LOGITRONICS PVT LTD vs. COMMISSIONER OF INCOME TAX & ANR

Whether Reporters of Local newspapers may be allowed to see the Judgment? 2. To be referred to the Reporter or not? 3. Whether the Judgment should be reported in the Digest?

Having regard to the commonality in the legal question which arises for consideration in these two appeals, they were heard on the same, one after the other. At the same time, after stating the

The AO framed assessment order dated 16.12.2006. For the following reasons, the Assessing Officer held that even waiver of principal amount of loan was also taxable: (a) When an assessee ceases to be liable to pay something that he was legally bound to pay, then in effect, he gains the amount that he was bound to pay. Therefore, principal amount of loan written off was nothing but gain/income in the hands of the appellant. (b) Income pursuant to waiver accrued on settlement because prior thereto claim of the bank was alive and that income must be recognized in the period during which settlement took place. (c) Judgment of this Court in Tosha International Ltd. (supra) was distinguishable because all that was decided was that the principal amount written off was not taxable under Section 41(1) of the Income Tax Act, 1961 (hereinafter referred to as „the Act‟) and it was not held that such income was exempt. (d) Income was taxable under the head profit and gains of business and profession because loan was taken for the purpose of business and one time settlement was an integral part of the business. 4. A perusal of the definition of Section 2(24) of the Act, which defines "income" would include the value of any benefit or perquisite, whether convertible into money or not, that would arise from the business. In order to appreciate the issue involved, it is relevant to extract the necessary provisions of the Act. “2(24)"income" includes-

Similarly, Section 41(1) of the Act deals with "profits chargeable to tax" and the same is extracted herein: “41(1). Where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the Assessee (hereinafter referred to as the first-mentioned person) and subsequently during any previous year (a)the first-mentioned person has 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, the amount obtained by such person or the value of benefit accruing to him shall be deemed to be profits and gains of business or profession and accordingly chargeable to income-tax as the income of that previous year, whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not; or (b)the successor in business has obtained, whether in case or in any other manner whatsoever, any amount in respect of which loss or expenditure was incurred by the first- mentioned person or some benefit in respect of the trading liability referred to in Clause (a) by way of remission or cessation thereof, the amount obtained by the successor in business or the value of benefit accruing to the successor in business shall be deemed to be profits and gains of the business or profession, and accordingly chargeable to income-tax as the income of that previous year. [Explanation 1.-For the purposes of this Sub-section, the expression "loss or expenditure or some benefit in respect of any such trading liability by way of remission or cessation thereof" shall include the remission or cessation of any liability by a unilateral act by the first mentioned person under Clause (a) or the successor in business under Clause (b) of that Sub-section by way of writing off such liability in his accounts.] [Explanation 2].- For the purposes of this Sub-section, "successor in business" means,

In the first appeal, the CIT (A), inter alia, relying upon the decision in Tosha International Ltd. (supra) deleted the addition holding that the provisions of Sections 2(24), 28(i), 28(iv) and 41(1) of the Act were not applicable and as such, the AO was not justified in making addition of `2,91,42,213 being waiver of principal amount of loan.

On second appeal filed by the Revenue, the Income Tax Appellate Tribunal (hereinafter referred to as „the Tribunal‟) by its impugned order dated 30.04.2010 reversed the order of the CIT (A) for the following reasons: (a) Since the Tribunal in the case of Tosha International Ltd. (supra) proceeded to decide the issue on the premise that loan was utilized to acquire capital assets, decision of the Tribunal as upheld by this Court would apply to the cases where the loan obtained is utilized for acquiring capital assets. (b) In the case of Mahindra & Mahindra Ltd. Vs. Commissioner of Income Tax [261 ITR 501(Bom.)], loan was to purchase plant and machinery – dies, tools, etc., i.e., capital assets. It was on these facts that waiver of principal amount of loan was held to be neither covered by Section 28(iv) nor Section 41 (1) of the Act.

Against the order of the Tribunal, the instant appeal is preferred and in the aforesaid circumstances, following substantial questions of law have arisen for consideration:

It is clear from the above that the issue relates to admissibility of waiver of loan. On the other hand, the assessee contends that the issue is covered in its favour by the two judgments of this Court in Tosha International Ltd. (supra) and Commissioner of Income Tax Vs. Jindal Equipments Leasing & consultancy Services Ltd. [(2004) 325 ITR 57]. The Tribunal has held that it is the ratio of the judgment of the Supreme Court in T.V. Sundaram Iyengar and Sons Ltd. (supra), which would be attracted in the instant case.

Before taking up all the decisions in the aforesaid cases, we may state the scheme of the Act on this aspect, in brief. Under Section 4 of the Act, the charging Section, the charge of income tax is upon the “total income of the previous year”. The term „income‟ is defined under Section 2(24) of the Act. In general, all receipts of revenue nature, unless specifically exempted are chargeable to tax. Loan taken is not normally a kind of receipt which will be treated as income. However, when a part of that loan is waived by the creditor, some benefit accrues to the assessee. Question is what would be the character of waiver of part of loan at the hands of the assessee? Waiver definitely gives some benefit to the assessee. Whether it is to be treated as capital receipt? If it is so,

In this context, Section 41(1) read with Section 59 of the Act would become relevant and these provisions have been brought within the sweep of taxation even the remission of debt/liability as income of the order in remission or such waiver amounts to provide or gains of business or provision liable to be taxed under Section 28 of the Act. Answer to these questions is provided in the case law cited by the parties.

Since the outcome of the appeal depends upon the ratio laid down by the Courts in the aforesaid cases and other cases stated before us, we may straightaway proceed to discuss the principle of law laid down in this case. The starting point of discussion, obviously would be the judgment in the case of T.V. Sundaram Iyengar and Sons Ltd. (supra), In the said case, the assessee in the course of trading transactions had collected deposits from customers. Since the customers did not claim the amounts standing to their credit, the assessee had transferred the unclaimed deposits to the profit and loss account. The view of the AO was that since the unclaimed deposits had arisen as a result of trading transactions, therefore, the same represented income of the assessee. In the first appeal, the CIT (A) held that the amount of unclaimed deposits were not revenue receipts but were capital receipts. This view of the CIT (A) was affirmed by the Tribunal. The Supreme Court while taking note of the facts observed that the deposits received by the assessee were in the course of business and were originally treated as capital receipts. The

Applying this principle to case before which the Court held the same to be trading receipt in the following manner:

The ratio of the decision of T.V. Sundaram Iyengar and Sons Ltd. (supra) is that the proposition enunciated in Tattersall (supra) that the quality and nature of a receipt for income tax purposes is fixed once and for all, when the receipt is received and that subsequent operation can change its nature, is not absolute and that in given cases by reason of subsequent events, the amounts which initially were not received as trading receipts may be regarded as business income.

T.V. Sundaram Iyengar and Sons Ltd. (supra) case was decided by Three Member Bench. It would be of interest to point out that barely a month ago, the Supreme Court had delivered another judgment on identical issue in the case of Commissioner of Income Tax Vs. Karam Chand Thapar and Others [222 ITR 112]. Two Hon‟ble Judges who constituted the said Bench were the Members of the Bench which had rendered the decision in T.V. Sundaram Iyengar and Sons Ltd. (supra).

This issue cropped up again in the Supreme Court in the case of The Travencore Rubber & Tea Co. Ltd. v. C.I.T., Trivandrum [243 ITR 158]. Analyzing these judgments, the Court reiterated that in Tattersall (supra), it had been held that the quality and

The Court, at the same time, stated emphatically that “the subsequent event must be such that a different quality is imprinted on the receipt”. In that case the assessee was a plantation company engaged in the business of growing rubber and tea. In 1975, it entered into three agreements with three purchasers for sale of old rubber trees. Each of the purchasers paid a certain amount by way of earnest money and another amount by way of advance under their respective agreements. The total amount of earnest money received by the assessee under the three agreements was `75,000/- and the total amount by way of advance was `3,56,300/-. All the three purchasers defaulted in payment of the balance amounts. The agreements were accordingly terminated and the amounts of earnest money and advance were forfeited by the assessee. The assessee‟s right to retain the amounts of earnest money and advance was confirmed by the Court. The assessee was eventually successful in selling the old rubber trees to a third party but at a loss. In the assessee‟s return for the Assessment Year 1977-78, the assessee claimed that the amounts forfeited were not taxable as revenue receipts. The Supreme Court held that in the instant case there

Coming to the decision of this Court in Tosha International Ltd. (supra), in that case, the assessee company had incurred huge loss as a result, it became sick company and got itself registered by BIFR. Under one time settlement scheme, the banks and financial institutions agreed for payment of 60% of amount due towards principal and waived entire interest amount. The A.O. opined that since the loans ceased to exist, it amounted to cessation of liability, and therefore, it had to be treated as income. The CIT (A), however, deleted the addition by observing that remission of principal amount of loan did neither amount to income under Section 41(1) nor under Section 28(iv) of the Act and nor under Section 2(24) of the said Act. The appeal of the Revenue was dismissed by the Tribunal holding that the remission would become income under Section 40(1) only if the assessee claimed deduction in respect of expenditure or trading liability. Since in that case remission of principal amount of loan so obtained from bank and financial institutions had not been claimed as expenditure or trading liability in any of earlier previous years, waiver thereof would not result in income and was a capital receipt. This Court dismissed the appeal of the

We find that similar issue is discussed at length, from all angles, by the High Court of Madras in the case of Iskraemeco Regent Limited (Originally Seahorse Industries Ltd. and Subsequently Iskraemeco Seahorse Ltd.) Vs. The Commissioner of Income Tax [196 Taxman 103]. In that case, the assessee was engaged in business of development, manufacturing and marketing of electro-Mechanical and Static Energy Meters. It had taken loans from bank for the purpose of capital assets both by way of imports as well as in the local markets. In view of the loss suffered, the assessee went before Board of Industrial and Financial Reconstruction (BIFR) where one time settlement was arrived at by the banker, State Bank of India whereby the Bank waived the outstanding due of principal amount of `5 Crores and a sum of `2 Crores as the outstanding interest amount. The Court held that the waiver of principal amount would not be income, the High Court went into the gamut of entire case law. After discussing the Sundaram Iyengar (T.V.) and Songs Ltd. (supra), it was held not applicable in view of the following reasons: “22. In the present case on hand, admittedly the Assessee was not trading in money transactions. A grant of loan by a Bank cannot be termed as a trading transaction and it cannot also be construed in the course of business. Indisputably, the Assessee obtained the loan for the purpose of investing in its capital assets. A part of this loan amount along with this interest was waived by way of an agreement between the parties. Therefore, the facts involved In the present case are totally different in the facts involved in Commissioner of Income Tax v. Sundaram Iyengar (T.V.) and Sons Ltd. (1996) 222 ITR 344. In the said case, admittedly there was a trading transaction whereas, In the present case it is not so. What has been done In the present case is a mere waiver of loan. It is only a mere waiver which has been effected by the bank in favour of the assesee. There is no change

In Commissioner of Income tax v. Ganesa Chettiar (P.) (1982) 133 ITR 103, this Court has held that a debt forgiven cannot be treated as income. The relevant portion is extracted herein:

It is a well established principle of law that, every deposit of money would not constitute a trading receipt. Broadly speaking even though a receipt may be in connection with the business, it cannot be said that every such receipt is a trading receipt. Therefore, the amount referable to the loans obtained by the Assessee towards the purchase of its capital asset would not constitute a trading receipt. The said issue has been fortified by the judgment of this Court in Commissioner of Income Tax v. A.V.M. Ltd. (1984) 146 ITR 355.”

The Court was also of the view that Section 28(iv) of the Act would not be attracted, as it would not be treated income under the said provision in the following terms: “xxx xxx xxx 27.2. The Division Bench of the Bombay High Court presided over by His Lordship Justice S.H. Kapadia (as he then was) in Mahindra and Mahindra Ltd. v. Commissioner of Income Tax (2003) 261 ITR 501, while approving the ratio laid down by the Division Bench of the Gujarat High Court in Commissioner of Income Tax v. Alchemic Pvt. Ltd. (1981) 130 ITR 168, has held as follows:

The facts involved in the present case are more or less identical to the case dealt with by the Bombay High Court as discussed earlier. The Division Bench has held in the said judgment that the loan agreement in its entirety, as in the present case is not obliterated by the waiver in as much as the Assessee has partly complied with, the Assessing Officer has not gone behind the loan agreement, the loan amount was towards the purchase of capital asset and the waiver of the amount was accepted and hence such an activity is not an income assessable to tax. The Division Bench was also pleased to hold that Section 28(iv) does not apply to the benefits in cash or money and it applies only to a transaction arising from business. The said view was also taken by the High Court of Delhi in Ravinder Singh v. Commissioner of Income-Tax (1994) 205 ITR 353 wherein, the earlier decision in Commissioner of Income Tax v. Alchemic pvt. Ltd. (1981) 130 ITR 168 was quoted with approval, the relevant paragraphs are extracted herein:

Section 41(1(1)(a) of the Act was also held inapplicable and following reasons were given in support of it: “30. Similarly, in so far as the applicability of Section 41(1)(a) of the Income Tax Act is concerned, the same also cannot have any application in as much as the said provision would be applicable only to a trading liability. Accordingly, it was held that a loan received for the purpose of capital asset would not constitute a trading liability and hence Section 41(1) has no application. The said issue has also been considered in Mahindra and Mahindra LTD. v. Commissioner of Income Tax (2003) 261 ITR 501, wherein it has been held as follows: “Alternatively, it was argued on behalf of the Department that in this case waiver constituted remission of trading liability and, therefore, Section 41(1) stood attracted. We do not find any merit in this argument. Firstly, in the present case, the prerequisite of Section 41(1) is not applicable. In order to apply Section 41(1), an Assessee should have obtained a deduction in the assessment for any year in respect of loss, expenditure or trading liability incurred by the Assessee. In this case, the Assessee has not obtained such allowance or deduction in respect of expenditure or trading liability. It is not disputed that the Assessee has paid interest at 6 per cent, over a period of ten years to KJC Rs. 57,74,064. In respect of that interest, the Assessee never got deduction under Section 36(1)(iii) or Section 37. In the circumstances, Section 41(1) of the Act was not applicable. Secondly, even assuming for the sake of argument that the Assessee had got deduction on allowance even then Section 41(1) was not applicable because such deduction was not in respect of loss, expenditure or trading liability. In order to get over this alternative argument, it was argued by the Department that the loan was used to buy toolings on which Assessee got depreciation allowance of Rs. 27,29,585 and, therefore, the amount of Rs. 27,29,585 should be set off against Rs. 57,74,064. We do not find any merit in this argument. The Department's case is that the Assessee got remission of Rs. 57,74,064. Remission for depreciation is not in issue before us. The only argument of the Department throughout has been that the waiver constituted remission of Rs. 57,74,064. In the circumstances, we cannot direct set off of Rs. 27,29,585 against Rs. 57,74,064. It is important to bear in mind that before Section 41(1) came to be enacted, various judgments as reported in Mohsin Rehman Penkar v. CIT (1948) 16 ITR 183 (Bom) and Orient Corporation v. CIT [1950] 18 ITR 28 (Bom) had laid down that remission was not income and in order to get over those judgments Section 41(1) came to be enacted. In the case of CIT v. Phool Chand Jiwan Ram (1981) 131 ITR 37 (Delhi), the Assessee-firm had purchased goods. They had also obtained loans from a party, accounts were settled and the balance was credited to the partners' account. It was held by the Delhi High Court that the amount referable to loans was not a trading liability.

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 Sundaram Iyengar (T.V.) and Songs Ltd. (supra), the waiver thereof may result in the income moreso when it was transferred to Profit and Loss account.

The Tribunal in the impugned judgment has rightly appreciated this ratio/principle of law from the aforesaid judgments, as is clear from the reading of Para 21 of the impugned order: “21. In the light of the above decision of Hon'ble Bombay High Court in the case of Mahindra & Mahindra Ltd. (supra), it is clear that in the case where capital assets are acquired by obtaining a loan, and subsequently, the loan amount is waived by the other party, the principal amount of loan waived by the other party cannot be brought to tax under Section 28(iv) of the Act or under Section 41(1) of the Act.”

However, in the present case, the Tribunal finds that nothing was brought on record to show that the loan taken by the assessee

It is clear from the above that the Tribunal has rightly culled out the principle laid down from the various judgments and has rather given an opportunity to the assessee to prove its case before the AO. In these circumstances, there is no reason or occasion for the assessee to feel aggrieved by the order and prefer this appeal.

We, accordingly, dismiss this appeal holding that no substantial question of law arises and impose cost of `25,000/- upon the assessee.

The AO found that the assessee had credited a sum of `25,00,000/- in Profit and Loss Account on account of remission of liability with respect of certain unsecured loans appearing in its financial results. This amount represented loan taken from one M/s. Sail Holdings Pvt. Ltd. more than ten years ago. Since there was no communication from the party and no claim was made for so many years the loan was written back. It was treated as capital receipt and was reduced from taxable income in the computation of assessable income for the assessment year in question. The

For this and other reasons stated in detail in the assessment order, the AO held that the amount of `25,00,000/- as written off liability was the income of the assessee and added in the taxable income.

The CIT (A) confirmed this order of the AO.

The Tribunal has, however, following the judgment of the Court in the case of Tosha International Ltd. (supra) deleted the addition holding on the ground that since the assessee had not claimed any deduction in respect of this loan, therefore, Section 41(1) would not be attracted.

Challenging the order of the Tribunal, the instant appeal was filed and this appeal was admitted on the following substantial question of law: “Whether learned ITAT erred in deleting the addition of `25 lacs made by the Assessing Officer on account of Unsecured Loan Written Back?”

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 profits done to the parties. While

The Tribunal while allowing the appeal simply relied upon the judgment of this Court in the case of Tosha International Ltd. (supra) and accepted the plea of the assessee that loan was not used in the financing business, but was used in long term investment made in shares. This discussion is in the following term: “8. On perusal of the Ld. CIT (A)‟s order we find that addition has not been made with the aid of Section 41(1) of the Act rather it is confirmed on the ground that assessee was in business of money lending, the moment it took loan in the normal trade transaction then this amount would become working capital or circulating capital in the business of the assessee. If assessee was not required to repay this loan as trading receipt then it would be treated as an income of the assessee. From the balance sheet as on 31.3.1993, we find that this amount was not used in the financing business. It was used in the long term investment made in share. As far as doubting genuineness of the loan is concerned, the AO himself accepted it in 1997-98 while passing the assessment u/s 143 ( ) (sic.). This year also he did not raise such doubt. Thus there was no sufficient material with Ld. CIT (A) to express his apprehension on the genuineness of this loan transaction. Since the amount was not used in servicing alleged money lending business, it cannot be treated as part of circulating capital and to be treated as trading receipt. In view of the above discussion, we allow the ground raised by Assessee and direct the AO not to treat this sum of Rs.25 lacs as income of the Assessee.”

It was also explained by the learned counsel for the assessee, during the arguments, that not only waiver of loans would not constitute income applying the judgment of the Bombay High Court in Mahindra & Mahindra Ltd.(supra), the benefit or perquisite must be one arising in the course of business, in order that the same is taxable under Section 28(iv) of the Act. The assessee is a company engaged, inter alia, in the business of finance and making investments in shares. The loan obtained by the respondent-assessee from SHPL was part of the source of funds employed by the assessee in its business. In pursuance of the business of financing, the assessee advances loans at interest. Such loans are advanced out of interest-free own funds available

Furthermore, as pointed out above, the Tribunal has reached a finding of fact that the amount of loan was not used in financing business. Having regard to these findings of facts constituting the nature of loan, we answer the question in affirmative and accordingly dismiss this appeal.