M/s. Kalyani Forge Ltd., Pune V. Assistant Commissioner of Income-tax,

ITA 569/PUN/2014

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 7070 (ITAT-PUNE)
• Duration Of Justice: 2 year(s) 10 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-02-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 31-01-2017
• Assessment Year: 2010-2011
• Appeal Filed On: 24-03-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ANIL CHAWARE
• Keywords: Capital asset; Depreciation; Capital receipt
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH A, PUNE , ! , $ BEFORE MS. SUSHMA CHOWLA, JM AND SHRI ANIL CHATURV EDI, AM . / ITA NO.569/PUN/2014 & & / ASSESSMENT YEAR : 2010-11 M/S. KALYANI FORGE LTD., C' WING, SHANGRILA GARDENS, 1 ST BUND GARDEN, PUNE 411001 . / APPELLANT PAN: AAACK7311H VS. THE ASST. COMMISSIONER OF INCOME TAX, CIRCLE 11(1), PUNE . RESPONDENT / APPELLANT BY : SHRI C.H. NANIWADEKAR / RESPONDENT BY : SHRI ANIL CHAWARE DATE OF HEARING : 31.01.2017 / DATE OF PRONOUNCEMENT: 15.02.2017 / ORDER PER SUSHMA CHOWLA, JM: THIS APPEAL FILED BY THE ASSESSEE IS AGAINST THE OR DER OF CIT(A)-I, PUNE, DATED 30.10.2013 RELATING TO ASSESSMENT YEAR 2010-1 1 AGAINST ORDER PASSED UNDER SECTION 143(3) OF THE INCOME-TAX ACT, 1961 (I N SHORT THE ACT). 2. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL:- 1] THE LEARNED CIT(APPEALS) ERRED ON FACTS AND IN L AW IN UPHOLDING DISCOUNT RECEIVED OF RS.28,70,126/- ON TERM LOAN AS INCOME CHARGEABLE ITA NO.569/PUN/2014 KALYANI FORGE LTD. 2 TO TAX. HE FAILED TO APPRECIATE THAT THE SAID SUM IS A CAPITAL RECEIPT AND NOT TAXABLE IN HANDS OF THE ASSESSEE. 2. THE LEARNED CIT(APPEALS) ERRED ON FACTS AND IN L AW IN UPHOLDING DISALLOWANCE OF RS.6,29,960/- BEING EMPLOYEES CONTR IBUTION TO PROVIDENT FUND U/S 43(B) OF THE ACT. 3. THE ISSUE RAISED BY WAY OF GROUND OF APPEAL NO.1 IS AGAINST THE ADDITION MADE OF RS.28,70,126/- HOLDING THE SAME TO BE CAPIT AL RECEIPT. 4. BRIEFLY, IN THE FACTS OF THE CASE, THE ASSESSEE FOR THE YEAR UNDER CONSIDERATION HAD FILED THE RETURN OF INCOME DECLAR ING TOTAL INCOME AT RS.3,64,98,370/-. THE ASSESSEE WAS ENGAGED IN THE BUSINESS OF MANUFACTURE OF FORGINGS AUTOMOBILE & AUTO PARTS INDUSTRY AND AL SO WAS ENGAGED IN THE BUSINESS OF FINANCE, LEASING AND DEALING IN SECURIT IES. THE ASSESSING OFFICER NOTED THAT IN THE COMPUTATION OF INCOME, THE ASSESS EE HAD REDUCED SUM OF RS.28,70,126/- ON ACCOUNT OF DISCOUNT ON TERM LOAN. THE ASSESSEE WAS ASKED TO FURNISH DETAILS IN THIS REGARD AND IN REPL Y, THE ASSESSEE STATED AS UNDER:- SINCE THE DISCOUNT RECEIVED ON ACCOUNT OF SETTLEME NT / PAYMENT THEREOF TOWARDS THE LIABILITY ON PURCHASE OF FIXED ASSETS I S TREATED AS CAPITAL RECEIPT AND THEREBY SUCH AN AMOUNT IS REDUCED FROM THE COST OF THE ASSETS. HENCE THE AMOUNT OF RS.28,70,126/- IS REDUCED IN THE COMPUTAT ION OF TOTAL INCOME. 5. THE ASSESSING OFFICER NOTED THAT IN ANNEXURE NO. 4 OF TAX AUDIT REPORT, THE ASSESSEE HAD REDUCED SUM OF RS.28,70,126/- TO A RRIVE AT THE WDV VALUE OF ASSETS AND CALCULATED DEPRECIATION THEREON. THE AS SESSING OFFICER FURTHER OBSERVED THAT AS PER ACCOUNTING STANDARD 10 PRESCRI BED FOR FIXED ASSETS, IT IS THE DISCOUNT RECEIVED FROM THE SELLER WHICH NEEDS T O BE ACCOUNTED FOR FROM THE COST OF ASSETS AND NOT THE DISCOUNT RECEIVED ON REP AYMENT OF LOAN. IN VIEW THEREOF, DISCOUNT RECEIVED ON TERM LOAN OF RS.28,70 ,126/- WAS DISALLOWED. THE ASSESSEE HAD CLAIMED DEPRECIATION @ 15% WHICH W AS ALLOWED TO THE ITA NO.569/PUN/2014 KALYANI FORGE LTD. 3 ASSESSEE AND CONSEQUENTLY, SUM OF RS.24,39,607/- WA S DISALLOWED IN THE HANDS OF ASSESSEE. 6. THE CIT(A) UPHELD THE ADDITION MADE BY THE ASSES SING OFFICER SINCE THE DISCOUNT RECEIVED WAS TREATED AS REVENUE RECEIPT BY THE ASSESSEE IN THE BOOKS OF ACCOUNT BY INCLUDING THE SAME UNDER THE HEAD OT HER INCOME IN THE PROFIT & LOSS ACCOUNT. HOWEVER, IN THE COMPUTATION OF INCOM E, THE DISCOUNT SO RECEIVED WAS REDUCED FROM THE BUSINESS PROFITS WITH NOTE THAT THE SAME NEEDS TO BE ADJUSTED IN VALUE OF FIXED ASSETS WHICH WERE ACQUIRED OUT OF SAID LOANS. THE CIT(A) HELD THAT THE SAID CONTENTION OF ASSESSE E WAS NOT LEGALLY SUSTAINABLE AND ACCORDINGLY, NET ADDITION OF RS.24, 39,607/- WAS UPHELD IN THE HANDS OF ASSESSEE. 7. THE ASSESSEE IS IN APPEAL AGAINST THE ORDER OF C IT(A). 8. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE AS SESSEE POINTED OUT THAT THE ASSESSEE HAD RAISED LOAN FROM DBS BANK WHICH WA S FOREIGN CURRENCY LOAN FOR CAPITAL INVESTMENT. THE TERMS OF THE LOAN WERE 30 MONTHS MORATORIUM AND 6 MONTHLY INSTALLMENTS SPREAD OVER FIVE YEARS. THE L OAN WAS RAISED IN ASSESSMENT YEAR 2008-09 BUT IN THE LATER YEAR, YEN BECAME STRONGER THAN INDIAN RUPEE AND THE LOAN OF RS.20,89,00,000/- WAS CONVERTED TO LOAN IN INDIAN RUPEE OF RS.24,99,00,000/-. THE SURPLUS OF THE LOA N WAS CAPITALIZED OVER THE COST OF ASSETS. HE ALSO POINTED OUT THAT AFTER THE ASSETS WERE PUT TO USE, THE INTEREST WAS CLAIMED AS DEDUCTION AND ALLOWED. ON NEGOTIATIONS WITH THE BANK, THERE WAS SETTLEMENT FOR REPAYMENT OF LOAN AND IN C ASE THE FIRST INSTALLMENT WAS PAID ON TIME, THEN THERE WAS SOME CONCESSION IN SEC OND INSTALLMENT TO BE PAID. ITA NO.569/PUN/2014 KALYANI FORGE LTD. 4 SIMILARLY, IF THIRD INSTALLMENT WAS PAID ON TIME, T HEN THERE WAS CONCESSION IN FOURTH INSTALLMENT AND WHERE THE FIFTH INSTALLMENT WAS PAID ON TIME, THERE WAS CONCESSION IN PAYMENT OF SIXTH INSTALLMENT. HE POI NTED OUT THAT THERE WAS NO CONCESSION IN INTEREST BUT THE CONCESSION WAS ONLY VIS--VIS THE PRINCIPAL AMOUNT. THE ASSESSEE HAD RECEIVED DISCOUNT OF RS.9 5,67,076/- IN ENTIRETY SINCE THERE WAS NO DEFAULT IN PAYMENT OF INSTALLMEN TS. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT VA LUE OF LOAN WAS CAPITALIZED TO THE VALUE OF FIXED ASSETS. HE FURTHER REFERRED TO THE ORDER OF CIT(A), WHO HAD PLACED RELIANCE ON THE RATIO LAID DOWN BY THE HONB LE BOMBAY HIGH COURT IN SOLID CONTAINERS LTD. VS. DCIT (2009) 178 TAXMAN 19 2, WHEREIN THE LOAN WAS TAKEN FOR TRADING PURPOSE AND WAS HELD TO BE TRADIN G LIABILITY. HE PLACED RELIANCE ON THE RATIO LAID DOWN BY THE HONBLE BOMB AY HIGH COURT IN CIT VS. XYLON HOLDINGS PVT. LTD. (2013) 90 DTR 205 (BOM), W HEREIN THE EARLIER PROPOSITION OF HONBLE BOMBAY HIGH COURT IN SOLID C ONTAINERS LTD. VS. DCIT (SUPRA) WAS ALSO TAKEN NOTE AND IT WAS HELD THAT WH ERE THE LOAN WAS TAKEN FOR THE PURPOSE OF INVESTMENT IN CAPITAL ASSET, THEN TH E SAME WAS ON DIFFERENT FOOTING THAN THE LOAN TAKEN FOR TRADING LIABILITY 9. THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE PLACED RELIANCE ON THE ORDERS OF ASSESSING OFFICER AND CIT (A). 10. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. THE FIRST ISSUE WHICH ARISES IN THE PRESENT CASE IS VIS--VIS ADDITION MADE TO THE INCOME OF ASSESSEE OF RS.28,70,126/-. THE ASSESSEE HAD RA ISED LOAN IN INSTALLMENTS AS PER CERTIFICATE OF FORWARD INWARD REMITTANCE AS DETAILED BELOW:- ITA NO.569/PUN/2014 KALYANI FORGE LTD. 5 DATE AGREEMENT NO. JPY INR RECEIVED AT DISBURSAL OF LOAN INR AFTER SWAP INTO INR INR AFTER DISCOUNT 24.1.2008 25405431 243,900,000 80,118,945 99,995,310 99,995,310 29.2.2008 25405535 365,850,000 128,877,358 149,992,964 140,425,878 TOTAL 609,750,000 208,996,303 249,988,274 240,421,188 11. THE ASSESSEE CLAIMS THAT INITIALLY LOAN WAS RAI SED IN THE DENOMINATION OF JAPAN YEN. WHEN THE SAME BECAME STRONGER THAN INDI AN RUPEE, THEN THE ASSESSEE SWAPPED IT INTO INDIAN RUPEE LOAN AND AFTE R SWAPPING THE LIABILITY TO PAY THE LOAN WAS ABOUT RS.24.99 CRORES AS AGAINST T HE LOAN RAISED OF RS.20.89 CRORES. THE SURPLUS ARISING THEREFROM WAS CAPITALI ZED OVER THE VALUE OF ASSETS. THE ASSESSEE FURTHER NEGOTIATED WITH THE BANK TO RE PAY THE SAID LOAN, AGAINST WHICH DISCOUNT WAS OFFERED VIDE AGREEMENT NO.254055 35 WHICH IS DETAILED AS UNDER:- DATE INR DISCOUNTED AMOUNT DISCOUNT 26.2.2010 44,997,889 42,127,763 2,870,126 31.8.2010 44,997,889 42,127,763 2,870,126 28.2.2011 59,997,186 56,170,352 3,826,834 149,992,964 140,425,878 9,567,086 12. THE INTEREST WAS TO BE PAID ON THE PRINCIPAL AM OUNT OUTSTANDING AND WAS NOT TO BE EFFECTED BY THE SETTLEMENT AGREEMENT AND THE DISCOUNT, IF ANY. THE PRINCIPAL WAS TO BE REPAID AFTER MORATORIUM OF 30 M ONTHS IN THREE INSTALLMENTS OF 30%, 30% AND 40% AS PER ORIGINAL AGREEMENT. HOW EVER, AS PER AMENDED AGREEMENT, IT WAS PROVIDED THAT IN CASE THE FIRST I NSTALLMENT FALLING DUE IN THE FINANCIAL YEAR IS PAID IN TIME, THEN THERE WOULD BE DISCOUNT IN RESPECT OF SECOND INSTALLMENT. THE TOTAL DISCOUNT DUE TO THE ASSESSE E WAS RS.28,70,126/- FOR THE YEAR. ITA NO.569/PUN/2014 KALYANI FORGE LTD. 6 13. THE ISSUE WHICH ARISES IN THE PRESENT APPEAL IS THE TREATMENT OF SAID DISCOUNT RECEIVED BY THE ASSESSEE. THE ASSESSEE CL AIMS THAT THE NATURE OF SAID DISCOUNT WAS CAPITAL AND HENCE, THE DISCOUNT R ECEIVED IS NOT TO BE TREATED ITS INCOME IN ITS HANDS. HOWEVER, THE CASE OF REVE NUE, ON THE OTHER HAND IS THAT THE SAID RECEIPTS ARE TO BE TAXED IN THE HANDS OF ASSESSEE, WHERE THE ASSESSEE HIMSELF HAS TREATED AS ITS INCOME IN THE P ROFIT & LOSS ACCOUNT. WE FIND NO MERIT IN THE SAID STAND OF ASSESSING OFFICE R WHERE THE ASSESSEE IS A LIMITED COMPANY AND IT HAS TO REPORT ALL ITS RECEIP TS AS PART OF THE PROFIT & LOSS ACCOUNT. THE RECEIPT IS WHETHER TAXABLE OR NOT IN THE HANDS OF ASSESSEE IS TO BE DECIDED THEREAFTER. THE AUDITOR HAD ALSO REDUCE D THE SAID AMOUNT FROM THE WRITTEN DOWN VALUE OF THE ASSETS AND COMPUTED DEPRE CIATION ACCORDINGLY. THE ASSESSEE ON THE OTHER HAND, HAD DISALLOWED THE SAID AMOUNT FROM THE PROFITS OF YEAR WHILE COMPUTING INCOME IN ITS HANDS. IT IS NO T DISPUTED THAT THE ASSESSEE HAD RECEIVED THE DISCOUNT ON LOAN AMOUNT, WHICH WAS UTILIZED FOR THE PURPOSE OF INVESTMENT IN ASSETS. ONLY BECAUSE IT WAS CREDITED AS OTHER INCOME IN THE PROFIT & LOSS ACCOUNT, WOULD NOT JUSTIFY ITS TAXABI LITY IN THE HANDS OF ASSESSEE. THE NATURE OF RECEIPT HAS TO BE SEEN AND WHERE IT I S RELATABLE TO ACQUISITION OF CAPITAL ASSET I.E. THE LOAN RAISED BY THE ASSESSEE WAS ADMITTEDLY, USED FOR PURCHASE OF CAPITAL ASSET, THEN THE DISCOUNT, IF AN Y, RECEIVED BY THE ASSESSEE IS CAPITAL RECEIPT IN THE HANDS OF ASSESSEE AND HENCE, THE SAME IS NOT ASSESSABLE TO TAX. 14. THE HONBLE BOMBAY HIGH COURT IN CIT VS. XYLON HOLDINGS PVT. LTD. (SUPRA) HAD HELD THAT WHERE THE LOAN WAS CAPITAL RE CEIPT AND WAS NEVER CLAIMED AS DEDUCTION FROM TAXABLE INCOME IN THE EARLIER YEA RS AND WAS THUS, NOT TAXABLE UNDER SECTION 41(1) OF THE ACT AND ALSO SECTION 28( IV) OF THE ACT WOULD APPLY ITA NO.569/PUN/2014 KALYANI FORGE LTD. 7 ONLY WHEN BENEFIT OF PERQUISITE WAS RECEIVED IN KIN D AND HAD NO APPLICATION WHERE THE BENEFIT IS RECEIVED IN CASH OR MONEY. HE NCE, THE HONBLE BOMBAY HIGH COURT HELD THAT CESSATION OF LIABILITY TO REPA Y LOAN LIABILITY WAS NOT TAXABLE EITHER UNDER SECTION 41(1) OR 28(IV) OF THE ACT. T HE DECISION OF THE HONBLE BOMBAY HIGH COURT IN SOLID CONTAINERS LTD. VS. DCIT (SUPRA) WAS HELD TO BE ON COMPLETELY ON DIFFERENT FACTS, WHERE THE ASSESSEE H AD TAKEN LOAN FOR BUSINESS PURPOSES. THE RELEVANT FINDINGS OF THE HONBLE BOM BAY HIGH COURT ARE AS UNDER:- 8. ISSUE ARISING IN THIS CASE STANDS COVERED BY DECISI ON OF THIS COURT IN MATTER OF MAHINDRA & MAHINDRA. DECISION OF THIS COURT IN MATTER OF SOLID CONTAINERS (SUPRA) WAS ON COMPLETELY DIFFERENT FACT S AND INAPPLICABLE TO THIS CASE. CASE OF ASSESSEE WAS THAT THE LOAN WAS A CAPITAL RECEIPT AND HAD NOT BEEN CLAIMED AS DEDUCTION FROM TAXABLE INCO ME IN EARLIER YEARS AND WOULD NOT COME WITHIN PURVIEW OF SECTION 41(1) OF THE ACT. CONSEQUENTLY, THE DECISION OF THIS COURT IN MATTER OF MAHINDRA AND MAHINDRA LIMITED WAS DISTINGUISHED AS IN THE SAID C ASE THE LOAN WAS TAKEN FOR THE PURCHASE OF CAPITAL ASSETS AND NOT FOR TRAD ING ACTIVITIES AS IN THE CASE OF SOLID CONTAINERS LIMITED (SUPRA). THE ALTER NATIVE SUBMISSION THAT THE AMOUNT OF LOAN WRITTEN OFF WOULD BE TAXABLE UND ER SECTION 28(IV) OF THE ACT ALSO CAME UP FOR CONSIDERATION ORE THIS COURT I N THE MATTER OF MAHINDRA & MAHINDRA LIMITED AND IT WAS HELD THEREIN THAT SECTI ON 28(IV) OF THE ACT WOULD APPLY ONLY WHEN A BENEFIT OR PERQUISITE IS RE CEIVED IN KIND AND HAS NO APPLICATION WHERE BENEFIT IS RECEIVED IN CASH OR MONEY. 15. APPLYING THE SAID PRINCIPLE TO THE ISSUE BEFORE US, WE HOLD THAT DISCOUNT RECEIVED BY THE ASSESSEE IS CAPITAL RECEIPT AND HEN CE, IS NOT TO BE INCLUDED IN THE TOTAL INCOME OF THE ASSESSEE. THE GROUND OF AP PEAL NO.1 RAISED BY THE ASSESSEE IS THUS, ALLOWED. 16. NOW, COMING TO THE GROUND OF APPEAL NO.2 RAISED AGAINST DEDUCTION CLAIMED ON ACCOUNT OF EMPLOYEES CONTRIBUTION TO PF AND ESI. 17. THE SAID ISSUE IS SQUARELY COVERED BY THE RATIO LAID DOWN BY THE HONBLE BOMBAY HIGH COURT IN CIT VS. GHATGE PATIL TRANSPORT S LTD. (2014) 368 ITR 749 ITA NO.569/PUN/2014 KALYANI FORGE LTD. 8 (BOM) AND IN CIT VS. HINDSTAN ORGANICS CHEMICALS LT D. (2014) 366 ITR 1 (BOM). FOLLOWING THE SAME PARITY OF REASONING, WE DIRECT THE ASSESSING OFFICER TO ALLOW THE CLAIM OF ASSESSEE TO THE EXTENT OF RS. 6,29,960/-. THE GROUNDS OF APPEAL RAISED BY THE ASSESSEE ARE THUS, ALLOWED. 18. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS AL LOWED. ORDER PRONOUNCED ON THIS 15 TH DAY OF FEBRUARY, 2017. SD/- SD/- (ANIL CHATURVEDI) (SUSHMA CHOWLA) / ACCOUNTANT MEMBER / JUDICIAL MEMBER / PUNE ; DATED : 15 TH FEBRUARY, 2017 . GCVSR ( )*+ ,+ / COPY OF THE ORDER IS FORWARDED TO : THE APPELLANT; THE RESPONDENT; ' () THE CIT(A)-I, PUNE; ' / THE CIT-I, PUNE; * --., ., / DR A, ITAT, PUNE; 3 / GUARD FILE. / BY ORDER, * - // TRUE COPY // / ASSISTANT REGISTRAR, . , / ITAT, PUNE