2018 (5) TMI 1250 - AT - Income Tax

Waiver of principal amount of term loan - taxability as capital asset - addition invoking section 41 - Held that - Revenue has not placed any material suggesting that the loan was for the purpose of working capital but on the contrary CIT(A) has given a finding that the principal amount related to term loan. Under these facts we do not see any reason to interfere with the finding of the decision arrived by the CIT(A) and the same is hereby affirmed. The ground raised by the Revenue is dismissed. Addition on account of stores & spare parts - assessee has not maintained proper record of this expense not established co-relation with production - Held that - There is no dispute with regard to the fact that the disallowances are made on estimation basis. The AO has not given any basis for arriving at such estimation. Therefore the finding of the ld. CIT(A) is not interfered with. - Decided in favour of assessee

Issues Involved:

1. Deletion of addition of ?17,39,01,253 as waiver of principal amount of IFCI Loan.
2. Consistency in deleting the addition of ?17,39,01,253 as waiver of principal amount of IFCI loan while confirming the working capital loan by State Bank of Bikaner and Jaipur.
3. Deletion of the addition of ?5,00,000 made on account of stores and spare parts.

Detailed Analysis:

1. Deletion of Addition of ?17,39,01,253 as Waiver of Principal Amount of IFCI Loan:

The Revenue challenged the deletion of ?17,39,01,253 by the CIT(A), which was originally added by the Assessing Officer (AO) under section 41(1) of the Income Tax Act, 1961. The AO had argued that the waiver of the principal amount of the IFCI loan constituted taxable income, referencing the Delhi High Court's decision in Rollatainers Ltd. vs. CIT.

The assessee contended that the waiver of the term loan was a capital receipt, not liable to tax, as the loan was used for acquiring fixed assets and not for working capital. The assessee supported this with several judicial precedents, including Polyflex (India) Pvt Ltd vs. CIT and CIT vs. Dholgiri Industries (P) Ltd, which held that the waiver of a loan taken for capital purposes does not fall under section 41(1).

The Tribunal upheld the CIT(A)'s decision, noting that the Revenue failed to provide contrary evidence. It was established that the loan was for capital assets, and thus, the waiver did not constitute taxable income under section 41(1). The Tribunal cited the jurisdictional High Court's ruling in CIT vs. Dholgiri Industries (P) Limited, affirming that the waiver of the principal amount of a loan used for capital purposes is not taxable.

2. Consistency in Deleting the Addition of ?17,39,01,253 as Waiver of Principal Amount of IFCI Loan While Confirming the Working Capital Loan by State Bank of Bikaner and Jaipur:

The Revenue argued that the CIT(A) was inconsistent in deleting the addition related to the IFCI loan waiver while confirming the working capital loan waiver by the State Bank of Bikaner and Jaipur. The AO had added the waiver amounts under section 41(1), treating them as taxable income.

The Tribunal found that the CIT(A) had correctly distinguished between the two types of loans. The principal amount of the term loan from IFCI was for acquiring capital assets, making its waiver a capital receipt, not taxable under section 41(1). In contrast, the working capital loan waiver was treated differently, aligning with the judgment in Rollatainers Ltd. vs. CIT, where the waiver of working capital loans was deemed taxable.

The Tribunal agreed with the CIT(A)'s approach, affirming that the waiver of the term loan was not taxable, while the working capital loan waiver was correctly treated as taxable income.

3. Deletion of the Addition of ?5,00,000 Made on Account of Stores and Spare Parts:

The AO had disallowed ?5,00,000 on account of stores and spare parts, citing improper record maintenance and lack of correlation with production. The CIT(A) deleted this addition, leading to the Revenue's appeal.

The assessee argued that the addition was based on conjectures and lacked a factual basis. The Tribunal noted that the AO had made the disallowance on an estimation basis without concrete evidence. The CIT(A)'s decision to delete the addition was upheld, as the AO failed to provide a valid basis for the estimation.

Conclusion:

The Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s decisions on all grounds. The principal amount waiver of the IFCI loan was deemed a capital receipt, not taxable under section 41(1). The working capital loan waiver was correctly treated as taxable income. The addition related to stores and spare parts was deleted due to lack of concrete evidence. The Tribunal's decision was pronounced in the open court on 01.05.2018.

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