2019 (8) TMI 455 - HC - Income Tax

Cessation of liability u/s 41(1) - conversion of the loan as well as the unpaid interest into share capital - HELD THAT - When there was no writing off of liabilities and only the sub-head, under which, the liability was shown in the account books of the assessee was changed, there could be no cessation of liability. As pointed out earlier, remission is a positive conduct on the part of the creditor and cessation may accrue either by operation of law and it may also accrue by way of a judicial pronouncement, absolving the assessee from the liability or if there is a contract between the parties whereby the liability gets extinguished or it may come to an end by discharge of the debt. However, some benefit accrued to the assessee by virtue of remission or cessation of liability, as the case may be. When the assessee company was liable to pay and it continued to remain liable even after change of entries in the books of account, no benefit would accrue to the assessee company merely on account of change of nomenclature and consequently the question of treating the same as profit and gain would not arise. The decision in Auto Kashyap India (P) Ltd 2010 (4) TMI 53 - DELHI HIGH COURT is applicable in full force to the assessee's case. As decided in M/S INDO WIDECOM INTERNATIONAL LTD. 2017 (12) TMI 678 - ALLAHABAD HIGH COURT the fact that the assessee adjusted subsequent sales to the holding company with share application money then held that Section 41 would not be applicable. By virtue of the Government Order in G.O.No.18 dated 07.03.2001 where the Government converted the existing Government loans, advances and interest outstanding into equity share capital, the assessee company had discharged its interest liability in the sense that instead of making payment in cash, it issued share capital to Government. Consequently Section 41(1) not stand attracted to the case of the assessee. Therefore, the finding rendered by the Tribunal is perfectly valid. Taxability of conversion of the loan and unpaid interest into share capital u/s 28(i) - whether the Revenue could be permitted to raise alternate submission at this juncture, for the first time, without even raising a supplementary ground in this appeal? - HELD THAT - The decision in CIT VERSUS JINDAL EQUIPMENTS LEASING AND CONSULTANCY SERVICES LTD. 2009 (12) TMI 364 - DELHI HIGH COURT will, in no manner, render assistance to the Revenue's case. They would be entitled to raise an alternate plea when Section 28(iv) stands attracted. Such a belated plea without amendment of the ground and raising the same for the first time before this Court during the course of argument cannot be permitted. Therefore, we reject the alternate submission made by the learned Senior Standing Counsel for the Revenue. - Appeal filed by the Revenue is dismissed

Summary

Issues Involved:
1. Whether the conversion of the loan and unpaid interest into share capital amounts to cessation of liability under Section 41(1) of the Income Tax Act.
2. Whether the Revenue can raise an alternate submission under Section 28(iv) of the Income Tax Act at this juncture.

Detailed Analysis:

1. Conversion of Loan and Unpaid Interest into Share Capital:
The primary issue was whether the conversion of the loan and unpaid interest into share capital amounts to cessation of liability under Section 41(1) of the Income Tax Act. The respondent, a Tamil Nadu Government undertaking, had converted outstanding interest on government loans into equity shares as per Government Order G.O.(Ms).No.18 dated 07.03.2001. The Assessing Officer contended that this conversion resulted in cessation of liability, making the amount assessable under Section 41(1) of the Act. The CIT(A) upheld this view, stating that the liability ceased to exist upon conversion into equity shares.

However, the Tribunal reversed the CIT(A)'s order, holding that the conversion into share capital was a proper discharge of interest payments and did not attract Section 41(1). The Tribunal's decision was based on the fact that the liability was not extinguished but transformed into another form of liability (equity shares).

The High Court affirmed the Tribunal's decision, emphasizing that there was no cessation of liability but a discharge of liability through conversion into equity shares. The Court referred to the decision in Auto Kashyap India (P) Ltd., where it was held that mere change of nomenclature in the books of accounts does not amount to cessation of liability. The Court concluded that Section 41(1) was not applicable as the liability was discharged and not ceased.

2. Raising Alternate Submission under Section 28(iv) of the Income Tax Act:
The Revenue sought to raise an alternate submission under Section 28(iv) of the Act, which deals with the value of any benefit or perquisite arising from business or profession. The High Court rejected this plea, noting that the appeal had been pending for over ten years and the Revenue had not raised this ground earlier or amended the grounds of appeal. The Court cited the decision in Jindal Equipments Leasing & Consultancy Services Ltd., where the Revenue was allowed to raise an alternate plea under different circumstances. The Court held that such a belated plea without amendment of the ground could not be permitted.

Conclusion:
The appeal filed by the Revenue was dismissed, and the substantial question of law was answered against the Revenue. The Court held that the conversion of loan and unpaid interest into share capital did not amount to cessation of liability under Section 41(1) of the Income Tax Act, and the Revenue was not permitted to raise an alternate submission under Section 28(iv) at this stage.