TaxTMI 
TaxTMI 
2010 (8) TMI 992
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.... noted that the assessee has claimed a sum of Rs. 9,69,363/- as bad debts. The AO was of the view that the assessee has not satisfied the conditions laid down under the provisions of section 36(1)(vii) read with sub-section 2 because the assessee did not furnish any evidence to show the nature of debts, the action taken by the assessee for the recovery and the circumstances forced for writing off the such debts. The AO questioned to the assessee as to how the assessee came to the conclusion that the debt became bad as the condition prescribed under section 36(1)(vii) read with section 36(2) are not fulfilled. Accordingly, the AO made the addition to the total income of the assessee of Rs. 9,39,363/-. 4. On appeal, the CIT(A) allowed the claim of the assessee and directed the AO to delete the addition vide impugned order. 5 Before us, the learned DR has submitted that before allowing the claim of the bad debts u/s 36(1)(vii) of the Act the debt should be bad in nature and merely writing off the amount is not sufficient. He has relied upon the order of the Hon. Gujarat High Court in the case of Dhall Enterprises reported in 295 ITR 481 (Guj). The learned DR has further pointed ....
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....e then in the absence of any findings by the AO that the decision taken by the assessee is not honest or malafide, the claim cannot be denied. In view of this legal position, we do not find any infirmity in the order of the CIT(A). Accordingly, we dismiss the ground of appeal raised by the revenue. 8. In the result, the appeal of the revenue is dismissed. ITA No. 7302/Mum/2008(by assessee) 9. The assessee has raised various grounds in this appeal. However, the only issue arises for our consideration and adjudication is whether the CIT(A) is justified in confirming the addition of Rs. 1,37,20,000/- as income of the assessee being remission of liability on account of Non-Convertible Debentures (in short NCD) 10. Brief facts of the case are that during the course of assessment proceedings the AO noted that the assessee has claimed deduction of Rs. 1,37,2000/- in the computation of income on account remission of NCDs. The assessee explained before the AO that the company has taken a home loan of Rs. 5 crores from State Bank of India Home Finance Ltd and later on in a settlement issued Zero percent Non Convertible Debentures for face value of Rs. 2,93,00,00/-. However, the a....
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.... Rs. 2,93,00,000/-. To discharge the above liabilities of outstanding of Rs. 2,93,00,000/- the debentures of Rs. 2,93,00,000/- were issued. In the books of account a total liability of Rs. 2,93,00,000/- was disclosed under the head Secured loan in the balance-sheet year after year, which was accepted by the revenue. In the scrutiny assessment for the assessment year 2000-01 onwards till assessment year 2004 05 no part of Rs. 2,93,00,000/- has been claimed by the assessee as deduction in computing the taxable income as no part has been debited to the profit and loss account. The learned AR of the assessee has further contended that Rs. 2,93,00,000/- represents the liability towards principal amount to be payable to the State Bank of India Home Finance Ltd. In the year 2002, once again, the settlement was reached with the State Bank of India Home Finance Ltd and they issued letter dated 1.07.2002 which is placed in the paper book at pages 11 to 13. The liability of Rs,1,45,00,00/- was re-scheduled by the State Bank of India Home Finance Ltd and the Company was liable to pay Rs. 25,00,000/- on or before 31.07.2002 and the balance of Rs. 1,20,00,000/- in 24 installments of Rs. 5 lakhs ....
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.... taken by the assessee for purchase of house property, therefore, the same was for acquiring the capital assets and not utilized for trading purpose of the assessee. He has relied on the following decisions: 1. Polyflex (India) Pvt ltd V/s CIT (257 ITR 343) 2. Mahindra and Mahindra V/s CIT (261 ITR 501) 3. Cipla Investment ltd (33 SOT 317) 4. Helious Food Improvers, Mumbai ITAT (P) Ltd 14 SOT 54 5. Prism Cement (I), Mumbai ITAT(101 ITD 130) 14. On the other hand, the learned DR has submitted that the assessee originally borrowed Rs. 5 crores in the year 1995 which was interest bearing. The assessee made the payment from time to time to State Bank of India Home Finance Ltd till 31.12.1996. Thereafter as per the settlement reached between the assessee and the State Bank of India Home Finance Ltd, the interest portion of Rs. 1,45,00,000/- was converted into NCDs. Similarly, Rs. 148,00,000 recapturing future interest also converted into NCDs. The total loan was converted into NCDs by the assessee of Rs. 2,93,00,000/- comprising two amount of Rs. 1,45,00,000/- being interest converted into NCDs and Rs. 1,48,00,000/- being recapturing futur....
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.... COPY. WITHOUT PREJUDIECE Ho/2002/cr/sb/355 July 01,2002 M/s Lloyds Realty Limited Modern Mills Compound ....
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....iate legal proceedings as may be necessary in order to protect the interest of the company; In this, read, please immediately comply with the following: Please submit the duplicate copy of this letter duly signed by Shri B L Agarwal,Managing director as a token of acceptance of the terms of settlement by LRL within 7 days from the date of receipt of this letter failing which the settlement will be treated as cancelled. Your early reply is awaited, Yours truly SD (Managing director)" 17. Thus, it is clear from the paragraph 1 of the said letter of the SBI Home Finance Limited that the settlement was arrived for payment of capitalized portion of corporation loan of Rs. 5 crores which was converted into Zero percent NCD of Rs. 1,45,00,000/-. Thus, the repayment was agreed between the parties with respect to NCD of Rs. 145,00,000/- in terms of clauses (a) to (d) of paragraph (1) and (2) of the said letter. As per paragraph 4 of the said letter the NCD of Rs. 1,48,00,000/- were issued for re-capturing future interest on unrealized capital dues was to be considered for cancellation only after receipt /realization of all dues by July 2004 as per the ....
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....ses 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 include the remission or cessation of any liability by a unilateral act by the first mentioned person under clause (a) or the successor in business under clause (b) of that sub-section by way of writing off such liability in his accounts." 18. It is to be noted that in the case in hand the assessee has not claimed the interest on the said loan as an expenditure of trading liability after 31.12.1996. Therefore, when the assessee has not claimed any expenditure in respect of said interest then the waiver of the same in the shape of cancellation of NCDs issued against the recapturing future interest on the unrealized capital itself cannot be treated as income of the assessee under the provisions of section 41(1). Since the loan was taken by the assessee for acquiring the house property /capital asset then it cannot be considered that the said amount was taken for assessee's trading purpose. The Hon'ble Jurisdictional High Court in the case of Solid Containers ltd V/s Dy CIT (supra) relied upon by the DR has observed as....
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.... the year of receipt as being of revenue character, the amount changes its character when the amount becomes the assessee's own money because of limitation or by any other statutory or contractual right. When such a thing happens, commonsense demands that the amount should be treated as income of the assessee. In the present case, the money was received by the assessee in the course of carrying on his business. Although it was treated as deposit and was of capital nature at the point of time it was received, by efflux of time the money has become the assessee's own money. What remains after adjustment of the deposits has not been claimed by the customers. The claims of the customers have become barred by limitation. The assessee itself has treated the money as its own money and taken the amount to its profit and loss account. There is no explanation from the assessee why the surplus money was taken to its profit and loss account even if it was somebody else's money. In fact, as Atkkinson. J Pointed out that what the assessee did was the commonsense way of dealing with the amounts." Since the revenue has not made out the case that the loan was taken for the trading purposes and n....
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....s income", hence the gain earned by the assessee in the course of business in investment and advance of loans is in the capital field but cannot be on the revenue field. As rightly held by various decisions above, remission of a debt by the holding company which was not claimed and allowed as a deduction in any manner in any earlier previous year could not be brought to tax either under section 41(1) or under section 28(iv). There is no benefit or perquisite arising to the assessee in this regard. Moreover, the assessee has to write off the amount in the books of account and the amount wall still outstanding at the end of the year. As rightly pointed out by the learned counsel the decision of the Hon'ble Bombay High Court in the case of Solid containers ltd (supra) does not apply to the facts of the case and, moreover, similar to the decision of the Hon'ble Bombay high Court in the case of Majhindra and Mahindra Ltd (supra). The loans availed for acquiring the capital asset, i.e. shares, when waived cannot be treated as assessable income for invoking the provisions of section 28. Since the original receipt was undoubtedly on account of capital nature, its waiver does not have the q....