Chargeability of waiver of loan depends upon the purpose of the loan taken if for trading purpose than chargeable and if for acquiring capital asset than not chargeable

IN THE INCOME TAX APPELLATE TRIBUNAL

MUMBAI BENCHES, ‘B’, MUMBAI

BEFORE HON’BLE PRESIDENT SHRI G.E.VEERABHADRAPPA

AND SHRI D.K.AGARWAL (JM)

ITA No.6494/Mum/2008

(Assessment Year: 2004-05)

Dy. Commissioner of Income Tax, 1(1),

Room No.579, Aayakar Bhavan,

M K Road,

Mumbai -400020.

APPELLANT

V/s

M/s Bhor Industries Ltd.,

Tanna House Annex,

11-A, Nathalal Parekh Marg,

Colaba,

Mumbai-400039.

PAN: AAACB3535C

RESPONDENT

Date of Hearing: 15.2.2012

Date of Pronouncement: 24.2.2012

Appellant by: Shri Pravin Varma

Respondent by: Shri Ronak G.Doshi

O R D E R

PER D.K.AGARWAL (JM)

This appeal preferred by the Revenue is directed against the order dated 29.8.2008 passed by the ld. CIT(A) for the assessment year 2004-05.

2. Briefly stated facts of the case are that the assessee company is engaged in the business of manufacturing of PVC sheets, Leathercloth, Flooring Materials and Trading in commodity, filed return declaring loss of Rs.4,79,89,263/-. During the course of assessment proceeding, the AO observed  that the assessee has credited to profit and loss account an amount of Rs.2,87,35,673/- under the head ‘other income’ which includes excess liability/ provisions written back of Rs.5,35,34,287/-. However, in the computation the assessee reduced an amount of Rs.2,28,36,132/- being interest provisions, disallowed in the assessment years 2002-03 and 2003-04. However, the assessee reduced its income by an amount of Rs.2,87,35,673/- being ‘term loan’ and ‘working capital term loan’. The assessee was asked to show as to why both the amounts should not be added to the total income of the assessee. In response, the assessee submitted that the assessee has taken ‘term loan’ and ‘working capital term loan’ from IDBI. During the year the assessee entered into a onetime settlement with the IDBI. As a result of one time Settlement, IDBI waived the interest of Rs.2,28,36,132/- on the above loan for the F.Ys. 2001-02 & 2002-03. The said interest was disallowed u/s.43B of the Act in the A.Ys.2002-03 & 2003-04. An amount of Rs.2,87,35,673/- represents waiver out of principal amount of loan. The assesses further stated that waiver of principal amount is not a liability within the meaning of section 41(1) of the Act. The assessee further submitted that “since the amount was originally received by the assesses as a loan and not in the normal course of trading, and since no deduction was claimed or allowed in the past in respect of the liability that is now proposed to be waived, the loan so waived cannot be treated as income chargeable to tax. However, the AO while admitting that waiver of term loan is not trading liability, expenditure or loss as envisaged in sec.

41(1) of the Act observed that every income that has accrued, received or receivable is chargeable to tax. According to the AO in the present case the assessee as a result of ‘One time Settlement’ has benefited by way of waiver of principle amount of term loan which otherwise the assessee would have to pay to the bank. The AO while relying on the decision of the Hon’ble Supreme Court in the case of S. G. Mercantile Corporation P Ltd V/s CIT (1972) 83 ITR 700 (SC) wherein according to him it has been held that waiver of principal amount of term loan is chargeable to tax under the head ‘Income from other sources’ added the amount of Rs.2,87,35,673/- to the income of the assessee.

3. On appeal, the ld. CIT(A) observed that the decision relied on by the AO in S.G. Mercantile Corporation (P.) Ltd. (supra) appears to be misdirected. The ld. CIT(A) while relying on certain decisions further observed that there is no dispute that the provisions of sec. 41(1) is not applicable to the appellant’s case. Further there is no other provision under which the waiver of loan can be considered as income received, receivable or accrued as has been held by the AO and accordingly deleted the addition made by the AO.

4. Being aggrieved by the order of the ld. CIT(A), the Revenue is in appeal before us taking the following grounds of appeal.

“1. Whether on the facts and in the circumstances of the mcase and in Law, the Ld.CIT(A) erred in deleting the addition of Rs.2,87,35,673/- made by the AO under the head ‘income from other sources’ being waiver of principal amount of term loan.

2. Further, placed in the above factual and legal scenario, the impugned order of the ld. CIT(A), is, the appellant prays, contrary to law and consequently merits to be set aside and that of the AO be restored”.

5. At the time of hearing, the ld.DR while admitting that the decision relied on by the AO in S. G. Mercantile Corporation P Ltd (supra) is misplaced, placed reliance on the decision in Logitronics (P.)Ltd. V/s CIT (2011) 197 Taxman 394 (Delhi). He, therefore, submits that the order passed by the AO be restored.

6. On the other hand, the ld. Counsel for the assessee, at the outset, submits that it is a case of returned loss and assessed loss resulting into taxable income at Rs.Nil. Therefore, in view of the decision of the Hon’ble Delhi High Court in CIT V/s Manglam Ricinus Ltd. (2008) 174 Taxman 186 (Delhi) the Revenue’s appeal is not maintainable. On merits, he submits that there is no dispute that the AO has not invoked the provisions of section 41(1) of the Act and has assessed the waiver principal amount of ‘term loan’ under the head income from other sources which he cannot assessed and for this proposition the reliance was also placed on the decision of the Hon’ble Supreme Court in CIT V/s D.P.Sandu Bros.Chembur (P.) Ltd. (2005) 142 Taxman 713 (SC) wherein it has been held that in view of the finding that section 45 could not be applied, it was not open to department to impose tax on capital receipt under any other section. In this regard the reliance was also placed on the decision of the Hon’ble Bombay High Court in Cadell Wvg. Mill Co. (P.) Ltd. V/s CIT (2001) 116 Taxman 77 (Bom.), wherein it has been held (para 16) that there is no merit in the contention of the department that capital gains which arise in cases of transfer of assets whose cost of acquisition cannot be computed would fall under section 56. He further submits that the Tribunal cannot take back benefit granted to the assessee by the AO in view of the decision of the Hon’ble Supreme Court in MCorp Global (P.) Ltd. V/s CIT (2009) 178 Taxman 347 (SC). The ld. Counsel for the assessee further submits that the decision relied upon  by the ld.DR in Logitronics (P.)Ltd. is distinguishable and not applicable to the facts of the present case. He, therefore, submits that the order passed by the ld. CIT(A) be upheld.

7. We have carefully considered the submissions of the rival parties and perused the material available on record. We find that admittedly, it has been observed by the AO that waiver of ‘term loan’ is not trading liability, expenditure or loss as envisaged under section 41(1) of the Act. In other words, he has not invoked the provision of section 41(1) of the Act but treated the waiver of principle of amount of ‘term loan’ chargeable to tax under the head ‘income from other sources’ Since the AO has not invoked the provisions of section 41(1) of the Act, therefore, respectfully following the decision of the Hon’ble Supreme Court in D.P.Sandu Bros.Chembur (P.) Ltd. (supra) wherein it has been held that in view of the finding that section 45 could not be applied, it was not open to department to impose tax on capital receipt under any of other section and the decision of the Hon’ble Bombay High Court in Cadell Wvg. Mill Co. (P.)(supra) wherein it has been held that there is no merit in the contention of the department that capital gains which arise in cases of transfer of assets whose cost of acquisition cannot be computed would fall under section 56, we  are of the view that the addition made by the AO under the head income from other sources is not sustainable in law.

8. As regards the decision relied on by the ld. DR in Logitronics (P.)Ltd. (supra), it has been held in paragraphs 23 of the decision as under :

“23. In the context of waiver of loan amount, what follows from the reading of the aforesaid judgment is that the answer would depend upon the purpose for which the said loan was taken. If the loan was taken for acquiring the capital asset, waiver thereof would not amount to any income exigible to tax. On the other hand, if this loan was for trading purpose and was treated as such from the very beginning in the books of account, as per T.V.Sundaram Iyengar and Sons Ltd’s case (supra), the waiver thereof may result in the income more so when it was transferred to Profit and Loss account.”

9. Whereas in the case before us, there is no material on record to show that the ‘term loan’ was taken for trading purposes, therefore, the decision relied on by the ld. DR is distinguishable and not applicable to the facts of the present case.

10. In S.G. Mercantile Corporation (P.) Ltd. (supra), it has been held that the income from leasehold property is assessable as business income and not under section 12 of the old Act. There is no quarrel with the principle enunciated in the aforesaid decision. However, the issue in the present appeal is entirely different therefore, the decision relied on by the AO is misplaced.

11. Since we have decided the issue on merits, therefore, we do not consider it necessary to adjudicate the assessee’s oral plea to dismiss the Revenue’s appeal on the ground of less tax effect as held by the Hon’ble Delhi High Court in the case of Manglam Ricinus Ltd.(supra).

12. For the reasons as discussed above, we are of the view that the ld. CIT(A) was fully justified in deleting the addition made by the AO. The grounds taken by the Revenue are , therefore, rejected.

13. In the result, the appeal filed by the Revenue stands dismissed.

Order pronounced in the open court on 24th Feb.,2012.

                                                            Sd                                Sd

                                    (G.E.VEERABHADRAPPA) (D.K.AGARWAL)

                                                    PRESIDENT           JUDICIAL MEMBER

Mumbai, Dated 24th February,2012.

SRL:

Copy to:

1. Appellant

2. Respondent

3. CIT Concerned

4. CIT(A) concerned

5. DR concerned Bench

6. Guard file.

True copy

                                                                                                                     BY ORDER

ASSTT. REGISTRAR,

                                                                                                                      ITAT, MUMBAI