2016 (9) TMI 653 - AT - Income Tax

Allowable deduction u/s 37 - payment of interest charges - Held that - It is observed that the terms of agreement have been placed by the assessee wherein the terms of settlement of dues and the payment schedule has been specified. It is observed that the payment made by the assessee is part of the contract / settlement entered into between the assessee and IFCI Ltd. and interest paid from 01.01.2007 till 15.02.2007 is a part of agreement and does not assume the nature of penalty. We are, therefore, of the considered opinion that the said expenditure should be allowed as deduction as per provisions of Section 37(1) of the Act. - Decided in favour of assessee Allowance of old stock written off - Held that - On perusal of the statement of account of the assessee for the year under consideration, it is found that the assessee has incurred expenses for maintaining office premises as well as paid salary and other miscellaneous expense relating to the administration of the business. It cannot be said that the business activities were completely shut down after the lock out that took place at the manufacturing unit in Kerala. It is observed that the reason for not continuing the manufacturing activities was due to power supply being cut by KSEB. Further, there is no material to suggest that the manufacturing operation of the assessee were in a stage of more than that of suspension.Section 36(1)(vii) and 36(2) of the Act require the assessee to write off the bad debts which are irrecoverable and that it has been considered as income in any of the previous year if it relates to such previous year. The Assessing Officer cannot insist the assessee to prove the authenticity of circumstances leading to write off the bad debts.The assessee has furnished the details of financial year in which write off of bad debts were taken into account in computation of income. The assessee has also placed reliance upon the decision of Hon ble Supreme Court in the case of TRF Ltd. Vs CIT reported 2010 (2) TMI 211 - SUPREME COURT . Thus the disallowance made by the Ld. Assessing Officer stands deleted. Addition u/s 41 - secured loan from IFCI Ltd - Held that - Respectfully followings the decision of Hon ble Jurisdictional High Court in the case of Tosha International Ltd (2007 (7) TMI 346 - ITAT DELHI-F) we are inclined to hold that the waiver of loan does not amount to cessation of liability and cannot be brought to tax by invoking the provisions of Section 41(1) of the Act.

Summary

Issues Involved:
1. Disallowance of interest paid to M/s. IFCI Ltd.
2. Disallowance of 'old stock written off' and 'irrevocable balances written off.'
3. Addition of loan waived by M/s. IFCI Ltd. to the income of the appellant company.

Issue-wise Detailed Analysis:

1. Disallowance of Interest Paid to M/s. IFCI Ltd.:
During the assessment proceedings, the Assessing Officer (A.O.) disallowed the interest charges of ?15,40,526/- paid by the assessee to IFCI Ltd., considering it penal in nature. The assessee contended that the interest was paid due to late payment of the settlement amount and not as a penalty. The CIT(A) upheld the A.O.'s decision, stating that the interest was for an action prohibited by law. However, upon appeal, it was found that the interest was part of a settlement agreement and not penal. Therefore, the Tribunal allowed the deduction under Section 37(1) of the Income Tax Act, ruling in favor of the assessee.

2. Disallowance of 'Old Stock Written Off' and 'Irrecoverable Balances Written Off':
The A.O. disallowed the write-off claims of ?19,57,079/- for old stock and ?15,76,944/- for irrecoverable balances, arguing that the assessee did not carry out any business during the year. The CIT(A) upheld this disallowance, noting that the business premises were under lock and key, indicating no business activity. The assessee argued that despite the lockout, it incurred various business-related expenses and was in the process of settling liabilities and realizing assets. The Tribunal found that the assessee maintained office premises, paid salaries, and incurred administrative expenses, indicating ongoing business activities. The Tribunal allowed the write-offs, citing that the bad debts had been taken into account in earlier income computations, and thus, the disallowance was deleted.

3. Addition of Loan Waived by M/s. IFCI Ltd. to the Income of the Appellant Company:
The A.O. added ?22,90,00,000/- to the assessee's income, treating the loan waiver by IFCI Ltd. as a revenue receipt under Section 41(1) of the Act. The CIT(A) confirmed this addition, arguing that the loan agreement did not specify that the loan was for purchasing fixed assets. The assessee contended that the loan was indeed for purchasing fixed assets and that the waiver should be treated as a capital receipt. The Tribunal examined the agreement and found that the loan was secured for setting up a manufacturing unit, thus qualifying as a capital receipt. The Tribunal ruled that the waiver of the principal loan amount did not constitute a trading receipt under Section 41(1) and should not be added to the income. Consequently, this ground of appeal was allowed in favor of the assessee.

Conclusion:
The Tribunal ruled in favor of the assessee on all grounds, allowing the appeal and providing relief from the disallowances and additions made by the lower authorities. The judgment emphasized the proper interpretation of agreements and the nature of expenses and receipts in determining tax liabilities.