Cable Corporation of India Limited Vs DCIT (ITAT Mumbai)
Conclusion: Surplus resulting from assignment of loan at present value of future liability was not cessation or extinguishment of liability as loan was to be repaid by the third party and therefore could not be brought to tax in the hands of the assessee under section 41(1).
Held: Assessee was in the line of manufacturing of cable and trading thereof and not in the purchase and sale of shares and securities. It had borrowed a sum of Rs. 12.00 crores from M/s MPPL to be repaid over a period of 100 years and the amount was utilized for the purchase of shares. The liability of loan of Rs. 12 crores to be discharged over a period of 100 years was assigned to the third parties M/s CPPL by making a payment of Rs. 0.36 crores in terms of present value of the future liability and the surplus resulting from assignment of loan liability was credited to the Profit & Loss Account under the head income from other sources but while computing the total income, the said income was reduced from the income on the ground that the surplus of Rs. 11.64 crores represented the capital receipt and therefore not taxable. AO held the surplus Rs. 11.64 Cr resulting from the assignment of loan to M/S CPPL under tripartite agreement between assessee , M/S MPPL and M/S CPPL as a revenue receipt liable to tax. It was held the loan was utilized for purchasing shares which was capital asset in the business of the assessee and the surplus resulting from assignment of loan was a capital receipt not liable to be taxed either u/s 28(iv) or u/s 4 1(1). More so, the surplus resulting from assignment of loan at present value of future liability was not cessation or extinguishment of liability as the loan was to be repaid by the third party and therefore could not be brought to tax in the hands of the assessee.
FULL TEXT OF THE ITAT JUDGEMENT
1. The present appeals filed by the assessee are arising out of order of the Ld. Commissioner of Income-Tax (Appeals)-4 [hereinafter referred to as CIT(A)], Mumbai, in Appeal No.CIT(A)- 4/DC.2(1)/IT-1/03-04 dated 17/08/2010 and order dated 03/09/2012 respectively.
ITA No. 7417/Mum/2010.
2. The grounds of the assessee raised are as under:
1. The learned Commissioner of Income-tax (Appeals) erred in upholding the action of the learned Deputy Commissioner Income-tax (The Assessing Officer) in holding that the “Gain on Assignment of Loan Obligation$$ constitutes $$income” chargeable to lax in the hands of appellant. The appellant submits that the “Gain on Assignment of Loan Obligation” is capital receipt and not an income chargeable to lax,
2. The appellant submits that the following observations/findings of the learned Commissioner of Income tax (Appeals) are not at all relevant to the issue under consideration:-
(a) The sum of Rs, 12.75 cores given by the appellant to Memoric Pictures Pvt, Ltd. (MPPL) as share application money was received back as loan to appellant;
(b) The treatment to the aforesaid transaction of loan, share application and assignment of loan in the books of the appellant, MPPL and Champions Pictures Pvt. Ltd. (CPPL);
(c) The appellant and the other companies have changed their accounting period under the Companies Act,
3. (a) The appellant submits that the learned Commissioner of Income tax (Appeals) failed to take note of the distinction between loan taken for the purpose of business and the business of buying and selling of loan.
(b) The appellant submits that the learned Commissioner of Income tax (Appeals) erred in holding that as MPPL and CPPL got merged with the appellant, it got the benefit of Rs, 11.64 Crores which was originally a loan and a capital transaction but due to influx of time the same changed its character.
(c) The appellant submits that the learned Commissioner of Income tax (Appeals) erred in relying on the decision of the Supreme Court in the case of CIT V T. V. Sunderam lyanger & Sons Ltd. [222 ITR 344 (SC) as the said decision was not applicable to the facts of the appellant’s case, there being no benefit on account of any trading operation.
4. The appellant submits that the Assessing Officer be directed to treat the “Gain on Assignment of Loan Obligation'” as a capital receipt and not as an income and to modify the assessment in accordance with the provisions of the Act.
5. Each of the above grounds of appeal are independent and without prejudice to each other.
6. The appellant craves liberty to add, to alter and / or amend the grounds of appeal as and when given.
3. The facts in brief are that the assessee company is engaged in the business of manufacturing and sales of cables. During the year, the assessee filed the return of income on 29/11/2000 declaring a loss of Rs. 41,67,90,642/- which was processed u/s 143(1) of the I.T.Act on 13/12/2000 accepting the returned income. Thereafter, the case of the assessee was selected for scrutiny and statutory notices were duly issued and served upon the assessee. During the year, the assessee entered into an agreement dated 17/11/1999 with Memoric Pictures Private Limited (hereinafter referred to as MPPL) whereby MPPL had agreed to advance an interest free loan of Rs. 12 crores to the assessee company. As per the said agreement, the assessee company was to repay the said loan amount to MPPL over a period of 100 years. The said loan was utilised for the purchase of shares by the assessee and was not used for its line of activity/business. Thereafter, the assessee entered into tripartite agreement dated 01/03/2000 entered into between the assessee company, MPPL and Champion Pictures Private Limited (hereinafter referred as CPPL) under which the obligation of repaying the above mentioned loan of Rs. 12 crores was assigned to CPPL at a discounted present value of Rs. 0.36 crores. The resultant difference of Rs. 11.64 crores was credited by the assessee to the profit and loss account as “Gain on Assignment of Loan obligation under the head income from other sources”. However, while computing the taxable income the assessee reduced the said amount from the taxable receipt on the ground that same constitute a capital receipt in the hands of the assessee and is not taxable. Thereafter during the course of assessment proceedings, the AO after noticing the said transactions issued show cause notices to the assessee as to why the profit on assignment of loan should not be added to the income of the assessee, which was replied by the assessee vide letter dated 21/11/2002 as under: –
“Our client is not engaged in the business of buying and selling of loans and the aforesaid transactions was a one-time transaction. The difference arising on transfer of the obligations of repaying the loan cannot be treated as business receipt (there being no receipt at all) or profit arising out of business of the assessee company. Further, any amount, which is not a business receipt, cannot be taxed under the head “Profit and Gains of Business or Profession”. We may further submit that:
