DCIT Vs Rama Phosphates Ltd (ITAT Mumbai)
The issue under consideration is whether Section 41(1) is applicable in case of waiver of liability incurred in respect of purchase of capital asset?
In the present case, AO treated principal amount of working capital loan waived off by Central Bank and IDBI Bank as income of assessee under section 41(1). Assessee challenged this on the ground that part of the working capital loan had been utilized for acquisition of capital goods.
ITAT states that Section 41(1) of the Income Tax Act does not apply since waiver of loan does not amount to cessation of trading liability. It is a matter on record that the respondent has not claimed any under section 36(1)(iii) of the Income Tax Act qua the payment of interest in any previous year”. In the present case, the authorities below have not given any finding of fact whether the whole amount of loan had been utilised either for the purpose of acquiring a capital asset or for the purpose of business activity or trading activity. There is also no finding of fact whether assessee had claimed any deduction in respect of interest on loan in earlier years. This matter requires finding of fact in the light of Judgment of Hon’ble Supreme Court in the case of Mahindra and Mahindra Ltd., (supra). Learned Counsel for the Assessee, therefore, rightly contended that matter may be remitted back to the file of assessing officer for reconsideration of the issue as per Law. In view of the above discussion, ITAT set aside the orders of the authorities below and restore the matter in issue to the file of assessing officer with a direction to re-decide the issue strictly in accordance with Law, by giving reasonable, sufficient opportunity of being heard to the assessee.
FULL TEXT OF THE ITAT JUDGEMENT
These are appeals by the revenue directed against the respective orders of learned commission of income tax appeals for assessment years 2010-11 and 2011-12.
2. Since the issues involved are common and connected and these appeals were heard together these are being consolidated and disposed of by this common order.
3. Grounds of appeal assessment year 2010-11 :-
1. “Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in not considering the fact that the amount of disallowance u/s 14A has to be computed as per Rule 8D when the computation of the assessee was not found to be correct and as held in the order of the Hon’ble High Court in the case of M/s Godrej & Boyce Mfg. Co. Ltd.”
2. “Whether on the facts and in the circumstances of the case and in law, the CIT(A) erred in deleting the addition of Rs. 11,10,70,860/-made on account of waiver of principal loan by financial institutions, without appreciating the fact that waiver of loan taken for acquiring capital assets is to be treated as income as held in the order of Hon’ble High Court in the case of Solid Containers Ld Vs. DCIT (2O09) (308 ITR 417).”
4. Grounds of appeal assessment year 2011-12 :-
1. “Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in not considering the fact that the amount of disallowance u/s 14A has to be computed as per Rule 8D when the computation of the assessee was not found to be correct and as held in the order of the Hon’ble High Court in the case of M/s Godrej & Boyce Mfg. Co. Ltd.”
2. “Whether on the facts and in the circumstances of the case and in law, the CIT(A) erred in deleting the addition of Rs 3,51,00,000/-made on account of waiver of principal loan by financial institutions, without appreciating the fact that waiver of loan taken for acquiring capital assets is to be treated as income as held in the order of Hon’ble High Court in the case of Solid Containers Ld Vs. DCIT (2009) (3O8 ITR 417).”
3. “Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition of Rs 3,46,273/- as bogus purchase as the director of M/s MaaChamunda Sales Pvt. Ltd. has confirmed by filing affidavit before the Sales Tax Department that he had not done any actual purchase/sales & only bills was issued without actual delivery of the material.”
5. One common issue raised in these appeals relates to disallowance on account of invoking the provisions of section 14A.
6. At the outset it transpires that the issue involved is covered in favour of the assessee as the assessee has not earned any exempt income. Reference in this regard may be decision of honourable Supreme Court in the case of Maxopp Investment Ltd vs CIT, New Delhi the Hon. Supreme Court in Civil Appeal 104-109 of 2015 dated 12.02.2018.
7. Another common issue raised is treatment of waiver of the amount of principal loan for working capital.
8. The issue involved here is treatment of principal amount of working capital loan waived by the central bank and IDBI Bank as the income of the assessee. For treating these waivers as income of the assessee the assessing officer has relied upon the decision of honourable jurisdictional High Court in the case of solid containers limited (308 ITR 417).
9. Upon assessee’s appeal learned commission of income tax appeals deleted the addition by placing reliance upon the CIT(A) order for assessment year 2009-10. The learned CIT(A) quoted the following from that order:-
“I have also perused the decision of IT AT Mumbai Bench in the matter of Cipla Investments Ltd. and also of Hon’ble Madras High Court in the case of Iskraemeco Regent Ltd. which holds similar view as held in “Mahindra & Mahindra Ltd.” (supra). Hence, on a consideration of the facts involved and applying the legal principle discussed above, I am of the view that the plea of the appellant in the case of waiver of principal amount of debentures of UTI (Rs. 7,45,64,838/-) is a Capital surplus arising out of waiver of principal liability is a capital receipt and therefore not income. Accordingly this ground of appeal is allowed.”
10. Against the above order revenue is in appeal before us. We have heard both the Counsel and perused the records.
11. Learned departmental representative submitted that the issue involved is squarely covered in favour of the revenue by the decision of the honourable Abex court in the case of Mahindra and Mahindra. Learned departmental representative submitted that the said honourable Supreme Court decision had expounded that when the loan was granted for working capital finance purposes the waiver of the same becomes the income of the assessee as revenue income. He submitted that it is only the loan meant for capital asset acquisition, the waiver of the same was under the capital field. Learned departmental representative submitted that in the present case the bank loans were for working capital finance hence the waiver of the same has rightly been treated as the income of the assessee by the Assessing Officer.
12. Per Contra learned counsel of the assessee submitted that the provisions of section 41(1) are not applicable here in as much as no allowance or deduction has been claimed by the assessee in the past in respect of the bank loan. He further submitted that following case laws supports the proposition canvassed by him.
