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Income Tax Appellate Tribunal, “F” BENCH, MUMBAI
PER SANDEEP GOSAIN, (JUDICIAL MEMBER): The present appeal by the Revenue being Cross Objection by the assessee being C.O. No.155/Mum/2013 are arising out of the order of the learned CIT (A)-7, Mumbai dated 23-02- 2012 passed in Appeal No.CIT (A)-7/DCIT-3(3)/IT-149/10-11 for assessment year 2008-09 on the following respective effective grounds:- Revenue’s Appeal in :
“1. On the facts and in the circumstances of the ld. CIT (A) erred in deleting the addition of Rs.8,41,34,321/-, being disallowance of principal amount of loan waived off by the lender on account of one time settlement of loan with Mafatlal Finance Company Ltd., holding that the loan was acquired for acquisition investment of capital assets as such its waiver cannot be termed as revenue receipt, without appreciating that in the course of assessment proceedings assessee failed to furnish any evidence to show that the loan was acquired for the purpose of acquiring/investment in capital assets. Therefore the benefit of remission of loan amounts to benefits as construed u/s. 28(iv) and is liable to be taxed as held in the case of Solid Container Ltd. Vs. DCIT (308 ITR 417).”
Assessee’s C.O.No.155/Mum/2013
“1. The learned Commissioner of Income Tax (Appeals) ought to have directed for deletion of disallowance made of interest of Rs.14,65,654/- incurred during the year.”
At first, we take up the Revenue’s Appeal in ITA No.4466/Mum/2012. The brief facts in the case are that the Assessee Company engaged in the business of investment in shares, bonds and debentures filed its return of income for assessment year 2008-09 on 30-09-2008 declaring total income at Rs.3,77,24,331/-. The return was selected for scrutiny and the AO after issuing statutory notices and receiving replies passed the assessment order u/s 143 (3) of the Act on 06-10-2010 assessing the total income of the assessee at Rs.12,33,24,300/- after disallowing Rs.8,41,34,321/- in respect of waiver of loan and Rs.14,65,654/- in respect of interest. The AO computed book profit u/s 115JB of the Act at Rs.12,49,97,809/-. Aggrieved by the order of the AO, the assessee carried the matter in appeal before the learned CIT (A) and the learned CIT (A) after considering the facts of the case has partly allowed the appeal filed by the assessee thereby deleting the additions made by the AO on account of principal amount of loan waived for Rs.8,41,34,321/- but sustained the action of the AO in disallowing the interest paid on borrowed loan by holding that the assessee had advanced interest-free loans to its subsidiaries/sister concerns. Aggrieved by this order of the learned CIT (A), the Revenue as well as the assessee, both is now in appeal before us on the grounds mentioned hereinabove.
The sole effective ground raised
by the Revenue before us is that the learned CIT (A) has erred in deleting the addition of Rs.8,41,34,321/- being disallowance of principal amount of loan waived by the lender on account of one time settlement of loan with Mafatlal Finance Co. Ltd. holding that the loan was acquired for acquisition/investment of capital assets and as such its waiver cannot be termed as revenue receipt without appreciating that in the course of the assessment proceedings the assessee failed to furnish any evidence to show that the loan was acquired for the purpose of investment in capital assets. Therefore, as per the Revenue, the benefit of remission of loan amounts to benefit as constituted u/s 28. (iv) of the Act is liable to be taxed as held in the case of Solid Container Ltd. Vs. DCIT reported in 308 ITR 417.
We have heard both the parties and have also perused the materials placed on record as well as the orders of the authorities below.
Before we decide the merits, it is necessary to analyze the order of the learned CIT (A). The relevant part of the order of the learned CIT (A) is reproduced herein below:-
“4.7 I have considered the A.O.’s order as well as the appellant’s A/R submission. Having considered both, I find that the A. O. taxed the aforesaid waiver of Rs.8,41,34,321/- as revenue receipt to the appellant company taking strength from jurisdictional High Court’s decision in the case of Solid Container Ltd. Vs. DCIT 308 ITR 417 on the basis that the appellant company has acquired benefit on account of waiver of the principal amount and hence the A.O. was of the view that as a result of such benefit arisen to the appellant company, the same will be taxable in the hands of the appellant as revenue receipt u/s 41(1) r. w. s. 28(iv) of the IT Act keeping on the jurisdictional High Court decision in the case of Solid Container Ltd. (supra).
4.8 Having considered the appellant’s submission, wherein the appellant’s A/R specifically drawn my attention to the observation of Bombay High Court’s judgment (supra) referred by the A. O., which is given on page no.421 of the decision, which is reproduced as under:-
“The facts of the present case are entirely different as much as it was a loan taken for trading activity and ultimately, upon waiver the amount was retained in the business by the assessee. Thus, the principal stated by the Supreme Court in the case of T. V. Sundaeram Iyenger & Sons Limited (1996) 222 ITR 344 would be squarely applicable to t he facts of the present case. The amount which initially did not fall within the scope of the provisions rendering it liable to tax subsequently had become the assessee’s income being part of the trading of the assessee.”
4.9 The appellant’s A/R, having drawn my attention to the aforesaid observation of jurisdictional High Court decision submits that virtually the case and observation of jurisdictional High Court support the case of the appellant, as the appellant loan was acquired on account of making investment/acquisition of capital asset, hence the waiver of such loan account cannot be termed by any stretch of imagination as revenue receipt, as the said loan was not acquired on trading receipt, but on account of making investment in capital asset. i.e. Investment in shares, hence, the A. O.’s reliance on the aforesaid judgment of jurisdictional High Court is misplaced.
4.10 Having taken note of the judgments cited by the appellant in its submission extracted as above specifically the judgment of jurisdictional ITAT in the case of King Prawns Ltd. vs. ITO, 2011 TIOL – 100-ITA (Mum) and in the case of Iskraemeco Regent Ltd. vs. CIT, 2010-TIOL-776-HC-Madras, wherein the judgment of jurisdictional High Court was dealt on which the A. O. relied upon and then after in both the decision it has been specifically held that the remission or reduction of liability, which is created on capital account as the case of the appellant. Hence in the given aforesaid fact of the appellant’s case, the same cannot result in a revenue receipt making it taxable u/s 28 or u/s 41 of the IT Act. Further I find that the Madras High Court in aforesaid case (supra) has held specifically that once the loan was obtained for the purpose of investing in capital asset then the waiver of such loan in favour of the assessee by the bank will not change the character of receipt with regard to original receipt, which was obtained initially for investing in capital asset and hence the Hon’ble Madras High Court held that waiver of principal sum is also not taxable u/s 28 (4) of the IT Act, 1961.
4.11 In the aforesaid stated facts of the case of the appellant, the appellant’s A/R also specifically drew my attention to the recent judgment of Hon’ble Delhi High Court in the matter of Jubiliant Securities Pvt. Ltd. in of 2010 reported in 197 Taxman 394/9, where3in the Hon’ble High Court has held that once the loan taken was utilized to generate capital asset and i.e. investment in shares, hence on the waiver of such loan, the character of loan will not change and will remain capital receipt itself, as the purpose of loan, which was utilized by the appellant was for investment in shares.
4.12 Thus having taken note of appellant’s submission and also the decisions cited therein, which clearly depicts the contention of the appellant company that the said loan was taken for purpose of long term investment, which is evident from appellant’s submission as extracted above. Hence after taking note of jurisdictional High Court’s decision of Solid Container Ltd. vs. DCIT supra) and Mahindra & Mahindra Ltd. reported in 261 ITR 501(Bom) and also the decision of Delhi High Court in the case of Jubiliant Securities Pvt. Ltd. (supra), I consider it proper and appropriate to hold that the A. O. was not correct in taxing the aforesaid waiver of loan as revenue receipt. Accordingly on the basis of aforesaid facts of the appellant’s case and also having taken note of the legal position pronounced by various courts as extracted above, I consider it proper and appropriate to hold that the aforesaid waiver of loan is capital receipt and hence t he same is not taxable. Accordingly the addition made by the A. O. is deleted. These grounds of appeal are allowed.”
We have analyzed the order of the learned CIT (A) and have also heard the arguments from both the sides. As per the learned DR appearing on behalf of the Revenue it was submitted that in the present case the unsecured loan was received in the course of business and in the present year under consideration the said loan was waived and hence, the liability ceased to exist. While arguing, the learned DR relied upon the judgment of the Hon’ble Bombay High Court in the case of Solid Containers Pvt. Ltd. reported in 308 ITR 417 (Bom.). As per the said judgment also the Hon’ble High Court has considered the provisions of Section 28 (iv) which reads as under:-
“Section 28 (iv) of the Income-tax Act, 1961 – Business income – value of any benefit or perquisite arising from business or exercise of profession – Assessee had taken a loan from ‘p’ during previous year for business purpose which was written back in relevant assessment year as a result of consent terms arrived between ‘p’ and assessee – Assessee claimed that said loan was a capital and, therefore, did not come under section 41(1) – Assessing Officer rejected assessee’s contention and held that credit balance written back was income of assessee in view of fact that it was directly arising out of business activity of assessee and, thus, was liable to tax under section 28 – Commissioner (Appeals) as well as Tribunal, following decision of Supreme Court in CIT v. T. V. Sundaram Iyengar & Sons Ltd. (1996) 88 Taxman 429, upheld the order of Assessing Officer – Whether order of Tribunal was in accordance with settled position of law and, therefore, it was to be upheld – Held, yes”.
5.1 The learned DR while relying upon the aforesaid judgment has categorically pointed out that since the facts of the aforementioned case are similar to the present case, therefore, following the decision of the Hon’ble Supreme Court in CIT v. T. V. Sundaram Iyengar & Sons Ltd. (1996) 88 Taxman 429 it was submitted by the learned DR that the AO has rightly rejected the assessee’s contention and hence in view of the fact that it was directly arising from business activity of the assessee and thus liable to be taxed u/s 28 (iv) of the Act. It was further submitted by the learned DR that the assessee Company has acquired the benefits by entering into One Time Settlement agreement with M/s. Mafatlal Finance Co. Ltd. by not repaying the principal amount of Rs.8,41,34,321/-, therefore, it is crystal clear that the amount received by the assessee being waiver is chargeable to tax and hence, the same has rightly been added by the AO to the total income of the assessee.
On the other hand, the learned AR submitted that during the previous year the assessee had entered into One Time Settlement agreement with M/s. Mafatlal Finance Co. Ltd. in respect of amount payable against outstanding loan. Consequently, an amount of Rs.12,17,18,379/- being no longer payable had been written off. It was further argued by the learned AR that vide letters dated 04-08-2010, 25- 08-2010 and 27-08-2010 submitted before the AO that for chargeability u/s 41 (1) of the Act there must be actual loan during the earlier year.
Whenever the loan relatable is offered for taxation u/s 41(1) of the Act it has been claimed as deduction. However, in the case of principle amount, the assessee company has never been allowed any deduction as no deduction was made for the principle amount. However, the provision of section 41(1) of the Act is not applicable in respect of principle loan amount. In this regard the learned AR relied upon the decision of the Hon’ble Bombay High Court rendered in the case of Mahindra & Mahindra Ltd. Vs CIT reported in 261 ITR 501 (Bom.) and the decision of the Hon’ble Delhi High Court rendered in the case of CIT Vs Tosha International Ltd. reported in 176 Taxman 187 (Del.). Further, the learned AR submitted that regarding taxability u/s 2 (24) for any benefit, whether convertible into money or not, shall be taxed as profit & gains of business or profession. He further submitted that u/s 28(iv) of the Act does not apply to cash receipt. When loan amounts to receipt in cash, it is not covered by the definition of section 28 (iv). In this connection, the learned AR relied upon the judicial pronouncement rendered in the case of CIT Vs Mafatlal Gangabhai and Co. Ltd. [219 ITR 644 (SC)] and CIT Vs Alchemic P. Ltd. [130 ITR 168 (Guj). It was further submitted by the learned AR that waiver is capital account as the loan was utilized in shares of subsidiaries and in other companies. As the said loan was not taken for assessee’s trading, the write back thereof does not give any rise to any tradeable receipts. In this connection, he relied upon the decision rendered in the case of Accelerated Freeze & Drying Co. Ltd. Vs DCIT reported in 31 SOT 442 (Coachin). It was further submitted by the learned AR that whenever on account of One Time Settlement the assessee becomes defaulter in repayment of loan, waiver of the same cannot partake the character of assessable income either u/s 28 (iv) or u/s 41 (1) of the Act and that even the capital receipt is not chargeable to tax u/s 2 (24) of the Act. In this regard, the learned AR placed reliance on the judicial pronouncement rendered in the case of CIT Vs. D. P. Sandu Bros.
Chembur P. Ltd. [273 ITR 1 (SC)].
After hearing both the parties and analyzing the judicial pronouncements as well as the orders of the authorities below we are of the view that the moot question for consideration before us is as to whether the receipt is capital or revenue in nature and whether the assessee was in the business of financing or trading. In this respect we have appreciated the submissions of the learned AR and have also noted that in this regard the assessee has already taken a specific stand before the AO which is already mentioned in the submissions made by the assessee before the AO at Para 6.4 which shows that the AO while dealing with the said issue has noted some factually incorrect facts which are contrary to the written statements made by the assessee before the AO. But the learned CIT (A) has considered the depth of the stand taken by the assessee and the facts of the case and has rightly come to the conclusion that the said loan was taken for the purpose of long term investments and the learned CIT (A) has also taken note of the decisions of the Hon’ble jurisdictional High Court rendered in the case of (i) Solid Containers Ltd. Vs. DCIT [308 ITR 417] and (ii) Mahindra & Mahindra Ltd. Vs. CIT [261 ITR 501 (Bom.)] and the learned CIT (A) after considering the submissions recorded from Para 4.1 to 4.12 of his order has rightly come to the conclusion that the AO was not correct in taxing the aforesaid waiver of loan by treating the same as revenue receipt. No new material has been brought on record by the revenue to rebut/controvert the findings of the learned CIT (A). In view of the above, we find no reason to deviate from the findings of the learned CIT (A). Accordingly, we sustain the findings of the learned CIT (A) on this issue and dismiss the appeal of the Revenue.
The assessee in its C. O. No.155/Mum/155 has raised solitary ground that the learned CIT (A) ought to have directed deletion of disallowance made by the AO on account of interest for Rs.14,65,654/- incurred during the year. We have heard both the parties and perused the materials placed on record. The learned CIT (A) while dealing with this issue has considered the detailed submissions as recorded in Para 5.1 to 5.3 of his order. The learned CIT (A) has also analyzed the judicial pronouncements relied upon by the assessee and has rightly come to the conclusion that the advances extended by the assessee to its subsidiaries were not for business purposes. The learned CIT (A) has also noted that the assessee has not been able to adduce any valid proof or explanation to support the contentions of the assessee. In the absence of any valid explanation/evidence supporting the assessee’s claim, the learned CIT (A) has rightly confirmed the action of the AO The learned CIT (A) while reaching to this conclusion has also appreciated the detailed submission of the assessee wherein it has been specifically recorded that the loan amount has been advanced to the assessee’s sister concerns can be treated as investment made with deposit with the sister concerns. Since, it is not the business activity of the assessee Company as can be seen from the records that this can be invested in the market. It has also been noted by the learned CIT (A) that the assessee was not in a position to adduce any evidence to prove that the business prospect of the assessee are inseparably linked with its sister concerns. Therefore, while rightly appreciating the order of the AO, the learned CIT (A) has confirmed the action of the AO in disallowing the interest expenses because the assessee has advanced interest-free loans to its subsidiaries without showing that there was any business exigency for the same. In view of this, we find no reason to interfere with the findings of the learned CIT (A).
Accordingly, we confirm his findings and dismiss the ground of cross objection raised by the assessee.
In the result, Revenue’s appeal as well as the Cross Objection of the assessee, both stands dismissed. Order pronounced in the open court on 19/8/2016.