Case Law Details
ITO Vs Meyer Apparel Pvt. Ltd (ITAT Delhi)
In a recent case, the Income Tax Appellate Tribunal (ITAT) Delhi delivered a significant verdict in the matter of ITO vs. Meyer Apparel Pvt. Ltd., challenging the order of the Commissioner of Income Tax (Appeals) [CIT(A)] for the assessment year 2006-07. The crux of the dispute revolved around the addition of Rs. 3,70,00,000 made by the Assessing Officer (AO) under section 28(iv) of the Income Tax Act, 1961 [the Act].
Background of the Case
The Revenue contended that the CIT(A) erred in justifying the deletion of the addition of Rs. 3,70,00,000, arguing that the amount was never used by the assessee company as capital expense, but rather for day-to-day business operations. The grounds of appeal also raised concerns about the AO limiting himself to the directions of the ITAT while making the addition.
Revenue’s Arguments
The Revenue, represented by the learned Senior DR, emphasized that the CIT(A) should not have deleted the addition, as the amount in question was never utilized as capital expense. It was argued that the funds were employed for regular business operations and not for acquiring capital assets. Furthermore, the Senior DR contended that the CIT(A) erred in holding that the AO had exceeded the ITAT’s directions.
Assessee’s Defense
In response, the assessee, through its learned Authorized Representative (AR), referred to the relevant parts of the assessment and the first appellate order. The AR highlighted that the Tribunal, in the first round of proceedings, had directed the AO to examine whether the amount of Rs. 3.70 crores, related to sundry creditors, was considered in the books of accounts. The AR pointed out that the AO, in the remand report, acknowledged that the fixed deposits of Rs. 3.70 crores were provided as collateral security for obtaining an overdraft facility from the bank. This, according to the AR, demonstrated that it was not a trading liability, and no deduction or claim had been made by the assessee.
CIT(A)’s Decision and Legal Precedents
The CIT(A) relied on the judgment of the Hon’ble Supreme Court in the case of CIT vs. Mahindra & Mahindra Ltd. [2018] 93 taxmann.com 32 (SC). The Supreme Court had held that the waiver of a loan, which results in the debtor having extra cash, is a receipt in the hands of the debtor/assessee. The CIT(A) further noted that waiver of a loan is neither taxable as a business perquisite under section 28(iv) nor taxable as a remission of trading liability under section 41(1).
The CIT(A) concluded that the AO, in the set-aside proceedings, had limited jurisdiction as per the directions of the ITAT. The ITAT had clearly specified that the examination should focus on whether the amount relating to sundry creditors had been considered in the books of accounts. Since the AO admitted that no deduction or claim was made by the assessee, the CIT(A) deleted the addition.
ITAT’s Verdict
After a careful analysis of the orders of the authorities below, the ITAT concurred with the CIT(A)’s decision to delete the addition. The ITAT emphasized the principle that in set-aside proceedings, the AO’s power is limited to the particular issue directed by the appellate authority.
Referring to the legal precedents set by the Hon’ble Supreme Court, the ITAT upheld the CIT(A)’s reliance on the Mahindra & Mahindra case. The waiver of a loan, in the hands of the debtor, is treated as a receipt in the form of cash or money, and it does not fall under the purview of section 28(iv) or section 41(1) of the Act.
Implications and Conclusion
The ITAT’s decision in the case of ITO vs. Meyer Apparel Pvt. Ltd. reinforces the importance of adhering to the specific directions given in set-aside proceedings. The judgment aligns with the legal position established by the Supreme Court, emphasizing that the waiver of a loan, even if utilized for day-to-day business operations, does not attract taxation as a business perquisite or a remission of trading liability.
This case provides clarity on the tax treatment of loan waivers related to capital assets acquisition, setting a precedent for similar situations. Taxpayers and professionals can take cues from this decision when faced with disputes regarding the taxability of waived loans, especially in the context of capital assets. The principle of limited jurisdiction in set-aside proceedings serves as a safeguard against overreach by the assessing authorities, ensuring a fair and focused examination of the specific issues directed by higher appellate forums.
FULL TEXT OF THE ORDER OF ITAT DELHI
1. This appeal has been filed by the revenue against the order of the ld CIT(A)-6, Delhi dated 08.05.20 19 for AY 2006-07.
2. The Revenue has raised the following grounds of appeal:-
“1. Whether on the facts and circumstances of the case, the Ld. CIT (A) is justifying in deleting the addition of Rs.3,70,00,000/- made by the AO u/s 28(iv) of the Act
2. Whether on the facts and circumstances of the case, the Ld. CIT(A) is justifying in deleting the addition of Rs.3,70,00,000/- as the assessee company has never used this receipts as capital expense although the assessee has used this fund for day to day business expense.
3. Whether on facts and circumstances of the case, the CIT(A)is justifying in deleting the addition of Rs.3,70,000,00/- by holding the AO has gone beyond the direction of the ITAT despite the facts the AO has limited himself to the direction of the Hon’ble ITA T and made the addition of Rs.3,70,00,000/- after carefully examination and proper adjudicating of law and facts of the case.”
3. The ld. Senior DR, supporting the assessment order submitted that in the facts and circumstances of the case, the Ld.CIT (A) was not justified in deleting the addition of Rs.3,70,00,000/- made by the AO u/s 28(iv) of the Act. She further contended that on the facts and circumstances of the case, the Ld.CIT(A) was not justified in deleting the addition of Rs.3,70,00,000/- as the assessee company has never used this receipts as capital expense although the assessee has used this fund for day to day business expense. It has also been contended by the ld. Senior DR that on facts and circumstances of the case, the Ld.CIT(A) was also not justified in deleting the addition of Rs.3,70,000,00/- by holding the AO has gone beyond the direction of the ITAT despite the facts the AO has limited himself to the direction of the Hon’ble ITAT and made the addition of 3,70,00,000/- after carefully examination and proper adjudicating of factual position of the issue and applicable law to the present case. The ld. Senior DR, therefore, submitted that first appellate order may kindly be set aside by restoring that of the Assessing Officer.
4. Replying to the above, the ld. AR drawing our attention towards relevant parts of assessment as well as first appellate order submitted that the Tribunal in the first round of proceedings directed the Assessing Officer for limited purpose for examination and to verify whether the amount relating to sundry creditors of Rs. 3.70 crores has been considered in the books of accounts of assessee or He further submitted that in the remand report the Assessing Officer noted that the fixed deposits of Rs. 3.70 crores were provided by the assessee as collateral securities to obtained and overdraft facility from the bank therefore the same was not a trading liability and no expenses/deduction has ever been claimed. The AR also placed reliance on the judgment of Hon’ble P& H High Court in the case Baldev Singh Giani vs. CIT 248 ITR 266 (P&H) and submitted that in the proceedings remanded back the powers of Assessing Officer is limited to the directions of the Tribunal or Court remanding the issue/case on the issue only and not beyond that.
5. Supporting the First Appellate Order and vehemently opposing the first appellate order, the ld. AR submitted that the ld. CIT(A) has rightly relied on the judgment of Hon’ble Supreme Court in the case of CIT vs. Mahindra & Mahindra Ltd. [2018] 93 com 32 (SC)while holding that as per order of the Tribunal, the limited issue for examination before the Assessing Officer during second round of proceedings was to verify whether the amount relating to sundry creditor of Rs. 3.70 crores had been considered in the books of accounts and P&L account or not. The ld. AR further submitted that the Assessing Officer in the remand report admitted a factual position by stating that it is evident that fixed deposit of Rs. 3.70 crores were provided by the guarantor as collateral security for the assessee to obtain an overdraft facility from the bank and thus it was not a trading liability and no deduction or claim was made by the assessee in its accounts. The ld. AR thus submitted that in view of findings of the Assessing Officer in the remand report that no deduction or claimed for expenses of any kind was claimed by the assessee then in view of preposition rendered by Hon’ble Supreme Court in the case of CIT vs. Mahindra & Mahindra Ltd. (supra) the claim of assessee was to be allowed and no addition was required to be made to the income of assessee as the same was neither taxable as business perquisites u/s. 28(iv) of the Act nor was taxable as remission of trading liability u/s. 41(1) of the Act. With these contentions the ld. AR submitted that the ld. CIT(A) has rightly deleted the baseless addition made by the Assessing Officer.
6. The ld. AR has relied on the following judgments:-
(i) CIT vs. Mahindra and Mahindra Ltd. [2018] 93 taxmann.com 32 (SC)
(ii) PCIT vs Gujarat State Financial Corporation [2021] 126 com 154 (SC)
(iii) G Petrochemicals Ltd. vs. ITA T [2023] 155 taxmann.com 45 (Karnataka)
(iv) Pelican Tobacco India P. Ltd. vs. DCIT in ITA No. 151 4/Del/2023 order dated 20.07.2023
(v) M/s. Luxor Writing Instruments (P) Ltd. vs. DCIT in ITA No. 6898/Del/2019 order dated 31 .07.2023
7. Placing rejoinder to the above the ld. Senior DR drew our attention towards para 6.3 of assessment order dated 13.12.2017 passed u/s. 254/250/143(3) of the Act in pursuant to the order of the Tribunal dated 27.07.2016 and submitted that the Assessing Officer after considering the entire facts and circumstances of the case drawn a correct conclusion that from the facts on record show that the assessee had taken a loan from Indian Overseas Bank against which FDR of Mr. Panchai Singh Sachthep was given as a guarantee. Since the assessee company could not repay the loan therefore the bank revoked the guarantee and adjusted the same against the amount of 3.70 crores which was outstanding on account of loan against the assessee. Subsequently, Mr. Panchai Singh Sachthep waived of the above amount which was due to him from the assessee. The above facts make it clear that Mr. Panchai Singh Sachthep waived of the amount of loan of Rs,3,70 crores which was payable to him by the assessee company. The above waiver was treated as capital receipt by the assessee whereas it was a revenue receipt in the hands of the assessee, since it was a remission of liability.
8. Further drawing our attention towards relevant operative para 1.4 to 5.2 the ld. Senior DR submitted that the impugned amount was not given to the assessee as loan for acquiring capital assets therefore preposition relied by the ld. CIT(A) in the case of Mahindra & Mahindra reported as (2018) 93 taxman.com 32 (SC) is not applicable does not apply to the present case hence, first appellate order may kindly be set aside by restoring that of the Assessing Officer.
9. First of all, from the assessment order we note that the Assessing Officer made disallowance/addition of impugned amount by observing that this is a cessation of liability for the assessee company and the facts shows that there was no contractual obligation left on the part of assessee to repay the amount to Mr. Panchal Singh Sachthep. From the first appellate order, we further note that the ld. CIT(A) granted relief to the assessee deleting the addition with following observations and findings:-
5.1.1 The AO held that the assessee had taken loan because of the trading operation and due to waiver of the loan it became richer by the amount which needs to be transferred to its P&L Account. It was also held that money had arisen out of the ordinary trading transactions. It was also held that although the amounts received original were not in the nature of income, with the waiver of the loan the amount had attained a different quality and became a definite trade surplus and the assessee got the benefit of the said amount of Rs. 3.70 crores which is the value of the benefit of the business of the assessee within the meaning of section 28(iv). The appellant has submitted that the AO has made an addition under section 41(1) in the original assessment proceedings and under section 28(iv) in the set aside proceedings. It has also been submitted that addition made in one section cannot be covered under another section. It has also been submitted that the fact that the addition has been made under section 28(iv) in the set aside proceedings means that the AO is convinced that the said amount is not a cessation of liability which is to be covered under section 41(1) as both the sections are exclusive to each other. It has also been submitted that the Hon’ble ITAT has given clear directions to the AO while setting aside the matter and it is a settled law that the scope of set aside proceedings is limited to the direction given by the appellate authority and the AO cannot go beyond the terms of the set aside proceedings.
5.1.2 I have considered the assessment order and the submissions of the appellant. It is a fact that in the original proceedings the amount of Rs.3.70 crores was considered to be income on account of secession of liability and it was held that there was a contractual obligation left on the part of the assessee to repay this amount. It was also held that the liability has ceased to exist and the amount was taxed as a revenue receipt.
5.1.3 In the case of CIT vs. Mahindra & Mahindra Ltd. (supra) it has been held that waiver is neither taxable as business perquisite under section 28(iv) nor is taxable as remission of trading liability under section 41(1) from a reading of the said case it is apparent that the Hon’ble Supreme Court have held that the scope of section 28(iv) is restricted to non-monetary benefits received during the course of business whereas waiver of loan is akin to receipt of money. In the said case the Hon’ble Supreme have held as under:
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- “The term ‘loan’ generally refers to borrowing something, especially a sum of cash that is to be paid back along with the interest decided mutually by the parties. In other terms, the debtor is under a liability to pay back the principal amount along with the agreed rate of interest within a stipulated [Para 10]
- It is a well-settled principle that creditor or his successor may exercise their ‘Right of Waiver’ unilaterally to absolve the debtor from his liability to repay. After such exercise, the debtor is deemed to be absolved from the liability of repayment of loan subject to the conditions of The waiver may be a partly waiver i.e., waiver of part of the principal or interest repayable, or a complete waiver of both the loan as well as interest amounts Hence, waiver of loan by the creditor results in the debtor having extra cash in his hand. It 1s receipt in the hands of the debtor/assesse, The short but cogent issue in the instant case arises whether waiver of loan by the creditor is taxable as a perquisite under section 28(iv) or taxable as a remission of liability under section 41(1). [Para 11]
- On a plain reading of section 28(iv), prima facie, it appears that for the applicability of the said provision, the income which can be taxed shall arise from the business or profession. Also, in order to invoke the provision of section 28 (iv), the benefit which is received has to be in some other form rather than in the shape of money. In the instant case, it is a matter of record that the amount of Rs.57.74 lakhs is having received as cash receipt due to the waiver of loan. Therefore, the very first condition of section 28(iv) which says any benefit or perquisite arising from the business shall be in the form of benefit or perquisite other than in the shape of money, is not satisfied in the instant case. Hence, in no circumstances, it can be said that the amount of Rs 57.74 lakhs can be taxed under the provisions of section 28(iv). [Para 13]
- On a perusal of section 41(1), 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 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. 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 assessee had been paying interest at 6 per cent per annum to the KJC as per the contract but the assessee never claimed deduction for payment of interest under section 36(1)(iii). In the case at hand, the Commissioner (Appeals) relied upon section 41(1) and held that the assessee 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 assessee in previous assessment years was due to the deprecation of the machine and not on the interest paid by it. Para 15]
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- Moreover, the purchase effected from the KJC is in respect of plant, machinery and tooling equipments which are capital assets of the assessee. 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. It is to be noted that there is difference between ‘trading liability’ and ‘other Liability’. Section 41(1) 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, there is no force in the argument of the revenue that the case of the assessee would fall under section 41(1).[Para 16]
- To sum up, the judgment and order passed by the High Court cannot be interfered with for the following reasons:
(a) Section 28(iv) does not apply on the present case since the receipts of Rs 57.74 lakhs are in the nature of cash or money
(b) Section 41(1) does not apply since waiver of loan does not amount to cessation of trading liability. It is a matter of record that the assessee has not claimed any deduction under section 36(1)(iii) qua the payment of interest in any previous year. [Para 17]
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- In view of above discussion, the appeals being devoid of merit are dismissed. [Para 18]”
5.1.4 It is also noted that the Hon’ble ITAT while setting aside the matter to the file of the AO had given a very clear direction at the time of setting aside. The limited issue for examination before the AO was to verify whether the amount relating to sundry creditors of Rs. 3.70 crores had been considered in the books of account or not. In the remand report the AO has noted that considering the facts and circumstances of the case it is evident that fixed deposits of Rs. 3.70 crores were provided by the as collateral security by the assessee to obtain an overdraft facility from that bank and, therefore, it was not a trading liability and no deduction for expenses of any kind was ever claimed.
5.1.5 It has been held by the Hon’ble Punjab and Haryana High Court in the case of Baldev Singh Giani vs. CIT (248 ITR 266) that in proceedings remanded back the power is limited to the particular issue only. Hence, in view of the finding of the AO in the remand report that no deduction for expenses of any kind was claimed, the decision of the Hon’ble Supreme Court in the case of Mahindra & Mahindra (supra) and also in view of the fact that the AO had to simply verify whether the amount had been considered as expenditure in the books of account or not and the AO could not have gone beyond the direction given, the addition made is deleted. Ground of appeal No.1 is allowed.
10. After thoughtful and logical analyses of orders of the authorities below we note that the addition was made by the Assessing Officer on the allegation of cessation of liability u/s. 41(1) of the Act. The ld. CIT(A) deleted the addition by following the proposition rendered by Hon’ble Supreme Court in the case of Mahindra & Mahindra (supra) wherein their Lordship speaking for the Apex Court held that waiver of loan for acquiring capital assets cannot be taxed as perquisite under section 28(iv) as receipt in hands of debtor/assessee are in form of cash/money and it also cannot be taxed as a remission/cessation of liability under section 41(1) as waiver of loan does not amount to cessation of trading liability. Furthermore, again reiterating the said preposition the Hon’ble Supreme Court in its subsequent judgment in the case of PCIT vs. Gujarat State Financial Corp. (supra) held that where the loan amount was never claimed by assessee as expenditure, waiver of same could not amount to cessation of trading liability and was not chargeable to tax under section 41(1) of the Act.
11. In view of above legal prepositions rendered by Hon’ble Apex Court (supra) and respectfully following the same, we are inclined to agree with the conclusion returned by the ld. CIT(A) while granting relief to the assessee. We are unable to see any ambiguity, perversity or any other valid reason to interfere with the said findings and conclusion drawn by the ld. First Appellate Authority and hence, we uphold the same. Accordingly, grounds of Revenue being devoid on merits are dismissed.
12. In the result, the appeal of Revenue is dismissed.
Order pronounced in the open court on 19/10/2023.
