2013 (1) TMI 289 - AT - Income Tax

Additions on loan converted into shares - CIT(A) deleted the addition made on account of waived loan u/s 28(iv) - Assessee Company was joint venture between Fortune Oceanic Products Limited & M/s Ookean Ltd., a Govt. owned trading organization of Estonia (Russia) - Held that - The loan was taken for acquiring the capital asset in the form of trawlers. This loan was taken from Ookean Ltd. who is also a joint venture partner in the company. This loan was carrying on interest @ 6%. The interest accrued up to 31.03.1995 was taken into account. Thereafter, this amount remained unchanged. Since assessee incurred heavy losses the loan could not be repaid. The capital asset in the form of trawler was registered in assessee s name and reflected in the books of account of the assessee and the same was used for business purposes. This amount was converted into the shares and share premium & was not taken to the profit & loss account. Therefore, this amount has not changed its character from capital to revenue. The liability was not ceased. The assessee has not derived any benefit out of this conversion of one liability to another liability. The ratio laid down in the case of T.V. Sundaram Iengar and Sons 1996 (9) TMI 1 - SUPREME COURT is not applicable to the facts of the assessee s case as decision of the Higher Forum cannot be made applicable without discussing the factual position involved - AO has invoked section 28(iv) which covers the benefits in perquisites received in kind and it has no applicability to any transaction which involves money. The loan was taken to invest in the capital asset. There was no waiver of the loan, therefore, conversion of the loan into share capital shall not constitute a trading receipt. As held in the case of CIT vs. Jindal Equipments Leasing and Consultancy Services Ltd. 2009 (12) TMI 364 - DELHI HIGH COURT to attract the provisions of section 28(iv), the sum in question must be a benefit or perquisite arising in the course of business is of nature, other than cash or money. Keeping these facts in view, no fault in the order of CIT (A). Addition on account of share application money u/s 28 (iv) - CIT(A) deleted the addition - Held that - The amount of Rs.5,43,50,000/- was pending for allocation of shares to Ookean Limited since 1995. During the year under consideration, the company has allotted shares. The outstanding share application money has not been carried out to the profit & loss account, thus in such a situation, the provisions of section 28(iv) cannot be made applicable - no fault in the order of CIT (A). Addition on account of cessation of liabilities u/s 41 - CIT(A) deleted the addition - Held that - The amount of outstanding liability of Rs.67,75,839/- has been converted into the share capital plus premium. The creditors have confirmed the allocation of the shares in their favour. Conversion of the outstanding liability into shares cannot be termed as cessation of liability. Thus no fault in the order of the CIT (A). Applicability of ratio of decision of Hon ble Supreme Court in the case of Mcdowell & Company 1985 (4) TMI 64 - SUPREME COURT - revenue appeal that CIT(A) erred in allowing the relief on these three counts above and assessee company having accumulated losses exceeding Rs.20 crores allotted shares of face value of Rs.10 at a hefty premium of Rs.146.51 - Held that - Reliance placed by the revenue on the case of Mcdowell & Co. cited supra has been considered in the case of Azadi Bachao Andolan vs. UOI 2003 (10) TMI 5 - SUPREME COURT wherein held that if the court finds that notwithstanding a series of legal steps taken by an assessee, the intended legal result has not been achieved, the court might be justified in overlooking the intermediate steps, but it would not be permissible for the court to treat the intermediate legal steps as non est based upon some hypothetical assessment of the real motive of the assessee. Hon ble Supreme Court also held that the Courts must dealt with what is tangible in an objective manner and cannot afford to chase a will of the wisp - order of CIT (A) confirmed - appeal of revenue dismissed.

Summary

Issues Involved:
1. Addition of Rs.4,39,03,750/- due to waiver of loan under section 28(iv) of the Income Tax Act, 1961.
2. Addition of Rs.5,42,50,000/- due to share application money under section 28(iv) of the Income Tax Act, 1961.
3. Addition of Rs.67,75,839/- due to cessation of liabilities under section 41(1) of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Addition of Rs.4,39,03,750/- due to waiver of loan under section 28(iv) of the Income Tax Act, 1961:
The Assessing Officer (AO) added Rs.4,39,03,750/- to the income of the assessee, considering it as a benefit under section 28(iv) of the Income Tax Act, 1961. The AO argued that the loan amount, which had been outstanding for about a decade, was converted into share capital and share premium without any consideration, thus constituting a benefit arising from business. The AO also noted the absence of a consent letter from M/s Okean Ltd., the lender.

The CIT (A) deleted this addition, stating that the conversion of the loan into share capital did not constitute income under the Act. It was highlighted that the loan was utilized for purchasing a capital asset (trawler), and the liability was settled by issuing shares, not waived. The CIT (A) relied on judicial pronouncements, including the case of Mahindra and Mahindra Ltd. vs. CIT, which held that the waiver of a loan for acquiring capital assets does not attract section 41(1) or section 28(iv).

The Tribunal upheld the CIT (A)'s decision, emphasizing that the loan was for acquiring a capital asset and was converted into share capital, not waived. The Tribunal noted that section 28(iv) applies to benefits in kind, not cash transactions, and the transaction in question involved money. The Tribunal also referenced the case of CIT vs. Jindal Equipments Leasing and Consultancy Services Ltd., which supported the view that the conversion of loan into share capital does not constitute a trading receipt.

2. Addition of Rs.5,42,50,000/- due to share application money under section 28(iv) of the Income Tax Act, 1961:
The AO added Rs.5,42,50,000/- to the income of the assessee, considering the share application money pending for allotment for about a decade as a benefit under section 28(iv). The AO argued that the capital nature of the share application money had changed to revenue with the passage of time.

The CIT (A) deleted this addition, stating that the allotment of shares against share application money did not constitute income. The CIT (A) noted that the share application money was received from a joint venturer and existing shareholder, and the conversion into share capital did not result in any income under the Act.

The Tribunal upheld the CIT (A)'s decision, emphasizing that the share application money was pending for allotment and was not carried to the profit & loss account. The Tribunal noted that section 28(iv) applies to benefits in kind, not cash transactions, and the share application money did not change its nature to revenue.

3. Addition of Rs.67,75,839/- due to cessation of liabilities under section 41(1) of the Income Tax Act, 1961:
The AO added Rs.67,75,839/- to the income of the assessee, considering the conversion of sundry creditors and expenses payable into share capital and share premium as cessation of liabilities under section 41(1). The AO argued that these were trading liabilities that had ceased.

The CIT (A) deleted this addition, stating that the conversion of liabilities into share capital did not constitute income. The CIT (A) noted that the liabilities were settled by issuing shares, not waived, and such settlement does not result in taxable income under section 41(1).

The Tribunal upheld the CIT (A)'s decision, emphasizing that the conversion of liabilities into share capital does not constitute cessation of liabilities. The Tribunal noted that the creditors confirmed the allocation of shares, and the conversion did not result in any taxable income.

Other Considerations:
The Tribunal also addressed the applicability of the decision in McDowell & Co. Ltd., noting that the decision had been considered by the Supreme Court in the case of Azadi Bachao Andolan vs. UOI. The Tribunal emphasized that legal steps taken by an assessee should not be disregarded based on hypothetical assessments of the real motive.

Conclusion:
The Tribunal dismissed the revenue's appeal, upholding the CIT (A)'s decision to delete the additions of Rs.4,39,03,750/-, Rs.5,42,50,000/-, and Rs.67,75,839/-. The Tribunal concluded that the conversions of loan, share application money, and liabilities into share capital did not constitute income under sections 28(iv) or 41(1) of the Income Tax Act, 1961.