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TMI Blog2013 (9) TMI 403X X X X Extracts X X X X X X X X Extracts X X X X ..... d return of income (ROI) through e-filing on 22.11.2006, declaring nil income. The assessee-company maintains its books of accounts in a computer system. But a hard copy of computerized cash-book, Ledger, Journal, Bank-Book and vouchers etc. were produced before A.O. for verification. The assessee-company has properly maintained its stock register. In Assessment Years 2004-05 to 2006-07 g.p. rates of 33.27%, 19.19% and 23.64%, respectively, have been disclosed. 4. Below the computation of income, the assessee has appended a 'note' as under :- "During the year financial institutions waived interest liability of Rs. 22,74,85,511/- in favour of the Company. Out of which an amount of Rs. 7,31,55,195/- pertains to pre- operative period and on the basis of legal opinion, same has not been brought to tax being a capital receipt." 5. During the course of assessment proceedings, the assessee was requested vide letter dated 30/10/2008 to show cause as to why interest related to pre-operative period of Rs. 7,31,55,195/- waived by the Financial Institution, should not be treated as revenue receipt and taxed accordingly. In this connection you are requested to explain/ furnish the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evious year,- a) The first mentioned person has obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remissionor cessation thereof, the amount obtained by such person or the value of benefit accruing to him shall be deemed to be profits and gains of business or profession and accordingly chargeable to income tax as the income of that previous year, whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not; or " Section 41(1), in a way, enacts statutory fictions. Therefore, the operation of such fictions should be limited to the language of the section. It is, inter alia, where the assessee has incurred a trading liability', and this trading liability has been allowed deduction in an earlier year, and something has, later on, been recovered in respect of such liability or such liability has either been remitted or has ceased to exist, than section 41(1) comes into operation. It is contended that in order to attract section 41(1) of the IT Act, the first requisite which ought to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... financed by the bankers as soon as that was capitalized. Whether or not a liability is a trading liability depends on the facts and circumstances of a particular case. A liability created for purchase of stock-in-trade on credit is certainly a trading liability. Where A purchases his stock-in-trade from B on credit, the liability of A to is a trading liability. But if A borrows money from C in order to pay off his liability to B, 's liability to C on such borrowing is not a trading liability. It is thus clear that section 41(1) cannot be invoked if C remits a part or whole of his loans to A [CIT vs. Phool Chandj Jiwan Ram, (1981) 131 ITR 17 (Del)]. The next issue which needs attention is, whether the waiver of loan will amount to a benefit relatable to depreciation expenditure claimed earlier? The depreciation u/s 32 is allowed on the "actual cost" of the assets. The term 'actual cost' has been defined in section 43(1) according to which, 'actual cost' means 'the actual cost of the assets to the assessee reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority'. So, the only deduct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed with deduction in respect of "loss, expenditure or trading liability" and, therefore, depreciation allowed cannot be brought back to tax. Even otherwise, there is no provision in the scheme of block assets to reduce the value of the Assets if the part of interest capitalized is subsequently reduced. The Hon'ble Kerala High Court in the case of Cochin Co (P) Ltd has specifically held that remission of loan taken to purchase machinery cannot be reduced from the cost of machinery In the light of foregoing discussions it is submitted that:- The waiver of principal portion of loan or interest thereon to the extent capitalized to the cost of assets couldn't be taken as trading liability, as the impugned amount has never been claimed as expenditure or allowance under IT Act. And in the absence of any provision for varying the written down value in the year subsequent to the year in which the capital asset was installed, it would be unjustified and unlawful to reduce the written down value as proposed in the notice." 7. But the A.O. was not convinced from the above explanation of the assessee-company that with a view to tackle its bad financial position, has entered into ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as being debited to the P&L Account in the respective years as revenue expenditure. It was contended that the assessee-company suffered huge losses and did not have funds to repay the over-dues to the Bankers, therefore, the Banks decided to waive a sum of Rs. 22,74,85,511/-, during the year under consideration against the overdue interest accumulated over the years including Rs. 7,31,55,195/- which pertained to pre-operative period. It was argued that the interest pertaining to pre-operative periods of Rs. 7,31,55,195/- was not offered for taxation because the company had neither claimed nor got deduction of this amount. He argued that the A.O. has wrongly taxed this amount by treated it as a revenue receipt with the meaning of sec. 41(1) of the Act on the premise that because the assessee-company, when bought/installed assets, had 'derived a benefit' under the head of 'depreciation'. He disputed the version of the A.O. and also of ld. CIT(A) that technically the depreciation is an expenditure being admissible for deduction u/ss 30 to 44D of the Act. By inviting our attention towards the provisions of section 41(1) of the Act he has submitted that in the facts and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se. The liability which has ceased to exist during the year has to be treated as assessee's income of the year. He has heavily supported the finding of ld. CIT(A) and has also relied on various decisions apart including those on which the authorities below have relied for ariving at their respective conclusions. 11. We have coolly considered rival stands. We have also gone through the relevant pages of the paper book / written submissions of the parties. We have also carefully perused the relevant provisions of the Act and also the decisions relied before us. The fact of this issue which we have called out are that the assessee-company had raised loans from the Banks to start its business. Subsequently due to heavy losses the company was in trouble and a settlement with the Banks had saved it from a deep crisis. As per this agreement the Banks gave a waiver of interest amount to the company. Whatever was given as a waiver out of interest amount has been treated by the company as a capital receipt being related to preoperational period. As per revenue this is to be treated as a revenue receipt taxable either u/s 41(1) or u/s 28(iv). Given the above facts of this case, let us ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e has been a demerger, the resulting company.]" 12. Sub section (1) of section 41 was substituted by the Finance Act, 19902 w.e.f. 1-4-1993. The pre-requisite conditions to apply sub- section (1) of section 41 are mainly two-fold :- (i) that an allowance or deduction must have been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee, and (ii) during any previous year the assessee has obtained any amount in respect of such loss or expenditure, or any benefit in respect of such trading liability by way of remission or cessation thereof, the amount so received shall be deemed to be the profit or gain of assessee's business chargeable to tax as the income of that previous year. 13. Let us now examine if the above two conditions are fulfilled in the given case or not. In case these conditions are satisfied, the interest on loan waiver receipt has to be taxed in this assessment year, otherwise not. 14. The obtaining facts of assessee's case are that it got benefit of waiver of total interest of Rs. 22.75 crores which included a sum of Rs. 732 lacs pertaining to the pre-operative period. The ld. CIT(A) has taken ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opinion the assessee has not obtained any 'allowance' or 'deduction' in respect of any loss or in respect of any expenditure or in respect of any trading liability. In fact the expressions expenditure and trading liability take their colour from each other and clearly suggest that they are talking about 'business' and not about 'assets'. All these 'terms' refer to 'revenue-side' and not to 'capital-side' of a business of any assessee. 17. Therefore, we find force in the contention of ld. AR. The operation of this statutory fiction created by section 41(1) has to be limited to the language of this section. When the assessee has incurred a trading liability and it has been allowed as deduction otherwise in a earlier year; and something has been recovered in respect of such liability even by way of remission or cessation than only this section comes into play. In our opinion from the facts of this case, this important ingredient is missing, as we have already discussed. The assessee-company has never got deduction in respect of this Rs. 732 lakh u/s 36(1)(ii) or under section 37 of the Act. Therefore, section 41(1) is not at all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urred a trading liability and this trading liability has been allowed in earlier years that s. 10(2A) is attracted on the occasion when the trading liability is either remitted or ceased to exist. In our opinion, the Tribunal was right in coming to the conclusion that the sum of Rs. 1,80,000 did not represent a trading liability owned by the assessee to M/s. Janki Dass Banarsi Dass, nor had this amount of liability been allowed as a deduction in earlier assessments. 8. For the above reasons, we agree with the view taken by the Tribunal and answer the question referred to us in the affirmative and against the applicant. There will be no order as to costs." 18. Further, The Hon'ble Apex Court in the case of Polyflex (India) (P) Ltd. vs CIT (2002) 177 CTR (SC) 93 has held that section 41(1) consist of two main ingredients viz (i) loss or expenditure and (ii) 'trading liability'. These two components of section 41(1) have to be read separately. The assessee must have - one - obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure; and two - some benefit in respect of such 'trading liability' by way of remissi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other assets being in the nature of capital receipt in origin would not change its character to revenue receipt on being waived by the bankers. Merely name of accounting head does not define its nature. Actually deciding factor about its character/taxability is the accounting treatment which has been given to respective transaction. In this case, preoperative interest was capitalized to the cost of fixed assets and was reflected in the balance sheet, not in Profit & Loss Account and also the remission of amount so obtained from Bankers had not been claimed as expenditure or trading liability in any of the earlier previous years. Whether or not a liability is a trading liability depends on the facts and circumstances of a particular case. A liability created for purchase of stock-in-trade on credit is certainly a trading liability. Where A purchases his stock-in-trade from B on credit, the liability of A to B is a trading liability. But if A borrows money from C in order to pay off his liability to B, A's liability to C on such borrowing is not a trading liability. It is thus clear that section 41(1) cannot be invoked if C remits a part or whole of his loans to A [CIT vs. Phool ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chinery, by any other person or authority, to that extent, the actual cost of the assets to the assessee will stand reduced. But it is a far cry to state that though at the time of purchase of the machinery, no person met the cost either directly or indirectly, if, long thereafter a debt incurred in that connection is written off, it could be equated to a position that the financier met part of the cost of the asset to the assessee. We are at loss to accept the proposal that the remission of liability by bankers can, in any way, be said to be one, where the bankers met directly or indirectly the cost of the asset to the assessee. Therefore, this waiver of loan amount cannot be considered as income as it is capital in nature and allowance of depreciation cannot be equated with deduction in respect of "loss, expenditure or trading liability" and, therefore, depreciation allowed cannot be brought back to tax. 23. As regards the decisions relied by the ld. CIT(A) of Bombay High Court in the case of Solid Containers Ltd. Vs. DCIT (2009) 308 ITR 497 and Hon'ble Supreme Court in the case of T V Sundaram Ayengar and Sons Ltd (1996) 222 ITR 344, their facts are entirely different in as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee for a long period unclaimed by the trade parties. By lapse of time, the claim of the deposit became time-barred and the amount attained a totally different quality. It became a definite trade surplus. The assessee itself had treated the money as its own money and taken the amount to its profit and loss account. The amounts were assessable in the hand of the assessee. But, in the case of this assessee, amount was borrowed for acquiring capital assets. 26. Next the ld. CIT(A) also considered the application of section 28. This section reads as under :- "28. The following income shall be chargeable to income-tax under the head "Profits and gains of business or profession", - (i) The profits and gains of any business or profession which was carried on by the assessee at any time during the previous year; (ii) Any compensation or other payment due to or received by, - (a) Any person, by whatever name called, managing the whole or substantially the whole of the affairs of an Indian company, at or in connection with the termination of his management or the modification of the terms and conditions relating thereto; (b) Any person, by whatever name called, managing the whol ..... X X X X Extracts X X X X X X X X Extracts X X X X
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