M/s. Hi- Tech Electrothermics & Hydropower Ltd., New Delhi V. DCIT, New Delhi

ITA 6080/DEL/2013

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 7506 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 8 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-08-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 09-06-2016
• Assessment Year: 2007-2008
• Appeal Filed On: 08-11-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: A K SAROHA
• Assessee Lawyers: V K JIAN
• Keywords: Capital asset; Principle of natural justice; Bad and doubtful debts; Capital receipt
• Section: 142(1); 37(1); 2

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH C, NEW DELHI BEFORE SHRI S. V. MEHROTRA, ACCOUNTANT MEMBER AND SMT. BEENA A. PILLAI, JUDICIAL MEMBER I.T.A. NO.6080/DEL/2013 (ASSESSMENT YEAR 2007-08) HI-TECH ELECTROTHERMICS VS. DCIT, CIRCLE 12(1), & HYDROPOWER LTD., NEW DELHI 3 RD FLOOR, MOHTA BUILDING, 4, BHIKAJI CAMA PLACE, NEW DELHI. GIR / PAN :AAACH9707N (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI V.K. JIAN, CA RESPONDENT BY : SHRI A. K. SAROHA, CIT, DR. DATE OF HEARING: 09.06.2016 DATE OF PRONOUNCEMENT: 04.08.2016 ORDER PER BEENA A. PILLAI, JM: THE PRESENT APPEAL HAS BEEN FILED BY THE ASSESSEE AGAINST THE ORDER DATED 20.08.2013 PASSED BY LD. CI T(A) XXVIII, NEW DELHI FOR THE ASSESSMENT YEAR 2007-08 O N THE FOLLOWING GROUNDS OF APPEAL:- THAT THE ORDER U/S 250 PASSED BY THE HON'BLE CIT(A ) IS BAD IN LAW, WRONG ON FACTS AND AGAINST THE PRINCIPLES OF NATURAL JUSTICE. 2(A) THE LD. CIT(A) HAS GROSSLY ERRED IN CONFIRMIN G THE DISALLOWANCE OF INTEREST PAID TO M/S. IFCI LTD. AMOUNTING TO RS.1525685/- ON THE GROUNDS THAT INTEREST PAID IS PENAL IN NATURE. THE LD. CIT(A) HA S 2 I.T.A.NO.6080/DEL/2013 FAILED TO APPRECIATE THAT THE INTEREST HAS BEEN PAI D ON ACCOUNT OF LATE PAYMENT OF SETTLEMENT AMOUNT TO M/S . IFCI LTD. AND SUCH INTEREST HAS BEEN PAID IN THE NORMAL COURSE AS PER TERMS AND CONDITIONS OF THE SETTLEMENT AND IS NOT PENAL IN NATURE. (B) THE LD. CIT(A) HAS WRONGLY CONCLUDED THAT THE PAYMENT OF THE IMPUGNED INTEREST IS FOR AN ACT PROHIBITED BY THE LAW AND THE APPELLANT HAS VIOLATE D THE SPECIFIC PROVISIONS OF THE RELEVANT ACT WHEREAS THERE IS NO VIOLATION WHATSOEVER ON THE PART OF THE APPELLANT COMPANY. 3(A) THE LD. CIT(A) HAS ERRED IN CONFIRMING THE DISALLOWANCE OF A SUM OF RS.1967079/- DEBITED TO TH E PROFIT & LOSS ACCOUNT UNDER THE HEAD 'OLD STOCK WRITTEN OFF' AND A SUM OF RS.5076944/- DEBITED UNDE R THE HEAD 'IRREVOCABLE BALANCES WRITTEN OFF' ON THE GROUNDS THAT THE APPELLANT COMPANY HAS NOT CARRIED OUT ANY BUSINESS DURING THE YEAR. (B) THE LD. CIT(A) HAS FAILED TO APPRECIATE THAT E VEN IF NO PURCHASE I SALE HAS BEEN MADE DURING THE YEAR BUT THE APPELLANT COMPANY DURING THE YEAR UNDER ASSESSMENT WAS IN THE PROCESS OF SETTLING ITS LIABI LITIES AND REALIZING ITS ASSETS AND THEREFORE IT CANNOT BE HELD THAT THE APPELLANT COMPANY HAS NOT CARRIED OUT ANY BUSINESS DURING THE YEAR. (C) THE LD. CIT(A) HAS FAILED TO APPRECIATE THAT T HE LD. AO HAS DULY ACCEPTED THAT THE APPELLANT WAS CARRYING OUT BUSINESS DURING THE YEAR AS HE HAS ALLOWED DEDUCTION FOR EXPENSES ON ACCOUNT OF SALARY PAID AND ALSO OTHER ADMINISTRATIVE EXPENSES AND THEREFORE IT IS INCORRECT NOT TO ALLOW DEDUCTION FO R 'OLD STOCK WRITTEN OFF' AND 'IRRECOVERABLE BALANCES WRIT TEN OFF' ON THE GROUNDS THAT THE APPELLANT COMPANY HAS NOT CARRIED OUT ANY BUSINESS ACTIVITY DURING THE YE AR. 4(A) THE LD. CIT(A) HAS ERRED IN CONFIRMING THE ADDITIONS OF A SUM OF RS.22,90,00,000/- TO THE INCO ME 3 I.T.A.NO.6080/DEL/2013 OF THE APPELLANT COMPANY REPRESENTING AMOUNT OF LOA N WAIVED BY M/S. IFCI LTD. OUT OF TERM LOAN TAKEN BY THE APPELLANT COMPANY IN EARLIER YEARS. THE LD. CIT (A) HAS FAILED TO APPRECIATE THAT REMISSION OF THE PRIN CIPAL AMOUNT OF TERM LOAN DO NOT AMOUNT TO INCOME UNDER SEC. 41 (1) OR 28(IV) OR 2(24) OF INCOME TAX ACT. (B) THE LD. CIT(A) HAS FAILED TO APPRECIATE THAT T HE LOAN WAS TAKEN BY THE APPELLANT COMPANY FOR PURCHASE OF FIXED ASSETS AND OUT OF THE TOTAL PRINC IPAL OUTSTANDING OF RS.39.40 CRORES A SUM OF RS.16.50 CRORES WAS PAID TO M/S. IFCI LTD. AGAINST ONE TIME SETTLEMENT AND THE BALANCE SUM OF RS.22.90 CRORES WAS WAIVED BY M/S IFCI LTD. AND BEING A CAPITAL RECEIPT THE AFORESAID AMOUNT WAS TRANSFERRED TO THE CAPITAL RESERVE DURING THE YEAR UNDER ASSESSMENT AN D NOT A REVENUE RECEIPT IN THE HANDS OF THE ASSESSEE. (C) THE LD. CIT(A) HAS WRONGLY CONCLUDED THAT THE LOAN AGREEMENT DOES NOT SPECIFY THAT THE LOAN AVAIL ED FROM IFCI WAS UTILIZED FOR PURCHASE OF FIXED ASSETS WHICH IS AGAINST THE FACTS OF THE CASE AND ACTUALLY THE LOAN FROM IFCI WAS UTILIZED FOR PURCHASE OF FIXED ASSETS ONLY AS PER EVIDENCES FILED DURING APPELLATE PROCEEDINGS. 2. THE BRIEF FACTS OF THE CASE ARE AS UNDER: 2.1 THE ASSESSEE FILED ITS RETURN OF INCOME DECLARI NG TOTAL INCOME OF RS.25,62,000/- AFTER CLAIMING SET OFF OF LOSSES OF EARLIER YEARS AMOUNTING TO RS.38,30,57,831/- ON 25.10.2007. THE CASE WAS SELECTED FOR SCRUTINY AND NOTICES U/S 143(2) AND 142(1) OF THE ACT WERE ISSUE D TO THE ASSESSEE. THE ASSESSEE IS IN THE BUSINESS OF MANUFACTURING SAND TRADING OF FERRO ALLOYS AND SHEE TS. 4 I.T.A.NO.6080/DEL/2013 DURING THE COURSE OF HEARING, THE ASSESSEE HAD PROD UCED BOOKS OF ACCOUNT WHICH WERE TEST CHECKED. 3. GROUND NO.1 IS GENERAL IN NATURE AND DOES NOT REQUIRE ANY ADJUDICATION. 4. GROUND NO.2: DURING THE ASSESSMENT PROCEEDINGS, THE LD. A.O. OBSERVED THAT THE ASSESSEE HAS PAID IN TEREST CHARGES TO THE EXTENT OF RS.15,40,526/-. LD. A.O. CONSIDERED THE SAID AMOUNT TO BE PENAL IN NATURE AN D MADE ADDITION OF SUCH AMOUNT TO THE TOTAL INCOME OF THE ASSESSEE. 4.1 AGGRIEVED BY THE DISALLOWANCE OF CLAIM, THE ASS ESSEE PREFERRED APPEAL BEFORE LD. CIT(A). BEFORE LD. CIT (A), IT WAS CONTENDED THAT THE ASSESSEE HAD RECEIVED LOANS FROM IFCI LTD. IN EARLIER YEARS OF THE PRINCIPAL SUM AMO UNTING TO RS.39.40 CRORES, ON WHICH INTEREST OF RS.39.65 C RORES WAS OUTSTANDING AS ON 31.03.2006. THE ASSESSEE SUBMITTED THAT DUE TO POOR FINANCIAL CONDITION OF T HE COMPANY, IT WAS NOT ABLE TO REPAY THE LOAN AND INTE REST THEREON THE ASSESSEE ENTERED INTO AN AGREEMENT DATE D 25.08.2006 FOR SETTLEMENT WITH IFCI LTD. ON NEGOTI ATION WITH IFCI LTD., THE LIABILITY WAS SETTLED FOR RS.16 .50 CRORES. THE ASSESSEE SUBMITTED THAT THE SAID PAYMENT WAS TO BE DISBURSED TO IFCI LTD. ON THE AGREED TERMS AS UNDER : I) 25% OF THE ABOVE AMOUNT ON OR BEFORE 30.9.2006; II) 25% OF THE ABOVE AMOUNT ON OR BEFORE 31.12.2006 ; III) BALANCE WITHIN A PERIOD OF 6 MONTHS FROM THE D ATE OF THIS LETTER. 5 I.T.A.NO.6080/DEL/2013 4.2 IT HAS BEEN SUBMITTED BY THE ASSESSEE THAT IT H AD PAID AN AMOUNT OF RS.8.5 LACS BEFORE 31.12.2006 AND BALANCE OF RS.8.5 LACS WAS PAID ON 15.02.2007. THE ASSESSEE HAS PAID INTEREST @ 12.50% FROM 01.01.2007 TILL 15.02.2007 AS PER THE TERMS OF AGREEMENT ENTERED IN TO BETWEEN THE ASSESSEE AND IFCI LTD. LD. CIT(A) CONF IRMED THE ADDITION MADE BY THE A.O. BY HOLDING AS UNDER: ON CAREFUL EXAMINATION OF THE CONTRACT, IT IS APPA RENT THAT APPELLANT HAS VIOLATED THE SPECIFIC PROVISION OF RELEVANT ACT AND THAT IMPUGNED INTEREST OF RS.15,25,685/- IS FOR AN ACTION PROHIBITED BY THE L AW AND HENCE, THE SAME IS CLEARLY NOTE ALLOWABLE AS DEDUCING AS PER PROVISIONS OF EXPLANATION TO SECTIO N 37(1) OF THE ACT. 4.3 AGGRIEVED BY THE ORDER OF LD. CIT(A), ASSESSEE IS IN APPEAL BEFORE US. 4.4 WE HAVE PERUSED THE ORDERS PASSED BY AUTHORITIE S BELOW AND SUBMISSIONS MADE BY BOTH THE SIDES. IT I S OBSERVED THAT THE TERMS OF AGREEMENT HAVE BEEN PLAC ED BY THE ASSESSEE AT PAGE 26A OF THE PAPER BOOK FILED BE FORE US WHEREIN, THE TERMS OF SETTLEMENT OF DUES AND THE PA YMENT SCHEDULE HAS BEEN SPECIFIED. IT IS OBSERVED THAT T HE PAYMENT MADE BY THE ASSESSEE IS PART OF THE CONTRAC T / SETTLEMENT ENTERED INTO BETWEEN THE ASSESSEE AND IF CI LTD. AND INTEREST PAID FROM 01.01.2007 TILL 15.02.2 007 IS A PART OF AGREEMENT AND DOES NOT ASSUME THE NATURE OF PENALTY. WE ARE, THEREFORE, OF THE CONSIDERED OPIN ION THAT THE SAID EXPENDITURE SHOULD BE ALLOWED AS DEDUCTION AS 6 I.T.A.NO.6080/DEL/2013 PER PROVISIONS OF SECTION 37(1) OF THE ACT. ACCORD INGLY, THE GROUND NO.2 RAISED BY THE ASSESSEE STANDS ALLOWED. 5. GROUND NO.3: DURING THE COURSE OF ASSESSMENT PROCEEDINGS, LD. A.O. OBSERVED FROM THE BALANCE SHE ET AND P & L ACCOUNT OF THE ASSESSEE THAT THE ASSESSEE HAS CLAIMED AN AMOUNT OF RS.19,57,079/- TOWARD OLD STOC K WRITTEN OFF AND HAS DEBITED P & L ACCOUNT AMOUNTING TO RS.15,76,944/- TOWARDS IRRECOVERABLE BALANCE WRITTE N OFF. LD. A.O. DISALLOWED THE CLAIM OF THE WRITE OFF SO M ADE BY THE ASSESSEE AS THERE WAS NO BUSINESS CARRIED ON BY THE ASSESSEE DURING THE YEAR. 5.1 AGGRIEVED BY THE ORDER OF LD. A.O., THE ASSESSE E PREFERRED APPEAL BEFORE LD. CIT(A). LD. CIT(A) UPH ELD THE ADDITION MA DE BY THE ASSESSING OFFICER BY OBSERVIN G AS UNDER: 6.3 THE FACTS OF THE CASE SHOW THAT THE ENTIRE PREMISES WAS HANDED OVER TO IFCI AND THE PLACE WAS PLACED UNDER LOCK AND KEY. UNDER THESE CIRCUMSTANCES IT CANNOT BE SAID THAT THE BUSINESS W AS BEING CARRIED OUT BY THE APPELLANT. THE ESSENTIAL CONDITION FOR WRITING OFF OF BAD DEBT AS DEDUCTION U/S. 36(1 )(VII) READ WITH S. 36(2) IS THAT THE DEDUCTIO N IS AVAILABLE IS IN RESPECT OF ANY BAD DEBT OR PART THE REOF, WHICH HAS BEEN TAKEN INTO ACCOUNT IN COMPUTING THE INCOME OF THE PREVIOUS YEAR IN WHICH THE AMOUNT OF BAD DEBT IS WRITTEN OFF OR OF AN EARLIER PREVIOUS Y EAR, WHICH IS WRITTEN OFF AS IRRECOVERABLE IN THE ACCOUN TS OF THE ASSESSEE FOR THE PREVIOUS YEAR AND THE BUSINESS SHOULD BE CARRIED ON IN THE RELEVANT PERIOD. THE ADDITION MADE BY THE ASSESSING OFFICER IS, THEREFOR E, UPHELD. 7 I.T.A.NO.6080/DEL/2013 5.2 AGGRIEVED BY THE ORDER OF LD. CIT(A) THE ASSESS EE IS IN APPEAL BEFORE US. 5.3 LD. A.R. SUBMITTED THAT HE ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUFACTURING FERRO ALLOYS ETC AND THE MANUFACTURING UNIT OF THE ASSESSEE WAS SITUATE AT PALAKKAD, KERALA. IT HAS BEEN SUBMITTED BY THE LD. A.R. THAT THE ASSESSEE WAS RUNNING ITS MANUFACTURING UNI T THROUGH THE POWER SUPPLIED BY KERALA STATE ELECTRIC ITY BOARD (KSEB) AND IT WAS HAVING AN AGREEMENT FOR PURCHASE OF POWER WITH KSEB AT SUBSIDIZED RATES. L D. A.R. SUBMITTED THAT DUE TO SOME DISPUTE AND DISAGREEMENT WITH KSEB, IT REFUSED TO SUPPLY POWER TO THE ASSESSEE AT SUBSIDIZED RATES AND ALSOREFUSED TO SU PPLY POWER TO THE ASSESSEE AT SUBSIDIZED RATES AS A RESU LT OF WHICH, THE COMPANY HAD TO STOP PRODUCTION TEMPORARI LY AND THE MANUFACTURING ACTIVITIES WERE DISCONTINUED. THE EMPLOYEES OF THE MANUFACTURING UNIT WENT ON STRIKE AND THE UNIT WAS UNDER LOCK OUT. DUE TO THE LOCK OUT S ITUATION THAT EXISTED, THE ASSESSEE EFFACED MAJOR FINANCIAL DIFFICULTIES IN TERMS OF LOAN AND LIABILITIES TOWAR DS IFCI LTD., AS A RESULT OF WHICH, THE ASSESSEE TRANSFERRE D THE STOCK AND PLANT & MACHINERY ETC. BELONGING TO THE ASSESSEE TO IFCI LTD. ON AS IS WHERE IS BASIS. THE LD. A.R. SUBMITTED THAT THE SUNDRY DEBTORS WHICH EXISTE D IN THE BOOKS OF ACCOUNTS OF THE ASSESSEE WERE ALSO WRI TTEN OFF AS THESE WERE NOT RECOVERABLE FROM THE PARTIES. LD. A.R. SUBMITTED THAT DETAILS OF SUNDRY DEBTORS HAVE BEEN PLACED 8 I.T.A.NO.6080/DEL/2013 AT PAGES 27-28 OF THE PAPER BOOK AND THE DETAILS REGARDING OLD STOCK ARE AT PAGE 29 OF THE PAPER BOO K. LD. A.R. SUBMITTED THAT MAJOR PORTION OF IRRECOVERABLE BALANCE WRITTEN OFF REPRESENT BAD DEBTS AND THEY HAVE BEEN TAKEN INTO ACCOUNT IN COMPUTATION OF INCOME OF THE ASSESS EE IN EARLIER YEARS. LD. A.R. SUBMITTED THAT BAD DEBTS W RITTEN OFF AMOUNTING TO RS.50,76,944/- IS ALLOWABLE AS BUS INESS EXPENSES. THE ASSESSEE HAS PLACED RELIANCE ON THE DECISION OF HON'BLE CHENNAI HIGH COURT IN THE CASE OF N. VAIRAVAL CHETTIYAR VS CIT REPORTED IN 72 ITR 114. 5.4 LD. A.R. FURTHER SUBMITTED THAT THE ASSESSEE, DURING THE YEAR UNDER CONSIDERATION WAS MAINTAINING OFFICE ON WHICH RENT MOUNTING TO RS.6,48,000/- WAS PAID. THE RE WERE OTHER EXPENSES INCURRED BY THE ASSESSEE TOWARD S POSTAGE, TELEGRAM, TELEPHONE, TRAVEL & CONVEYANCE A ND VEHICLE RUNNING AND MAINTENANCE EXPENSES ETC. THE ASSESSEE WAS ALSO INCURRING LEGAL AND PROFESSIONAL EXPENSES WHICH WERE PAID TO VARIOUS ADVOCATES FOR REPRESENTING THE ASSESSEE AT VARIOUS COURTS IN RESP ECT OF THE DISPUTE THAT MAY ARISE. LD. A.R. SUBMITTED THA T THE ASSESSEE HAD NOT SHUT DOWN ITS BUSINESS IN TOTO AND WAS TAKING EVERY POSSIBLE STEP TO RESUME ITS BUSINESS. IT WAS THE INTENTION OF THE ASSESSEE TO RESTORE THE MANUFA CTURING UNIT AT PALAKKAD, KERALA, AND THUS, HE SUBMITTED TH AT BECAUSE NO MANUFACTURING ACTIVITIES COULD BE CARRIE D OUT, IT CANNOT BE ASSUMED THAT THERE WAS NO BUSINESS 9 I.T.A.NO.6080/DEL/2013 ACTIVITIES THAT WAS CARRIED OUT BY THE ASSESSEE DUR ING THE YEAR. 6. ON THE CONTRARY, LD. D.R. SUBMITTED THAT FOR ALL OWING ANY DEDUCTION U/S 28-43 THERE HAS TO BE INCOME THAT MUST HAVE BEEN EARNED DURING THE YEAR UNDER CONSIDERATION AGAINST WHICH THE DEDUCTION COULD BE CLAIMED. LD. D.R. SUBMITTED THAT CONTINUING WITH TH E MANUFACTURING ACTIVITIES CANNOT BE SAID TO HAVE BEE N ESTABLISHED AS THE ASSESSEE HAS TRANSFERRED ALL ITS ASSETS ON AS IS WHERE IS BASIS TO M/S. IFCI LTD. 7. WE HAVE PERUSED THE DETAILS FILED BEFORE US AND THE ARGUMENTS ADVANCED BY BOTH THE PARTIES. ON PERUSAL OF THE STATEMENT OF ACCOUNT OF THE ASSESSEE FOR THE YE AR UNDER CONSIDERATION, IT IS FOUND THAT THE ASSESSEE HAS INCURRED EXPENSES FOR MAINTAINING OFFICE PREMISES A S WELL AS PAID SALARY AND OTHER MISCELLANEOUS EXPENSE RELA TING TO THE ADMINISTRATION OF THE BUSINESS. IT CANNOT BE S AID THAT THE BUSINESS ACTIVITIES WERE COMPLETELY SHUT DOWN A FTER THE LOCK OUT THAT TOOK PLACE AT THE MANUFACTURING U NIT IN KERALA. IT IS OBSERVED THAT THE REASON FOR NOT CON TINUING THE MANUFACTURING ACTIVITIES WAS DUE TO POWER SUPPL Y BEING CUT BY KSEB. FURTHER, THERE IS NO MATERIAL T O SUGGEST THAT THE MANUFACTURING OPERATION OF THE ASS ESSEE WERE IN A STAGE OF MORE THAN THAT OF SUSPENSION. 7.1 SECTION 36(1)(VII) AND 36(2) OF THE ACT REQUIRE THE ASSESSEE TO WRITE OFF THE BAD DEBTS WHICH ARE IRREC OVERABLE AND THAT IT HAS BEEN CONSIDERED AS INCOME IN ANY OF THE 10 I.T.A.NO.6080/DEL/2013 PREVIOUS YEAR IF IT RELATES TO SUCH PREVIOUS YEAR. THE ASSESSING OFFICER CANNOT INSIST THE ASSESSEE TO PRO VE THE AUTHENTICITY OF CIRCUMSTANCES LEADING TO WRITE OFF THE BAD DEBTS. RELIANCE HAS BEEN PLACED ON THE DECISION OF HON'BLE HIGH COURT IN THE CASE OF DIT VS OMAN INTERNATIONAL BANK REPORTED IN 100 ITD 285. THE ASS ESSEE HAS FURNISHED THE DETAILS OF FINANCIAL YEAR IN WHIC H WRITE OFF OF BAD DEBTS WERE TAKEN INTO ACCOUNT IN COMPUTA TION OF INCOME. THE ASSESSEE HAS ALSO PLACED RELIANCE UPON THE DECISION OF HON'BLE SUPREME COURT IN THE CASE OF TR F LTD. VS CIT REPORTED IN 323 ITR 397. RESPECTFULLY FOLLOW ING THE RATIO LAID DOWN IN THE DECISIONS CITED ABOVE, THE DISALLOWANCE MADE BY THE LD. ASSESSING OFFICER STAN DS DELETED. THIS GROUND OF APPEAL THUS STANDS ALLOWED . 8. GROUND NO.4: DURING THE ASSESSMENT PROCEEDINGS, LD. A.O. OBSERVED THAT THE ASSESSEE HAS TRANSFERRED AN AMOUNT OF RS.22,90,00,000/- TO THE CAPITAL RESERVE ACCOUNT FOR THE YEAR UNDER CONSIDERATION. THE ASSE SSEE HAS SUBMITTED THAT IT HAD SECURED LOAN FROM IFCI LT D. IN THE PREVIOUS YEAR AND THE AMOUNT OF RS.39.40 CRORES ON WHICH INTEREST PAYABLE WAS AT RS.29.65 CRORES, WHIC H STOOD OUTSTANDING AS ON 31.03.2006. DUE TO ADVERSE MARKET CONDITIONS, THE FORESAID FINANCIAL SITUATION , THE ASSESSEE COULD NOT MAKE PAYMENTS AND SETTLEMENT AGREEMENT WAS ENTERED INTO BY THE ASSESSEE WITH IFC I LTD. AND SETTLED THE SAID LOAN FOR RS.16.50. LD. A.O. T REATED THE REMISSION OF RS.22.90 CRORES AS REVENUE RECEIPT AND 11 I.T.A.NO.6080/DEL/2013 MADE ADDITION TO THE INCOME OF THE ASSESSEE U/S 41( 1) OF THE ACT. ON APPEAL, LD. CIT(A) CONFIRMED THE ADDIT ION MADE BY THE LD. A.O. BY OBSERVING AS UNDER: SIMILARLY, IN THE SUBJECT CASE THE LOAN IS SECURED AS FIRST CHARGE AGAINST ALL MOVEABLE AND IMMOVABLE ASSETS, PRESENT AND FUTURE, INSTALLED OR IN LOOSE CONDITION. THE AGREEMENT OF LOAN DISBURSEMENT AT N O POINT SPECIFIES THAT THE LOAN HAS TO BE UTILIZED FO R PURCHASE IF FIXED ASSETS. SIMILARLY THERE IS NO MEN TION OF ANY SUCH CONDITION IN THE BALANCE SHEET FOR THE YEAR. THE APPELLANT HAS NOT ENCLOSED THE BANK ACCOUNT TO SHOW THAT THE LOAN HAS BEEN UTILIZED ONL Y FOR THE PURPOSE OF PURCHASE OF FIXED ASSETS AND HAS NOT FORMED PART OF WORKING CAPITAL. SINCE THERE WAS NO PRE-REQUISITE ON THE PART OF IFCI THAT THE LOAN HAS TO BE UTILIZED FOR PURCHASE OF FIXED ASSETS AND THE LOAN HAS BEEN WALLED OFF BY THE FINANCIAL INSTITUTIONS, THEREFORE, THE PROVISIONS OF SECTION 41(1) ARE APPLICABLE TO THE APPELLANT. THE GROUND OF APPEAL I S THEREFORE DISMISSED. 8.1 AGGRIEVED BY THE ORDER OF LD. CIT(A), THE ASSES SEE IS IN APPEAL BEFORE US NOW. 8.2 LD. A.R. SUBMITTED THAT DUE TO HEAVY LOSSES SUF FERED BY THE ASSESSEE, IT WAS DECLARED SICK AND HAD UNDER GONE FINANCIAL DIFFICULTIES. LD. A.R. SUBMITTED THAT TH E AMOUNT SO TRANSFERRED TO THE CAPITAL RESERVE ACCOUNT, DID NOT REPRESENT CESSATION OF LIABILITY AS OUT OF THE TOTA L PRINCIPAL AMOUNT OF RS.39.49 CRORES RS.16.50 CRORES WERE PAID . LD. A.R. SUBMITTED THAT IT WAS ONLY THE BALANCE SUM OF RS.22.90 CRORES THAT WAS TRANSFERRED TO THE CAPITAL RESERVE BEING A CAPITAL RECEIPT. AS THERE WAS NO REMISSION BY ANY CREDITOR, THEREFORE THE PROVISIONS OF SECTION 41 WE RE NOT 12 I.T.A.NO.6080/DEL/2013 APPLICABLE. LD. A.R. PLACED RELIANCE UPON THE DECI SION OF HON'BLE DELHI HIGH COURT IN THE CASE OF ROLL ATTAIN ERS LTD. VS CIT REPORTED IN 339 ITR 54. 8.3 ON THE CONTRARY, LD. D.R. SUBMITTED THAT THE SA ID LOAN WAS TAKEN FROM M/S. IFCI LTD., FOR THE PURPOSE OF SETTING UP OF MANUFACTURING PLANT IN KERALA. HE SUBMITTED THAT THE CLAIM OF THE ASSESSEE CANNOT BE ALLOWED AS THERE IS NO ACQUISITION OF ANY FIXED ASS ET BY THE ASSESSEE. LD. D.R. EMPHASIZED THAT THE LOAN WAS TA KEN FOR TRADING PURPOSES AND THUS SHOULD NOT BE ALLOWED BY PLACING RELIANCE UPON THE DECISION IN THE CASE OF C IT VS T V SUNDARAM AYANGAR SONS REPORTED IN 222 ITR 344 (S. C.). 8.4 WE HAVE PERUSED THE DETAILS OF THE ORDERS PASSE D BY THE AUTHORITIES BELOW AND THE ARGUMENTS ADVANCED BY BOTH THE PARITIES. WE SUPPORT THE CONTENTION OF TH E ASSESSEE THAT EVERY RECEIPT IN QUESTION WITH THE BU SINESS CANNOT BE SAID TO BE A TRADING RECEIPT. THE ASSES SEE IS ENGAGED IN THE BUSINESS OF MANUFACTURING FERRO ALLO YS AND TERM LOAN WAS TAKEN FROM M/S. IFCI LTD. FOR SET TING UP A MANUFACTURING UNIT A PALAKKAD, KERALA, WHICH I S EVIDENT FROM LETTER DATED 07.01.1998 BY IFCI AT PAG E 44 OF THE PAPER BOOK. WE HAVE ALSO PERUSED THE TERMS AND CONDITIONS OF AGREEMENT ENTERED INTO BETWEEN THE AS SESSEE AND IFCI LTD. WHICH IS PLACED AT PAGES 31.-36 OF TH E PAPER BOOK. IT IS OBSERVED FROM CLAUSE (II) AT PAGE 34 T HAT THE ASSESSEE HAS RECEIVED SECURED LOAN BY MORTGAGING 13 I.T.A.NO.6080/DEL/2013 IMMOVABLE ASSET PURCHASED IN KERALA FOR SETTING UP OF THE MANUFACTURING UNIT. THE CLAUSE READS AS UNDER: 1. SECURITY: (A) THE LOAN SHALL BE SECURED BY A FIRST MORTGAGE A ND CHARGE ON ALL THE IMMOVABLE AND MOVABLE ASSET, PRESENT AND FUTURE, OF HEHL IN SUCH FORM AS MAY BE REQUIRED BY IFCI (SUBJECT TO THE PRIOR CHARGE ON CE RTAIN SPECIFIED MOVABLES CREATED / TO BE CREATED IN FAVOU R OF HEHLS BANKERS BY WAY OF SECURITY FOR BORROWINGS FO R WORKING CAPITAL). 8.5 IT IS ALSO OBSERVED THAT THE LOAN WAS TAKEN BY THE ASSESSEE FOR PURCHASE OF FIXED ASSET AND OUT OF OUTSTANDING LOAN OF RS.39.40 CRORES, A SUM OF RS.16 .50 CRORES WAS PAID TO IFCI LTD. AS ONE TIME SETTLEMENT AND THE BALANCE SUM OF RS.22.90 CRORES WAS WAIVED BY IF CI LTD. 8.6 THE AMOUNT OF RS.22.90 CRORES HAVE BEEN CARRIED TO THE RESERVE AND SURPLUS AND THE SECURED LOAN HAS BE EN SHOWN AS NIL FOR THE YEAR UNDER CONSIDERATION (PA GES 52- 69 OF THE PAPER BOOK). THE ASSESSEE CREDITED THE P RINCIPAL AMOUNT WAIVED TO THE CAPITAL RESERVE ACCOUNT IN THE BALANCE SHEET FOR THE YEAR UNDER CONSIDERATION TREA TING IT AS CAPITAL IN NATURE AS PER THE TERMS OF THE AGREEM ENT BETWEEN THE PARTIES. 8.7 IN OUR CONSIDERED VIEW, ON THE BASIS OF THE ABO VE FACTUAL MATRIX, THE AMOUNT REFERRED TO AS LOAN OBTA INED BY THE ASSESSEE TOWARDS THE PURCHASE OF CAPITAL ASSET WILL NOT PARTAKE THE CHARACTER OF TRADING RECEIPT UNDER SECT ION 41(1) OF THE ACT. 14 I.T.A.NO.6080/DEL/2013 8.8 IN THE PRESENT CASE, THE MONEY WAS RECEIVED BY THE ASSESSEE IN THE COURSE OF CARRYING ON HIS BUSINESS AS A TERM LOAN FOR PURCHASE OF FIXED ASSET AND THE WAIVE OF THE PRINCIPAL AMOUNT HAS BEEN REFLECTED IN BALANCE SHEE T AND NOT IN P & L ACCOUNT. 8.9 IN THE FACTS OF SUNDRAM AYANGER CASE (SUPRA), T HE ASSESSEE THEREIN HAD RECEIVED DEPOSITS FROM ITS CUS TOMERS. IN THE COURSE OF TRADING TRANSACTIONS WHICH WAS NOT CLAIMED BY THE CUSTOMERS AND IT WAS HELD THAT SUCH CLAIM BALANCE REPRESENT INCOME OF THE ASSESSEE THEREIN. BUT, IN THE FACTS OF THE PRESENT CASE, THE LOAN RECEIVED BY THE ASSESSEE WAS FOR THE PURCHASE OF CAPITAL ASSET. LD . A.O. HAS ALSO PLACED RELIANCE UPON THE DECISION OF CIT V S V S ADIES ADVERTISERS PVT. LTD. REPORTED IN 255 ITR 510 . A PERUSAL OF THIS JUDGMENT, IT IS OBSERVED THAT THE A SSESSEE THEREIN HAD WRITTEN OFF CLAIM AND CREDITED BALANCES OF THE SUPPLIES DURING THE NORMAL COURSE OF ITS BUSINESS OPERATION AND SUCH CREDIT BALANCE REPRESENTS MONEY ARRIVED OUT OF NORMAL TRADE TRANSACTION. THE FACTS OF THIS CASE ARE ALSO DISTINGUISHABLE FOR THE REASON THAT I N THE PRESENT CASE BEFORE US, THE LOAN WAS TAKEN BY THE ASSESSEE FOR CARRYING OUT ITS MANUFACTURING ACTIVIT IES AT THE UNIT SET UP IN PALAKKAD, KERALA. LD. A.R. HAS PLACED HIS RELIANCE UPON THE DECISION OF HON'BLE JURISDICT IONAL HIGH COURT IN THE CASE OF DCIT VS TOSHA INTERNATION AL LTD. REPORTED IN 116 TTJ 941 WHEREIN, IN THE IDENTI CAL CIRCUMSTANCES, IT WAS HELD THAT: 15 I.T.A.NO.6080/DEL/2013 AS PER OUR CONSIDERED VIEW, FOR ATTRACTING THE PROVISIONS OF S.41(1), THE FIRST REQUISITE CONDITIO N TO BE SATISFIED IS THATS THE ASSESSEE SHOULD HAVE GOT DEDUCTION OR BENEFIT OF ALLOWANCE IN RESPECT OF LOS S, EXPENDITURE OR TRADING LIABILITY INCURRED BY IT AND SUBSEQUENTLY DURING ANY PREVIOUS YEAR, THE ASSESSEE SHOULD HAVE RECEIVED ANY AMOUNT IN RESPECT OF SUCH LOSS, EXPENDITURE OR TRADING LIABILITY BY WAY OF REMISSION OR CESSATION THEREOF. THE REMISSION WOULD BECOME INCOME ONLY IF THE ASSESSEE HAS CLAIMED DEDUCTION IN RESPECT OF EXPENDITURE OR TRADING LIAB ILITY. IN MAHINDRA & MAHINDRA LTD. VS. CIT (2003) 182 CTR (BOM) 34 : (2003) 261 ITR 501 (BOM) HON'BLE HIGH COURT OF BOMBAY, HELD THAT NO ALLOWANCE OR DEDUCTIO N HAVING BEEN ALLOWED IN RESPECT OF LOAN TAKEN BY ASSESSEE FOR PURCHASE OF CAPITAL ASSETS. S.41(1) WA S NOT ATTRACTED TO REMISSION OF PRINCIPAL AMOUNT OF L OAN. IN THE INSTANT CASE THE ASSESSEE HAS NOT GOT ANY DEDUCTION ON ACCOUNT OF ACQUISITION OF CAPITAL ASSE TS AS THE SAME HAS BEEN REFLECTED IN THE BALANCE SHEET AND NOT IN THE P&L A/C, AND ALSO THE REMISSION OF T HE PRINCIPAL AMOUNT OF LOAN SO OBTAINED FROM THE BANK AND FINANCIAL INSTITUTION HAD NOT BEEN CLAIMED AS EXPENDITURE OR TRADING LIABILITY IN ANY OF THE EARL IER PREVIOUS YEAR. 8.10 ON THE BASIS OF ABOVE DISCUSSION, RESPECTFULLY FOLLOWINGS THE DECISION OF HON'BLE JURISDICTIONAL H IGH COURT IN THE CASE OF TOSHA INTERNATIONAL LTD (SUPRA ), WE ARE INCLINED TO HOLD THAT THE WAIVER OF LOAN DOES N OT AMOUNT TO CESSATION OF LIABILITY AND CANNOT BE BROU GHT TO TAX BY INVOKING THE PROVISIONS OF SECTION 41(1) OF THE ACT. 16 I.T.A.NO.6080/DEL/2013 8.10 THIS GROUND OF APPEAL RAISED BY THE ASSESSEE S TANDS ALLOWED. 9. IN THE RESULT, APPEAL FILED BY THE ASSESSEE STAN DS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 04 TH AUG., 2016. SD./- SD./- (S. V. MEHROTRA) (BEENA A. PILLAI) ACCOUNTANT MEMBER JUDICIAL MEMBER DATE:04.08.2016 SP. COPY FORWARDED TO:- 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT 4. THE CIT (A)-, NEW DELHI. 5. THE DR, ITAT, LOKNAYAK BHAWAN, KHAN MARKET, NEW DELHI. TRUE COPY. BY ORDER (ITAT, NEW DELHI) S.NO. DETAILS DATE INITIALS DESIGNATION 1 DRAFT DICTATED ON 17/06 SR. PS/PS 2 DRAFT PLACED BEFORE AUTHOR 20/6,4/8 SR. PS/PS 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER AM/AM 5 APPROVED DRAFT COMES TO THE SR. PS/PS 4/8/16 SR. PS/PS 6 KEPT FOR PRONOUNCEMENT 4/8 SR. PS/PS 7 FILE SENT TO BENCH CLERK 4/8 SR. PS/PS 8 DATE ON WHICH THE FILE GOES TO HEAD CLERK 9 DATE ON WHICH FILE GOES TO A.R. 10 DATE OF DISPATCH OF ORDER