 of 2004 clearly held that depreciation is neither a loss, nor an expenditure, nor a trading liability, referred to in Section 41(1).

The Act does not provide for reversal of depreciation. The adjustment of cost as prescribed by the law was done by the Assessee and the same were accepted by the AO. The adjustment of the cost is prescribed in section 43 of the Act, which does not include the Interest part.

The decapitalization is a book entry and does not warrant for any further adjustment in the depreciation working. The said entry does not affect the Block of Assets. The said entry of decapitalization can be compared with the revaluation of the Assets or Depreciation on the Revalued Assets, wherein though there are entries in the books of accounts there are no adjustments are called for in the Block of Assets. The depreciation is governed by the rule of Block of Assets, wherein the additions and deletion from the block are well defined. The current entry of decapitalization does not get covered in the block adjustments. The concept of Block of assets has separated the Book of Accounts and depreciation claim. This fact was well understood by the AO and he did not make any adjustments in the block for the interest decapitalization.

The adjustment of Rs.58.37 crores in the books does not fall in any of the above categories. Since, the block of assets are independent of the Book value of Assets, the said adjustment is not made in the WDV for Income tax. The same is mentioned in the notes and explained during the Assessment U/s. 147. The AO has made the meaningful enquiry and agreed with the situation and did not make any further additions/adjustments. We further reiterate that there is no loss of revenue in this entry of decapitalization as Company has assessed Income tax losses / unabsorbed depreciation of more than 150 Cras on the said date.

6 ITA No.2047/M/2019 M/s. Ganesh Benzoplast Ltd. With regard to your observation that the cessation of Liability on account of capitalized interest needs to be reduced from the WDV, we submit that, as mentioned in your observations it is the capitalized Interest. Any capital receipt on account of OTS is not a revenue item as clarified in the latest Judgment of Supreme court in the case of Mahindra & Mahindra Ltd.”

7 ITA No.2047/M/2019 M/s. Ganesh Benzoplast Ltd. off. The ls AR argued that de-capitalized interest can not be treated as waiver of trading liability. The Ld. A.R. submitted that depreciation claimed on such capitalized interest is not any loss or expenditure or some benefit in respect of such trading liability. It is a depreciation allowance for doing capital expansion and not expenses in any way and pertained to fixed assets accounts and not trading liability at all and therefore there is no need to reduce the block of fixed assets on account of de-capitalization. The Ld. A.R. submitted that the depreciation is a statutory allowance governed by the provision of section 32 of the Act and is not an expenditure and thus the Pr CIT has no jurisdiction u/s 263 to set aside the assessment. The Ld. A.R. submitted that the Hon’ble Supreme Court in the case of Nectar Beverages Pvt. Ltd. vs. DCIT (2009) 314 ITR 314 civil appeal No.5291 of 2004 held that depreciation is neither a loss nor an expenditure nor a trading liability as referred to in section 41(1) of the Act. The Ld. A.R. submitted that de-capitalization is a book entry and does not warrant any further adjustment in the depreciation calculation as it does not affect the block of assets. The Ld. A.R. in defence of his argument relied on the series of decisions. The Ld. A.R. relied on the decision of Apex Court in the case of CIT vs. Mahindra & Mahindra Ltd. (2018) 404 ITR 001 (SC). The Ld. A.R. also submitted that in the reassessment proceedings the AO has specifically reopened the assessment of the assessee after receiving information from the DGIT Investigation that assessee has received one time settlement of loan from Canara Bank which was specifically raised by the AO in the notice issued to the assessee on 22.09.2016 calling for the details and information qua one time settlement. Thereafter, the

8 ITA No.2047/M/2019 M/s. Ganesh Benzoplast Ltd. said was replied comprehensively by the assessee. The Ld. A.R. submitted that the AO after considering the reply of the assessee framed the assessment under section 143(3) read with section 147 of the Act dated 26.12.2016 wherein these issues were specifically dealt with in the assessment order and addition was made towards profit of OTS on Canara Bank Rs.80,63,686/- and profit on OTS with SBI of Rs.2,11,75,714/-. The Ld. A.R. submitted that a specific query raised by the AO and responded by the assessee and the AO after due consideration and application of mind framed the assessment. Therefore, the order passed by the Pr Commissioner exercising the revisionary jurisdiction is bad in law. The Ld. A.R. relied on a series of decisions in defence of his arguments namely; 1. CIT vs. Mahindra & Mahindra Ltd. (2018) 101 CCH 0194 2. CIT vs. Gabrial India Ltd. (1993) 203 ITR 108 (Bom) 3. CIT vs. Ganpat Ram Bishnoi (2008) 296 ITR 292 (Raj.) 4. Girdhar Lal B. Rohra vs. CIT (2004) 86 TTJ 0177 5. Moil Ltd. vs. CIT 396 ITR 0244 (Bom) 6. Grasim Industries Ltd. vs. CIT (2010) 78 CCH 0108 Mum HC (2010) 229 CTR 0347 : (2010) 188 Taxman 0327 7. CIT vs. Fine Jewellery (India) Ltd. (2015) 372 ITR 0303 8. CIT vs. Max India Ltd. (2007) 295 ITR 0282 9. CIT vs. Development Credit Bank Ltd. (2010) 78 CCH 0230 Mum HC (2010) 40 DTR 0061 : (2010) 323 ITR 0206 : (2011) 196 taxman 0329 10. CIT vs. Fine Jewellery (India) Ltd. (2015) 92 CCH 0045 Mum HC (2015) 372 ITR 0303 (Bom). 11. Sterling Construction and Investments vs. ACIT (Investigation) (2015) 93 CCH 0139 MumHC (2015) 277 CTR 0202 (Bom) 12. CIT vs. Kiran Hirji Shah (2014) 90 CCH 0507 MumHC (2015) 231 Taxman 0670 (Bombay)

Finally, the Ld. A.R. submitted that the order by the Ld. Pr. CIT has nowhere recorded a clear cut finding that order of the

9 ITA No.2047/M/2019 M/s. Ganesh Benzoplast Ltd. AO is erroneous and prejudicial to the interest of the Revenue which are the pre-conditions to be satisfied for resorting the jurisdiction under section 263 of the Act. The Ld. A.R. finally prayed that in view of the aforesaid submissions, the order of Ld. Pr. CIT may kindly be quashed.

10 ITA No.2047/M/2019 M/s. Ganesh Benzoplast Ltd. Bank and State Bank of India as stated (supra) and total loss was assessed at Rs.6,94,63,609/- as against the return loss of Rs.13,09,72,199/-. Now the issue before us is whether the issue raised by the Ld. Pr. CIT by exercising the revisionary jurisdiction u/s 263 of the Act that AO has failed to disallow depreciation of Rs.58.37 crores on account of decapitalisation in consequence of waiver of loan is correct or not. In this case, we observe that the loans were taken for the purpose of fixed assets and up to a specified date the interest on the loans was capitalized and assessee has claimed depreciation over the years on the cost of fixed assets. Now the issue before us is whether the depreciation claimed on the fixed assets falls within the ambit of section 41(1) or not. After considering the overall facts of the case, we are of the view that the provisions of section 41(1) of the Act are not applicable to the present case as there is no profit on cessation of liability upon OTS. In this case the assessee has claimed depreciation which is allowable under the provisions of section 32 and is not an expense but a wear and tear resulting from the aging and use of the assets. The case of the assessee is squarely covered by the decision of the Apex Court in the case of CIT vs. Mahindra & Mahindra Ltd. (supra) wherein the Hon’ble Supreme Court has held that waiver of said loan resulted into cessation of liability other than the trading liability and thus not covered by the provisions of section 41(1). The Apex Court held that the deduction claimed by the assessee was on account of depreciation of machines and not on interest paid on it. Accordingly, Apex Court held that the waiver of loan by the creditor is not taxable as perquisite under section 28(iv) of the Act nor taxable as remission of liability under section

11 ITA No.2047/M/2019 M/s. Ganesh Benzoplast Ltd. 41(1) of the Act. We are, therefore, of the considered view that the waiver of loan by the banks would not result into any profit to be assessed under section 28(iv) or as remission of liability under section 41(1) of the Act as in this case the assessee has claimed depreciation on fixed assets and not interest paid by it and thus waiver of loan amounted to cessation of liability other than trading liability. So on this count, the exercise of revisionary jurisdiction of the Pr. CIT is wrong and against the provision of the Act. Even otherwise ,we notice that the issue stood examined in depth by the AO in the reassessment proceedings and AO was satisfied with the explanation of the assessee and thus the exercise of revisionary jurisdiction is not justified. The case of the assessee is also covered by the decision of Hon’ble Bombay High Court in the case of CIT vs. Gabrial India Ltd. (supra) wherein the Hon’ble Bombay High Court has held where ITO has conducted enquiry and assessee has given detailed submission and ITO after being satisfied with the explanation of the assessee passed the assessment order ,then CIT can not set aside the same and direct the AO to reexamine the facts. Similarly, in the case of Moil Ltd. vs. CIT the Hon’ble Bombay High Court has held that where the AO is satisfied about the admissibility of claim on the basis of materials and details supplied by the assessee then the Pr. CIT can not exercise the jurisdiction under section 263 of the Act. In view of the above facts and ratio laid down by the Hon’ble Bombay High Court and jurisdictional High Court, the order of Pr. CIT is not sustainable. Accordingly, the order passed under section 263 is quashed. 8. In the result, the appeal of the assessee is allowed.

12 ITA No.2047/M/2019 M/s. Ganesh Benzoplast Ltd.

Order pronounced in the open court on 11.09.2019.

Sd/- Sd/- (Amarjit Singh) (Rajesh Kumar) JUDICIAL MEMBER ACCOUNTANT MEMBER

Mumbai, Dated: 11.09.2019. * Kishore, Sr. P.S.

Copy to: The Appellant The Respondent The CIT, Concerned, Mumbai The CIT (A) Concerned, Mumbai The DR Concerned Bench //True Copy// [ By Order

Dy/Asstt. Registrar, ITAT, Mumbai.