Citation Codes

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citation codes

Case Number

ITA 606/VIZ/2018

Attorney(S)

Acts

Rs.1,70,00,000/- u/s 41(1) of the Income Tax Act, 1961 (in short Act)
Section 36 (1) (iii) of the IT Act.
(b) Section 41(1) of the IT Act
Section 41 (1) of the IT Act
u/s. 28(i) of the I.T. Act,

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Tribunal Summary — ITA No.606/Viz/2018 (A.Y.2013-14): M/s Sri Vasavi Polymers (P) Ltd., Rajam

Factual and Procedural Background

This appeal was filed by the Revenue against the order of the Commissioner of Income Tax (Appeals)-9, Hyderabad (CIT(A)-9) dated 09.08.2018 for the Assessment Year 2013-14. The appeal by the Revenue was filed with a delay of one day; the Tribunal admitted the appeal after condoning the delay on administrative grounds.

The core factual matrix (as recorded in the opinion) is that the assessee had outstanding liabilities to Indian Overseas Bank amounting to approximately Rs. 4.3 crores (term loan and an Overdraft/Cash Credit (OCC) facility). During assessment proceedings the Assessing Officer (AO) added Rs. 1,70,00,000 as income under section 41(1) of the Income Tax Act, 1961, on account of a one-time settlement / waiver of part of the OCC (working capital) loan by the bank. Separately, interest of Rs. 43,81,572 was disallowed and taxed under section 43B.

The assessee appealed to the CIT(A), who deleted the addition. The CIT(A) relied upon decisions of the ITAT Mumbai (M/s SHRM Food & Allied Services Pvt. Ltd.), ITAT Hyderabad (Tini Pharma Ltd.), and the decision of the Hon'ble Supreme Court in CIT v. Mahindra & Mahindra Ltd. The Revenue then appealed to this Tribunal (ITAT, Visakhapatnam).

Legal Issues Presented

Whether the waiver of Rs. 1,70,00,000 of an OCC (working capital) loan by the bank, realized by the assessee through a one-time settlement, is taxable as income under section 41(1) of the Income Tax Act, 1961.
Whether that waiver/benefit should be treated as a revenue receipt taxable under section 28(i) (or section 28(iv) as discussed) of the Income Tax Act, instead of being brought to tax under section 41(1).
Whether the manner of accounting of the waived amount in the assessee's balance sheet (e.g., transfer to "other reserve" rather than "capital reserve") affects its taxability under section 28(i).
Whether the OCC loan was taken (directly or indirectly) for acquisition of capital assets such that the waiver would attract a different taxation treatment.

Arguments of the Parties

Revenue (Ld. Departmental Representative)

Contended that the Rs. 1,70,00,000 represented waiver of working capital debt which was used for day-to-day business, hence a revenue receipt and taxable under section 28(i) of the Act.
Relied on High Court authorities (Solid Containers Ltd. v. Dy. CIT (Bombay); Rollatainers Ltd. v. CIT (Delhi); Commissioner of Income Tax, Chennai v. Ramaniyam Homes (Madras)) to support the proposition that such waivers/benefits are assessable under section 28.
Raised grounds in the appeal that CIT(A) erred in deleting the addition under section 41(1), that the waiver ought to be treated as revenue receipt under section 28(i), that the assessee's accounting (transfer to 'other reserve') mandated taxation, and that the OCC was not used for acquisition of capital assets.

Assessee (Ld. Authorised Representative)

Pointed out that the AO made the addition specifically under section 41(1) and did not make an addition under section 28(i); therefore, arguments of the department seeking to tax under section 28(i)/(iv) are not relevant to the addition actually made and ought not to be entertained.
Argued that section 41(1) applies only where a trading liability or expenditure was previously incurred and allowed as a deduction; in this case the principal amount of OCC was never claimed as an expenditure or debited to profit & loss in earlier years, only interest had been relevant.
Maintained that the CIT(A) correctly deleted the addition under section 41(1) and that no interference was warranted.
Relied upon the precedents cited by the CIT(A), including the Mahindra & Mahindra decision (as applied by the CIT(A) and relied upon in the Tribunal's reasoning).

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Commissioner of Income Tax v. Mahindra & Mahindra Ltd. (Hon'ble Supreme Court)	Section 41(1) requires that (i) there must have been an allowance or deduction earlier in respect of loss/expenditure/trading liability and (ii) the liability must be of the kind contemplated by section 41(1); waiver of liability not preceded by a deduction is not taxable under section 41(1). Also observed that section 28(iv) does not apply where the receipt is in the nature of cash or money.	The Tribunal applied the Supreme Court's reasoning to the present facts: since the principal of the OCC loan was never claimed as deduction or debited to profit & loss in earlier years, section 41(1) does not apply; likewise, earlier High Court decisions that predate this Supreme Court ruling were less persuasive. The Mahindra & Mahindra decision was treated as squarely applicable and decisive in upholding deletion of the addition.
M/s SHRM Food & Allied Services Pvt. Ltd. (ITAT Mumbai)	Used by CIT(A) in support of deleting an addition arising from waiver/settlement in similar factual circumstances (as relied upon by CIT(A)).	The CIT(A) relied upon this ITAT decision when deleting the addition; the Tribunal noted the CIT(A)'s reliance on it as part of the basis for deletion.
Tini Pharma Ltd. (ITAT Hyderabad) dated 23.05.2018	ITAT decision relied upon by CIT(A) in support of deleting an addition on waiver/settlement facts analogous to the present case.	The CIT(A) followed or relied on this ITAT Hyderabad decision; the Tribunal recorded that the CIT(A) had relied upon it when deleting the addition.
Solid Containers Ltd. v. Dy. Commissioner of Income Tax (Hon'ble Bombay High Court)	High Court authority cited by the Department to support the proposition that waiver of working capital/loan might be taxable as revenue receipt under section 28.	The Department relied on this decision during the hearing to argue taxation under section 28(i). The Tribunal observed that such High Court decisions were delivered prior to the Mahindra & Mahindra Supreme Court decision and thus did not displace the Supreme Court's principle applied here.
Rollatainers Ltd. v. Commissioner of Income Tax (Hon'ble Delhi High Court)	High Court authority cited by the Department for the view that waiver may be taxable under section 28.	The Tribunal recorded that the Department relied on this decision, but noted that it predated the Supreme Court decision in Mahindra & Mahindra and therefore was not persuasive in light of the Supreme Court's ruling.
Commissioner of Income Tax, Chennai v. Ramaniyam Homes (P.) Ltd. (Hon'ble Madras High Court)	High Court authority cited by the Department to support taxability under section 28 in respect of waivers/benefits.	The Tribunal noted the Department's reliance upon this decision but observed that it was rendered before the Mahindra & Mahindra Supreme Court judgment and did not consider that authority; therefore it did not alter the Tribunal's conclusion.
CIT v. T.V. Sundaram Iyengar and Sons Ltd. (222 ITR 344)	Authority cited in the Revenue's grounds to support the proposition that waiver of OCC (working capital) may be revenue in nature and taxable under section 28(i).	The Revenue invoked this authority in its grounds. The Tribunal's analysis, however, focused on the requirements of section 41(1) and the Supreme Court's decision in Mahindra & Mahindra, and ultimately found for the assessee on the basis that the principal was never claimed as deduction in earlier years.

Court's Reasoning and Analysis

The Tribunal examined the statutory language of section 41(1) and the factual matrix to determine whether the addition under section 41(1) was sustainable. The Tribunal set out the following points of legal analysis (as recorded in the opinion):

Construction of section 41(1): The Tribunal observed that section 41(1) applies when (a) an expenditure, trading liability or loss was incurred by the assessee in earlier years and allowed as a deduction, and (b) subsequently in a later previous year the creditor remits or waives such liability — in which event the remission/cessation becomes taxable as business income of that later year. Thus, taxation under section 41(1) requires a prior deduction/allowance of the relevant expenditure/liability.
Application to the present facts: The Tribunal noted that in the instant case the principal component of the OCC loan (the Rs. 1.70 crore waived) was never debited to the Profit & Loss account nor was it claimed as an expenditure or deduction in earlier years. What was relevant earlier was the interest on the OCC loan — interest which had been addressed separately. Because the principal was never claimed as an expenditure or allowed as a deduction, the twin conditions of section 41(1) were not satisfied with respect to the principal amount.
Reliance on Mahindra & Mahindra (Supreme Court): The Tribunal relied on the Supreme Court's reasoning in CIT v. Mahindra & Mahindra Ltd., where the Court held that section 41(1) is inapplicable unless there was an earlier allowance/deduction; the Supreme Court also made clear that section 28(iv) does not apply where the receipt is cash or money. The Tribunal found the Supreme Court decision squarely applicable: the waiver of principal that was not earlier debited/allowed cannot be taxed under section 41(1).
Treatment of High Court decisions relied upon by Revenue: The Department's reliance on earlier High Court decisions (e.g., Rollatainers; Ramaniyam Homes; Solid Containers) was noted, but the Tribunal observed those decisions were delivered prior to the Mahindra & Mahindra Supreme Court judgment and therefore did not take precedence over the Supreme Court's pronouncement. Consequently, the Tribunal found no reason to depart from the CIT(A)'s reliance on the Supreme Court and the ITAT decisions cited by the CIT(A).
Conclusion of analysis: On the basis that the principal waiver did not meet the statutory requirements of section 41(1), and having regard to the controlling Supreme Court decision, the Tribunal concluded that the CIT(A) correctly deleted the addition and no interference with the CIT(A)'s order was warranted.

Holding and Implications

Holding: The appeal of the Revenue is dismissed.

Implications:

Direct effect: The deletion of the addition of Rs. 1,70,00,000 by the CIT(A) is upheld; the assessee is not required to include that waived principal amount in income under section 41(1) for A.Y. 2013-14.
Reasoning scope: The Tribunal's decision rests on the statutory requirements of section 41(1) and the Supreme Court's ruling in CIT v. Mahindra & Mahindra Ltd. The Tribunal emphasised that section 41(1) applies only where there was a prior allowance/deduction in respect of the liability; absent such prior allowance, the waiver of principal is not taxable under section 41(1).
Precedential note: The Tribunal applied existing Supreme Court authority (Mahindra & Mahindra) rather than creating a new principle. The opinion does not announce a new legal test beyond the application of those authorities; it states that High Court decisions rendered prior to the Supreme Court decision cannot override the Supreme Court's ratio in this context.

Order pronounced on: 05.06.2020. Members: V. Durga Rao (Judicial Member) and D.S. Sunder Singh (Accountant Member). Appeal admitted after condonation of one day's delay.

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The Income Tax Officer, Ward-3, , Srikakaulam v. Sri Vasavi Polymers Private Limited`, Rajam,

Per Shri D.S.Sunder Singh, Accountant Member : This appeal is filed by the revenue against the order of the Commissioner of Income Tax (Appeals) [CIT(A)]-9, Hyderabad in ITA No.10300/CIT(A)-9, Hyd/2017-18 dated 09.08.2018 for the Assessment Year (A.Y.)2013-14. with the delay of 1 day. The department has filed condonation petition and submitted that the delay was due to the

I.T.A. No.606/Viz/2018, A.Y.2013-14 M/s Sri Vasavi Polymers (P) Ltd., Rajam administrative reasons beyond the control of the department, hence requested to condone the delay and admit the appeal. After hearing both the parties , we condone the delay and admit the appeal.

2. All the grounds of appeal are related to the addition made by the Assessing Officer (AO) for a sum of Rs.1,70,00,000/- u/s 41(1) of the Income Tax Act, 1961 (in short Act) which was deleted by the Ld.CIT(A). During the course of assessment proceedings, the AO found that the assessee had received the benefit of Rs.1,70,00,000/- as a result of one time settlement of loan by the Indian Overseas bank. The assessee was due to Indian Overseas Bank, Visakhapatnam in respect of term loan & OCC for a sum of Rs. 4.3 crores which included the interest subsidy as well as the working capital loan. The interest of Rs.43,81,572/- was added back to income and taxed u/s 43B of the Act. However, the sum of Rs.1.7 crores which represent the waiver of working capital loan was added as income u/s 41(1) of the Act in the assessment order made u/s 143(3) of the Act.

3. Against the order u/s 143(3), the assessee went on appeal before the CIT(A) and the Ld.CIT(A) deleted the addition following the order of Honble ITAT Mumbai in the case of M/s SHRM Food & Allied Services Pvt. Ltd., in I.T.A.No.657/Mum/2009, 595/Mum/2008 & 1116/Mum/2013 and

I.T.A. No.606/Viz/2018, A.Y.2013-14 M/s Sri Vasavi Polymers (P) Ltd., Rajam ITAT Hyderabad in the case of Tini Pharma Ltd., Hyderabad dated 23.05.2018 and also the decision of Honble Apex Court in the case of Mahindra & Mahindra.

4. Against which the department has filed appeal before this Tribunal. The department has raised following grounds in this appeal.

1. The Ld. CIT(A) erred on both facts and law in deleting the addition made by the AO of Rs. 1.70 crores on account of benefit of waiver of OCC loan amount received by the assessee during the year.

2. The Ld. CIT(A) ought to have appreciated that the 0CC facility was availed by assessee for working capital requirements and waiver of any such 0CC loan amount either partly or fully is a revenue receipt u/s. 28(i) of the I.T. Act, in view of the decision of the Apex Court in the case of CITVs, T.V. Sundaramlyengar and Sons Ltd. (222 ITR 344).

3. The Ld. CIT(A) ought to have further considered that the assessee itself carried the loan amount waived of Rs. 1.70 crore to any 'other reserve' instead of capital reserve under the head 'reserves and surplus in the balance sheet as on 31.03.2013 and therefore such benefit is liable to be assessed as income u/s. 28(i) of the I.T. Act.

4. The Ld. CIT(A) ought to have also appreciated that the 0CC loan facility, a part of which was waived during the year, was not taken directly or indirectly for the purpose of acquisition of any capital asset though the assessee claimed that the part of the OCC loan was utilized indirectly for repayment of old term loans availed by the assessee from SBI.

5. The appellant craves leave to add or delete or substitute or amend any ground of appeal before and / or at the time of hearing of the appeal.

I.T.A. No.606/Viz/2018, A.Y.2013-14 M/s Sri Vasavi Polymers (P) Ltd., Rajam

5. During the appeal hearing, the Ld.DR submitted that the amount of Rs.1,70,00,000/- represent waiver of working capital loan which was used for day to day running of the business, therefore, submitted that the same required to be brought to tax u/s 28(i) of the Act. The Ld.DR relied on the following decisions : (a) Honble High Court of Bombay in the case of Solid Containers Ltd. Vs. Dy.Commissioner of Income Tax (b) Honble High Court of Delhi in the case of Rollatainers Ltd. Vs. Commissioner of Income Tax (2011) 15 taxmann.com 111 (Delhi) (c) Honble High Court of Madras in the case of Commissioner of Income Tax, Chennai Vs. Ramaniyam Homes (P.) Ltd. [2016] 68 taxmann.com 289 (Madras)

6. On the other hand, the Ld.AR submitted that the AO made addition u/s 41(1) of the Act, but not under section 28(i) of the Act. The amount waived by the bank was relating to working capital loan which is not covered u/s 41(1) of the Act. The AO disallowed the interest debited to Profit and Loss account in the year, therefore, there is no trading liability claimed by the assessee representing the working capital in the earlier years, hence, argued that there is no case for taxing the waiver of working capital u/s 41(1) of the Act, therefore, argued that the Ld.CIT(A) has rightly deleted the addition and no interference is called for. The Ld.AR further argued that the AOs case is the addition u/s 41(1) of the Act, but not the case of section 28(i)/(iv) of the Act, hence, submitted that the departments

I.T.A. No.606/Viz/2018, A.Y.2013-14 M/s Sri Vasavi Polymers (P) Ltd., Rajam grounds and arguments with regard to taxing the waiver under section 28(i)/(vi) are not relevant to the addition made and the same should not be considered since, neither the AO nor the Ld.CIT(A) considered the issue u/s 28(i) of the Act. The Ld.AR relied on the decisions relied upon by the Ld.CIT(A).

7. We have heard both the parties and perused the material placed on record. The AO made the addition u/s 41(1) of the Act, but not u/s 28 of the Act. As per section 41(1) of the Act, trading liability or expenditure or the loan which was already claimed as incurred by the assessee and subsequently during any previous year received the benefit in respect of such trading liability by way of remission or cessation of liability is deemed to be profits and gains of the business or profession and accordingly chargeable to tax as the income of the previous year. From section 41(1), it is observed that there must be trading liability or expenditure or loss which was incurred by the assessee in the earlier years and allowed the same as deduction to tax the same u/s 41(1). The twin conditions required to be satisfied for taxing the benefit received by the assessee. i.e., the expenditure should be Revenue expenditure or the loss incurred and the same ought to have been allowed as deduction. The benefit received by the assessee

I.T.A. No.606/Viz/2018, A.Y.2013-14 M/s Sri Vasavi Polymers (P) Ltd., Rajam should be relating to such expenditure which was claimed and allowed in the earlier years. In the instant case, the trading liability or the expenditure or deduction was claimed by the assessee in respect of interest paid on the OCC loan. In respect of principal amount, though the assessee has gained the benefit by way of one time settlement the same cannot be brought to tax u/s 41(1) because the OCC loan represents the principal which was never claimed as expenditure. The AO also did not make out a case that the principal amount was debited to the Profit & Loss account in the earlier years. Therefore there is no case for making addition u/s 41(1) in respect of the principal amount. The Honble Supreme Court in the case of CIT Vs. Mahindra & Mahindra Ltd considered the similar issue and held as under :

15. On a perusal of the said provision, it is evident that it is a sine qua non that there should be an allowance or deduction claimed by the assessee in any assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee. Then, subsequently, during any previous year, if the creditor remits or waives any such liability, then the assessee is liable to pay tax under Section 41 of the IT Act. The objective behind this Section is simple. It is made to ensure that the assessee does not get away with a double benefit once by way of deduction and another by not being taxed on the benefit received by him in the later year with reference to deduction allowed earlier in case of remission of such liability. It is undisputed fact that the Respondent had been paying interest at 6 % per annum to the KJC as per the contract but the assessee never claimed deduction for payment of interest under Section 36 (1)

(iii) of the IT Act. In the case at hand, learned CIT (A) relied upon Section 41 (1) of the IT Act and held that the Respondent had received amortization benefit. Amortization is an accounting term that refers to the process of allocating the cost of an asset over a period of time, hence, it is nothing else than depreciation. Depreciation is a reduction in the value of an asset over time, in particular, to wear and tear. Therefore, the deduction claimed by the Respondent in previous

I.T.A. No.606/Viz/2018, A.Y.2013-14 M/s Sri Vasavi Polymers (P) Ltd., Rajam assessment years was due to the deprecation of the machine and not on the interest paid by it.

16. Moreover, the purchase effected from the Kaiser Jeep Corporation is in respect of plant, machinery and tooling equipments which are capital assets of the Respondent. It is important to note that the said purchase amount had not been debited to the trading account or to the profit or loss account in any of the assessment years. Here, we deem it proper to mention that there is difference between 'trading liability' and 'other liability'. Section 41 (1) of the IT Act particularly deals with the remission of trading liability. Whereas in the instant case, waiver of loan amounts to cessation of liability other than trading liability. Hence, we find no force in the argument of the Revenue that the case of the Respondent would fall under Section 41 (1) of the IT Act.

17. To sum up, we are not inclined to interfere with the judgment and order passed by the High court in view of the following reasons: (a) Section 28(iv) of the IT Act does not apply on the present case since the receipts of Rs 57,74,064/- are in the nature of cash or money. (b) Section 41(1) of the IT Act does not apply since waiver of loan does not amount to cessation of trading liability. It is a matter of record that the Respondent has not claimed any deduction under Section

36 (1) (iii) of the IT Act qua the payment of interest in any previous year. The Honble Supreme Court also considered the issue with regard to taxing the remission of liability u/s 28(iv) and decided the issue against the revenue and in favour of the assessee, since, the receipt was in the nature of cash or money. The Honble Supreme Court held that section 28(iv) of the Act has no application since the receipt was in the nature of cash or money. In the instant case what the assessee has received was remission of liability which was in the form of cash or money and the difference amount of principal which was settled by onetime payment was never debited to Profit & Loss account. Therefore, the decision of Honble Supreme Court is

I.T.A. No.606/Viz/2018, A.Y.2013-14 M/s Sri Vasavi Polymers (P) Ltd., Rajam squarely applicable in the instant case. The Ld.DR relied on the decision of Honble Delhi High Court in the case of Rollatainers Ltd. Vs. Commissioner of Income Tax [2011] 15 taxmann.com 111 (Delhi) and the decision of Honble High Court of Madras in the case of Commissioner of Income Tax, Chennai Vs. Ramaniyam Homes (P.) Ltd., the judgements were delivered prior to the judgement of Honble Supreme Court in the case of Mahindra and Mahindra supra and the Honble High Courts have no occasion to consider the decision of Honble Supreme Court. Therefore, we do not find any reason to interfere with the order of the Ld.CIT(A) and accordingly, we uphold the same. The appeal of the revenue is dismissed.

8. In the result, appeal of the revenue is dismissed. Order pronounced on 5th June, 2020. Sd/- Sd/- (. ) (.. ) (V. DURGA RAO) (D.S. SUNDER SINGH) /JUDICIAL MEMBER /ACCOUNTANT MEMBER /Visakhapatnam /Dated : 05.06.2020

L.Rama, SPS

I.T.A. No.606/Viz/2018, A.Y.2013-14 M/s Sri Vasavi Polymers (P) Ltd., Rajam /Copy of the order forwarded to:-

1. /The Revenue Income Tax Officer, Ward-3, Srikakulam

2. / The AssesseeM/s Sri Vasavi Polymers P.Ltd., S.No.125 & 126, Anthakapalli, Rajam

3. The Pr.Commissioner of Income Tax-2, Visakhapatnam

4. The Commissioner of Income Tax (Appeals)-9, Hyderabad

5. , , /DR, ITAT, Visakhapatnam

6. / Guard file / BY ORDER // True Copy // Sr. Private Secretary ITAT, Visakhapatnam

The Income Tax Officer, Ward-3, , Srikakaulam v. Sri Vasavi Polymers Private Limited`, Rajam,

Tribunal Summary — ITA No.606/Viz/2018 (A.Y.2013-14): M/s Sri Vasavi Polymers (P) Ltd., Rajam

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Revenue (Ld. Departmental Representative)

Assessee (Ld. Authorised Representative)

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

The Income Tax Officer, Ward-3, , Srikakaulam v. Sri Vasavi Polymers Private Limited`, Rajam,

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