Unabsorbed depreciation can be carried forward indefinitely but loan waiver without fixed asset evidence becomes taxable income under section 28(iv)

ITAT Pune held that unabsorbed depreciation from AYs 1997-98 to 2000-01 can be carried forward without 8-year time limit, following SC precedent in Petrofils Co-operative Ltd. However, the tribunal reversed CIT(A)'s decision on loan waiver treatment, ruling that without evidence of loans being used for fixed asset acquisition, the waiver constitutes taxable income under section 28(iv). The tribunal also disallowed write-backs of provisions for worker liabilities, interest, and sundry creditors under BIFR rehabilitation scheme, noting CBDT had rejected similar claims. Revenue's appeal was largely allowed except on unabsorbed depreciation issue.

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Issues Involved:
1. Carry forward of unabsorbed depreciation.
2. Write back of onetime settlement of loans.
3. Provision of additional liability for Thane Workers.
4. Provision of interest under rehabilitation scheme.
5. Write back of sundry creditors.

Summary:

1. Carry Forward of Unabsorbed Depreciation:
The Revenue challenged the CIT(A)'s decision allowing the carry forward of unabsorbed depreciation from A.Ys. 1997-98 to 2000-01 without any time limit. The CIT(A) relied on the Supreme Court's decision in Petrofils Co-operative Ltd., which upheld that unabsorbed depreciation from these years should be dealt with under section 32(2) as amended by the Finance Act, 2001, allowing indefinite carry forward. The ITAT agreed with the CIT(A), referencing the Supreme Court's dismissal of the Revenue's SLPs in similar cases, affirming the carry forward without any time limit. Thus, the Revenue's ground was dismissed.

2. Write Back of Onetime Settlement of Loans:
The Revenue contested the CIT(A)'s treatment of Rs. 20,04,30,668/- as a capital receipt, not liable to tax, from a loan waiver. The AO had disallowed this amount, treating it as taxable under section 28(iv) and 41(1) of the Act. The CIT(A) cited various judicial precedents, including Mahindra & Mahindra Ltd., to conclude that the principal amount of loan waiver is a capital receipt and not taxable under sections 41(1) or 28(iv). The ITAT upheld the CIT(A)'s decision, finding the AO's conclusions unsupported by evidence, and ruled in favor of the assessee.

3. Provision of Additional Liability for Thane Workers:
The Revenue challenged the allowance of Rs. 7,41,13,347/- provision for Thane Workers' liabilities. The CIT(A) found that the provision was disallowed in earlier years and thus allowed the write-back. However, the ITAT noted that the assessee failed to prove any such liability provided in the books and disallowed over and above the final settlement. The ITAT reversed the CIT(A)'s decision, restoring the AO's order, as the provision was not justified.

4. Provision of Interest Under Rehabilitation Scheme:
The Revenue disputed the CIT(A)'s allowance of Rs. 654.28 lakh interest write-back. The CIT(A) held that since the interest was not deducted earlier, its write-back was not taxable. The ITAT found that the interest accrued but not due was part of a restructuring package and not separately written back. The ITAT reversed the CIT(A)'s decision, restoring the AO's order, as the allowance was not justified.

5. Write Back of Sundry Creditors:
The Revenue contested the CIT(A)'s allowance of Rs. 52,61,122/- write-back of sundry creditors. The CIT(A) allowed it, directing the AO to verify if it was not allowed earlier and was not on capital account. The ITAT found that the remission of sundry creditors represented outstanding payments for prior expenditures and was taxable. The ITAT reversed the CIT(A)'s decision, restoring the AO's order, as the allowance was not justified.

Conclusion:
The ITAT partly allowed the Revenue's appeal, upholding the CIT(A)'s decision on the carry forward of unabsorbed depreciation and the write-back of the onetime settlement of loans, while reversing the CIT(A)'s decisions on the provision of additional liability for Thane Workers, provision of interest under the rehabilitation scheme, and write-back of sundry creditors.

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