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2022 (6) TMI 945 - AT - Income TaxAddition u/s 41 - cessation of liability towards unsecured loans availed from financial institutions in terms of order of the BIFR - assessee is a sick company under Sick Industrial Companies (Special Provisions) Act - assessee argued that remission of capital liability by virtue of scheme sanctioned by the BIFR cannot be brought to tax u/s.41(1) of the Income Tax Act, 1961, because the BIFR has granted immunity from taxation by specific direction in their order - HELD THAT - As from the order of the BIFR, it is very clear that reliefs and concessions allowed towards repayment of liability cannot be brought to tax u/s.41(1) of the Income Tax Act, 1961. Further, as per the provisions of section 32 of Sick Industrial Companies Act, 1985, order of the BIFR is binding on the Assessing Officer, because once there is direction, it overrides all other provisions, including provisions of Income Tax Act, 1961. In this case, there is a specific direction from the BIFR to the income-tax department to allow immunity from the provisions of section 41(1) and other relevant provisions of the Income Tax Act, 1961. Therefore, we are of the considered view that once there is immunity from the provisions of section 41(1) of the Income Tax Act, 1961, whatever amount credited to profit loss account on account of remission / cessation of liability, then same cannot be brought to tax u/s.41(1) of the Income Tax Act, 1961. This view is fortified by the decision of M/s.Kriloskar Oil Engines Ltd. 2012 (7) TMI 736 - ITAT, PUNE where the Tribunal, after considering relevant facts has held that directions given by the BIFR is binding on the Assessing Officer and thus, remission / cessation of liability cannot be brought to tax u/s.41(1) of the Income Tax Act, 1961. Amount credited to profit loss account towards remission of liability by the order of BIFR is capital liability and thus, remission of such liability cannot be brought to tax u/s.41(1) of the Income Tax Act, 1961. This legal principle is supported by the decision of CIT Vs Mahindra Mahindra Ltd 2018 (5) TMI 358 - SUPREME COURT where it has been considered an identical issue and held that waiver of loan for acquiring capital assets cannot be treated as remission of trading liability and brought to tax u/s.41(1) of the Income Tax Act, 1961 or u/s.28(iv) of the Income Tax Act, 1961. Therefore, we are of the considered view that the Assessing Officer has erred in assessing cessation of liability towards unsecured loans availed from financial institutions in terms of order of the BIFR u/s.41(1) of the Income Tax Act, 1961. Hence, we direct the Assessing Officer to delete additions made towards remission/ cessation of liability u/s.41(1) Liability pertains to advance from customers and loan from others - liabilities mentioned in Table 2 of the assessment order, except fixed deposits are capital advances. However, facts with regard to nature of advances and purpose of taking such advances are not clear from details filed by the assessee, Although, the assessee has filed MoU with M/s. Pioneer Embroideries Ltd., but based on said MoU alone, it cannot be decided that liabilities are in the nature of capital liability, which is outside scope of section 41(1) -Therefore, we are of the considered view that remission of liability to the extent of advance received from customers and loan from others needs verification from the Assessing Officer. Therefore, we set aside this aspect to the file of the Assessing Officer and direct the Assessing Officer to re-examine the issue in light of various details filed by the assessee and also obtain confirmation from parties regarding nature of liability. In case, parties confirm fact that advances are for sale of assets, then the Assessing Officer is directed to delete additions made towards remission/cessation of liability - Appeal filed by the assessee is treated as allowed for statistical purposes.
Issues Involved:
1. Ad hoc addition of income. 2. Waiver of loan outstanding for capital liability. 3. Application of Section 28 and Section 41(1) of the Income Tax Act, 1961. 4. Taxation of book profits. 5. Interest charged under Section 234B. Detailed Analysis: 1. Ad hoc Addition of Income: The assessee challenged the ad hoc addition of Rs. 3,39,77,243/- made by the Assessing Officer (AO) as income. The AO had construed the cessation of liability as trading receipts without applying the provision of taxation of book profits under the Income Tax Act, 1961. 2. Waiver of Loan Outstanding for Capital Liability: The assessee company, declared as a sick company by the Board for Industrial & Financial Reconstruction (BIFR), had received relief and concessions as per BIFR's order dated 17.05.2012. During the relevant financial year, the company credited Rs. 3,39,77,245/- towards remission of capital liability but excluded it from profits/income. The BIFR's order included specific directions to exempt the company from the applicability of sections like 41(1), 79, 80, 43B, 72(3), and 115JB of the Income Tax Act, 1961. 3. Application of Section 28 and Section 41(1) of the Income Tax Act, 1961: The AO invoked Section 41(1) to assess the remission of liability, stating that even remission of capital liability would become income when it becomes the assessee's own money, relying on the Supreme Court decision in CIT Vs TVS Sundaram Iyengar & Sons. The CIT(A) upheld the AO's decision, stating that the BIFR's order was not explicit and the Directorate of Income Tax (Recovery) had rejected the BIFR's relief. 4. Taxation of Book Profits: The assessee argued that the remission of capital liability by the BIFR scheme could not be taxed under Section 41(1) as the BIFR's order granted immunity from such taxation. The assessee further contended that the remission pertained to unsecured loans used for acquiring capital assets, thus constituting capital receipts not taxable under Section 41(1). 5. Interest Charged under Section 234B: The assessee also contested the AO's decision to charge interest under Section 234B, denying liability for such interest. Judgment Summary: The Tribunal examined the nature of the liabilities and the reliefs granted by the BIFR. It was noted that the BIFR's order, being binding under Section 32 of the Sick Industrial Companies Act, 1985, provided specific directions exempting the assessee from Section 41(1) of the Income Tax Act, 1961. Consequently, the Tribunal held that the remission of capital liability could not be taxed under Section 41(1). For the portion of the liability pertaining to unsecured loans from financial institutions (Rs. 2,55,53,342/-), the Tribunal found that these were used for acquiring capital assets and thus constituted capital receipts, not taxable under Section 41(1). The Tribunal directed the AO to delete the additions made towards this remission. Regarding the advances from customers and loans from others (Rs. 84,23,901/-), the Tribunal noted the need for further verification to determine the nature of these advances. The case was remanded to the AO for re-examination, with instructions to obtain confirmations from the parties involved. If confirmed as capital advances, these too would not be taxable under Section 41(1). Conclusion: The appeal was allowed for statistical purposes, with the AO directed to delete certain additions and re-examine others based on further verification. Order Pronounced: The order was pronounced in the open court on 15th June, 2022.
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