Section 41(1) -Remission or cessation of trading liability – When loan is taken for acquiring capital asset, waiver thereof would not amount to any income exigible to tax; on other hand, if loan is for trading purpose and has been treated as such from very beginning in books of account, waiver thereof may result in income, more so when it is transferred to profit and loss account.
Fact: Loans/advances were taken by assessee-company from company B in course of its business activity. Company B approached assessee-company to clear its dues as they had immediate business obligation. Old outstanding dues of Rs. 1,20,67,817 was settled for Rs. 85,00,000. Balance amount of Rs. 35,67,817 was waived by company B. Assessee credited this amount into capital reserve account. Advance received by assessee from company B had never been allowed as a deduction in any of previous financial year. It was a case of loan liability and not trading liability.
Waiver of loan liability credited by assessee under capital reserve account in its books of account would be a capital receipt and could not be deemed as remission or cessation of liability and consequently no benefit would have arisen to assessee in terms of section 41(1).
IN THE ITAT MUMBAI BENCH ‘B’
Bombay Gas Co. Ltd.
v.
Additional Commissioner of Income-tax, 1(1), Mumbai
IT APPEAL NOS. 646 AND 1188 (MUM.) OF 2009
[ASSESSMENT YEAR 2004-05]
MARCH 30, 2012
ORDER
D.K. Agarwal, Judicial Member
These cross-appeals by the assessee and Revenue are directed against the order, dated 25.11.2008 passed by the ld. CIT(A) for the assessment year 2004-05. Both these appeals are disposed of by this common order for the sake of conveyance.
2. Briefly stated facts of the case are that the assessee company is engaged in the business of Finance and Investment, income from house property, compensation, service charges from sub-tenants and income by way of interest and dividend. It filed return declaring total income at Rs. 27,780/-. However, the assessment was completed at an income of Rs. 92,12,980/- under normal provisions of the Act vide assessment order dated 20.12.2006 passed under section 143(3) of the Income Tax Act, 1961 (the Act). On appeal, the ld. CIT(A) partly allowed the appeal.
3. Being aggrieved by the order of the ld. CIT(A), the assessee and Revenue both are in appeal before us.
ITA No.646/Mum/2009 (by assessee)
4. Grounds of appeal No. I taken by the assessee reads as under :
“1. On the facts and circumstances of the case and in law, the CIT(A), erred in upholding the action of the Additional Commissioner of Income Tax, Range 1(1), Mumbai (“the A.O.”) in disallowing a sum of Rs. 7,54,200/- being 50% of the expenditure in nature of Legal & Professional Expenses on the alleged ground that expenses were not incurred for the purpose of business.”
5. Briefly stated facts of the above issue are that the AO noted that the assessee company has claimed deduction for expenses incurred for Lalbaugh property to the tune of Rs. 15,08,400/- under the head “Legal and Professional expenses” . When asked to explain the nature of this expenses, the assessee submitted that “Company has claimed expenses as Lalbaugh property. The Co. was a 50% partner in a firm M/s Gas Property developers formed in 1986 with M/s Mittals. The Co. contributed a piece of land at Lalbaugh, Parel into the Firm as its contribution towards capital in the year 1986. Thereafter, dispute arose between the partners. During the year settlement has been arrived at between the partners and development agreement was entered by partnership firm with a third party in which Co. is confirming party. The Co. has incurred Legal & Professional expenses for drafting, perusing, and approving the suit papers, settlement agreement, development agreement etc.” The AO after considering the assessee’s explanation held that the expenditure incurred by the assessee company is in fact, the liability of the partnership firm and not of the individual partner who might have contributed that asset as his capital contribution and hence the same cannot be allowed in the hands of the assessee company and accordingly added a sum of Rs. 15,08,400/- to the income of the assessee. On appeal, the ld. CIT(A) in the absence of exact break up of various expenses, directed the AO to allow 50% of the claim of the expenses and sustained 50% of disallowance.
6. At the time of hearing, the ld. Counsel for the assessee while reiterating the same submissions as submitted before the AO and the ld. CIT(A) further submits that the Legal and Professional expenses were incurred in settlement of dispute of the Lalbaug property in which the assessee company was the partner, therefore to protect the interests of the Company property, the assessee has incurred the expenses of Rs. 15,08,400/-, the copy of invoices for Legal and Professional fees paid are appearing at pages 34-37 of the assessee’s paper book and hence, the same be allowed in full as business expenses.
7. On the other hand, the ld. DR while relying on the order of the AO further submits that the expenditure incurred by the assessee company is in fact the liability of the partnership firm and hence it cannot be allowed and accordingly the ld. CIT(A) was not justified in allowing even 50% relief to the assessee and the same be reversed and the disallowance made by the AO be restored.
8. We have carefully considered the submissions of the rival parties and perused the material available on record. We find that the ld. CIT(A) has observed that the expenditure claimed also includes expenses for development agreement which has been entered into by the partnership firm with third party in respect of the land after the appellant reaching a settlement with its partners. Therefore, development project belongs to the firm and any expenditure incurred in this regard cannot be the expenditure of the appellant. In the absence of the exact break up of expenses, he reduced the disallowance to 50%. In the absence of any contrary material placed on record by the ld. Counsel for the assessee against the findings of the ld. CIT(A) we are of the view that the ld. CIT(A) was fully justified in sustaining the disallowance to 50% and accordingly, the order passed by the ld. CIT(A) does not call for any interference. The ground taken by the assessee is, therefore, rejected.
9. Grounds of appeal No. II taken by the assessee reads as under :
“1. On the facts and circumstances of the case and in law, the CIT(A) erred in upholding the action of the A.O. in assessing the Income received in the form of Rent and service charges from sub-lease under the head “Income form House property” instead of “Income from Business” on the alleged ground that provisions of Section 27 (iii) (b) r.w.s. 269UA(f) of the Income tax Act (“the Act”) relating to deemed ownership is attracted.”
10. The Brief facts of the above issue are that the AO found that the assessee had credited the following rental income to the P&L account:
