ITO 2(3)(3), MUMBAI vs. TOPICAL BUILDERS P.LTD, MUMBAI

On the facts and in circumstances of the case and in law the learned CIT(A) has erred in allowing relief to the assessee extent impugned in the grounds enumerated below: 1. On the facts and in circumstances of the case and in law the learned CIT(A) erred in holding that loan liability written off of Rs. 521.60 lacs cannot be taxed u/s 28(iv) without appreciating the fact that the assessee had taken loans for the expansion of its business by acquiring a controlling stake in Mum 2014-M/s. Topical Builders P. Ltd.

The return of income was selected for scrutiny and the assessment was completed on 25.03.2013 under section 143(3). During the assessment, the Assessing Officer noted that the assessee has taken a loan of Rs. 661.74 Lakhs from Mahindra Realty and Infrastructure Developers Limited (MRIDL) during the year 1997-98 to 1999. The assessee has been carrying on this liability in its books of account for almost 10 years.

On appeal before the ld. CIT(A), the entire addition was deleted. The ld. CIT(A) deleted the addition holding that, when creditors had waived the repayment of loan amount, it amounted to capital receipt and not revenue receipt. The waiver cannot be constitute income of the assessee. The ld. CIT(A) also held that for the purpose of applicability of section 28(iv), the benefit or perquisite must relate to the revenue account of the assessee. The liability of assessee was a capital liability and loan was taken for the purpose of investment in share to Deep Mangal. The ld. CIT(A) also held that the cessation of liability is also not taxable under any other provision of the Act as the said liability does not pertain to the year under consideration. Thus, aggrieved by the order of ld. CIT(A), the revenue has filed the present appeal before us. 3 ITA No. 6089 Mum 2014-M/s. Topical Builders P. Ltd.

We have heard the submission of ld. Departmental Representative (DR) for the revenue and ld. Authorized Representative (AR) of the assessee and perused the material available on record. The ld. DR for the revenue supported the order of Assessing Officer. The ld. DR further submits that the creditor has written off in their books of account due from the assessee-company to the extent of Rs. 5,01,93,000/- for Financial Year 2000-01 and Rs. 19,67,000/- sometime in Financial Year 2002-03 and the amount due from the assessee-company is only Rs. 1.40 Crore. The assessee creditor, thus, write of the liability to the extent of Rs. 5.21 Crore. There was no justification on the part of assessee to continue its liability which is already written off by the creditor. No claim whatsoever has been made by the creditor for such a long time. The so-called unsecured loan does not any more take a character of loan but in reality, the same partakes the character of income. The assessee has taken a loan and invested in share of Deep Mangal at an abnormal price by making payment of huge premium on which the assessee has not received any dividend. The ld. DR for the revenue in support of his submission relied upon the decision of Hon’ble Bombay High Court in Solid Container vs. DCIT (308 ITR 417 (Bom), Madras High Court in CIT vs. Ramaniyam Homes (P.) Ltld. (384 ITR 530 (Madras) and the decision of Hon’ble Supreme Court in CIT vs. T.V. Sundaram Iyengar & Sons Limited (222 ITR 344). 4 Mum 2014-M/s. Topical Builders P. Ltd.

On the other hand, the ld. AR of the assessee supported the order of ld. CIT(A). The ld. AR of the assessee submits that during the year 1997 to 1999, the assessee availed a loan of Rs. 6.61 Crore from group company i.e. MRIDL. The entire loan amount was invested in the share of other group company namely Deep Mangal for purchase of share. The total consideration was paid for purchase of share of Rs. 8.28 Crore. The payment on purchase of share was financed by the loan of Rs. 6.61 Crore availed from MRIDL and the balance of Rs. 1.66 Crore was financed from other borrowings. The share of Deep Mangal was purchased as the huge premium because the said company owned a huge piece of land at Murud, however, the project of Deep Mangal takes off for technical reasons. Therefore, during the Financial Year 2000-01 MRIDL wrote off substantial portion of loan of Rs. 5.01 Crore in the books of account of MRIDL, the loan amount remains only of Rs. 1.59 Crore (Being Rs. 6,61,74,000/- minus Rs. 5,01,93,000/-). The assessee made no corresponding change in its books of account, the loan in the books of account continued as it is. The Realty and Infrastructure Division of MRIDL was demerged and amalgamated with Gesco Corporation, which is now known as MLDL. During the financial year 2002-03 MLDL also write of Rs. 19.67 Lakhs in its books of accounts, thus, the balance receivable from the assessee is only 1.40 Crore. Still no corresponding change was made by assessee in its books of account. The liability in the 5 Mum 2014-M/s. Topical Builders P. Ltd. books of account of assessee continued at Rs. 6.61 Crore. During the assessment proceeding of current Assessment Year, the Assessing Officer made enquiries under section 133(6). In response to the notice under section 133(6) MLDL responded with balance receivable from assessee at Rs. 1.40 Crore against the liability of Rs. 6.61 Crore. The difference of Rs. 5.21 Lakhs was added by Assessing Officer to the income of assessee as non-existing liability.

The ld. AR of the assessee further submits that the observation of Assessing Officer that loan was borrowed for business purpose for acquiring control in Deep Mangal is factually incorrect because year after year, the department has been accepted as a pure investment. In share and denying this to be business activities. The ld. AR of the assessee submits that he has filed a copy of assessment order for Assessment Year 2001-02 wherein this fact has been observed by Assessing Officer. The ld. AR of the assessee further submits that in the balance sheet of assessee’s share holding has been treated as a long term investment which has been remained unchanged in 10 years. 8. During the period under consideration, no taxable event and in absence of any such event, income cannot be assessed or brought to charge to tax.

The ld. AR of the assessee submits that the decision of Solid Container (supra) is not applicable. In case of Solid Container, the waiver of loan was taken for trading activities and the assessee has credited such a waiver to the Profit & Loss Account claimed to be a capital receipt. The ratio in case of T.V. Sundaram Iyengar & Sons Limited (supra) is also not applicable on the facts of the present case. In T.V. Sundaram Iyengar & Sons Limited (supra), the loan/advance constituted a trading liability or was taken under trading account, therefore, the facts of this case are differ to the present case.

The ld. AR of the assessee further submits that decision of Hon’ble Bombay High Court in Mahindra and Mahindra (supra) has been affirmed by Hon’ble Apex Court in ITA No. 6949/6950/2004 dated 24.04.2018.

We have considered the rival submission of the parties and have gone through the orders of authorities below. We have also deliberated on various case laws relied by lower authorities and the ld. Representative of the parties. During the assessment the assessing officer made investigation about carrying the loan liability in its books of account for almost 10 years. The Assessing Officer issued notice to the creditors. On receipt of confirmation from MLDL that the creditor has write off of Rs. 5.01 Crore in Financial Year 2000-01 and Rs. 19.67 Lakhs in Financial Year 2002-03 treated the amount as unclaimed deposit and time barred deposit as trading receipt on the basis of decision of T.V. Sundaram Iyengar & Sons Limited (supra). Before the ld. CIT(A), the assessee urged that liability to refund the loan continued since liability still exist and also reflected in the financial statement of the assessee. The assessee also contended that provision of section 41(1) are also not applicable as it is not the remission of liability and not claimed on allowance for deduction made in the assessment of any earlier years. The assessee also explained that loan was taken on capital account for making investment in share of Deep Mangal (supra). Further, no loan was taken during the year under consideration and even in the last 10 years, the loan balance has been carried forward in the accounts of assessee. The said balance 8 Mum 2014-M/s. Topical Builders P. Ltd. was always accepted by revenue, the Assessing Officer in Assessment Year 2001-02 while passing the assessment order has considered the loan transaction as a colorable device and not allowance or deduction of loan was made in any earlier years. The ld. CIT(A) after perusing the record and considering the submission of assessee framed three question for his consideration (i) Whether liability of Rs. 5.21 Crore having seized to exist, was a capital liability and whether at present it can be considered to have changed its character and has taxable in the hand of assessee as a revenue receipt (ii) Whether the said amount can be taxed under the provision of section 41(1) or else under section 28(iv) of the Act and or (iii) Whether the said amount can be taxed under any other provision of the Act.

The ld. CIT(A) examined the facts of the case with the facts of decision in T.V. Sundaram Iyengar & Sons Limited (supra) and find that the assessee in that case received benefit on account of cessation of liability in respect of the sum/deposit received on account of trading transaction, the liability shall seized to exist, became the income of assessee under section 41 or section 28. In case of assessee, the liability was a capital liability and loan was taken on account of capital account for the purpose of investment in share. No loan was taken during the year or even in last 10 years. The loan balance has been carried forward in the account of assessee for more than 10 years. The balance was always accepted by 9 Mum 2014-M/s. Topical Builders P. Ltd. Assessing Officer while passing the assessment order even in Assessment Year 2001-02. The assessee has not claimed any allowance or deduction of loan amount in earlier years. Thus, cannot be taxed under section 41(1) of the Act. The ld. CIT(A) further concluded that assessee has capital liability and the loan was utilized for purchase of share of sister concern, having seized to exist cannot be taxed as a revenue receipt, the liability seized to exist, was a capital account and hence same is not in the hands of the assessee.

The ld. CIT(A) by following the decision of Hon’ble Bombay High Court in Mahindra and Mahindra (supra), wherein it was held that loan received for purpose of capital asset would not constitute a trading liability and accordingly section 41(1) was not attracted. Since the capital liability has not changed its character at the time when it seized to exist, therefore, the ld. CIT(A) finally concluded that the provision of section 41(1) or section 28(iv) are not attracted, therefore, the Assessing Officer was not justified in making the addition to the total income of assessee and directed to delete the entire addition.

We have noted that Hon’ble Supreme Court in CIT vs. Mahindra and Mahindra (supra) while dismissing the appeal of revenue held as under:

In view of the above factual and legal discussion, we do not find any illegality in the order passed by ld. CIT(A). The case law relied by ld. DR for the revenue is distinguishable on the facts of the present case.

In Solid Container (supra), the assessee has taken a loan for the purpose of business and was right back in the relevant Assessment Year. The Hon’ble Bombay High Court in Solid Container (supra), relied upon the case of T.V. Sundaram Iyengar & Sons Limited (supra), wherein the loan/advance constituted a trading liability and was taken under the trading account. Thus, in our humble opinion, the ratio of said decision is not applicable. Moreover, the decision of Hon’ble Bombay High Court in Mahindra and Mahindra (supra) has been affirmed by the Hon’ble Apex Court.

In view of the above discussion, we do not find any merit in the grounds of appeal raised by revenue.

In the result, appeal of the revenue is dismissed.