SHRM FOOD AND ALLIED SERVICES P.LTD ( NOW KNOWN RKHS FOOD AND ALLIED SERVICES P.LTD),MUMBAI vs. ITO 8(3)(1), MUMBAI

Grounds taken by assessee in the A.Y.2001-02 in ITA No.595/Mum/2008 is as under:- I. VALIDITY OF RE-OPENING OF ASSESSMENT UNDER SECTION 148 OF THE ACT: 1.1 On the fact and in the circumstances of the case and in law, the learned CIT (A) erred in upholding the validity of reopening by the Assessing Officer the assessment under section 148 of the Act for the 3 595/Mum/2008 & 1116/Mum/2013 M/s. SHRM Food & Allied Services Pvt. Ltd., above year without satisfying the conditions laid down under Section 147 of the Act required to be fulfilled before reopening such assessment. 1.2 The learned CIT (A) and Assessing Officer failed to appreciate the explanations given and submissions made by the appellant with reference to the validity of reopening of assessment under section 148 of the Act. It is submitted that the proceedings initiated for reopening the assessment under Section 148 of the Act for reopening the assessment are bad in law and invalid. In view of the above the appellant prays that the assessment framed by the learned CIT(A) and Assessing Officer be quashed or set aside as null and void and bad in law. II. ADDITION IN RESPECT OF SETTLEMENT OF LOAN UNDER SECTION 41 (1) READ WITH SECTION 28(iv) OF THE ACT RS.1,50,00,000/-: 2.1 On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in upholding the addition made by the Assessing Officer for a sum of Rs.1,50,00,000/- respect of waiver of loan on settlement with the bank by invoking the provisions of Section 41(1) read with Section 28(iv) of the Act.

The Grounds taken in 2001-02 are as under:- I. PENALTY LEVIED UNDER SECTION 271(1)(C) OF THE ACT RS. 59,32,500/-: 1.1 On the facts and in the circumstances of the case and in law, the learned Commissioner of Income Tax (Appeals) [CIT(A)] erred in confirming penalty imposed under Section 271(l)(c) of the Act at Rs, 59,32,500 for alleged furnishing of inaccurate particulars of income of the appellant. 1.2 On the facts and in the circumstances of the case and in law, the learned CIT(A) failed to appreciate the explanation offered by the Appellant in its proper context. The learned CIT(A) failed to appreciate that the Appellant is not guilty of furnishing any inaccurate particulars of income or concealment of income and hence, the levy of penalty under Section 271(l)(c) of the Act is unjustified and unreasonable. 1.3 The appellant has disclosed all the relevant facts accurately and in a transparent manner in support of its claims and contentions and hence, the provisions of Section 271(1)(c) of the Act are not at all applicable.

Common grounds have been raised by assessee in both the years under consideration, accordingly both the appeals were heard together and are now decided by this consolidated order. 6. Rival contentions have been heard and record perused. Facts in brief in the A.Y.2000-01 the assesses filed return of income at los of Rs. 57,60,252/- on 29/11/2000. It was found that during the relevant year previous year, Group SHRM-France one of the share holders, had paid to 5 595/Mum/2008 & 1116/Mum/2013 M/s. SHRM Food & Allied Services Pvt. Ltd., Banque National De Paris, France, an amount of Rs.73,33,834.70 pursuant to invocation of a guarantee provided in connection with overdraft facilities extended to the assessee company Banque Nationale De Paris India. The amount so paid had been waived by Group SHRM. The assessee company written back an amount of Rs. 8,33,834.70 representing the interest component to the profit and loss account under the head other income. AO observed that the balance amount of Rs. 65,00,000/- paid by Group SHRM and waived off becomes income of the assessee itself as there exists no liability for this amount. This net amount of Rs. 65,00,c000/- becomes income of the assessee company.”

In view of the above, A.O held that the amount of Ra. 65,00,000/- chargeable to tax had escaped assessment and accordingly the A.O. reopened the case u/s, 147 of the Act and finally added Rs.65,00,000/- u/s.41(1) of IT Act.

By the impugned order, CIT(A) confirmed the action of the AO against which assessee is in further appeal before us.

We have considered rival contentions and carefully gone through the orders of the authorities below and also deliberated on the judicial pronouncements referred by lower authorities in their respective orders and also as cited by learned AR and DR during the course of hearing before us in the context of factual matrix of the case.

From the record we found that Banque Nationale De Paris (herein after referred to as Bank) had extended cash credit facilities to the 6 595/Mum/2008 & 1116/Mum/2013 M/s. SHRM Food & Allied Services Pvt. Ltd., assessee company in the earlier years. These facilities were secured by way of hypothecations of all movable assets including book debts and stocks. Further, these facilities were guaranteed by Group SHRM - France, one of the shareholders of the assessee company. Since the assessee company was not able to repay the overdrafts availed and interest due thereon, the corporate guarantee given by Groupe SHRM - France was invoked by the Bank for recovery of the amount payable by the assessee company to the Bank. Copies of letter dated 27/10/1998, 22/05/1998 and 11/03/1999 issued by the Bank, in this behalf, are placed on the record. Accordingly, during the year ended 31st March, 2000 Groupe SHRM paid a sum of Rs. 73,33,834.70 (Rs. 65,00,000 for principal amount and Rs. 8,33,834 for interest thereon). This amount was directly paid by Groupe SHRM to the bank as it has given the guarantee and the same was invoked by the bank. Consequently, the assessee company had credited a sum of Rs.65,00,000/- representing the principal component to its Capital Reserve Account and a sum of Rs. 8,33,834/- representing the interest component was credited to the Profit and Loss Account under the head "Other Income - Provision no longer required written back" and duly offered the same to tax. The Principal Component of the amount paid by Groupe SHRM being a loan in respect of which no deduction, benefit or loss was either claimed or allowed, was transferred to Capital Reserve Account and interest component was duly credited to the Profit and Loss 7 595/Mum/2008 & 1116/Mum/2013 M/s. SHRM Food & Allied Services Pvt. Ltd., Account and also offered to tax as income within the meaning of Section 41(1) of the Act. The loan received is a capital receipt and it does not lose its capital nature even when it is renounced or waived by the lender.

We found that the interest component has duly been credited by assessee to the Profit and Loss Account and has also been considered as income within the meaning of Section 41 (1) of the Act. However, neither any loss, deduction or benefit was claimed by the assessee company nor was allowed to it in respect of the Principal component in earlier years, it was carried to Capital Reserve Account. The transaction of obtaining a loan is not a trading transaction and therefore, the same cannot be considered as income exigible to income tax. The rule of law laid down by the Hon'ble Supreme Court in the case of CUT Vs. Ty Sundaram lyengar & Sons Limited (1996) 222 ITR 344 relied upon by assessee also refers to cessation of trading liability. It is useful to refer to the observations of the Supreme Court in this regard; "If an amount is received in the course of trading transaction, even though it is not taxable in the year of receipt as being of revenue character, the amount charges its character when the amount becomes the assessee's own money because of limitation owned by any other statutory or contractual right. When such a thing happens, common sense demand that the amount should be treated as income of the assessee. If a common sense view of the matter were taken, the assessee, because of the trading operation, had become richer by the amount which it transferred to its profit and loss account. The money had arisen out of ordinary trading transaction. Although the amounts received originally were not of income nature, the amounts remained with the assesses for a long period unclaimed by the trade parties. By lapse of time, the claim of the deposit became time-barred and the amount attained a totally different quality. It became a definite trade surplus".

In view of the above, it is clear that secured loan obtained from the bank is not obtained during the course of trading transaction and hence neither the provisions of Section 41(l) of the Act nor the rule of law laid down in the decisions relied upon by AO can be invoked to treat that as income within the meaning of Section 41(1) of the Act. Accordingly, AO is directed to delete the addition so made u/s.41(1).

As we have already decided the merit in favour of the assessee, we are not going to deal with the issue of reopening which is now academic in nature. 15. In the result, appeal for the A.Y.2000-01 is allowed. 16. In the A.Y.2001-02, assessee is aggrieved for addition of Rs.1.50 crores in respect of waiver of loan on settlement with the bank by 10 595/Mum/2008 & 1116/Mum/2013 M/s. SHRM Food & Allied Services Pvt. Ltd., invoking the provisions of Section 41(1) read with Section 28(iv) of the Act. 17. We have considered rival contentions and found that Banque Nationale De Paris (herein after referred to as Bank) had extended overdraft facilities to the assessee company in the earlier years. These facilities were secured by way of hypothecations of all movable assets including book debts and stocks. Further, these facilities were guaranteed by Group SHRM - France, one of the shareholders of the assessee company. Since the assessee company was not able to repay the overdrafts availed and interest due thereon, the corporate guarantee given by Group SHRM - France was invoked by the Bank for recovery of the amount payable by the assessee company to the Bank. The amount payable by the assessee company to the Bank as at 31st March, 2000 stood at Rs. 1,94,44,420.14 which included principal amount of Rs. 1,50,00,000/- and interest component of Rs. 44,44,420.14. During the year ended 31st March, 2001 relevant to Assessment Year 2001-02, Group SHRM - France, the shareholder of the assessee company paid a sum of Rs. 60,00,000 directly to the Bank towards the overdraft facilities extended by the Bank to the assessee company. In terms of the compromise settlement offer accepted by the Bank the balance amount was waived by the Bank. Consequently, the assessee company had credited a sum of Rs. 1,50,00,000 representing the principal component to its capital reserve account and a sum of Rs.44,44,420 representing the interest component was credited to the