2013 (11) TMI 834 - AT - Income Tax

Application of section 41(1) of the Income tax act - Assessee has incurred losses and has obtained waiver of principle as well as interest - Assessee company received financial assistance of Rs. 598 lakhs under venture capital fund scheme comprising convertible rupee term loan of Rs. 480 lakhs and subscription of 100 lakhs to the equity share capital and 17.5% redeemable convertible accumulative preferential shares of 98 lakhs - Further received financial assistance of 104 million under project finance scheme for the expansion cum up- gradation project for the manufacture of smart cards by way of term loan from IDBI - Since Assessee ended up in losses, it has entered into one time settlement for the dues Held that - Loan sanctioned is not received in the course of trading transaction, this being a capital receipt for purpose of purchase of assets/ business. All amounts received during the course of business cannot be considered as amount received in the course of trading transaction - Relied upon Hon ble Supreme Court decision in the case of CIT Vs. Tosha International 2009 (7) TMI 1149 - SUPREME COURT , on similar issue, held that Assessee had not got any deduction on account of acquisition of capital assets as it has been reflected in the balance sheet and not in the P&L A/c and the remission of principle amount of loan obtained from bank and financial institution had not been claimed as expenditure or trading liability in any of the earlier year, hence, section 41(1) was not applicable. Relying upon the judgment of Hon ble Supreme Court in the case of Nector Beverages (P) Ltd. 2009 (7) TMI 5 - SUPREME COURT , it has been held that if Assessee has not got any deduction as a trading liability in any of the earlier years, provisions of section 41(1) does not apply - Unless principle amount pertains to any amount received during the course of trading activity, the same cannot be brought to tax as income of Assessee particularly only in those situations as stated by the Hon ble Supreme Court in the case of TVS Sundaram Iyyengar & Sons 1996 (9) TMI 1 - SUPREME Court Decided in favor of Assessee. Jurisdiction u/s 263 of the Income tax Act CIT directed u/s 263 to treat entire amount of Capital receipt as Income Held that - Direction of CIT to treat the entire capital amount as income is not correct on the facts of the case and also on the principles of law - Once a decision was taken by AO on the said facts, the CIT cannot review the same under the provisions of section 263. When there are two views possible, one of the plausible opinion taken by the AO cannot be dissented by CIT under section 263. Therefore, CIT lacks jurisdiction and so the direction of CIT is cancelled Reliance has been placed on the judgment in the case of Malabar industrial Co. Ltd. Vs. CIT, 2000 (2) TMI 10 - SUPREME Court Decided in favor of Assessee.

Summary

Issues Involved:

1. Whether the waiver of principal amount of loan should be considered as income under section 41(1) of the Income Tax Act.
2. Whether the provisions of section 115JB should be invoked for calculating book profit.

Issue-Wise Detailed Analysis:

1. Waiver of Principal Amount as Income under Section 41(1):

The Assessee filed a return of income for AY 2007-08 admitting 'Nil' income after setting off brought forward losses. The AO disallowed bad debts and allowed carry forward losses, resulting in 'Nil' income. The CIT-II, Hyderabad, issued a notice under section 263, holding that the AO's order was erroneous and prejudicial to the interests of Revenue. The CIT opined that Rs. 10,44,87,420/- received by the Assessee as waiver of interest and principal from term loans should be considered as income under section 41(1).

The Assessee contended that the principal amount waived could not be considered income under section 41(1) as it was obtained for purchasing assets via term loans, and the interest waiver had already been credited to the P&L account. The AO had examined these aspects during the assessment proceedings and correctly considered the interest waiver as income.

The Tribunal observed that no deduction was claimed in earlier years for the principal amount, so treating it as income under section 41(1) was not justified. The Tribunal cited the Supreme Court's decision in the case of TVS Sundaram Iyengar and Sons Ltd., which states that amounts received in the course of trading transactions become income when they change character. However, in this case, the loan was a capital receipt for purchasing assets, not a trading transaction.

The Tribunal also referenced the Supreme Court's decision in CIT Vs. Tosha International, which held that remission of the principal amount of a loan not claimed as an expenditure or trading liability in earlier years does not attract section 41(1). Therefore, the CIT's direction to treat the principal amount as income was incorrect. The Tribunal concluded that the CIT lacked jurisdiction under section 263 to review the AO's decision, which was a plausible opinion.

2. Applicability of Section 115JB:

The CIT also directed the AO to invoke section 115JB, arguing that the brought forward losses should have been set off against the book profit. The Assessee provided details showing that the carry forward losses and depreciation exceeded the profit for the year, making section 115JB inapplicable.

The Tribunal noted that the CIT had incorrectly calculated the carry forward losses by excluding depreciation allowed under the Company Law. The correct figures, supported by annual reports, showed that the carry forward losses and depreciation were more than the profit earned during the year.

The Tribunal found that the AO's finding that section 115JB was not applicable was correct and that the CIT's direction to determine taxable profit was erroneous. The Tribunal emphasized that the CIT could not invoke section 263 when the AO had adopted one of the permissible views under the law.

Conclusion:

The Tribunal held that the CIT's directions were erroneous and not based on facts. The CIT lacked jurisdiction under section 263 to review the AO's decision. The appeal of the Assessee was allowed, and the directions of the CIT were canceled. The Tribunal followed the Supreme Court's principles in Malabar Industrial Co. Ltd. Vs. CIT, emphasizing that section 263 could not be invoked when the AO's order was not erroneous and prejudicial to the interests of Revenue.