AI Insights
The case involves the Revenue's appeal against the order of the Commissioner of Income Tax (Appeals) which had deleted the addition made by the Assessing Officer under section 41(1) of the Income Tax Act, 1961. The issue centered around the share application money of Rs.16,63,96,600/- received from M/s. Ansaldo Caldaie Spa-Italy, which was pending allotment and later waived by the investor. The Assessing Officer had treated this as income under section 41(1) due to alleged cessation of liability, which was contested and ultimately rejected by the CIT(A) and upheld by the Tribunal.
Appeal Details
Counselvise Citation
[2023] 140 COUNSELVISE.COM (IT) 132720 (ITAT-CHENNAI)
Assessee PAN
Bench
Appeal Number
Duration Of Justice
4 year(s) 23 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
19-05-2023
Appeal Filed By
Department
Order Result
Dismissed
Bench Allotted
B
Next Hearing Date
16-05-2023
Assessment Year
2014-2015
Appeal Filed On
25-04-2019
Judgement Text
अपीलीय अिधकरण, ‘बी’ ᭠यायपीठ,चे᳖ई IN THE INCOME TAX APPELLATE TRIBUNAL ‘B’ BENCH, CHENNAI ᮰ीमहावीर ᳲसह, उपा᭟यᭃ एवं ᮰ी मनोज कुमार अᮕवाल, लेखा सद᭭य के समᭃ BEFORE SHRI MAHAVIR SINGH, VICE PRESIDENTAND SHRI MANOJ KUMAR AGGARWAL, ACCOUNTANT MEMBER आयकर अपील सं./ITA No.: 1256/CHNY/2019 िनधाᭅरण वषᭅ /Assessment Year:2014-15 The DCIT, Corporate Circle 1(1), Chennai. v. Ansaldo Caldaie Boilers India Pvt. Ltd., New No.45 (Old No.45) No.3, 3 rd Floor, Manjula Towers, Ceebros Complex, Egmore, Chennai – 600 008. PAN: AAFCA 0623B (अपीलाथᱮ/Appellant) (ᮧ᭜यथᱮ/Respondent) अपीलाथᱮ कᳱ ओर से/Appellant by : Shri S. Senthil Kumaran, CIT ᮧ᭜यथᱮ कᳱ ओर से/Respondent by : Shri R. Vijayaraghavan, Advocate सुनवाई कᳱ तारीख/Date of Hearing : 17.05.2023 घोषणा कᳱ तारीख/Date of Pronouncement : 19.05.2023 आदेश /O R D E R PER MAHAVIR SINGH, VICE PRESIDENT: This appeal filed by the Revenue is directed against the order of the Commissioner of Income Tax (Appeals)-1, Chennai in ITA No.655/CIT(A)-1/2016-17 dated 31.01.2019. The assessment was framed by the ACIT (OSD), Corporate Range 1, Chennai for the assessment year 2014-15 u/s.143(3) of the Income Tax Act, 1961 (hereinafter the ‘Act’) vide order dated 29.12.2016. 2 I.T.A. No.1256/Chny/2019 2. The only issue in this appeal of Revenue is as regards to the order of CIT(A) deleting the addition made by AO u/s.41(1) of the Act holding that there is no cessation of liability for an amount of Rs.16,63,96,600/-. For this Revenue has raised following effective ground Nos.2 & 3:- 2. The Ld. CIT(A) erred in deleting the addition of Rs.16,63,96,600/- under section 41(1) by holding that there is no cessation of liability even when the investor, M/s Ansaldo Caldaie SpA -Italy has categorically stated that it hạs waived all its rights either to receive refund of the impugned amount or to receive shares against the same. 3. The Ld. CIT(A) erred in deleting the addition under section 41(1) by holding that there is no cessation of liability even when RBI has denied the assessee permission to convert it into a loan or the time period for allotment of shares as per RBI guidelines has expired. 3. Brief facts are that the assessee is a private limited company engaged in manufacturing of boilers used for power generation and environmental applications. During the course of assessment proceedings, the AO on perusal of accounts of the assessee noticed that it is showing share application money pending allotment under other liabilities for an amount of Rs.16,63,96,600/-. He required the assessee to provide the details of share application money pending allotment, from which date and what is the treatment given by assessee for the liability as on date. The assessee replied that the share application money pending allotment is on account of M/s. 3 I.T.A. No.1256/Chny/2019 Ansaldo Caldaie Spa-Italy who has sent an amount of Rs.16.64 crores towards share application money in the assessee’s company to increase the share percentage in the year 2011. The assessee replied that the shares were not issued within 180 days on receipt of money for the reason that there are FERA conditions and since, as RBI has not permitted for issuance of shares which is mandatory condition and directed to refund of money, the matter is referred to RBI and case is pending before RBI to submit the complete financials of assessee as on the date. The assessee also furnished a letter from M/s. Ansaldo Caldaie Spa-Italy wherein they have intimated about waiving of their right to receive the shares or the refund amount. Accordingly, the AO invoking the provisions of section 41(1) of the Act added the share application money pending allotment to the returned income of the assessee. Aggrieved, assessee preferred appeal before CIT(A). 4. The CIT(A) after considering the submissions of the assessee and after considering the legal position and relying on the decision of Hon’ble Madras High Court in the case of CIT vs. Tamilnadu Warehousing Corporation, [2008] 170 taxmann 123 deleted the disallowance by observing as under:- 4 I.T.A. No.1256/Chny/2019 The submissions of the appellant were considered vis-a-vis the findings of the A.O During the appellate proceedings, the appellant was asked to substantiate its submissions regarding the share application money which was still treated as pending allotment during the A.Y. 2014-15. In this regard, the appellant furnished a copy of the letter issued by the Associate Enterprise, Ansaldo Caldaie Spa-Italy regarding waiver of share application money pending allotment. In their letter dated 18/5/2015, the A.C Boilers SPA stated that under the Foreign Exchange Regulations in India, ACBI appellant) was required to issue and allot shares to then within 180 days of receiving the advance share application money and to refund the share application money to them. It was also stated that the appellant had requested permission for refund of the advance share application money which was permitted by the RBI on January 29, 2014. It was also stated that since the appellant did not have the financial capability to refund the said amount, it was agreed to convert the advance share application money into a loan payable by ACBI to their company. Subsequently, a request was made by the appellant to the RBI to convert the said share application money into a Long Term loan. It was stated that this request was denied by the RBI on June 21, 2015 wherein the RBI directed the company to allot the shares to them within a period of one year. The Associate Enterprise, Ansaldo Caldaie Spa-Italy stated that they chose to irrevocably waive their right to be issued and allotted shares by ACBI and also to waive their right to receive the refund of the advance share application money from the appellant. It was stated therein that such advance share application money may be retained by the appellant with the permission of the RBI. The appellant also furnished the financial statements pertaining to the F.Y. 2013-14 in which it was stated that the share application money received from the Associate Enterprise, Ansaldo Caldaie Spa-Italy was held as pending allotment. It was noted that in the Balance sheet, under the head 'other current Liabilities', the sum of Rs.l6,63,96,600/- was listed against Share Application Money Pending Allotment". In the letter dated 16/8/2018 (which was furnished during the appellate proceedings), the RBI advised the appellant to refund the amount of Rs.9,37,300/- received for allotment of 16,95,000 shares on 28/7/2005, Rs.97,06,046/- received on July 21, 2010 and Rs. 15,66,93,954 /- received on 30/11/2011 representing excess share application money to M/s.Ansaldo Caldaire S.P.A. These sums aggregated to Rs. 16,73,37,300/-. Thus, it was substantiated that during the F.Y. 2013- 14, the liability was in existence and the allotment of and shares/ refund of share application money was still pending. 5 I.T.A. No.1256/Chny/2019 Furthermore, in the instant case, the provisions of section 41(1) of the Act do not come into play as the waiver of allotment of shares by the Associate Enterprise, Ansaldo Caldaie Spa-Italy pertains to an amount which is in the nature of capital asset and not to a trading liability. It also was not claimed as a deduction or a refund in the earlier years. The jurisdictional Tribunal in the case of Tyco Sanmar Ltd cited supra has held that liabilities as per books of accounts could not be treated as income of the appellant. In the instant case, the liabilities in the form of Share Application pending allotment amounting to Rs.63,96,000/ - still exist as per their financials. The High Court of Madras (2008) 170 taxmann 123 in the case of CIT vs. Tamilnadu Warehousing Corporation in their decision dated 10/10/ 2006 ruled that that once the liability has been reflected in the Balance sheet it could not be assessed u/s.41(1) of the Act The Apex Court declared that unless and until there was a cessation of liability, section 41 could not be pressed into service. Taking into account the facts, circumstances and the prevailing judicial decisions pertaining to this case, I am inclined to accept the contentions of the appellant. The disallowance u/s.4 1(1) amounting to Rs.16,63,96,600/- requires to be deleted. Aggrieved, now Revenue is in appeal before Tribunal. 5. Now before us, ld.CIT-DR argued that the associated enterprises of the assessee i.e., M/s. Ansaldo Caldaie Spa-Italy applied for share application money in 2011 and sent the amount to the extent of Rs.16.64 crores and thereafter furnished letter communicating that they have waived of their right to receive the shares or the refund money and no share is allotted by the assessee company. Now, the amount waived by the associated enterprises is the income of the assessee in term of section 41(1) of the Act 6 I.T.A. No.1256/Chny/2019 because such amount or value of benefit is always chargeable to tax as income of the previous year wherein such amount or benefit is obtained by the assessee. Hence, he argued that in the present case, the waiver of amount came in the year under consideration and even the associated enterprise has also waived the refund of amount. He argued that the assessee company could not allot shares within 180 days of receipt of share application money as per conditions stipulated under the Foreign Exchange Regulation Act and the assessee company was asked to return the money to M/s. Ansaldo Caldaie Spa-Italy. The assessee company themselves consider the same as loan but could not repay because of its financial position and hence the lender also agreed to waive the right to receive the money. The contention of the assessee that it was not in a position to refund the money and considered the same as loan because RBI has not permitted the transaction and directed to issue shares within a year. The ld.CIT-DR referred to the letter issued by RBI i.e., the Assistant General Manager, Foreign Exchange Department vide their letter in Che.FED.FID.No.3439/25.01.085/ 2018-19 dated 07.05.2019 informing that the company was delaying refund for one or other reason but not complying with the RBI instructions and repeatedly requesting for waiver of allotment of shares/refund of share application money. The ld.CIT-DR further 7 I.T.A. No.1256/Chny/2019 stated that the colour of the money is changed, although it was capital in nature but when the share application pending allotment was used by assessee for its own business purpose, it became revenue. For this, ld.CIT-DR referred to the decision of Hon’ble Supreme Court in the case of CIT vs. T.V. Sundaram Iyengar & Sons Ltd., 222 ITR 344 and he referred to particular para 23 of the judgment which reads as under:- “In the present case, the money was received by the assessee in the course of carrying on his business. Although it was treated as deposit and was of capital nature at the point of time it was received, by efflux of time the money has become the assessee's own money. What remains after adjustment of the deposits has not been claimed by the customers. The claims of the customers have become barred by limitation. The assessee itself has treated the money as its own money and taken the amount to its profit and loss account. There is no explanation from the assessee why the surplus money was taken to its profit and loss account even if it was somebody else's money. In fact, as Atkinson J. pointed out that what the assessee did was the commonsense way of dealing with the amounts". 5.1 He also referred the letter from assessee to RBI dated 18.06.2019 which is enclosed at page 9 of assessee’s paper-book, which is as under:- “Since AnsaldoCaldaie Boilers India has no funds to refund the amount since its operations are practically closed, We have sought help from M/s. Gammon India Ltd to resolve this matter. M/s. Gammon India Ltd is on the verge of admission to the NCLT and will need approval of its lenders (JLF) for cash support which will clearly take time and is uncertain as well.” In view of this, ld.CIT-DR argued that this is a clear cut benefit derived by assessee by use of this money and till date, assessee has 8 I.T.A. No.1256/Chny/2019 not refunded the amount nor allotted shares to M/s. Ansaldo Caldaie Spa-Italy. 6. On the other hand, the ld.counsel for the assessee supported the order of CIT(A) and stated that the finding of CIT(A) that till date the liability exits in the books of accounts and the assocated enterprises i.e., M/s. Ansaldo Caldaie Spa-Italy has right to recover the amount. He particularly referred to CBDT Instruction No.2/2015 dated 29 th January, 2015, wherein the decision of Hon’ble Bombay High Court in the case of Vodafone India Services Pvt. Ltd., was accepted and the relevant para of CBDT instructions read as under:- “Subject Acceptance of the Order of the Hon'ble High Court of Bombay in the case of Vodafone Indio Services Pvt. Ltd.- reg. In reference to the above cited subject, I am directed to draw your attention to the decision of the High Court of Bombay in the case of Vodafone India Services Pvt. Ltd. for AY 2009-10 (WP No.87112014), wherein the Court has held, inter-alia, that the premium on shore issue was on account of o capital account transaction and does not give rise to income and, hence, not liable to transfer pricing adjustment.” 6.1 The ld.counsel for the assessee also made argument that this issue is covered by the decision of Hon’ble Supreme Court in the case of CIT vs. Mahindra and Mahindra Ltd., (2018) 404 ITR 1 (SC) wherein Hon’ble Supreme Court held that waiver of loan by creditor is neither taxable as a perquisite u/s.28(iv) of the Act nor taxable as 9 I.T.A. No.1256/Chny/2019 a cessation of liability u/s.41(1) of the Act. The ld.counsel for the assessee particularly referred to para 16 & 17 of the judgment which reads as under:- 16. Moreover, the purchase effected from the Kaiser Jeep Corporation is in respect of plant, machinery and tooling equipments which are capital assets of the Respondent. It is important to note that the said purchase amount had not been debited to the trading account or to the profit or loss account in any of the assessment years. Here, we deem it proper to mention that there is difference between 'trading liability' and 'other liability'. Section 41 (1) of the IT Act particularly deals with the remission of trading liability. Whereas in the instant case, waiver of loan amounts to cessation of liability other than trading liability. Hence, we find no force in the argument of the Revenue that the case of the Respondent would fall under Section 41 (1) of the IT Act. 17. To sum up, we are not inclined to interfere with the judgment and order passed by the High court in view of the following reasons: (a) Section 28(iv) of the IT Act does not apply on the present case since the receipts of Rs 57,74,064/- are in the nature of cash or money. (b) Section 41(1) of the IT Act does not apply since waiver of loan does not amount to cessation of trading liability. It is a matter of record that the Respondent has not claimed any deduction under Section 36 (1) (ii) of the IT Act qua the payment of interest in any previous year. 6.2 Another facet argued by ld.counsel for the assessee that the share application money received by assessee is never been claimed as deduction in any of the earlier assessment years and hence the basic condition laid down in the provisions of section 41(1) of the Act is not met with and hence, the CIT(A) has rightly deleted the addition. 10 I.T.A. No.1256/Chny/2019 7. We have heard rival contentions and gone through facts and circumstances of the case. Admitted facts are that the assessee company received share application money in the year 2011 from its associated enterprises M/s. Ansaldo Caldaie Spa-Italy amounting to Rs.16.64 crores and AO noted from financials that share application money pending allotment amounting to Rs.16,63,96,600/- was shown as other liabilities and according to AO this is cessation of liability u/s.41(1) of the Act because the assessee company has neither returned money to holding company nor issued shares within 180 days of receipt of money in term of conditions of Foreign Exchange Regulation Act. Admittedly there was a dispute and since assessee was not in a position to refund the money it was considered as loan to assessee but RBI has not permitted that transaction and directed to issue shares within a year. However due to various limitations M/s. Ansaldo Caldaie Spa- Italy decided not to increase its stake and also waive the right to receive the refund. The assessee referred the matter to RBI and case is pending before RBI till date. As explained by ld.counsel for the assessee, on a specific proposition raised by ld.CIT-DR that till date the dispute is pending and neither money is refunded nor shares are allotted but he argued that they will not affect the case of assessee or Revenue because waiver is not there and the alleged 11 I.T.A. No.1256/Chny/2019 waiver claimed by Revenue is in financial year 2013-14 which according to Revenue is in term of communication received from RBI. The proposition argued by both the sides that the share application pending allotment, money is outstanding in the books of accounts of the assessee, we agree with the argument of the ld.counsel for the assessee that once there is existing liability as per books of accounts, the provision of section 41(1) in regard to cessation of liability will not come into play because the two conditions or two fictions of the provision of section 41(1) of the Act are not met. The section has prescribed following two fictions:- a) the amount obtained by the assessee or the value of benefit accruing to him is deemed to be profits and gains of business or profession which otherwise would not be income, and (b) such amount or value of benefit is made chargeable to income-tax as the income of the previous year wherein such amount or benefit was obtained, and, that is so irrespective of the fact whether the business or profession in respect of which the allowance or deduction had been made is in existence in that year or not. Further the provisions of section 41(1) have application only if (i) an allowance or deduction had been made, in the computation of profits and gains of a business or profession, in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee, and (ii) subsequently during any previous year the assessee had 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 12 I.T.A. No.1256/Chny/2019 In the present case before us, the assessee has neither claimed any allowance or deduction on account of any loss, expenditure of trading liability incurred by it. Further there is no amount obtained till date in respect of the share application money pending allotment. There is no benefit obtained in respect of any trading liability by way of remission or cessation thereof. Still the amount is outstanding on account of share allotment pending allocation, which is capital in nature and hence, the provisions of section 41(1) of the Act does not apply to the present facts of the case of the assessee. Hence, the CIT(A) has rightly deleted the addition. We confirm the same and therefore, the appeal of the Revenue is dismissed. 8. In the result, the appeal filed by the Revenue is dismissed. Order pronounced in the open court on 19 th May, 2023 at Chennai. Sd/- Sd/- (मनोज कुमार अᮕवाल) (MANOJ KUMAR AGGARWAL) लेखा सद᭭य/ACCOUNTANT MEMBER (महावीर ᳲसह ) (MAHAVIR SINGH) उपा᭟यᭃ /VICE PRESIDENT चे᳖ई/Chennai, ᳰदनांक/Dated, the 19 th May, 2023 RSR आदेश कᳱ ᮧितिलिप अᮕेिषत/Copy to: 1. अपीलाथᱮ/Appellant 2. ᮧ᭜यथᱮ/Respondent 3. आयकर आयुᲦ /CIT 4. िवभागीय ᮧितिनिध/DR 5. गाडᭅ फाईल/GF.
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