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TMI Blog2016 (5) TMI 49X X X X Extracts X X X X X X X X Extracts X X X X ..... rred to the profit and loss account. We find that in the case under consideration, this very basic aspect has not been looked into by the AO or the FAA. Before the AO the assessee had stated that there was no reduction of liability and that it was a capital restructuring exercise. The assessee had not produced the documents with regard to sanction or waiver of the loan and the AO had not called for such details. The FAA also did not deliberate upon the issue as to whether the loan was in the field of capital asset or was trading liability. Nomenclature given by the assessee/AO do not decide the real nature of any transaction until and unless the relevant documents are examined and looked into. It is true that cases relied upon by the AO/FAA laid down certain principles. But, how those principles were applicable to the facts of the case under consideration has not been discussed either by the AO/FAA. We are of the opinion, that provisions of section 28 are not applicable to the facts of the case. But, same cannot be held for the provisions of section 41(1)of the Act, as proper investigation about the real nature of the waived amounts have not been carried out. Considering the peculi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent, that it had nil exempt income. After considering the submission of the assessee the AO held that assessee had made investment in shares from the interest-bearing funds, that it had failed to substantiate the claim of not incurring any expenditure in relation to exempt income. Invoking the provisions of rule 8D he made a disallowance of ₹ 59, 373/-. 2. 1. Aggreived by the order of the AO, the assessee preferred an appeal before the first appellate authority(FAA). Before him, it was argued that investment in question had been made more than 8 to 10 years back out of the profits, that it had not incurred any expenditure for earning exempt income. After considering the submission of the assessee and the assessment order the FAA observed that the assessee had invested ₹ 11. 39 lakhs in equity shares of one of the group companies and ₹ 22, 000 in shares of BMC bank Ltd long back, that the investments were made at the time out of the own funds and not out of the borrowed funds, that during the year under consideration it had not received any income from those investments. He further held that rule 8D r. w. s. 14A (2) could be invoked only if the AO was not satisf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee had derived the benefit of waiver of principal amounts in respect of the loans taken from State bank of Hyderabad (Rs. 1. 20 crores) and Unit Trust of India (Rs. 6. 25 crores). He observed that the assessee had taken loans from the banks in the normal course of the business, that for the year under appeal it got a benefit of waiver of such loans, that it had no liability to pay such loan. He directed the assessee to explain as to why the benefit derived by way of waiver of outstanding loan amounting to ₹ 7. 45 crores should not be considered as income and added to its total income. The assessee contended that there was no reduction of liability, that the receipt was not taxable, that even if the company had been taken to liquidation the preference shareholder would not get any amount, that the companies assets would be insufficient to discharge its creditors, that the preference shareholders would rank after them in priority of distribution of assets, that the waiver of reference capital is a capital restructuring exercise. After considering the submission of the assessee, the AO referred to the case of Solid Containers Ltd. (308 ITR 417), delivered by the Hon ble posit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3. 2. Before us, the DR contended that facts of the case were similar to the facts of Solid Containers Ltd (supra), that there was cessation of liability, that the provisions of section 41 (1) were applicable. The AR argued that the FAA had rightly pointed out that facts of the case of Mahindra and Mahindra (supra) were similar to the facts of the case under consideration, that assessee had offered the interest portion of the waiver for taxation, that the waiver of principal amount was a capital receipt. He relied upon the case of Xylon Holdings Private Limited (90 DTR 205). 3. 3. We have heard the rival submissions and barriers the material before us. We find that the State bank of Hyderabad and unit trust of India had waived ₹ 7. 45 crores during the year under consideration, during the assessment proceedings the assessee had claimed that there was no reduction of liability and therefore it was not a taxable receipt, that the waiver of preference capital was a capital restructuring exercise, that the AO had made the addition applying the ratio laid down in the case of Solid Containers Ltd (supra), that the FAA had held that facts of the case under consideration were simi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red the submissions. The issue arising in this case stand covered by the decision of this court in the matter of Mahindra and Mahindra (supra). The decision of this court in the matter of Solid Containers (supra) is on completely different facts and in applicable to this case. In the matter of Solid Containers (supra) the assessee therein had taken a loan for business purposes. In view of the considered terms arrived at, the amount of loan taken was waived by the lender. The case of the assessee therein was that the loan was a capital receipt and has not been claimed as deduction from the taxable income in the earlier years and would not come within the purview of section 41 () of the act. However this court by placing reliance upon the decision of the apex court in the matter of CIT v. Subramanian Sons Ltd to 22 ITR 344 held that the loan was received by the assessee for carrying on its business and therefore, not a loan taken for the purchase of capital assets. Consequently, the decision of this court in the matter of Mahindra and Mahindra Ltd (supra) was distinguished as in the said case the loan was taken for the purchase of capital asset and not for trading activities as in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ital asset or was trading liability. Nomenclature given by the assessee/AO do not decide the real nature of any transaction until and unless the relevant documents are examined and looked into. It is true that cases relied upon by the AO/FAA laid down certain principles. But, how those principles were applicable to the facts of the case under consideration has not been discussed either by the AO/FAA. We are of the opinion, that provisions of section 28 are not applicable to the facts of the case. But, same cannot be held for the provisions of section 41(1)of the Act, as proper investigation about the real nature of the waived amounts have not been carried out. Considering the peculiar facts and circumstances of the case, we are of the opinion that the matter needs further verification . Therefore, in the interest of justice, matter is being restored back to the file of the AO to decide the issue afresh after considering the loan sanctioning and the loan waiver documents. He is directed to afford a reasonable opportunity of hearing to the assessee. Here, we would like to refer to the case of Logitronics P. Ltd. (333ITR386), delivered by the Hon ble High Court of Delhi. The facts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the A. O. in the appeal and by the assessee in the C. O. are identical to the grounds taken by them in the appeal No. ITA/1859/Mum/2013 and C. O. No. 106/Mum/2014 in the case of Rama Phosphates Ltd. The only difference is about the amounts involved. The AO had made a disallowace of ₹ 2. 43 lakhs u/s. 14A r. w. 8D of the Rules. The disallowance was partly upheld by the FAA. Similarly, the assessee had settled its outstanding principal amount with Bank of India and the sum involved by way of waiver was ₹ 98. 86 lakhs. 6. Following our orders for the earlier appeal, we decide Ground No. 1 against the A. O. Ground No. 2 is partly allowed . The AO is directed to make further verification as stated in the earlier appeal. He would afford reasonable opportunity to the assessee. 7. We are not adjudicating the C. O. treating it as infructuous. ITA/1857/Mum/2013 (A. Y. 2009-10) 8. The AO has raised only one Ground of appeal in this case and it pertains to waiver of loan amount and applicability of section 41(1)/28 of the Act. Following our earlier orders the issue is restored back to the file of the AO for fresh adjudication. He would decide the issue after hearing ..... X X X X Extracts X X X X X X X X Extracts X X X X
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