MITHI SOFTWARE TECHNOLOGIES PRIVATE LIMITED,PUNE vs. INCOME TAX OFFICER WARD 14(3), PUNE

ORDER

PER DR. DIPAK P. RIPOTE, AM:

Ground No.1 :

In upholding the addition of Rs.75,00,000 being waiver of non- convertible debentures on grounds that it is a revenue receipt taxable u/s.28(iv)/41(1) of the Income-tax Act, 1961. i. the debentures were capital borrowings from SIDBI Venture Capital Ltd and utilized for financing the business structure and not for trading activity ii. the waiver of such capital liability does not give rise to taxable income iii. the learned CIT(A) has not clearly specified the exact section under which the addition is sustained, indicating uncertainty by invoking both section 28(iv) and 41(1) simultaneously, which are mutually exclusive in nature. iv. The addition sustained by the CIT(A) is not justified, based on mere presumptions and surmises, and therefore needs to be deleted.

Ground No.2 :

In confirming the AO’s action of not allowing set-off of brought forward business loss of Rs 1,09,60,556 and unabsorbed depreciation of Rs.1,03,38,647, though duly declared in the RETURN OF INCOME, available and claimed as per law u/s 72 and 32(2). The appellant pleads that the denial of such set-off is contrary to the provisions of the Act and principles of natural justice and ought to be allowed.

Ground No.3 :

The appellant pleads for directions allowing the appeal and craves leave to, add to, alter, amend, modify or withdraw any or all grounds of appeal

.” 2 Findings & Analysis :

2. We have heard both the parties and perused the records. In this case, as per assessment order, Assessee is a Company. It had e- filed Return of Income for A.Y.2014-15 on 24.09.2014 declaring total income at Rs.NIL, after claiming loss of Rs.51,01,433/-. Assessee’s case was selected for scrutiny. During the scrutiny proceedings, Assessing Officer observed that debenture holders of the Assessee-Company had waived off their right in debenture payable of Rs.75 lakhs. Assessee treated it as capital receipt. The Assessing Officer disagreed with submission of assessee. The relevant paragraph 3.2 and 3.3 of the Assessment Order are reproduced here as under : “3.2 It was brought to the attention of the assessee, that if the debentures were issued for capital transaction such as acquisition of assets then the debt waived by the debenture holders is capital receipt not subject to tax. The assessee was given numerous opportunities to prove that the funds received through issue of debentures in the year 2004 are actually utilized for acquiring capital assets & none of the expenses were debited to Profit & Loss account.

3.3 However the assesse has failed to submit any documentary evidence to prove that the funds received through issue of debentures were actually utilized for acquiring capital assets. Hence, the waiver of debenture debt by the debenture holders is treated as revenue receipt & 2.1 Thus, Assessing Officer made an addition of Rs.75 lakhs without referring to any section. Aggrieved by the same, Assessee filed appeal before the ld.CIT(A). Ld.CIT(A) confirmed the addition stating that Assessee failed to discharges its onus that borrowed funds were utilized for creation of capital structure. Therefore, ld.CIT(A) held that waiver is taxable under section 28(iv) or Section 41(1) of the Act.

2.2 Thus, even the ld.CIT(A) was not sure about the applicability of the section.

2.3 Aggrieved by the order of the ld.CIT(A), Assessee filed appeal before this Tribunal.

2.4 Thus, the question before us is whether the waiver of debentures of Rs.75 lakhs is taxable or not! Admittedly, debentures of Rs.75 lakhs were issued to SIDBI Venture Capital Limited during F.Y.2004-05. Assessee explained that it was a long term borrowing duly reflected in balance sheet. Ld.AR relied on the decision of Hon’ble Supreme Court in the decision of CIT Vs. Mahindra & 4 Mahindra Ltd., in [2018] 404 ITR 1 (SC) order dated 24.04.2018. Ld.AR also relied on the following decisions :  I.G. Petrochemicals Ltd., [2023] 155 taxmann.com 45(Karnataka)  DCIT Vs. Ramani Exports [2023] 153 taxmann.com 465 (Mumbai Tribunal)  ITAT Pune Bench decision in Seco Tools India Private Limited Vs. Addl.CIT in ITA No.445/PUN/2020

"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,- (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 6

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.

(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 Section 36 (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. Accordingly, the appeals are dismissed. All the other connected appeals are disposed off accordingly, leaving parties to bear their own cost.”

5.1 Thus, Hon’ble Supreme Court held that Section 28(iv) does not apply on the receipts which are in the nature of money.

Ground No.2 8. Ld.AR for the Assessee pleaded that Assessing Officer has not allowed set-off of brought forward business loss and unabsorbed depreciation. Ld.AR filed a Chart as under : Sr Assessment Year Date of Filing Loss From Loss From No Business Depreciation 1 2006-2007 28.11.2006 4,539,159 9,299,377 2 2007-2008 Nil Nil Nil 3 2008-2009 29.09.2008 640,332 217,097 4 2009-2010 21.09.2009 1,045,984 404,611 5 2010-2011 Nil Nil Nil 9 2011-2012 13.09.2011 Nil 58,221 6 2012-2013 Nil Nil Nil 7 2013-2014 Nil Nil Nil 9 2014-2015 Nil 4,742,081 359,352 Total loss 10,967,556 10,338,658 Carried Forward to Future years