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Order u/s.254(1)of the Income-tax Act,1961(Act) खंडपीठ के अनुसार PER BENCH : Challenging the orders dated 19/04/2011 and 27/04/2011 of the CIT (A)-7,Mumbai,the assessing officers(AO.s)and the assessees have filed above mentioned appeals/cross objections(CO) raising various grounds of appeal.As the issues involved in the appeals/CO.s are almost identical, so, for sake of convenience we are passing a common order for all of them. The details of dates of filing of returns, assessed incomes etc. can be summarised as under: Assessee ROI Filed on Returned Assessment dt. Assessed Income Income M/s. Rama Industries 30.09.2009 Nil 14/03/2011 Nil Ltd. M/s. Rama 29.09.2009 (-)1,21,84,669/- 15/03/2011 (-)20,54,377/- Petrochemicals Ltd. 1857-59-Rama M/s. Rama 30.09.2009 Nil 15/03/2011 Nil Phosphates Ltd.
ITA/1859/Mum/2013: 2.First ground of appeal is about deleting the disallowance to the extent of Rs. 59,373/- u/s. 14A of the Act.During the assessment proceedings, the AO observed that assessee had investment in shares, the income from such investment was exempt from tax, that it had been claiming expenditure on account of interest. He asked the assessee to give details of expenses incurred with respect to investment made and to explain as to why the expenses incurred and claimed in respect of investments should not be disallowed as per the provisions of section 14. A r.w.Rule 8D of the income-tax,rules,1962(Rules).The assessee contended that no borrowed funds had been used for purpose of investment, that it had nil exempt income. After considering the submission of the assessee the AO held that assessee had made investment in shares from the interest-bearing funds, that it had failed to substantiate the claim of not incurring any expenditure in relation to exempt income. Invoking the provisions of rule 8D he made a disallowance of Rs. 59,373/-. 2.1.Aggreived by the order of the AO,the assessee preferred an appeal before the first appellate authority(FAA).Before him,it was argued that investment in question had been made more than 8 to 10 years back out of the profits, that it had not incurred any expenditure for earning exempt income.After considering the submission of the assessee and the assessment order the FAA observed that the assessee had invested Rs. 11.39 lakhs in equity shares of one of the group companies and Rs. 22,000 in shares of BMC bank Ltd long back, that the investments were made at the time out of the own funds and not out of the borrowed funds,that during the year under consideration it had not received any income from those investments. He further held that rule 8D r.w.s.14A (2) could be invoked only if the AO was not satisfied with the correctness of the claim of the assessee in respect of the expenditure incurred in relation to tax free income, that there should be some nexus between expenses incurred with the earning of exempt income before making any disallowance, that the AO had made on ad hoc disallowance without assigning any reason. Referring to the judgment of Godrej and Boyce Manufacturing Company Ltd, he held that the application of rule 8D was justified from assessment year 2008-09 onwards, that admitted AO and managerial expenses could not be ruled out in earning exempt income.He directed the AO to restrict the disallowance of earning exempt income to the extent of 0.5% of ever is of the value of investment. 2.2.Before us,the Departmental Representative (DR)supported the order of the AO. The Authorised Representative(AR)contended that no expenditure was incurred by the assessee for earning exempt income, that investments were made long back, that the investments were made in the group companies. 2.3.We have heard the rival submissions and perused the material before us. We find that the assessee had not claimed any expenditure in its books of accounts for earning tax free income,that it had not earned exempt income during the year under consideration, that the investment was made in purchasing shares of one of the group concerns and of a cooperative bank,that such investments were made long back. In our opinion if the assessee had not claimed any expenditure, no disallowance can be made u/s.14 A read with rule 8D of the rules. In the case of Cheminvest Ltd.(378ITR33),the Hon’ble Delhi High Court has held as under: “The expression “does not form part of the total income” in section 14A of the Income-tax Act, 1961, envisages that there should be an actual receipt of income, which is not includible in the total income, during the relevant previous year for the purpose of disallowing any expenditure incurred in relation to the income. In other words, section 14A will not apply if no exempt income is received or receivable during the relevant previous year.” 2 1857-59-Rama Respectfully following the above judgment,we decide first ground of appeal against the AO.
3.Second ground of appeal is about applicability of the provisions of section 41. (1)/28 of the Act.During the assessment proceedings,the AO found that for the year under consideration the assessee had derived the benefit of waiver of principal amounts in respect of the loans taken from State bank of Hyderabad (Rs.1.20 crores) and Unit Trust of India (Rs.6.25 crores). He observed that the assessee had taken loans from the banks in the normal course of the business, that for the year under appeal it got a benefit of waiver of such loans, that it had no liability to pay such loan. He directed the assessee to explain as to why the benefit derived by way of waiver of outstanding loan amounting to Rs. 7.45 crores should not be considered as income and added to its total income.The assessee contended that there was no reduction of liability,that the receipt was not taxable,that even if the company had been taken to liquidation the preference shareholder would not get any amount, that the companies assets would be insufficient to discharge its creditors, that the preference shareholders would rank after them in priority of distribution of assets, that the waiver of reference capital is a capital restructuring exercise. After considering the submission of the assessee, the AO referred to the case of Solid Containers Ltd.(308 ITR 417),delivered by the Hon’ble position High Court and held that assessee had acquired benefit of waiver of principal amounts, that it had no liability to make payment of Rs. 7.45crores,that the amount in question received by the assessee,being waiver,was chargeable to tax.Accordingly,he made an addition of Rs.7,45,64, 838/- to the total income of the assessee. 3.1.During the appellate proceedings before the FAA, the assessee contended that that the amount credited in the account had been written back in the profit and loss appropriation part of the profit and loss account after the figure of profit before tax commonly referred to as below the line, that the amount in question had been transferred to capital reserve is part of total amount of Rs. 16.98 crores, that the facts of the case under consideration were different from the facts of the case of Solid Containers as well as the judgement of TV Sundram Iyengar and Sons Ltd.,that in both the cases the waiver of loan or amount received was from regular customers/suppliers during the course of trade, that those facts had been clearly discussed in both the cases, in those cases the loan was taken for trading activity, that the facts of the Mahindra and Mahindra Ltd.(128 Taxmann 394) were applicable to the facts of the case under appeal, that the Hon’ble Bombay High Court had laid down the ratio in the case of Mahindra and Mahindra (supra),that no deduction was claimed in earlier years in respect of the liability the provisions of section 41(1) would not be applicable,that the provisions of section 28. (iv) were not applicable,that there was no benefit or perquisite arising to the assessee in that regard. After considering the submission of the assessee and the assessment order, the FAA referred to the provision of sections 41(1)and 28(iv) of the act and held that there had been no allowance or deduction in any of the preceding years, that there was no question of applying the provisions of the above mentioned two sections, it could not be said that the assessee was carrying on business of obtaining loans and the waiver of such loan by banks/financial institution was a benefit arising from such business. He referred to the case of Mahindra and Mahindra Ltd. (supra) and held that waiver of principal amount of debentures was a capital surplus arising out of waiver of principal liability was a capital receipt. 3.2.Before us, the DR contended that facts of the case were similar to the facts of Solid Containers Ltd (supra), that there was cessation of liability, that the provisions of section 41. (1) were applicable. The AR argued that the FAA had rightly pointed out that facts of the case of Mahindra and Mahindra (supra) were similar to the facts of the case under consideration, that assessee had offered the interest portion of the waiver for taxation, that the 1857-59-Rama waiver of principal amount was a capital receipt. He relied upon the case of Xylon Holdings Private Limited (90 DTR 205). 3.3.We have heard the rival submissions and barriers the material before us. We find that the State bank of Hyderabad and unit trust of India had waived Rs. 7.45 crores during the year under consideration, during the assessment proceedings the assessee had claimed that there was no reduction of liability and therefore it was not a taxable receipt, that the waiver of preference capital was a capital restructuring exercise, that the AO had made the addition applying the ratio laid down in the case of Solid Containers Ltd (supra), that the FAA had held that facts of the case under consideration were similar to the facts of case of Mahindra and Mahindra. We are of the opinion that before proceeding further, it would be useful to refer to the cases relied upon by the AO and the AR.In the case of Xylon Holdings Private Limited (supra) it was found that the assessee had entered into an agreement with its holding company by virtue of which the liability to pay a loan of Rs. 29.17 lakhs taken towards the purchase of a car was taken over by the holding company,that the motor car for which the loan was taken continued to be a part of the schedule of assets of the assessee and depreciation thereon was also claim, that the AO added back an amount of Rs. 29.7 lakhs to the income of the assessee as being taxable u/s.41 (1) of the Act.The FAA allowed the appeal of the assessee holding that the liability to repay a loan taken towards the purchase of a motor car could not be subjected to tax, that the extinguishment of loan taken for purchase of a capital asset, like a motor, was not a revenue receipt and hence not taxable. The Department preferred an appeal before the Tribunal.Upholding the order of the FAA, the Tribunal held that cessation of liability to repay a loan taken to purchase a capital asset did not result in a revenue receipt, that the provisions of section 41 (1) were not applicable.It referred to the judgment of Mahindra and Mahindra Ltd.(supra) and held that the amount of Rs. 29.17 lakhs was not taxable either u/s.41 (1) or 28 (iv)of the act. Before the Hon’ble High Court it was contended on behalf of the revenue that the decision in the matter of Mahindra and Mahindra Ltd.(supra) was not applicable in view of the subsequent decision delivered in the case of Solid Containers Ltd.(supra), that in the case of Solid Containers Ltd.the court had distinguished the decision rendered in the matter of Mahindra and Mahindra Ltd.,that it was held that waiver of loan taken for trading activity would become the assessee’s income and subject to tax. On behalf of the assessee it was argued that issue stood covered by the decision of the Hon’ble court in the matter of Mahindra and Mahindra Ltd.,that the judgment in the matter of Solid Containers was not applicable, that in that case loan was taken for business purposes and not for purchase of capital asset. Deciding the appeal, the Hon’ble High Court held as under: “8.We have considered the submissions. The issue arising in this case stand covered by the decision of this court in the matter of Mahindra and Mahindra (supra). The decision of this court in the matter of Solid Containers (supra) is on completely different facts and in applicable to this case. In the matter of Solid Containers (supra) the assessee therein had taken a loan for business purposes. In view of the considered terms arrived at, the amount of loan taken was waived by the lender. The case of the assessee therein was that the loan was a capital receipt and has not been claimed as deduction from the taxable income in the earlier years and would not come within the purview of section 41 () of the act. However this court by placing reliance upon the decision of the apex court in the matter of CIT v. Subramanian & Sons Ltd to 22 ITR 344 held that the loan was received by the assessee for carrying on its business and therefore, not a loan taken for the purchase of capital assets. Consequently, the decision of this court in the matter of Mahindra and Mahindra Ltd (supra) was distinguished as in the said case the loan was taken for the purchase of capital asset and not for trading activities as in the case of Solid Containers Ltd (supra). In view of the above the decision of this court in the matter of Solid Containers Ltd (supra) will have no application to the facts of the present case and the matter stands covered by the decision of this court in the matter of 1857-59-Rama Mahindra and Mahindra Ltd (supra). The alternative submission that the amount of loan written off would be taxable u/s.28 (iv) of the act also came up for consideration before this court in the matter of Mahindra and Mahindra Ltd (supra) and it was held therein that section 28 (iv) of the act would apply only when a benefit or perquisite is received in kind and has no application where benefit received in cash or money .
In view of the issue arising this appeal being covered by the decision of this score in the matter of Mahindra and Mahindra Ltd (supra), no substantial question of law arises and both the questions are dismissed.” We are of the opinion that if the judgments of Mahindra and Mahindra Ltd.(supra) and Solid Containers Ltd.(supra)are analysed in light of the decision of Xylon Holdings private Ltd.,it becomes clear that the basic issue to be decided for invoking the provisions of section 41 (1) of the Act is to decide the nature of the transaction.If the loan waived relates to capital asset the waiver would not result in a revenue receipt,but if the waiver of loan is for trading liability, the AO will be justified in invoking the provisions of section 41(1). Thus, the nature of the loan is the touchstone on which the waiver is to be examined.In other words,if a loan was taken for acquiring a capital asset,waiver thereof would not amount to any income exigible to tax. On the other hand,if the loan was for trading purpose and was treated as such from the very beginning in the books of account the waiver thereof may result in income more so when it was transferred to the profit and loss account.We find that in the case under consideration,this very basic aspect has not been looked into by the AO or the FAA.Before the AO the assessee had stated that there was no reduction of liability and that it was a capital restructuring exercise.The assessee had not produced the documents with regard to sanction or waiver of the loan and the AO had not called for such details.The FAA also did not deliberate upon the issue as to whether the loan was in the field of capital asset or was trading liability.Nomenclature given by the assessee/AO do not decide the real nature of any transaction until and unless the relevant documents are examined and looked into.It is true that cases relied upon by the AO/FAA laid down certain principles. But,how those principles were applicable to the facts of the case under consideration has not been discussed either by the AO/FAA.We are of the opinion,that provisions of section 28 are not applicable to the facts of the case.But,same cannot be held for the provisions of section 41(1)of the Act, as proper investigation about the real nature of the waived amounts have not been carried out. Considering the peculiar facts and circumstances of the case,we are of the opinion that the matter needs further verification .Therefore,in the interest of justice,matter is being restored back to the file of the AO to decide the issue afresh after considering the loan sanctioning and the loan waiver documents.He is directed to afford a reasonable opportunity of hearing to the assessee. Here,we would like to refer to the case of Logitronics P.Ltd.(333ITR386),delivered by the Hon’ble High Court of Delhi.The facts of the case were that under a one-time settlement with the bank,the assessee discharged Rs.1, 85, 00,000/- against the principal amount of loan of Rs.4,76,92,213 and the remaining sum of Rs.1, 90,42,295/-was waived,that the AO taxed the principal amount of loan waived as income,that the FAA deleted the addition holding that the provisions of sections 2(24),28(i),(iv) and 41(1) were not applicable and that the AO was not justified in making the addition of Rs.2,91,42,213/-being the principal amount of loan waived. The Tribunal reversed the order of the FAA.On further appeal,the Hon’ble High Court held as under: “The Tribunal had found that nothing was brought on record to show that the loan taken by the assessee from the bank was utilised for the purpose of acquiring capital assets. On the contrary, the material on record indicated that the assessee had obtained the loan or credit facility by way of hypothecation of finished goods, semi-finished goods, raw material, book debts, receivable claims,securities and rights by way of first charge which indicated that the assessee had obtained the loan facility for its business activity or trading operations. On the 1857-59-Rama question whether the whole amount of the loan had been utilised either for the purpose of acquiring a capital asset or for the purpose of business activity or trading activity the Tribunal remitted the matter to the Assessing Officer for fresh adjudication.The Tribunal had rightly culled out the principle laid down from the various judgments and had given an opportunity to the assessee to prove its case before the Assessing Officer. Therefore, there was no reason or occasion for the assessee to feel aggrieved by the order of the Tribunal.” Considering the above discussion,we decide the second ground of appeal
in favour of the AO, in part. C.O.106/Mum/2014(2009-10) 4.During the course of hearing,the AR stated that if the Ground of appeal No.1 raised by the AO was decided against him the C.O. filed by the assessee would become infructuous.While adjudicating the appeal filed by the AO,we have decided issue of 14A-disallowance against the AO and in favour of the assessee.Therefore, C.O. filed by the assessee is not being adjudicated treating the same as infructuous. ITA/1858/Mum/13 and C.O. 107/Mum/2014(A.Y.2009-10) 5.Grounds raised by the A.O. in the appeal and by the assessee in the C.O. are identical to the grounds taken by them in the appeal No.ITA/1859/Mum/2013 and C.O.No.106/Mum/2014 in the case of Rama Phosphates Ltd.The only difference is about the amounts involved.The AO had made a disallowace of Rs.2.43 lakhs u/s.14A r.w.8D of the Rules.The disallowance was partly upheld by the FAA.Similarly,the assessee had settled its outstanding principal amount with Bank of India and the sum involved by way of waiver was Rs.98.86 lakhs. 6.Following our orders for the earlier appeal,we decide Ground No.1 against the A.O.Ground No.2 is partly allowed .The AO is directed to make further verification as stated in the earlier appeal.He would afford reasonable opportunity to the assessee. 7.We are not adjudicating the C.O. treating it as infructuous. ITA/1857/Mum/2013 (A.Y.2009-10) 8.The AO has raised only one Ground of appeal in this case and it pertains to waiver of loan amount and applicability of section 41(1)/28 of the Act. Following our earlier orders the issue is restored back to the file of the AO for fresh adjudication.He would decide the issue after hearing the assessee.Ground No.1 is decided in favour of the AO in part. As a result,appeals filed by the AO.s.stand partly allowed.CO.s.of the assessee are treated infructuous. फलतः िनधा�रती अिधका�रय� �ारा दािखल क� ग� अपील� अंशतःमंजूर क� जाती ह�.िनधा�रती के ��या�ेप िन��भावी करार �दए जाते ह�. Order pronounced in the open court on 28th, March, 2016. आदेश क� घोषणा खुले �यायालय म� �दनांक 28 माच�, 2016 को क� गई । Sd/- Sd/- (अिमत शु�ल/ Amit Shukla ) (राजे�� / Rajendra) �याियक सद�य / JUDICIAL MEMBER लेखा लेखा लेखा सद�य लेखा द�य द�य / ACCOUNTANT MEMBER द�य मुंबई Mumbai; �दनांकDated : 28.03.2016. Jv.Sr.PS. आदेश क� क� �ितिलिप �ितिलिप अ�ेिषत अ�ेिषत/Copy of the Order forwarded to : आदेश आदेश आदेश क� क� �ितिलिप �ितिलिप अ�ेिषत अ�ेिषत 1.Appellant /अपीलाथ#
2. Respondent /��यथ# 6