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ITA 396/2012
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$~10 * IN THE HIGH COURT OF DELHI AT NEW DELHI
Date of decision: 20th November, 2012 + ITA 396/2012
CIT
..... Appellant Through: Mr. Sanjeev Sabharwal, Sr. Standing Counsel with Mr. Puneet Gupta, Jr. Standing Counsel and Ms. Gayatri Verma, Advocate.
versus
ICC INDIA P. LTD
..... Respondent Through: Mr. Satyen Sethi with Mr. Arta Trana, Advocates.
CORAM: MR. JUSTICE S. RAVINDRA BHAT
MR. JUSTICE R.V. EASWAR
S. RAVINDRA BHAT, J: (OPEN COURT)
The Revenue is aggrieved by an order of ITAT dated 30.09.2011 in ITA No.1174/Del/2011. It urges that the following questions of law arise for consideration: - “1. Whether the Tribunal fell into error in deleting the additions of `1,32,88,530/- made by Assessing Officer under Section 28(iv) of the Act on account of write back of share application money?
Whether in the facts of the case the ITAT fell into error in deleting the addition of `45,41,542/- made by the Assessing Officer under Section 41(1) of the Act on account of write back of loan?”
The assessee is a subsidiary of a company in USA. It received share application money from its holding company in the earlier years to the extent of `1,32,88,530/-. This was partly in cash and partly in kind in the form of capital goods. As on 31.01.2006, balance in the share application money on account of
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`1,32,88,530.08. The assessee had also imported consumable in the earlier years in respect of which the outstanding liability in its books of accounts was `45,28,192/-. “The Board of Directors of the company is a meeting held on January 31, 2006 has recognized that the holding company has waived the obligation of the company to issue shares towards share application money and also waived the obligation of the company to repay the outstanding liability against the import of capital goods and consumables.” Thus the company transferred the entire balance of these two amounts to the capital reserve account in accordance with the resolution of Board of Directors dated 31.01.2006. 3. The Assessing Officer in the proceedings for the concerned year took the position that the sum of `1,32,88,530/- was taxable under Section 28(iv) of the Act as a business receipt and that the sum of `45,28,192/- was taxable under Section 41(1) of the Act. The Commissioner of Appeals, however, reversed the determination of the Assessing Officer. The Revenue’s appeal was dismissed by the impugned order. The Tribunal observed as follows: - “6. We have heard the rival contentions in light of the material produced and precedent relied upon. We find that liability incurred by the assessee on account of share application money and the purchase of fixed assets is undoubtedly on capital account. It was not a liability incurred on account of trading operations.
6.1 As far as taxation u/s 41(1) is concerned, it is clear that the said section is applicable only if an allowance or deduction has been made, in the computation of profits and gains of a business or profession, in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee and subsequently, during any previous year the assessee had obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof. Therefore, in order to apply the provisions of section 41(1) of the IT Act conditions mentioned above should cumulatively exist and that too in respect of the trading liability. This view is supported by the decision of the Hon’ble Supreme Court in the case of Polyflex (India) (P) Ltd. (257 ITR 343). From the facts of the case it is clear that the assessee has never claimed any allowance or deduction in respect of the amounts transferred to the capital
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reserves from the loan account. Further, the facts also clearly show that the amounts outstanding in the loan account were on account of capital liability and not on account of trading liability. Based on the facts of the case and the legal principles, the said transfer from loan account to capital reserve cannot be brought to tax under section 41(1). Accordingly, we do not find any infirmity in the order of the Ld. Commissioner of Income Tax (Appeals) in holding that the addition of `45,41,542/- made by the Assessing Officer u/s 41(1) is liable to be deleted.
As far as taxation of the transfer of `1,32,88,530/- from the share application account to the capital reserve account is concerned, the Assessing Officer has taxed it under section 28(iv) of the IT Act Section 28(iv) reads as under: -
Profits and gains of business or profession.
The following income shall be chargeable to income-tax under the head “Profits and gains of business or profession”,
(iv) the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession.”
Learned counsel for the Revenue urges, by placing reliance on Section 2
(24) of the Act that the definition of “income” is extensive and the artificial distinction sought to be made in the present case by placing reliance on the earlier decisions of this Court and Supreme Court is not warranted. It is emphasised that the amount received towards share application money and more particularly the outstanding liability towards capital goods imported which was written back amounted to income which had to be taxed. The learned counsel placed reliance on the Supreme Court in Sundaram Iyengar & Sons Ltd. v. CIT, (1996) 222 ITR 344.
Learned counsel for the assessee on the other hand contended that the principles applicable in the present case were correctly applied by the Tribunal. He relied upon the judgment in Logitronics Pvt. Ltd. v. CIT, (2011) 333 ITR 386 (Del.) and Rollatainers Ltd. v. CIT, (2011) 339 ITR 54 (Del.). It was submitted
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that the nature and character of the receipt, which was originally capital, did not change when the conversion takes place. In this case, both the share application liability and the capital goods imported shown in the books of accounts assessee were on capital account. These amounts were outstanding for the period 1994 – 2000 when they were transferred to capital reserve account and were shown as such. That for 6-7 years till the assessment year in question i.e. 2006-07, they were shown on capital account revealed its intention to treat as capital since inception. 6. This Court has considered the submissions of the parties. As far as the first question is concerned, the Court is of the opinion that the previous Division Bench decision of this Court in case of Handloom Export Corporation of India v. CIT, (1983) 140 ITR 532 is conclusive on the subject. In that case too the holding company had made over amounts to the subsidiary i.e. assessee-HHEC. The Court noticed the previous rulings of the Allahabad High Court and Madras High Court in Ratna Sugar Mills Co. v. CIT, (1958) 33 ITR 644 and Meenakshi Achi (V.S.SV.) v. CIT, (1963) 50 ITR 206 respectively and held that the amounts given by the HTC to HHEC in order to recoup its losses is akin to a father giving monies to his child to ensure business survival by child. The decision of the Madras High Court in Meenakshi Achi (supra) was confirmed by the Supreme Court subsequently. It would also be appropriate at this stage to notice the following observations in the case of Supreme court in CIT v. Ponni Sugar and Chemicals Ltd., (2008) 306 ITR 392 wherein it was held as follows: - “11. We have examined in this case the 1980 and 1987 Schemes. Essentially all the four schemes are similar except in the matter of details. Four factors exist in the said Schemes, which are as follows: - (i) Benefit of the incentive subsidy was available only to new units and to substantially expanded units, not to supplement the trade receipts. (ii) The minimum investment specified was Rs. 4 crores for new units and Rs. 2 crores for expansion units. (iii) Increase in the free sale sugar quota depended upon increase in the production capacity. In other words, the
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extent of the increase of free sale sugar quota depended upon the increase in the production capacity. (iv) The benefit of the scheme had to be utilized only for repayment of term loans.”
In our view the controversy in hand can be resolved if the test laid down is applied. Therefore, the form and mechanism in which the amount is given as subsidy are irrelevant, but the purpose is.
In Logitronics (supra) a Bench of this Court had considered the previous rulings in Sundaram Iyengar & Sons Ltd. (supra) as well as decision in CIT v. Karan Chand Thapar, (1966) 222 ITR 112. In both the decisions the Court of Appeal decision in Morley v. Tattersall, (1939) 7 ITR 316 (CA) was analysed. This Court in Logitronics Pvt. Ltd. after examining the previous ruling of the Supreme Court observed as follows: - “In the context of waiver of loan amount, what follows from the reading of the aforesaid judgment is that the answer would depend upon the purpose for which the said loan was taken. If the loan was taken for acquiring the capital asset, waiver thereof would not amount to any income exigible to tax. On the other hand, 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. (1996) 222 ITR 344 (SC), the waiver thereof may result in the income more so when it was transferred to the profit and loss account.
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In view of our legal discussion above, what is to be seen is as to whether the aforesaid loan was taken for trading purpose or it was to generate some capital assets. As mentioned above, the assessee is an investment company mainly into the business of purchase and sale of shares. It is also engaged into taking business loans and further financing done to the parties.”
Having regard to the facts in that case the Court held that the assessee’s appeal was without merit since even originally that amount was received for trading purpose.
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In the present case the amounts were never received towards trading purposes. The share application amount was treated as a capital receipt; and likewise the amount of `45,41,542/- was shown as liability towards purchase of capital assets. Having regard to the law declared in HHEC, consequently it never changed its character when it was eventually transferred to the capital reserve in 2006-07 when the conversion took place 6-7 years later. The period of time when the amounts were held by the assessee in its books also factually eliminated the suspicion that the amounts were given as grants or aid.
Having said so there is one aspect to the second question as to whether the assessee claimed any depreciation in respect of the second amount i.e. `45,41,542/-. There is no observation or finding on the part of the assessing officer. If such is actually the position those amounts allowed as depreciation are liable to be added back. For these reasons the matter is remanded, restricted to the second question, for determination as to whether any amount was allowed as depreciation by the assessee towards goods it imported from its holding company.
The appeal is partly allowed in the above terms in terms.
S. RAVINDRA BHAT, J
R.V.EASWAR, J NOVEMBER 20, 2012 hs