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Before: SHRI INTURI RAMA RAO & SMT SUCHITRA KAMBLE
ORDER PER SUCHITRA KAMBLE, JM
This appeal is filed by the assessee against order dated 5/12/2012 passed by Ld. CIT(A) XVII, New Delhi. 2. During the course of hearing, concise grounds of appeal are filed by the AR which are reproduced herein below:
“1. On the facts and circumstances of the case, the order passed by the Ld. Commissioner of Income Tax [(CIT)] is bad, both in the eye of law and on the facts and against the principle of natural justice. 2. On the facts and circumstances of the case, the Ld. CIT(A) has erred, both on facts and in law, in confirming the addition of Rs.3,41,25,895/- made by the Ld. A.O representing amount transferred by the appellant company in its audited accounts for F.Y 2008-09 from capital reserve account to Profit & Loss Account under the head prior period adjustment.
3. On the facts and circumstances of the case, the Ld. CIT(A) has erred, both on facts and in law, in confirming the addition of Rs.3,41,25,895/- made by the Ld. A.O to the book profit of the appellant company u/s 115JB of the Income Tax Act representing principal amount of loan for purchase of Plant and Machinery waived by the bank transferred during F.Y 2008-09 from capital reserve account to Profit & Loss Account.”
The assessee company is engaged in the running of nursing home cum lithotripsy and laproscopic centers. The assessee filed its return of income for the assessment year under consideration on 30/9/2009 declaring a loss of Rs.5,85,83,476/- and subsequently filed revised returns on 8/1/2010 declaring a loss of Rs.5,74,79,318/-. The assessee company recorded prior period adjustment of Rs.3,41,25,895/-. The Assessing Officer relied upon the provisions of Section 41(1) of the Act stating that the remission of the said liability shall be deemed to the profit of the assessee. The Assessing Officer held that the said amount does not qualify to be reduced from the book profit as per the provisions of Section 115JB of the Income Tax Act as the assessee himself shown the amount credited to the P&L A/c as profit before tax and added Rs. 3,41,25,895/- to the income of the assessee. The Assessing Officer further held as under:
“3.4.2 It is seen that the assessee has credited the above income as prior period income and has not offered the same u/s 115JB of the I.T. Act, 1961 as well. The Clause (i) only allows for the above amount to be reduced from Book Profit if the said amount has been offered for tax in the earlier year. The assessee has not explained as to whether the above was offered to tax in the earlier year. Therefore, the above amount cannot be reduced from the P & L Account, as determined u/s 115 JB (2) of the I.T. Act, 1961. In view of the same, the amount is added back to the income of the assessee as the assessee has failed to prove that above amount has been offered to tax in the earlier years when the same was accrued to the assessee u/s 115J or 115JB of the I. T. Act, 1961. The assessee in his own submission has mentioned that the principle loan amount of Rs.3,41,25,895/-, being the waiver amount has been transferred to Capital Reserve in the year 1998. Therefore, this amount has been directly taken to reserves and has never been an item of the P & L Account for the earlier years under consideration. Therefore, it is very clear that the same has never been offered for tax. In view of the same, as per clause (i) for the sums to be reduced from Book Profit, the above amount does not qualify at all. Therefore, the deduction of the same from Book Profit cannot be allowed.”
The Ld. CIT(A) upheld the addition made by the Assessing Officer holding that liability actually ceased to exist in the relevant year by the unilateral act of the assessee. The CIT(A) further held that the income has been recognized during the current year as prior period income and has been shown as profit before tax by the assessee. The CIT(A) held that there is no clause under the Act under which the said income reflected in the Profit & Loss Account can be claimed as exempt. Thus the addition made by the Assessing Officer was upheld by the CIT(A).
The AR submitted that the assessee company is Ravi Hospitals and Nursing Homes. During the year 1987-88, the assessee acquired lithotripsy machine through loans obtained from M/s Barclays Bank. There was a steep increase in the currency rates and, therefore, the payments were made by the Bank of India under DPJ. Since, the payments made by the Bank of India under DPJ could not be made. The Bank of India filed a suit for recovery. The AR further submitted that during the financial year 1997-98 a sum of Rs.3,41,25,895/- was waived by the Bank pursuant to the compromise and the same was transferred to capital reserve account. The financial statements for the year ended 31/3/1998 was enclosed at Page 70 to 94 of the paper book. The ledger account of the loans with Bank of India is also enclosed at Pages 95 to 97 of the paper book. Notes to balance-sheet for the year ended on 31/3/1998 (Page 92 of the paper book) and for the year ended on 31/3/1997 Page 102, 103 of the paper book also makes it absolutely clear. The assessee, therefore, submitted that the said remission of principal amount has been shown as capital reserve since the year 1997-98 to 2007-08 i.e. for almost 11 years. The Assessing Officer as well as the Ld. CIT(A) failed to appreciate that the remission of liability took place in financial year 1997-98 and not in F.Y 2008-09 and hence there was no justification for making this addition in this year. Mere transfer from one account to another account will not make these amounts chargeable to tax. During the year under consideration the Assessing Officer and Ld. CIT(A) both have failed to point out the event which makes these amounts chargeable to tax in the year under consideration. Observation of the Ld. CIT(A) that liability ceased to exist in the relevant year is factually incorrect as the bank having waived the liability for the year 1997-98 and the assessee having written off the amount in books of accounts as is evident from the ledger account and credited the amount to capital reserve the liability ceased to exist in F. Y. 1997-98. The observations of Ld. CIT(A) that this income cannot be claimed exempt under any clause is also wrong. There is no income during the year under consideration. The issue is not of claiming exemption of income, the issue is that there is no income during the year under consideration. On the contrary, law holds that transfer from capital reserve to profit and loss account will be considered as income. Even otherwise, this addition is not sustainable. Evidently, in the present case, the assessee has not claimed any deduction in respect of in laws or expenditure for these laws it is a settled law that where there is a waiver of principle of laws which was a well for the purpose of plant and machinery then such amount of waiver cannot be taxable as income as per the provisions of Section 41(1) of the Act. A similar issue has come up in the case of CIT Vs. Tushar International Ltd 116 TTJ 941 where the Delhi High Court has held that waiver of the principal amount of the loan which the assessee had deducted to the capital account is not chargeable to tax in the hands of the assessee u/s 41(1) nor u/s 28 (iv) nor u/s 2(XXIV) of the Act. Special Leave Petition filed by the Revenue against the said judgment of the Delhi High Court was dismissed by the Supreme Court. Vide order dated 24th July 2009. Reliance is also placed on the following judgments:-
• Mumbai High Court in the case of Mahindra and Mahindra Ltd. 261 ITR 501 (Bom) • Cochin ITAT in the case of Accelerated Freeze & Drying Co. Ltd. Vs. DCIT 31 SOT 442 • Delhi ITAT in the case of CIT Vs. Rollatainers Ltd. in • Mumbai ITAT in the case of Cipla Investments Ltd. Vs. ITO in ITA No. 1996/Mum/2008 33 SOT 317
The DR relied upon the Assessment order as well as the order of the Ld. CIT(A) and submitted that the orders passed by the authorities are just and proper.
We have perused all the records and heard both the parties. We have observed that the assessee had already claim depreciation allowances over the period and has claimed interest expenses either in a capitalized form or in Revenue form on the asset against the liability existent. The said liability no longer remains during the year under consideration. In fact the expenses was also claimed during the past years. The submission made by the assessee before the Assessing Officer that the same should have been treated prior period adjustments of Rs.3,41,25,895/- and the same has been treated as Revenue receipt for the tax purposes. In light of this, the matter is remitted back on the short issue to the Assessing Officer.
In result, the appeal is partly allowed for statistical purpose.
The order is pronounced in the open court on 15th of January, 2016.