TaxTMI 
TaxTMI 
2010 (4) TMI 1125
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....rutiny, and, accordingly, notices under ss. 143(2) and 142(1) of the Act were issued, which were complied with by the assessee. Various details required by the AO were furnished during the course of assessment proceedings. In the course of assessment proceedings, it was noticed by the AO that assessee has appended a note to the accounts in Sch. XV, Part B, which reads as under : "The company has sold/agreed to sell during the year its entire fixed assets comprising, leasehold land, building and electric installation therein and has realized a sum of Rs. 1.85 crores from sale and advance and has paid the said sum to SBI to settle the entire outstanding principal amount of Rs. 4,76,42,213 under the one-time settlement with the said bank. The company has created the capital reserve of Rs. 2,91,42,213 for the balance outstanding principal amount not to be paid by the company under the settlement with the said bank. The company has written back outstanding provision for bank interest of Rs. 1,90,42,295 in the books now not liable to be paid by the company under the settlement with the said bank to P&L a/c and shown under provision for bank interest written back respectively. Th....
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....1(1) of the Act. This line of the argument advanced by the learned counsel for the assessee before the AO has been accepted by the AO, who observed that this version of the learned counsel is quite acceptable in the light of the decision of Hon'ble Delhi High Curt in the case of CIT vs. Tosha International Ltd. (supra). However, the AO proceeded further to state that the matter does not end there but the next question to be decided is as to whether the above principal amount written off by the bank is otherwise assessable as income in the hands of the assessee under the provisions of IT Act. In this respect, the AO examined the definition of "income" given in s. 2(24) of the Act and held that in case any benefit arises to the assessee by way of waiver of loan taken by the assessee, the same shall be treated to be the income chargeable to tax under the Act notwithstanding the fact that the item may not be covered by the provisions of s. 41(1) of the Act. The AO further held that since this loan amount was related to the business of the assessee, the same would be assessable under the head "Business". He, therefore, brought the said amount of Rs. 2,91,42,213 to tax as income incl....
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....y High Court in the case of Mahindra & Mahindra Ltd. vs. CIT (supra). For ready reference, the CIT(A)'s order is extracted here as under : "3.1 I have carefully considered the written and oral submissions made on behalf of the appellant, the findings of the AO and the facts on record. I have also gone through the case laws CIT vs. P. Ganesa Chettiar (1982) 133 ITR 103(Mad), Mahindra & Mahindra Ltd. vs. CIT (2003) 182 CTR (Bom) 34: (2003) 261 ITR 501(Bom) and the decision of Hon'ble Delhi High Court dt. 23rd Sept., 2008 in the case of CIT vs. Tosha International Ltd. relied upon by the appellant during the appellate proceedings before the undersigned. It has been gathered that the decision of the jurisdictional High Court of Delhi in the case of Tosha International Ltd. (supra) has been reported in (2009) 176 Taxman 187(Del). The relevant portion of the said judgment in the case of Tosha International Ltd. (supra) is extracted below for ready reference : 'Paras 2, 3 and 4 of the judgment of Hon'ble Delhi High Court in the case of Tosha International Ltd. (supra) has been reproduced here by the CIT(A).' 3.2 After having considered the fa....
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....ning of s. 28(iv) or s. 28(i) or s. 2(24) of the Act. He further submitted that the principal amount of loan waived by the bank is also not liable to be taxed in the light of the decision of Hon'ble Madras High Court in the case of CIT vs. P. Ganesa Chettiar (supra). The learned counsel for the assessee also relied upon the decision of Hon'ble Delhi High Court in the case of CIT vs. Phool Chand Jiwan Ram (1981) 131 ITR 37(Del). He further submitted that the decision of Hon'ble Supreme Court in the case of T.V. Sundaram Iyengar & Sons (supra) is also not applicable to the present case in as much as the transaction between the assessee and the bank was not in the nature of any trading transaction, but the loan was obtained for the purpose of business de hors trading transaction carried out by the assessee. He, therefore, submitted that since the transaction between the assessee and the bank is not connected or related to any trading activity of the business of the assessee, the principal laid down by the Hon'ble Supreme Court in the case of T.V. Sundaram Iyengar & Sons (supra) cannot be applied to the present case so as to treat the principal amount of Rs. 2,91,42,213....
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....ars, the assessee credited the said amount of interest of Rs. 1,90,42,295 to the P&L a/c and also included the same in the total income shown by the assessee in the return of income filed by it. Thus, there is no dispute with regard to the waiver of interest includible in the total income of the assessee for the year under consideration. However, a dispute has arisen between the Department and the assessee with regard to waiver of the principal amount to the extent of Rs. 2,91,42,213. The entire outstanding principal amount of Rs. 4,76,42,213 was settled at Rs. 1.85 crore giving a benefit of Rs. 2,91,42,213 to the assessee by way of waiver. Now, the question arises whether the waiver of the principal amount to the extent of Rs. 2,91,42,213, which has been credited to the capital reserve account, is an income chargeable to tax under the Act. According to the AO, the assessee had derived benefit by way of waiver of loan in the course of carrying on business activity and, therefore, the amount to the extent it is waived by the bank, is includible in the assessee's hands as business income. From the order of the AO, it is clear that no dispute has been raised by the AO with regard ....
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....ge and personal guarantee of directors) : (a) In cash credit account 2,79,42,213 (b) C.T.L. State Bank of India 1,19,00,000 (c) W.C.T.L. State Bank of India 78,00,000 4,76,42,213" In the notes to the accounts (Sch. XV), under Item B, it has been stated as under : "(B) The company has sold/agreed to sell during the year its entire fixed assets comprising leasehold land, building and electric installation therein and has realized a sum of Rs. 1.85 crore from sale and advance and has paid the said sum to SBI to settle the entire outstanding principal amount of Rs. 4,76,42,213 under the one time settlement with the said bank. The company has created the capital reserve of Rs. 2,91,42,213 for the balance outstanding principal amount not to be paid by the company under the settlement with the said bank. The company has written back outstanding provision for bank interest of Rs. 1,90,42,295 in the books now not liable to be paid by the company under the settlement with the said bank to P&L a/c and shown under provision for bank interest written back respectively. The company has further created capital reserve of Rs. 1,60,55,282 out of the amount....
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....hat it clearly indicates that the assessee has been deriving benefit on the basis of either depreciation or utilizing the working capital in earlier years. The CIT(A) deleted the addition by observing that the remission of the principal amount of loan did not amount to income under s. 41(1) nor under s. 28(iv) nor under s. 2(24) of the Act. On further appeal by the Revenue, the Tribunal upheld the order of learned CIT(A). The relevant para 4 of the Tribunal's order runs as under : "Aggrieved by the above order of the CIT(A), the Revenue is in further appeal before us. We have considered the rival contentions carefully, gone through the orders of the authorities below and also deliberated on the case laws cited by learned Authorised Representative in support of the provisions that waiver of principal amount of loan is not income. We found from the record that assessee being a sick company, not in a position to repay the loan, the financial institution and banks have waived the interest and a part of principal amount. So far as waiver of interest is concerned, the assessee either has not claimed the expenditure of interest which was waived or has shown the same as income....
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.... a trust, value of any perquisite or profit in lieu of salary, special allowance or benefit granted to the assessee to meet his personal expenses, benefit or perquisite of directors, any such chargeable under cls. (iiia), (iiib), (iiic), (iv) and (v) of s. 28, capital gains under s. 45, profit and gains of business in accordance with s. 44, winning from lotteries, races, etc., and any sum received by the assessee from his employee as contribution to any provident fund so set up. Waiver of principal amount of tax by no stretch of imagination can be treated as income within the meaning of s. 2(24) of the Act." 17. The Hon'ble High Court has observed in para 3 of their order that Tribunal had examined the case in detail and particularly from the standpoint of the provisions of s. 41(1) of the Act. The Hon'ble High Court then reproduced the Tribunal's observations and decision with regard to the applicability of s. 41(1) of the Act to that case in para 3 of their order as under : "As per our considered view, for attracting the provisions of s. 41(1), the first requisite condition to be satisfied is that the assessee should have got deduction or benefit of allowa....
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....bay High Court in the case of Mahindra & Mahindra Ltd. vs. CIT (supra) where Hon'ble Bombay High Court held that any disallowance or deduction having been allowed in respect of loan taken by the assessee for purchase of capital asset, s. 41(1) was not attracted to remission of principal amount of loan. In that case, the Tribunal further found that the assessee did not get any deduction on account of acquisition of capital asset as the same was reflected in the balance sheet and not in the P&L a/c, and, also the remission of the principal amount of loan so obtained from the bank and financial institution had not been claimed as expenditure or trading liability in any of the earlier previous years. The Tribunal further observed that provisions of s. 28(iv) would apply to the value of benefit or perquisites whether convertible into money or not, arising from business but does not apply for benefit received in cash or money as so held in Mahindra & Mahidnra Ltd. vs. CIT (supra). The Tribunal further held that the waiver of principal amount of loan also does not come under the definition of 'income' as contained in s. 2(24) of the Act, and as such waiver of principal amount ....
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....idend, voluntary contribution received by a trust, value of any perquisite or benefit in lieu of salary or specifically granted to the assessee to meet his personal expenses, benefit or perquisite or any sum chargeable under cls. (iiia), (iiib), (iiic), (iv) and (v) of s. 28, capital gains chargeable under s. 45, profit and gains of business in accordance with s. 44, winning from lotteries, races etc. and any sum received by the assessee from his employer as contribution to any provident fund set up. However, the Tribunal in that case has not considered the issue from the standpoint of the principle laid down by the Hon'ble Supreme Court in the case of CIT vs. T.V. Sundaram Iyengar & Sons (supra). 19. While deciding the issue, the Tribunal in the case of CIT vs. Tosha International Ltd. (supra) has recorded a finding of fact that in that case the assessee has not got any deduction on account of acquisition of capital assets as the same was reflected in the balance sheet and not in the P&L a/c, and also the remission of principal amount of loan so obtained from the bank was not claimed as an expenditure or trading liability in any of the earlier previous years. It is thus see....
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....rer of heavy vehicles and jeeps. It required these dies for expansions. Therefore, the import was that of plant and machinery. The consideration paid was for such import of plant and machinery, i.e., capital assets. In these circumstances, it was held that s. 28(iv) was not attracted. The Hon'ble High Court further found that the principal amount of loan had been foregone as a part of takeover arrangement, to which the assessee was not a party, and the waiver of principal amount was unexpected, and in the circumstances, such waiver would not constitute business income. The Hon'ble High Court further held that in order to apply s. 41(1), the assessee should have obtained a deduction in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee. The assessee had not obtained such allowance or deduction in respect of expenditure or trading liability, In the circumstances, it was held that s. 41(1) of the Act was not applicable. The Hon'ble High Court further held that even assuming that the assessee had got deduction of allowance, s. 41(1) was not applicable because such deduction was not in respect of loss, expenditure or tra....
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....t the same as business income of the assessee liable to tax. 23. On an appeal, CIT(A) upheld the AO's action. On further appeal before the Tribunal, the Tribunal sustained the view taken by the CIT relying upon the judgment of the Hon'ble Supreme Court in the case of CIT vs. T.V. Sundaram Iyengar & Sons Ltd. (supra). The Tribunal observed that Hon'ble Supreme Court in the case of CIT vs. T.V. Sundaram Iyengar (supra) held that if the amount is received in the course of trading transactions, even though it is not taxable in the year of receipt, as being of capital character, the amount changes its character when the amount becomes assessee's own money because of limitation or by any other statutory or contractual right. Where the assessee received deposits in the course of trading transactions, the amount of such credit balances, which were barred by limitation and which were returned back by the assessee to the P&L a/c, were to be assessed as the assessee's income. On further appeal before the Hon'ble High Court, the Hon'ble High Court held that the assessee can hardly derive any advantage from the case of Mahindra & Mahindra Ltd. vs. CIT (supra) as i....
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.... taken place, But, where a new asset came into being automatically by operation of law, commonsense demanded that the amount should be entered in the P&L a/c for the year and be treated as taxable income. In other words, the principle appears to be that if an amount is received in course of a 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 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. 23. In the present case, the money was received by the assessee in 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 had 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 P&L a/c. There is no e....
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....r is taken, the assessee, because of the trading operation, becomes richer by the amount, which it has transferred to its general reserve account. The money had arisen out of ordinary trading transactions. Although the amounts received originally were not of income nature, but subsequently, it becomes the assessee's income when the amount was written off in the accounts. In this case, the Hon'ble Madras High Court has also observed that once the assessee transferred any amount to the general reserve, it treated the same as the profit. In this connection, reference was made to the decision of Hon'ble apex Court in the case of Vazir Sultan Tobacco Co. Ltd. vs. CIT (1981) 25 CTR (SC) 186: (1981) 132 ITR 559(SC), where it has been held that a reserve is appropriation of profits. 25. In the light of the discussion made above, and following the decision of Hon'ble Bombay High Court in the case of Solid Containers Ltd. vs. Dy. CIT (supra) where the principle enunciated by the Hon'ble Supreme Court in the case of CIT vs. T.V. Sundaram Iyengar & Sons Ltd. (supra) has been applied, we held that the principal amount of loan, which is taken for the purpose of business or....
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....y, has not been looked into or examined by the authorities below nor the assessee has established that the loan amount was utilized only for the purpose of acquiring capital asset. The assessee has merely relied upon the decision of Hon'ble Delhi High Court in the case of CIT vs. Tosha International Ltd. (supra) and the decision of Hon'ble Bombay High Court in the case of Mahindra & Mahidnra Ltd. vs. CIT (supra) without giving details about the purpose for which the loan amount was utilized. The learned CIT(A) has decided the matter by relying upon the aforesaid two decisions i.e., decision of Delhi High Court in the case of Tosha International Ltd. (supra) and decision of Bombay High Court in the case of Mahindra & Mahindra Ltd. vs. CIT (supra) besides the decision of Hon'ble Madras High Court in the case of CIT vs. P. Ganesha Chettiar (supra), without examining and appreciating the nature and purpose for which the loan was taken. We, therefore, restore this issue back to the file of the AO 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 ....