DCIT 10(1), MUMBAI vs. ZYMA LABORATORIES LTD, MUMBAI

This appeal is directed by the Revenue against the order dated 21.05.2013 passed by CIT(A)-21, Mumbai raising only one ground regarding the deletion of addition of Rs. 4,04,02,671/- made by Assessing Officer (AO) in its order dated 22.12.2009 on account of cessation of liability.

This is second round of appeal, on earlier occasion the assessee approached this Tribunal against the various additions/disallowance made by AO, in the assessment order against which the appeal was preferred to the CIT(A) and thereafter to this Tribunal. The appeal of assessee was registered vide and was disposed of vide order dated 10.08.2012 and the matter was remanded to the file of CIT(A) with the direction to give proper opportunity, as the order passed by the CIT(A) was passed without giving opportunity to the assessee. 3. The impugned order 21 .05.2013, against which the present appeal is filed was passed in giving effect the order of ITAT dated 10.08.2012, wherein the revenue has raised only one ground about the deleting of addition of Rs. 4,04,02,671/- on account of cessation of liability.

We have heard the Departmental Representative (DR) of the revenue and Authorised Representative (AR) of the assessee, DR argued that the AO passed the order after correctly appreciating the fact as narrated in paragraph no. 2.2.3 of assessment order and the addition was wrongly deleted by the CIT(A).

The AR of the assessee has argued that CIT(A) while dealing with this ground in paragraph no. 4.3 and while appreciating the fact of the case and law, the CIT(A) has correctly appreciating the fact that deletion of addition and the finding of CIT(A) does not require any interference.

We have considered the rival contention of the parties and perused the material available on record.

The AO while making the addition has observed that the assessee in his Profit & Loss A/c credited Rs. 4,04,87,771/- ‘being balances written back’. However, in the computation of income ‘Waiver of Loan of Rs. 4,04,02,671/-’ is reduced from the net profit taxable u/s 28(iv) or 41(1) and the AO sought the details of receipt by way of waiver of loan along with documentary support.

The assessee explained before the AO that about the genesis of loan that Zyma Laboratory Ltd. And M/s Lovin Crae Product Pvt. Ltd was amalgamated w.e.f. 01.03.2004 in Zyma Laboratory Ltd and earlier to this amalgamation m/s Lovin Cre Ltd. By business transfer agreement 01.04.2004 acquired manufacturing plant and liability from Orgo Pharma Chemicals which was a partnership firm. M/s Orgo Farma Chemicals after transfer of manufacturing plant and liability is also carriying other business. Thus the assets and liability including manufacturing plant was taken over by M/s Lovin Care Product Pvt. Ltd in the said agreement for a consideration for a consideration of Rs.100,000/-, and the consideration of Rs. one lacks was in excess of assets and liability of Orgo Pharmaceuticals. And as per the details of assest and liability of Orgo Chemicals , the assest was of Rs. 163,44,43,978/- and Liablity of Rs. 163,44,43,978/-. M/s Orgo Chemical was extended a loan of Rs. 4,04,02,671/- by M/s Landmark Builder which is unit of M/s Synchem Chemical(I) Pvt. Ltd. And this loan was advances to M/s Khandelwal Estate by Orgo, which was used for the payment of loan of HDFC.

It was further explained to the AO that the loan which Zyma Lab Ltd has written off is a part of liability which it has received from partnership firm of Orgo Pharma Chemical through Lovin Care Product Pvt Ltd which was amalgamated and later this Zyma

The contention of assessee was not accepted by the AO and treated this amount as income chargeable to the tax was added to the business income.

The CIT(A) while dealing with the ground has observed that to satisfy the condition of section 41(1), three condition must be satisfied (i) the loan is for capital purpose or trading purpose, (ii) is there any deduction or allowance in the earlier year which accrues benefit in respect of loan, expenditure, or trading by way of remission of cessation (iii) whether there is a succession to business on the fact of the case and further observed that the exemption whether the loan advanced by Landmark Builders to Orgo Pharma Chemicals in FY-2002-03 is for trading purpose or capital purpose, the loan of Rs. 4.04 Crore advanced by Landmark Builder which was unit of Synchem Chemical to Orgo Pharm Chemical which is partnership firm of Orgo Pharma Chemical in term of advance this loan to Khandelwal Estates Pvt. Ltd. has utilized this amount for payment of loan to HDFC. The CIT(A) further observed that M/s Orgo Pharma entered in business transfer agreement from 01.01.2004 and sole certain assets and liability to M/s Lovin Care Pvt. Ltd. for a consideration of Rs. 1,00,000/- and that Lovin Care Pvt. Ltd. amalgamated w.e.f 01.03.2005 with Zyma Laboratory Ltd.. M/s Orgo after transfer of liability and assets was also conducting their own business on examination of above details and examining the details it had to be seen whether the loan was for trading purpose or capital purpose and concluded the loan was utilized only at the end of the re-payment of loan which is capital in nature as it is treated as a loan standard for any trading purpose and for fulfilling the condition no. 2 & 3 of section 41(1), the CIT(A) observed that whether assessee claimed any deduction or allowance in respect of loan expenditure of trading liability and examined the returns of Orgo Pharma Chemicals to which loan was advanced by Landmark Builders and after examining the return of income for FY-2002- 03 of M/s Orgo Pharma Chemical concluded that it had not paid any interest to the Landmark Builder nor claim any interest and further concluded that neither the assessee claimed deduction in FY-2002-03 nor Orgo Pharma Chemical claimed as interest as deduction for FY-2005-06 & 2006-07 by M/s Orgo Pharma Chemicals and further concluded that if deduction is claimed by the assessee in the return of income then section 41(1) is not attracted. 12. The CIT(A) further concluded that M/s Orgo Pharma Chemicals entered into business transfer agreement in which certain liability and assets were transferred to M/s Lovin Care Pvt. Ltd. on 01.01.2004 for a consideration of Rs. 1,00,000/-.

While considering the various transactions in between Orgo Pharma till the assessee, the CIT(A) concluded as under: “4.3(v) Further to satisfy the condition for Succession of business in this case, as per I. T. Act Explanation 1 to sec.41(1) examine the details of transfer of M/s.Orgo Pharma Chemicals entered business transfer agreement in which certain liabilities and assets were transferred to M/s. Lovin Care Products P. Ltd. on 01.01.2004 for a consideration of Rs.1,00,000/-. The assets transferred from partnership firm M/s. Orgo Pharma Chemicals to M/s. Lovin Care Products P. Ltd. 1S Rs.163,44,34,971/- and aggregated liabilities are Rs.163,43,34,970/-. After the transfer also M/s.Orgo Pharma Chemicals is existing as a business concern and conducting the business and it is also filing income-tax returns in its own name i.e. M/s. Orgo Pharma Chemicals, Partnership Firm. If we examine sec.170 of I. T. Act in which succession was defined, it is evident that after the succession of business existing unit fully looses its identity and income-tax return will be filed up to the date of succession only, later successor files the income-tax return? .it 'does not even exist as business concern. But we examine the above details Orgo Pharma Chemicals was continuing as business concern after transferring certain assets and liabilities, .hence, A.O's contention that there is succession is not factually correct as per law. This issue has come into consideration in the case of Oriental Fire & General Insurance Co Ltd v. CIT (2000) 244 ITR 631 (Del). The Delhi High Court held as under: “Succession implies that there is end of an entity carrying on the business, and its place has been taken by an entirely new entity to run in continuity and as a going concern, the same business. Substantial identity and continuity of the business must be preserved. The tests of change of ownership, integrity, identity and continuity of a business have to be satisfied before it can be said that a person “succeeded” to the business of another” It is clear from the above decision also that the original concern will look the identity and need not file I.T. Return. As Orgo Pharma Chemicals is existing after the transfer of certain assets and liabilities, hence, the condition no.(iii) that there is succession in business is not factually correct. As there is no succession business as per sec.41(1) Explanation of Sec. 170 of I.T. Act, hence condition no. (ii) was not fulfilled. A.O’s addition is not tenable in law.

The AO while making the addition relied upon the case of CIT vs. T.V. Sundram Iyngar & Sons reported vide 222 ITR 344(SC) and Solid Containers Ltd. vs. DCIT 308 ITR 417 on the issue of treating the loan as trading liability. The fact of the T.V. Sundram Iyngar case are entirely different from the fact of the case in our hand the case in our hand in respect of re-payment of loan which was assigned on account of scheme of amalgamation which was approved by Hon’ble Bombay High Court and in the case of T.V.Sundram, the assessee was given trading advances which were adjusted by carrying on the business and credit balance standing in favour of the assessee were claimed by the customer, the assessee transferred the said amount to Profit & Loss A/c and the case of Solid Containers Pvt. Ltd., the fact of the present case is also at the variance and Solid Containers, the assessee has taken a loan for purchase of Car and deducted the amount from Profit & Loss a/c and further claimed deduction but in the present case there was no deduction from return of income from any of the predecessor interest of the assessee rather it is an assignment of liability on transfer/amalgamation of company and assets and the CIT(A) after considering the entire fact available before him, the addition was deleted.