BDA STEEL LTD., MUMBAI vs. ITO 6 (1) (1), MUMBAI

The assessee is aggrieved by the decision rendered by the learned CIT(A) on the following issues: - (a) Addition relating to waiver of loan (b) Disallowance of depreciation (c) Addition made under Section 41(1) of the Income Tax Act (hereinafter “the Act”).

The assessee is a manufacturer and trader in steel. The first issue related to the addition arising on account of waiver of loan. The AO noticed that the company has reduced `75 lakhs from unsecured loans and also from Plant & Machinery. When questioned, the assessee submitted that it had purchased certain Plant & Machinery by taking loan from a bank. Since the assessee incurred substantial losses it defaulted in repaying the loans.

The AO noticed that the assessee has reduced the amount of `75 lakhs from its fixed assets in the books of account. However, the same was not reduced from the WDV of Plant & Machinery while computing depreciation under Income Tax Act. The AO noticed that the WDV of Plant & Machinery as on 01.04.2010 stood at `31,406/-. Accordingly the AO reduced `75 lakhs from the WDV of Plant & Machinery, which resulted in a profit of `74,68,594/-. The AO assessed the same as short term capital gain under Section 50 of the Act. The learned CIT(A) also confirmed the same.

The learned A.R. submitted that, during the course appellate proceedings, the learned CIT(A) called for a remand report from the AO. During the course of remand proceedings, the AO issued notice to the UTI Bank (from whom loan was taken) under Section 133(6) of the Act. The UTI Bank has given reply to the AO, wherein it was stated that it had advanced an amount of `75 lakhs to the assessee for allotment of secured debentures, but the assessee did not issue debentures to the UTI Bank. The UTI Bank also stated that it has not waived the amount of `75 lakhs and the loan amount is still outstanding in its books of account. The learned A.R. submitted that the assessee, in view of the reply given by the UTI Bank, has restored the liability of Rs.75.00 lakhs in its books of account during the financial year relevant to A.Y. 2016-17. The learned A.R. further submitted that the reply given by the UTI Bank clearly shows that there was no waiver of loan liability as presumed by the assessee and hence the question of assessing any income under Section 50 of the Act does not arise. The learned A.R. also submitted that the assessee has wrongly credited the amount of alleged waiver to the account of Plant & Machinery instead of showing the same as capital receipt. Hence, the AO was M/s. BDA Steel Ltd. not justified in invoking provisions of Section 50 of the Act by placing reliance on the entries passed in the books of account.

On the contrary, the learned D.R. submitted that the assessee did not furnish any details relating to waiver of loan liability to the AO. Since the assessee has reduced the amount of `75 lakhs from the value of Plant & Machinery in the books of account, the AO had no other option than applying provisions of Section 50 of the Act.

Having heard the rival submission we are of the view that the this issue needs to be examined afresh at the end of AO, as new facts have been brought on record during the course of remand proceedings. It is the case of the assessee that it has presumed that the loan has been waived by UTI Bank, whereas the reply given by the UTI Bank to the AO during the course of remand proceeding revealed that the loan has not been waived. Hence, the assessee has reinstated the loan in the books of account during the financial year relevant to A.Y. 2016-17. Since the basic facts relating to the issue have undergone a change, we are of the view that this issue requires to be set aside to the file of the AO for examining it afresh. Accordingly we set aside the order passed by the learned CIT(A) on this issue and restore the same to the file of the AO for adjudicating it afresh after affording adequate opportunity of being heard to the assessee.

Next issue relates to disallowance of depreciation. Since the AO had computed short term capital gain under Section 50 of the Act, the AO disallowed depreciation of `4,711/- claimed by the assessee. Since we have restored the issue relating to waiver of loan to the file of the AO, this issue, being consequential in nature, is also restored to the file of the AO. Consequently the order passed by the CIT(A) on this issue is set aside.

Next issue relates to assessment of `4,21,855/- as remission of liability under Section 41(1) of the Act. During the course of assessment proceedings the AO noticed that the assessee was showing liability in the name of two parties namely, Rattan Chand Amrit Lal and New Modern Garments aggregating to `4,21,855/-. The AO issued notices under Section M/s. BDA Steel Ltd. 133(6) of the Act to the above said parties in order to verify the transactions entered with them. Since the above said parties did not comply with the notices, the AO took the view that the amount of `4,21,855/- is no longer payable by the assessee and accordingly assessed the same under Section 41(1) of the Act. The learned CIT(A) also confirmed the same.

The learned A.R. submitted that the AO has not conclusively established that the impugned liability of `4,21,855/- is no longer payable by the assessee. He submitted that the AO had drawn an adverse inference on conjectures and surmises only for the reason that the above said parties did not respond to the notices issued by the AO. He submitted that the liabilities towards these parties are subsisting and hence the tax authorities are not justified in assessing the same under Section 41(1) of the Act.

We have heard the learned D.R. on this issue and perused the record. Admittedly the AO has concluded that the amount of `4,21,855/- payable to the parties cited above is no longer payable only for the reason that the notices issued by him to the above said parties were not responded to. In this regard we agree with the contentions of the learned A.R. that non-compliance of notice cannot lead to the inference that the liability is no longer payable. Nothing was brought on record by the AO to prove that the above said liabilities are no longer payable. Accordingly we are of the view that that the AO was not justified in assessing the above said amount under Section 41(1) of the Act. Accordingly we set aside the order passed by the learned CIT(A) on this issue and direct the AO to delete the addition made under Section 41(1) of the Act.

In the result, the appeal filed by the assessee is treated as allowed for statistical purposes.