AI Drafter 
TaxTMI 
TaxTMI 
2010 (6) TMI 784
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....nces of the case as well as in law, the ld. CIT(A) has erred in directing to reduce the amount of Rs. 9,41,86,658/- and Rs. 4,07,65,542/- from taxable income accepting the assessee's version that it was wrongly credited to P & L account without calling for a report from A.O as required under rule 46A of the IT Rules, nor the CIT(A) has himself verified the claims of the assessee. As per details on page 20 of the CIT(A)'s order, total amount credited to the income on account of waiver is only Rs. 10,89,07,907/- where as the CIT(A) has allowed a relief of Rs. 13,22,52,000/-, which establishes that the CIT(A) has not properly verified the issue." 2. In regard to ground no. 1, the ld. DR draws our attention towards paragraph 3 of the assessment order, in which it is mentioned that the assessee wrote off certain amounts and also wrote back certain amounts to the profit and loss account, resulting into a net credit balance of Rs. 1,01,40,554/-. This amount along and another credit amount of Rs. 1.07 crore, representing security deposits, have been brought to tax. For the sake of ready reference, this paragraph is reproduced below:- "3. The assessee was requested to furnish the deta....
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....factory reply. In the absence of any satisfactory reply, advances and security deposits of the above mentioned parties of Rs. 1,01,40,554/- and Rs. 1,07,00,000/- respectively are being added back u/s 41(1) of the I.T.Act." 2.1 Thereafter, he draws our attention towards the order of ld. CIT(Appeals). After hearing the assessee, the ld. CIT(Appeals) returned a finding that the AO committed mistakes in arriving at correct facts. The correct position is that - (i) the assessee has written off outstanding against sale of packing material, (ii) it received security deposits against machines given on lease, and (iii) advances were received against orders for sale of machines. In view thereof, it has been concluded that the AO wrongly added amounts representing advances received from customers and security deposits amounting to Rs. 69,45,064/- and Rs. 4,50,000/- respectively. Thereafter, he dealt with outstanding liability of security deposits amounting to Rs. 1.07 crore. After considering the assessment order and the arguments of the assessee, it is concluded that this amount is not taxable as the liability subsists even in this year. For the sake of ready reference, his findings are r....
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....ed the facts of the case and submissions made before us. The amount of Rs. 1.07 crore represents the security deposits received by the assessee in respect of lease of machines manufactured by it. The ld. CIT(Appeals) has fairly pointed out that these liabilities have not ceased to exist u/s 41(1). The assessee has also not derived any benefit or perquisite in so far as these amounts are concerned from carrying on the business. Consequently, we do not find any error in his order, which requires any interference from us. 3.1 Thus, this ground is dismissed. 4. Ground no. 2 is in regard to waiver of loan amount and interest thereon by the banks and financial institutions after the assessee was declared to be a sick company by the Board for Industrial & Financial Reconstruction ('BIFR' for short) leading to re-structuring of its debt by Corporate Debt Restructuring Cell ('CDRC' for short). The assessee had credited the amount of loan and interest waived to the profit and loss account. However, in the course of hearing the claim was raised by way of a letter dated 25.11.2008 that the assessee inadvertently claimed Rs. 5,46,95,291/- but omitted to claim the balance amount of Rs. 4,0....
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....fore us, the ld. DR submits that the question here is regarding taxability of the principal amount and interest waived by the banks and financial institutions on account of debt-restructuring of the assessee company. The assessee received these benefits in the course of carrying on the business and, therefore, these amounts are includible in the income of the assessee u/s 28(iv). In the alternative, since these amounts have been written back to profit and loss account, these are taxable u/s 41(1). 4.4 In reply, the ld. counsel submits that the writing off of the principal amount is a benefit in the capital field and not in the revenue field. In so far as writing off of the interest is concerned, the amount had not been claimed in any previous year because of the provision contained in section 43B. Thus, the condition that "where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee" has not been satisfied. Therefore, it is argued the ld. CIT(Appeals) has rightly granted relief in this matter. 4.5 Coming to the waiver of principal amount of loan is concerned, reliance is placed on th....
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....m had purchased cloth worth Rs. 3,75,120/- from a firm in Bombay styled as M/s Narsinghdass Banarsidass. On the last day of the accounting year, i.e., October 30, 1948, this account had been debited with a sum of Rs. 1,80,000/- representing the amount paid to that firm by M/s Janki Dass Banarsi Dass on behalf of the assessee-firm. The argument is that to the extent the account of M/s Janki Dass Banarsi Dass reflects a credit of Rs. 1,80,000/- on account of this cash payment it should also be treated as a payment to M/s Janki Dass Banarsi Dass for the purchase of cloth from the Bombay firm and, therefore, is in effect representing a trading liability of the assessee-firm. We agree with the Tribunal that this construction of the transaction is farfetched. The purchase of cloth between November 12, 1947, and October 30, 1948, was effected by the assessee from the Bombay firm. The debt owed by the assessee to the Bombay firm was a trading debt and that was no doubt allowed for the purpose of income-tax. However, so far as the account of M/s Janki Dass Banarsi Dass is concerned, the liability of the assessee to this party arose because the above party had paid a sum of Rs. 1,80,000/- to....
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....h reservations, but it was finally held that the waiver did not constitute business income. For the sake of ready reference, the relevant portions of the judgment are reproduced below:- "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 business. Secondly, section 28(iv) does not apply to benefit in cash or money (see CIT Vs. Alchemic Pvt. Ltd. [1981] 130 ITR 168 (Guj.)). Applying section 28(iv) to the facts of this case, one finds that on June 18,1964, the assessee entered into an agreement to purchase toolings from KJC. In 1964-65, India was facing foreign exchange crunch. In the circumstances, around June 7, 1965, the Government of India and the Reserve Bank of India, in this case, approved the arrangement under which KJC (supplier of toolings) was permitted to advance a loan of $ 6,50,000 to the assessee for ten years bearing interest at the rate of 6 per cent,....
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....ase of tools was entered into much prior to approval of loan arrangement by the Reserve Bank of India. Therefore, the loan agreement was not entirely obliterated by the waiver. Further, in that case purchase consideration related to a capital asset. In the present case, the loan was taken for trading activity and thus the principle enunciated in the case of T.V. Sundaram Iyengar & Sons Ltd. would be applicable. Similar view was also taken by Hon'ble Madras High Court in the case of Aries Advertising Pvt. Ltd. (2002) 255 ITR 510, in which it was held that because of trading operations, the assessee became richer by the amount which had been transferred to profit & loss account. 5.5 Coming to the case of Velocient Technologies Ltd. (supra), the facts of the case are that the assessee forfeited a sum of Rs. 10.65 crore, claimed to be a loan from a company called SFT and credited the amount to the reserve and surplus account. That company entered into a joint venture agreement with the assessee under which equity and the aforesaid loan of Rs. 10.65 crore were contributed. The tenure of the loan was five years and no interest was payable for initial period of five years. Thereafter, ....
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.... Name of Institution Amount (Rs.) 1 Life Insurance Corporation of India 8,925,261.00 2 Unit Trust of India 11,786,334.00 3 General Insurance Company of India 581,955.00 4 The Oriental Insurance Company Ltd. 581,955.00 5 United India Insurance Company Ltd. 581,955.00 6 Federal Bank Limited 2,672,043.00 7 IDBI New Loan 33,852,171.00 8 Canara Bank TL 5,292,000.00 9 WCTL SBI 7,779,126.00 10 WCTL SBM 13,583,693.00 11 ICICI LOAN 7,425,000.00 12 Unit Trust of India 1,455,365.00 Total: 70,944,190.00 6.1 The loan by way of cash-credit limit, written off by the banks are as under:- "S.No. Name of Bank Amount(Rs.) Amount (Rs.) (i) State Bank of India 13,215,818.00 (ii) State Bank of Mysore 18,426,756.00 (iii) Canara Bank 28,893,320.00 Total: 60,535,894.00 Less: Waiver of interest debited during the year 20,457,235.00 Less: Waiver of interest pertaining to previous years 19,536,191....
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.... not been claimed as expenditure or trading liability in any of the earlier previous year. So far as waiver of interest is concerned, the assessee-company itself has treated the same either as income or has not claimed the same as expenditure in the computation of income filed before the lower authorities." 6.3 The Hon'ble High Court upheld this order by mentioning that the decision was based on correct appreciation of law and the principles enunciated in Mahindra & Mahindra Ltd were fully applicable. From this decision, it is clear that the provision of section 41(1) is not applicable in respect of a loan. The Tribunal deleted the addition by applying the provision contained in the aforesaid section. However, the provision contained in section 28(iv) was not considered by the Tribunal. This provision was considered in the case of Mahindra & Mahindra Ltd. The relevant portion of the judgment in that case has already been reproduced by us. It has also been mentioned that that decision is couched in a cautious language and the facts are somewhat more complicated. Therefore, we will not like to base our decision on that judgment particularly because the Hon'ble Court itself mention....
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....nsent terms arrived at between them. It was claimed that the receipt is capital in nature. The Hon'ble Court considered the decision in the case of T.V. Sundaram Iyengar & Sons Ltd., Mahindra & Mahindra Ltd. and found that no support could be derived by the assessee from the latter decision. It was mentioned that the money was received by the assessee in the course of carrying on business. At the time of receipt it was treated as a deposit and, thus, the receipt was of capital nature. However, by efflux of time, the money became assessee's own money. The money was taken to profit and loss account. Therefore, the character of the receipt changed when the amount was credited to profit and loss account as there was no explanation as to why somebody else's money was taken to profit and loss account. The Hon'ble Court noted that similar view was taken in the case of Aries Advertising Pvt. Ltd. by Hon'ble Madras High Court. Coming to the facts of this case, the assessee obtained cash credit limits from State Bank of India, State Bank of Mysore and Canara Bank for its business operations. These monies were used for daily operations. The principal amount to the extent of about Rs. 2.05 cro....
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....he machinery and plant. The facts of this case are also distinguishable. In the case of Jindal Equipments Leasing & Consultancy Services Ltd., the background facts leading to loan of about Rs. 6.8 crore are not available. Only a part of the loan was written off by the creditor in its books of account. Thus, it has not been demonstrated before us that in that case the loan was taken in the course of business for carrying out business operations. Thus, we finally find that the facts of the case are closer to the facts of the case of Solid Containers Ltd. and there is no decision to the contrary from the jurisdictional High Court as contended. On the other hand, the decision in the case of Jay Engineering Works (supra), decided by the jurisdictional High Courts, supports the case of the revenue. Further, the benefit is in the revenue field as the monies have been borrowed for day-to-day operations and not for purchases of machinery, thus, the loans are for the circulating capital and not the fixed capital. The liability is also contractual in nature. Therefore, respectfully following these decisions, it is held that the amount of Rs. 2,05,42,468/- written off by the banks in cash-cred....