2013 (9) TMI 561 - AT - Income Tax

Addition u/s 41(1) - Addition of Capital Reserve - amount credited to capital reserve on account of waiver allowed by Centurion Bank of principal amount. - Held that - The orders of the revenue authorities were not clear as to how the amount of principal waived by the bank was arrived at a sum - On the waiver of the principal amount due to the bank and the benefit that accrues to assessee on waiver of such waiver provisions under section 41(1) cannot be applied - One had to look at the statement of the Bank to identify what was the principal amount waived and the interest amount waived and the terms of the loan in respect of which the liability in question arose - It had also to be verified as to what was the interest expenditure that was claimed by the Assessee as deduction in the past while computing its taxable income and what was the amount that was actually allowed as deduction in the past assessments - Neither the order of the AO nor the that of the CIT(A) was clear on this aspect. In principle the provisions of section 41(1) of the Act will not be applicable to waiver of principal amount - We direct the AO to examine the issue with regard to the actual quantum of principal waived and the quantum of interest that was waived by the bank and restrict the addition to be made under section 41(1) of the Act to the extent that the waiver relates to the interest liability of the assessee which had been claimed as deduction by the assessee while computing its income in the past. Depreciation on Electrical Fittings 15% or 25% - Held that - The electrical installation once they form part of the block of assets, plant and machinery prior to A.Y 2003-04, depreciation has to be allowed on the written down value of the block - We are of the view that once a particular depreciable asset enters the block it losses its identity and it is not possible to apply the new rates of depreciation on the written down value of the electrical installation by carving out its WDV from the block of assets, plant and machinery - We, therefore, agree with the submissions of the assessee and direct the AO to allow depreciation as claimed by the assessee. - Decided in favor of assessee. Expenses related to discontinued business or not - Held that - Following Triumph Securities Ltd. Versus Deputy Commissioner of Income-tax, Central Circle 40, Mumbai 2010 (4) TMI 874 - ITAT MUMBAI and KNP Securities P. Ltd. Versus Assistant Commissioner of Income-tax 2009 (5) TMI 840 - ITAT MUMBAI - The reasoning of the Tribunal is that the Assessee could not do business because of the ban imposed on its trading by SEBI which he was challenging and the business could not be carried on for reasons beyond the Assessee s control - We therefore following the order of the co-ordinate bench hold that the Assessee is entitled to carry forward the loss for set off in subsequent assessment years as allowed by the AO. - Decided in favor of assessee.

Summary

Issues Involved:
1. Addition of waiver amount credited to capital reserve.
2. Depreciation rate on electrical fittings.
3. Enhancement of income by disallowing expenses and not allowing carry forward of loss.

Issue-Wise Detailed Analysis:

1. Addition of Waiver Amount Credited to Capital Reserve:

The primary issue was whether the waiver of Rs. 14,45,48,419/- credited to the capital reserve by the assessee should be taxed under Section 41(1) of the Income Tax Act. The assessee argued that this amount, being the principal amount waived by Centurion Bank, should not be taxed as it represents the extinguishment of a liability of a capital nature. The Assessing Officer (AO) disagreed, stating that the waiver included both principal and interest, with the interest portion of Rs. 10,37,11,957/- having been previously claimed as a deduction. The AO, therefore, added this amount to the total income under Section 41(1). The CIT(A) upheld this view, distinguishing between the principal amount, which was capital in nature and not taxable, and the interest, which was taxable under Section 41(1). The Tribunal agreed in principle that the waiver of the principal amount is not taxable under Section 41(1) but found the records unclear regarding the exact amounts of principal and interest waived. The Tribunal directed the AO to re-examine and determine the correct amounts and restrict the addition under Section 41(1) to the interest liability waived.

2. Depreciation Rate on Electrical Fittings:

The second issue concerned the appropriate depreciation rate for electrical fittings. The assessee claimed depreciation at 25%, treating electrical fittings as part of the plant and machinery block of assets. The AO allowed only 15%, classifying them as furniture and fittings based on amendments effective from the assessment year 2003-04. The CIT(A) upheld the AO's decision without providing detailed reasoning. The Tribunal sided with the assessee, ruling that once an asset enters a particular block, it loses its individual identity and cannot be reclassified. Therefore, the electrical fittings, being part of the plant and machinery block before the amendment, should continue to receive depreciation at 25%.

3. Enhancement of Income by Disallowing Expenses and Not Allowing Carry Forward of Loss:

The third issue was the CIT(A)'s enhancement of the assessee's income by disallowing expenses on the grounds that no business activity was conducted during the year, thus not allowing the carry forward of a loss of Rs. 37,99,796/-. The AO had treated the loss as a speculation loss under Section 73 and allowed it to be carried forward. The CIT(A) enhanced the income, arguing that the assessee had not conducted any business since its SEBI registration was canceled, and thus, the loss could not be carried forward. The Tribunal referenced a similar case involving a sister company, where it was ruled that the inability to conduct business due to SEBI's ban did not equate to a cessation of business. The Tribunal concluded that the expenses incurred were for maintaining the business establishment and should be allowed, thus permitting the carry forward of the loss as initially determined by the AO.

Conclusion:

The appeal was partly allowed. The Tribunal directed the AO to re-examine the waiver amount to correctly identify the principal and interest portions and apply Section 41(1) only to the interest waived. It also ruled in favor of the assessee regarding the depreciation rate on electrical fittings and allowed the carry forward of the loss, overturning the CIT(A)'s enhancement of income.