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TMI Blog2019 (7) TMI 788X X X X Extracts X X X X X X X X Extracts X X X X ..... cquiring any capital asset, the same, on its waiver, would not constitute income chargeable to tax as held in the case of Mahindra Mahindra Ltd. vs CIT [ 2018 (5) TMI 358 - SUPREME COURT] and CIT vs. Tosha International Ltd [ 2008 (9) TMI 31 - HIGH COURT DELHI] either under section 41(1) or 28(iv) or 2(24). In the instant case, it would be the duty of the assessee to prove and establish that the amount of loan taken from the Directors/shareholders was utilized for the purpose of business. If on an enquiry and verification, it transpires that the assessee had utilized the loan for the purpose of its business activity or trading activity, the amount of loan to the extent it has been waived by the Directors/shareholders shall be deemed to be the assessee s income chargeable to tax as per the decision in the case of Solid Containers Ltd. vs DCIT (supra) where the principle laid down by the Supreme Court in the case of CIT vs. T.V. Sundaram Iyengar Sons Ltd.(supra) has been applied and followed. It was found that there was no details furnished by the assessee as to how the loan amount was utilized or applied or for the purpose for which the loan was raised. Hence, we remit t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... limited Company on 11.2.200S. The Company was initially incorporated by Mr S.R.Nair, Mrs.Saleena Nair and Mr. Venkitachalam. Mr. Venkitachalam left the Company in few years. The other two promoters were holding 50% of shares of the Company. The Company was dealing in sales and services of computers and computer relating systems, networking, integration and implantation of software. Since computer business industry was not doing well, the Directors sold their shares in the company to three of its employees. Accordingly, they entered into an agreement and all the assets and liabilities were taken over by the outgoing shareholders, including bank loan and personal loan of the Directors. The writing off of the unsecured loan of ₹ 1,59,25,662/-, is a nomenclature error, it is only the taking over of certain loans, loss, assets, debtors and creditors from the company by the outgoing partners, since incoming partners don't want to take the liability of such items which is doubtful or not realizable. . 3.1 On going through the agreement dated 28.2.2015 made between the outgoing partners and incoming shareholders, the Assessing Officer found that the outgoing share ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s outstanding as on 1.4.2014, apart from Director's loan, it was met by the assessee's own money. Hence, the Assessing Officer assessed the amount of ₹ 15925662/- added to the Reserve Surplus during the year as loan waiver as income of the assessee. 4. On appeal, the CIT(A) observed that three outgoing shareholders Shri S.R.Nair, Srnt.Shleena Nair and M/s Peso Infrastructure Pvt Ltd waived the loan given to the assessee company of ₹ 31,08,832/-, ₹ 1,14,87,737/- and ₹ 15,37,304/- respectively totalling to ₹ 1,61,33,873/-, However, total amount added to the Reserve Surplus during he year as waiver of loan was ₹ 1,59,25,662/- only, which the Assessing decided to add to the total income of the assessee company. Because of this waiver of loan, the accumulated loss of the assessee company got reduced to ₹ 10,19,04,681/- from the loss of ₹ 1,78,30,343/-. Before the CIT(A), the Ld. AR contended that loan from Director was on the capital account and was not claimed as expenses and it was not a trade or revenue liability which was waived and therefore the same cannot be added u/s. 41(1) for cessation of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it received during the course of business which was no longer repayable was assessed as income. In the assessee s case the waiver was loan from directors and not deposit received in the course of business. 6.1 The Ld. AR submitted that the issues in the case relied on by the CIT (A) are different and, therefore, not applicable in the present case .In this case, the Apex Court had considered the applicability of section 28(iv) in relation to loan waived. With regard to the question of application of section 28 (iv) in relation to waiver of loan, the Apex Court had held in the case of Mahindra and Mahindra (supra) that section 28 (iv) of the IT Act cannot be applied in the case considered since the receipts are in the nature of cash or money. It was submitted that in the case of Mahindra and Mahindra loan received from one Kaiser Jeep Corporation which was used for acquiring capital asset was waived by the lender and the assessing officer assessed the waived amount as income u/s 28 (iv) of the Act. On appeal by the Revenue against High Court order, the Apex Court had declined to interfere with the judgment of the High court in view of the reasons that se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the contention of the assessee that the waiver of this amount of loan is not hit by Section 41(1) of the Act. In other words, no dispute has been raised by the AO with regard to the applicability of the provisions of section 41(1) of the Act. In this situation, now the question arises as whether the waiver of the above loan can be treated as business income in view of the principles laid down in the case of T.V. Sundaram Iyengar Sons (222 ITR 344). In the present case, in order to decide the question as to whether the decision of Supreme Court in the case of T.V. Sundaram Iyengar Sons (supra) is applicable to the present case, we deem it necessary on our part to dwell upon the facts of the present case, particularly to find out the nature and purpose for which the loan was taken and utilized. The outgoing shareholders, Shri S.R.Nair and Smt. Saleena Nair agreed to set off the accumulated loss of the company against their loan outstanding with the assessee company which was ₹ 31,08,832/-and 1,14,87,737/- respectively. The third outgoing shareholder M/s.Peso Infrastructures P Ltd agreed to waive the loan of ₹ 15,37,304/- which was given by them to the assessee company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... following observation of Hon ble Apex Court in T.V. Sundaram Iyengar Sons Ltd. s case has been noted by Hon ble Bombay High Court in the case of Solid Containers Ltd. vs DCIT (308 ITR 417): 22. The principle laid down by Atkinson J. applies in full force to the facts of this case. If a common sense view of the matter is taken, the assessee because of the trading operation had become richer by the amount, which is transferred to its profit and loss account. 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, common sense demanded that the amount should be entered in the profit and loss account for the year and be treated as taxable income. In other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould be squarely applicable to the facts of the present case. The amount which initially did not fall within the scope of the provisions rendering it liable to tax subsequently have become the assessee s income being part of the trading of the assessee. Similar view was also taken by a Bench of Madras High Court in the case of CIT vs Aries Advertising (P) Ltd. (2002) 255 ITR 510. The court took the view that the assessee because of trading operation became richer by the amount which had been transferred and or retained in the Profit and Loss Account of the assessee. 7.4 In the case of CIT vs Aries Advertising P. Ltd., 255 ITR 510 (Mad), 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 common sense 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 reserv ..... X X X X Extracts X X X X X X X X Extracts X X X X
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