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Income Tax Appellate Tribunal, “A” BENCH, CHENNAI
Before: SHRI A. MOHAN ALANKAMONY & SHRI S.S. GODARA
आदेश /O R D E R
PER S.S. GODARA, JUDICIAL MEMBER:
This Revenue’s appeal for assessment year 2009-10, arises from order of the Commissioner of Income Tax (Appeals)- I, Chennai, dated 24.02.2014 passed in restricting interest disallowance made u/s 36(1)(iii) of ` 6.12
- - 2 crores to `3.25 crores and deleting addition of `2,25,13,704/- u/s 28(iv) arising from waiver of principal amount in one time settlement scheme, in proceedings under Section 143(3) of the Income-tax Act, 1961 (in short 'the Act').
The assessee-company manufactures Indian made foreign liquor. It filed its return on 20.09.2009 stating loss of ` 23,29,24,828/-. The A.O. took up ‘scrutiny’. He inter alia noticed an interest outgo of `17,60,21,995/-. He was of the view that the assessee had utilized both unsecured and secured loan funding for mailing interest free advance to is associate concern M/s REPL. He opined that there was no commercial expediency involved therein and it had resulted in deprivation of financial sources only. He quoted history of this issue to have arisen in regular assessment framed in earlier assessment years. There is no dispute that the CIT(A) has deleted identical disallowances in the past. The Assessing Officer sought to distinguish the relevant facts for invoking Section 36(1)(iii) and treated the impugned interest outgo as unfruitful for disallowing the sum in question of `6,11,69,042/-
- - 3 I.T.A. No.1585/Mds/2014
The assessee preferred an appeal. The CIT(Appeals) restricts the impugned interest disallowance @ 15% of the interest relatable to diversion of interest bearing funds to `3.25 Crores as under:-
“5.2 I have gone through the facts and circumstances of the case. The same issue has been lingering from A.Y.02-03 onwards. My ld. predecessor while passing order for A.Y.08- 09 vide his order in ITA No.654/10-11/A.III dated 11.4.2011 had a detailed discussion of the diversion of funds to the sister concern M/s Raghava Enterprise P Ltd. (RAPL). While discussing about the borrowed funds and own funds and the sources of diverted fund to sister concerns, he has safely came to a conclusion that ` 3.25 crores which are interest bearing funds, have been diverted to sister concern, RAPL and restricted the deemed interest disallowance only on this amount @ 15%. The concluding part of my predecessor’s order is reproduced hereunder: “5.2 I have carefully considered the facts of the case and the submissions of the ld.AR. I have also gone through the decisions relied on by the A.O. and the AR. The facts of the case and submission of the ld.AR are similar to those of A.Ys 2002-03, 2004-05 and 2005-06. The issue has been elaborately discussed in the appellate order for A.Y.2002-203 in 10/A.III dated 25.10.2010. It was seen from the working given by the appellant for various years that interest bearing fund of ` 3.25 crores had been advanced by it to REPL during the previous year relevant to A.Y.2000- 01. No further advance out of interest bearing fund had been made subsequently. Hence, interest @ 15 per cent on the advance of ` 3.25 crores amounting to ` 48.75 lakhs was held to be not allowable. Since no further advances were made out of interest bearing funds in the subsequent years, following the reasons given in A.Y.2002-03, the disallowance was restricted to ` 48.75 lakhs each in A.Y.2004-05 and 2005-06 respectively vide orders in ITA Nos.811 & 812/09- 10/A.III dated 25.10.2010. It is seen from the details given by the ld.AR for the year under consideration that no fresh advance was given by appellant to REPL
- - 4 during the previous year ending 31.03.2008. Hence, for the reasons stated in ITA Nos.813, 811 and 812/09- 10/A.III dated 25.10.2010 (supra), the A.O. is directed to restrict the disallowance to ` 48.75 lakhs towards the interest attributable to interest-free advances given by the appellant to REPL. Accordingly, this ground is partly allowed.” Respectfully following my predecessor’s painstaking observations, I direct the A.O. to restrict the disallowance of 15% interest relatable to diversion of interest-bearing funds of ` 3.25 crores. The ground is partly allowed.”
We have heard both sides and perused relevant findings.
There is no dispute that the very interest disallowance had been restricted to the extent of diversion of interest bearing funds @ 15% in the past. It has already come on record that the ‘tribunal’ (supra) has also decided this ground in assessee’s favour to the extent indicated hereinabove. No distinction much less a justifiable one on facts is forthcoming. In these circumstances, we uphold the CIT(A)’s findings and reject the Revenue’s ground.
Now, we take up the second issue involving addition of ` 2,25,13,704/- u/s 28(iv) of the Act. The assessee got sanctioned a term loan of ` 10 crores for its brewery Project. During financial year 2008-09, it had an outstanding loan of `3,29,99,927/-. The lender bank settled it through one time
- - 5 settlement scheme of ` 1,04,86,223/-. The assessee got benefitted by a sum of `2,25,13,704/-. It would treat this amount as a capital receipt since the loan had been availed for acquiring a capital asset; not to be included in its total income. The Assessing Officer referred to relevant loan documents and observed that the same had been obtained for servicing term loan of `9.4 crores already granted. He held that the same was a working loan to help in cost over run. This made him to invoke Section 28(iv) of the Act and include the principal amount as income resulting in the impugned addition of ` 2,25,13,704/-.
The CIT(Appeals) has accepted the assessee’s arguments as under:-
“6.2 I have carefully considered the facts of the case, the submission made by the ld. AR and the case laws relied upon by the A.O. The appellant has submitted that the remission in the liability related to a loan taken for acquisition of a capital asset. There was one time settlement (OTS) of the loan obtained from Bank of Baroda resulting in a remission of principal borrowed. It has been held in various judicial decisions that where there is a waiver of loan relating to a capital asset, the same cannot be treated as a revenue receipt. Where, however, there is a waiver of loan utilized for the purpose of trading obligation or interest, the same is chargeable to tax as a revenue receipt. The Hon'ble Madras High Court in the recent decision in the case of Iskraemeco Regent Ltd. v. CIT (331 ITR 317 (Mad.), has taken similar view and upheld the claim of the assessee. In that case, the decision of the Hon'ble Supreme Court in the case of T.V. Sundaram Iyengar &
- - 6 I.T.A. No.1585/Mds/2014
Sons Ltd. (222 ITR 344) was clearly distinguished. The jurisdictional High Court in the above case held as under: “(ii) That admittedly the assessee was not trading in money transactions. A grant of loan by a bank cannot be termed a trading transaction nor construed to be in the course of business. Indisputably, the assessee obtained the loan for the purpose of investing in its capital assets. A part of this loan with interest was waived under agreement between the parties. The amount referable to the loans obtained by the assessee towards the purchase of its capital asset would not constitute trading receipt. Therefore, the facts were totally different from the facts in CIT v. T.V. Sundaram Iyengar and Sons Ltd. [1996] 222 ITR 344 (SC). (iii) That section 28(iv) of the Act speaks about the benefit or perquisite received in kind and has no application to any transaction which involves money. The transaction in question being a loan transaction having no application with respect to section 28(iv) of the Income-tax Act, the sum in question was not income within the purview of section 2(24) of the Act. (iv) That similarly section 41(1)(a) of the Act also did not apply as it would be applicable only to a trading liability.” Further, the Hon'ble Delhi High Court in the case of CIT v. Tosha International Ltd. 331 ITR 440 (Del) and Hon'ble Bombay High Court in the case of Mahindra & Mahindra Ltd. v. CIT 261 ITR 501 have also decided a similar issue in favour of the assessee. Respectfully following the above decisions, I am of the considered opinion that the amount of remission of principal amount on account of one time settlement relating to capital assets cannot be chargeable to tax. Accordingly, the A.O. is directed to delete the addition. The ground is allowed.”
Heard both sides. Record perused. There is no dispute on facts. Undisputedly, purpose of the loan in question is acquisition of capital assets only. The lower appellate order records a finding of fact that one time settlement scheme in - - 7 question does not give rise to any revenue or trading receipt under Section 28(iv) of the Act in the nature of remission of a corresponding trading liability under Section 41(1) of the Act. It also refers to case law of hon'ble jurisdictional high court (supra) deciding the very substantial question of law against the Revenue. In the course of hearing, the appellant-Revenue fails to draw any distinction on facts as well as law. Thus, we uphold the finding under challenge. The Revenue’s corresponding ground is dismissed.
This Revenue’s appeal is dismissed.
Order pronounced on Wednesday, the 11th of March, 2015 at Chennai.