2019 (4) TMI 1848 - AT - Income Tax

Profits chargeable to tax u/s 41(1) - Waiver of loan - waiver of outstanding principal loan amount is a capital receipt or not? - HELD THAT - Hon ble Madras High Court in the matter of Iskraemeco Regent Ltd. 2010 (11) TMI 43 - MADRAS HIGH COURT wherein it was held by the Hon ble Court that Waiver of loan even though a receipt may be in connection with the business every such receipt is not a trading receipt. Amount referable to the loan obtained by the assessee towards the purchase of capital asset did not constitute a trading receipt. Further Section 28(iv) speaks of benefit or perquisite received in kind. The same has no application to any transaction which involves money. It was further observed that loan received for the purpose of acquiring capital assets did not constitute a trading liability and hence Section 41(1) also has no application. If the ratio of the judgment is applied to the instant case then we can safely conclude that the waiver of principal amount of loan by IDBI to the tune of 8, 07, 35, 116/- under one time settlement scheme though written off by the concerned bank does not constitute trading receipt which was never claimed by the assessee as deduction does not give rise to profits chargeable to tax u/s 41(1) of the Act and thus cannot be added at all to the income of the assessee. Addition is thus hereby deleted. Thus this ground of appeal is allowed. Disallowance of penal interest paid to Government of Gujarat - HELD THAT - As decided in own case 2012 (11) TMI 351 - ITAT AHMEDABAD Observations of the CIT(A) that such late payment is against the public policy and amount paid by the same could not be allowed as deductible expenses u/s.37(1A) in view of the explanation to section 37(1) is not sustainable in /aw. The interest charged at the rate of 2% per month for delayed payment of installment by the assessee-company could not be equated with payment made against the public policy or payment made in contravention of law. We are of the considered view that the interest paid by the assessee on delayed payment of installment to the State of Gujarat is in the nature of financial charges for late payment of installment. In this view of the matter we hold that no case of disallowance by holding the payment of penal interest as against the public policy could be made out by the department and accordingly the issue is decided in favour of the assessee. Disallowance of bad debts written off - whether mere write off of the bad debts in the books of account as irrecoverable is sufficient to claim deductions as bad debts? - HELD THAT - In terms of Section 36(2)(i) the deduction on account of bad debts which have become bad and been written off is allowable in case the debts represents money lent in original course of business of banking or money lending which in this particular case is carried out by the assessee. The ratio of the judgment passed by the Hon ble Apex Court in the matter of TRF Limited-vs- CIT 2010 (2) TMI 211 - SUPREME COURT has also been followed by the Learned CIT(A) holding that the requirement of conditions with the bad debts written off as irrecoverable in the accounts of assessee has been since fulfilled by the assessee disallowance made by the Learned AO is not sustainable in the eye of law. Hence deleted. - Decided in favour of assessee.

Summary

Issues Involved:
1. Taxability of waiver of principal loan amount.
2. Disallowance of penal interest paid to the Government of Gujarat.
3. Disallowance of bad debts written off.
4. Disallowance of provision for certain bad debts.

Issue-wise Detailed Analysis:

1. Taxability of Waiver of Principal Loan Amount:
The assessee claimed that the waiver of the principal loan amount of ?8,07,35,116/- should be considered a capital receipt and thus not taxable. The Assessing Officer (AO) disagreed, treating the waiver as cessation of liability under Section 41(1) of the Income Tax Act, 1961, and added it to the assessee's income. The AO relied on the Supreme Court's decision in CIT vs. T.V. Sundaram Iyengar & Sons Ltd., which held that when a trading liability ceases, it becomes taxable income. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld this view, stating that the loan was for trading purposes and its waiver resulted in taxable income. However, the ITAT, considering the judgments in Iskraemeco Regent Ltd. vs. CIT and Mahindra and Mahindra Ltd. vs. CIT, concluded that the waiver of the principal loan amount did not constitute a trading receipt and was not taxable under Section 41(1). Thus, the addition of ?8,07,35,116/- was deleted.

2. Disallowance of Penal Interest Paid to the Government of Gujarat:
The assessee paid penal interest of ?7,34,83,295/- to the Government of Gujarat, which the AO disallowed, considering it a penalty and not allowable under the Income Tax Act. The assessee argued that the penal interest was additional interest for late payment of loans, not a penalty for breach of law. The CIT(A) deleted the disallowance, and the ITAT upheld this decision, referring to the Co-ordinate Bench's order in the assessee's own case for AY 2006-07, where it was held that such penal interest was not a penalty but a financial charge for late payment, thus allowable as a deduction.

3. Disallowance of Bad Debts Written Off:
The assessee claimed bad debts of ?31,99,26,645/-, which the AO disallowed, questioning the recoverability and the method of writing off. The CIT(A) allowed the claim, noting that the assessee had duly written off the bad debts in its accounts. The ITAT, referring to the Supreme Court's judgment in TRF Limited vs. CIT, upheld the CIT(A)'s decision, stating that the mere write-off of bad debts in the books was sufficient for claiming a deduction under Section 36(2).

4. Disallowance of Provision for Certain Bad Debts:
The assessee claimed a provision for bad and doubtful debts amounting to ?14,30,48,827/-, which the AO disallowed, considering it a provision and not an actual write-off. The CIT(A) allowed the claim, and the ITAT upheld this decision, referring to the Co-ordinate Bench's order in the assessee's own case for AY 2011-12, which followed the Supreme Court's judgment in Vijaya Bank vs. CIT. The ITAT confirmed that the provision, when debited to the profit and loss account and reduced from loans and advances in the balance sheet, was allowable as a deduction.

Conclusion:
The ITAT allowed the assessee's appeal regarding the waiver of the principal loan amount and upheld the CIT(A)'s decisions on the issues of penal interest, bad debts written off, and provision for bad debts, thereby dismissing the revenue's appeal. The judgments were pronounced in open court on 04/04/2019.