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TMI Blog2010 (4) TMI 1125X X X X Extracts X X X X X X X X Extracts X X X X ..... essee with regard to waiver of the principal amount HELD THAT:- In the light of the discussions, and following the decision of Hon'ble Bombay High Court in the case of Solid Containers Ltd. vs. Dy. CIT [ 2008 (8) TMI 156 - BOMBAY HIGH COURT] where the principle enunciated by the Hon'ble Supreme Court in the case of CIT vs. T.V. Sundaram Iyengar Sons Ltd.[ 1996 (9) TMI 1 - SUPREME COURT] has been applied, we held that the principal amount of loan, which is taken for the purpose of business or trading activity, on its waiver by the creditor, would constitute income chargeable to tax under the Act. However, if the loan is utilized for the purpose of acquiring any capital asset, the same, on its waiver, would not constitute income chargeable to tax as held by Hon'ble Bombay High Court in the case of Mahindra Mahindra Ltd. vs. CIT [ 2003 (1) TMI 71 - BOMBAY HIGH COURT] and Hon'ble Delhi High Court in the case of CIT vs. Tosha International Ltd.[ 2008 (9) TMI 31 - HIGH COURT DELHI] either u/s. 41(1) or 28(iv) or 2(24). The assessee has not brought any material or evidences on record to show that the loan taken by the assessee from bank in cash credit acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the AO were furnished during the course of assessment proceedings. In the course of assessment proceedings, it was noticed by the AO that assessee has appended a note to the accounts in Sch. XV, Part B, which reads as under : The company has sold/agreed to sell during the year its entire fixed assets comprising, leasehold land, building and electric installation therein and has realized a sum of ₹ 1.85 crores from sale and advance and has paid the said sum to SBI to settle the entire outstanding principal amount of ₹ 4,76,42,213 under the one-time settlement with the said bank. The company has created the capital reserve of ₹ 2,91,42,213 for the balance outstanding principal amount not to be paid by the company under the settlement with the said bank. The company has written back outstanding provision for bank interest of ₹ 1,90,42,295 in the books now not liable to be paid by the company under the settlement with the said bank to P L a/c and shown under provision for bank interest written back respectively. The company has further created 'capital reserve' of ₹ 1,60,55,232.95 out of the amount realized in excess of original cost on s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the AO has been accepted by the AO, who observed that this version of the learned counsel is quite acceptable in the light of the decision of Hon'ble Delhi High Curt in the case of CIT vs. Tosha International Ltd. (supra). However, the AO proceeded further to state that the matter does not end there but the next question to be decided is as to whether the above principal amount written off by the bank is otherwise assessable as income in the hands of the assessee under the provisions of IT Act. In this respect, the AO examined the definition of income given in s. 2(24) of the Act and held that in case any benefit arises to the assessee by way of waiver of loan taken by the assessee, the same shall be treated to be the income chargeable to tax under the Act notwithstanding the fact that the item may not be covered by the provisions of s. 41(1) of the Act. The AO further held that since this loan amount was related to the business of the assessee, the same would be assessable under the head Business . He, therefore, brought the said amount of ₹ 2,91,42,213 to tax as income includible in the assessee's total income. 5. Being aggrieved, the assessee preferred an app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erence, the CIT(A)'s order is extracted here as under : 3.1 I have carefully considered the written and oral submissions made on behalf of the appellant, the findings of the AO and the facts on record. I have also gone through the case laws CIT vs. P. Ganesa Chettiar (1982) 133 ITR 103(Mad), Mahindra Mahindra Ltd. vs. CIT (2003) 182 CTR (Bom) 34: (2003) 261 ITR 501(Bom) and the decision of Hon'ble Delhi High Court dt. 23rd Sept., 2008 in the case of CIT vs. Tosha International Ltd. relied upon by the appellant during the appellate proceedings before the undersigned. It has been gathered that the decision of the jurisdictional High Court of Delhi in the case of Tosha International Ltd. (supra) has been reported in (2009) 176 Taxman 187(Del). The relevant portion of the said judgment in the case of Tosha International Ltd. (supra) is extracted below for ready reference : 'Paras 2, 3 and 4 of the judgment of Hon'ble Delhi High Court in the case of Tosha International Ltd. (supra) has been reproduced here by the CIT(A).' 3.2 After having considered the facts of the case of the appellant, I am of the view that ratio decidendi of the above cited judgm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncipal amount of loan waived by the bank is also not liable to be taxed in the light of the decision of Hon'ble Madras High Court in the case of CIT vs. P. Ganesa Chettiar (supra). The learned counsel for the assessee also relied upon the decision of Hon'ble Delhi High Court in the case of CIT vs. Phool Chand Jiwan Ram (1981) 131 ITR 37(Del). He further submitted that the decision of Hon'ble Supreme Court in the case of T.V. Sundaram Iyengar Sons (supra) is also not applicable to the present case in as much as the transaction between the assessee and the bank was not in the nature of any trading transaction, but the loan was obtained for the purpose of business de hors trading transaction carried out by the assessee. He, therefore, submitted that since the transaction between the assessee and the bank is not connected or related to any trading activity of the business of the assessee, the principal laid down by the Hon'ble Supreme Court in the case of T.V. Sundaram Iyengar Sons (supra) cannot be applied to the present case so as to treat the principal amount of ₹ 2,91,42,213 waived by the bank as income of the assessee even in common sense of the term. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 95 to the P L a/c and also included the same in the total income shown by the assessee in the return of income filed by it. Thus, there is no dispute with regard to the waiver of interest includible in the total income of the assessee for the year under consideration. However, a dispute has arisen between the Department and the assessee with regard to waiver of the principal amount to the extent of ₹ 2,91,42,213. The entire outstanding principal amount of ₹ 4,76,42,213 was settled at ₹ 1.85 crore giving a benefit of ₹ 2,91,42,213 to the assessee by way of waiver. Now, the question arises whether the waiver of the principal amount to the extent of ₹ 2,91,42,213, which has been credited to the capital reserve account, is an income chargeable to tax under the Act. According to the AO, the assessee had derived benefit by way of waiver of loan in the course of carrying on business activity and, therefore, the amount to the extent it is waived by the bank, is includible in the assessee's hands as business income. From the order of the AO, it is clear that no dispute has been raised by the AO with regard to the contention of the assessee that the remissio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns SBI, Noida (secured against the hypothecation of finished goods, semi-finished goods, raw material book debts, receivable claims, securities rights by way of first charge, mortgage of building and plant and machinery by way of second charge and personal guarantee of directors) : (a) In cash credit account 2,79,42,213 (b) C.T.L. State Bank of India 1,19,00,000 (c) W.C.T.L. State Bank of India 78,00,000 4,76,42,213 In the notes to the accounts (Sch. XV), under Item B, it has been stated as under : (B) The company has sold/agreed to sell during the year its entire fixed assets comprising leasehold land, building and electric installation therein and has realized a sum of ₹ 1.85 crore from sale and advance and has paid the said sum to SBI to settle the entire outstanding principal amount of ₹ 4,76,42,213 under the one time settlement with the said bank. The company has created the capital reserve of ₹ 2,91,42,213 for the balance outstanding principal amount not to be paid by the company u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wed amount from financial institutions against working capital and against term loans, and these borrowed monies were utilized for the working capital or indirectly the benefit would have translated into the trading results of the company. According to the AO, the assessee definitely gained in the trading activity on the basis of these loans, and, secondly, the assessee when bought assets consisting of plant and machinery, buildings and other assets, it derived benefit of depreciation. The AO observed that it clearly indicates that the assessee has been deriving benefit on the basis of either depreciation or utilizing the working capital in earlier years. The CIT(A) deleted the addition by observing that the remission of the principal amount of loan did not amount to income under s. 41(1) nor under s. 28(iv) nor under s. 2(24) of the Act. On further appeal by the Revenue, the Tribunal upheld the order of learned CIT(A). The relevant para 4 of the Tribunal's order runs as under : Aggrieved by the above order of the CIT(A), the Revenue is in further appeal before us. We have considered the rival contentions carefully, gone through the orders of the authorities below and also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es whether convertible into money or not, arising from business, but does not apply for benefit received in cash or money; as held in Mahindra Mahindra Ltd. (supra), the waiver of principal amount of loan also does not come under the definition of income as contained under s. 2(24) of the Act. The definition of income as contained under s. 2(24) speaks as to what are the items to be included under the definition of income. It includes profit and gains, dividend, voluntary contribution received by a trust, value of any perquisite or profit in lieu of salary, special allowance or benefit granted to the assessee to meet his personal expenses, benefit or perquisite of directors, any such chargeable under cls. (iiia), (iiib), (iiic), (iv) and (v) of s. 28, capital gains under s. 45, profit and gains of business in accordance with s. 44, winning from lotteries, races, etc., and any sum received by the assessee from his employee as contribution to any provident fund so set up. Waiver of principal amount of tax by no stretch of imagination can be treated as income within the meaning of s. 2(24) of the Act. 17. The Hon'ble High Court has observed in para 3 of their order that Tri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lowance in respect of loss, expenditure, or trading liability incurred by it and subsequently, during any previous year, the assessee should have received any amount in respect of such loss. expenditure or trading liability by way of remission or cessation thereof. The Tribunal further observed that the remission would become income only if the assessee has claimed deduction in respect of expenditure or trading liability. Then, the Hon'ble Tribunal referred to the decision of Hon'ble Bombay High Court in the case of Mahindra Mahindra Ltd. vs. CIT (supra) where Hon'ble Bombay High Court held that any disallowance or deduction having been allowed in respect of loan taken by the assessee for purchase of capital asset, s. 41(1) was not attracted to remission of principal amount of loan. In that case, the Tribunal further found that the assessee did not get any deduction on account of acquisition of capital asset as the same was reflected in the balance sheet and not in the P L a/c, and, also the remission of the principal amount of loan so obtained from the bank and financial institution had not been claimed as expenditure or trading liability in any of the earlier previo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... R 1010(Guj). Therefore, we hold that the present case is also not covered by the provisions of s. 28(iv) of the Act. In the case of CIT vs. Tosha International Ltd. (supra), the Tribunal further held that waiver of principal amount of loan also does not come under the definition of income as contained under s. 2(24) of the Act as the definition of income as contained under s. 2(24) speaks as to what are the items to be included under the definition of income, which includes profit and gains. dividend, voluntary contribution received by a trust, value of any perquisite or benefit in lieu of salary or specifically granted to the assessee to meet his personal expenses, benefit or perquisite or any sum chargeable under cls. (iiia), (iiib), (iiic), (iv) and (v) of s. 28, capital gains chargeable under s. 45, profit and gains of business in accordance with s. 44, winning from lotteries, races etc. and any sum received by the assessee from his employer as contribution to any provident fund set up. However, the Tribunal in that case has not considered the issue from the standpoint of the principle laid down by the Hon'ble Supreme Court in the case of CIT vs. T.V. Sundaram Iyengar Son ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... waiver was not received by the assessee in cash. The Tribunal further took the view that even s. 41(1) of the Act was not applicable because there was no cessation of any trading liability. On reference, the Hon'ble High Court held that there were two important facts, which had been overlooked by the AO. One of such important fact referred to by the High Court was that the purchase consideration was related to capital asset. The tooling were in the nature of dies. The assessee was manufacturer of heavy vehicles and jeeps. It required these dies for expansions. Therefore, the import was that of plant and machinery. The consideration paid was for such import of plant and machinery, i.e., capital assets. In these circumstances, it was held that s. 28(iv) was not attracted. The Hon'ble High Court further found that the principal amount of loan had been foregone as a part of takeover arrangement, to which the assessee was not a party, and the waiver of principal amount was unexpected, and in the circumstances, such waiver would not constitute business income. The Hon'ble High Court further held that in order to apply s. 41(1), the assessee should have obtained a deduction i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 41(1) of the Act. The credit balance written back was treated by the AO to be the income of the assessee under s. 28 of the Act in view of the fact that the credit balance was directly arising out of the business activity. The assessee, relying upon the judgment of Hon'ble Bombay High Court in the case of Mahindra Mahindra Ltd. (supra) contended that in relation to the transaction in question, s. 28(iv) was not attracted and even provisions of s. 41(1) of the Act could not be applied to treat the same as business income of the assessee liable to tax. 23. On an appeal, CIT(A) upheld the AO's action. On further appeal before the Tribunal, the Tribunal sustained the view taken by the CIT relying upon the judgment of the Hon'ble Supreme Court in the case of CIT vs. T.V. Sundaram Iyengar Sons Ltd. (supra). The Tribunal observed that Hon'ble Supreme Court in the case of CIT vs. T.V. Sundaram Iyengar (supra) held that if the amount is received in the course of trading transactions, even though it is not taxable in the year of receipt, as being of capital character, the amount changes its character when the amount becomes assessee's own money because of limitat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a/c. The moneys had arisen out of ordinary trading transactions. Although the amounts received originally were not of income nature, the amounts remained with the assessee for a long period unclaimed by the trade parties. By lapse of time, the claim of deposit became time-barred and the amount attained a totally different quality. It became a definite trade surplus, Atkinson, J. pointed out that in Morley's case (supra) no trading asset was created. Mere change of method of book-keeping had taken place, But, where a new asset came into being automatically by operation of law, commonsense demanded that the amount should be entered in the P L a/c for the year and be treated as taxable income. In other words, the principle appears to be that if an amount is received in course of a trading transaction, even though it is not taxable in the year of receipt as being of revenue character, the amount changes its character when the amount becomes the assessee's own money because of limitation or by any other statutory or contractual right. When such a thing happens, commonsense demands that the amount should be treated as income of the assessee. 23. In the present case, the mone ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... P L a/c of the assessee. 24. In the case of CIT vs. Aries Advertising (P) Ltd. (supra), an amount of ₹ 1,77,886, being the balance due to printers; block makers and souvenir publishers by the erstwhile firm of an outstanding more than three years had been transferred to general reserve since these amounts had remained unclaimed for a long period of time. It was held by the Hon'ble High Court that in the case of unclaimed balance written back, if a commonsense view of the matter is taken, the assessee, because of the trading operation, becomes richer by the amount, which it has transferred to its general reserve account. The money had arisen out of ordinary trading transactions. Although the amounts received originally were not of income nature, but subsequently, it becomes the assessee's income when the amount was written off in the accounts. In this case, the Hon'ble Madras High Court has also observed that once the assessee transferred any amount to the general reserve, it treated the same as the profit. In this connection, reference was made to the decision of Hon'ble apex Court in the case of Vazir Sultan Tobacco Co. Ltd. vs. CIT (1981) 25 CTR (SC) 18 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e loan or credit facility by way of hypothecation of finished goods, semi-finished goods, raw material, book debts, receivable claims, securities, and rights by way of first charge, which indicates that the assessee have obtained the loan facility for its business activity or trading operations. However, this aspect of the matter, whether the whole of the loan amount has been utilized either for the purpose of acquiring capital asset or for the purpose of business activity or trading activity, has not been looked into or examined by the authorities below nor the assessee has established that the loan amount was utilized only for the purpose of acquiring capital asset. The assessee has merely relied upon the decision of Hon'ble Delhi High Court in the case of CIT vs. Tosha International Ltd. (supra) and the decision of Hon'ble Bombay High Court in the case of Mahindra Mahidnra Ltd. vs. CIT (supra) without giving details about the purpose for which the loan amount was utilized. The learned CIT(A) has decided the matter by relying upon the aforesaid two decisions i.e., decision of Delhi High Court in the case of Tosha International Ltd. (supra) and decision of Bombay High Co ..... X X X X Extracts X X X X X X X X Extracts X X X X
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