2012 (2) TMI 731 - AT - Income Tax

Summary

Issues Involved:
1. Remission of loan made under One Time Settlement (OTS) scheme.
2. Claim of interest not recorded in books.
3. Addition on account of bad debts u/s 36(vii).
4. Reduction of Written Down Value (WDV) of assets by principal amount of loan waived.
5. Disallowance of stock write-off.
6. Set off of brought forward losses.

Summary:

1. Remission of Loan under OTS Scheme:
The primary issue was whether the remission of loan under the OTS scheme by IDBI and State Bank of Hyderabad should be taxed u/s 28(iv) and 41(1) of the Act. The assessee argued that the loans were for acquiring capital assets and thus, the benefit from the settlement should not be taxable. The Tribunal referred to the judgment in Mahindra and Mahindra Ltd. Vs. CIT, 261 ITR 501, and held that remission of a term loan for capital assets does not constitute business income and is not taxable u/s 28(iv) or 41(1). However, for working capital loans, the Tribunal remitted the matter back to the AO for verification of facts.

2. Claim of Interest Not Recorded in Books:
The assessee contended that interest charged by the bank but not recorded in the books should not be treated as income u/s 28(iv) or cessation of liability u/s 41(1). The Tribunal agreed, directing the AO to verify the facts and decide accordingly.

3. Addition on Account of Bad Debts u/s 36(vii):
The AO disallowed Rs. 2,00,000 on account of bad debts, stating that the assessee did not establish that the debts had become bad. The CIT(A) partly allowed the claim except for Rs. 2,00,000 related to tender deposits. The Tribunal found that these deposits were business-related and allowed the claim, reversing the CIT(A)'s decision.

4. Reduction of WDV of Assets by Principal Amount of Loan Waived:
The AO reduced the WDV of assets by the principal amount of loan waived, invoking Explanation (10) to section 43(1). The CIT(A) disagreed, citing that the waiver is not equivalent to reimbursement or grant. The Tribunal upheld the CIT(A)'s decision, stating that the waiver does not fall under Explanation (10) to section 43(1).

5. Disallowance of Stock Write-Off:
The AO disallowed the write-off of Rs. 1,93,28,886 for substandard finished goods. The CIT(A) allowed the write-off based on a technical report confirming the goods were unusable. The Tribunal upheld the CIT(A)'s decision, agreeing that the write-off was justified due to the unusable nature of the goods.

6. Set Off of Brought Forward Losses:
The AO did not allow the set-off of brought forward losses as the claim was omitted in the revised return. The CIT(A) held that the set-off is consequential and should be allowed if claimed in the original return. The Tribunal upheld the CIT(A)'s decision, directing the AO to allow the set-off of brought forward losses.

Conclusion:
Both appeals by the assessee and revenue were partly allowed for statistical purposes. The Tribunal provided specific directions to the AO for further verification and decisions in accordance with the law.