V.K. Gupta, Accountant Member. - This appeal filed by the assessee arises out of order of Commissioner of Income-tax (Appeals), Mumbai, dated 9-12-2002 for assessment year 1997-98.
2. The concise ground of appeal raised by the assessee reads as under :—
"1. The learned CIT(A) has erred in law and in facts in confirming the addition of Rs. 92,45,618 made by the Assessing Officer on account of remission of foreign currency loan."
3. We have heard both the parties and we have also perused the material on record.
4. The facts, in brief, are that the original return filed by the assessee declaring nil income was accepted as such. Subsequently, notice under section 148 was issued because Assessing Officer was of the opinion that 50 per cent of interest-free foreign currency loan amounting to Rs. 92,45,618, wrote off by the assessee by crediting the same to the capital reserve account directly, was taxable. The assessee-company, in response to notice under section 148, stated that the original return filed should be treated as return filed in response to notice under section 148. The Assessing Officer drew the attention of the assessee to the decision of the Hon’ble Supreme Court in the case of CIT v. T.V. Sundaram Iyengar & Sons Ltd. [1996] 222 ITR 344 1. The assessee differentiated its case on facts and contended that because of this, the ratio of the case of T.V. Sundaram Iyengar & Sons. Ltd. (supra) was not applicable. The assessee also submit- ted that in the case of the assessee no deduction was either claimed or allowed earlier, hence, provisions of section 41(1) were also not applicable. The Assessing Officer, however, held that the borrowing of loan, though not a trading receipt, but it was a receipt of the assessee-company in the ordinary course of its business and also the fact that it was not credited in the P&L account made no difference. The Assessing Officer, accordingly, held that if it was liable to be treated as income of the assessee under section 28(iv) of the Act. Aggrieved by this, the assessee carried the matter into the appeal before the learned CIT(A) wherein, the assessee pointed out that the assessee had borrowed interest-free loan from Industrialisation fund for Developing Countries and Palsgaard Industry in 1991-92 which was utilized to repay the overdraft liabilities of the banks and other current liabilities. Subsequently, when the assessee was not in a position to repay the loan due to continuous losses, it requested the Financial Institutions for waiver of loan who remitted Rs. 92,45,618. In this factual background, the assessee also pleaded that the amount received was of capital nature and remained so, hence, it was not taxable. It was also contended that provisions of section 28(iv) were also not applicable as the remission of loan was not any benefit or perquisite arising from business. The learned CIT(A) observed that in the case of T.V. Sundaram Iyengar & Sons Ltd. (supra) the Hon’ble Supreme Court had held that if an amount was received in the course of a trading transaction, though not taxable in the year of receipt as being of Revenue character, the amount changed this character when the amount became the assessee’s own money either because of limitation or any contractual or statutory right. The learned CIT(A), accordingly, held that the assessee-company became richer by the remission of loan amount by the lenders, hence, it derived benefit in the ordinary course of business and confirmed the action of the Assessing Officer. Still aggrieved, the assessee is in appeal before us.
5. The learned counsel, appearing on behalf of the assessee narrated the factual matrix of the case to initiate his arguments. Thereafter, the learned counsel contended that the issue was prima facie covered in favour of the assessee by the decision of the Hon’ble jurisdictional High Court in the case of Mahindra & Mahindra Ltd. v. CIT [2003] 261 ITR 501 1 (Bom.) wherein it was held by the Hon’ble jurisdictional High Court that loan taken for import of capital assets which was waived subsequently by the foreign company could not be brought to tax under section 28(iv) of the Act.
6. The learned counsel contended that it was not the business of the assessee to first raise the loans and thereafter claim remission of the same as the assessee was engaged in the business of manufacturing, hence, loan raised was for the purposes of business and did not arise from the business as a part of trading operations, and, therefore, provisions of section 28(iv) were not applicable. The learned counsel further placed strong reliance on the order of the Hon’ble Gujarat High Court in the case of Commissioner Of Income-Tax v. Chetan Chemicals Pvt. Ltd. [2004] 267 ITR 770 to contend that section 28(iv) would apply only where benefit or perquisite was not in cash or money whereas in the present case, the loan amount had been received in cash, hence, provisions of section 28(iv) are not applicable. It was also pointed out that the amount of remission was directly transferred to capital reserve without routing the same through P&L account and these two facts clearly distinguished this case from the case of T.V. Sundaram Iyengar & Sons Ltd. (supra). The learned counsel further contended that in the present case it was a positive act of remission and such remission was duly approved by the Reserve Bank of India (RBI) unlike claim becoming time-barred by way of limitation in the case of T.V. Sundaram Iyengar & Sons Ltd. (supra). The learned counsel further contended that decision of the Hon’ble Supreme Court was not an authority for applicability of provisions of section 28(iv) of the Act. The learned counsel, once again reiterated that all transactions of business might not necessarily be of the nature of trading operations whereas all transactions of trading operations would necessarily be part of the business and in the case of T.V. Sundaram Iyengar & Sons Ltd. (supra) the Hon’ble Apex Court was concerned with the transactions of the nature of trading operations, hence, the present case was clearly distinguishable on this count also. The learned counsel also submitted that only Revenue receipts were liable to be taxed generally and if this kind of remissions were brought to tax that would amount to taxation of capital receipt at the point of remission and such approach would not be in consonance with the provisions of law.
7. The learned counsel further placed strong reliance on the decision of the Division Bench of the Tribunal in the case of Comfund Financial Services (I) Ltd. v. Dy. CIT [1998] 67 ITD 304 (Bang.) wherein it was held that waiver of principal amount of loan affecting assessee’s capital account did not constitute assessee’s income under section 28(iv) of the Act.
8. The learned counsel also placed strong reliance on the decision of the Division Bench of the Tribunal in the case of Prism Cement Ltd. v. Jt. CIT [2006] 101 ITD 103 (Mum.) wherein the Tribunal after considering the decision of the Hon’ble Apex Court in the case of T.V. Sundaram Iyengar & Sons Ltd. (supra) and the decision of Hon’ble jurisdictional High Court in the case of Mahindra & Mahindra Ltd. (supra) had held that the character of receipt, being of capital nature at the time of funds borrowed by way of issue of non-convertible debentures would not change at the time of forfeiture of such non-convertible debentures on account of non-payment of call money.
9. The learned counsel further referred to the decision of the Division Bench of the Tribunal in the case of APR Ltd. v. Dy. CIT [2003] 87 ITD 618 (Hyd.) wherein it was held that there was a difference between an amount received in the course of a trading transaction and other deposit or loan and the loan did not loose its capital nature when it was renounced by the lender and became the money of the assessee. The learned counsel also stated that in this decision the Division Bench of the Tribunal considered the decision of the Hon’ble Apex Court in the case of T.V. Sundaram Iyengar & Sons Ltd. (supra) and also earlier decision of Hon’ble Apex Court in the case of K.M.S. Lakshmanier & Sons v. CIT/EPT [1953] 23 ITR 202 , hence, present case was directly covered in favour of the assessee by the ratio of this decision.
10. The learned AR also referred to various other judicial decisions in support of its case (copies of same are placed on records).
11. The learned Departmental Representative, initiated his arguments by stating that in the case of Mahindra & Mahindra Ltd. (supra) the Hon’ble jurisdictional High Court had not considered the decision of the Hon’ble Supreme Court in the case of T.V. Sundaram Iyengar & Sons Ltd. (supra), hence, that this decision could not be treated as conclusive on this issue. The learned Departmental Representative further emphasised on the fact that what was important was the fact that these monies were received in the course of business and referred to the observations of Hon’ble Supreme Court at page 353 of the report in the case of T.V. Sundaram Iyengar & Sons Ltd. (supra) to contend that although the Hon’ble Court generally observed that the money was received in the course of trading transactions but the conclusive observations were that the money was so received in the course of carrying of his business, hence, ultimately the ratio of this decision was to be read in the sense what could be logically deduced from the decision. The learned Departmental Representative placed strong reliance on the decision of Hon’ble jurisdictional High Court in the case of CIT v. Ratilal Bacharilal & Sons [2006] 282 ITR 457 1 (Bom.) for this proposition. The learned Departmental Representative also placed strong reliance on the decision of the learned CIT(A).
12. The learned counsel, in the rejoinder, contended that all the case laws considered by the Hon’ble Supreme Court in the case of T.V. Sundaram Iyengar & Sons Ltd. (supra) were related to trading transactions i.e. the amounts received originally were trading receipts or were capable of being converted into profit subsequently, hence, the focus point in that case was in respect of trade receipts or amounts received as a part of trade transactions and the observations of the Hon’ble Court at page 353 at placitum ‘F’ and ‘G’ were mere reiteration of the facts of that case and were not ratio of that decision.
13. We have considered the submissions made by both the sides material on record and orders of authorities below. It is an undisputed fact of this case that amount taxed under section 28(iv) has been received by the assessee as interest-free loans. It is also not in dispute that these loans have been utilised by the assessee in repayment of other loans and overdraft facilities wherein the assessee was liable to pay interest. Thus, by obtaining these loans the assessee, has in fact, saved interest costs being allowable as revenue expenditure which could have increased the losses or reduce the profits. Both the revenue authorities have treated the amount of loan remitted by the lender as income of the assessee placing heavy reliance on the decision of the Hon’ble Supreme Court in the case of T.V. Sundaram Iyengar & Sons Ltd. (supra). At the very out set, we may point out in that case the issue was regarding the treatment of unclaimed balances where claim was barred by limitation and the assessee credited those amounts to the P&L account. Whereas, in the present case, there has been positive act of remission by the lender and the assessee has converted the remitted part of the loan into a capital reserve directly without making any entries through the P&L account, hence, there is a substantial difference in the facts of both the cases. Further, in the case of T.V. Sundaram Iyengar & Sons Ltd. (supra), no view has been expressed by the Hon’ble Supreme Court on the provisions of section 28(iv) and in fact, the Hon’ble Supreme Court has not referred to any specific provision of the Act in holding the amount of unclaimed balances as taxable in the year of credit of the same to the P&L account. However, the issue before us is strictly with reference to the applicability of provisions of section 28(iv) of the Act, hence, we are eventually required to deal with this section only. However, before proceeding with the matter on this aspect, we would prefer to deal with the findings of the learned CIT(A) that even if the amount was of capital nature originally but it changed its character to revenue nature by positive act of remission. If this view is accepted then there can be some other consequences in the sense that concept of capital receipt v. revenue receipt or capital loss v. revenue loss would become meaningless and also the scheme of the Act to tax receipts of revenue nature as income except capital receipt as capital gains in specified case would also become meaningless. For example, at present business losses of revenue nature are allowed in computing the business income, however, business losses of capital nature are not so set-off. In case an assessee gives an advance for purchase of capital asset and i.e. not received back by the assessee in nor any machinery is supplied by the other party, then this loss is treated as of capital nature and is not allowed as deduction. But if, the ratio of this decision is applied in the manner as it has been applied by the learned CIT(A), on non-receipt of such advance given for any purchase of said capital assets and no machineries being supplied, such advance would change its character to the nature of revenue loss and would be allowable for set-off against the business profits. Further, the concept of income under the provisions of Income-tax Act is as more less similar to the commercial concept of the income and even any commercial terms where as a result of restructuring, remission in full or in part by lender, no doubt, results into discharge of loan liability to that extent as per the mutual agreement but this discharge of loan liability is not perceived as income and generally such remission results into re-statement on the value of assets and accumulated losses or creation of capital reserve. In the present case also the assessee has created capital reserve which itself is indicative of nature of this amount even at the time of such a write-off as being of capital nature. Here, we would like to mention the fact that no material has been brought on record to say that loan so received was in the nature of revenue grant or subsidy or assistance originally or it was convertible into such type of receipts in the situation of the assessee not being in position of paying back the same, hence, its character of loan at all points cannot be doubted. We would further like to mention that the income as such or by way of retained earning is capable of being distributed or used for the purpose of the business and in the present case, the loan taken earlier have been repaid, therefore it cannot be distributed as retained earnings directly or indirectly, hence, on this count also the address of capital reserve created by the assessee cannot be termed as income. Having examined the nature of this item in commercial and accounting terms as well as the legal consequence of the findings given by the CIT(A), now, we will deal with the other aspects of the issue.
14. The learned Departmental Representative has pointed out that the Hon’ble Supreme Court in the case of T.V. Sundaram Iyengar & Sons Ltd. (supra) ultimately held that money received in the course of business were liable to be taxed as income on remission and not the money received in the course of trading operations. We find it difficult to accept this proposition. We have gone through the decision in the case of T.V. Sundaram Iyengar & Sons Ltd. (supra) and it is observed that the Assessing Officer in that case had held that surplus had arisen as a result of trade transactions, the amount had a character of income and had to be added as income of the assessee for the purpose of the income-tax assessment. However, the learned CIT(A) had held that in the first instance, these amounts were not revenue receipts, but were capital receipts which was negatived by the Tribunal. Thus, the fact that these receipts arose from trading operations was never under any dispute and the only question which was referred to was whether in spite of arising from trading transactions and not being of the revenue nature at the point of receipt, could such receipts would change its character on its remission. Thus, it was not a case of change of character if original receipt which was of capital nature initially and was not a part of trading transactions. Accordingly, we are of the view that the observations of the Hon’ble Apex Court cannot be given a meaning which is not at all intended in the facts of that case and question of law being decided by the Hon’ble Supreme Court in the background of those facts. Therefore, we are of the humble view that the Hon’ble Supreme Court did not lay down the principle that every amount of capital nature received in the course of business would alter its character by efflux of time or by any other statutory or contractual right. Thus, the contention of the assessee that receipt should be of revenue character at the point of receipt or being capable of conversion into revenue receipt subsequently deserves to be accepted.
15. Now, we would revert back to the core issue of applicability of section 28(iv) of the Act.
16. The learned counsel has placed a number of decisions in support of its contention that this amount is not taxable under section 28(iv) on various counts e.g. the loan was received in the cash and provisions of section 28(iv) of the Act do not apply to amounts received in cash, or character of receipt would not change by the passage of time or there was a difference between amount received in the course of trading character and other deposits or loans and such a loan did not loose its capital nature when it was denounced by the lender. The Counsel has laid of special emphasis on the decision of the Hon’ble jurisdictional High Court in the case of Mahindra & Mahindra (supra) wherein the Court, in the facts of that case held that provisions of section 28(iv) were not applicable. In our considered view, the aforesaid decisions, support the case of the assessee substantially. Having stated so, the other question which remains to be seen is that can this receipt be said to have arisen from the business of the assessee as contemplated under section 28(iv) of the Act because section 28 is a charging section for profits and gains of business or profession and it takes into account the receipts of specified categories as of income as well as the receipts which can be generally construed as income in the ordinary sense. But the facts remains that all the receipts mentioned in section 28 have inherently of income nature except in case or receipt under a Key Man Insurance Policy which is a recovery of expenditure already allowed as deduction. Hence, prima facie, the loan received by an assessee in the course of business is not envisaged an income. Now, coming to specific provisions of sub-section (iv) of section 28 it is also in connection with the value of any benefit or perquisite arising from business which means that such benefit or perquisite should be in the nature of income from the very beginning or it must have characteristics of income before it becomes chargeable at a later stage, if the original transaction is completed as designed. As stated earlier that no material has been brought on record to show that the loan agreements provided for such waiver at subsequent stages, hence, this receipt cannot be construed as a benefit within the meaning of section 28(iv) of the Act. Further, the words "benefit" or "perquisite" have been used in this sub-section, which have to be read together and would draw colour from each other. Normally, the term "perquisite" denotes meeting out of an obligation of one person by another person either directly or indirectly or provision of some facility or amenity by one person to another person and from the very beginning, the person providing such facilities or concessions knows that whatever is being done is irretrievable to him as it has been granted to a person as a privilege or right of that person. In this view of the matter, the word "benefit" has also to be interpreted in the same manner i.e. at the time of execution of the business transaction, the one party should give to the other party some irretrievable benefit or advantage. In the present case, the assessee has not such special right or privilege. The only privilege which he enjoyed was regarding no liability to pay any interest as the funds were interest-free, hence, assessee derived benefit to this extent only and had it been a case of interest being payable by the assessee originally which was waived subsequently, in part or toto, the same would have been a benefit under section 28(iv) surely. We are further of the opinion that provisions of section 28(iv) can be applied in a number of situations but the bottom-line or crucial fact would always be circumvention of income by taking or receiving income in other forms. For example, in case of a trader the goods may be sold at a discounted price but a gift of car taken from the party to whom such goods have been sold. In that case there being no other consideration or reason for such party for giving car in gift to the seller, the value of that car can be taxed as income under section 28(iv) of the Act. To conclude, we hold that the order of the CIT(A) is not correct in law and accordingly, we quash the same and direct the Assessing Officer not to charge the amount of loan waived by the lender as income of the assessee. Thus, this ground of the assessee stands accepted.
17. In the result, appeal filed by the assessee is allowed.