TaxTMI 
TaxTMI 
2020 (12) TMI 568
X X X X Extracts X X X X
X X X X Extracts X X X X
....hereinafter called as "Act"), which resulted in a refund of Rs. 3,07,086/- in the case of M/s.Kothari Biotech Limited. The case was selected for scrutiny as per norms and notice was issued u/s.143(2) and notice calling for certain information was also sent. After furnishing of information by the assessee, Assessment order was passed on 30/08/2006 in both assessees case. As the assessment completed was considered to be erroneous and prejudicial to the interests of revenue, notice under Section 263 was issued to the assessee on 15.01.2009. The reasons for issue of notice u/s.263 are as under:- Insofar as TCA.133 of 2019 - M/s.Kothari International Trading Limited is concerned, the reasons are :- (i) The assessing officer erred in not bringing to tax the amount of Rs. 2,72,10,113/- out of Rs. 2,81,20,950/- being the relief to the assessee under the compromise settlement with the ICICI Bank. The Assessing Officer failed to verify the details of the write off and how the original liability was treated in accounts. The A.O., also failed to examine whether the amount could be brought to tax under section 28(iv) applying the decision of the Supreme Court in the case of T.V.Sundaram Iyen....
X X X X Extracts X X X X
X X X X Extracts X X X X
...., the assessee has written back in profit and loss account as relief on one time settlement of debts, comprising principal and interest. The assessee/M/s.Kothari Biotech charged the preoperative expenses like interest, exchange fluctuation losses to the profits and loss account. (b) As far as bad debts written off for Rs. 3,68,76,832/- by M/.Kothari International Trading Ltd., is concerned, the assessee has replied that the amounts were not recoverable from these companies either because they have approached BIFR or civil suits and suits filed under Section 138 of Negotiable Instrument Act has not yet yielded results. According to the assessee, once the amounts are written off in the books, the same should be allowed as deduction and it is not necessary to prove that the debts had become bad. 4.1. The Commissioner of Income Tax, Chennai-1 vide order dated 27.03.2009 passed order under Section 263 of the Act, and viewed that the debt could be written off only if the condition given in Section 36(1) which states no deduction towards bad debts shall be allowed "unless such debt or part thereof has been taken into account in computing the income of the assessee of the previous ye....
X X X X Extracts X X X X
X X X X Extracts X X X X
....debts written off of Rs. 3,68,76,832/- are the amounts due from three companies. The A.O., pointed out that the assessee has neither furnished account copies of the creditors nor proof for steps taken for recovery of the debts. Further, the Assessee has written off bad debts to the tune of Rs. 1,07,77,432.56 as on 31/3/2003 whereas as on 31/3/2004 the bad debts written off has increased to Rs. 3,68,76,832/-. (c) Finally, the Assessing Officer held that the assessee could not produce any material for verification to substantiate that the debts were actually written off. Considering the fact that papers filed by the assessee in relation to legal proceedings taken against the parties does not help the assessee much, a sum of Rs. 3,68,76,832/- is disallowed and added back to the return of income. 7. In the case of assessee/M/s.Kothari Biotech Ltd., (i) Pre-operative Expenses claim was disallowed; (ii) Debts written back in the P&L Account deducted from total income, as observed above in the case Kothari International Trading Ltd., viewed that though it was of capital nature, at the point of time it was received, since the assessee company has not utilized the amount for business ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....03-04, contended that no disallowance is warranted. It is observed in the decision of Kothari Sugars Chemicals Ltd., that the Delhi Bench of the Tribunal in the case of ACIT Vs. SRF Ltd (supra) confirmed that once the asset introduced into a block and is used in the first year and even if the same is not used later, depreciation has to be allowed on the basis of block concept. However, the user criteria has to be fulfilled only when as asset formed part of the block of assets and once the asset is part of the block of assets, it would lose its individual cost or written down value and thereafter depreciation has to be allowed on the entire block of assets. This concept was introduced with effect from 01.04.1988. The Assessing Officer acknowleged the fact that these assets were part of the block of assets earlier and that the business of the appellant has been suspended since September 1999. Therefore, following the decision of ITAT Bench, the disallowance of depreciation of Rs. 20,80,639/- is deleted. (c) With regard to disallowance of pre operative expenses, it is held that since the appellant had not commenced its commercial business operations during the previous year relevan....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sessees have raised the following grounds:- (a) The Tribunal erred in holding that the loan amount waived by ICICI Bank has to be necessarily considered as revenue receipt. (b) The Tribunal erred in not appreciating that the waiver of loan cannot be considered to be income either u/s.28(iv) or u/s.41(1) of the Act. (c) It is incorrect to say that just because an item is credited by the assessee to Profit & Loss account it becomes an income under the Income Tax Act. (d) The Tribunal erred in holding that loans received from ICICI Bank are indeed capital in nature and therefore, the waiver of such loans would constitute a capital receipt. Thus, neither Section 41(1) which talks of remission or benefit in respect of loss, expenditure or trading liability nor sec 28 (iv) will have application in the instant case. (vi) The decision of the Madras High Court in the case of CIT Vs. Ramaniyam Homes (P) Ltd., 384 ITR 530 (Mad) relied on by the Tribunal has not become final and a Review Application has been admitted by this Court in Review Appeal No.63 of 2018 and the same is pending. 15. After hearing the learned counsel for the assessees/appel....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ised Representative of the assessees to show cause as to why claim cannot be disallowed as the decisions in which he relied upon were not applicable to their case and added that no materials like books and documents and any other proof to prove the same in response to the questions asked vide letter dated 13.07.2009, were filed. Moreover, the Bank also not furnished any information sought for in this regard. Hence, even after granting time and opportunity, the Authorised Representative did not furnish any other materials to substantiate the claim by production of books. The only facts available on record is that the receipt of money by the assessees. Therefore, since the assessees had not furnished any particulars or documents to substantiate their case, the Assessing Officer found that the waiver of the loan is the income and is taxable based on the decision of the Apex Court in the case of M/s.T.V.Sundaram Iyengar & Sons Ltd., Vs. CIT (222 ITR 344). 19. The learned Standing Counsel further submits that the order of the Assessing Officer has been challenged before the CIT (Appeals). The CIT (Appeals) also observed and referred to the order of Assessing Officer and found that....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ld be taxed u/s.28(iv) or Section 41(1) relying on the decision of CIT Vs. T.V.Sundaram Iyengar & Sons 222 ITR 344. The said order was challenged before the Commissioner of Income Tax (Appeals), Chennai-1. The CIT (Appeals) pointed out that no enquiry has been conducted in the course of assessment proceedings and there is nothing on record to show that the explanation was called for from the assessee. Therefore, the CIT (Appeals) following the decision of Delhi High Court in Logitronics (P) Ltd., Vs. CIT (2011) 333 ITR 386/197 Taxman 349/9 taxmann.com 302 and Rollatainers Ltd., Vs. CIT (2011) 339 ITR 54/15 taxmann.com 111 (Delhi) which followed the decision of Madras High Court in Iskraemeco Regent Ltd., and expounded the law that if a loan had been taken for acquiring a capital asset, waiver thereof would not amount to any income leviable to tax. In the said decision, it is further held that when the loan amount borrowed for acquiring an asset gets wiped off by repayment, two entires are made in the books of account, one in the profit and loss account where payments are entered and another in the balance sheet where the non-payment of loan amount is reflected on the side of the li....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he case of CIT Vs. Mahindra and Mahindra, decided on 24th April 2018, wherein, it is held that the waiver of the loan by the creditor is neither taxable as the very first condition of Section 28(iv) of the Act which says any benefit or perquisite arising from the business shall be in the form of benefit or perquisite other than in the shape of money, is not satisfied in the said case and therefore, the waiver of the loan amount cannot be taxed under Section 28(iv) of the Act. 25. However, it is pertinent to mention herein the points considered by the Honourable Supreme Court in the above said case (CIT Vs. Mahindra & Mahindra) as to in what circumstances, the order passed holding Section 28(iv) and Section 41(1) of the IT Act does not apply in the said case. In such situation, extraction of Paragraphs 9 to 18 has become necessary, which is as under:- "9.Further, it was also submitted that it is very clear that the amount of $650,000 provided by KJC was in fact a loan on which interest was being paid regularly from time to time. It is also pointed out that in the books of account of the Respondent, this loan has been shown in the Balance Sheet under the heading ''....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... of the IT Act, the benefit which is received has to be in some other form rather than in the shape of money. In the present case, it is a matter of record that the amount of Rs. 57,74,064/- is having received as cash receipt due to the waiver of loan. Therefore, the very first condition of Section 28 (iv) of the IT Act which says any benefit or perquisite arising from the business shall be in the form of benefit or perquisite other than in the shape of money, is not satisfied in the present case. Hence, in our view, in no circumstances, it can be said that the amount of Rs. 57,74,064/- can be taxed under the provisions of Section 28(iv) of the IT Act. 14.Another important issue which arises is the applicability of the Section 41(1) of the IT Act. The said provision is re-produced as under: ''41. Profits chargeable to tax.- (1) 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 (herinafter referred to as the first-mentioned person) and subsequently during any previous year,- (a) the first-mentioned person has obtained, whether in cash or in nay ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of the assessment years. Here, we deem it proper to mention that there is difference between 'trading liability' and 'other liability'. Section 41(1) of the IT Act particularly deals with the remission of trading liability. Whereas in the instant case, waiver of loan amounts to cessation of liability other than trading liability. Hence, we find no force in the argument of the Revenue that the case of the Respondent would fall under Section 41(1) of the IT Act. 17.To sum up, we are not inclined to interfere with the judgment and order passed by the High Court in view of the following reasons: (a) Section 28(iv) of the IT Act does not apply on the present case since the receipts of Rs. 57,74,064/- are in the nature of cash or money. (b) Section 41(1) of the IT Act does not apply since waiver of loan does not amount to cessation of trading liability. It is a matter of record that the Respondent has not claimed any deduction under Section 36(1) (iii) of the IT Act qua the payment of interest in any previous year. 18. In view of the above discussion, we are of the considered view that these appeals are devoid of merits and deserve to b....
X X X X Extracts X X X X
X X X X Extracts X X X X
....aken for recovery. (iv) Any provision has been made for bad debts in the earlier years preceding to the previous year. Subsequently, the Manager (Taxation) of the assessees appeared and filed certain details. But during the hearing, the assessing officer raised questions to the Authorised Representative and issued show cause notice that he has not furnished required particulars and the particulars furnished was not sufficient to consider their case. Even after granting sufficient time and opportunities, the Authorised Representative could not furnish any other materials to substantiate the claim by production of books. Further the Assessing Officer has held that the only fact available on record is the receipt of money by the assessee. Therefore, based on the available records, found that the waiver of the loan is the taxable income. Therefore, challenging the order of the Assessing Officer, once again, the assessees filed the appeal before the CIT (Appeals). He also found that the assessees have not produced sufficient materials, so too, the Income Tax Appellate Tribunal. 29. Now coming to the conclusion, the only point to be decided herein is whether the loan amount waiv....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the capital was borrowed for the acquisition of the asset, till the date on which such asset was put to use, shall not be allowed as deduction. 43. Therefore, it is clear that the moment the asset is put to use, then the interest paid in respect of the capital borrowed for acquiring the asset, could be allowed as deduction. When the loan amount borrowed for acquiring an asset gets wiped off by repayment, two entries are made in the books of account, one in the profit and loss account where payments are entered and another in the balance sheet where the amount of unrepaid loan is reflected on the side of the liability. But, when a portion of the loan is reduced, not by repayment, but by the lender writing it off (either under a one time settlement scheme or otherwise), only one entry gets into the books, as a natural entry. A double entry system of accounting will not permit of one entry. Therefore, when a portion of the loan is waived, the total amount of loan shown on the liabilities side of the balance sheet is reduced and the amount shown as Capital Reserves, is increased to the extent of waiver. Alternatively, the amount representing the waived portion of the....