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2008 (7) TMI 1025 - AT - Income TaxApplicability of sections 41(1) and 28(iv) - Liability written off - deduction on loss, expenditure or trading liability - loan for meeting the day-to-day requirements of the company - section 41(1) were wrongly invoked - Whether the action of AO, linking the loss of the assessee to the loans given by lender (SDD CPL) and thereby considering that the amount given by the lender is in respect of the said loss, is correct? - Assessee submitted that he never claimed any deduction or allowance of losses or expenditure involving M/s. SDD CPL in respect of the amounts written-off - HELD THAT - We find that the assessee was in huge losses and was in search of incoming group. Such group wanted a Balance Sheet of the company cleared off the liabilities. The SDD CPL has come to the rescue of the assessee to provide loans and write off the same. In this case, the amount given by SDD CPL is not a trade deposit and the said amount has not become a definite trade surplus. Further, giving loans and the write off of the same by SDD CPL happened in the time span of only 5 months. Applying the provisions of section 41(1) to the facts of the instant case, we find that the amount of loan received has no connection to any such allowance or deduction. It is a mere loan unconnected to any allowance or deduction made in the assessee s assessment. Although it is an undisputed fact that the assessee received benefit by way of remission or cessation of liability, the same is certainly not in respect of any trading liability. We find that the assessee did not receive the said amount in respect of any sales or purchases or other related direct or indirect expenses to qualify for trading activity. The said amount was given by the M/s. SDD CPL for the purpose of making the assessee-company fit for takeover and for shaping up a presentable Balance Sheet for the incoming group. In this regard, we have also examined if the AO has made out any case against assessee for the proposition that if the amounts given by M/s. SDD CPL are given to assessee on behalf of other trade debtors in order to be covered by the provisions of section 41(1) of the Act, that is also not the case here. Therefore, The AO action of linking the loss of the assessee to the loans given by lender (SDD CPL) and thereby considering that the amount given by the lender is in respect of the said loss, is an incorrect finding and the same is not in accordance with section 41(1) of the Act. It is almost a settled law that A debt waived by the creditor cannot be the income of the debtor as held in the case of British Mexican Petroleum Co. Ltd. v. Jackson and affirmed in the case of CIT v. P. Ganesa Chettiar 1979 (6) TMI 5 - MADRAS HIGH COURT . Hence, the transaction between assessee and SDD CPL are aimed at making the company eligible for take over by the income group and are consequential to the contractual agreement. The transactions in the books of account are not found bogus or collusive by the AO. The loans has nothing to do with the assessee s claims of deduction or allowances in that assessment as assessee within the meaning of section 41(1) as held by the co-ordinate Bench in the case of Jahangir Gullabbhai 2007 (12) TMI 316 - ITAT MUMBAI . Further, the provisions of section 28(iv) of the Act does not come to the rescue of the revenue in the view of the co-ordinate Bench decision in the case of Hellios Food Improvers (P.) Ltd. 2007 (2) TMI 348 - ITAT MUMBAI . Therefore, assessee s ground is allowed.
Issues Involved:
1. Addition of Rs. 3,51,34,000 as income due to loan write-back. 2. Disallowance of provision for doubtful debts amounting to Rs. 7,70,000. 3. Disallowance of depreciation amounting to Rs. 12,64,420 for scrapped fixed assets. 4. Disallowance of provision for doubtful deposits amounting to Rs. 5,95,591. 5. Disallowance of Rs. 5,77,950 for filing fees and stamp duty expenses related to share capital increase. Issue-wise Analysis: 1. Addition of Rs. 3,51,34,000 as Income Due to Loan Write-back: The primary issue revolves around the addition of Rs. 3,51,34,000 to the assessee's income, which was the amount of loan written back in the Profit and Loss Account. The assessee argued that this amount should not be treated as income under section 41(1) or any other provisions of the Income-tax Act, 1961. The loan was taken from M/s. Saurabh Digital Devices & Circuits Private Limited (SDD & CPL) to meet the company's operational expenses and make it fit for a takeover. The Assessing Officer (AO) added this amount as income under section 41(1), reasoning that it was received to recoup business losses. The CIT(A) upheld this decision, referencing the Supreme Court's judgment in T.V. Sundaram Iyengar & Sons Ltd., which held that amounts received in the course of trading, even if initially not taxable, could become taxable income upon forfeiture. However, the Tribunal found that the loan was a capital receipt and not a trading liability. The Tribunal noted that the loan was given to make the company fit for takeover and was not connected to any allowance or deduction made in the assessee's assessment. Therefore, the provisions of section 41(1) were not applicable. The Tribunal also distinguished the case from T.V. Sundaram Iyengar & Sons Ltd., stating that the loan was not a trade deposit and did not become a trade surplus. Consequently, the addition of Rs. 3,51,34,000 was deleted. 2. Disallowance of Provision for Doubtful Debts Amounting to Rs. 7,70,000: The assessee contested the disallowance of Rs. 7,70,000 as a provision for doubtful debts. The CIT(A) confirmed the disallowance, holding that the provision was not allowable. The Tribunal did not provide specific details on this issue in the reproduced text, indicating it might be a minor issue or resolved similarly to other provisions. 3. Disallowance of Depreciation Amounting to Rs. 12,64,420 for Scrapped Fixed Assets: The assessee claimed depreciation of Rs. 12,64,420 for fixed assets scrapped during the year, which was disallowed by the CIT(A). The Tribunal's detailed analysis on this issue is not provided in the reproduced text, suggesting it might have been resolved in a manner consistent with the treatment of other disallowances. 4. Disallowance of Provision for Doubtful Deposits Amounting to Rs. 5,95,591: The CIT(A) confirmed the addition of Rs. 5,95,591 as a provision for doubtful deposits, which the assessee argued should be allowed. The Tribunal did not elaborate on this issue in the reproduced text, implying it might be a minor issue or resolved similarly to other provisions. 5. Disallowance of Rs. 5,77,950 for Filing Fees and Stamp Duty Expenses Related to Share Capital Increase: The assessee claimed Rs. 5,77,950 for filing fees and stamp duty expenses incurred for increasing share capital, which was disallowed by the CIT(A). The Tribunal did not provide specific details on this issue in the reproduced text, indicating it might be a minor issue or resolved in a consistent manner with other disallowances. Conclusion: The Tribunal allowed the assessee's appeal regarding the addition of Rs. 3,51,34,000, holding that the provisions of section 41(1) were not applicable to the loan write-back, as it was a capital receipt and not a trading liability. The Tribunal distinguished the case from the Supreme Court's judgment in T.V. Sundaram Iyengar & Sons Ltd., noting the differences in the nature of the transactions. Other issues involving minor disallowances were not elaborated upon, suggesting they were resolved in a manner consistent with the Tribunal's approach to the primary issue.
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