2019 (11) TMI 753 - AT - Income Tax

Addition u/s 41(1) - utilization of working capital towards capital expenditure in respect of waiver of loans stated to be working capital loan/term loan - HELD THAT - Upon perusal of impugned order, we find that learned first appellate authority failed to clinch the issue in the correct perspective since it was the observation in the impugned order that discretionary payment on compassionate grounds would be capital in nature and therefore, not taxable in the hands of the assessee, which was not the case of revenue. It was also observed that the purpose of utilization of the funds were not, at all, relevant for the determination of the taxability of the waiver. Rather it is the prime argument of assessee that since working capital loan was utilized for the purpose of capital expansion and therefore, the same would not constitute trading liability within the meaning of Sec.41(1). The terms of term loan granted by SICOM were referred to while providing the relief, ignoring the fact that one-time settlement was done by the assessee with Dena Bank and the matter was related with determination of taxability of principal amount of working capital loan waived by Dena Bank. Nothing was brought on record to justify the conclusion that the provisions of Section 41(1) were not applicable to the case of the assessee overlooking the fact that the assessee was claiming as well as allowed deduction of interest on working capital loans in earlier years. Rather onus was placed on Ld. AO to establish this fact. Therefore, we find ourselves unable to subscribe to the view of learned first appellate authority, in this regard. Proceeding further, it transpires that the assessee obtained certain loans in the shape of non-convertible debentures and working capital loans in earlier years from Dena Bank. The working capital loan was secured by hypothecation of inventories, book debts and documentary DA bills and third-party cheques drawn in assessee s favor. The assessee has claimed as well as allowed the deduction of interest on working capital loan, which is evident from its financial statements for various years, as placed on record. As submitted that total expenditure on capital expansion was ₹ 1880 Lacs which was financed out of NCD, term loan, working capital loan and internal accruals etc. as evidenced by addition to fixed assets, cash flow statements, statement of utilization of funds for capital expansion etc. This is contrary to the observation of Ld. AO that the assessee failed to prove such nexus despite being provided with adequate opportunity. Regarding differential interest amount of ₹ 148.33 Lacs, Ld. Sr. Counsel has submitted that such amount was never provided for in the books of accounts and therefore, the cessation of the same would not be covered u/s 41(1). We deem it fit to set-aside the order of Ld. CIT(A) on stated issues and direct Ld. AO to re-adjudicate the same de novo in the light of submissions made by Ld. Sr. Counsel, before us. The assessee, in turn, is directed to substantiate his stand, in this regard with documentary evidences including reconciliation of the interest differential.

Issues Involved:
1. Deletion of addition made under Section 41(1) of the Income Tax Act regarding the utilization of working capital towards capital expenditure in respect of waiver of loans.
2. Deletion of addition made on account of waiver of interest on borrowing based on the statement from Dena Bank.

Issue-wise Detailed Analysis:

1. Deletion of Addition under Section 41(1):
- The revenue contested the deletion of the addition made under Section 41(1) of the Income Tax Act by the CIT(A). The CIT(A) had deleted the addition related to the waiver of loans, stating that the loans were utilized for capital expenditure.
- The assessee argued that the loans, including non-convertible debentures (NCDs) and working capital loans, were used for capital expansion, and hence, the waiver of these loans should not be considered income under Section 41(1).
- The CIT(A) concurred with the assessee, noting that the waiver of loans was a discretionary payment on compassionate grounds, which is capital in nature and not taxable. The CIT(A) relied on the decision in Padmaraje R. Kadambande Vs. CIT and Mahindra & Mahindra Ltd. Vs. CIT.
- The CIT(A) observed that the loans were granted for capital purposes, evidenced by the sanction letters, auditor’s reports, and other materials. The CIT(A) concluded that the waiver of these loans did not constitute income under Section 41(1) as they were capital receipts.
- The Tribunal found that the CIT(A) did not address the issue correctly, as the utilization of funds for capital expansion was crucial to determine the taxability of the waiver. The Tribunal noted that the assessee had claimed and was allowed deductions for interest on working capital loans in earlier years.
- The Tribunal set aside the CIT(A)'s order and directed the Assessing Officer (AO) to re-adjudicate the issue de novo, considering the submissions and documentary evidence provided by the assessee.

2. Deletion of Addition on Account of Waiver of Interest:
- The revenue contested the deletion of the addition made on account of the waiver of interest on borrowing based on the statement from Dena Bank. The AO had added a differential amount of ?148.33 Lacs to the income of the assessee, noting that the actual interest waived was ?978.68 Lacs, whereas the assessee had offered only ?830.35 Lacs to tax.
- The assessee argued that the differential amount was unilaterally levied by Dena Bank and was not provided for in its books of accounts. The CIT(A) agreed with the assessee, stating that the waiver of interest not provided in the books of accounts cannot be taxed under Section 41(1).
- The Tribunal noted that the AO had not verified whether the differential amount of interest was debited and allowed to the assessee in earlier years. The Tribunal directed the AO to re-adjudicate the issue, verifying the documentary evidence and reconciliation of the interest differential provided by the assessee.

Conclusion:
- The Tribunal allowed the appeal for statistical purposes, setting aside the CIT(A)'s order and directing the AO to re-adjudicate both issues de novo, considering the submissions and documentary evidence provided by the assessee. The Tribunal emphasized the need for the AO to verify the utilization of loan funds for capital expansion and the reconciliation of the interest differential.

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