TaxTMI 
TaxTMI 
2011 (2) TMI 12
X X X X Extracts X X X X
X X X X Extracts X X X X
....ellant could not discharge its liability for specific time, keeping in view the guidelines/directions of the SBI, the SBI categorized this loan as Non-Performing Asset (NPA). As on 31.03.1998, principal amount of loan due to the bank was Rs. 4,76,92,213 and outstanding interest was Rs. 1,90,42,295. Issue of recovery of loan was referred to Debt Recovery Tribunal in the year 2000. During the pendency of these proceedings, the assessee had settled the matter with the SBI. Pursuant to one time settlement with the bank, on payment of Rs. 1,85,00,000 against loan of Rs. 4,76,92,213 (principal amount), the remaining sum of Rs. 1,90,42,295 was waived. In the tax return filed by the assessee, it showed interest waived as income but not the amount of loan waived by SBI, though amount of interest written off i.e., Rs. 1,90,42,295 was credited to profit & loss account and was offered for taxation. However, relying upon the decision of this Court in the case of Commissioner of Income Tax Vs. Tosha International Ltd. [176 Taxman 187], principal amount written off i.e. Rs. 2,91,42,213 that was directly taken to balance sheet under the head capital reserve, was not offered for taxation. 3....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... in respect of such trading liability by way of remission or cessation thereof, the amount obtained by such person or the value of benefit accruing to him shall be deemed to be profits and gains of business or profession and accordingly chargeable to income-tax as the income of that previous year, whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not; or (b)the successor in business has obtained, whether in case or in any other manner whatsoever, any amount in respect of which loss or expenditure was incurred by the first-mentioned person or some benefit in respect of the trading liability referred to in Clause (a) by way of remission or cessation thereof, the amount obtained by the successor in business or the value of benefit accruing to the successor in business shall be deemed to be profits and gains of the business or profession, and accordingly chargeable to income-tax as the income of that previous year. [Explanation 1.-For the purposes of this Sub-section, the expression "loss or expenditure or some benefit in respect of any such trading liability by way of remission or cessation thereof" shall in....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Mahindra Ltd. (supra) and has held that on waiver of loan taken for business purposes, the amount is retained in the business and as such, the amount that initially did not have the character of income becomes income liable to tax. (e) Decisions rendered in Commissioner of Income Tax Vs. P. Ganesh Chettiar [(1982) 133 ITR 103 (Mad.) and Commissioner of Income Tax Vs. Phool Chand Jiwan Ram [(1981) 131 ITR 37 (Del.) were of no assistance to the appellant because the same were rendered prior to judgment of the Supreme Court in T.V. Sundaram Iyengar and Sons Ltd. (supra). 9. Against the order of the Tribunal, the instant appeal is preferred and in the aforesaid circumstances, following substantial questions of law have arisen for consideration: "(1) Whether the Tribunal was right in law in holding that taxability of waiver of loan would be governed by the purpose for which the loan was taken, inasmuch as, though waiver of loan taken/utilized for acquiring capital asset does not constitute income, however, waiver of loan taken for the purpose of business/trading activity gives rise to income taxable under the Act? (2) Whether waiver of loan, a subsequent event has the effect ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... may straightaway proceed to discuss the principle of law laid down in this case. The starting point of discussion, obviously would be the judgment in the case of T.V. Sundaram Iyengar and Sons Ltd. (supra), In the said case, the assessee in the course of trading transactions had collected deposits from customers. Since the customers did not claim the amounts standing to their credit, the assessee had transferred the unclaimed deposits to the profit and loss account. The view of the AO was that since the unclaimed deposits had arisen as a result of trading transactions, therefore, the same represented income of the assessee. In the first appeal, the CIT (A) held that the amount of unclaimed deposits were not revenue receipts but were capital receipts. This view of the CIT (A) was affirmed by the Tribunal. The Supreme Court while taking note of the facts observed that the deposits received by the assessee were in the course of business and were originally treated as capital receipts. The question, thus, which was posed was that even though the deposits were of capital in nature at the point of time of receipts of the assessee, could there character change by afflux of time. The Supr....
X X X X Extracts X X X X
X X X X Extracts X X X X
....unt as a receipt at the time they are received. Only time will show what their ultimate fate and character will be. After three years that fate is such, as to one class of surplus, that insofar as the suspense account has not been reduced by payments to clients, that part of it which is remaining becomes by operation of law a receipt of the Company, and ought to be transferred from the suspense account and appear in the profit and loss account for that year as a receipt and profit. That is what it in fact is. In that year Jays become the richer by the amount which automatically becomes theirs and that asset arises out of an ordinary trade transaction. It seems to me to be the commonsense way of dealing with these matters............ " Applying the aforesaid principle, it was held that the assessee because of the trading operations had become richer by the amount transferred to its profit and loss account. The Court observed as under: "In other words, the principle appears to be that if an amount is received in course of trading transaction, even though it is not taxable in the year of receipt as being of revenue character, the amount changes its character when the amount becomes th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....es were fixed once and for all when receipt was received and that no subsequent operation could change the nature of the receipt. However, in CIT Vs. Karam Chand Thapar [1996] 222 ITR 112, the Supreme Court held that the proposition enunciated in Tattersall (supra) was not absolute and that in given cases, amounts which were not received initially as trading receipts could eventually be regarded as business income by reason of subsequent events. 18. The Court, at the same time, stated emphatically that "the subsequent event must be such that a different quality is imprinted on the receipt". In that case the assessee was a plantation company engaged in the business of growing rubber and tea. In 1975, it entered into three agreements with three purchasers for sale of old rubber trees. Each of the purchasers paid a certain amount by way of earnest money and another amount by way of advance under their respective agreements. The total amount of earnest money received by the assessee under the three agreements was Rs. 75,000/- and the total amount by way of advance was Rs. 3,56,300/-. All the three purchasers defaulted in payment of the balance amounts. The agreements were accor....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sue is discussed at length, from all angles, by the High Court of Madras in the case of Iskraemeco Regent Limited (Originally Seahorse Industries Ltd. and Subsequently Iskraemeco Seahorse Ltd.) Vs. The Commissioner of Income Tax [196 Taxman 103]. In that case, the assessee was engaged in business of development, manufacturing and marketing of electro-Mechanical and Static Energy Meters. It had taken loans from bank for the purpose of capital assets both by way of imports as well as in the local markets. In view of the loss suffered, the assessee went before Board of Industrial and Financial Reconstruction (BIFR) where one time settlement was arrived at by the banker, State Bank of India whereby the Bank waived the outstanding due of principal amount of Rs. 5 Crores and a sum of Rs. 2 Crores as the outstanding interest amount. The Court held that the waiver of principal amount would not be income, the High Court went into the gamut of entire case law. After discussing the Sundaram Iyengar (T.V.) and Songs Ltd. (supra), it was held not applicable in view of the following reasons: "22. In the present case on hand, admittedly the Assessee was not trading in money transactions. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... amount referable to the loans obtained by the Assessee towards the purchase of its capital asset would not constitute a trading receipt. The said issue has been fortified by the judgment of this Court in Commissioner of Income Tax v. A.V.M. Ltd. (1984) 146 ITR 355." 21. The Court was also of the view that Section 28(iv) of the Act would not be attracted, as it would not be treated income under the said provision in the following terms: "xxx xxx xxx 27.2. The Division Bench of the Bombay High Court presided over by His Lordship Justice S.H. Kapadia (as he then was) in Mahindra and Mahindra Ltd. v. Commissioner of Income Tax (2003) 261 ITR 501, while approving the ratio laid down by the Division Bench of the Gujarat High Court in Commissioner of Income Tax v. Alchemic Pvt. Ltd. (1981) 130 ITR 168, has held as follows: "At the outset, we wish to clarify that this judgment is confined to the facts of this case. This is because the value of any benefit or perquisite arising from business, as contemplated by Section 28(iv), could accrue in numerous ways. The income which can be taxed under Section 28(iv) must not only be referable to a benefit or perquisite, but it must be arising from....
X X X X Extracts X X X X
X X X X Extracts X X X X
....cipal amount of loan as a part of take-over arrangement with KJC to which the Assessee was not a party. The waiver of the principal amount was unexpected. In the circumstances, one fails to understand how such waiver would constitute business income." 28. The facts involved in the present case are more or less identical to the case dealt with by the Bombay High Court as discussed earlier. The Division Bench has held in the said judgment that the loan agreement in its entirety, as in the present case is not obliterated by the waiver in as much as the Assessee has partly complied with, the Assessing Officer has not gone behind the loan agreement, the loan amount was towards the purchase of capital asset and the waiver of the amount was accepted and hence such an activity is not an income assessable to tax. The Division Bench was also pleased to hold that Section 28(iv) does not apply to the benefits in cash or money and it applies only to a transaction arising from business. The said view was also taken by the High Court of Delhi in Ravinder Singh v. Commissioner of Income-Tax (1994) 205 ITR 353 wherein, the earlier decision in Commissioner of Income Tax v. Alchemic pvt. Ltd. (1981) ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ion allowance of Rs. 27,29,585 and, therefore, the amount of Rs. 27,29,585 should be set off against Rs. 57,74,064. We do not find any merit in this argument. The Department's case is that the Assessee got remission of Rs. 57,74,064. Remission for depreciation is not in issue before us. The only argument of the Department throughout has been that the waiver constituted remission of Rs. 57,74,064. In the circumstances, we cannot direct set off of Rs. 27,29,585 against Rs. 57,74,064. It is important to bear in mind that before Section 41(1) came to be enacted, various judgments as reported in Mohsin Rehman Penkar v. CIT (1948) 16 ITR 183 (Bom) and Orient Corporation v. CIT [1950] 18 ITR 28 (Bom) had laid down that remission was not income and in order to get over those judgments Section 41(1) came to be enacted. In the case of CIT v. Phool Chand Jiwan Ram (1981) 131 ITR 37 (Delhi), the Assessee-firm had purchased goods. They had also obtained loans from a party, accounts were settled and the balance was credited to the partners' account. It was held by the Delhi High Court that the amount referable to loans was not a trading liability. That, only amounts allowed as deduction in earli....
X X X X Extracts X X X X
X X X X Extracts X X X X
....on 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. However, noted the Tribunal, this aspect of the matter whether the whole amount of the loan had been utilized either for the purpose of acquiring capital asset or for the purpose of business activity or trading activity had not been looked into or examined by the Authorities below. For this reason, the Tribunal has restored the case to the file of the AO for fresh adjudication giving details in the behalf, in the following manner: "27................ We, therefore, restore this issue back to the file of the Assessing Officer for his fresh adjudication with a direction to the Assessee to furnish all the details and particulars of loan, and the purpose for which the loan taken from Bank was utilized. All these informations are within the control and specific knowledge of the Assessee and, therefore, it would be the duty of the Assessee to prove and establish that the amount of loan taken from the Bank was utilized for the purpose of....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 28. In this case, which pertains to the Assessment Year 2004-05, the respondent assessee M/s. Jubilant Securities Pvt. Ltd. (hereinafter referred to as „the assessee‟) had filed the income of Rs. 5,95,148/- in its return. The assessee is an investment company engaged in the business of sale/purchase of shares and business of taking loans and further providing it to the parties. 29. The AO found that the assessee had credited a sum of Rs. 25,00,000/- in Profit and Loss Account on account of remission of liability with respect of certain unsecured loans appearing in its financial results. This amount represented loan taken from one M/s. Sail Holdings Pvt. Ltd. more than ten years ago. Since there was no communication from the party and no claim was made for so many years the loan was written back. It was treated as capital receipt and was reduced from taxable income in the computation of assessable income for the assessment year in question. The AO was of the view that the assessee had treated such write off (Loan Written Back) as receipt of a capital nature without explaining as to how and in what manner such cash credited were transferred to the Profit ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ntrary to contention made in : submissions filed before me. All along it has been admitted by the appellant that borrowing was made for financing business. However, after the assessment order was passed & the AO added this amount treating it as part of circulating capital, the appellant has come up with the plea that the funds were borrowed for long term investment. This is nothing but change of stand. It is therefore established that the loan was obtained by the appellant for financing business. The table which the appellant has made to contend that loan was part of fixed capital, shows position as on 31/3/03 whereas loan was taken in FY 92-93, i.e. ten years back. Therefore the balance sheets as on 31/3/03 or 31/3/04 do not in any way prove the actual use of loan. Having established that the funds were borrowed for the purpose of lending business by the appellant, it is to be examined as to whether remission or write back to such loan wot.~ld (sic.) give rise to taxable income? 4.5 So far as the decision in Sugauli Sugar Pvt Ltd. 236 ITR 518 relied upon by the appellant are concerned, it is noted that the fact are quite different. In that case the relevant amount was directly car....