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Income Tax Appellate Tribunal, DELHI BENCH: ‘C’: NEW DELHI
Before: SH. H.S. SIDHU & SH. O.P. KANT
Appellant by Sh. T. Vasanthan, Sr.DR Respondent by Sh. C.S. Gupta, Adv. Date of hearing 07.12.2015 Date of pronouncement 20.01.2016 ORDER PER O.P. KANT, A.M.: The present appeal by the Revenue is directed against the order dated 31.12.2012 of the Commissioner of Income Tax (Appeals) –XV, New Delhi, for the assessment year 2009-10 raising following grounds of appeal:
1. On the facts and circumstances of the case and in law the order of the learned Commissioner of Income Tax(Appeals) is wrong and against the provisions of law which is liable to be set aside.
2. On the facts and circumstances of the case the learned Commissioner of Income Tax(Appeals) has erred in holding that provisions of section 41(1) are not applicable in the present case, thereby deleting the addition of Rs. 78,25,727/-.
3. On the facts and circumstances of the case the learned Commissioner of Income Tax(Appeals) has erred in holding that provisions of section 115JB are not applicable in the present case, thereby deleting the book profits computed at Rs. 3,65,49,363/- Galore Print Industries Ltd.
4. The appellant craves to add, alter, amend, modify, add or forego any ground of appeal at any time before or during the hearing of this appeal. 2.1 The facts in brief as culled out from the orders of the authorities below and the submission of the assessee are that the assessee company was declared sick by the Board For Industrial and Financial Reconstruction ( in short ‘BIFR’) on 05.11.2003 and the scheme for its revival was sanctioned by the BIFR vide order dated 16.11.2009. Under the scheme the M/s Uttar Pradesh State Financial Corporation (in short ‘UPSFC’) a secured creditor, was directed by the BIFR to accept a payment of Rs. 117 Lacs as against outstanding dues of Rs. 210.87 lacs as on 31.12.2007. Similarly, another secured creditor M/s Indian Overseas Bank (IOB) was directed to accept payment of Rs. 250 lacs as against total dues of Rs. 692.47 as on 31.12.2007. Further, in respect of the old unsecured Trade Creditors of goods and expenses it was directed as to agree to waive 50% of their dues as on 31.12.2007. 2.2 For the assessment year under consideration i.e. 2009-10, the assessee company recorded a loss of Rs. 76,10,878/- in its books of accounts, and filed return of income on 13.09.2009 declaring a loss of Rs. 10,42,754/- . The case was selected for scrutiny and the notice under Section 143(3) of the Income-tax Act, 1961 (for short “the Act”) was issued and the assessment was completed under Section 143(3) of the Act. The additions in respect of the normal provisions as well as under the provisions of Section 115JB of the Act were made as under:
Galore Print Industries Ltd. Under normal provisions of the Act (a) addition towards unexplained cash deposit in bank of Rs. 9 lacs (b) addition towards sundry creditors waived by the BIFR held as liability remitted under Section 41(1) of the Act amounting to Rs. 78,25,727/- Under the provisions of section 115JB of the Act. (a) Addition of Rs. 4,41,70,241/- towards waiver of interest payable to banks etc., though credited in books of account but not added for the purpose of books profit. 2.3 As the tax liability under section 115JB of the Act was more than the taxable liability under the normal provisions of the Act, the tax was finally computed under Section 115JB of the Act at book profit of Rs. 3,65,59,363/-. 2.4 Aggrieved, the assessee filed an appeal before the learned Commissioner of Income Tax(Appeals). As regard the addition of Rs. 9 lacs, the ld. Commissioner of Income Tax(Appeals) confirmed the unexplained cash deposit in bank. However, in respect of the addition of Rs. 78,25,727/- towards remission of liability under Section 41(1) of the Act and the addition of Rs. 4,41,70,241/- to the book profit towards waiver of interest, the learned Commissioner of Income Tax(Appeals) allowed relief to the assessee. Aggrieved with the relief allowed in respect of the aforesaid two additions by the learned Commissioner of Income Tax(Appeals), the Revenue is in appeal before us.
Galore Print Industries Ltd.
Ground no. 1 of the appeal is general in nature and, therefore, not required to adjudicate upon.
In ground no. 2, the Revenue has contested the finding of the Commissioner of Income Tax (Appeals) that the provisions of Section 41(1) of the Act were not applicable in the present case, deleting the addition of Rs. 78,25,727/-. 4.1 Learned Sr. Departmental Representative relied on the order of the Assessing Officer in respect of issue in dispute. He further, referring to page no. 57 of the paper book of the assessee, submitted that the learned Commissioner of Income Tax (Appeals) has misconstrued the entire facts as the ld. Assessing Officer considered for addition only 50% of the sundry creditors for goods and expenses waived by the BIFR , in terms of Clause 15.31 of the Scheme of Revival by the BIFR whereas the ld. Commissioner of Income Tax(Appeals) in para 5.3 of his order, referred to liability of interest and, therefore, he submitted that the finding of the Commissioner of Income Tax(Appeals) was misplaced. Further, he submitted that the ld. Assessing Officer rightly invoked provisions of section 41(1) of the Act, as the liability in respect of sundry creditors of goods and expenses was waived to the extent of 50% and the assessee was following mercantile system of accounting and thus the assessee was required to credit the equivalent amount in books of account as remission of liability due to operation of law.
Galore Print Industries Ltd. 4.2 On the other hand, the learned Authorized Representative submitted that out of the liability of Rs. 1,56,561,455/-, most of the liabilities were towards statutory liability and other liabilities. Further, he referred to page nos. 80 ant 73 of the paper books and submitted that the assessee has already written back the unclaimed liability in the financial year ending on 31.03.2008 and 31.03.2010. In view of this facts, the learned Authorized Representative submitted that the addition in respect of cessation of liability was not warranted in the case of the assessee. 4.3 We have heard the rival submissions and perused the material on record. We find that the out of “current liability and provision” as appearing under Schedule 10 of the Balance Sheet as on 31.03.2009, which is placed on page 37 of the assessee’s paper book, ld. Assessing Officer has considered the sundry creditors for goods and expenses of Rs. 1,56,51,455/- excluding the advance of Rs. 5.7 crores received against the sale of land and building, details of which is as under: (i) Sundry Creditors for goods of Rs. 98,17,339/- (ii) Sundry Creditors for expenses of Rs. 17,32,706/- (iii) Other liabilities of Rs. 12,03,326/- (iv) Statutory liability of Rs. 20,55,655/- (v) Advance from customers Rs. 8,38,603/- (vi) Unpaid share application money of Rs. 3,825/- 4.4 The Assessing Officer in view of the Clause 15.3.1 of the scheme of revival by the BIFR held that the BIFR reduced creditors to the extent of 50% but no such accounting for waiver was made by the assessee in its books of Galore Print Industries Ltd. account and, therefore, he held 50% of the amount of sundry creditors of Rs. 1,56,51,455/- as a liability ceased to exists invoking section 41(1) of the Act. To decide the issue in dispute, we feel it relevant to reproduce section 41(1) of the Act as under: “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) ……………………………………………………………………. 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.”
4.5 On perusal of the section, we find that the legal fiction of section 41(1) comes in existence, once the two conditions are fulfilled. First, allowance or deduction has been claimed or allowed in assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee. Second, the assessee must have subsequently, (a) obtained any amount (whether cash or any other mode) in respect of loss or expenditure or (b) obtained some benefit in Galore Print Industries Ltd. respect of trading liability. We find that in the case of the assessee both the conditions are fulfilled as regard to the sundry creditors of goods and expenses waived by the BIFR because that amount was claimed by the assessee in earlier year as deduction and same was allowed by the Assessing Officer and due to waiver by operation of law, the assessee has received benefit of reduction of that trading liability. Thus the assessee is liable for remission of liability under the provisions of section 41(1) of the Act. Further, we find that the assessee was following mercantile system of accounting, the said remission of liability in respect of sundry creditors was to be offered in the year when the benefit crystallized to the assessee. The ld AR has submitted the assessee has already written back sundry creditors in year ending on 2008 and 2010 and part of the liability included by the ld AO was statutory liability was not allowed under section 43B of the Act. Further, we find that learned Commissioner of Income Tax (Appeals), has omitted to consider the issue of sundry creditors for goods and expenses and held that the assessee had not claimed the expenditure in respect of interest payable to bank and the UPFC in the earlier assessment year, and therefore, the waiver of the same by the BIFR did not call for addition under Section 41(1) during the current year. The findings of the Commissioner of Income Tax (Appeals) in para 5.3 are reproduced as under: “5.3 Regarding the Ground no. 3 (Mistakenly again numbered as ground no. 2 in appeal memo) of the Appeal relating to addition of Rs. 78,25,727/- u/s 41(1), I am in agreement with the observations of the learned Assessing Officer that the order of the BIFR dated 16.11.2009 (issued on 18.11.2009) did not have the effect of granting waiver u/s 41, Galore Print Industries Ltd. 72(3) and investment of capital gains, since the directions of the BIFT in this regard were only advisory in nature to the income tax department, who were to ‘consider to grant relief to the company from the above referred provisions’ (item 15.8.1 of the sanctioned scheme). However, having said so, the provisions of Section 41(1) will come into operation only where an allowance or deduction in respect of any expenditure or trading liability had been made in any earlier year and subsequently the assessee has received the benefit in respect of such a liability by way of its remission or cessation thereof. The appellant furnished the details of computation of income for earlier years starting from assessment year 200304 onwards, which shows that it had itself in the respective computation of income added back the amount of interest payable to the back aggregating to Rs. 4,21,92,518/- and Rs. 10,826,425/- in respect of interest payable to UPFC since the same was not actually paid. Thus, it is evident that Appellant had not claimed the expenditure in respect of the interest payable to the bank and the UPFC in the earlier assessment years and therefore, the waiver of the same by the BIFR did not call for the addition u/s 41(1) during the current year. In view of the same, the addition made by the learned Assessing Officer is not justified, hence being deleted. 4.6 On perusal of the above paragraph , it clear that the learned Commissioner of Income Tax(Appeals) has not considered the facts of the addition made by the Assessing Officer. Since the learned Commissioner of Income Tax(Appeals) has not decided the issue based on correct facts, we feel it appropriate to restore the matter to the file of the learned Commissioner of Income Tax(Appeals) for afresh adjudication on the facts of the case. Accordingly, this ground of Revenue is allowed for statistical purposes.
In respect of ground no. 3, learned Sr. Departmental Representative submitted that in the final order of Revival by the BIFR dated 16.11.2009, the benefit of Section 115JB of the Act mentioned in the Draft was deleted. He further submitted that the computation of the net worth of the assessee was not verified, either by the learned Commissioner of Income Tax (Appeals) of by the Galore Print Industries Ltd. Assessing Officer and, therefore, the issue needs to be restored to the file of the learned Commissioner of Income Tax(Appeals). 6.1 On the other hand, the learned Authorized Representative relied on the findings of the learned Commissioner of Income Tax(Appeals) and submitted that the profit of the sick unit was required to be reduced out of the book profit of the assessee for the purpose of Section 115JB of the Act as per Clause (vii) below explanation 1 to Section 115JB(2) of the Act. 6.2 We have heard the rival submissions and perused the material on record. The learned Commissioner of Income Tax(Appeals) has allowed the relief as per the provisions of Section 115JB of the Act. The relevant para of the order of Commissioner of Income Tax (Appeals) is reproduced as under: “5.4 The Ground No. 4 relates to computation of income by the Ld AO u/s 115 JB whereby the Ld. AO has made adjustment of by way of addition of Rs. 4,41,70,241/- in respect of the waiver granted by BIFR in respect of interest payable to banks, which has been credited in the P&L account. The Ld. AO was of the view that since this amount was clearly revenue in nature, the same ought to, have been included in the book profits u/s 115JB. On careful consideration of the accounts of the Appellant, the order of the BIFR dated 16/11/2009 and the provisions of Section 115JB, I find that the said company was declared sick in the hearing of BIFR held on 5/11/2003 and for this purpose, a rehabilitation scheme for the company was later approved by the BIFR vide its order dated 16/11/2009, by which the cut-off date was taken at 31/12/2003. Therefore in the current year the appellant company was a declared Sick Industrial Company. The provisions of the Explanation 1 to Section 115 JB provide for reducing from the profit shown in the P&L account, the following items, for the purpose of computing the 'Book Profits' for Section 115J B "(vii] the amount of profits of sick industrial company for the assessment year commencing on and from the assessment year relevant to the previous year in which the said company has become a sick Galore Print Industries Ltd. industrial company under sub- section (1) of the section 17 of the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986) and ending with the assessment year during which the entire net worth of such company becomes equal to or exceeds the accumulated losses. Explanation - For the purpose of this clause, "net worth" shall have the meaning assigned to it in clause (ga) of sub-section (1) of section 3 of the Sick Industrial companies (Special Provisions) Act, 1985 (1 of 1986); or" In view of the above, it is crystal clear that the Appellant company has been declared a sick company under BIFR with effect from 31/12/2003 and has a negative net worth, as determined by the BIFR in its order. Therefore, the profits of the Appellant Company are not liable to be included in the book profits for the purpose of Section1l5JB. Furthermore, the Ld. AO failed to appreciate that the above adjustment of Rs. 4,41,70,241/- was only with respect to a book entry whereby the interest liability was reversed by the Appellant Company in the books prepared as per Company Act 1956 and as evident from its accounts. For the purpose of taxation, the Appellant Company had never claimed such amount, which though was debited in P&L account in terms of the accounts prepared as per the Company Act 1956, but was added back in the computation of income by the Appellant. Therefore, since the Appellant had never debited the above sum, there can't be any addition to the book profits through the adjustment made by the AO. In view of the above, the AO is directed to exclude the profits of the Appellant Company keeping in view the adjustment for reduction from the book profits in terms of Clause (vii) to explanation I to Section 115JB as referred above. 6.3 The ld CIT(A) has rightly made reference of the clause (vii) below explanation -1 to section 115JB(2) of the Act and in view of the said clause, it is clear that the profit of sick industrial company has to be reduced from the book profit till net worth of such company becomes equal or exceeds the accumulated loss and . When the provisions are clear and there is no ambiguity, then, there is no scope of the ld. Assessing officer to decide otherwise. Though, the learned Authorized Representative has submitted that the net worth of the company was negative as computed and placed on page 55 of the paper book, however, the Galore Print Industries Ltd. same has not been verified either at the end of the Assessing Officer or by the ld. Commissioner of Income Tax(Appeals), therefore, in the interest of justice, we feel it proper to restore the matter for verification of this fact . As the matter in ground No. 2 has already been restored to the ld CIT(A), we restore this issue also to the file of ld CIT(A). In case, the net worth of the assessee is negative at the end of the financial year , then no interference in the finding of the ld. Commissioner of Income Tax (Appeals) on issue in dispute is warranted. Accordingly, this ground of appeal
is allowed for statistical purpose.
7. Ground no. 4 is general in nature, not required any adjudication.
8. In the result, the appeal filed by the assessee is allowed for statistical purposes. The decision is pronounced in the open court on 20th January, 2016.