M/s. Shangrila Latex Industries Limited, Surat V. Assistant Commissioner of Income Tax - 4, Surat

ITA 38/SRT/2017

• Counselvise Citation: [2022] 104 COUNSELVISE.COM (IT) 1618 (ITAT-SURAT)
• Duration Of Justice: 5 year(s) 1 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-09-2022
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: DB
• Next Hearing Date: 30-06-2022
• Assessment Year: 2006-2007
• Appeal Filed On: 10-08-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: SANJAY S. KAPADIA; WAY OF DEDUCTION
• Keywords: Reopening of assessment; Capital asset; Depreciation; Capital receipt; Unabsorbed depreciation; Reassessment proceedings; Set aside
• Section: 32; 148; 56; 43B; 143(3); 234B; 72; 13; 22

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, SURAT BENCH, SURAT BEFORE SHRI PAWAN SINGH, JM & DR. A. L. SAINI, AM आयकर अपील सं./ITA No.38/SRT/2017 Assessment Year: (2006-07) (Physical Court Hearing) Shangrila Latex Industries Limited, C/o. B.M. Parekh & Co., 203, 2 nd Floor, Navjivan Society, Bldg. No. 03, Lamington Road, Mumbai-400008. Vs. The ACIT, Circle-4, Surat. èथायीलेखासं./जीआइआरसं./PAN/GIR No.: AAICS1479E (Appellant) (Respondent) Assessee by Shri Sanjay S. Kapadia, CA Respondent by Shri H. P. Meena, CIT(DR) Date of Hearing 01/07/2022 Date of Pronouncement 28/09/2022 आदेश / O R D E R PER DR. A. L. SAINI, AM: Captioned appeal filed by the assessee, pertaining to Assessment Year (AY) 2006-07, is directed against the order passed by the Learned Commissioner of Income Tax (Appeals)-II, Surat [in short “the ld. CIT(A)”] in Appeal No. CAS/II/106/2014-15, dated 15.02.2016, which in turn arises out of an assessment order passed by the Assessing Officer under section 143(3) r.w.s 147 of the Income Tax Act, 1961 (hereinafter referred to as “the Act”), dated 31.03.2014. 2. Grounds of appeal raised by the assessee are as follows: “1. On the facts and circumstances of the case and in law, the ld. CIT(A) has erred in confirming the addition of Rs.3,63,65,889/- on account of considering capital receipt as income of the assessee. The said addition may please be deleted. 2. On the facts and circumstances of the case and in law, the ld. CIT(A) has erred in confirming the disallowance of set off of carry forward of Business loss of Rs.2,08,89,887/-. The said set off of loss may please be allowed. 3. On the facts and circumstances of the case and in law, the ld. CIT(A) has erred in confirming the disallowance of set off of unabsorbed depreciation loss of Rs.1,20,55,688/-. The said set off of unabsorbed depreciation loss may please be allowed. Page | 2 ITA.38/SRT/2017/AY.2006-07 Shangrila Latex Industries Pvt. Ltd. 4. Without prejudice to the above, if such capital remission is treated as income, the Appellant may please be allowed set off of such income against carry forward business loss and unabsorbed depreciation. 5. The ld. AO has erred in calculation of interest u/s. 234B. The Appellant requests Your honor to direct the ld AO to calculate the interest as per the provisions of the Act. 6. The assessee craves leave to add, alter, amend, modify or drop the grounds of appeal at the time of hearing.” 3. Since all the grounds raised by the assessee are interconnected and mix, therefore, we shall take them together. 4. The relevant material facts, as culled out from the material on record, are as follows. The assessee before us is a Private Limited Company and filed its return of income for A.Y. 2006-07 on 28.12.2006, declaring total income of Rs. NIL. The assessment has been finalized u/s 143(3) of the Act on 14.11.2008 accepting the returned income. The assessing officer, on perusal of the Schedule 2 of ‘Capital and Reserve’, of the audited balance sheet of the company, noticed that an addition of Rs.3,63,65,889/- was made on account of "Remission" in Bank Term Liability under OTS Scheme". From the details furnished during the course of assessment proceedings, it was noticed that the said amount consists of capital remission by IFCI (Foreign Currency Loan) of Rs.3,31,80,729/- and capital remission by Canara Bank of Rs.31,85,160/-, totaling to Rs.3,63,65,889/- (Rs.3,31,80,729+ Rs.31,85,160) under one time settlement scheme (OTS). However, the benefit accruing on account of above capital remission has not been credited to the P & L account or offered for taxation. Further on verification of Schedule 9, to the P & L account, it was noticed that assessee- company credited Rs.1036.76 lacs under the head 'Misc. income'. The assessee is a sick unit and during the year it had not carried out any business activity. Therefore, the income was determined at NIL after set off of income of Rs.3,29,45,565/- against brought forward business loss of Rs.2,08,89,877/- and unabsorbed depreciation loss of Rs.1,20,55,688/-totaling to Rs.3,29,45,565/- (Rs.2,08,89,877 + Rs.1,20,55,688). Thus, after allowing inter head adjustments u/s 71 of the Act, the remaining income of Rs.329.46 lacs was not admissible to be set off against the business loss or unabsorbed depreciation. Accordingly, the case was reopened u/s147 of the I.T. Act and accordingly notice Page | 3 ITA.38/SRT/2017/AY.2006-07 Shangrila Latex Industries Pvt. Ltd. u/s148 of the I.T. Act was issued on 20.03.2013 and duly served upon the assessee on 21.03.2013. The assessee vide letter dated 03.04.2013, has requested to treat the original return filed on 28.12,2006 as the return of income filed in response to notice u/s 148 of the Act. 5. During the reassessment proceedings, the assessee company was provided copy of the reasons recorded for reopening of the case. The assessee vide letter dated 05.02.2014 filed objections for reopening of the case. The objections for reopening of assessment were duly disposed of, vide by AO by speaking order dated 19.02.2014. 6. Further, a show cause notice was issued on 19.03.2014 to the assessee, which is reproduced as under: "On verification of the Schedule - 2 of Capital Reserve of the audited balance sheet of your company, it was seen that an addition of Rs.3,63,65,889/- has been made on account of "Remission in Bank Term Liability under OTS Scheme". From the details furnished during the course of assessment proceedings, it has been noticed that the said amount consists of capital remission by IFCI (Foreign Current Loan) of Rs.3,31,80,729/- and capital remission by Canara Bank of Rs.31,85,160/-, totaling to Rs.3,63,65,889/- under one time settlement scheme. However, the benefit accruing on account of above capital remission has not been credited to the P & L account or offered for taxation. In light of the above facts, you are requested to show cause as to why the addition to the tune of Rs.3,63,65,889/- should not be made in total Income, Further, on verification of Schedule-9 to the P & L A/c, It Is noticed that your company credited Rs.1036.76 lacs under the head 'miscellaneous income', the details of which are as under: Unpaid bank interest no longer payable Rs.10,13,16,006 Interest received on F.D. Rs.23,59,760 Total Rs.10,36,75,766 As the company is a sick unit and during the year it is not engaged any business activities. Therefore, the income was determined at NIL after setting off of income of Rs.3,29,45,565/- against brought forward business loss of Rs,2,08,89,877/- and unabsorbed depreciation loss of Rs.1,20,55,688/- totaling to Rs.3,29,45,565/-. From the above table, it is found that the amounts including remission from Bank and the same are not covered under the head "profit and gains of business or profession". Since, no deduction in respect of the above unpaid bank interest had been allowed to your company in any of the earlier assessment years, the remission of bank interest is not covered by the provisions of section 41(1) of the Act. It is covered by the head "income from other sources". Thus, after allowing inter-head adjustments u/s. 71 of the Act, the remaining income of Rs.329,46 lacs Page | 4 ITA.38/SRT/2017/AY.2006-07 Shangrila Latex Industries Pvt. Ltd. is required to be added to the total income of your company and set off of brought forward business loss or unabsorbed depreciation allowed are inadmissible and therefore, the same is also required to be disallowed. In view of the same you are requested to show cause as to why addition of Rs.329.46 lacs should not be made in your total income. You are requested to furnish the above details on or before 25.03.2014". 7. In response to the show-cause notice, the assessee furnished his reply on 24.03.2014 before assessing officer which is reproduced as under: “(a) Remission of Bank Liability under the OTS Scheme: In our opinion, Bank interest remitted under the One Time Settlement would not have the character of income. Also we have submitted various details in the course of assessment proceedings. From the said details your good self shall appreciate that the said loans taken were utilized for the purpose of acquiring capital assets. Also in the said details you shall appreciate that the assessee has taken Foreign Currency loans. The said loans were taken for acquiring capital asset. We have submitted the One Time Settlement claims in respect of the said Banks vide letter dated 08.09.2008, 29.08.2008 end various other letters. The said claims and the supporting papers clearly indicate that the said loans have been taken for the purpose of capital asset. Also in the reasons recorded for the re-opening of the said assessment, there is no mention of the fact that the said loans are not taken for any capital asset. There is only a finding to the effect that the said remission is an income and should be taxed. Also you have stated in the order disposing of the objections filed that such remission is not to be treated as business income but as income from other sources. Hence, your good-self have accepted the above fact there is no cessation of trading liability but that of capital asset. The above action of the assessee is supported by the decision of the judiciary in the following cases wherein it was held as under: In the case of Mohsin Rehman Penkar Vs CIT(1948) 16 ITR 183 (Bom) endorsed by the Supreme Court in the case of C. Ag It Vs. Kerala Estate Mooriad Chalapuram (1986) 161 ITR 155 (SC) that the amount remitted under a settlement even including interest would not have the character of income being capital receipt. The copy of the said decision is enclosed herewith for your ready reference and records. Since the Supreme Court has endorsed the view, we request your good self to kindly consider the said decision before passing of the assessment order The Cochin Tribunal in the case of Accelerated Freez and Drying. Co. Ltd. Vs. Deputy CIT (2010) 1 ITR (Trib) 226 Cochin has held that the provisions of section 28(iv) are not applicable for such amount to be waived and any other view taken shall be contrary to the settled law. The copy of the decision is enclosed herewith for your ready reference and records, iii. We are also enclosing herewith copy of the order of the Mumbai Tribunal in the case of Rama Pulp and Paper Ltd. vs. Department of Income Tax dated 26.03.20.13. The said decision is also in our favour. Page | 5 ITA.38/SRT/2017/AY.2006-07 Shangrila Latex Industries Pvt. Ltd. iv. Also we are enclosing herewith the decision of the Gujarat High Court in the case of Logitronics Pvt. Ltd. Vs. CIT TTA no. 1623 of 2010 wherein the High Court held that waiver of loan would not amount to any Income eligible to tax. v. We request your good self to refer to the following decision in the case of 2010- TIOL - 406 - TTAT - Del and the decision in the case of 2011-TIOL -100-ITAT- Mum which also supports the contention of the assessee. vi. Also the following decisions are in support of the assessee: 1. Delhi High Court In the case of Tosha International Ltd. 2. Bombay High Court in the case of Mahindra and Mahindra ltd, 3. Madras High Court in the case of CJT Vs. P. Ganesa Chettlar vii. Also in our opinion that the said remission is covered by the provisions of section 41(1) and not covered by the provision of section 56 as this is a remission and not an income. viii. Irrespectively, it is a well-established point of law that remission of loan is not chargeable to tax as clearly stated in the above case laws. S.32(2) provides for the carry forward of unabsorbed depreciation. It reads as: "where in the assessment of the assessee, full effect cannot be given to any allowance under Ss.(l) in any previous year, owing to there being no profits or gains chargeable for that previous year or owing to the profits or gains chargeable being less than the allowance, then subject to the provisions of Ss. (2) of 72 and Ss. (3) of S.73, the allowance for the part of the allowance to which effect has not been given, as the case may be,, shall be added to the amount of the allowance for the depreciation for the following previous year and deemed to be part of that allowance or if there is no such allowance for that previous year, be deemed to be the allowance for the previous year and so on for the succeeding previous years". 3. The respected SC IN CASE OF VIRMANI INDUSTRIES LTD. Vs. CTT has set the following rules and steps for set off and carry forward of unabsorbed depreciation. Step 1: Where there is current year's depreciation relating to a business then it should be set off from the amount of profits the same business, Step 2: If full depreciation cannot be set off under step 1 then set off the unabsorbed depreciation against the profits of any business or from income or profession carried on by the assesses. Step 3: If still full depreciation cannot be set off under step 2 then it can be set off from the incomes of any other head of income, except from the income under the head salary and winning from lotteries etc., Step 4: If full depreciation cannot be set off under step 3 then it shall be carried forward to next previous year. Step 5: Add such unabsorbed depreciation to the amount of depreciation of such previous year in which it has been brought forward. Brought forward depreciation shall be treated as part of current year's depreciation. Now set off aggregated depreciation as per steps 1 to 3. Page | 6 ITA.38/SRT/2017/AY.2006-07 Shangrila Latex Industries Pvt. Ltd. However, step 5 and 6 are subject to the conditions of section 72(1). This means that if there is any brought forward loss of the business then it shall be set off in priority to such unabsorbed depreciation. As such unabsorbed depreciation can be set off against such income from other sources". 8. Thus, on verification of the Schedule - 2 of ‘Capital & Reserve’ of the audited balance sheet of the company, it was noticed by the assessing officer that an addition of Rs.3,63,65,889/- has been made on account of "Remission in Bank Term Liability under OTS Scheme". On perusal of the details submitted by the assessee, it was noticed by the assessing officer that said amount consists or capital remission by IFCI (Foreign Current Loan) of Rs.3,31,80,729/- and capital remission by Canara Bank of Rs.31,85,160/-, totaling to Rs.3,63,65,889/- under one time settlement scheme. However, the same was not credited in the P & L account or offered for taxation. In view of the above facts, the addition to the tune of Rs.3,63,65,889/- was made by assessing officer to the total income of the assessee- company on account of the capital remittance. 9. Further, on verification of Schedule-9 to the P & L A/c, it was noticed by AO that the company credited Rs.1036.76 lacs under the head ‘miscellaneous income’, the details of which are as under: Unpaid bank interest no longer payable Rs.10,13,16,006 Interest received on F.D. Rs.23,59,760 Total Rs.10,36,75,766 The assessing officer noted that the assessee- company was a sick unit and during the year under consideration, it had not carried any business activity. Therefore, the income was determined at NIL after setting off of income of Rs.3,29,45,565/- against brought forward business loss of Rs.2,08,89,877/- and unabsorbed depreciation loss of Rs. l,20,55,688/-, totaling to Rs.3,29,45,565/-. Thus, the assessee- company was not eligible for set off of the brought forward business loss or unabsorbed depreciation. In view of the same, unabsorbed business loss of Rs.2,08,89,877/- and unabsorbed depreciation loss of Rs.1,20,55,688/- claimed by the assessee-company were also disallowed by assessing officer. Page | 7 ITA.38/SRT/2017/AY.2006-07 Shangrila Latex Industries Pvt. Ltd. 10. Aggrieved by the order of the Assessing Officer, the assessee carried the matter in appeal before the ld. CIT(A), who has confirmed the action of the Assessing Officer observing as follows: “DECISION 6.1.1 I have considered the assessment order as well as the submissions of the appellant. The Grounds of appeal-Ground No.1 pertains to assessing the total income of the appellant at Rs.6,93,11,450/- instead of returned income of Rs. Nil. The returned income of the appellant may please be accepted, It is a general ground and the additions made by the AO have been agitated m the subsequent grounds of appeal, therefore this ground needs no separate adjudication. 6.2.1 The Grounds of appeal- Ground No. 2 pertains to treating remission of principal amount (Capital) amounting to Rs.3,63,65,889/- by banks as income During the course of the assessment proceedings, the AO noticed on the verification of the Schedule 2 of the Capital Reserve of the audited balance sheet, that an addition of Rs. 3,63,65,889/- was made on account of 'Remission in Bank Term Liability under OTS Scheme', The AO noticed that the said amount consists of capital remission by IFCI (Foreign Currency Loan) of Rs.3,31,80,729/- and capital Remission by Canara Bank of Rs.31,85,160/- totaling to Rs.3,63,65,889/- under 'One Time Settlement Scheme’ but the benefit accruing on account of the capital remission has not been credited to the P & L account offered for taxation. The AO added this amount of Rs.3,63.65,889/- to the total income of the appellant on account of capital remittance. The appellant submitted that the remission of interest amounting to Rs.3,63,85,889/- was under One Time Settlement Scheme, The loans taken were utilized for the purpose of acquiring capital assets which included Foreign Currency Loan also was contended that the remission of this amount under the OTS was a capital receipts as done by the banks under the OTS Schemes and cannot form part of the total income. The appellant relied on several case laws including Chetan Chemicals Pvt. Ltd, 267 ITR 770 (Guj.). 6.2.2. On the perusal of the details, it is observed that the company had taken loans from the banks in the earlier years and was unable to repay these outstanding loans to the bank. The appellant approached the banks for One Time Settlement. The appellant credited in his capital reserve account Rs.3,31,80,729/- which represented 'Remission in Bank Term Liability under OTS Scheme' which included capital remission by IFCI (Foreign Currency Loan) of Rs.3,31,80,729/- and capital Remission by Canara Bank of Rs.31,85,160/- totaling b Rs.3,63,65,889/- under 'One Time Settlement Scheme', In order to understand and clarify, the terms and conditions of the OTS Scheme were required and therefore the appellant was issued a query letter dated 21.1,2016 asking the appellant to submit the following details: In your submissions it has been contended that the company on account of one time settlement with the banks received capital remission of Rs.3,63,65,889/- as the company had failed to repay the outstanding loans to the banks in earlier years. You are required to furnish the copy of the contract entered with the banks alongwith the terms and conditions for the OTS scheme regarding the remission of the principle amount. The complete details of the loans raised by the company alongwith the interest payment in the following format are to be provided," Page | 8 ITA.38/SRT/2017/AY.2006-07 Shangrila Latex Industries Pvt. Ltd. 6.2.3. The appellant submitted a reply dated 6.2.2016 wherein it was claimed that the ‘NIL’ amount of interest has been debited in the P&L account. The details were furnished as per the proforma provided in the query letter. The appellant submitted the details as following: Page | 9 ITA.38/SRT/2017/AY.2006-07 Shangrila Latex Industries Pvt. Ltd. 6.2.4. The claim of the appellant that NIL interests had been debited in the P & L account was a very unusual claim and against the basic principles of accountancy. Therefore, the case records were examined and the returns of income filed by the appellant were verified to check the claim of the appellant regarding nil interest being claimed in the P&L account. The appellant vide his letter dated 28.01.2014 submitted before the AO had provided the complete details of the return of income for the various years start from AY 1993-94 to 2005-06 alongwith the computation of income etc. The appellant himself had filed the details of the interest debited to profit and loss account, interest disallowed u/s 43B and interest allowed the deduction. The details are as following:- Page | 10 ITA.38/SRT/2017/AY.2006-07 Shangrila Latex Industries Pvt. Ltd. 6.2.5. The above facts show that the appellant had debited interest on the secured loans m the P & L accounts as per the chart above and interest has been allowed of Rs.5,06,62,939/- in various assessment years. The appellant's claim of interest of Rs.19,55,21,348/- had been disallowed. The appellant himself has submitted a false and incorrect reply during the appellate proceedings pertaining to nil Interest being debited in the P&L account Section 41(1) was applicable for the assessment year under consideration reads as under: "(1) Whether an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assesses, and subsequently during any previous year the assessee has obtained, whether in cash or in any other manner whatsoever, any amount respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtained by him or the value or 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 of profession in respect of which (he allowance or reduction has been made is in existence in that year or not". 6.2.6. On a reading of the provisions, it is apparent that before the section can be invoked necessary that an allowance or a deduction has been granted during the course of assessment for any year in respect of loss, expenditure or trading liability which Is incurred by the assesses, and subsequently during any previous year the assessee obtains, whether in cash or in any other manner, any amount in respect of such trading liability by way of remission or cessation of such liability, in that case, either the amount obtained by the assessee or the value of the benefit accruing to the assessee can be deemed to be the profits and gains of a business or profession and can be brought to tax as income of the previous year in which such amount or benefit is obtained. In the facts of the case it is an admitted position that there had been deduction of interest in any of the preceding years. This view has been held in the case relied upon by the appellant in Chetan Chemicals Pvt. Ltd. 267 ITR 770 (Guj.). 6.2.7. In view of the above facts, it is evident that the appellant has already been allowed the claim of interest of Rs.5,06,62,939/- in different assessment years The contention of the appellant regarding nil amount of interest debited/claimed in the P&L account in each year was found to be incorrect and false. Hence, the contention of the appellant is rejected and the addition made by the AO of Rs.3,63,65,889/- is upheld and the ground of appeal is dismissed. 6.3.1. The Grounds of appeal- Ground No. 3 to 5 pertains to not allowing set off of carry forward business loss. The said set off of carry forward business loss may please be allowed and no allowing set off of carry forward depreciation loss. The said set off of carry forward depreciation loss may please be allowed. The AO on the verification of Schedule 9 to the P&L account noticed that the appellant has credited Rs.10,36,75,766/- under the head ‘miscellaneous income’ which included unpaid bank interest no longer payable of Rs.10,13,16,006/- and ‘interest received on FD’ of Rs.23,59,760/-. The AO found that the company is a sick unit and is not engaged -n -any business activity and therefore the income was determined at nil after setting of income of Rs.3,29,45,565/- against the brought forward business loss of Rs.2,08.89,877/- and unabsorbed depreciation loss of Rs.1,20,55,688/- totaling to Rs.3,29,45,565/-. The AO noticed that the amounts including remission Page | 11 ITA.38/SRT/2017/AY.2006-07 Shangrila Latex Industries Pvt. Ltd. from bank and the same are not covered under the head profit and gains of business or profession. The AO disallowed the set off of the brought forward business; loss/unabsorbed depreciation of Rs.3,29,45,565/-. 6.3.2. The appellant submitted that the AO's decision that the income from other sources cannot be set off against the brought forward business loss or unabsorbed depreciation is erroneous as the unabsorbed depreciation can be set off against any head of income in view of the provisions of section 32(2) w.e.f. AY 2002-03. The amended section has held that where the full effect cannot be given to the depreciation allowance because the either there being no profits or gains chargeable being less than the allowance, then the unabsorbed amount shall be added to the depreciation allowance for the following previous year and deemed to be part of that allowance of if there is not such allowance for that previous year, that unabsorbed amount itself shall be deemed to be the allowance for that previous year and so on for the succeeding years. The setting off of the unabsorbed depreciation is made subject to section 72 and 73, The manner of carry forward depreciation and business losses is different. 6.3.3. On the perusal of the details, it is observed that the appellant had credited Rs.10,36,75,766/- under the head 'miscellaneous income which included unpaid bank interest no longer payable' of Rs.10,13,16,006/- and 'interest received on FD' of Rs.23,59,760/- . The AO found that the company is a sick unit and is not engaged in any business activity and therefore the income was determined at nil after setting of income of Rs.3,29,45,565/- against the brought forward business loss of Rs.2,08,89,877/- and unabsorbed depreciation loss of Rs.1,20,56,668/- totaling to Rs.3,29,45,565/-. The appellant submitted that the remission of the interest amounting to Rs.10,13,16,006/- is covered by the provisions of sec. 41(1) as the said interest is debited to the P&L account while the AO has held that the total amount of remission is taxable as income from other sources, The AO has failed to appreciate that the provisions of section 32(2) lays down that the unabsorbed depreciation can be adjusted against any head of Income. The appellant was issued a query letter dated 21.01.2016 during the appellate proceedings asking the appellant to submit the following details: '"You have claimed brought forward business loss of Rs.2,08,89,877/- and unabsorbed depreciation loss of Rs.1,20,55,688/- totaling to Rs.3,29,45,565/-. You are required to file the brought forward business loss and unabsorbed depreciation in the given format from the first assessment year in which the claim has been made till the relevant assessment year along with the claim made in the return of income in the relevant schedules Assessment Year Depreciation of the Year Loss for the Year Profit for the Year Unabsorbed Depreciation Accumulated Loss 6.3.4. It is found on the perusal of the details that the appellant company was a sick unit for the last many years and during the year it has not carried out any business activity in the previous year. In fact during the A.Y, 2003-04, the AO had disallowed the claim of the depreciation on the ground that the appellant had not carried out any business activities. Hence, the addition made by the AO of Rs.3,63,65,889/- is upheld and the ground of appeal is dismissed.” Page | 12 ITA.38/SRT/2017/AY.2006-07 Shangrila Latex Industries Pvt. Ltd. 11. Aggrieved by the order of ld. CIT(A), the assessee is in further appeal before us. 12. Learned Counsel for the assessee, pleads that on account of one time settlement the interest accrued to the tune of Rs.10,36,75,766/- has been shown as part of income and assessee has claimed the deprecation of income in accordance with law. However, the Assessing Officer added the principle waived by banks, treating as the assessee’s income which is absolutely wrong. The Ld. Counsel contended that since the accrued interest has been debited in profit and loss account and the remission of such liability would constituted as income. However, so far as the waiver of principle amount is concerned, the principal amount of Rs.3,63,65,889/- has not been shown as an expense in the profit and loss account, therefore it cannot be treated as income of the assessee at the time of remission. It is on account of capital receipt which is not taxable in the eye of law. 13. In respect of ground No. 2 and 3, the ld. Counsel then argued that Assessing Officer also erred in not allowing the set off, of carry forward of depreciation to the tune of Rs.1,20,54,688/-. Apart from this, Assessing Officer also denied the set off of, carry forward of business loss to the tune of Rs.2,08,89,887/-, which is wrong. The ld. Counsel submits that since the plant of the company is in working condition and not shut down. However, the assessee- company`s business is discontinued, for the time being only, and there are chances to revive the company`s business very soon, therefore claim of deprecation should be allowed. Therefore, ld Counsel contended that set off of business loss and depreciation, both should be allowed. 14. Therefore, in a nut shell, the Ld. Counsel contended that addition on account of waiver/remission of principle amount of Rs.3,63,65,889/- by the banks and financial institutions, should not be treated as an income. Since the assessee has shown income in respect of interest waived by the banks to the tune of Rs.10,36,75,766 /-, therefore out of such interest income, the unabsorbed deprecation loss of Rs.1,20,55,688/- should be allowed and set off of, carry forward business loss to the tune of Rs.2,08,89,887/- should also be allowed. Page | 13 ITA.38/SRT/2017/AY.2006-07 Shangrila Latex Industries Pvt. Ltd. 15. On the other hand, the Ld. DR for the Revenue has primarily reiterated the stand taken by the Assessing Officer, which we have already noted in our earlier para and is not being repeated for the sake of brevity. 16. We have heard both the parties and carefully gone through the submissions put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the facts of the case including the findings of the ld. CIT(A) and other material brought on record. We note that assessee submitted the letter of IFC Ltd, about one time settlement of dues (OTS) dated 08.11.2005. The Ld. Counsel also submitted a statement showing remission of principle amount and interest amount at Canara Bank and statement of remission of principle amount and interest component of IFCI Bank which is reproduced below: From the above statement, it is evidently clear that the principal amount waived is to the tune of Rs.3,63,65,889/- and the interest waived by these two banks are to the tune of Rs.10,36,75,766/-. Page | 14 ITA.38/SRT/2017/AY.2006-07 Shangrila Latex Industries Pvt. Ltd. 17. We note that waiver/remission of principal amount by banks and financial institution cannot be treated as income of the assessee for that reliance can also be placed on the judgment of the Co-ordinate Bench of ITAT Ahmedabad, in the case of Aadinath Ornaments Pvt. Ltd, in ITA No. 180/Ahd/2018, dated11.05.2018, wherein it was held as follows: “7. We have heard the rival contentions made by the parties, perused the relevant materials on record. The provision of section 41(1) of the Act is reproduced herein below for ready reference: “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 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) the successor in business has obtained, whether in cash or in any other manner whatsoever, any amount in respect of which loss or expenditure was incurred by the first-mentioned person or some benefit in respect of the trading liability referred to in clause (a) by way of remission or cessation thereof, the amount obtained by the successor in business or the value of benefit accruing to the successor in business shall be deemed to be profits and gains of the business or profession, and accordingly chargeable to income-tax as the income of that previous year. [Explanation 1.—For the purposes of this sub-section, the expression "loss or expenditure or some benefit in respect of any such trading liability by way of remission or cessation thereof" shall include the remission or cessation of any liability by a unilateral act by the first mentioned person under clause (a) or the successor in 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-section, "successor in business" means,— (i) where there has been an amalgamation of a company with another company, the amalgamated company; (ii) where the first-mentioned person is succeeded by any other person in that business or profession, the other person; (iii) where a firm carrying on a business or profession is succeeded by another firm, the other firm;] Page | 15 ITA.38/SRT/2017/AY.2006-07 Shangrila Latex Industries Pvt. Ltd. [(iv) where there has been a demerger, the resulting company.]” The following conditions need to be satisfied in order to make an addition under section 41(1) of the Act: (i) The assessee should have claimed any allowance or deduction in the earlier year. (ii) Such deduction should be in respect of the loss, expenditure or trading liability incurred by the assessee. (ii) In the relevant previous year the assessee should have obtained either in cash or otherwise any benefit of any amount in respect to such loss or expenditure or such trading liability which would constitute remission or cessation of the said amount. The benefit so accrued by the assessee would be deemed to be the profit of the previous year. Therefore, it has become clear that the for the purpose of taxing any income the assessee should have claimed the expenditure which would be in the nature of reduction or allowance. Obtaining loan does not amount to any claim of reduction or expenditure on the part of the assessee. The interest accruing on such loan would constitute expenditure as claimed by the assessee by way of deduction and offered to tax. The assessee in this particular case has been given a concession amount of Rs.3,19,86,740/- comprises of interest of Rs.1,07,72,299/- and principal amount of Rs.2,12,14,441/-. The interest amount of Rs.1,07,72,299/- was debited to Profit & Loss account and the principal amount of Rs.2,12,14,441/- was shown as outstanding liabilities and therefore not debited to the Profit & Loss account which is now being written back and for which no benefit had been taken and has shown as revenue and surplus and therefore not liable to tax. 8. The learned advocate appearing for the assessee relied upon the judgment of Hon’ble Gujarat High Court in the case of Gujarat State Fertilizers & Chemicals Ltd. (2013) 217 Taxman 343 (Guj.) where it is held the principal amount of loan waived could not be taxed u/s.41(1) of the Act if there had been no allowance or deduction in any preceding year. The Ld.AR also relied upon the judgement of Hon’ble Delhi High Court in the case of CIT vs. Tosha International Ltd. 331 ITR (2011)440 (Delhi). In the said case, the assessee offered the interest amount of Rs. 1,07,72,299/- to tax and the principal amount shown as outstanding liabilities and written back and no benefit as allowance or deduction was claimed by the assessee in any preceding year in respect of that principal amount which is identical to the judgement cited above which is applicable to the instant case. Furthermore, in the case of Jt.CIT vs. Bisani Zinc Ltd. (2004) 88 TTJ (Cal.) 346 following observations were made:- “10. The above legal provision makes it clear that where a person has obtained, in any manner whatsoever, any amount, in respect of inter alia an expenditure, 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 the business, provided such an expenditure has been allowed as a deduction in any year. It is a sine qua non, for bringing a remission or cessation of liability to tax Page | 16 ITA.38/SRT/2017/AY.2006-07 Shangrila Latex Industries Pvt. Ltd. under section 41(1), that "an allowance or deduction has been made in the assessment for any year" for loss, expenditure or trading liability in respect of which such remission or cessation has been made. A fortiorari, if an expenditure, for whatever reasons, has not been allowed as a deduction in any previous year and the liability in respect of such expenditure ceases in the current previous year, such a cessation of liability, in our considered view, cannot be brought to tax in the current previous year. We are further of the considered view that the reason of such an expenditure not being allowed as a deduction is not material. Clearly, section 41(1) seeks to reverse the undue benefit of deduction given to the assessee in respect of a liability which eventually turns out to be non-existent but when no such benefit of deduction is anyway made available to the assessee, there cannot be any question of reversal of such a non-existent or undue benefit of deduction. We are, therefore, of the considered view that deduction in respect of disputed amount of Rs.58,80,502 never having been allowed by the Assessing Officer, cessation of liability of this amount cannot result in any tax liability in the hands of the assessee.” The ratio laid down in the said judgement is squarely applicable to the instant case. Taking into consideration the entire aspect of the matter and the ratio of the judgement discussed hereinabove, we hold that the order passed by the CIT(A) cannot sustain and we therefore set aside the same and allow the appeal preferred by the assessee. 9. In the result, appeal of the assessee is allowed.” 18. Therefore, from the above judgment of the Coordinate Bench in the case of Aadinath Ornaments Pvt. Ltd. (supra) it is abundantly clear that remission of principal amount (principal amount waived) by these two banks to the tune of Rs.3,63,57,984/-, has never been claimed by the assessee in its the profit and loss account and hence remission of such amount of Rs.3,63,57,984/- cannot be treated as taxable income of the assessee. Hence, respectfully following the binding precedent, as narrated above, ground no.1 raised by the assessee is allowed. 19. Now, coming to ground nos. 2 and 3 raised by assessee. We have already narrated the facts of the assessee in above para of this order, therefore we do not reiterate them. These grounds relate to the issue whether assessee is entitled to claim the set -off of an unabsorbed depreciation loss to the tune of Rs.1,20,55,688/- and set- off, of carry forward of business loss to the tune of Rs.2,08,89,887/-. Learned DR for the Revenue relied on the stand taken by the assessing officer. However, ld Counsel for the assessee, pleaded that the issue under consideration is squarely covered in favour of assessee by the Judgment of the Jurisdictional High Page | 17 ITA.38/SRT/2017/AY.2006-07 Shangrila Latex Industries Pvt. Ltd. Court of Gujarat in the case of Gujarat Themis Biosyn Ltd. (in Tax Appeal No. 3 of 2014), dated 24.02.2014. 20. After giving our thoughtful consideration to the submission of the parties and perusing the judicial decisions relied upon by the Ld. AR, we find that the issue involved in the grounds of assessee is no longer res integra. The question as to whether assessee is entitled to claim the set off of an unabsorbed depreciation loss to the tune of Rs.1,20,55,688/- and set off, of carry forward of business loss to the tune of Rs.2,08,89,887/-, has been decided in favour of assessee by the Jurisdictional Hon'ble High Court of Gujarat in the case of Gujarat Themis Biosyn Ltd. (in Tax Appeal No. 3 of 2014), dated 24.02.2014 wherein it was held as follows: “Challenging the order of the Income Tax Appellate Tribunal dated 10th May 2013, the present Tax Appeal has been preferred. On 8th January 2014, while issuing notice to the other side, we had decided to hear only question B which reads as under: "B. Whether in law and on the facts and circumstances of the case, the ITAT was right in allowing the claim of the assessee for carry forward of unabsorbed depreciation of Rs.58,48,076/- for the period A.Y. 1997-98 to 2000-01 i.e. more than eight years in contravention to the provisions of the unamended provisions of section 32(2)(iii)(b) as stood in the assessment years 1997-98 to 2000-2001 ?" While issuing the notice, we observed thus: "With respect to question B, counsel for the Revenue drew our attention to a decision of this Court in the case of General Motors India (P.) Ltd. v. Dy. CIT [2013] 354 ITR 244 in which while examining the validity of the notice for reopening of the assessment, the Court also examined in detail the question of carry forward of unabsorbed depreciation. The Tribunal has relied on this decision to accept the claim of the assessee. The counsel for the Revenue wanted to draw some factual distinction in the present case as compared to the case of General Motors. We would like to hear the other side as well. Issue notice returnable on 5th February 2014 to consider only question 'B'." 2. We have heard learned counsel Mr. Sudhir Mehta for the Revenue and learned counsel Mr. Bhargav Karia for the assessee-respondent. 3. This very issue has been decided by this Court in the case of General Motors India P. Ltd. v. Dy. CIT [2013] 354 ITR 244/[2012] 25 taxmann.com 364/210 Taxman 20 (Guj.)(Mag.). While deciding the question of reopening of the notice, this Court chose to consider whether unabsorbed depreciation could be carried forward and set off after a period of eight years and would that be governed by section 32 as amended by the Finance Act 2 of 1996. This Court has chosen to answer the same in the following manner: Page | 18 ITA.38/SRT/2017/AY.2006-07 Shangrila Latex Industries Pvt. Ltd. 'The last question which arises for consideration is that whether the unabsorbed depreciation pertaining to A.Y. 1997-98 could be allowed to be carried forward and set off after a period of eight years or it would be governed by Section 32 as amended by Finance Act 2001? The reason given by the Assessing Officer under section 147 is that Section 32(2) of the Act was amended by Finance Act No.2 of 1996 w.e.f. A.Y. 1997-98 and the unabsorbed depreciation for the A.Y. 1997-98 could be carried forward up to the maximum period of 8 years from the year in which it was first computed. According to the Assessing Officer, 8 years expired in the A.Y. 2005-06 and only till then, the assessee was eligible to claim unabsorbed depreciation of A.Y. 1997-98 for being carried forward and set off against the income for the A.Y. 2005-06. But the assessee was not entitled for unabsorbed depreciation of Rs.43,60,22,158/- for A.Y. 1997-98, which was not eligible for being carried forward and set off against the income for the A.Y. 2006-07. Prior to the Finance Act No.2 of 1996 the unabsorbed depreciation for any year was allowed to be carry forward indefinitely and by a deeming fiction became allowance of the immediately succeeding year. The Finance Act No.2 of 1996 restricted the carry forward of unabsorbed depreciation and set-off to a limit of 8 years, from the A.Y.1997-98. Circular No.762 dated 18.2.1998 issued by the Central Board of Direct Taxes (CBDT) in the form of Explanatory Notes categorically provided, that the unabsorbed depreciation allowance for any previous year to which full effect cannot be given in that previous year shall be carried forward and added to the depreciation allowance of the next year and be deemed to be part thereof. So, the unabsorbed depreciation allowance of A.Y. 1996-97 would be added to the allowance of A.Y. 1997-98 and the limitation of 8 years for the carry-forward and set-off of such unabsorbed depreciation would start from A.Y. 1997-98. We may now examine the provisions of section 32(2) of the Act before its amendment by Finance Act 2001. The section prior to its amendment by Finance Act, 2001, read as under:— "Where in the assessment of the assessee full effect cannot be given to any allowance under clause (ii) of sub-section (1) in any previous year owning to there being no profits or gains chargeable for that previous year or owing to the profits or gains being less than the allowance, then, the allowance or the part of allowance to which effect has not been given (hereinafter referred to as unabsorbed depreciation allowance), as the case may be, (i) shall be set off against the profits and gains, if any, of any business or profession carried on by him and assessable for that assessment year; (ii) if the unabsorbed depreciation allowance cannot be wholly set off under clause (i), the amount not so set off shall be set off from the income under any other head, if any, assessable for that assessment year; (iii) if the unabsorbed depreciation allowance cannot be wholly set off under clause (i) and Clause (ii), the amount of allowance not so set off shall be carried forward to the following assessment year and — Page | 19 ITA.38/SRT/2017/AY.2006-07 Shangrila Latex Industries Pvt. Ltd. (a) it shall be set off against the profits and gains, if any, of any business or profession carried on by him and assessable for that assessment year; (b) if the unabsorbed depreciation allowance cannot be wholly so set off, the amount of unabsorbed depreciation allowance not so set off shall be carried forward to the following assessment year not being more than eight assessment years immediately succeeding the assessment year for which the aforesaid allowance was first computed: Provided that the time limit of eight assessment years specified in sub-clause (b) shall not apply in case of a company for the assessment year beginning with the assessment year relevant to the previous year in which the said company has become a sick industrial company under sub-section (1) of section 17 of the Sick Industrial Company (Special Provisions) Act, 1985 (1 of 1986) and ending with the assessment year relevant to the previous year in which the entire net worth of such company becomes equal to or exceeds the accumulated losses. Explanation.— For the purposes of this clause, "net worth" shall have the meaning assigned to it in clause (ga) of sub-section (1) of section 3 of the Sick Industrial Companies (Special Provisions) Act, 1985." The aforesaid provision was introduced by Finance (No.2) Act, 1996 and further amended by the Finance Act, 2000. The provision introduced by Finance (No.2) Act was clarified by the Finance Minister to be applicable with prospective effect. Section 32 (2) of the Act was amended by Finance Act, 2001 and the provision so amended reads as under :— "Where, in the assessment of the assessee, full effect cannot be given to any allowance under sub-section (1) in any previous year, owing to there being no profits or gains chargeable for that previous year or owing to the profits or gains chargeable for that previous year, owing to the profits or gains chargeable being less than the allowance, then, subject to the provisions of sub-section (2) of section 72 and sub-section (3) of section 73, the allowance or the part of the allowance to which effect has not been given, as the case may be, shall be added to the amount of the allowance for depreciation for the following previous year and deemed to be part of that allowance, or if there is no such allowance for that previous year, be deemed to be allowance of that previous year, and so on for the succeeding previous years." The purpose of this amendment has been clarified by Central Board of Direct Taxes in the Circular No.14 of 2001. The relevant portion of the said Circular reads as under :- "Modification of provisions relating to depreciation 30.1 Under the existing provisions of section 32 of the Income-tax Act, carry forward and set off of unabsorbed depreciation is allowed for 8 assessment years. 30.2 With a view to enable the industry to conserve sufficient funds to replace plant and machinery, specially in an era where obsolescence takes place so often, the Act has dispensed with the restriction of 8 years for carry forward and Page | 20 ITA.38/SRT/2017/AY.2006-07 Shangrila Latex Industries Pvt. Ltd. set off of unabsorbed depreciation. The Act has also clarified that in computing the profits and gains of business or profession for any previous year, deduction of depreciation under section 32 shall be mandatory. 30.3 Under the existing provisions, no deduction for depreciation is allowed on any motor car manufactured outside India unless it is used (i) in the business of running it on hire for tourists, or (ii) outside in the assessee's business or profession in another country. 30.4 The Act has allowed depreciation allowance on all imported motor cars acquired on or after 1st April, 2001. 30.5 These amendments will take effect from the 1st April, 2002, and will, accordingly, apply in relation to the assessment year 2002-03 and subsequent years" The CBDT Circular clarifies the intent of the amendment that it is for enabling the industry to conserve sufficient funds to replace plant and machinery and accordingly the amendment dispenses with the restriction of 8 years for carry forward and set off of unabsorbed depreciation. The amendment is applicable from assessment year 2002-03 and subsequent years. This means that any unabsorbed depreciation available to an assessee on 1st day of April, 2002 (A.Y. 2002-03) will be dealt with in accordance with the provisions of section 32(2) as amended by Finance Act, 2001 and not by the provisions of section 32(2) as it stood before the said amendment. Had the intention of the Legislature been to allow the unabsorbed depreciation allowance worked out in A.Y. 1997-98 only for eight subsequent assessment years even after the amendment of section 32(2) by Finance Act, 2001 it would have incorporated a provision to that effect. However, it does not contain any such provision. Hence keeping in view the purpose of amendment of section 32(2) of the Act, a purposive and harmonious interpretation has to be taken. While construing taxing statutes, rule of strict interpretation has to be applied, giving fair and reasonable construction to the language of the section without leaning to the side of assessee or the revenue. But if the legislature fails to express clearly and the assessee becomes entitled for a benefit within the ambit of the section by the clear words used in the section, the benefit accruing to the assessee cannot be denied. However, Circular No.14 of 2001 had clarified that under Section 32(2), in computing the profits and gains of business or profession for any previous year, deduction of depreciation under Section 32 shall be mandatory. Therefore, the provisions of section 32(2) as amended by Finance Act, 2001 would allow the unabsorbed depreciation allowance available in the A.Y. 1997-98, 1999-2000, 2000-01 and 2001-02 to be carried forward to the succeeding years, and if any unabsorbed depreciation or part thereof could not be set off till the A.Y. 2002-03 then it would be carried forward till the time it is set off against the profits and gains of subsequent years. Therefore, it can be said that, current depreciation is deductible in the first place from the income of the business to which it relates. If such depreciation amount is larger than the amount of the profits of that business, then such excess comes for absorption from the profits and gains from any other business or business, if any, carried on by the assessee. If a balance is left even thereafter, that becomes deductible from out of income from any source under any of the other heads of income during that year. In case there is a still balance left over, it is to be Page | 21 ITA.38/SRT/2017/AY.2006-07 Shangrila Latex Industries Pvt. Ltd. treated as unabsorbed depreciation and it is taken to the next succeeding year. Where there is current depreciation for such succeeding year the unabsorbed depreciation is added to the current depreciation for such succeeding year and is deemed as part thereof. If, however, there is no current depreciation for such succeeding year, the unabsorbed depreciation becomes the depreciation allowance for such succeeding year. We are of the considered opinion that any unabsorbed depreciation available to an assessee on 1st day of April 2002 (A.Y. 2002-03) will be dealt with in accordance with the provisions of section 32(2) as amended by Finance Act, 2001. And once the Circular No.14 of 2001 clarified that the restriction of 8 years for carry forward and set off of unabsorbed depreciation had been dispensed with, the unabsorbed depreciation from A.Y.1997-98 upto the A.Y.2001-02 got carried forward to the assessment year 2002-03 and became part thereof, it came to be governed by the provisions of section 32(2) as amended by Finance Act, 2001 and were available for carry forward and set off against the profits and gains of subsequent years, without any limit whatsoever.' 4. We notice that in the instant case, the Tribunal while dealing with this case has noted that the carry forward of unabsorbed depreciation concerning A.Y. 2001-02 and assessment years prior thereto can be set off in subsequent years without any set time limit, considering the decision in the case of General Motors India (P.) Ltd. (supra) wherein this Court has held that carry forward of unabsorbed depreciation prior to assessment can be set off in subsequent years without setting time limit. The Tribunal has rightly applied the law to the facts of the instant case. 5. No question of law therefore arises in the present Tax Appeal for our consideration. Tax Appeal is resultantly dismissed.” 21. Respectfully following the binding precedent of Jurisdictional Hon'ble High Court of Gujarat in the case of Gujarat Themis Biosyn Ltd. (supra), we allow ground Nos.2 and 3 raised by the assessee. 22. Since, we have adjudicated ground nos. 1, 2 and 3 in favour of assessee; therefore ground no.4 raised by the assessee “without prejudice” does not require adjudication. In ground no.5, assessee raised the contention that Assessing Officer was erred in calculating interest under section 234B. Now, since we have allowed the appeal of the assessee, therefore Assessing Officer will modify the calculation under section 234B in accordance with law. 23. In the result, appeal filed by the assessees is allowed. Page | 22 ITA.38/SRT/2017/AY.2006-07 Shangrila Latex Industries Pvt. Ltd. Order is pronounced in the open court on 28/09/2022 by placing the result on the Notice Board as per Rule 34(5) of the Income Tax (Appellate Tribunal) Rule 1963. Sd/- Sd/- (PAWAN SINGH) (Dr. A.L. SAINI) JUDICIAL MEMBER ACCOUNTANT MEMBER lwjr /Surat Ǒदनांक/ Date: 28/09/2022 SAMANTA Copy of the Order forwarded to 1. The Assessee 2. The Respondent 3. The CIT(A) 4. CIT 5. DR/AR, ITAT, Surat 6. Guard File By Order // TRUE COPY // Assistant Registrar/Sr. PS/PS ITAT, Surat