2022 (6) TMI 945 - AT - Income Tax

Tribunal rules BIFR capital liability remission not taxable under Income Tax Act

M/s. Arcot Textiles Mills Ltd. Versus The Assistant Commissioner of Income Tax, Villupuram Circle, Villupuram

M/s. Arcot Textiles Mills Ltd. Versus The Assistant Commissioner of Income Tax, Villupuram Circle, Villupuram - TMI Issues Involved:1. Ad hoc addition of income.2. Waiver of loan outstanding for capital liability.3. Application of Section 28 and Section 41(1) of the Income Tax Act, 1961.4. Taxation of book profits.5. Interest charged under Section 234B.Detailed Analysis:1. Ad hoc Addition of Income:The assessee challenged the ad hoc addition of Rs. 3,39,77,243/- made by the Assessing Officer (AO) as income. The AO had construed the cessation of liability as trading receipts without applying the provision of taxation of book profits under the Income Tax Act, 1961.2. Waiver of Loan Outstanding for Capital Liability:The assessee company, declared as a sick company by the Board for Industrial & Financial Reconstruction (BIFR), had received relief and concessions as per BIFR's order dated 17.05.2012. During the relevant financial year, the company credited Rs. 3,39,77,245/- towards remission of capital liability but excluded it from profits/income. The BIFR's order included specific directions to exempt the company from the applicability of sections like 41(1), 79, 80, 43B, 72(3), and 115JB of the Income Tax Act, 1961.3. Application of Section 28 and Section 41(1) of the Income Tax Act, 1961:The AO invoked Section 41(1) to assess the remission of liability, stating that even remission of capital liability would become income when it becomes the assessee's own money, relying on the Supreme Court decision in CIT Vs TVS Sundaram Iyengar & Sons. The CIT(A) upheld the AO's decision, stating that the BIFR's order was not explicit and the Directorate of Income Tax (Recovery) had rejected the BIFR's relief.4. Taxation of Book Profits:The assessee argued that the remission of capital liability by the BIFR scheme could not be taxed under Section 41(1) as the BIFR's order granted immunity from such taxation. The assessee further contended that the remission pertained to unsecured loans used for acquiring capital assets, thus constituting capital receipts not taxable under Section 41(1).5. Interest Charged under Section 234B:The assessee also contested the AO's decision to charge interest under Section 234B, denying liability for such interest.Judgment Summary:The Tribunal examined the nature of the liabilities and the reliefs granted by the BIFR. It was noted that the BIFR's order, being binding under Section 32 of the Sick Industrial Companies Act, 1985, provided specific directions exempting the assessee from Section 41(1) of the Income Tax Act, 1961. Consequently, the Tribunal held that the remission of capital liability could not be taxed under Section 41(1).For the portion of the liability pertaining to unsecured loans from financial institutions (Rs. 2,55,53,342/-), the Tribunal found that these were used for acquiring capital assets and thus constituted capital receipts, not taxable under Section 41(1). The Tribunal directed the AO to delete the additions made towards this remission.Regarding the advances from customers and loans from others (Rs. 84,23,901/-), the Tribunal noted the need for further verification to determine the nature of these advances. The case was remanded to the AO for re-examination, with instructions to obtain confirmations from the parties involved. If confirmed as capital advances, these too would not be taxable under Section 41(1).Conclusion:The appeal was allowed for statistical purposes, with the AO directed to delete certain additions and re-examine others based on further verification.Order Pronounced:The order was pronounced in the open court on 15th June, 2022.