AI Insights
The case involves M/s Ashik Woolen Mills Limited, which underwent a One Time Settlement (OTS) with IDBI Bank, resulting in a waiver of Rs. 13,51,39,000/- on loans. The Income Tax Officer (ITO) treated this waiver as a 'cessation of trading liability' and taxable under section 41(1) of the Income-tax Act, 1961. The assessee contested this in the first appeal, which was successful, leading to the Revenue's appeal to the Tribunal. The Tribunal, referencing decisions from the Delhi High Court and other precedents, upheld the taxability of the waiver under section 41(1), except for the components of interest and legal charges, which were remitted for verification by the ITO.
Appeal details
Counselvise Citation
[2023] 140 COUNSELVISE.COM (IT) 130544 (ITAT-MUMBAI)
Assessee PAN
Bench
Appeal Number
Duration Of Justice
5 month(s) 11 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
09-05-2023
Appeal Filed By
Department
Order Result
Allowed
Bench Allotted
A
Next Hearing Date
13-02-2023
Assessment Year
2011-2012
Appeal Filed On
28-11-2022
Judgement Text
Page 1 of 20 IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH, MUMBAI SHRI VIKAS AWASTHY, JUDICIAL MEMBER & SHRI B.M. BIYANI, ACCOUNTANT MEMBER ITA No. 3021/Mum/2022 (Assessment Year: 2011-12) ITO, Ward-4(1)(3), Room No. 637A, 6 th Floor, Aayakar Bhawan, M.K. Road, Churchgate, Mumbai – 400 020 बनाम/ Vs. M/s Ashik Woolen Mills Limited, 5 th Floor, Shreeji Krupa, Krishnalal Zaveri Marg, CP Tank, Mumbai – 400 004 (Appellant / Revenue) (Respondent / Assessee) PAN: AAACA 5048 F C.O. No. 10/Mum/2023 (Assessment Year: 2011-12) M/s Ashik Woolen Mills Limited, 5 th Floor, Shreeji Krupa, Krishnalal Zaveri Marg, CP Tank, Mumbai – 400 004 बनाम/ Vs. ITO, Ward-4(1)(3), Room No. 637A, 6 th Floor, Aayakar Bhawan, M.K. Road, Churchgate, Mumbai – 400 020 (Appellant / Assessee) (Respondent / Revenue) Assessee by Shri Fenil Bhat, Ld. AR Revenue by Smt. Shailja Rai, Ld. CIT-DR Date of Hearing 14.02.2023 Date of Pronouncement 10.05.2023 आदेश / O R D E R Per B.M. Biyani, A.M.: Feeling aggrieved by appeal-order dated 03.10.2022 passed by learned Commissioner of Income-Tax (Appeals)-National Faceless Appeal Centre, Delhi [“Ld. CIT(A)”], which in turn arises out of assessment-order dated 26.12.2018 passed by learned ACIT(OSD)-I/c ITO, 4(1)(3), Mumbai [“Ld. AO”] u/s 147 read with section 144 of Income-tax Act, 1961 [“the Act”] for M/s Ashik Woolen Mills Limited, ITA No. 3021/Mum/2022 and CO No. 10/Mum/2023 Assessment year 2011-12 Page 2 of 20 Assessment-Year [“AY”] 2011-12, the revenue has filed the captioned appeal. The assessee has also filed cross-objection [“C.O.”]. 2. Heard the learned Representatives of both sides at length and case- records perused. 3. Briefly stated the facts are such that the assessee-company filed original return of income of relevant AY 2011-12 on 20.09.2011 declaring a total income of Rs. Nil, which was processed u/s 143(1). Subsequently the AO received an information that the assessee had undergone One Time Settlement of loans availed by it from IDBI Bank, under which the bank had granted partial waiver of assessee’s liability. Forming a belief that this transaction had escaped assessment, the AO re-opened the case of assessee through notice u/s 148 dated 28.03.2018. Finally, Ld. AO completed assessment after making a total addition of Rs. 13,51,39,000/- u/s 41(1). Aggrieved by action of AO, the assessee carried matter in first-appeal and succeeded. Now, the revenue has come in captioned appeal assailing the order of CIT(A) and the assessee has also filed C.O. We first-take up Revenue’s Appeal. Revenue’s Appeal: 4. The grounds raised by revenue are as under: “1. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition of Rs. 7,85,00,000/-made towards OTS and other costs of Rs. 28,96,088/- discharged directly to banker by the third party and credited directly to capital reserve account in the balance sheet by holding that it does not amount to revenue receipt and therefore outside the purview of taxability u/s 41(1) of the Act. 2. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition of Rs. 5,37,42,912/-by following the judicial decision in the case of Graham Firth Steel Products Vs. CIT 85 taxmann.com 110 (Bombay) and has not appreciated the fact that only a reference to the BIFR has been made by the assessee in its case and no order is passed by BIFR. M/s Ashik Woolen Mills Limited, ITA No. 3021/Mum/2022 and CO No. 10/Mum/2023 Assessment year 2011-12 Page 3 of 20 (iii) Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition of Rs. 5,37,42,912/-without appreciating the fact that the loan facility was availed towards working capital requirement of the company and paid interest thereon and claimed the same as an allowable expenditure in the earlier years. (iv) The appellant craves leave to amend or alter any ground or add new ground which may be necessary.” 5. Ld. CIT-DR representing the revenue drew our attention to assessment-order and submitted that during assessment-proceeding, the AO observed that the assessee took a Corporate loan of Rs. 5 crore (+) Working capital loan of Rs. 5 crore; thus aggregating to Rs. 10 crore from IDBI Bank. However, the total liability of these loans at the time of One Time Settlement was Rs. 13,22,42,912/-, consisting of principal of Rs. 10,00,00,000/- plus outstanding interest of Rs. 3,22,42,912/-. She submitted that in terms of One Time Settlement with lending bank, the assessee made a payment of Rs. 7,85,00,000/- which was first appropriated by bank towards interest of Rs. 3,22,42,912/- and thereafter towards principal of Rs. 4,62,57,088/-; lastly the bank waived remaining balance of Rs. 5,37,42,912/- which consisted only of principal component. Simultaneously, the AO also found that the impugned payment of Rs. 7,85,00,000/- plus other cost of Rs. 28,96,088/- towards legal expenses were recovered by bank by sale of assets belonging to the guarantor of loan provided by assessee but the assessee did not show any liability towards guarantor in books of account. The assessee treated all these liabilities of Rs. 5,37,42,912 (+) 7,85,00,000 (+) 28,96,088 aggregating to Rs. 13,51,39,000/- as ‘capital receipts’ and credited to ‘Capital Reserve A/c’ in the Balance-Sheet instead of carrying to P&L A/c. However, the Ld. AO treated the same as ‘cessation of trading liability’ taxable u/s 41(1); accordingly made a total addition of Rs. 13,51,39,000/- while completing assessment. 6. As a matter of fact, Ld. CIT-DR drew our attention to Para No. 6 of letter dated 06.10.2021 filed by assessee to CIT(A) during proceeding of first- M/s Ashik Woolen Mills Limited, ITA No. 3021/Mum/2022 and CO No. 10/Mum/2023 Assessment year 2011-12 Page 4 of 20 appeal, copy placed at Page No. 9 of Paper-Book, and demonstrated that the entire original loan of Rs. 10 crore was taken by assessee for working capital purpose only and not for acquiring any kind of capital asset/fixed asset. The said Para is re-produced here for an immediate reference: “6. The company had availed financial facility of Rs. 10 crores from IDBI being term loan for margin money for working capital of Rs. 5 crores and working capital loan of Rs. 5 crores. As at 31.3.2011, the total outstanding with interest was at Rs. 13.22 crores.” This way, the Ld. CIT-DR successfully demonstrated that the waiver of Rs. 5,37,42,912/- granted by bank was qua ‘working capital loan’. She further submitted that the payment of Rs. 7,85,00,000 (+) Rs. 28,96,088 has been made to bank by utilizing the sale proceeds of assets of guarantor and neither the assessee has spent a single penny from its own pocket nor it has shown any liability of guarantor in books of account; therefore the assessee’s liability towards all three components, namely Rs. 5,37,42,912 (+) 7,85,00,000 (+) 28,96,088 = Rs. 13,51,39,000/- is exhausted; effectively it is cessation of ‘working capital loan’ for which the AO has made addition u/s 41(1). Therefore, the exact controversy to be adjudicated in present appeal is very simple i.e. whether the AO was justified in taxing u/s 41(1) a sum of Rs. 13,51,39,000/- relatable to cessation of ‘working capital loan’ and she would be presenting revenue’s case precisely on that footing. Ld. AR representing the assessee could not contradict this submission of Ld. CIT- DR. The present appeal is being decided accordingly. 7. Then, the Ld. CIT-DR straightaway carried us to the relevant portion of section 41(1) which reads as under: Section 41: “(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 (hereinafter 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 any other manner whatsoever, any amount in respect of such loss or M/s Ashik Woolen Mills Limited, ITA No. 3021/Mum/2022 and CO No. 10/Mum/2023 Assessment year 2011-12 Page 5 of 20 expenditure or some benefit in respect of such trading liability by way of remission or 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 (b) XXXX” 8. Ld. CIT-DR submitted that the language of section 41(1) is very much clear and leaves no doubt for interpretation. She submitted that once it is found that there is a cessation of trading liability, it is taxable u/s 41(1). She submitted that in the present case the assessee had taken a ‘working capital loan’ which was necessarily utilized by assessee for funding the business/ trading operations/expenses of assessee for which allowance/deduction was allowed; therefore cessation thereof definitely attracts section 41(1). She submitted that had there been a case of cessation of loan taken for fixed assets/capital assets, the department would not have taken a single minute in accepting that section 41(1) is not applicable, but this is not so in present case. Ld. CIT-DR straightaway relied upon the decision of Hon’ble Jurisdictional High Court of Mumbai in Solid Containers Ltd. Vs. DCIT, Spl. Range-1, Mumbai (2009) 178 Taxman 192 to support the revenue’s stand that section 41(1) is very much applicable to tax the cessation of ‘working capital loan’. Relevant part of decision is extracted below: “This appeal is directed against the order passed by the Income Tax Appellate Tribunal, Mumbai Bench dated 31st December, 2001 wherein the Tribunal has rejected the contention raised by the Assessee that the loan was a capital receipt and has not been claimed as deduction from the taxable income as expenses and, therefore, did not represent income under section 41(1) and, thus, sustained the addition of Rs.6,86,071. The Assessing Officer had made the addition on the ground that the credit balance returned back is the income of the Assessee in view of the fact that it is again directly arising out of the business activity and the same was liable to be taxed under section 28 of the Act. The learned counsel appearing for the appellant argued that the impugned order suffers from error of law as well as of appreciation of facts. While relying upon the judgment of this court in the case of Mahindra & Mahindra v. Commissioner of Income tax, 2003 ITR 261, page 501, it was M/s Ashik Woolen Mills Limited, ITA No. 3021/Mum/2022 and CO No. 10/Mum/2023 Assessment year 2011-12 Page 6 of 20 contended that in relation to the transaction in question, section 28(iv) was not attracted and even provisions of section 41(1) of the Act could not be applied to treat the same as business income of the Assessee liable to tax. 2. In order to examine whether any substantial question of law arises in the present appeal or not, reference to basic facts may be necessary. The Assessee-appellant had taken a loan of Rs. 6,86,071/- during the previous year for business purposes which was returned back, as a result of consent terms arrived at between M/s. P.S. Jain Motors on the one hand and the Assessee on the other. The Assessee claimed that the said loan was the capital receipt and has not been claimed as deduction from the taxable income as expenses and therefore, did not come under section 41(1). As already noticed, this contention was rejected by the Assessing Officer on the ground that credit balance returned back is the income of the Assessee in view of the fact that it is again directly arising out of the business activity of the Assess and was liable to tax under section 28 of the Act. The order was appealed against. Commissioner partially allowed the appeal. Aggrieved from the order of the Income Tax Commissioner (Appeals), further appeal was preferred before the Income Tax Appellate Tribunal which again allowed the appeal on other counts but on the above issue and while relying upon the judgment of the Supreme Court in the case of Commissioner of Income Tax, Madurai v. T.V. Sundaram Iyengar and Sons Ltd., (1996) 6 SCC 294, sustained the view taken by the Commissioner. The Tribunal held as under: XXX 3. The present appellant can hardly drive any advantage from the case of Mahindra & Mahindra Ltd. (supra). As in that case, a clear finding 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 Bank of India. Therefore, the loan agreement, in its entirety, was not obliterated by such waiver. Secondly, the purchase consideration related to capital assets. The toolings were in the nature of dies and the Assessee was a manufacturer of heavy vehicles. The import was that of plant and machinery and the waiver could not constitute business. The facts of the present case are entirely different in as much as it was a loan taken for trading activity and ultimately, upon waiver the amount was retained in business by the Assessee. Thus, the principle stated by the Supreme Court in the case of T.V. Sundaram Ayengar & Sons Ltd. (supra) would be squarely applicable to the facts of the present case. The amount which initially did not fall within the scope of the provisions rendering it liable to tax subsequently have become the Assessee's income being part of the trading of the Assessee. Similar view was also taken by a Bench of Madras High Court in the case of Commissioner of Income tax v. Aries Advertising Pvt. Ltd. 2002 (255) ITR 510. The court took the view that the Assessee because of M/s Ashik Woolen Mills Limited, ITA No. 3021/Mum/2022 and CO No. 10/Mum/2023 Assessment year 2011-12 Page 7 of 20 trading operation became richer by the amount which had been transferred and/or retained in the Profit and Loss Account of the Assessee. 4. In view of the above settled position of law and the facts of the present case, we are of the considered view that no question of law much less substantial question of law arises for consideration in the present appeal. Appeal dismissed in limine.” 9. Then, Ld. CIT-DR went on submitting that the Ld. CIT(A) has given relief to assessee by relying upon CIT Vs. Graham Firth Steel Products (I) Ltd. (2017) 85 taxmann.com 110 (Jurisdictional High Court of Bombay) but the reliance of CIT(A) is totally mis-placed. Ld. CIT-DR referred to concluding para of this decision: “32......Before us, the Tribunal relied on the Division Bench Judgment of the Rajasthan High Court in Shree Pipes Ltd. There, on identical facts, the assessee was a sick industrial company and proceedings were pending before the BIFR. Under the scheme of its rehabilitation, interest liability in respect of certain debts of the assessee due to Banks and financial institutions stood waived. With the waiver of the interest liability of the assessee under the scheme, it was also ordered that the assessee would be entitled to exemption from the operation of Section 41(1) of the I.T. Act. The assessee had written off in its books of account its liability towards interest and the payment of commission, expenses incurred and allowed as deduction in the earlier years. The Assessing Officer considered this unilateral action as remission or cessation of its liability and made additions for the assessment year concerned, including under Section 41(1). As in our case, the Tribunal deleted the addition. The Revenue was in appeal before the Rajasthan High Court. The Division Bench held that the act of remission was attributable to the creditor and it could not be unilaterally attributed to the debtor himself declaring that he would not pay. There was no material which suggested any act or omission on the part of the creditor which resulted in extinguishment of the liability of the assessee on its account. Writing off such liability in the books of account by the debtor only conveyed the intention of the assessee not to pay. The Revenue relied on the circumstances stated by the Income Tax Officer that claims had not been filed before the Board by Creditors. However, as rightly observed by the Division Bench of the Rajasthan High Court that, there is no provision in the Sick Industrial Companies (Special Provisions) Act, 1985 permitting lodging or raising of claims by the creditor before the BIFR. Before us as well, the BIFR issued notices to those whose debts are secured and equally those whose stakes are involved. As far as the company is concerned, the BIFR could have recommended winding up but it took on record a scheme of rehabilitation and revival of the company. In that process, the arrangements as carved out have been made. Therefore, as held by the Tribunal, in the present case the ingredients of sub- section (1) of Section 41 are not attracted. The liability remains and because under the scheme of the BIFR the principal sum was waived, the assessee has not enjoyed any actual benefit of M/s Ashik Woolen Mills Limited, ITA No. 3021/Mum/2022 and CO No. 10/Mum/2023 Assessment year 2011-12 Page 8 of 20 remission of liability in the nature of trading. It is in these circumstances that the claim of deduction in respect of the waiver of loan amounting to Rs.8,36,99,463/- was granted. The Assessing Officer was directed to allow it.” Ld. CIT-DR submitted that the decision in Grahm First Steel (supra) is based on the decision of Hon’ble Rajasthan High Court in CIT Vs. Shree Pipes Limited (2008) 301 ITR 240, relevant paragraphs of which are re- produced below: “The Tribunal also noticed that the audited accounts of the respondent- company had the following notice : (i)The effect of the rehabilitation scheme sanctioned by the BIFR on May 27, 1993, have not been considered in the return for the assessment year 1993-94 although effect of the same have been given in the books of account of the company for the year ended on March 31, 1993, for the following reasons : (a) The scheme was sanctioned on May 27, 1993, i.e., the previous year relating to the assessment year 1994-95 ; and (b) Financial institutions/banks will give effect of the scheme in their books in the financial year 1993-94 as also necessary documents would be executed in the financial year 1993-94 Apparently, from the treatment of the order in the books of account cannot affect the position of law. The interest in question had accrued since the advances were received by the assessee and has been dealt with accordingly each year when the liability to such interest had accrued. That liability had not ceased and remitted by the financial institutions during the financial year relevant to the assessment year 1993-94. The financial institutions and banks were required to waive the interest only in pursuance of directions issued by the BIFR vide its order dated May 27, 1993. Hence, waiver of liability of the assessee to pay the interest could come only after that date and not earlier. Merely dealing of such waiver by the assessee in his books of account for earlier period will not alter the effect of the order to befall earlier than interest was made. The assessment for the assessment year 1993-94 related to the financial year ending on March 31, 1993. Only the transactions which actually took place or liability incurred or ceased up to March 31, 1993, could be the subject-matter of consideration. No remission or cessation of liability towards interest came into consideration until March 31, 1993. Nor the assessee became entitle to waiver of interest as on March 31, 1993, under the orders of the BIFR. He became entitled to such waiver only under the orders of the BIFR is not in dispute. It is merely because accounts were completed after the order of the BIFR came into existence and the assessee made entries in his books of account by writing off the liability towards interest on the basis of the order of the BIFR in the wake of scheme sanctioned by the BIFR on May 27, 1993, and waiver of such liability came M/s Ashik Woolen Mills Limited, ITA No. 3021/Mum/2022 and CO No. 10/Mum/2023 Assessment year 2011-12 Page 9 of 20 into existence only in the previous year corresponding to the assessment year 1994-95. No remission was granted by the creditors or any other agency to the assessee to discharge him of liability during the accounting period relevant for the assessment in question. Nor did the liability cease to exist in the previous year relevant to the assessment year 1993-94. Therefore, merely on account of making entries in the books of account would not affect computation of total income of the assessee accrued or received by him during the financial year ending on March 31, 1993, in accordance with the provisions of the Income-tax Act. At this juncture, we may notice that Explanation 1 to section 41(1) was inserted vide amendment through the Finance (No. 2) Act of 1996, with effect from April 1, 1997, which made it permissible to add such sum in the income of the assessee in terms of section 41(1), if the assessee has written off such sum in his books of account, as his unilateral act. However, the provision was specifically brought into effect prospectively with effect from April 1, 1997, only and did not have retrospective operation. The amendment had come due to the tact that the judicial pronouncements have been that section 41(1) cannot be invoked on unilateral action of writing off liability in his books of account by any debtor. Remission can be only by an act of creditor and cessation of liability can come by agreement or by law. Apparently the present case is a case of writing off the liability to pay interest, accrued in the past, in the books of the assessee relating to the previous year corresponding to the assessment year 1993-94, as a result of the order passed by the BIFR sanctioning scheme for rehabilitation of the respondent- assessee, a sick industrial undertaking. The order sanctioning the scheme did not come into existence during the accounting period in question. Writing off the sum in the books for the accounting period in question was voluntary and unilateral act on the part of the assessee. In the present case, the financial year ending on March 31, 1993, is relevant to the assessment year in question, no waiver was granted under the BIFR scheme in respect of outstanding liability towards interest on advances received from banks and financial institutions. Liability of the assessee cannot be said to have been remitted or ceased to exist prior to the sanction of the scheme by the BIFR. Until then no benefit to that extent was obtained by the assessee nor could have been obtained by it by any voluntary act of it. The question of inclusion under section 41(1) of such sum governed by waiver by the BIFR in the income of the assessee could arise for consideration only while considering the assessment of the assessment year 1994-95 relevant to the financial year ending on March 31, 1994, during which remission of waiver of interest was directed by the BIFR. That was clear purport of the order of the BIFR that is how creditors were to act on the direction of the BIFR thereafter and that is how the assessee-company has to treat the same. The benefit of the interest waived can actually be said to have been obtained by the assessee only during the financial year relevant to the assessment year 1994- 95. This finding of fact is obvious from the material available on record that no remission or cessation came to the company during the accounting period relevant to the assessment year 1993-94. Therefore, it could not have been M/s Ashik Woolen Mills Limited, ITA No. 3021/Mum/2022 and CO No. 10/Mum/2023 Assessment year 2011-12 Page 10 of 20 taken into account while computing the income for the assessment year 1993- 94. Apart from the aforesaid reason there is yet another reason which emerges clearly from the record to justify the order of the Tribunal. The remission on the basis of which the assessee had made entries in the books of account directly related to the order passed by the BIFR. The order of the BIFR could not have been taken into truncated form. Under the orders of the BIFR while directing waiver of interest, it was also made clear that section 41(1) of the Act will not be applicable. In fact the Income-tax Officer, in the first instance had issued notice under section 148 for reassessment of the assessment year 1994-95, but when faced with the order of the BIFR exempting operation of section 41(1) of the Act, proceedings were dropped. Thereafter, for the same amount of waiver under the same order he made additions in the income of the assessee for the assessment year 1993-94, only on the basis of book entries made by the assessee as noted above. As per the Revenue's own decision it has accepted the condition of extending the operation of section 41(1) as permissible, and the remission or waiver of interest liability was granted subject to the above condition. The assessee has given effect to the said waiver in terms of the order of the BIFR only at best in the books of the financial year ending on March 31, 1993, if that waiver by the BIFR could be considered as benefit obtained by the assessee during the previous year related to the assessment year 1993-94, it cannot be within the order of the BIFR. Independent of the order of the BIFR there is no remission or cessation which could invite the operation of section 41(1) of the Act of 1961, under the older of the BIFR operation of section 41(1) in respect of such waiver is excluded. As a consequence of the aforesaid discussion, we are of the opinion that the decision of the Tribunal in deleting the addition made on account of interest written off in the books of account of the assessee for the assessment year 1993-94, by the Assessing Officer on account of waiver of interest by the order of the BIFR was correct and does not call for interference.” Analysing there paras very critically in the court, Ld. CIT-DR submitted that the decision of Shree Pipes Limited (supra) is based on a distinguishing factor which is very important, namely the assessee got waiver benefit from the order dated 27.05.1993 passed by BIFR which happened in previous year 1993-94 relevant to AY 1994-95, hence the Hon’ble Court held that the waived sum can’t be taxed u/s 41(1) in AY 1993-94. Thus, there was a problem of taxability-year. Unfortunately, this factor was not informed to the ITAT / Hon’ble Bombay High Court in Graham Firth Steel (supra), hence such a vital factor remained un-noticed and the Hon’ble Bombay High Court relying upon Shree Pipes Limited (supra) held that the waiver of loan M/s Ashik Woolen Mills Limited, ITA No. 3021/Mum/2022 and CO No. 10/Mum/2023 Assessment year 2011-12 Page 11 of 20 cannot be taxed u/s 41(1). Therefore, Ld. CIT-DR strongly submits, the decision in Grahm First Steel (supra), with due respect, cannot be said to have decided the proposition correctly and in any case can’t be applied to present assessee. 10. With these submissions, Ld. CIT-DR strongly argued that the case of assessee is covered by decision of Hon’ble jurisdictional High Court in Solid Containers (supra) and not in Grahm First Steel (supra); therefore the AO has rightly invoked section 41(1) and made addition thereunder but the Ld. CIT(A) has wrongly deleted the same. Therefore, in the circumstance, the AO’s action must be upheld. 11. Replying to above, Ld. AR made a lengthy submission. He raised following contentions: (i) It is submitted that Solid Containers Ltd. (supra) is based on section 28 and does not decide conclusively about taxability u/s 41(1); therefore the Ld. CIT-DR’S reliance on that decision is mis-placed. (ii) Then, it is submitted that the law of section 41(1) is vehemently and correctly decided by Hon’ble Gujrat High Court in PCIT Vs. Gujrat State Financial Corporation (2020) 122 taxmann.com 101 where it was categorically held that in the case of loan, the assessee does not claim any allowance or deduction; therefore, waiver of loan does not attract section 41(1) at all. (iii) Additionally, Ld. AR also raised a contention that in the present case the assessee has carried the waived amount to “Capital Reserve” and not to “P&L A/c” or “General Reserve” in books of account; therefore also it cannot be taxed u/s 41(1). 12. With these submissions, Ld. AR strongly contented that the AO has wrongly made addition u/s 41(1); the Ld. CIT(A) has rightly reversed the action of AO. Hence, the order of CIT(A) must be upheld. M/s Ashik Woolen Mills Limited, ITA No. 3021/Mum/2022 and CO No. 10/Mum/2023 Assessment year 2011-12 Page 12 of 20 13. In Rejoinder, Ld. CIT-DR submitted that the treatment given by assessee in books of account is not decisive of the nature and tax- implication of transaction. Ld. CIT-DR submitted that once the provision of section 41(1) is applicable, the relevant sum would be taxable irrespective of whatever accounting treatment is done by assessee. 14. We have considered rival submissions of both sides and perused the orders of lower-authorities. We have also considered the provisions of section 41(1) in the light of decided judicial rulings. After a mindful consideration, we would like to present our analysis as under: (i) Firstly, we would like to decide the contention raised by Ld. AR as to whether or not the decision of Hon’ble Jurisdictional High Court in Solid Container (supra) decided taxability u/s 41(1). In this regard, we gainfully refer the decision of Hon’ble Delhi High Court in Rollatainers Ltd. Vs. CIT, ITA 127 of 2011 dated 30.08.2011. In that case, the Hon’ble Court was concerned to decide whether the principal amount of working capital loan granted in the form of cash-credit limit by bank and subsequently waived off, constituted taxable income of assessee? The Court held as under: “7. In this appeal filed by the assessee, we are concerned with the waiver of the loan in respect of cash credit which is stated income in revenue field by the Tribunal and the appeal has been admitted on this question of law. Mr. Vohra, learned counsel appearing for the appellant/assessee fairly stated that the issue is answered against the assessee by a decision dated 18th February, 2011 of this Court in the case of Logitronics Pvt. Ltd. Vs. Commissioner of Income Tax & Anr. (ITA 1623/2010). He, however, made a benevolent plea that the said decision required reconsideration as it was in conflict with the earlier decision rendered by this Court. 8. Before we consider the submissions of Mr. Vohra on this aspect, it would be apposite to discuss the judgment of this Court in Logitronics (supra). That was also a case where certain amount of loan and interest was waived by the financial institution as it had become Non Performing Asset (NPA) for the bank in view of the guidelines of the Reserve Bank of India. On waiver the principal amount written off was directly taken to balance sheet under the head capital reserve, was not offered for taxation. The Assessing Officer treated the said waiver of principal amount of loan as “income‟ within the meaning of Section M/s Ashik Woolen Mills Limited, ITA No. 3021/Mum/2022 and CO No. 10/Mum/2023 Assessment year 2011-12 Page 13 of 20 2(24) of the Income-Tax Act, exigible to tax. The CIT (A) deleted the addition holding that it was not an income and provisions of Section 28(iv) as well as Section 41(1) of the Act were not applicable. The Tribunal, however, reversed the decision of the CIT (A) giving inter alia following reasons:- "(a) Since the Tribunal in the case of Tosha International Ltd. (supra) proceeded to decide the issue on the premise that loan was utilized to acquire capital assets, decision of the Tribunal as upheld by this Court would apply to the cases where the loan obtained is utilized for acquiring capital assets. (b) In the case of Mahindra & Mahindra Ltd. Vs. Commissioner of Income Tax [261 ITR 501(Bom.)], loan was to purchase plant and machinery - dies, tools, etc., i.e., capital assets. It was on these facts that waiver of principal amount of loan was held to be neither covered by Section 28(iv) nor Section 41(1) of the Act. (c) In the case of Tosha International Ltd. (supra), neither the Tribunal nor this Court considered the issue from the standpoint of principal laid down by the Supreme Court in the case of Commissioner of Income Tax Vs. T.V. Sundaram Iyengar and Sons Ltd. (1966) 222 ITR 344. (d) In Solid Containers Ltd. Vs. Deputy Commissioner of Income Tax [(2009) 308 ITR 417], the Bombay High Court applying the decision in T.V. Sundaram Iyengar and Sons Ltd. (supra) distinguished its decision in Mahindra & Mahindra Ltd. (supra) and has held that on waiver of loan taken for business purposes, the amount is retained in the business and as such, the amount that initially did not have the character of income becomes income liable to tax. (e) Decisions rendered in Commissioner of Income Tax Vs. P. Ganesh Chettiar [(1982) 133 ITR 103 (Mad.) and Commissioner of Income Tax Vs. Phool Chand Jiwan Ram [(1981) 131 ITR 37 (Del.) were of no assistance to the appellant because the same were rendered prior to judgment of the Supreme Court in T.V. Sundaram Iyengar and Sons Ltd. (supra). 9. Against the orders of the Tribunal, appeal was preferred by the said assessee and this Court vide orders dated 18th February, 2011 affirmed the order of the Tribunal. 10. The Court first discussed the scheme of the Act on this aspect and observed that Under Section 4 of the Act, the charging Section, the charge of income tax is upon the "total income of the previous year". The term “income‟ is defined under Section 2(24) of the Act. In general, all receipts of revenue nature, unless specifically exempted are chargeable to tax. Loan taken is not normally a kind of receipt which will be treated as income. However, when a part of that loan is waived by the creditor, some benefit accrues to the assessee. Question is what would be the character of waiver of part of loan at the hands of the assessee? Waiver definitely gives some benefit to the assessee. Whether it is to be treated as capital receipt? If it is so, then only M/s Ashik Woolen Mills Limited, ITA No. 3021/Mum/2022 and CO No. 10/Mum/2023 Assessment year 2011-12 Page 14 of 20 capital gain tax would be chargeable under Section 45 of the Act. Or else, whether remission of loan is no income at all? 11. In this context, Section 41(1) read with Section 59 of the Act would become relevant and these provisions have been brought within the sweep of taxation even the remission of debt/liability as income of the order in remission or such waiver amounts to provide or gains of business or provision liable to be taxed under Section 28 of the Act. The Court thereafter took into consideration various decision in extenso discussing the ratio of those judgments and summarized the principle laid down in those judgments in the following manner:- "In the context of waiver of loan amount, what follows from the reading of the aforesaid judgment is that the answer would depend upon the purpose for which the said loan was taken. If the loan was taken for acquiring the capital asset, waiver thereof would not amount to any income exigible to tax. On the other hand, if this loan was for trading purpose and was treated as such from the very beginning in the books of account, as per Sundaram Iyengar (T.V.) and Songs Ltd. (supra), the waiver thereof may result in the income more so when it was transferred to Profit and Loss account." 12. The Submissions of Mr. Vohra was that the aforesaid extracted passage did not state the correct principle of law. According to him, it is settled law that all receipts are not income. Receipt of loan is a transaction on capital account i.e. the receipt of sum of money by way of loan which is repayable does not amount to income. Therefore, waiver of loan would be of capital account with no indicia of income. He further submitted that Section 41(1) of the Act was not applicable as following conditions need to be satisfied before this section is invoked:- (i) An allowance or deduction has been claimed in any earlier assessment year(s) with respect to a trading liability; (ii) Benefit by way of remission or cessation is obtained in respect of such trading liability in succeeding year (s). 13. According to him in case of waiver of principal amount of loan, no income accrues as the transaction is of capital account and does not constitute income. He referred to the judgment of this Court in CIT Vs. Phool Chand, 131 ITR 37 and CIT Vs. Tosha International Ltd. 176 Taxman 187 (del.) in support of this proposition. 14. His further submission was that Section 28(iv) of the Act was equally not applicable. According to him, in terms of the aforesaid section, the value of any benefit or perquisite arising from business, whether convertible into money or not, is taxable under the head "profits and gains of business or profession" The said section does not contemplates bringing to tax benefits in cash or money. The waiver of principal amount of loan, being benefit received in cash would, at the threshold do not constitute income under Section 28(iv) of the Act and for that reason, it was not necessary to go into the purpose for which M/s Ashik Woolen Mills Limited, ITA No. 3021/Mum/2022 and CO No. 10/Mum/2023 Assessment year 2011-12 Page 15 of 20 the loan was utilized. Further, in order that Section 28(iv) of the Act is attracted, the benefit must be arising from business and not in the course of business. The said section is intended to bring to tax the benefit in the kind of “arising from business‟ and not any and every benefit which arises in the course of carrying on business. The appellant is engaged in the business of manufacturing and trading of packing materials. The appellant cannot be said to be in the business of borrowing money. The moneys borrowed constitute source of funds from which the business of the appellant is carried on. The waiver of loan outstanding did not arise from the business of the appellant. Consequently, since the business carried on by the appellant was not the source of alleged benefit, Section 28(iv) of the Act has no application. He also argues that the judgment of Supreme Court in CIT Vs. T.V. Sundaram Iyengar and Sons Ltd. 222 ITR 344 was not applicable. Likewise, the decision of Bombay High Court in Solid Containers (supra) had no application. 15. All the arguments advanced by the learned counsel were raised before this Court in Logitronics (supra) as well. Predicated on the same judgments on which Mr. Vohra has now relied upon. The judgment in Logitronics (supra) is rendered by this very Bench. Therefore, it is not necessary to repeat the discussion all over again. Suffice to state that after considering the aforesaid submissions of Mr. Vohra, we are unable to agree with the same and find no reason to deviate the view we have taken in the aforesaid decision in Logitronics (supra). We would, however, like to add that the Tribunal in the impugned judgment has discussed at length both the decision of this Court in CIT Vs. Phool Chand and CIT Vs. Tosha International Ltd (supra) and held that they are not applicable in the instant case. In the case of Phool Chand (supra) the relevant facts are that the assessee had purchased goods in an earlier year from M/s Narsinghdass Banarsidass, the payment in respect of which was made by M/s Janaki Dass Banarasi Dass. The amount was subsequently waived. The case of the revenue was that the amount so paid should be taken towards purchase of cloth and, therefore, it represents a trading liability. This Court came to the conclusion that this conclusion was rather far- fetched. The cloth was purchased from M/s Narsinghdass Banarsidass and the debt represented a trading debt. However, so far as M/s Janaki Dass Banarsi Dass is concerned, the payment made by it was not for the purpose of purchase of stock-in-trade. Therefore, it was held that the liability was not a trading liability and the amount waived could not be brought to tax in the hands of the assessee. 16. Thus, the entire judgment rested on the premise that the liability in question was not a trading liability. Coming to the case of Tosha International Ltd. (supra) the facts are that the assessee was engaged in manufacturing of black and white picture tubes. It ran into huge losses and ultimately became a sick company and was so registered with the BIFR. Under one time settlement Scheme, the banks and financial institutions required the assessee to pay 60% of the amount towards the principal and waived the entire interest amount. The question before the Court was whether waiver of the principal amount of amount ` 10.48 crore, credited to the capital reserve account, constituted income? The Court came to the conclusion that the amount is not covered by the provision contained in Section 41(1). It was also mentioned that the principles enunciated in the case of Mahindra and Mahindra Ltd. are M/s Ashik Woolen Mills Limited, ITA No. 3021/Mum/2022 and CO No. 10/Mum/2023 Assessment year 2011-12 Page 16 of 20 fully applicable. Again, it was a case where the loan was on capital account and not for trading purposes. Even in the instant case, as far as term loans are concerned, waiver thereof by the financial institutions has not been treated as income at the hands of the assessee. It is only the writing off loans on cash credit account which was received for carrying out the day to day operations of the assessee which is treated as "income" in the hands of the assessee. The judgment of the Bombay High Court in “Solid Containers‟ and that of Madras High Court in “Aries Advertisement‟ are directly on this issue. The Tribunal has rightly applied the said judgments wherein the view taken is the same as taken by this Court in Logitronics. 17. Insofar as the decision in Jindal Equipment Leasing & Consultancy Services Ltd. is concerned, that was a case where the assessee was an investment company registered with the Reserve Bank of India as a Non- Banking Financial Company (NBFC). In the return for the assessment year 2003-04, it had shown a loan of Rs. 6,80,31,189 payable to M/s Jindal Steel & Power Ltd. (JSPL). It is the JSPL which had return of a sum of Rs. 1,46,53,065 in its books of account. On that premise, the Assessing Officer had treated the same as income of the assessee on the ground that the creditor had written of the said amount and, therefore, it was no more the liability of the assessee and to this extent it was the assessee’s gain and added the same under Section 41(1) of the Act. The plea of the assessee in that case was that JSPL had done it unilaterally and without the knowledge of the assessee. The CIT(A) confirmed the addition made by the Assessing Officer in term of Section 41(1) read with Section 28(i) of the Act. The ITAT deleted the addition holding that Section 41(1) of the Act had no application. In the appeal preferred by the Revenue, it did not press the applicability of Section 41(1) of the Act or Section 28(i) of the of the Act but took a totally different stand namely the said waiver was to be treated as income under Section 28(iv) of the Act. No doubt, this Court held that the amount written of in the books of accounts by JSPL was in the nature of value of any benefit or perquisites, whether convertible into money or not and, therefore, could not be treated “profits and gains from business‟. However, no other aspects were looked into or discussed. The nature of loan taken by the said assessee, which was waived by the JSPL, namely whether it was on capital account or in the trading field was not the aspect looked into. In fact, neither there was any material on this aspect nor it was argued. This Court had relied upon the judgment of Bombay High Court in Mahindra and Mahindra 261 ITR 501. When we go through the said judgment of the Bombay High Court, it becomes clear that in that case, the loan arrangement in its entirety was not obliterated and more importantly the purchase consideration related to capital asset. 18. In any case, even if we hold that Section 28(iv) of the Act is not applicable, Section 41(i) of the Act is clearly applicable.” [Emphasis supplied] M/s Ashik Woolen Mills Limited, ITA No. 3021/Mum/2022 and CO No. 10/Mum/2023 Assessment year 2011-12 Page 17 of 20 A bare reading of the decision clearly demonstrates that the Hon’ble Delhi High Court has critically and vehemently considered the decision in Solid Container (supra) in arriving at the conclusion that impugned waiver was held to be taxable u/s 41(1). Since Hon’ble Delhi High Court has already held so, ITAT being at a lower forum, is duty bound to follow the same. Therefore, we do not find any merit in the contention raised by Ld. AR that Solid Container (supra) does not decide taxability u/s 41(1). Further, since the decision of Solid Container (supra) given by Hon’ble jurisdictional High Court is binding upon us, we have no authority to look into whatever decision taken by non-jurisdictional High Court of Gujrat in PCIT Vs. Gujrat State Financial Corporation (2020) 122 taxmann.com 101. (ii) Secondly, we find that the Ld. CIT(A) has deleted addition by relying upon Graham Firth Steel (supra). But, the Ld. CIT-DR has successfully demonstrated as to how that decision can’t be applied. Ld. AR could not rebut the submissions made by Ld. CIT-DR as narrated by us earlier in much detail. Therefore, we agree that the said decision can’t be applied. 15. Thus, in view of decision of Hon’ble Jurisdictional High Court in Solid Container (supra), we are persuaded to accept revenue’s contention that that the waiver of working capital loan is taxable u/s 41(1). 16. However, we would like to address the additional claim of Ld. AR that the assessee has transferred to “Capital Reserve” and not to “P&L A/c” or “General Reserve”. In that respect, we agree with Ld. CIT-DR’s contention that accounting treatment is not decisive of the nature or tax implications of transaction. On a careful reading of income-tax law, we find that section 2(24) prescribes thus: “(24) “income” includes- M/s Ashik Woolen Mills Limited, ITA No. 3021/Mum/2022 and CO No. 10/Mum/2023 Assessment year 2011-12 Page 18 of 20 (v) any sum chargeable to income-tax under clauses (ii) and (iii) of section 28 or section 41 or section 59;” Thus, the income taxable u/s 41(1) is treated as “income” and the accounting treatment given by assessee cannot obliterate the applicability of section 41(1) or section 2(24). Therefore, we reject the contention raised by Ld. AR. 17. During hearing, Ld. AR also raised a claim that the interest of Rs. 3,22,42,912/- or legal charges of Rs. 28,96,088/- are not waived, they are very much paid to bank and therefore not taxable. We do not find any merit in this pleading because the facts of this appeal are very peculiar. We have seen in the beginning of this order that the assessee’s entire liability has been exhausted/waived without incurring a single penny from assessee’s pocket. To make it clear, the interest and charges were also paid by using the guarantor’s assets; therefore in a way the liability of interest and charges is also waived. In that view of matter, we reject the contention raised by Ld. AR. But we would like to add one more thing. There is no dispute on the point that section 41(1) attracts taxability only if the assessee has obtained any allowance or deduction. Therefore, it needs to be seen whether or not the assessee has obtained deduction of interest of Rs. 3,22,42,912/- or legal charges of Rs. 28,96,088/-. If it is found that the deduction was allowed, those components would be taxable but if it is otherwise, there would be no taxability to that extent. This fact needs a proper verification at the stage of AO. Therefore, we remit this limited point to the file of AO. Ld. AO will make necessary verification qua interest of Rs. 3,22,42,912/- and legal charges of Rs. 28,96,088/- and take a final call. The assessee shall provide the details as required by AO for verification. 18. That brings us to conclude that in the present case, the waiver of Rs. 13,51,39,000/- is taxable u/s 41(1), subject to the verification of the component of interest and legal charges as mentioned in preceding para. In the result, this appeal of revenue is allowed in terms indicated here. M/s Ashik Woolen Mills Limited, ITA No. 3021/Mum/2022 and CO No. 10/Mum/2023 Assessment year 2011-12 Page 19 of 20 Assessee’s C.O.: 19. At the time of hearing, Ld. AR representing the assessee made a clear submission that the assessee is not interested in pursuing the C.O. and the same may be dismissed. Ld. DR did not have any objection. Hence, we dismiss assessee’s C.O. 20. Resultantly, the Revenue’s Appeal is allowed in terms indicated above. Assesse’s C.O. is dismissed. Order pronounced in the open court on 10/05/2023. Sd/- Sd/- (VIKAS AWASTHY) (B.M. BIYANI) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai िदनांक /Dated : 10.05.2023 Patel/Sr. PS Copies to: (1) The appellant (2) The respondent (3) CIT (4) CIT(A) (5) Departmental Representative (6) Guard File By order UE COPY Assistant Registrar Income Tax Appellate Tribunal ITAT, Mumbai M/s Ashik Woolen Mills Limited, ITA No. 3021/Mum/2022 and CO No. 10/Mum/2023 Assessment year 2011-12 Page 20 of 20 1. Date of taking dictation 2. Date of typing & draft order placed before the Dictating Member 3. Date on which the approved draft comes to the Sr. P.S./P.S. 4. Date on which the approved draft is placed before other Member 5. Date on which the fair order is placed before the Dictating Member for pronouncement 6. Date on which the file goes to the Bench Clerk 7. Date on which the file goes to the Head Clerk 8. Date on which the file goes to the Assistant Registrar for signature on the order 9. Date of dispatch of the Order
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