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Income Tax Appellate Tribunal, DELHI BENCH ‘C’, NEW DELHI
Before: SHRI S. V. MEHROTRA & SMT. BEENA A. PILLAI
per provisions of Section 37(1) of the Act. Accordingly, the ground No.2 raised by the assessee stands allowed. 5. Ground No.3: During the course of assessment proceedings, Ld. A.O. observed from the balance sheet and P & L account of the assessee that the assessee has claimed an amount of Rs.19,57,079/- toward old stock written off and has debited P & L account amounting to Rs.15,76,944/- towards irrecoverable balance written off. Ld. A.O. disallowed the claim of the write off so made by the assessee as there was no business carried on by the assessee during the year. 5.1 Aggrieved by the order of Ld. A.O., the assessee preferred appeal before Ld. CIT(A). Ld. CIT(A) upheld the addition ma de by the Assessing Officer by observing as under: “6.3 The facts of the case show that the entire premises was handed over to IFCI and the place was placed under Lock and Key. Under these circumstances it cannot be said that the business was being carried out by the appellant. The essential condition for writing off of bad debt as deduction u/s. 36(1 )(vii) read with S. 36(2) is that the deduction is available is in respect of any bad debt or part thereof, which has been taken into account in computing the income of the previous year in which the amount of bad debt is written off or of an earlier previous year, Which is written off as irrecoverable in the accounts of the assessee for the previous year and the business should be carried on in the relevant period. The addition made by the Assessing Officer is, therefore, upheld.”
7 I.T.A.No.6080/Del/2013 5.2 Aggrieved by the order of Ld. CIT(A) the assessee is in appeal before us. 5.3 Ld. A.R. submitted that he assessee is engaged in the business of manufacturing Ferro alloys etc and the manufacturing unit of the assessee was situate at Palakkad, Kerala. It has been submitted by the Ld. A.R. that the assessee was running its manufacturing unit through the power supplied by Kerala State Electricity Board (KSEB) and it was having an agreement for purchase of power with KSEB at subsidized rates. Ld. A.R. submitted that due to some dispute and disagreement with KSEB, it refused to supply power to the assessee at subsidized rates and alsorefused to supply power to the assessee at subsidized rates as a result of which, the company had to stop production temporarily and the manufacturing activities were discontinued. The employees of the manufacturing unit went on strike and the unit was under lock out. Due to the lock out situation that existed, the assessee effaced major financial difficulties in terms of loan and liabilities towards IFCI Ltd., as a result of which, the assessee transferred the stock and plant & machinery etc. belonging to the assessee to IFCI Ltd. on ‘as is where is’ basis. The Ld. A.R. submitted that the sundry debtors which existed in the books of accounts of the assessee were also written off as these were not recoverable from the parties. Ld. A.R. submitted that details of sundry debtors have been placed
8 I.T.A.No.6080/Del/2013 at pages 27-28 of the Paper Book and the details regarding old stock are at page 29 of the Paper Book. Ld. A.R. submitted that major portion of irrecoverable balance written off represent bad debts and they have been taken into account in computation of income of the assessee in earlier years. Ld. A.R. submitted that bad debts written off amounting to Rs.50,76,944/- is allowable as business expenses. The assessee has placed reliance on the decision of Hon'ble Chennai High Court in the case of N. Vairaval Chettiyar Vs CIT reported in 72 ITR 114. 5.4 Ld. A.R. further submitted that the assessee, during the year under consideration was maintaining office on which rent mounting to Rs.6,48,000/- was paid. There were other expenses incurred by the assessee towards postage, telegram, telephone, travel & Conveyance and vehicle running and maintenance expenses etc. The assessee was also incurring legal and professional expenses which were paid to various advocates for representing the assessee at various courts in respect of the dispute that may arise. Ld. A.R. submitted that the assessee had not shut down its business in toto and was taking every possible step to resume its business. It was the intention of the assessee to restore the manufacturing unit at Palakkad, Kerala, and thus, he submitted that because no manufacturing activities could be carried out, it cannot be assumed that there was no business
9 I.T.A.No.6080/Del/2013 activities that was carried out by the assessee during the year.
On the contrary, Ld. D.R. submitted that for allowing any deduction u/s 28-43 there has to be income that must have been earned during the year under consideration against which the deduction could be claimed. Ld. D.R. submitted that continuing with the manufacturing activities cannot be said to have been established as the assessee has transferred all its assets on ‘as is where is’ basis to M/s. IFCI Ltd.
We have perused the details filed before us and the arguments advanced by both the parties. On perusal of the statement of account of the assessee for the year under consideration, it is found that the assessee has incurred expenses for maintaining office premises as well as paid salary and other miscellaneous expense relating to the administration of the business. It cannot be said that the business activities were completely shut down after the lock out that took place at the manufacturing unit in Kerala. It is observed that the reason for not continuing the manufacturing activities was due to power supply being cut by KSEB. Further, there is no material to suggest that the manufacturing operation of the assessee were in a stage of more than that of suspension. 7.1 Section 36(1)(vii) and 36(2) of the Act require the assessee to write off the bad debts which are irrecoverable and that it has been considered as income in any of the 10 I.T.A.No.6080/Del/2013 previous year if it relates to such previous year. The Assessing Officer cannot insist the assessee to prove the authenticity of circumstances leading to write off the bad debts. Reliance has been placed on the decision of Hon'ble High Court in the case of DIT Vs Oman International Bank reported in 100 ITD 285. The assessee has furnished the details of financial year in which write off of bad debts were taken into account in computation of income. The assessee has also placed reliance upon the decision of Hon'ble Supreme Court in the case of TRF Ltd. Vs CIT reported in 323 ITR 397. Respectfully following the ratio laid down in the decisions cited above, the disallowance made by the Ld. Assessing Officer stands deleted. This ground of appeal
thus stands allowed.
8. Ground No.4: During the assessment proceedings, Ld. A.O. observed that the assessee has transferred an amount of Rs.22,90,00,000/- to the capital reserve account for the year under consideration. The assessee has submitted that it had secured loan from IFCI Ltd. in the previous year and the amount of Rs.39.40 crores on which interest payable was at Rs.29.65 crores, which stood outstanding as on 31.03.2006. Due to adverse market conditions, the foresaid financial situation, the assessee could not make payments and settlement agreement was entered into by the assessee with IFCI Ltd. and settled the said loan for Rs.16.50. Ld. A.O. treated the remission of Rs.22.90 crores as revenue receipt and 11 I.T.A.No.6080/Del/2013 made addition to the income of the assessee u/s 41(1) of the Act. On appeal, Ld. CIT(A) confirmed the addition made by the Ld. A.O. by observing as under: “Similarly, in the subject case the loan is secured as first charge against all moveable and immovable assets, present and future, installed or in loose condition. The agreement of loan disbursement at no point specifies that the loan has to be utilized for purchase if fixed assets. Similarly there is no mention of any such condition in the balance sheet for the year. The appellant has not enclosed the Bank Account to show that the loan has been utilized only for the purpose of purchase of Fixed Assets and has not formed part of working capital. Since there was no pre-requisite on the part of IFCI that the loan has to be utilized for purchase of fixed assets and the loan has been walled off by the Financial Institutions, therefore, the provisions of section 41(1) are applicable to the appellant. The ground of appeal is therefore dismissed.”
8.1 Aggrieved by the order of Ld. CIT(A), the assessee is in appeal before us now. 8.2 Ld. A.R. submitted that due to heavy losses suffered by the assessee, it was declared sick and had undergone financial difficulties. Ld. A.R. submitted that the amount so transferred to the capital reserve account, did not represent cessation of liability as out of the total principal amount of Rs.39.49 crores Rs.16.50 crores were paid. Ld. A.R. submitted that it was only the balance sum of Rs.22.90 crores that was transferred to the capital reserve being a capital receipt. As there was no remission by any creditor, therefore the provisions of Section 41 were not 12 I.T.A.No.6080/Del/2013 applicable. Ld. A.R. placed reliance upon the decision of Hon'ble Delhi High Court in the case of Roll Attainers Ltd. Vs CIT reported in 339 ITR 54. 8.3 On the contrary, Ld. D.R. submitted that the said loan was taken from M/s. IFCI Ltd., for the purpose of setting up of manufacturing plant in Kerala. He submitted that the claim of the assessee cannot be allowed as there is no acquisition of any fixed asset by the assessee. Ld. D.R. emphasized that the loan was taken for trading purposes and thus should not be allowed by placing reliance upon the decision in the case of CIT Vs T V Sundaram Ayangar Sons reported in 222 ITR 344 (S.C.). 8.4 We have perused the details of the orders passed by the authorities below and the arguments advanced by both the parities. We support the contention of the assessee that every receipt in question with the business cannot be said to be a trading receipt. The assessee is engaged in the business of manufacturing Ferro Alloys and term loan was taken from M/s. IFCI Ltd. for setting up a manufacturing unit a Palakkad, Kerala, which is evident from letter dated 07.01.1998 by IFCI at page 44 of the Paper Book. We have also perused the terms and conditions of agreement entered into between the assessee and IFCI Ltd. which is placed at pages 31.-36 of the Paper Book. It is observed from clause (ii) at page 34 that the assessee has received secured loan by mortgaging
13 I.T.A.No.6080/Del/2013 immovable asset purchased in Kerala for setting up of the manufacturing unit. The clause reads as under: “1. Security: (a) The loan shall be secured by a first mortgage and charge on all the immovable and movable asset, present and future, of HEHL in such form as may be required by IFCI (subject to the prior charge on certain specified movables created / to be created in favour of HEHL’s Bankers by way of security for borrowings for working capital).
8.5 It is also observed that the loan was taken by the assessee for purchase of fixed asset and out of outstanding loan of Rs.39.40 crores, a sum of Rs.16.50 crores was paid to IFCI Ltd. as one time settlement and the balance sum of Rs.22.90 crores was waived by IFCI Ltd. 8.6 The amount of Rs.22.90 crores have been carried to the reserve and surplus and the secured loan has been shown as ‘nil’ for the year under consideration (pages 52- 69 of the Paper Book). The assessee credited the principal amount waived to the capital reserve account in the balance sheet for the year under consideration treating it as capital in nature as per the terms of the agreement between the parties. 8.7 In our considered view, on the basis of the above factual matrix, the amount referred to as loan obtained by the assessee towards the purchase of capital asset will not partake the character of trading receipt under Section 41(1) of the Act.
14 I.T.A.No.6080/Del/2013 8.8 In the present case, the money was received by the assessee in the course of carrying on his business as a term loan for purchase of fixed asset and the waive of the principal amount has been reflected in balance sheet and not in P & L account. 8.9 In the facts of Sundram Ayanger case (supra), the assessee therein had received deposits from its customers. In the course of trading transactions which was not claimed by the customers and it was held that such claim balance represent income of the assessee therein. But, in the facts of the present case, the loan received by the assessee was for the purchase of capital asset. Ld. A.O. has also placed reliance upon the decision of CIT Vs V S Adies Advertisers Pvt. Ltd. reported in 255 ITR 510. A perusal of this judgment, it is observed that the assessee therein had written off claim and credited balances of the supplies during the normal course of its business operation and such credit balance represents money arrived out of normal trade transaction. The facts of this case are also distinguishable for the reason that in the present case before us, the loan was taken by the assessee for carrying out its manufacturing activities at the unit set up in Palakkad, Kerala. Ld. A.R. has placed his reliance upon the decision of Hon'ble Jurisdictional High Court in the case of DCIT Vs Tosha International Ltd. reported in 116 TTJ 941 wherein, in the identical circumstances, it was held that:
15 I.T.A.No.6080/Del/2013
“As per our considered view, for attracting the provisions of S.41(1), the first requisite condition to be satisfied is that’s the assessee should have got deduction or benefit of allowance in respect of loss, expenditure or trading liability incurred by it and subsequently during any previous year, the assessee should have received any amount in respect of such loss, expenditure or trading liability by way of remission or cessation thereof. The remission would become income only if the assessee has claimed deduction in respect of expenditure or trading liability. In Mahindra & Mahindra Ltd. vs. CIT (2003) 182 CTR (Bom) 34 : (2003) 261 ITR 501 (Bom) 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. S.41(1) was not attracted to remission of principal amount of loan. In the instant case the assessee has not got any deduction on account of acquisition of capital assets as the same has been reflected in the balance sheet and not in the P&L a/c, and also the remission of the principal amount of loan so obtained from the bank and financial institution had not been claimed as expenditure or trading liability in any of the earlier previous year.”
8.10 On the basis of above discussion, respectfully followings the decision of Hon'ble Jurisdictional High Court in the case of Tosha International Ltd (supra), we are inclined to hold that the waiver of loan does not amount to cessation of liability and cannot be brought to tax by invoking the provisions of Section 41(1) of the Act.
16 I.T.A.No.6080/Del/2013 8.10 This ground of appeal raised by the assessee stands allowed. 9. In the result, appeal filed by the assessee stands allowed. Order pronounced in the open court on 04th Aug., 2016.