Kothari Biotech Ltd., CHENNAI V. ACIT, CHENNAI

ITA 353/CHNY/2017

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 6254 (ITAT-CHENNAI)
• Duration Of Justice: 6 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-09-2017
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 31-07-2017
• Assessment Year: 2004-2005
• Appeal Filed On: 09-02-2017
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Assessee Lawyers: R VIJAYARAGHAVAN
• Keywords: Capital asset; Depreciation; Capital receipt; Revenue expenditure

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, CHENNAI . . . , . !' , $ % BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND SHRI A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER ./ ITA NO.352/MDS/2017 ' (' / ASSESSMENT YEAR : 2004-05 M/S KOTHARI INTERNATIONAL TRADING LTD., KOTHARI BUILDINGS, NO.115, M.G. ROAD, CHENNAI - 600 034. PAN : AABCK 3566 B V. THE ASSISTANT COMMISSIONER OF INCOME TAX, CORPORATE CIRCLE 4(2), CHENNAI - 600 034. (*+/ APPELLANT) (,-*+/ RESPONDENT) ./ ITA NO.353/MDS/2017 ' (' / ASSESSMENT YEAR : 2004-05 M/S KOTHARI BIOTECH LTD., KOTHARI BUILDINGS, NO.115, M.G. ROAD, CHENNAI - 600 034. PAN : AAACK 2329 K V. THE ASSISTANT COMMISSIONER OF INCOME TAX, CORPORATE CIRCLE 4(2), CHENNAI - 600 034. (*+/ APPELLANT) (,-*+/ RESPONDENT) *+ . / / APPELLANTS BY : SH. R. VIJAYARAGHAVAN, ADVOCATE ,-*+ . / / RESPONDENT BY : SHRI AR.V. SREENIVASAN, JCIT 0 . 1$ / DATE OF HEARING : 03.08.2017 2!( . 1$ / DATE OF PRONOUNCEMENT : 06.09.2017 2 I.T.A. NOS.352 & 353/MDS/17 / O R D E R PER N.R.S. GANESAN, JUDICIAL MEMBER: BOTH THE APPEALS OF THE TWO INDEPENDENT ASSESSEE S ARE DIRECTED AGAINST THE RESPECTIVE ORDERS OF THE COMMI SSIONER OF INCOME TAX (APPEALS)-8, CHENNAI, DATED 24.11.2016 A ND PERTAIN TO ASSESSMENT YEAR 2004-05. SINCE COMMON ISSUES ARISE FOR CONSIDERATION IN BOTH THE APPEALS, WE HEARD THE APP EALS TOGETHER AND DISPOSING OF THE SAME BY THIS COMMON ORDER. 2. THERE WAS A DELAY OF 2 DAYS IN FILING THESE APPE ALS BY THE ASSESSEES. THE ASSESSEES HAVE FILED PETITIONS FOR CONDONATION OF DELAY. WE HAVE HEARD THE LD.COUNSEL AND THE LD. D. R. WE FIND THAT THERE WAS SUFFICIENT CAUSE FOR NOT FILING THES E APPEALS BEFORE THE STIPULATED TIME. THEREFORE, WE CONDONE THE DELAY A ND ADMIT THE APPEALS. 3. THE FIRST ISSUE ARISES FOR CONSIDERATION IS ASSE SSMENT OF WAIVER OF PRINCIPLE AMOUNT OF LOANS. 4. SH. R. VIJAYARAGHAVAN, THE LD.COUNSEL FOR THE AS SESSEES, SUBMITTED THAT THE CIT(APPEALS) BY PLACING RELIANCE ON THE JUDGMENT OF MADRAS HIGH COURT IN CIT V. RAMANIYAM HOMES P. L TD. (2016) 3 I.T.A. NOS.352 & 353/MDS/17 384 V. 530, FOUND THAT THE WAIVER OF LOAN AMOUNT WO ULD CONSTITUTE INCOME UNDER SECTION 28(IV) OF THE INCOME-TAX ACT, 1961 (IN SHORT 'THE ACT') BEING THE BENEFIT ARISING IN THE COURSE OF BUSINESS. THE MADRAS HIGH COURT IN ANOTHER CASE IN ISKRAEMECO REG ENT LTD. V. CIT (2011) 331 ITR 317 FOUND THAT THE WAIVER OF LOA N CANNOT BE CONSIDERED TO BE INCOME EITHER UNDER SECTION 28(IV) OR UNDER SECTION 41(1) OF THE ACT. THEREFORE, ACCORDING TO THE LD. COUNSEL, THIS JUDGMENT OF MADRAS HIGH COURT WAS NOT PROPERLY APPRECIATED BY THE CIT(APPEALS). 5. REFERRING TO THE ASSESSMENT ORDERS, THE LD.COUNS EL FOR THE ASSESSEES SUBMITTED THAT THE ASSESSEES HAVE CREDITE D THE LOAN WRITTEN BACK IN THE PROFIT & LOSS ACCOUNT. SUBSEQU ENTLY, THE LOSS WAS ALSO ADDED TO THE BUSINESS. ACCORDING TO THE L D. COUNSEL, THE ASSESSEES CLAIMED BEFORE THE ASSESSING OFFICER THAT THE WAIVER OF LOAN BY THE BANK DOES NOT CONSTITUTE INCOME AND IT IS A CAPITAL RECEIPT, THEREFORE, IT IS NOT TAXABLE IN THE HANDS OF THE ASSESSEES. THE LD.COUNSEL FURTHER SUBMITTED THAT ALL THE RECEI PTS IN CONNECTION WITH BUSINESS ARE NOT TRADING RECEIPTS. THEREFORE, ACCORDING TO THE LD. COUNSEL, THE CIT(APPEALS) OUGHT TO HAVE FOLLOWE D THE JUDGMENT OF MADRAS HIGH COURT IN ISKRAEMECO REGENT LTD. (SUP RA). 4 I.T.A. NOS.352 & 353/MDS/17 6. ON THE CONTRARY, SHRI AR.V. SREENIVASAN, THE LD. DEPARTMENTAL REPRESENTATIVE, SUBMITTED THAT THE ASS ESSEES BORROWED LOAN AND THE LOAN WAS WAIVED BY THE LENDER . THE ASSESSEES CLAIMED THAT IT IS A CAPITAL RECEIPT IN T HE HANDS OF THE ASSESSEE. ACCORDING TO THE LD. D.R., IT WAS CLAIME D BEFORE THE ASSESSING OFFICER THAT IT IS NEITHER INCOME UNDER S ECTION 28(IV) OF THE ACT NOR CAN IT BE ASSESSED UNDER SECTION 41(1) OF THE ACT. THE ASSESSING OFFICER, HOWEVER, FOUND THAT THE WAIVER O F LOAN TAKEN BY THE ASSESSEES IS A BENEFIT ARISING OUT OF THE BUSIN ESS, HENCE, IT IS ASSESSABLE AS INCOME. PLACING RELIANCE ON THE JUDG MENT OF MADRAS HIGH COURT IN RAMANIYAM HOMES P. LTD. (SUPRA), THE LD. D.R. POINTED OUT THAT THE DIVISION BENCH OF THE MADRAS H IGH COURT, AFTER REFERRING TO ITS EARLIER JUDGMENT IN ISKRAEMECO REG ENT LTD. (SUPRA), FOUND THAT WHEN A PORTION OF THE LOAN IS WAIVED, TH E TOTAL AMOUNT OF LOAN SHOWN ON THE LIABILITIES SIDE OF THE BALANCE-S HEET IS REDUCED AND THE AMOUNT SHOWN AS CAPITAL RESERVES, IS INCREA SED TO THE EXTENT OF WAIVER. ACCORDINGLY, THE DIVISION BENCH FOUND THAT THE EARLIER DIVISION BENCH IN ISKRAEMECO REGENT LTD. (S UPRA) HAD NOT TAKEN NOTE OF THE FACTS. IN VIEW OF SUBSEQUENT JUD GMENT OF MADRAS 5 I.T.A. NOS.352 & 353/MDS/17 HIGH COURT, ACCORDING TO THE LD. D.R., THE CIT(APPE ALS) HAS RIGHTLY CONFIRMED THE ORDER OF THE ASSESSING OFFICER. 7. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS ON EITH ER SIDE AND PERUSED THE RELEVANT MATERIAL AVAILABLE ON RECORD. BOTH THE ASSESSEES BORROWED LOAN FROM ICICI BANK. THE ICICI BANK WAIVED THE LOAN. THE ASSESSEES CLAIM THAT THE WAIVER OF L OAN CANNOT BE CONSTRUED TO BE INCOME UNDER SECTION 28(IV) OF THE ACT AND IT IS ALSO NOT AN INCOME UNDER SECTION 41(1) OF THE ACT. THE CIT(APPEALS), HOWEVER, FOUND THAT THE WAIVER OF LOAN AMOUNT WOULD CONSTITUTE INCOME UNDER SECTION 28(IV) OF THE ACT. 8. WE HAVE ALSO CAREFULLY GONE THROUGH THE JUDGMENT OF MADRAS HIGH COURT IN ISKRAEMECO REGENT LTD. (SUPRA). THE MADRAS HIGH COURT FOUND THAT THE LOAN WAS BORROWED FOR PURCHASE OF A CAPITAL ASSET, HENCE, THE WAIVER OF LOAN IS NOT AN INCOME A SSESSABLE TO TAX. THE HIGH COURT FURTHER FOUND THAT IT CANNOT BE TREA TED AS INCOME EITHER UNDER SECTION 28(IV) OF THE ACT OR UNDER SEC TION 41(1) OF THE ACT. THE HIGH COURT FURTHER FOUND THAT SINCE THE L OAN BORROWED WAS USED FOR PURCHASE OF CAPITAL ASSET, IT IS A CAPITAL RECEIPT. 6 I.T.A. NOS.352 & 353/MDS/17 9. THE MADRAS HIGH COURT SUBSEQUENTLY HAD ANOTHER O CCASION TO CONSIDER AN IDENTICAL ISSUE IN RAMANIYAM HOMES P . LTD. (SUPRA). AFTER REFERRING TO ITS EARLIER JUDGMENT IN ISKRAEME CO REGENT LTD. (SUPRA), THE HIGH COURT HAS OBSERVED AS FOLLOWS AT PARAS 42 & 43 OF ITS ORDER:- 42. BUT, SECTION 36(1)(III) MAKES A DISTINCTION. THE AMO UNT OF INTEREST PAID IN RESPECT OF CAPITAL BORROWED FOR THE PURPOSE OF BUSINESS OR PROFESSION IS ALLOWED AS DED UCTION UNDER SECTION 36(1)(III), IN COMPUTING THE INCOME REF ERRED TO IN SECTION 28. BUT, THE PROVISO THEREUNDER STATES THAT ANY AMOUNT OF INTEREST PAID IN RESPECT OF CAPITAL BORRO WED FOR ACQUISITION OF AN ASSET FOR EXTENSION OF EXISTING BU SINESS OR PROFESSION, WHETHER CAPITALISED IN THE BOOKS OF ACC OUNT OR NOT FOR ANY PERIOD BEGINNING FROM THE DATE ON WHICH THE CAPITAL WAS BORROWED FOR THE ACQUISITION OF THE ASS ET, TILL THE DATE ON WHICH SUCH ASSET WAS PUT TO USE, SHALL NOT BE ALLOWED AS DEDUCTION. 43. THEREFORE, IT IS CLEAR THAT THE MOMENT THE ASSET IS PUT TO USE, THEN THE INTEREST PAID IN RESPECT OF THE CA PITAL BORROWED FOR ACQUIRING THE ASSET, COULD BE ALLOWED AS DEDUCTION. WHEN THE LOAN AMOUNT BORROWED FOR ACQUIR ING AN ASSET GETS WIPED OFF BY REPAYMENT, TWO ENTRIES ARE MADE IN THE BOOKS OF ACCOUNT, ONE IN THE PROFIT AND LOSS AC COUNT WHERE PAYMENTS ARE ENTERED AND ANOTHER IN THE BALAN CE- SHEET WHERE THE AMOUNT OF UNREPAID LOAN IS REFLECTE D ON THE SIDE OF THE LIABILITY. BUT, WHEN A PORTION OF THE LO AN IS REDUCED, NOT BY REPAYMENT, BUT BY THE LENDER WRITIN G IT OFF (EITHER UNDER A ONE TIME SETTLEMENT SCHEME OR OTHER WISE), ONLY ONE ENTRY GETS INTO THE BOOKS, AS A NATURAL EN TRY. A DOUBLE ENTRY SYSTEM OF ACCOUNTING WILL NOT PERMIT O F ONE ENTRY. THEREFORE, WHEN A PORTION OF THE LOAN IS WAI VED, THE TOTAL AMOUNT OF LOAN SHOWN ON THE LIABILITIES SIDE OF THE BALANCE-SHEET IS REDUCED AND THE AMOUNT SHOWN AS CA PITAL RESERVES, IS INCREASED TO THE EXTENT OF WAIVER. 7 I.T.A. NOS.352 & 353/MDS/17 ALTERNATIVELY, THE AMOUNT REPRESENTING THE WAIVED P ORTION OF THE LOAN IS SHOWN AS A CAPITAL RECEIPT IN THE PR OFIT AND LOSS ACCOUNT ITSELF. THESE ASPECTS HAVE NOT BEEN TA KEN NOTE OF IN ISKRAEMECO REGENT LTD. 10. IN VIEW OF THE ABOVE OBSERVATION MADE BY THE SU BSEQUENT DIVISION BENCH OF THE MADRAS HIGH COURT, THIS TRIBU NAL IS OF THE CONSIDERED OPINION THAT THE LOAN AMOUNT WAIVED BY I CICI BANK HAS TO BE NECESSARILY CONSIDERED AS REVENUE RECEIPT, HE NCE, IT IS TAXABLE. THEREFORE, THIS TRIBUNAL DO NOT FIND ANY REASON TO INTERFERE WITH THE ORDERS OF THE LOWER AUTHORITY AND ACCORDIN GLY THE SAME ARE CONFIRMED. 11. THE ASSESSEE IN I.T.A. NO.353/MDS/2017 HAS TAKE N ANOTHER GROUND WITH REGARD TO DISALLOWANCE OF PRE-OPERATIVE EXPENSES. 12. SH. R. VIJAYARAGHAVAN, THE LD.COUNSEL FOR THE A SSESSEE, SUBMITTED THAT THE ASSESSING OFFICER DISALLOWED ` 1,81,54,653/- TOWARDS PRE-OPERATIVE EXPENSES. ACCORDING TO THE L D. COUNSEL, THE ASSESSEE WAS HAVING TWO DIVISIONS ONE IS CULTURE CENTRE AND ANOTHER IS ESSENTIAL OIL DIVISION. THE ASSESSEE IN CURRED REVENUE EXPENDITURE LIKE INTEREST, LOSSES DUE TO EXCHANGE R ATE FLUCTUATION, WHICH WAS DEBITED TO PRE-OPERATIVE EXPENSES. SINCE THE UNIT BEGAN TO OPERATE DURING THE ASSESSMENT YEAR UNDER CONSIDE RATION, 8 I.T.A. NOS.352 & 353/MDS/17 ACCORDING TO THE LD. COUNSEL, THE ASSESSEE CHARGED THE PRE- OPERATIVE EXPENSES TO THE PROFIT & LOSS ACCOUNT AND CLAIMED THE SAME AS DEDUCTION. HOWEVER, THE ASSESSING OFFICER REJECTED THE CLAIM OF THE ASSESSEE ON THE GROUND THAT THE ASSESS EE HAS CLAIMED THE PRE-OPERATIVE EXPENSES ONLY TO REDUCE THE BOOK PROFIT WHICH WAS INCREASED ON ACCOUNT OF WRITTEN BACK OF INTEREST ON LOAN. ACCORDING TO THE LD. COUNSEL, SINCE THE ASSESSEE STARTED ITS OPERATION, THE EXPENSES CLAIMED BY THE ASSESSEE HAS TO BE ALLOWED. 13. ON THE CONTRARY, SHRI AR.V. SREENIVASAN, THE LD . DEPARTMENTAL REPRESENTATIVE, SUBMITTED THAT THE ASS ESSEE CLAIMS THE PRE-OPERATIVE EXPENSES ONLY TO REDUCE THE BOOK PROFIT DURING THE YEAR UNDER CONSIDERATION, THEREFORE, THE CIT(APPEAL S) HAS RIGHTLY CONFIRMED THE DISALLOWANCE. 14. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS ON EIT HER SIDE AND PERUSED THE RELEVANT MATERIAL AVAILABLE ON RECORD. THE CIT(APPEALS) FOUND THAT THE ASSESSEE SHOWED THE PRE -OPERATIVE EXPENSES TO THE EXTENT OF ` 2,36,27,733/- IN THE BALANCE SHEET AS ON 31.03.2003. HOWEVER, WHAT WAS WRITTEN OFF IS ONLY ` 1,81,54,653/- AS PER THE PROFIT & LOSS ACCOUNT FOR THE FINANCIAL YEAR 2003-04. THE CIT(APPEALS) FURTHER FOUND THAT THE COMMERCIAL BUSI NESS OPERATION 9 I.T.A. NOS.352 & 353/MDS/17 WAS NOT COMMENCED. THE CIT(APPEALS) HAS FOUND THAT THE BUSINESS OPERATION OF THE ASSESSEE WAS SUSPENDED SI NCE SEPTEMBER, 1999 AND NO ACTIVITY WAS UNDERTAKEN THER EAFTER. THERE IS NO MATERIAL AVAILABLE ON RECORD TO SUGGEST THAT THE ASSESSEE HAS COMMENCED THE BUSINESS OPERATION. HENCE, THE BUSIN ESS OPERATION WAS NOT COMMENCED AND HENCE, THE EXPENDITURE LIKE I NTEREST, LOSSES DUE TO EXCHANGE RATE FLUCTUATION CANNOT BE A LLOWED. THEREFORE, THIS TRIBUNAL IS OF THE CONSIDERED OPINI ON THAT THE CIT(APPEALS) HAS RIGHTLY CONFIRMED THE ORDER OF THE ASSESSING OFFICER. 15. THE ASSESSEE HAS ALSO TAKEN ONE MORE GROUND WIT H REGARD TO DISALLOWANCE OF DEPRECIATION TO THE EXTENT OF ` 20,89,639/-. 16. SH. R. VIJAYARAGHAVAN, THE LD.COUNSEL FOR THE A SSESSEE, VERY FAIRLY SUBMITTED THAT THE DISALLOWANCE OF ` 20,89,639/- TOWARDS DEPRECIATION WAS DELETED BY THE CIT(APPEALS) AND NO FURTHER APPEAL WAS FILED BY THE REVENUE, THEREFORE, THIS ISSUE DOE S NOT ARISE OUT OF THE ORDER OF THE CIT(APPEALS) IN THE ASSESSEES APP EAL. 17. IN THE RESULT, BOTH THE APPEALS OF THE ASSESSEE S ARE DISMISSED. 10 I.T.A. NOS.352 & 353/MDS/17 ORDER PRONOUNCED ON 6 TH SEPTEMBER, 2017 AT CHENNAI. SD/- SD/- (. !' ) ( . . . ) (A. MOHAN ALANKAMONY) (N.R.S. GANESAN) $ / ACCOUNTANT MEMBER /JUDICIAL MEMBER /CHENNAI, 4 /DATED, THE 6 TH SEPTEMBER, 2017. KRI. . ,156 76(1 /COPY TO: 1. *+ /APPELLANTS 2. ,-*+ /RESPONDENT 3. 0 81 () /CIT(A)-8, CHENNAI 4. PRINCIPAL CIT, CHENNAI- 4, CHENNAI 5. 69 ,1 /DR 6. :' ; /GF.