KUMAR WIRE CLOTH MANUFACTURING CO. LTD,RAIGAD vs. ITO 5(2)(2), MUMBAI

This appeal by assessee under Section 253 of Income-tax Act is directed against the order of ld. CIT(A)-9, Mumbai dated 24.07.2012 for Assessment Year 2008-09. The assessee has raised the following grounds of appeal:

We have heard the submissions of ld. Authorised Representative (AR) for the assessee and the ld. Departmental Representative (DR) for the Revenue and perused the material available on record. We have seen that the assessee has filed an application for admission of additional grounds of 2 Mum 2012-M/s Kumar Wire Cloth Manufacturing Co. Ltd. appeal vide application dated 05/01/2016, however at the time of making submissions the ld AR for the assessee neither referred nor made any submissions, therefore, the application for admissions of additional grounds of appeal

On the other hand, the ld. DR for the Revenue supported the orders of authorities below. The ld. DR for the Revenue submits that case law relied by ld. AR of the assessee is not applicable on the facts of the present case.

We have considered the rival submission of the parties and have gone through the orders of authorities below. During the assessment proceeding, the Assessing Officer noted that assessee has claimed depreciation, and other expenses e.g. manufacturing and power and fuel expenses. The assessing officer disallowed the depriciation and other expenses on his observation that no reply was filed by the assessee. The ld CIT(A) confirmed the action of the assessing officer holding that no production was done during the period. We have noted that the assessee before the assessing officer in its written submissions contended that company is declared seeks under the provision of Sick Industrial Companies (Special Provisions) Act. From the facts and the documents 4 Mum 2012-M/s Kumar Wire Cloth Manufacturing Co. Ltd. placed on record, the assessee has brought sufficient documentary evidences to prove its contentions that due to continuous losses the assessee filed an application before Board of Industrial Finance and Reconstruction (BIFR) and in financial year 2006-07 the assessee was declared as sick company. During the financial year 2007-08, the assessee had suspended its production as hearing on the application before BIFR were pending. It is also brought on record that in subsequent years the assessee has shown revenue from its operations and the record of financial statements for Assessment Year 2012-13, wherein the assessee has shown revenue from operation of Rs. 31,65,047/- and other income at Rs. 19,50,000/- is placed on record. The assessing officer has not brought any contrary fact on record to discard the evidences furnished by the assessee.

From the financial statement furnished by assessee for subsequent year when the assessee has revised its operation and has shown the positive income. The documentary evidences furnished by assessee go to show that the assessee has started its business activity and the contentions of assessee that there was temporary lull in the business are correct.

Ground No.4 relates to addition on account of Provision of Sale Tax. The ld. AR of the assessee submits that assessee has not claimed expenses in the books of account in the computation of income. On the other hand, the ld. DR for the Revenue supported the order of authorities below.

We have considered the rival submission of the parities and have gone through the orders of authorities below. During the assessment proceeding, the Assessing Officer noted that the assessee has shown the outstanding sale tax liability of Rs. 2.31 core. The assessee was asked to provide break-up of the outstanding dues. The assessee filed its reply and furnished the copy of statement of Board of Annual Finance and Reconstruction (BIFR) dated 21.08.2010. After perusing the statement furnished by assessee. The Assessing Officer concluded that the assessee has inflated a liability and not explained reliability. Accordingly, a provision of Rs. 89,10,570/- was added under section 68 of the Act. The ld. CIT(A) confirmed the addition on his observation that no evidence is placed about the discrepancy of Rs. 89,10,570/- which arose due to two different set of figures furnished by assessee. 10. We have noted that the assessee has not claimed liability in Assessment Year 2004-05 to 2008-09. Even in the assessment year under consideration, the assessee has excluded the Interest on Sale Tax from the computation. We have also seen the Profit & Loss Account for the year ended on 31.03.2008, wherein the assessee has not claimed the Sale Tax 6 Mum 2012-M/s Kumar Wire Cloth Manufacturing Co. Ltd. Liability. Thus, no disallowance of item which is not claimed is warranted. Thus, Ground no.4 of the appeal is allowed. 11. Ground No.5 relates to Cessation of Liability. The ld. AR of the assessee submits that assessee made the settlement with Bank and got the remission of liability which included interest due to old term loan and interest thereon. The Cessation of Liability by Bank on one time settlement is a capital receipt in the hand of assessee and the same is not taxable as revenue receipt. In support of his submission, the ld. AR of the assessee relied upon the decision Bombay High Court in Mahindra & Mahindra Ltd Vs CIT 261 ITR 501(Bom), Hon’ble Supreme Court in Indian Cement Ltd Vs CIT(1966) 60 ITR 52 (SC), Delhi High Court in CIT Vs Tosha International Ltd (2009) 176 Taxman 187 (Delhi), Accelerated Freez & Drying Co Ltd Vs DCIT (2009) 31 SOT 442( Cochin) and Tribunal in CIT vs. King Prawans Ltd. 12. On the other hand, the ld. DR for the Revenue supported the order of authorities below. 13. We have considered the rival submission of the parties and have gone through the orders of authorities below. During the assessment the assessing officer noted that the assessee has paid Rs. 60,00,000/- to Karnataka Bank Ltd on account of on time full and final settlement against the outstanding liability of Rs. 3,07,42,528/- and the balance amount of Rs. 2,47,52,200/- was treated as capital reserve. The assessee was show 7 Mum 2012-M/s Kumar Wire Cloth Manufacturing Co. Ltd. caused as to why disallowance of such amount be not made. The assessee filed its reply dated 13/12/2010 and relied on the various decisions viz; Mahindra & Mahindra Ltd Vs CIT 261 ITR 501(Bom), Solid Container Vs DCIT (2009)(308 ITR 417 (Bom), CIT Vs Tosha International Ltd (2009) 176 Taxman 187 (Delhi). The contention of the assessee was not accepted by the assessing officer holding that disclosed the purpose for which the loan was utilized and treated the same as income of the assessee as per the provisions of section 41(1) rws 28(iv) of the Act. The ld CIT(A) confirmed the action of the assessing officer holding that the loan was obtained in respect of stock in trade or for working capital for purchasing material.

There is not dispute of the facts that Karnataka Bank has entered in one time settlement of its due and has settled all the due on payments of Rs. 60.00 lakhs as per its letter dated 21.05.2008 (page 62 of PB). The assessee has placed on record the copy of renewal of loan with enhancement credit facility dated 19.10.200 for the purpose of working capital and purchasing the machinery and the reimbursement of the capital asset acquired (page No.56 of PB). The assessee has availed the loan for running its business is no where disputed by the lower authorities. On settlement of loan the assessee has not received any thing; rather its liability was waived by the banker. Mum 2012-M/s Kumar Wire Cloth Manufacturing Co. Ltd.

In Mahindra & Mahindra Ltd. v. CIT (supra) the Hon’ble High Court of Bombay held that no allowance or deduction having been allowed in respect of loan taken by assessee for purchase of capital assets, section 41(1) was not attracted to remission of principal amount of loan.

We have noted that the Hon’ble High Court of Delhi, on identical facts in Tosha International ltd (supra) while following the decision of Hon’ble Bombay High Court held as under “ 2. The assessee was engaged in the manufacturing of black and white picture tubes. The assessee-company ran into huge losses and it ultimately became a sick company and registered with the BIFR. Under the one time settlement scheme, the financial institutions and banks required the assessee to pay 60 per cent of the amount due towards principal and waived the entire interest payment. There is no dispute with regard to the waiver of interest payment. The only objection raised by the Assessing Officer is with regard to the waiver of the principal amount to the extent of Rs. 10,47,93,857 which the assessee had directly credited to the Capital Reserve Account. According to the Assessing Officer the assessee had derived benefit on the basis of either depreciation or utilizing the working capital which would have formed part of the earlier years income. According to the Assessing Officer since the loans ceased to exist, this amounted to cessation of liability and, therefore, it has to be treated as an income. Consequently, the Assessing Officer added the said sum of Rs. 10.47 crores in the income of the assessee. The Commissioner of Income-tax (Appeals) deleted the addition by observing that the remission of the principal amount of loan did not amount to income under section 41(1) nor under section 28(iv) nor under section 2(24) of the Income-tax Act, 1961 (hereinafter referred to as the 'said Act').

In the result, appeal of the assessee is allowed.