Kansara Modler Limited, JODHPUR V. ACIT-1, JODHPUR

ITA 196/JODH/2011

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 1613 (ITAT-JODHPUR)
• Duration Of Justice: 1 year(s) 8 month(s) 30 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-02-2013
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: DB
• Next Hearing Date: 08-01-2013
• Assessment Year: 2006-2007
• Appeal Filed On: 12-05-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: A K KHANDELWAL
• Assessee Lawyers: R K BOTHRA
• Keywords: Capital asset; Depreciation; Capital receipt; Revenue expenditure
• Section: 43B; 32; 37; 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL JODHPUR BENCH, JODHPUR BEFORE SHRI HARI OM MARATHA, JUDICIAL MEMBER AND SHRI N.K.SAINI, ACCOUNTANT MEMBER ITA NO. 196/JU/2011 [ASSESSMENT YEAR 2006-07] SHRI KANSARA MODULAR LTD VS. THE A.C.I.T -1 A-41 [B], MIA, PHASE II JODHPUR BASNI, JODHPUR PAN NO: AAACK 5090 P (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI R.K. BOTHRA DEPARTMENT BY : SHRI A.K. KHANDELWAL DATE OF HEARING : 08.01.2013 DATE OF PRONOUNCEMENT : .1.2013 ORDER PER HARI OM MARATHA, J.M. THIS APPEAL OF THE ASSESSEE FOR ASSESSMENT YEAR 200 6-07 IS DIRECTED AGAINST THE ORDER OF THE LD. CIT(A) DAT ED 21.03.2011. 2 2. THE APPELLANT HAS RAISED THE FOLLOWING GROUNDS I N ITS APPEAL: 1. THAT ON THE BASIS OF FACTS AND CIRCUMSTANCES OF TH E CASE, WHETHER THE LEARNED CIT(A) WAS JUSTIFIED IN DETERMI NING INTEREST PERTAINING TO PREOPERATIVE PERIOD AT RS.5 24 LACS AS AGAINST RS. 731.55 LACS CLAIMED BY THE APPELLANT . 2. THAT ON THE FACTS AND CIRCUMSTANCE OF THE CASE, WHE THER THE LEARNED CIT(A) WAS JUSTIFIED IN HOLDING THAT WA IVER OF INTEREST AMOUNTING RS.731.55 LACS IS TAXABLE UNDER SECTION 41(1)AND SECTION 28(IV) OF THE INCOME TAX ACT,1961. 3. THE FACTS LEADING TO THIS APPEAL, IN BRIEF, ARE THAT THE ASSESSEE IS A PUBLIC LTD COMPANY, ENGAGED IN THE MANUFACTURI NG OF ROLLERS FOR BEARINGS. FOR THE ASSESSMENT YEAR 2006-07, IT FILED RETURN OF INCOME (ROI) THROUGH E-FILING ON 22.11.2006, DECLAR ING NIL INCOME. THE ASSESSEE-COMPANY MAINTAINS ITS BOOKS OF ACCOUN TS IN A COMPUTER SYSTEM. BUT A HARD COPY OF COMPUTERIZED CA SH-BOOK, LEDGER, JOURNAL, BANK-BOOK AND VOUCHERS ETC. WERE P RODUCED BEFORE A.O. FOR VERIFICATION. THE ASSESSEE-COMPANY HAS PROPERLY MAINTAINED ITS STOCK REGISTER. IN ASSESSMENT YEARS 2004-05 TO 2006- 3 07 G.P. RATES OF 33.27%, 19.19% AND 23.64%, RESPECT IVELY, HAVE BEEN DISCLOSED. 4. BELOW THE COMPUTATION OF INCOME, THE ASSESSEE HAS APPENDED A NOTE AS UNDER :- DURING THE YEAR FINANCIAL INSTITUTIONS WAIVED INTE REST LIABILITY OF RS.22,74,85,511/- IN FAVOUR OF THE CO MPANY. OUT OF WHICH AN AMOUNT OF RS. 7,31,55,195/- PERTAINS TO P RE- OPERATIVE PERIOD AND ON THE BASIS OF LEGAL OPINION , SAME HAS NOT BEEN BROUGHT TO TAX BEING A CAPITAL RECEIPT.' 5. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, TH E ASSESSEE WAS REQUESTED VIDE LETTER DATED 30/10/2008 TO SHOW CAUSE AS TO WHY INTEREST RELATED TO PRE-OPERATIVE PERIOD OF RS.7,31 ,55,195/- WAIVED BY THE FINANCIAL INSTITUTION, SHOULD NOT BE TREATED AS REVENUE RECEIPT AND TAXED ACCORDINGLY. IN THIS CONNECTION YOU ARE R EQUESTED TO EXPLAIN/ FURNISH THE FOLLOWING: (A) A COPY OF LEGAL OPINION. 4 (B) BASIS OF WORKING OF AMOUNT OF INTEREST PERTAINS TO PRE- OPERATIVE EXPENSES (ASSTT. YEAR WISE BIFURCATION OF EXPENSES SHOULD BE FURNISHED). (C) WHAT TREATMENT WAS GIVEN TO INTEREST AMOUNT PERTAI NING TO PRE-OPERATIVE EXPENSES? WHETHER CAPITALIZED OR SET OFF AGAINST INTEREST RECEIVED ON FDR'S PURCHASED AGAINS T LETTER OF CREDIT. (D) WHEN YOU HAVE TREATED THE SAME AS CAPITAL RECEIPT T HEN WHY THE VALUE OF ASSETS WAS NOT REDUCED PROPORTIONA TELY. (E) YOU ARE REQUESTED TO SHOW CAUSE AS TO WHY THESE RECEIPTS SHOULD NOT BE TREATED AS REVENUE RECEIPTS AND ASSESSED TO TAX ACCORDINGLY.' 6. IN COMPLIANCE TO THE ABOVE SHOW CAUSE, THE ASSESSEE FILED A WRITTEN SUBMISSION ON 27/11/2008 EXPLAINING AS UNDE R:- ' YOU HAVE ASKED TO SHOW CAUSE WHY INTEREST RELATIN G TO PREOPERATIVE PERIOD OF RS. 7,31,55,195/- WAIVED BY THE FINANCIAL INSTITUTIONS BE NOT TREATED AS REVENUE RE CEIPTS AND ASSESSED TO TAX ACCORDINGLY AND ANOTHER QUERY THAT WHY INTEREST HAS NOT BEEN REDUCED FROM THE COST OF ASSE TS PROPORTIONATELY. IN THIS REGARD WE HAVE BEEN DIRECT ED TO SUBMIT 5 AS UNDER: AT THE VERY OUTSET, WE WISH TO POINT OUT SOME FACTS WHICH IN OUR OPINION ARE UNDISPUTED: THOSE LOANS WERE ADVANCED BY STATE BANK OF BIKANER & JAIPUR, JODHPUR AND OTHER BANKS TO THE ASSESSEE COM PANY FOR THE CONSTRUCTION OF FACTORY BUILDING, PURCHASIN G & INSTALLATION OF PLANT & MACHINERY AND OTHER CAPITAL ASSETS. THAT ASSESSEE COMPANY HAD CAPITALIZED INTEREST TO T HE COST OF VARIOUS ASSETS UP TO THE PERIOD THEY WERE PUT TO USE AND SUBSEQUENT YEAR'S INTEREST WAS BEING DEBITED TO PRO FIT & LOSS ACCOUNT IN RESPECTIVE YEARS AS REVENUE EXPENDI TURE. THAT THE ASSESSEE NEVER CLAIMED/GOT DEDUCTION FOR P AYMENT OF PREOPERATIVE INTEREST U/S 36(L)(III) OR UNDER SE CTION 37 OF THE ACT DUE DISALLOWANCES/DEDUCTIONS UNDER SECTION 43B HAVE BEEN MADE IN COMPUTATIONS OF TOTAL INCOME IN RESPECT OF INTEREST CLAIMED AS REVENUE EXPENDITURE IN VARIOUS YEARS. NOW LET US EXAMINE THE TAXABILITY OF WAIVER OF INTE REST WHICH WAS CAPITALIZED TO THE COST OF FIXED ASSETS: RELEVANT PORTION OF SECTION 41(1) OF THE INCOME TAX ACT, 1961 READS AS UNDER: '41(1) WHERE AN ALLOWANCE OR DEDUCTION HAS BEEN MAD E IN THE ASSESSMENT FOR ANY YEAR IN RESPECT OF LOSS, EXPENDITURE OR TRADING LIABILITY INCURRED BY THE AS SESSEE 6 (HEREINAFTER REFERRED TO AS THE FIRST MENTIONED PER SON) AND SUBSEQUENTLY DURING ANY PREVIOUS YEAR,- A) THE FIRST MENTIONED PERSON HAS OBTAINED, WHETHER IN CASH OR IN ANY OTHER MANNER WHATSOEVER, ANY AMOUNT IN RESPECT OF SUCH LOSS OR EXPENDITURE OR SOME BENEFIT IN RESPECT OF SUCH TRADING LIABILITY B Y WAY OF REMISSIONOR CESSATION THEREOF, THE AMOUNT OBTAINED BY SUCH PERSON OR THE VALUE OF BENEFIT ACCRUING TO HIM SHALL BE DEEMED TO BE PROFITS AND GAINS OF BUSINESS OR PROFESSION AND ACCORDINGLY CHARGEABLE TO INCOME TAX AS THE INCOME OF THAT PREVIOUS YEAR, WHETHER THE BUSINESS OR PROFESSION IN RESPECT OF WHICH THE ALLOWANCE OR DEDUCTION HAS BEEN MADE IS IN EXISTENCE IN THAT YEAR OR NOT; OR ' SECTION 41(1), IN A WAY, ENACTS STATUTORY FICTIONS . THEREFORE, THE OPERATION OF SUCH FICTIONS SHOULD BE LIMITED T O THE LANGUAGE OF THE SECTION. IT IS, INTER ALIA, WHERE THE ASSESSEE HAS INCURRED A TRADING LIABILITY', AND THIS TRADIN G LIABILITY HAS BEEN ALLOWED DEDUCTION IN AN EARLIER YEAR, AND SOM ETHING HAS, LATER ON, BEEN RECOVERED IN RESPECT OF SUCH LIABIL ITY OR SUCH LIABILITY HAS EITHER BEEN REMITTED OR HAS CEASED T O EXIST, THAN SECTION 41(1) COMES INTO OPERATION. 7 IT IS CONTENDED THAT IN ORDER TO ATTRACT SECTION 4 1(1) OF THE IT ACT, THE FIRST REQUISITE WHICH OUGHT TO BE SATISFI ED IS THAT THE ASSESSEE SHOULD HAVE GOT DEDUCTION OR BENEFIT OF A LLOWANCE IN RESPECT OF LOSS, EXPENDITURE OR TRADING LIABILITY INCURRED BY THE ASSESSEE AND THAT SUBSEQUENTLY DURING ANY PREV IOUS YEAR THE ASSESSEE RECEIVED ANY AMOUNT IN RESPECT OF SUC H LOSS, EXPENDITURE OR TRADING LIABILITY BY WAY OF REMISSI ON OR CESSATION THEREOF. IN OUR CASE, ASSESSEE COMPANY HAS NEVER GOT DEDUCT ION IN RESPECT OF IMPUGNED RS.7.32 CRORES UNDER SECTION 3 6(L)(III) OR SECTION 37, AND UNDER THE CIRCUMSTANCES SECTION 41 (1) OF THE ACT IS NOT ATTRACTED. IN THE CASE OF CIT VS. PHOOL CHAND JIWAN RAM(1981)131 ITR 37(DEL), THE ASSESSEE FIRM HAD PU RCHASED GOODS. THEY HAD ALSO OBTAINED LOANS FROM A PARTY, ACCOUNTS WERE SETTLED AND THE BALANCE WAS CREDITED TO THE P ARTNER'S ACCOUNT. IT WAS HELD BY THE DELHI HIGH COURT THAT THE AMOUNT REFERABLE TO LOANS WAS NOT A TRADING LIABILITY. TH AT, THE ONLY AMOUNTS ALLOWED AS DEDUCTION IN EARLIER YEARS COUL D BE TREATED AS A TRADING LIABILITY. IN OTHER WORDS, UNLESS THE AMOUNTS HAVE BEEN ALLOWED AS DEDUCTION IN EARLIER YEARS THEY CA NNOT BE TREATED AS TRADING LIABILITY AND AS SUCH SECTION 4 1(1) IS NOT APPLICABLE. IT WILL NOT BE OUT OF PLACE TO MENTION HERE THAT S ECTION 41(1) CONSISTS OF TWO MAIN INGREDIENTS VIZ., (A) 'LOSS O R EXPENDITURE' AND (B) 'TRADING LIABILITY'. AS PER THE DECISION O F THE HON'BLE 8 SUPREME COURT DECISION IN THE CASE OF POLYFLEX (IN DIA) (P) LTD. VS. CIT (2002) 177 CTR (SC) 93, THE TWO COMPONENTS OF SECTION 41(1) OF THE ACT HAVE TO BE READ SEPARATELY, NAMEL Y (I) HAS OBTAINED, WHETHER IN CASH OR IN ANY OTHER MANNER W HATSOEVER, ANY AMOUNT IN RESPECT OF SUCH LOSS OR EXPENDITURE; (II) SOME BENEFIT IN RESPECT OF SUCH TRADING LIABILITY BY WA Y OF REMISSION OR CESSATION THEREOF. ACCORDINGLY THE HON'BLE APEX COURT HELD THAT THE WORDS 'REMISSION OR CESSATION THEREOF SHA LL APPLY ONLY TO TRADING LIABILITY AND IT SHALL NOT APPLY TO ANY LOSS OR EXPENDITURE. THE NEXT ISSUE WHICH NEEDS TO BE RESOLVED IS WHETH ER WAIVER OF INTEREST AMOUNT WHICH WAS CAPITALIZED TO THE COST OF ASSETS WOULD AMOUNT TO TRADING LIABILITY? IN THIS REGARD IT IS SUBMITTED THAT ONLY TRADING D EBTS, WHICH ARE ALLOWED AS DEDUCTION IN EARLIER YEARS, CAN BE TREATED AS TRADING LIABILITY. IT IS NOT IN DISPUTE THAT THE I NTEREST AMOUNT WHICH HAS BEEN WAIVED HAS NOT BEEN CLAIMED AS DEDU CTION IN ANY OF THE YEARS, ON THE CONTRARY IT ALSO BECAME P ART OF LOAN AMOUNT FINANCED BY THE BANKERS AS SOON AS THAT WAS CAPITALIZED. WHETHER OR NOT A LIABILITY IS A TRADING LIABILITY DEPENDS ON THE FACTS AND CIRCUMSTANCES OF A PARTICULAR CASE. A LIABILITY CREATED FOR PURCHASE OF STOCK-IN-TRADE ON CREDIT I S CERTAINLY A TRADING LIABILITY. WHERE A PURCHASES HIS STOCK-IN- TRADE FROM B ON CREDIT, THE LIABILITY OF A TO IS A TRADING LIAB ILITY. BUT IF A 9 BORROWS MONEY FROM C IN ORDER TO PAY OFF HIS LIABI LITY TO B, 'S LIABILITY TO C ON SUCH BORROWING IS NOT A TRADING LIABILITY. IT IS THUS CLEAR THAT SECTION 41(1) CANNOT BE INVOKED IF C REMITS A PART OR WHOLE OF HIS LOANS TO A [CIT VS. PHOOL CHANDJ JIW AN RAM, (1981) 131 ITR 17 (DEL)]. THE NEXT ISSUE WHICH NEEDS ATTENTION IS, WHETHER TH E WAIVER OF LOAN WILL AMOUNT TO A BENEFIT RELATABLE TO DEPREC IATION EXPENDITURE CLAIMED EARLIER? THE DEPRECIATION U/S 32 IS ALLOWED ON THE 'ACTUAL COST' OF THE ASSETS. THE TERM 'ACTUAL COST' HAS BEEN DEFINED IN SECTION 43(1) ACCORDING TO WHICH, 'ACTUAL COST' MEANS 'THE ACTUAL COST OF THE ASSETS TO THE ASSESSEE REDUCED BY THAT PORT ION OF THE COST THEREOF, IF ANY, AS HAS BEEN MET DIRECTLY OR INDIRECTLY BY ANY OTHER PERSON OR AUTHORITY'. SO, THE ONLY DEDUC TION PERMISSIBLE FROM THE ACTUAL COST IS THE AMOUNT, WH ICH HAS BEEN MET BY ANY OTHER PERSON OR AUTHORITY. THE WORDS 'WHICH HAS BEEN MET BY ANY OTHER PERSON OR AUTHORITY' WOULD MEAN THE NON-REFUNDABLE AMOUNT GI VEN BY ANY OTHER PERSON OR AUTHORITY FOR THE PURPOSE OF M EETING THE COST OF THE ASSET. WHEN A PERSON AVAILS A TERM LOA N, IT HAS TO BE REPAID ALONG WITH THE INTEREST, IF ANY, IN A CCORDANCE WITH THE TERMS AND CONDITIONS PRESCRIBED FOR THAT PURPOSE. IF THE TERM LOAN IS UTILIZED FOR ACQUIRING ANY ASSET, IT CANNOT BE TERMED AS 'MEETING OF A PORTION OF COST OF THE ASS ET'. LOAN IS AVAILED AS A SOURCE OF FINANCE WHILE THE DEPRECIAT ION IS 10 ALLOWED ON THE ACTUAL USER OF THE ASSET. SO 'AVAIL ING OF LOAN' AND 'CLAIM OF DEPRECIATION' ARE TWO DISTINCT THING S, WHICH CANNOT BE CLUBBED TOGETHER AND, THEREFORE, REMISSI ON OF LOAN ALONGWITH INTEREST (ON WHICH ASSESSEE GOT NO DEDUC TION U/S 36(1) (III) OR UNDER SECTION 37 OF THE ACT) WILL N OT AMOUNT TO REMISSION OF DEPRECIATION. WHEN THE BANKERS WROTE OFF THE LIABILITY OF THE AS SESSEE COMPANY, IT CANNOT BE SAID IN RETROSPECT THAT THE COST TO' THE ASSESSEE OF ANY PART OF THE CAPITAL ASSETS ACQ UIRED DURING THE YEARS UNDER INSTALLATION, WAS MET BY BA NKERS. IT IS, THEREFORE, ARGUED THAT THE REMISSION OF LIABIL ITY BY BANKERS LONG AFTER THE LIABILITY WAS INCURRED CANN OT BE RELIED ON TO HOLD THAT BANKERS MET DIRECTLY OR IND IRECTLY, PART OF THE COST OF THE CAPITAL ASSETS INSTALLED A S EARLY AS 1995-96. AS PER SECTION 43(1) OF THE ACT, IF THE C OST OF THE ASSET IS MET DIRECTLY OR INDIRECTLY, AT THE TIME O F PURCHASE OF THE MACHINERY, BY ANY OTHER PERSON OR AUTHORITY, T O THAT EXTENT, THE ACTUAL COST OF THE ASSETS TO THE ASSES SEE WILL STAND REDUCED. BUT IT IS A FAR CRY TO STATE THAT T HOUGH AT THE TIME OF PURCHASE OF THE MACHINERY, NO PERSON MET T HE COST EITHER DIRECTLY OR INDIRECTLY, IF, LONG THEREAFTER A DEBT INCURRED IN THAT CONNECTION IS WRITTEN OFF, IT COU LD BE EQUATED TO A POSITION THAT THE FINANCIER MET PART OF THE COST OF THE ASSET TO THE ASSESSEE. WE ARE AT LOSS TO ACCEPT THE PROPOSAL THAT THE REMISSION OF LIABILITY BY BA NKERS CAN, 11 IN ANY WAY, BE SAID TO BE ONE, WHERE THE BANKERS M ET DIRECTLY OR INDIRECTLY THE COST OF THE ASSET TO TH E ASSESSEE. IT IS, THEREFORE, SUBMITTED THAT WAIVER OF LOAN AM OUNT CANNOT BE CONSIDERED AS INCOME AS IT IS CAPITAL IN NATURE AND ALLOWANCE OF DEPRECIATION CANNOT BE EQUATED WITH DEDUCTION IN RESPECT OF 'LOSS, EXPENDITURE OR TRAD ING LIABILITY' AND, THEREFORE, DEPRECIATION ALLOWED CA NNOT BE BROUGHT BACK TO TAX. EVEN OTHERWISE, THERE IS NO PROVISION IN THE SCHEM E OF BLOCK ASSETS TO REDUCE THE VALUE OF THE ASSETS IF THE PA RT OF INTEREST CAPITALIZED IS SUBSEQUENTLY REDUCED. THE HON'BLE KERALA HIGH COURT IN THE CASE OF COCHIN CO (P) LTD HAS SPECIFICALLY HELD THAT REMISSION OF LOAN TAKEN TO PURCHASE MACHINERY CANNOT BE REDUCED FROM THE COST OF MACHI NERY THE WAIVER OF PRINCIPAL PORTION OF LOAN OR INTEREST THEREON TO THE EXTENT CAPITALIZED TO THE COST OF AS SETS COULDN'T BE TAKEN AS TRADING LIABILITY, AS THE IMPU GNED AMOUNT HAS NEVER BEEN CLAIMED AS EXPENDITURE OR ALLOWANCE UNDER IT ACT. AND IN THE ABSENCE OF ANY PROVISION FOR VARYING THE WRITTEN DOWN VALUE IN THE YEAR SUBSEQUENT TO THE IN THE LIGHT OF FOREGOING DISCUSSIONS IT IS SUBMITTED TH AT: 12 YEAR IN WHICH THE CAPITAL ASSET WAS INSTALLED , IT WOULD BE UNJUSTIFIED AND UNLAWFUL TO REDUCE THE WRITTEN DOWN VALUE AS PROPOSED IN THE NOTICE.' 7. BUT THE A.O. WAS NOT CONVINCED FROM THE ABOVE EX PLANATION OF THE ASSESSEE-COMPANY THAT WITH A VIEW TO TACKLE ITS BAD FINANCIAL POSITION, HAS ENTERED INTO AN AGREEMENT WITH THE BA NKS AND THE FORMULA SUGGESTED BY THE BANK HAS BEEN IMPLEMENTED. THE A.O. HAS OPINED THAT ANY SUCH FORMULA WILL NOT OVERRIDE OR O VERRULE THE PROVISIONS OF THE ACT AND THE PRINCIPLES OF ACCOUNT ANCY. ACCORDING TO THE A.O., THE FOLLOWING ADJUSTMENTS ARE NECESSITATE D :- (I) WHATEVER ASSESSEE HAS PAID, DURING PRE-OPERATIVE PE RIOD I.E. DEBITS IN BANK ACCOUNT, WERE TO BE FIRST ADJUS TED AGAINST THE ACCRUED INTEREST; (II) WHATEVER HAS BEEN CHARGED AS INTEREST BY TH E BANKS AND ACCOUNTED FOR AGAINST THE INTEREST CANNOT BE WAIVE D. WAIVER, AS A PRUDENT MEANING REFERS WAIVER OF AMO UNT DUE. THIS POSITION IS VERY MUCH SUPPORTED BY THE BANK ACCOUNTS FILED BY THE ASSESSEE. FOR EXAMPLE, ASSE SSEE'S ACCOUNT IN STATE OF BIKANER & JAIPUR FOR THE F.Y. 98-99 IS REPRODUCED, AS IT IS, AS UNDER:- 13 ' 30 MAY TO LESS INTEREST RECOVERY 65,438.05 84, 17,589.95 DR 30 JUN 98 INT FRM AC01502/065376/ 18,51,396.48 1,02,68,986.23 DR 30 JUN 98 INTEREST TO DATE 3,72,685.70 1,06,41,671.93 DR 01 AUG 98 BY TRANSFER AMOUNT OFTT NO. .33/36 SBM - JAIPUR 38,99,160.00 67,42,511.93 DR 30 SEP 98 INT FRM ACO1502/065376/ 20,54,959.79 87,97,471.72 DR 30 SEP 98 INTEREST TO DATE 3,64,376.81 91,61,848.53 DR 8. FINALLY, THE A.O. HAS TREATED THE SUM OF RS.7,31 ,55,195/- AS A REVENUE RECEIPT AND NOT A CAPITAL ONE. HE HAS, THUS , ADDED THIS ENTIRE AMOUNT TO THE INCOME OF THE ASSESSEE. WHILE DECIDIN G THE APPEAL OF THE ASSESSEE-COMPANY, THE LD. CIT(A), HAS TAKEN THE INTEREST ON TERM LOAN PERTAINING TO PRE-OPERATIVE PERIOD AT RS. 524 LACS AS AGAINST RS. 731.55 LACS SHOW BY THE ASSESSEE-COMPANY. HE HAS AL SO TREATED THIS AMOUNT OF RS. 731.55 LACS AS TAXABLE U/S 41(1) AND U/S 28(IV) OF THE ACT. THE ASSESSEE IS IN SECOND APPEAL. 9. WE HAVE HEARD THE RIVAL SUBMISSIONS AND HAVE CAR EFULLY PERUSED THE RELEVANT MATERIAL ON RECORD. BOTH PARTIES HAVE REITERATED THEIR EARLIER STAND EVEN BEFORE US. IT WAS SUBMITTED BY L D. AR OF THE APPELLANT SHRI R.K. BOTHRA THAT THE ASSESSEE-COMPA NY HAD TAKEN LOANS FOR THE CONSTRUCTION OF FACTORY-BUILDING, FOR PURCH ASING AND INSTALLATION 14 OF PLANT AND MACHINERY AND OTHER CAPITAL ASSETS, FR OM THE STATE BANK OF BIKANER AND JAIPUR AND ALSO FROM OTHER BANKS. IT HAD CAPITALIZED INTEREST TO THE COST OF VARIOUS ASSETS UPTO THE PER IOD THEY WERE PUT TO USE AND THEREAFTER IT WAS BEING DEBITED TO THE P&L ACCOUNT IN THE RESPECTIVE YEARS AS REVENUE EXPENDITURE. IT WAS CON TENDED THAT THE ASSESSEE-COMPANY SUFFERED HUGE LOSSES AND DID NOT H AVE FUNDS TO REPAY THE OVER-DUES TO THE BANKERS, THEREFORE, THE BANKS DECIDED TO WAIVE A SUM OF RS. 22,74,85,511/-, DURING THE YEAR UNDER C ONSIDERATION AGAINST THE OVERDUE INTEREST ACCUMULATED OVER THE Y EARS INCLUDING RS. 7,31,55,195/- WHICH PERTAINED TO PRE-OPERATIVE PERI OD. IT WAS ARGUED THAT THE INTEREST PERTAINING TO PRE-OPERATIVE PERIO DS OF RS. 7,31,55,195/- WAS NOT OFFERED FOR TAXATION BECAUSE THE COMPANY HAD NEITHER CLAIMED NOR GOT DEDUCTION OF THIS AMOUNT. H E ARGUED THAT THE A.O. HAS WRONGLY TAXED THIS AMOUNT BY TREATED IT AS A REVENUE RECEIPT WITH THE MEANING OF SEC. 41(1) OF THE ACT ON THE PR EMISE THAT BECAUSE THE ASSESSEE-COMPANY, WHEN BOUGHT/INSTALLED ASSETS, HAD DERIVED A BENEFIT UNDER THE HEAD OF DEPRECIATION. HE DISPU TED THE VERSION OF THE A.O. AND ALSO OF LD. CIT(A) THAT TECHNICALLY TH E DEPRECIATION IS AN EXPENDITURE BEING ADMISSIBLE FOR DEDUCTION U/SS 30 TO 44D OF THE ACT. BY INVITING OUR ATTENTION TOWARDS THE PROVISIONS OF SECTION 41(1) OF THE 15 ACT HE HAS SUBMITTED THAT IN THE FACTS AND THE CIRC UMSTANCES OF THE CASE AND IN LAW, THIS ADDITION IS NOT AT ALL WARRAN TED. IT WAS VEHEMENTLY ARGUED BY LD. AR THAT THIS AMOUNT CANNOT BE TREATED AS INCOME UNDER SECTION 41(1) OR UNDER ANY OTHER PROVI SION OF THE ACT AND THE SAME DESERVES TO BE DELETED. IT WAS FURTHER CON TENDED THAT THE FICTION CREATED BY SEC. 41(1) COMES INTO OPERATION WHEN THE ASSESSEE INCURS A TRADING LIABILITY WHICH HAS BEEN ALLOWED AS DEDUCTION IN ANY EARLIER YEAR(S) AND SOMETHING OUT OF THE SAME IS RE COVERED IN RESPECT OF SUCH LIABILITY OR SUCH LIABILITY HAS EITHER BEEN REMITTED OR HAS CEASED TO EXIST, THEN THE PROVISIONS OF SEC. 41(1) COME IN TO OPERATION. IN OTHER WORDS TO ATTRACT THIS SECTION, REQUISITE CONDITIONS ARE THAT FIRSTLY THE ASSESSEE SHOULD HAVE GOT DEDUCTION OR BENEFIT OF AL LOWANCE IN RESPECT OF LOSS, EXPENDITURE OR TRADING LIABILITY INCURRED BY THE ASSESSEE AND SECONDLY DURING ANY PREVIOUS YEAR THE ASSESSEE HAD RECEIVED ANY AMOUNT IN RESPECT OF SUCH A LOSS / EXPENDITURE OR T RADING LIABILITY BY WAY OF REMISSION OR CESSATION THEREOF. AS PER LD. A R THIS ASSESSEE- COMPANY NEVER GOT DEDUCTION IN RESPECT OF THE AMOUN T OF RS.7.32 CRORES UNDER SECTION 36(1)(III) OR U/S 37, THEREFOR E PROVISION OF SECTION 41(1) WOULD NOT APPLY. IN THIS REGARD RELIANCE WAS PLACED ON THE DECISION OF CIT VS. PHOOL CHAND JIWAN RAM (1981) 13 1 ITR 37 (DEL).HE 16 HAS ALSO RELIED ON THE DECISION OF THE HONBLE APEX COURT RENDERED IN THE CASE OF POLLYFLEX (INDIA) (P) LTD. VS CIT (2002 ) 177 CTR (HON'BLE SUPREME COURT) 93, WHEREIN IT HAS BEEN HELD THAT TH E TWO COMPONENTS OF SECTION 41(1) HAVE TO BE READ SEPARATELY. IT HAS BEEN HELD THAT THE WORDS REMISSION OR CESSATION THEREOF SHALL APPLY ONLY TO THE TRADING LIABILITY AND IT SHALL NOT APPLY TO ANY LOSS OR EXP ENDITURE. THE LD. AR ALSO HEAVILY RELIED ON THE RATIO OF THE DECISION OF HONBLE MUMBAI BENCH GIVEN IN THE CASE OF SULZER INDIA LTD. VS JCI T REPORTED (2010) 47 DTR (MUMBAI) S.B.(TRIB) 329, WHEREIN IT HAS BEEN HE LD THAT IF A RECEIPT IS ON CAPITAL ACCOUNT THEN ANY BENEFIT, IF ANY, OBT AINED IS ALSO TO BE TAKEN ON CAPITAL ACCOUNT TO WHICH SECTION 41(1) WIL L NOT APPLY. THE LD. AR HAS FURTHER RELIED ON HOST OF OTHER JUDGMENTS/OR DERS. 10. PER CONTRA, LD. CIT(DR) HAS HEAVILY RELIED ON A .O.S AND CIT(A)S ORDERS. HE HAS FURTHER SUBMITTED THAT SECTION 41(1) AND / OR SEC 28 (IV) OF THE ACT DEFINITELY APPLIES TO THE FACTS OF THIS CASE. THE LIABILITY WHICH HAS CEASED TO EXIST DURING THE YEAR HAS TO BE TREATED AS ASSESSEES INCOME OF THE YEAR. HE HAS HEAVILY SUPPO RTED THE FINDING OF LD. CIT(A) AND HAS ALSO RELIED ON VARIOUS DECISIONS APART INCLUDING THOSE 17 ON WHICH THE AUTHORITIES BELOW HAVE RELIED FOR ARIV ING AT THEIR RESPECTIVE CONCLUSIONS. 11. WE HAVE COOLLY CONSIDERED RIVAL STANDS. WE HAVE ALSO GONE THROUGH THE RELEVANT PAGES OF THE PAPER BOOK / WRIT TEN SUBMISSIONS OF THE PARTIES. WE HAVE ALSO CAREFULLY PERUSED THE REL EVANT PROVISIONS OF THE ACT AND ALSO THE DECISIONS RELIED BEFORE US. TH E FACT OF THIS ISSUE WHICH WE HAVE CALLED OUT ARE THAT THE ASSESSEE-COMP ANY HAD RAISED LOANS FROM THE BANKS TO START ITS BUSINESS. SUBSEQU ENTLY DUE TO HEAVY LOSSES THE COMPANY WAS IN TROUBLE AND A SETTLEMENT WITH THE BANKS HAD SAVED IT FROM A DEEP CRISIS. AS PER THIS AGREEMENT THE BANKS GAVE A WAIVER OF INTEREST AMOUNT TO THE COMPANY. WHATEVER WAS GIVEN AS A WAIVER OUT OF INTEREST AMOUNT HAS BEEN TREATED BY T HE COMPANY AS A CAPITAL RECEIPT BEING RELATED TO PREOPERATIONAL PER IOD. AS PER REVENUE THIS IS TO BE TREATED AS A REVENUE RECEIPT TAXABLE EITHER U/S 41(1) OR U/S 28(IV). GIVEN THE ABOVE FACTS OF THIS CASE, LET US EXAMINE THE LEGAL POSITION ON THIS ISSUE. 18 SECTION 41(1) OF THE ACT READS AS UNDER :- 1. (1) WHERE AN ALLOWANCE OR DEDUCTION HAS BEEN MADE IN THE ASSESSMENT FOR ANY YEAR IN RESPECT OF LOSS, EXPENDI TURE OR TRADING LIABILITY INCURRED BY THE ASSESSEE (HEREINAFTER RE FERRED TO AS THE FIRST- MENTIONED PERSON) AND SUBSEQUENTLY DURING ANY PREV IOUS YEAR, (A) THE FIRST-MENTIONED PERSON HAS OBTAINED, WHE THER IN CASH OR IN ANY OTHER MANNER WHATSOEVER, ANY AMOUN T IN RESPECT OF SUCH LOSS OR EXPENDITURE 3 OR SOME BENEFIT IN RESPECT OF SUCH TRADING LIABILITY BY WAY OF REMISS ION OR CESSATION THEREOF, THE AMOUNT OBTAINED BY SUCH PER SON OR THE VALUE OF BENEFIT ACCRUING TO HIM SHALL BE DEEM ED TO BE PROFITS AND GAINS OF BUSINESS OR PROFESSION AND AC CORDINGLY CHARGEABLE TO INCOME-TAX AS THE INCOME OF THAT PRE VIOUS YEAR, WHETHER THE BUSINESS OR PROFESSION IN RESPEC T OF WHICH THE ALLOWANCE OR DEDUCTION HAS BEEN MADE IS IN EXISTENCE IN THAT YEAR OR NOT; OR (B) THE SUCCESSOR IN BUSINESS HAS OBTAINED, WH ETHER IN CASH OR IN ANY OTHER MANNER WHATSOEVER, ANY AMOUNT IN RES PECT OF WHICH LOSS OR EXPENDITURE WAS INCURRED BY THE FIR ST- MENTIONED PERSON OR SOME BENEFIT IN RESPECT OF T HE TRADING LIABILITY REFERRED TO IN CLAUSE (A) BY WAY OF REMISSION OR CESSATION THEREOF, THE AMOUNT OBTAIN ED BY THE SUCCESSOR IN BUSINESS OR THE VALUE OF BENE FIT ACCRUING TO THE SUCCESSOR IN BUSINESS SHALL BE DE EMED TO BE PROFITS AND GAINS OF THE BUSINESS OR PROFESSIO N, AND ACCORDINGLY CHARGEABLE TO INCOME-TAX AS THE INCOM E OF THAT PREVIOUS YEAR. [EXPLANATION 1.FOR THE PURPOSES OF THIS SUB-SEC TION, THE EXPRESSION LOSS OR EXPENDITURE OR SOME BENEFIT I N RESPECT OF ANY SUCH TRADING LIABILITY BY WAY OF REMISSIO N OR CESSATION THEREOF SHALL INCLUDE THE REMISSION O R CESSATION OF ANY LIABILITY BY A UNILATERAL ACT B Y THE FIRST MENTIONED PERSON UNDER CLAUSE (A) OR THE SUCCESS OR IN 19 BUSINESS UNDER CLAUSE (B) OF THAT SUB-SECTION BY WAY OF WRITING OFF SUCH LIABILITY IN HIS ACCOUNTS.] [EXPLANATION 2].FOR THE PURPOSES OF THIS SUB-SEC TION, SUCCESSOR IN BUSINESS MEANS, (I) WHERE THERE HAS BEEN AN AMALGAMATION OF A COMPANY W ITH ANOTHER COMPANY, THE AMALGAMATED COMPANY; (II) WHERE THE FIRST-MENTIONED PERSON IS SUCCEEDE D BY ANY OTHER PERSON IN THAT BUSINESS OR PROFESSION, THE OTHER PERSON; (III) WHERE A FIRM CARRYING ON A BUSINESS OR PROF ESSION IS SUCCEEDED BY ANOTHER FIRM, THE OTHER FIRM;] [(IV) WHERE THERE HAS BEEN A DEMERGER, THE RESULT ING COMPANY.] 12. SUB SECTION (1) OF SECTION 41 WAS SUBSTITUTED B Y THE FINANCE ACT, 19902 W.E.F. 1-4-1993. THE PRE-REQUISITE CONDITIONS TO APPLY SUB- SECTION (1) OF SECTION 41 ARE MAINLY TWO-FOLD : (I) THAT AN ALLOWANCE OR DEDUCTION MUST HAVE BEEN MADE IN THE ASSESSMENT FOR ANY YEAR IN RESPECT OF LOSS, EX PENDITURE OR TRADING LIABILITY INCURRED BY THE ASSESSEE, AND (II) DURING ANY PREVIOUS YEAR THE ASSESSEE HAS OBTAINED ANY AMOUNT IN RESPECT OF SUCH LOSS OR EXPENDITURE, OR A NY BENEFIT IN RESPECT OF SUCH TRADING LIABILITY BY WAY OF REMISSION OR CESSATION THEREOF, THE AMOUNT SO RECEI VED 20 SHALL BE DEEMED TO BE THE PROFIT OR GAIN OF ASSESSE ES BUSINESS CHARGEABLE TO TAX AS THE INCOME OF THAT PR EVIOUS YEAR. 13. LET US NOW EXAMINE IF THE ABOVE TWO CONDITIONS ARE FULFILLED IN THE GIVEN CASE OR NOT. IN CASE THESE CONDITIONS ARE SATISFIED, THE INTEREST ON LOAN WAIVER RECEIPT HAS TO BE TAXED IN THIS ASSESSMENT YEAR, OTHERWISE NOT. 14. THE OBTAINING FACTS OF ASSESSEES CASE ARE THAT IT GOT BENEFIT OF WAIVER OF TOTAL INTEREST OF RS. 22.75 CRORES WHICH INCLUDED A SUM OF RS. 732 LACS PERTAINING TO THE PRE-OPERATIVE PERIOD. TH E LD. CIT(A) HAS TAKEN THIS FIGURE AT RS. 524 LACS AND THIS IS THE S UBJECT MATTER OF GROUNDS NO. (1) OF ASSESSEES APPEAL. WE WILL DEAL WITH THAT ASPECT LATER. THE INTEREST PERTAINING TO PRE-OPERATIVE PER IOD WAS CAPITALIZED TO THE RESPECTIVE ASSETS AND DEDUCTION OF DEPRECIAT ION ON SUCH ASSETS HAD BEEN CLAIMED ON THE BASIS OF WRITTEN DOWN VALUE (WDV) OF DIFFERENT BLOCK OF ASSETS. ACCORDING TO THE LD. AR FIRST CONDITION OF SECTION 41(1) IS NOT SATISFIED FROM THE FACTS OF TH IS CASE. ACCORDING TO LD. DR THE ASSESSEE HAS GOT BENEFIT BY WAY OF WAIVE R OF INTEREST ON TERM LOAN SHOWN UNDER PRE-OPERATIVE EXPENDITURE IN ACCOUNTING YEAR 21 RELEVANT TO A.Y. 2005-06 AND HAS CAPITALIZED TO THE ASSETS, THEREFORE, TOTAL DEDUCTION OF DEPRECIATION IN TERM OF SECTION 32 WHICH CAN BE TREATED AS CLAIM OF EXPENDITURE BY THE ASSESSEE AND AS SUCH WAIVER OF THIS INTEREST AMOUNT HAS TO BE TAXED IN THIS YEAR. THE CONTENTION OF LD. AR IS THAT THIS EXPENDITURE TO WHICH LD. DR IS RE FERRING TO, HAS TO BE INCURRED IN RESPECT OF TRADING-LIABILITY AND NOT IN RESPECT OF CAPITAL LIABILITY. ACCORDING TO HIM EVEN DEPRECIATION ALLO WED CAN NOT BE CONSIDERED AS CLAIM OF EXPENDITURE AS IT IS ON THE CAPITAL SIDE. 15. WE HAVE CAREFULLY ANALYZED THE PROVISIONS OF SE CTION 41(1) OF THE ACT. WE ARE OF THE CONSIDERED OPINION THAT THE DEP RECIATION CLAIMED ON THE CAPITAL ASSETS ARE NOT AT ALL COVERED UNDER THIS PROVISION. WHAT ARE ACTUALLY COVERED IN SECTION 41(1) ARE PROFITS (AS THE HEADING SUGGESTS DERIVED IN RESPECT OF LOSS OR EXPENDITURE OR SOME BENEFIT IN RESPECT OF TRADING LIABILITY BY WAY OF REMISSION OR CESSATION THEREOF. FROM THE BARE READING OF THIS SECTION IT BECOMES MA NIFEST THAT THERE ARE THREE SITUATIONS TO ONE OF WHICH SUCH BENEFIT OBTAINED MUST RELATE TO. THESE SITUATIONS ARE AS UNDER: (I) LOSS CLAIMED OR (II) EXPENDITURE CLAIMED OR 22 (III) LIABILITY INCURRED BY THE ASSESSEE. 16. TO FURTHER ELABORATE AND SIMPLIFY THE ABOVE TO FIT IN THE REQUIREMENT OF SEC. 41(1) IT IS REQUIRED THAT THE A SSESSEE MUST HAVE MADE A CLAIM AND IT MUST HAVE BEEN EITHER (I) ALLOW ED OR (II) DEDUCTED IN ANY PREVIUS YEAR. THIS ALLOWANCE/DEDUCTION MUST RELATE TO LOSS, EXPENDITURE OR TRADING LIABILITY, INCURRED BY THE A SSESSEE AS THE CASE MAY BE. THIS BENEFIT OBTAINED MUST BE BY WAY OF R EMISSION OR CESSATION OF SUCH LOSS, EXPENDITURE OR TRADING LI ABILITY. IN OUR OPINION THE ASSESSEE HAS NOT OBTAINED ANY ALLOWANCE OR D EDUCTION IN RESPECT OF ANY LOSS OR IN RESPECT OF ANY EXPENDITUR E OR IN RESPECT OF ANY TRADING LIABILITY. IN FACT THE EXPRESSIONS EXPE NDITURE AND TRADING LIABILITY TAKE THEIR COLOUR FROM EACH OTHER AND CLE ARLY SUGGEST THAT THEY ARE TALKING ABOUT BUSINESS AND NOT ABOUT ASSETS . ALL THESE TERMS REFER TO REVENUE-SIDE AND NOT TO CAPITAL-SIDE O F A BUSINESS OF ANY ASSESSEE. 17. THEREFORE, WE FIND FORCE IN THE CONTENTION OF L D. AR. THE OPERATION OF THIS STATUTORY FICTION CREATED BY SECT ION 41(1) HAS TO BE LIMITED TO THE LANGUAGE OF THIS SECTION. WHEN THE A SSESSEE HAS INCURRED 23 A TRADING LIABILITY AND IT HAS BEEN ALLOWED AS DEDU CTION OTHERWISE IN A EARLIER YEAR; AND SOMETHING HAS BEEN RECOVERED IN R ESPECT OF SUCH LIABILITY EVEN BY WAY OF REMISSION OR CESSATION THA N ONLY THIS SECTION COMES INTO PLAY. IN OUR OPINION FROM THE FACTS OF T HIS CASE, THIS IMPORTANT INGREDIENT IS MISSING, AS WE HAVE ALREADY DISCUSSED. THE ASSESSEE-COMPANY HAS NEVER GOT DEDUCTION IN RESPECT OF THIS RS. 732 LAKH U/S 36(1)(II) OR UNDER SECTION 37 OF THE ACT. THEREFORE, SECTION 41(1) IS NOT AT ALL RELEVANT TO TAX THIS BENEFIT QU A THE PRE-OPERATIONAL STAGE INTEREST-WAVIER. IN THIS REGARD THE DECISION OF THE HONBLE DELHI HIGH COURT RENDERED IN THE CASE OF CIT VS. PHOOL CH AND JIWAN RAM REPORTED AT (1981) 131 ITR 37 DEL IS RELEVANT. IN T HIS CASE IT HAS BEEN HELD THUS: THE POINT THAT IS URGED ON BEHALF OF THE DEPARTMEN T BEFORE US, AS WAS ALSO URGED BEFORE THE TRIBUNAL, WAS SLIGHTLY DIFFERENT. IT WAS POINTED OUT THAT FOR THE PERIOD FROM NOVEMBER 1 2, 1947, TO OCTOBER 30, 1948, THE ASSESSED-FIRM HAD PURCHASED C LOTH WORTH RS. 3,75,120 FROM A FIRM IN BOMBAY STYLED AS M/S. N ARSINGHDASS BANARSIDASS. ON THE LAST DAY OF THE ACCOUNTING YEAR , I.E., OCTOBER 30, 1948, THIS ACCOUNT HAD BEEN DEBITED WIT H A SUM OF RS. 1,80,000 REPRESENTING THE AMOUNT PAID TO THAT F IRM BY M/S. JANKI DASS BANARSI DASS ON BEHALF OF THE ASSESSED-F IRM. THE ARGUMENT IS THAT TO THE EXTENT THE ACCOUNT OF M/S. JANKI DASS 24 BANARSI DASS REFLECTS A CREDIT OF RS. 1,80,000 ON A CCOUNT OF THIS CASH PAYMENT IT SHOULD ALSO BE TREATED AS A PAYMENT TO M/S. JANKI DASS BANARSI DASS FOR THE PURCHASE OF CLOTH F ROM THE BOMBAY FIRM AND, THEREFORE, IS IN EFFECT REPRESENTI NG A TRADING LIABILITY OF THE ASSESSED-FIRM. WE AGREE WITH THE T RIBUNAL THAT THIS CONSTRUCTION OF THE TRANSACTION IS FAR-FETCHED . 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 DE BT AND THAT WAS NO DOUBT ALLOWED FOR THE PURPOSE OF INCOME-TAX. HOWEVER, SO FAR AS THE ACCOUNT OF M/S. JANKI DASS BANARSI DA SS IS CONCERNED, THE LIABILITY OF THE ASSESSEE TO THIS PA RTY AROSE BECAUSE THE ABOVE PARTY HAD PAID A SUM OF RS. 1,80, 000 TO THE BOMBAY FIRM ON THE ASSESSEE'S ACCOUNT. IN OTHER WOR DS, VIS-A-VIS THE ASSESSEE AND M/S. JANKI DASS BANARSI DASS, THIS WAS NOT A PAYMENT MADE FOR THE PURCHASE OF STOCK-IN-TRADE; IT WAS A CREDIT IN RESPECT OF AN AMOUNT BORROWED BY THE ASSESSED FR OM M/S. JANKI DASS BANARSI DASS IN ORDER TO DISCHARGE ITS L IABILITY TO THE BOMBAY FIRM. THE SUM OF RS. 1,80,000 WHICH IS REFLE CTED IN THE ACCOUNT OF M/S. JANKI DASS BANARSI DASS COULD NOT, THEREFORE, BE DESCRIBED AS A LIABILITY ON TRADING ACCOUNT. AS RIG HTLY POINTED OUT BY THE TRIBUNAL, S. 10(2A) ENACTS A STATUTORY F ICTION. THE OPERATION OF THIS FICTION SHOULD BE LIMITED TO THE LANGUAGE OF THE SECTION. IT IS ONLY WHERE THE ASSESSED HAS INCURRED A TRADING LIABILITY AND THIS TRADING LIABILITY HAS BEEN ALLOW ED IN EARLIER YEARS THAT S. 10(2A) IS ATTRACTED ON THE OCCASION W HEN THE 25 TRADING LIABILITY IS EITHER REMITTED OR CEASED TO E XIST. IN OUR OPINION, THE TRIBUNAL WAS RIGHT IN COMING TO THE CO NCLUSION THAT THE SUM OF RS. 1,80,000 DID NOT REPRESENT A TRADING LIABILITY OWNED BY THE ASSESSEE TO M/S. JANKI DASS BANARSI DA SS, NOR HAD THIS AMOUNT OF LIABILITY BEEN ALLOWED AS A DEDUCTIO N IN EARLIER ASSESSMENTS. 8. FOR THE ABOVE REASONS, WE AGREE WITH THE VIEW TA KEN BY THE TRIBUNAL AND ANSWER THE QUESTION REFERRED TO US IN THE AFFIRMATIVE AND AGAINST THE APPLICANT. THERE WILL B E NO ORDER AS TO COSTS. 18. FURTHER, THE HONBLE APEX COURT IN THE CASE OF POLYFLEX (INDIA) (P) LTD. VS CIT (2002) 177 CTR (SC) 93 HAS HELD THA T SECTION 41(1) CONSIST OF TWO MAIN INGREDIENTS VIZ (I) LOSS OR EXP ENDITURE AND (II) TRADING LIABILITY. THESE TWO COMPONENTS OF SECTIO N 41(1) HAVE TO BE READ SEPARATELY. THE ASSESSEE MUST HAVE - ONE - OB TAINED, WHETHER IN CASH OR IN ANY OTHER MANNER WHATSOEVER, ANY AMOUNT IN RESPECT OF SUCH LOSS OR EXPENDITURE; AND TWO - SOME BENEFIT IN RESPECT OF SUCH TRADING LIABILITY BY WAY OF REMISSION OR RECESSAT ION THEREOF. THE HONBLE SUPREME COURT HAS HELD THAT THE TERMS REMI SSION OR CESSATION THEREOF SHALL APPLY ONLY TO TRADING LIABILITY AND IT SHALL NOT APPLY TO ANY LOSS OR EXPENDITURE. ACCORDINGLY, IN OUR CO NSIDERED OPINION, THE 26 FACTS OF THE GIVEN CASE ARE DIFFERENT AND THEREFORE , THIS SECTION WILL NOT APPLY TO ASSESSEES CASE. 19. THE ASSESSEE COMPANY HAS NEVER GOT DEDUCTION IN RESPECT OF IMPUGNED RS. 7.32 CRORES UNDER SECTION 36(1) (IIL) OR SECTION 37, AND UNDER THE CIRCUMSTANCES SECTION 41(1) OF THE ACT AR E NOT ATTRACTED. IN THE CASE OF CIT VS. PHOOL CHAND JIWAN RAM (1981) 131 ITR 37 (DEL), THE ASSESSEE FIRM HAD PURCHASED GOODS. THEY HAD ALS O OBTAINED LOANS FROM A PARTY, ACCOUNTS WERE SETTLED AND THE BALANCE WAS CREDITED TO THE PARTNER'S ACCOUNT. IT WAS HELD BY THE DELHI HIGH COURT THAT THE AMOUNT REFERABLE TO LOANS WAS NOT A TRADING LIABILI TY. THUS, THE ONLY AMOUNTS ALLOWED AS DEDUCTION IN EARLIER YEARS COULD BE TREATED AS A TRADING LIABILITY. IN OTHER WORDS, UNLESS THE AMOUN TS HAVE BEEN ALLOWED AS DEDUCTION IN EARLIER YEARS THEY CANNOT B E TREATED AS TRADING LIABILITY AND AS SUCH SECTION 41(1) IS NOT APPLICABLE. IT WILL NOT BE OUT OF PLACE TO MENTION HERE THAT SECTION 41(1) CONSISTS OF TWO MAIN INGREDIENTS VIZ., (A) 'LOSS OR EXPENDITURE' AN D (B) 'TRADING LIABILITY'. AS PER THE DECISION OF THE HON'BLE SUPR EME COURT DECISION IN THE CASE OF POLYFLEX (INDIA) (P) LTD. VS. CIT (2 002) 177 CTR (SC) 93, THE TWO COMPONENTS OF SECTION 41(1) OF THE ACT HAVE TO BE READ SEPARATELY, NAMELY (I) HAS OBTAINED, WHETHER IN CAS H OR IN ANY OTHER 27 MANNER WHATSOEVER, ANY AMOUNT IN RESPECT OF SUCH LO SS OR EXPENDITURE; (II) SOME BENEFIT IN RESPECT OF SUCH T RADING LIABILITY BY WAY OF REMISSION OR CESSATION THEREOF. ACCORDINGLY THE HON'BLE APEX COURT HELD THAT THE WORDS 'REMISSION OR CESSATION T HEREOF SHALL APPLY ONLY TO TRADING LIABILITY AND IT SHALL NOR AP PLY TO ANY LOSS OR EXPENDITURE. 20. THE LD. A.R. HAS FURTHER SUBMITTED THAT ONLY TR ADING DEBTS, WHICH ARE ALLOWED AS DEDUCTION IN EARLIER YEARS, CA N BE TREATED AS TRADING LIABILITY. IT IS NOT IN DISPUTE THAT THE IN TEREST AMOUNT WHICH HAS BEEN WAIVED HAS NOT BEEN CLAIMED AS DEDUCTION I N ANY OF THE YEARS, ON THE CONTRARY IT ALSO BECAME PART OF LOAN AMOUNT FINANCED BY THE BANKERS AS SOON AS THAT WAS CAPITAL IZED. THE PRE- OPERATIVE INTEREST CAPITALIZED TO THE COST OF MACHI NES & OTHER ASSETS BEING IN THE NATURE OF CAPITAL RECEIPT IN OR IGIN WOULD NOT CHANGE ITS CHARACTER TO REVENUE RECEIPT ON BEING WA IVED BY THE BANKERS. MERELY NAME OF ACCOUNTING HEAD DOES NOT DE FINE ITS NATURE. ACTUALLY DECIDING FACTOR ABOUT ITS CHARACTE R/TAXABILITY IS THE ACCOUNTING TREATMENT WHICH HAS BEEN GIVEN TO RESPECTIVE TRANSACTION. IN THIS CASE, PREOPERATIVE INTEREST WA S CAPITALIZED TO 28 THE COST OF FIXED ASSETS AND WAS REFLECTED IN THE B ALANCE SHEET, NOT IN PROFIT & LOSS ACCOUNT AND ALSO THE REMISSION OF AMOUNT SO OBTAINED FROM BANKERS HAD NOT BEEN CLAIMED AS EXPEN DITURE OR TRADING LIABILITY IN ANY OF THE EARLIER PREVIOUS YE ARS. WHETHER OR NOT A LIABILITY IS A TRADING LIABILITY DEPENDS ON THE F ACTS AND CIRCUMSTANCES OF A PARTICULAR CASE. A LIABILITY CRE ATED FOR PURCHASE OF STOCK-IN-TRADE ON CREDIT IS CERTAINLY A TRADING LIA BILITY. WHERE A PURCHASES HIS STOCK-IN-TRADE FROM B ON CREDIT, THE LIABILITY OF A TO B IS A TRADING LIABILITY. BUT IF A BORROWS MONEY FROM C IN ORDER TO PAY OFF HIS LIABILITY TO B, A'S LIABILITY TO C ON SUCH BORROWING IS NOT A TRADING LIABILITY. IT IS THUS CLEAR THAT SECTION 41 (1) CANNOT BE INVOKED IF C REMITS A PART OR WHOLE OF HIS LOANS TO A [CIT VS. PHOOL CHANDJIWAN RAM, (1981) 131 ITR 17 [DEL)] 21. AO IN HIS ASSESSMENT ORDER HIMSELF HAS SAID THA T 'THE JUDGMENTS RELIED UPON BY THE ASSESSEE ARE RELATED T O TRADING LIABILITIES WHICH HAS NO RELEVANCE IN THE CASE OF T HE ASSESSEE', THEN HOW HE CAN MAKE THE ADDITION BY INVOKING SECTION 41 (1) OF THE ACT? 29 22. THE NEXT ISSUE WHICH NEEDS ATTENTION IS, WHETHE R THE WAIVER OF LOAN WILL AMOUNT TO A BENEFIT RELATABLE TO DEPRECIA TION EXPENDITURE CLAIMED EARLIER? THE DEPRECIATION U/S 32 IS ALLOWE D ON THE 'ACTUAL COST' OF THE ASSETS. THE TERM 'ACTUAL COST' HAS BEE N DEFINED IN SECTION 43(1) ACCORDING TO WHICH, 'ACTUAL COST' MEA NS 'THE ACTUAL COST OF THE ASSETS TO THE ASSESSEE REDUCED BY THAT PORTI ON OF THE COST THEREOF, IF ANY, AS HAS BEEN MET DIRECTLY OR INDIRE CTLY BY ANY OTHER PERSON OR AUTHORITY'. SO, THE ONLY DEDUCTION PERMIS SIBLE FROM THE ACTUAL COST IS THE AMOUNT, WHICH HAS BEEN MET BY AN Y OTHER PERSON OR AUTHORITY. THE WORDS 'WHICH HAS BEEN MET BY ANY OT HER PERSON OR AUTHORITY' WOULD MEAN THE NON-REFUNDABLE AMOUNT GIV EN BY ANY OTHER PERSON OR AUTHORITY FOR THE PURPOSE OF MEETING THE COST OF THE ASSET. WHEN A PERSON AVAILS A TERM LOAN, IT HAS TO BE REPA ID ALONG WITH THE INTEREST, IF ANY, IN ACCORDANCE WITH THE TERMS AND CONDITIONS PRESCRIBED FOR THAT PURPOSE. IF THE TERM LOAN IS UT ILIZED FOR ACQUIRING ANY ASSET, IT CANNOT BE TERMED AS 'MEETING OF A POR TION OF COST OF THE ASSET'. LOAN IS AVAILED AS A SOURCE OF FINANCE WHI LE THE DEPRECIATION IS ALLOWED ON THE ACTUAL USER OF THE ASSET. SO 'AVA ILING OF LOAN' AND 'CLAIM OF DEPRECIATION' ARE TWO DISTINCT THINGS, WH ICH CANNOT BE CLUBBED TOGETHER AND, THEREFORE, REMISSION OF LOAN ALONGWITH 30 INTEREST (ON WHICH ASSESSEE GOT NO DEDUCTION U/S 36 (1) (III) OR UNDER SECTION 37 OF THE ACT) WILL NOT AMOUNT TO REMISSION OF DEPRECIATION. WHEN THE BANKERS WROTE OFF THE LIABILITY OF THE ASS ESSEE COMPANY, IT CANNOT BE SAID IN RETROSPECT THAT THE COST TO THE A SSESSEE OF ANY PART OF THE CAPITAL ASSETS ACQUIRED DURING THE YEAR S UNDER INSTALLATION, WAS MET BY BANKERS. THE REMISSION OF LIABILITY BY BANKERS LONG AFTER THE LIABILITY WAS INCURRED CANNO T BE RELIED ON TO HOLD THAT BANKERS MET DIRECTLY OR INDIRECTLY, PART OF THE COST OF THE CAPITAL ASSETS INSTALLED AS EARLY AS 1995-96. AS PE R SECTION 43(1) OF THE ACT, IF THE COST OF THE ASSET IS MET DIRECTLY O R INDIRECTLY, AT THE TIME OF PURCHASE OF THE MACHINERY, BY ANY OTHER PER SON OR AUTHORITY, TO THAT EXTENT, THE ACTUAL COST OF THE ASSETS TO TH E ASSESSEE WILL STAND REDUCED. BUT IT IS A FAR CRY TO STATE THAT TH OUGH AT THE TIME OF PURCHASE OF THE MACHINERY, NO PERSON MET THE COST E ITHER DIRECTLY OR INDIRECTLY, IF, LONG THEREAFTER A DEBT INCURRED IN THAT CONNECTION IS WRITTEN OFF, IT COULD BE EQUATED TO A POSITION THAT THE FINANCIER MET PART OF THE COST OF THE ASSET TO THE ASSESSEE. WE ARE AT LOSS TO ACCEPT THE PROPOSAL THAT THE REMISSION OF LIABILITY BY BANKERS CAN, IN ANY WAY, BE SAID TO BE ONE, WHERE THE BANKERS MET D IRECTLY OR INDIRECTLY THE COST OF THE ASSET TO THE ASSESSEE. THEREFORE, THIS 31 WAIVER OF LOAN AMOUNT CANNOT BE CONSIDERED AS INCOM E AS IT IS CAPITAL IN NATURE AND ALLOWANCE OF DEPRECIATION CANNOT BE E QUATED WITH DEDUCTION IN RESPECT OF 'LOSS, EXPENDITURE OR TRADI NG LIABILITY' AND, THEREFORE, DEPRECIATION ALLOWED CANNOT BE BROUGHT B ACK TO TAX. 23. AS REGARDS THE DECISIONS RELIED BY THE LD. CIT (A) OF BOMBAY HIGH COURT IN THE CASE OF SOLID CONTAINERS LTD. VS. DCIT (2009) 308 ITR 497 AND HON'BLE SUPREME COURT IN THE CASE OF T V SUNDARAM AYENGAR AND SONS LTD (1996) 222 ITR 344, THEIR FACT S ARE ENTIRELY DIFFERENT IN AS MUCH AS THERE WAS A AMOUNT WHICH WA S TAKEN FOR TRADING ACTIVITY AND ULTIMATELY, UPNN WAIVER THE AM OUNT WAS RETAINED IN BUSINESS BY THE ASSESSEE. 24. WE WOULD LIKE TO REFER PARA 3 OF THE ORDER OF B OMBAY HIGH COURT IN THE CASE OF SOLID CONTAINERS LTD WHICH CLEARLY E STABLISHES THAT THIS CASE IS NOT AT ALL APPLICABLE TO THE FACTS OF THIS CASE. PARA 3 OF THE ORDER IS REPRODUCED HERE BELOW FOR YOUR READY REFER ENCE: 'THE PRESENT APPELLANT CAN HARDLY DERIVE ANY ADVANT AGE FROM THE CASE OF MAHINDRA & MAHINDRA LTD. (SUPRA). AS IN THAT CASE, A CLEAR F INDING WAS RECORDED THAT THE ASSESSEE CONTINUED TO PAY INTEREST AT THE RATE OF 6 % FOR A PERIOD OF 10 YEARS AND THE AGREEMENT FOR PURCHASE OF TOOLINGS WAS ENTERED INTO MUCH PRIOR TO THE APPROVAL OF LOAN ARRANGEMENT GIVEN BY THE RESERVE B ANK OF INDIA. THEREFORE, 32 THE LOAN AGREEMENT, IN ITS ENTIRETY, WAS NOT OBLITE RATED BY SUCH WAIVER. SECONDLY, THE PURCHASE CONSIDERATION RELATED TO CAP ITAL ASSETS. THE TOOLINGS WERE IN THE NATURE OF DIES AND THE ASSESSEE WAS A MANUFA CTURER OF HEAVY VEHICLES. THE IMPORT WAS THAT OF PLANT AND MACHINERY AND THE WAIV ER COULD NOT CONSTITUTE BUSINESS. THE FACTS OFTHE PRESENT CASE ARE ENTIRELY DIFFERENT IN AS MUCH AS IT WAS A LOAN TAKEN FOR TRADING ACTIVITY AND ULTIMATELY, UPO N WAIVER THE AMOUNT WAS RETAINED IN BUSINESS BY THE ASSESSEE. THUS, THE PRI NCIPLE STATED BY THE SUPREME COURT IN THE CASE OF T V SUNDARAM AYENGAR & SONS LT D (SUPRA) WOULD BE SQUARELY APPLICABLE TO THE FACTS OF THE PRESENT CASE. THE AM OUNT WHICH INITIALLY DID NOT FALL WITHIN THE SCOPE OF THE PROVISIONS RENDERING IT LIA BLE TO TAX SUBSEQUENTLY HAVE BECOME THE ASSESSEE'S INCOME BEING PART OF THE TRAD ING OF THE ASSESSEE ' 25. SAME IS IN THE CASE OF T V SUNDARAM AYENGAR AN D SONS LTD. THE HON'BLE SUPREME COURT IN THIS CASE FOUND T HAT THE SUMS WERE STATED TO BE CREDIT BALANCES STANDING IN FAVOUR OF THE 'CUSTOMERS' OF THE COMPANY. SINCE THESE BALANCES WE RE NOT CLAIMED BY THE CUSTOMERS, THE AMOUNTS WERE TRANSFER RED BY THE ASSESSEE TO THE PROFIT & LOSS ACCOUNT. IT HELD THAT IF A COMMONSENSE VIEW OF THE MATTER WERE TAKEN, THE ASSE SSEE, BECAUSE OF THE 'TRADING OPERATION', HAD BECOME RICHER BY THE A MOUNT WHICH IT TRANSFERRED TO ITS PROFIT AND LOSS ACCOUNT. THE MON EY HAD ARISEN OUT OF ORDINARY TRADING TRANSACTIONS. ALTHOUGH THE AMOUNTS RECEIVED ORIGINALLY WERE NOT OF INCOME NATURE, THE AMOUNTS REMAINED WIT H THE ASSESSEE FOR 33 A LONG PERIOD UNCLAIMED BY THE TRADE PARTIES. BY LA PSE OF TIME, THE CLAIM OF THE DEPOSIT BECAME TIME-BARRED AND THE AMO UNT ATTAINED A TOTALLY DIFFERENT QUALITY. IT BECAME A DEFINITE TRA DE SURPLUS. THE ASSESSEE ITSELF HAD TREATED THE MONEY AS ITS OWN MO NEY AND TAKEN THE AMOUNT TO ITS PROFIT AND LOSS ACCOUNT. THE AMOUNTS WERE ASSESSABLE IN THE HAND OF THE ASSESSEE. BUT, IN THE CASE OF THIS ASSESSEE, AMOUNT WAS BORROWED FOR ACQUIRING CAPITAL ASSETS. 26. NEXT THE LD. CIT(A) ALSO CONSIDERED THE APPLICA TION OF SECTION 28. THIS SECTION READS AS UNDER :- 28. THE FOLLOWING INCOME SHALL BE CHARGEABLE TO IN COME-TAX UNDER THE HEAD 'PROFITS AND GAINS OF BUSINESS OR PR OFESSION', - (I) THE PROFITS AND GAINS OF ANY BUSINESS OR PROFESSION WHICH WAS CARRIED ON BY THE ASSESSEE AT ANY TIME DURING THE P REVIOUS YEAR; (II) ANY COMPENSATION OR OTHER PAYMENT DUE TO OR RE CEIVED BY, - (A) ANY PERSON, BY WHATEVER NAME CALLED, MANAGING THE WHOLE OR SUBSTANTIALLY THE WHOLE OF THE AFFAIRS OF AN IND IAN COMPANY, AT OR IN CONNECTION WITH THE TERMINATION OF HIS MAN AGEMENT OR THE MODIFICATION OF THE TERMS AND CONDITIONS RELATI NG THERETO; (B) ANY PERSON, BY WHATEVER NAME CALLED, MANAGING T HE WHOLE OR SUBSTANTIALLY THE WHOLE OF THE AFFAIRS IN INDIA OF ANY OTHER COMPANY, AT OR IN CONNECTION WITH THE TERMINATION O F HIS OFFICE OR THE MODIFICATION OF THE TERMS AND CONDITIONS REL ATING THERETO; (C) ANY PERSON, BY WHATEVER NAME CALLED, HOLDING AN AGENCY IN INDIA FOR ANY PART OF THE ACTIVITIES RELATING TO TH E BUSINESS OF ANY 34 OTHER PERSON, AT OR IN CONNECTION WITH THE TERMINAT ION OF THE AGENCY OR THE MODIFICATION OF THE TERMS AND CONDITI ONS RELATING THERETO; (D) ANY PERSON, FOR OR IN CONNECTION WITH THE VESTI NG IN THE GOVERNMENT, OR IN ANY CORPORATION OWNED OR CONTROLL ED BY THE GOVERNMENT, UNDER ANY LAW FOR THE TIME BEING IN FOR CE, OF THE MANAGEMENT OF ANY PROPERTY OR BUSINESS; (III) INCOME DERIVED BY A TRADE, PROFESSIONAL OR SI MILAR ASSOCIATION FROM SPECIFIC SERVICES PERFORMED FOR IT S MEMBERS; (IIIA) PROFITS ON SALE OF A LICENCE GRANTED UNDER T HE IMPORTS (CONTROL) ORDER, 1955, MADE UNDER THE IMPORTS AND E XPORTS (CONTROL) ACT, 1947 (18 OF 1947); (IIIB) CASH ASSISTANCE (BY WHATEVER NAME CALLED) RE CEIVED OR RECEIVABLE BY ANY PERSON AGAINST EXPORTS UNDER ANY SCHEME OF THE GOVERNMENT OF INDIA; (IIIC) ANY DUTY OF CUSTOMS OR EXCISE RE-PAID OR RE- PAYABLE AS DRAWBACK TO ANY PERSON AGAINST EXPORTS UNDER THE CU STOMS AND CENTRAL EXCISE DUTIES DRAWBACK RULES, 1971; (IV) THE VALUE OF ANY BENEFIT OR PERQUISITE, WHETHE R CONVERTIBLE INTO MONEY OR NOT, ARISING FROM BUSINESS OR THE EXE RCISE OF A PROFESSION; (V) ANY INTEREST, SALARY, BONUS, COMMISSION OR REMU NERATION, BY WHATEVER NAME CALLED, DUE TO, OR RECEIVED BY, A PAR TNER OF A FIRM FROM SUCH FIRM : PROVIDED THAT WHERE ANY INTEREST, SALARY, BONUS, CO MMISSION OR REMUNERATION, BY WHATEVER NAME CALLED, OR ANY PART THEREOF HAS NOT BEEN ALLOWED TO BE DEDUCTED UNDER CLAUSE (B) OF SECTION 40, THE INCOME UNDER THIS CLAUSE SHA LL BE ADJUSTED TO THE EXTENT OF THE AMOUNT NOT SO ALLOWED TO BE DE DUCTED; 35 (VI) ANY SUM RECEIVED UNDER A KEYMAN INSURANCE POLI CY INCLUDING THE SUM ALLOCATED BY WAY OF BONUS ON SUCH POLICY. 27. WE HAVE EXAMINED THE PROVISIONS OF SECTION 28 ( IV), AS EXTRACTED ABOVE AND HAVE FOUND THAT THIS SECTION IS NOT AT AL L APPLICABLE TO THE FACTS OF THIS CASE. IT IS INCORRECT FINDING OF LD. CIT(A) THAT THE AMOUNT OF INTEREST RELATING TO THE PRE-OPERATIVE PERIOD BE CAME PART OF TRADING OPERATION OF BUSINESS AND ANY BENEFIT RECEIVED ON A CCOUNT OF WAIVER OF INTEREST IS IN THE NATURE OF PROFITS AND GAINS OF B USINESS IN TERMS OF PROVISIONS OF SECTION 28(IV). 28. ACCORDINGLY, IN VIEW OF OUR FOREGOING DISCUSSIO NS, WE ALLOW THE APPEALS OF THE ASSESSEE. 29. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS AL LOWED. ORDER PRONOUNCED IN THE COURT ON JANUARY, 201 3. (N.K.SAINI) [HARI OM MARATHA] ACCOUNTANT MEMBER JUDICIAL MEMBER DATED : JANUARY , 2013 VL/- 36 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT 4. THE CIT(A) BY ORDER 5. THE DR ASSISTANT REGISTRAR ITAT, JODHPUR