TaxTMI 
TaxTMI 
2019 (8) TMI 455
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....l Nadu Government undertaking, operating transport services. For the Assessment Year under consideration (2001-02), the assessee filed its return of income on 24.10.2001 declaring total loss of Rs. 35,55,32,390/-. The return was processed under Section 143(1) of the Act on 10.04.2002. A notice under Section 148 of the Act dated 30.07.2003 was served on the assessee along with a questionnaire. In this appeal, we are concerned about the interest payable by the respondent/assessee on the loans availed from the Government of Tamil Nadu. 4. The assessee had taken over the assets and liabilities of the transport services, which were previously run by the Tamil Nadu State Government. The State Government treated a part of the net worth of the undertaking as its share capital and the balance was treated as loan, on which, the assessee was claiming interest payable year after year and the same was allowed as deduction under Section 37 of the Act. The Government of Tamil Nadu took a decision and issued G.O.(Ms).No.18 dated 07.03.2001 converting the interest outstanding of Rs. 8264.17 lakhs payable by the assessee company on 31.10.2000 into equity shares. The question posed by the Assessing....
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....erest received and debited its account towards capital outlay and there was no question of application of Section 41(1) of the Act, because interest liability stood discharged and instead of that, the assessee company had issued share capital to the Government. 8. The Tribunal, after noting the facts, held in favour of the assessee that the assessee company had discharged its interest liability and instead of making the payment in cash, it had issued share capital to the Government as per G.O.(Ms)No.18 dated 07.03.2001 and that the provisions of Section 41(1) of the Act were not attracted. Accordingly, the Tribunal allowed the appeal filed by the assessee, set aside the order of the CIT(A) and remitted the matter to the Assessing Officer for verification of the actual figures in the light of the observation made by the Tribunal that conversion into share capital had to be treated as proper discharge of interest payments and that the provisions of Section 41(1) of the Act were not attracted. The Revenue is before us challenging the order passed by the Tribunal and the appeal has been admitted on the above mentioned substantial question of law. 9. Mr.Karthik Ranganathan, learned S....
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....14. Relying upon the decision in the case of of CIT Vs. Jindal Equipments Leasing & Consultancy Services Ltd. [reported in (2010) 325 ITR 87 Delhi], it is submitted that this submission being a question of law, the Revenue should be permitted to raise this alternate submission on the above ground. Learned Senior Standing Counsel seeks to restore the order passed by the CIT(A) and to answer the substantial question of law in favour of the Revenue. 15. Mr.A.S.Sriraman, learned counsel appearing for the respondent/assessee submitted that the Tribunal rendered a clear finding that the assessee discharged its interest liability, that instead of making the payment in cash, it had issued share capital to the Government as per G.O.(Ms)No.18 dated 07.03.2001 and that the provisions of Section 41(1) of the Act were not attracted. Further, it is submitted that Section 28 of the Act could never be applied to the facts of the present case. That apart, such a plea was never raised at any earlier point of time. It is further submitted that the change of nomenclature in the balance sheet would not amount to cessation of liability, but it was a case of discharge of liability as rightly held by the....
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....est liability ceased to be a trading liability and this was undoubtedly resulting in a benefit to the assessee in respect of such trading liability and it was as good as the amount has been written off. Therefore, it is submitted that the provisions of Section 41(1)(a) of the Act stand attracted to the assessee's case and the Tribunal erroneously reversed the order passed by the CIT(A). Referring to the decision in Compaq Electric Ltd., it is submitted that interpretation given by the CIT(A) needs to be sustained. Alternatively, it is submitted that Section 28(iv) of the Act would stand attracted and this being a question of law, the assessee should be permitted to raise the same as has been held in the case of Jindal Equipments Leasing & Consultancy Services Ltd. 20. The first aspect, which we have to steer clear is as to whether there has been cessation of liability or it is a case of discharge of liability. 21. We have perused the Government Order in G.O.(Ms) No.18 dated 07.03.2001. The Government issued the said order for restructuring the transport undertakings by converting existing Government loans and advances and interest outstanding as equity share capital. The res....
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....Parmanand Kashyap father of Mr.Rajinder Kashyap was the director of the assessee company therein, who used to purchase spare parts from different parties, on credit, in his own name and an amount was payable to Mr.Parmanand Kashyap for the purchase made by him for the assessee company. The outstanding credit balance was shown in the books of accounts of the assessee company under the sub-head "other supplier" of the mainhead "sundry creditors". Since the purchases were being handled by Mr.Parmanand Kashyap, the assessee decided to make the matter simple by transferring the credit balance to Mr.Parmanand Kashyap and consequently, the nomenclature of the outstanding balance was changed from "other suppliers" to Mr.Parmanand Kashyap in the audited financial statement of the said assessee company. The Assessing Officer was of the view that the transfer of the account of "sundry creditors" by way of book entry in the name of Mr.Parmanand Kashyap constituted cessation of liability, which is taxable under Section 41 of the Act. While, the matter was pending before the CIT(A), Mr.Parmanand Kashyap died. Consequently, the CIT(A) was of the view that the liability had ceased to exist. Howeve....
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....ebt. Some benefit however must accrue to the assessee by virtue of remission or cessation of the liability, as the case may be. 8. Mere change of nomenclature in the books of account without anything more brings no benefit to the assessee and its liability to pay to the creditor does not get extinguished merely by change of nomenclature or by change of the sub-head under which the liability is shown in the account books of the assessee. What is relevant is that the liability of the assessee to pay the amount of Rs. 11,81,045 to its creditor(s) did not come to any end merely on account of the aforesaid change in the sub-head under which the liability was shown in the account books. Transfer of liability from one sub-head to another does not absolve the assessee of its obligation to pay that amount. There is no cessation of liability in such a case and the company still remains liable to its assessee (sic-creditor). It cannot be said that the creditors of the assessee would not have been able to recover the aforesaid amount from it merely on account of a change made in the sub-head under which the liability was shown in the account books of the assessee company. The company was lia....
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....it continued to remain liable even after change of entries in the books of account, no benefit would accrue to the assessee company merely on account of change of nomenclature and consequently the question of treating the same as profit and gain would not arise. The decision in Auto Kashyap India (P) Ltd is applicable in full force to the assessee's case. 26. In the decision in the case of Indo Widecom International Ltd case, the assessee received Rs. 1 crore by way of share application money from its holding company, continued to retain the money without allotment of any shares being made by it. Subsequently, the assessee made sales to the holding company and the assessee adjusted the amount as against the said sales made to the holding company and made book entries to transfer the amount to the general account under a narration 'share application money transfer' and adjusted the share application money to the sale price realisable from the holding company. The question was whether the same would amount to cessation or remission of liability as contemplated under Section 41 of the Act. The Court answered the question in the negative and held that Section 41 of the Act....
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....q Electric Ltd., did not pertain to converting an unsecured loan into equity share capital and it pertains to the balance amount, which was written off as not payable. This is clear from a reading of paragraph 2 of the order, wherein the Court noted that the assessee is a wholly owned subsidiary company of M/s. Dr.Reddy's Laboratories Limited (DRL) and in view of huge losses suffered by the assessee company, the operations of the company had been funded by way of unsecured loans by M/s.DRL from year to year and the loan accumulated to about Rs. 11.64 Crores during the year. The assessee therein proposed and M/s.DRL accepted the request for conversion of the unsecured loan partly into equity share capital and waive the balance as not recoverable. Accordingly, the assessee company converted unsecured loan into equity share capital to the extent of Rs. 9 Crores and wrote back the balance amount of Rs. 2.64 Crores as not payable. This amount of Rs. 2.64 Crores was the subject matter in this decision. In the said decision, the question was whether there was remission or cessation of trading liability. Therefore, in the case of Compaq Electric Ltd., no question was raised by the Reve....