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TMI Blog2009 (5) TMI 622X X X X Extracts X X X X X X X X Extracts X X X X ..... section 143(1). Thereafter the case was selected for scrutiny. In the course of assessment proceedings, the Assessing Officer observed that the general reserve reflected in the balance-sheet of the assessee for the year ending on 31-3-2005, relevant for the impugned assessment year, has shown a substantial increase when compared to the general reserve reflected as on 31-3-2004 relating to the preceding assessment year. The general reserve for the last year was Rs. 3,54,37,539, whereas the general reserve for the current year is Rs. 13,90,40,486. Thus, there is an increase of Rs. 10,36,02,957 in the general reserve. The assessee was directed to explain the basis of this increase reflected in the general reserve of the assessee-company. 4. The assessee-company replied that in the financial year 2004-05, which is the previous year relevant to the assessment year under appeal, the assessee was able to reach an agreement with ICICI Bank Ltd., Standard Chartered Bank Ltd. and Sumitomo Mitsui Banking Corporation (SMBC), Hong Kong, for One Time Settlement (OTS) of the outstanding liabilities due to those banks. The loan amount outstanding was Rs. 3,486.03 lakhs, which was settled on payme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat waiver of amounts in capital accounts cannot be treated as the income of the assessee even under section 28. But the assessing authority referred the matter to the Addl. Commissioner of Income-tax, Alleppey, under section 144A for pre-assessment directions and after obtaining the direction of the concerned authority, proceeded to complete the assessment on the basis of the proposition already conveyed by him to the assessee-company. The Assessing Officer added the sum of Rs. 10,36,02,957, which is the waiver amount of loans and completed the assessment on a total income of Rs. 9,22,99,410. 7. The assessment was taken up in first appeal. The assessee submitted before the CIT (Appeals) that in the light of a scheme promulgated by the Reserve Bank of India, the banks were authorized to waive the principal amounts due from their customers under One Time Settlement scheme (OTS). This scheme was basically framed to enable the banks to reduce their Non-performing assets by way of advances and loans and to show more realistic picture of the financial affairs of the banks. The assessee-company has defaulted in making the repayment of loans for a long period of time. The financial condi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that section 28(iv) enables the Assessing Officer to charge the value of benefits or perquisites to tax and therefore the waiver amount received by the assessee was rightly brought to tax under section 28(iv) of the Act. The CIT (Appeals) referred to the decision of the Orissa High Court in the case of CIT v. American Consulting Corpn. [1980] 123 ITR 513 and held that the benefit obtained by the assessee by way of remission of liability has the character of income within the ambit of section 28(iv). She also observed that the decision of the Supreme Court in the case of T.V. Sundaram Iyengar & Sons Ltd. (supra), is analogous in facts and the ratio of the said decision is applicable in the present case. Accordingly, she held that the appeal filed by the assessee was liable to be dismissed. 9. The assessee is aggrieved and therefore the second appeal before us. 10. The grounds raised by the assessee-company read as below : "1. The Officers below are not justified in treating the principal amount of bank loan waived as income. 2. The Officers below failed to appreciate the fact that there is no provision under the Act for taxing this amount as income. 3. The decision of the Ape ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t a party. The waiver of the principal amount was unexpected. In the circumstances, the waiver would not constitute business income. Section 41(1) also would not apply, as the assessee has not claimed any deduction in its computation of income on this loan amount. 13. The learned Chartered Accountant, submitted that the above judgment of the Hon'ble High Court of Bombay in the case of Mahindra & Mahindra Ltd. (supra) fully endorse the contentions of the assessee-company. 14. The learned Chartered Accountant, thereafter relied on the order of the Appellate Tribunal, Delhi Bench "G" delivered in the case of Velocient Technologies Ltd. v. ITO [2009] 120 TTJ 659. In the said case the Tribunal held that the primary requirement for providing the amount as business income of the assessee was that the money should have been arisen out of the ordinary trading transactions. The loan availed for capital purposes cannot be equated to transactions in the nature of normal trade and therefore, the waiver of such loans could not be treated as an item taxable under section 28(iv) or section 28(v). In support of the factual matrix of the case, the learned Chartered Accountant, produced a copy of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Aries Advertising (P.) Ltd. [2002] 255 ITR 510 . In that case, the assessee has transferred the unclaimed credits to the general reserve by writing off of the credit balances. The court held that the assessee has not treated the amount as a liability and more particularly a continuing liability. The assessee has transferred the amount to the general reserve. It is trite law that any amount transferred to the general reserve would be out of the profits alone. Once the assessee transferred this amount to the general reserve, it should be treated as the profits. The amounts represented various credits and deposits during the trading with a firm. They remained for a long time to be recovered and thus remained unclaimed. The assessee-company thus transferred the amounts to general reserve obviously treating them to be as profits. Relying on the judgment of the Hon'ble Supreme Court in the case of T.V. Sundaram Iyengar & Sons Ltd. (supra), the Court held that the amount written off by the assessee was liable for taxation. The learned Additional Commissioner has quoted the relevant portion in the judgment as follows : "Therefore, it would have to be held that once the assessee transfer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt in terms of the guidelines of the RBI so that some relief is given to the borrowers by way of waiver in the loan amount. 20. The assessee opted for OTS with the concurrence of the banks and settled the loans for ever in the previous year relevant to the assessment year under appeal. The total loans that remained payable to the banks amounted to Rs. 3,486.03 lakhs. The loans were settled for ever on payment of Rs. 2,450 lakhs and thereby the assessee-company obtained the benefit of waiver of term loans amounting to Rs. 10,36,02,957. This waiver benefit obtained by the assessee-bank was transferred to its general reserve account. 21. It is a trite law that the nomenclature given by an assessee to a particular account in its books of account is not the sole test to decide the real character of that account. The Court of appeals in the case of Grafton Hotel Ltd. - 1942 (1) All ER 675-682 has observed that accountancy is a matter of taste. One assessee may be conservative because of outlook and may well decide the debt payments of revenue account that they are in their nature proper to be debited to capital account. The Supreme Court in the case of Hoshiarpur Electric Supply Co. v. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isite arising from business as construed in section 28(iv) would not include cash receipt. The Court observed that it is only if the benefit or perquisite is not in cash or money, that section 28(iv) would apply and the question of including the value of such benefit or perquisite as income from business would ever arise. Agreeing with the above ratio laid down by the Gujarat High Court, the Hon'ble High Court of Bombay in the case of Mahindra & Mahindra Ltd. (supra) held that waiver of loan is in respect of money transaction and, therefore, would not be in the nature of any benefit or perquisite as construed in section 28(iv). The Court further observed that the loan amount was utilized by the assessee to purchase machinery and, therefore, it was on capital account and waiver of such capital account liability cannot be treated as on revenue account and cannot be brought to tax, as only the receipts on revenue account would partake the character of income. The issue raised in this appeal has been thus made clear by the Hon'ble High Court of Bombay in the case of Mahindra & Mahindra Ltd. (supra). 24. In the case of Mahindra & Mahindra Ltd. (supra), the assessee was a manufacturer o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r & Sons Ltd. (supra), the assessee's own conduct as well as accounts showed the amount as income offered for taxation and the assessee was not in a position to justify a contrary position in appellate proceedings. Therefore, we are afraid that the facts of the present case are quite different from the facts considered by the Supreme Court in the case of T.V. Sundaram Iyengar & Sons Ltd. ( supra), and the said decision does not become applicable to the present case of the assessee. 26. In the course of arguments, the learned Additional Commissioner appearing for the revenue has relied on a recent judgment of the Bombay High Court in the case of Solid Containers Ltd. ( supra) to support his argument that even the waiver of loan would amount to taxable under section 28(iv). In that case, the assessee had taken a loan for business purposes, which was written back and thereafter credited to the reserve account as a result of the consent terms arrived at in a suit. The assessee claimed the amount as capital receipt, even though it had offered the interest on the said loan as its income by crediting the same to its Profit and Loss Account. Dismissing the plea of the assessee, the Tribun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in the case of Solid Containers Ltd. (supra), clashes with the judgment of the same Court in the case of Mahindra & Mahindra Ltd. (supra). 29. We find that for the purpose of section 28(iv), the loan waiver amount credited by the assessee in its general reserve account is covered by the judgment of the Bombay High Court in the case of Mahindra & Mahindra Ltd. (supra), and, therefore, the said waiver amount cannot be held as taxable. 30. Now, secondly, we will examine whether section 41(1) operates against the contentions of the assessee or not. The Supreme Court in the case of Polyflex (India) (P.) Ltd. v. CIT [2002] 257 ITR 343 has examined the constitution of section 41(1). The Court has pointed out that section 41(1) consists of two main ingredients, (a) loss or expenditure and (b) trading liability. The two ingredients of section 41(1), the court held, have to be read independently. As the first ingredient relates to loss or expenditure and the second ingredient relates to remission or cessation of trading liability. The Court has categorically ruled that the words "remission or cessation thereof" shall apply only on a trading liability. 31. There is no doubt that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ising (P.) Ltd. (supra). In that case, the assessee had transferred unclaimed credits to the general reserve. The credit balances considered by the Court in that case were not in the nature of term loans availed for the capital purposes. It is in that circumstances, the court has relied on the judgment of the Supreme Court in the case of T.V. Sundaram Iyengar & Sons Ltd. (supra) and held that the credit balances written off and transferred to general reserve could be chargeable as profit under section 41(1). The said decision in no way is applicable to the present case. 35. In the facts and circumstances of the case, we find that the waiver amount of term loan availed by the assessee does not partake the character of assessable income either under section 28(iv) or under section 41(1). The decision of the Apex Court in the case of T.V. Sundaram Iyengar & Sons Ltd. (supra) relied on by the lower authorities is distinguishable on facts. The decision relied on by the Addl. Commissioner in the case of Solid Containers Ltd. (supra) is also not applicable to the present case for the reason that the said decision does not differ from the ratio laid down in the decision of the Bombay High ..... X X X X Extracts X X X X X X X X Extracts X X X X
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