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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 ..... and 142(1) of the Act were issued, which were complied with by the assessee. Various details required 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 Rs. 1.85 crores from sale and advance and has paid the said sum to SBI to settle the entire outstanding principal amount of Rs. 4,76,42,213 under the one-time settlement with the said bank. The company has created the capital reserve of Rs. 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 Rs. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rned counsel for the assessee before 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 Rs. 2,91,42,213 to tax as income includible in the assessee's total income. 5. Being aggrieved ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . For ready reference, 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 cite ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mount 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 Rs. 2,91,42,213 waived by the bank as income of the assessee even in common sense of the term. 11. In the cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... luded 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 Rs. 2,91,42,213. The entire outstanding principal amount of Rs. 4,76,42,213 was settled at Rs. 1.85 crore giving a benefit of Rs. 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 Rs. 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 remission of the principal amount of loan is not hit by s. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Rs. 1.85 crore from sale and advance and has paid the said sum to SBI to settle the entire outstanding principal amount of Rs. 4,76,42,213 under the one time settlement with the said bank. The company has created the capital reserve of Rs. 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 Rs. 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 Rs. 1,60,55,282 out of the amount realized in excess of original cost on sale of leasehold land." From the aforesaid details and notes furnished by the assessee and its auditor, it is seen that total ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 deliberated on the case laws cited by learned Authorised Representative in support of the provisions that waiver of principal amount of loan is not income. We found from the record that assessee being a sick company, not in a position to repay the loan, the financial institution and banks have waived the interest and a part of principal amount. So far as waiver of interest is concerned, the assessee either has not claimed the expenditure of interest which was waived or has shown the same as income. However, in respect of the waiver of principal amount, the assessee has directly credited the same to capital reserve account. The AO has no dispute with regard to waiver of interest, however, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... argeable 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 Tribunal had examined the case in detail and particularly from the standpoint of the provisions of s. 41(1) of the Act. The Hon'ble High Court then reproduced the Tribunal's observations and decision with regard to the applicability of s. 41(1) of the Act to that case in para 3 of their order as under : "As per our considered view, for attracting the provisions of s. 41(1), the first requisite condition to be satisfied is that the assessee should have got deduction or benefit of allowance 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 tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 previous years. The Tribunal further observed that provisions of s. 28(iv) would apply to the value of benefit or perquisites whether convertible into money or not, arising from business but does not apply for benefit received in cash or money as so held in Mahindra & Mahidnra Ltd. vs. CIT (supra). The Tribunal further held that the waiver of principal amount of loan also does not come under the definition of 'income' as contained in s. 2(24) of the Act, and as such waiver of principal amount by no stretch of imagination can be treated as income within the meaning of s. 2(24) of the Act. However, it seems that while deciding the issue, the Hon'ble High Court has only considered the issue from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 & Sons (supra). 19. While deciding the issue, the Tribunal in the case of CIT vs. Tosha International Ltd. (supra) has recorded a finding of fact that in that case the assessee has not got any deduction on account of acquisition of capital assets as the same was reflected in the balance sheet and not in the P&L a/c, and also the remission of principal amount of loan so obtained from the bank was not claimed as an expenditure or trading liability in any of the earlier previous years. It is thus seen that the Tribunal in that case proceeded to decide the case in the light of the fact that the assessee had acquired capital assets and has applied the decision of Hon'ble Bombay High Court in the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ets. 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 in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee. The assessee had not obtained such allowance or deduction in respect of expenditure or trading liability, In the circumstances, it was held that s. 41(1) of the Act was not applicable. The Hon'ble High Court further held that even assuming that the assessee had got deduction of allowance, s. 41(1) was not applicable because such deduction was not in respect of loss, expenditure or trading liability. It was lastly held that the tooling constitutes capital asset and not stock-in-trade. From the said decision, it is evident that the loan was obtained for payment of consideration for import of p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 limitation or by any other statutory or contractual right. Where the assessee received deposits in the course of trading transactions, the amount of such credit balances, which were barred by limitation and which were returned back by the assessee to the P&L a/c, were to be assessed as the assessee's income. On further appeal before the Hon'ble High Court, the Hon'ble High Court held that the assessee can hardly derive any advantage from the case of Mahindra & Mahindra Ltd. vs. CIT (supra) as in that case, a clear finding was recorded that the purchase consideration was related to capital assets; the toolings were in the nature of dies and the assessee was a manufacturer of heavy vehicles; the import was th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 money was received by the assessee in course of carrying on his business. Although it was treated as deposit and was of capital nature, at the point of time, it was received by efflux of time the money has become the assessee's own money. What remains after adjustment of the deposits had not been claimed by the customers. The claims of the customers have become barred by limitation. The assessee itself has treated the money as its own money and taken the amount to its P&L a/c. There is no explanation from the assessee why the surplus money was taken to its P&L a/c even if it was somebody else's money. In fact, as Atkinson, J. pointed out that what the assessee did was the commonsense way of dealing with the amoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ally 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) 186: (1981) 132 ITR 559(SC), where it has been held that a reserve is appropriation of profits. 25. In the light of the discussion made above, and following the decision of Hon'ble Bombay High Court in the case of Solid Containers Ltd. vs. Dy. CIT (supra) where the principle enunciated by the Hon'ble Supreme Court in the case of CIT vs. T.V. Sundaram Iyengar & Sons Ltd. (supra) 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 cha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hi 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 Court in the case of Mahindra & Mahindra Ltd. vs. CIT (supra) besides the decision of Hon'ble Madras High Court in the case of CIT vs. P. Ganesha Chettiar (supra), without examining and appreciating the nature and purpose for which the loan was taken. We, therefore, restore this issue back to the file of the AO for his fresh adjudication with a direction to the assessee to furnish all the details and particulars of loan, and the purpose for which the loan taken from bank was utilized. All these information are within the control and specific knowledge of the assessee and, therefore, it would be the duty of the assessee to prove and establish that the amount of loan taken from the bank was utilized for the purpose of acquiring capita ..... X X X X Extracts X X X X X X X X Extracts X X X X
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