ITO 1(3)(2), MUMBAI vs. SAURABH INDUSTRIES LTD, MUMBAI

ORDER

PER N.K. PRADHAN, AM

1. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting addition made u/s 41(1) r.w.s. 28(iv) of the I.T. Act amounting to Rs. 1,00,00,000/- on account of cessation of liability on the ground that it was not of the nature of trading liability ignoring the fact that the assessee is a NBFC (Non Banking Finance Company) engaged in financing activity as a business confirming the cessation of liability to be a trading liability.

2. Whether on the facts and in the circumstances of the case and in Law and without prejudice to ground of appeal No. 1, the CIT(A) ought to have confirmed the addition u/s 41(1) r.w.s. 28(iv) in view of the decision of Hon’ble Bombay High Court in the case of Solid Containers Ltd. (308 ITR 417) and M/s. T.V. Sundaram Ayyangar & Sons (222 ITR 344 (1996).

In response to a query raised by the Assessing Officer (A.O.), the assessee submitted that “in the F.Y. 1994-95 the company had received capital amounts of Rs. 1,00,00,000/- from M/s. S & S Power Switchgear Ltd. (S&SPSL). The said liability is not a trading liability. Thus, on cessation of liability, the same was treated as a capital receipt and no effect was given in the Profit & Loss Account. The amounts received were not from any customer. These were advances which were capital in nature, without having any trade transaction. Accordingly, the write back does not resulting in making the said amount the income of the company. Furthermore, S&SPSL have not claimed the amount as a bad debt and they have not reduced their income by this amount.”

The assessee also submitted before the A.O. that it had written to M/s. S&SPSL on 10.12.2005 stating that “we are not in a financial position to repay the principle loan amount, we request you to please accept Rs. 39,59,875/- towards interest outstanding in full and final”.

The assessee also stated before the A.O. that M/s. S&SPSL vide letter dated 17.12.2005 informed the assessee that “refer your letter dated 10.12.2005 regarding settlement of outstanding loan. We have considered your request and considering your financial position and mounting losses and our urgent need of fund, we accept Rs. 39,59,875/- in full & final settlement of all our outstanding provided you pay the above amount immediately.”

The A.O. found the break-up of outstanding interest as on 01.04.2005 as under:

A.Y. 1999-2000 Rs. 19,00,000/- A.Y. 2000-01 Rs. 19,00,000/- A.Y. 2001-02 Rs. 17,00,548/- Total Rs. 56,00,548/ Less: Adjusted for Rs. 15,40,673/- rent paid Outstanding as on Rs. 39,59,875/- 01.04.2005 3.1 The A.O. was not convinced with the above explanation of the assessee and observed that the cessation of liability has resulted in the benefit to the assessee and the same is covered by the provisions of section 28(iv) of the Act .Therefore, the A.O. made an addition of Rs. 1,00,00,000/-.

4.1 Then the learned CIT(A) passed an order on 28.10.2014 allowing the appeal of the assessee on the above issue on the ground that (i) no deduction or allowance was availed by the assessee in respect of the said liability nor it was in the nature of a trading liability and therefore, the waiver of the loan by M/s. S&SPSL is not a profit chargeable to tax u/s 41(1) of the Act, (ii) the waiver of loan by the lender is not a profit of the nature u/s 28(iv) of the Act and therefore, the same is not taxable as a business income.

The learned CIT(A) placed reliance on the decision in the case of Mahindra & Mahindra Ltd. vs. CIT (2003)261 ITR 501 (Bom) and Bombay Gas Co. Ltd. vs. Additional CIT 54 SOT 13 (2012). Considering the above, the learned CIT(A) deleted the addition of Rs. 1,00,00,000/- made by the A.O.

Reliance was also placed by him on the decision in the case of Parimissetti Seetharamamma vs. Commissioner of Income Tax, 1965 AIR 1905; M/s. Bombay Gas Co. Ltd. vs. Addl. CIT (ITA No. 646/Mum/2009) – ITAT ‘B’ Bench, Mumbai; CIT vs. Alchemic Pvt. Ltd. (1981) 130 ITR 168 (Guj) and CIT vs. M/s. Xylon Holdings Pvt. Ltd. (ITA No. 3704 of 2010) by Bombay High Court.

The learned counsel of the assessee placed reliance on the decision of the Hon'ble Bombay High Court in CIT vs. Sulzer India Ltd. 369 ITR 746 – 747, stating that therein the decision in the case of Solid Containers has been distinguished and decision in the case of Mahindra & Mahindra has been accepted.

The learned Counsel also relied on the judgement of the Hon'ble Bombay High Court in Mahindra & Mahindra Ltd. (supra) wherein the reliance has been placed on the decision in Alchemic (P) Ltd. (supra). It is also submitted by him that Alchemic (P) Ltd. (supra) has been approved by the Hon'ble Supreme Court in CIT vs. Mafatlal Gangabhai & Co. (P) Ltd. (1996) 219 ITR 644. He further stated that there had been no allowance or deduction in respect of any of the preceding years and as such there is no question of applying the provision of section 41 of the Act. Reliance was placed by him on the decision of the Hon'ble Gujarat High Court in the case of CIT vs. Chetan Chemicals Ltd. 267 ITR 770 (Guj).

In T.V. Sundaram Iyengar & Sons Ltd. (supra), the assessee had received certain deposits from customers in the course of carrying on his business, which were originally treated as capital receipts. Since these credit balances standing in favour of assessee's customers, were not claimed by the customers, the assessee transferred such amounts to its profit and loss account. The assessee did not include such amounts in its total income. The Assessing Officer was of the view that because the surplus had arisen as a result of trade transactions, the amounts had a character of income, and accordingly he added the same in its income. On appeal, the Commissioner (Appeals) accepting assessee's contention held that such an amount could not be treated as income either under section 41(1) or under section 28, since these were excess trading advances given by the clients to the assessee. Therefore, he deleted the addition made by the Assessing Officer. The Tribunal held that the amount received in course of trade was of capital nature, the Tribunal, thereafter, straightway applied the principle of Morley v. Tattersall [1939] 7 ITR 316 (CA) and held since it was of a capital nature at the time of the receipt, it could not become assessee's income later on. The Tribunal also rejected reference application under section 256(2) on the ground that no question of law arose. The High Court held that the question sought to be agitated was completely concluded by the decision of that Court in the case of CIT v. A.V.M. Ltd. [1984] 146 ITR 355 and rejected application made under section 256(2).The Hon'ble Supreme Court held as under:

“23. In the present case, the money was received by the assessee in course of carrying on his business. Although it was treated as deposit and was of capital nature at the point of time it was received, by influx of time the money has become the assessee's own money. What remains after adjustment of the deposits has not been claimed by the customers. The claims of the customers have become barred by limitation. The assessee itself has treated the money as its own money and taken the amount to its profit and loss account. There is no explanation from the assessee why the surplus money was taken to its profit and loss account even if it was somebody else's money. In fact, as Atkinson, J. pointed out that what the assessee did was the commonsense way of dealing with the amounts.”

In the case of M/s. Ramaniyam Homes P. Ltd. (supra), the A.O. found that the assessee was indebted to the Indian Bank. By a letter dated 15.02.2006, the Indian Bank mooted a proposal for a one time settlement. The total amount payable under the ‘One Time Settlement Scheme’ was Rs. 10.50 crores and the amount had to be paid on or before 30.04.2006. The company paid only a sum of Rs. 93,89,000/-. The A.O. was of the view that since the assessee accepted the ‘One Time Settlement Scheme’, they should have shown the entire interest waived by the bank as income u/s 41(1) on accrual basis during the relevant assessment year. The A.O. found that the total amount waived was Rs. 10.50 crores and that as per the assessee’s account, the total interest and principal waived worked out to Rs. 9,29,32,594/- which left a difference of Rs. 1,20,67,406/-. The A.O. treated the above amount as income u/s 28(iv). The following two substantial questions of law were before the Hon'ble High Court.

“1. Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in holding that the amount representing the principal loan amount waived by the bank under the one time settlement scheme which the assessee received during the curse of its business is not exigible to tax? 2. Whether on the facts and i the circumstances of the case, the Income Tax Appellant Tribunal ought to have seen that the waiver of principal amount would constitute income falling under section 28(iv) of the Income Tax Act being the benefit arising for the business”.

The Hon'ble Madras High Court answered the above questions of law in favour of the Revenue.

7.1 Now we turn to the decisions relied on by the learned counsel of the assessee. In Parimissetti Seetharamamma (supra), the appellant submitted a return of her income from property and business for the assessment year 1947-48 and disclosed in a statement that the Maharani of Baroda had, between November 1945 and February 1948, “out of natural love and affection”, given her some jewellery and money amounting to Rs. 5,20,000/-. The Income-tax Officer accepted this statement and did not treat the jewellery and money as taxable income. But while considering the payment of further similar amounts in the course assessment proceedings for a subsequent year, the Income Tax Officer decided to issue the appellant a notice u/s 34; he eventually held the gifts made by the Maharani during the years in question to be remuneration for services rendered by the appellant as a maid-servant, or Secretary, and therefore, to be taxable income. The Hon'ble Supreme Court held as under:

“The burden of proof was wrongly placed on the appellant. In all cases in which a receipt is sought to be taxed as income, the burden lies upon the Department to prove that it is within the taxing provision. Where, however, a receipt is of the nature of income, the burden of proving that it is not taxable because it falls within an exemption provided by the Act, lies upon the assessee. The appellant admitted that she had received jewellery and diverse sums of money from the Maharani and claimed that as these were gifts made out of love and affection, they did not fall within the taxing provisions. It was not her case that being income, the receipts were exempt from taxation because of a statutory provision. Consequently, it was for the Department to establish that these receipts were chargeable to tax. Whether a receipt is liable to the treated as income depends very largely upon the facts and circumstances of each case; it is open to the income-tax authorities to raise an inference that a receipt by an assembly is assessable income where he fails to disclose satisfactorily the source and the nature of the receipt. But here the source of income was disclosed by the appellant and there was no dispute about the truth of the disclosure.” In M/s. Bombay Gas Co. Ltd. (supra), the assessee-company is engaged in the business of finance & investment, income from house property, compensation, service charges from sub-tenants and income by way of interest and dividend. As per the note appended to Form No. 3CD of the audit report, there was a cessation of liability amounting to Rs. 35,67,817/- which has not been credited to the P&L A/c and not declared as taxable income. On enquiry by the A.O., the assessee submitted that it owed Rs. 1,20,67,817/- to M/s. Blue Chip Business Centre Pvt. Ltd. towards advance received in earlier years. That party was in requirement of funds and agreed to accept Rs. 85,00,000/- as full and final settlement of the dues. The difference amount of Rs. 35,67,817/- has been transferred to capital reserve. The A.O. brought to tax the sum of Rs. 35,67,817/- as the assessee’s income for the year under consideration. The learned CIT(A) following the decision of the Hon'ble Bombay High Court in the case of Mahindra & Mahindra Ltd. vs. CIT(2003) 261 ITR 501 (Bom) and the decision of the Tribunal in Prism Cement Ltd. vs. JCIT (2006) 285 ITR (AT) 43 ITAT (Mum) held that the A.O. was not justified in making addition to the appellant’s income and hence he deleted the same. In further appeal, the Tribunal observed that (i) it is settled that if the loan was taken for acquiring the capital asset, waiver thereof would not amount to any income eligible to tax (ii) if this loan was for trading purpose and was treated as such from the very beginning in the books of account, as per T.V. Sundaram Iyengar and Sons Ltd.’s case (supra), the waiver thereof may result in the income more so when it was transferred to Profit & Loss Account (iii)in Solid Containers Ltd. (supra), the loan was taken for trading activities and not for acquiring capital assets (iv) in the present case, there is no material on record to show that the loan was taken for trading purposes.

Therefore, the Tribunal held that the waiver of loan liability credited by the assessee under capital reserve account in its books of accounts is a capital receipt and cannot be deemed as remission or cessation of liability.

In Alchemic Pvt. Ltd. (supra), the Hon'ble Gujrat High Court held as under:

“(i) that when the Tribunal declined to allow the revenue to go into the question arising under section 41(1) on the ground that extensive investigation into facts would be necessary, the Tribunal was acting in the exercise of its jurisdiction. The considerations which led the Tribunal to its conclusion not to allow the revenue to raise the contention under section 41(1) namely the necessity to investigate into facts, would also apply to the question whether the amount was assessable under the general principles underlying section 41(1). The Tribunal was justified in its conclusion and the question could not be considered from the point of view of section 41(1) or the general principles underlying section 41(1)” In Xylon Holdings Pvt. Ltd. (supra) the assessee had entered into an agreement with its holding company by virtue of which the liability to pay a loan of Rs. 29.17 lacs taken towards the purchase of a car was taken over by the holding company. The motor car for which the loan was taken continued to be a part of the schedule of assets of the assessee and depreciation thereon was also claimed. The A.O. added back the amount of Rs. 29.17 lacs to the income of the assessee as being taxable u/s 41(1) of the Act. In appeal, the learned CIT(A) held that the liability to repay a loan taken towards the purchase of a motor car which had ceased cannot be subject to tax. This is for the reason that the extinguishment of the loan which was taken for the purchase of a capital asset like a motor car is not a revenue receipt. Also the Tribunal in this case held that (i) the cessation of liability to repay a loan taken to purchase a capital asset does not result in a revenue receipt; (ii) the amount of Rs. 29.17 lacs was not taxable u/s 41(1) as the same was not an expenditure incurred in the earlier years. The Tribunal followed the decision in the case of Mahindra & Mahindra Ltd. (supra). In further appeal, the Hon'ble High Court held that the issue was covered by the decision in the case of Mahindra & Mahindra (supra).

“The facts of the case indicate that no deduction or allowance was availed by the appellant in respect of the said liability nor it was in nature of a trading liability and therefore the waiver of the loan by M/s. S&S Power Switch Gear Ltd. is not a profit chargeable to tax u/s. 41(1) of the Act. Secondly, the waiver of loan by the lender is not a profit of the nature as per the provisions of section 28(iv) of the Act and therefore, the same is not taxable as a business income. In this context decision of the Hon'ble Jurisdictional High Court in the case of Mahindra & Mahindra Ltd. Vs. Commissioner of Income-tax (Bombay) 261 ITR 0501 (2003) relied upon by the appellant, is found to be applicable to the facts of the case of the appellant. Further the appellant has also relied upon the decision of Hon'ble ITAT, Mumbai Bench, in the case of Bombay Gas Company Ltd. Vs. Addl. CIT 54 SOT 13 (2012) Which is also applicable to the facts of the case of the appellant. The ratio of the decisions referred to above make it clear that the cessation of liability of the nature brought to tax by the A.O. in the case of the appellant is neither taxable u/s 41(1) of the Act nor u/s 28(iv) of the Act. Accordingly, the addition made by the A.O. is hereby deleted.”

9.1 We find that the above order of the learned CIT(A) is based on proper appreciation of facts and as per the ratio laid in the decisions cited at length here-in-above. Therefore, we uphold the order of the learned CIT(A).

Order pronounced in the open Court on 12/05/2017