ROLLATAINERS LTD. Vs. COMMISSIONER OF INCOME TAX (DELHI HIGH COURT)
The assessee, Rollatainers Ltd was declared as a sick company by Board for Industrial Financial Reconstruction (BIFR) due to poor financial position and erosion of entire net worth. Pursuant to Restructuring Package as approved by Corporate Restructuring Cell, the bank waived off the interest and principal amount of working capital loan granted in the form of ‘Cash Credit’ to the assessee. The assessee treated the waiver of principal amount of loan as capital receipt and hence argued that the same was not taxable. A division bench of Delhi HC, rejecting assessee’s contention, ruled that waiver of principal amount of working capital loan in the form of Cash Credit was ‘revenue’ in nature.
HC thus held that Sec 41(1) was applicable and waiver of principle amount of loan was taxable as income. HC relied on its own decision in Logitronics Pvt. Ltd. [ TS-54-HC-2011(DEL) ] wherein it was held that taxability of waiver of loan amount depends upon purpose of borrowing. In Logitronics’s case, HC had observed that waiver of loan taken for acquiring a capital asset, would be treated as non taxable capital receipt and where the loan is taken for trading or ongoing business operations, it would be treated as taxable income.
IN THE HIGH COURT OF DELHI AT NEW DELHI
ITA No. 127 of 2011
Judgement Delivered On: 30.08.2011
COMMISSIONER OF INCOME TAX
A.K. SIKRI, J.
1. This appeal was admitted on 8th July, 2011 on the following substantial question of law:-
“Whether on the facts and circumstances of the case, the Tribunal erred in law in holding that Rs. 2,05,42,468/- being the principal amount of working capital loans granted in the form of cash credit limits by the bank and subsequently waived off, constitutes taxable income of the appellant?”
The appellant is a public limited company, which is engaged in the business of, inter alia, manufacturing of Lined and Flexible Cartons/ packing material, automatic packing machines, weighing machines, trading of machines, spares and leasing of machines.
6. Thus, on writing off the said loans/part loans, benefit had arisen to the assessee. As per the Tribunal, when the money/loan was received in the course of carrying on business even if it was treated as loan at the time of receipt which was of capital nature on the waiver had become assessee‟s own money which was even taken to profit and loss account. This benefit was in the revenue field as the money had been borrowed for day to day affairs and not for the purchase of machinery. Thus, the loans were for the circulating capital and not the fixed capital.
“(a) Since the Tribunal in the case of Tosha International Ltd. (supra) proceeded to decide the issue on the premise that loan was utilised to acquire capital assets, decision of the Tribunal as upheld by this Court would apply to the cases where the loan obtained is utilized for acquiring capital assets.
(b) In the case of Mahindra & Mahindra Ltd. Vs. Commissioner of Income Tax [261 ITR 501 (Bom.)], loan was to purchase plant and machinery – dies, tools, etc., i.e., capital assets. It was on these facts that waiver of principal amount of loan was held to be neither covered by Section 28(iv) nor Section 41 (1) of the Act.
(c) In the case of Tosha International Ltd. (supra), neither the Tribunal nor this Court considered the issue from the stand point of principal laid down by the Supreme Court in the case of Commissioner of Income Tax Vs. T.V. Sundaram Iyengar and Sons Ltd. [(1966) 222 ITR 344.
(d) In Solid Containers Ltd. Vs. Deputy Commissioner of Income Tax [(2009) 308 ITR 417], the Bombay High Court applying the decision in T.V. Sundaram Iyengar and Sons Ltd. (supra) distinguished its decision in Mahindra & Mahindra Ltd. (supra) and has held that on waiver of loan taken for business purposes, the amount is retained in the business and as such, the amount that initially did not have the character of income becomes income liable to tax.
(e) Decisions rendered in Commissioner of Income Tax Vs. P. Ganesh Chettiar [(1982) 133 ITR 103 (Mad.) and Commissioner of Income Tax Vs. Phool Chand JiwanRam [(1981) 131 ITR 37 (Del.) were of no assistance to the appellant because the same were rendered prior to judgment of the Supreme Court in T.V. Sundaram Iyengar and Sons Ltd. (supra).
“In the context of waiver of loan amount, what follows from the reading of the aforesaid judgement is that the answer would depend upon the purpose for which the said loan was taken. If the loan was taken for acquiring the capital asset, waiver thereof would not amount to any income exigible to tax. On the other hand, if this loan was for trading purpose and was treated as such from the very beginning in the books of account, as per Sundaram Iyengar (T.V.) and Songs Ltd. (supra), the waiver thereof may result in the income moreso when it was transferred to Profit and Loss account.”
12. The Submissions of Mr. Vohra was that the aforesaid extracted passage did not state the correct principle of law. According to him, it is settled law that all receipts are not income. Receipt of loan is a transaction on capital account i.e. the receipt of sum of money by way of loan which is repayable does not amount to income. Therefore, waiver of loan would be of capital account with no indicia of income. He further submitted that Section 41 (1) of the Act was not applicable as following conditions need to be satisfied before this section is invoked:-
(i) An allowance or deduction has been claimed in any earlier assessment year(s) with respect to a trading liability;
(ii) Benefit by way of remission or cessation is obtained in respect of such trading liability in succeeding year (s).
15. All the arguments advanced by the learned counsel were raised before this Court in Logitronics (supra) as well. Predicated on the same judgments on which Mr. Vohra has now relied upon. The judgment in Logitronics (supra) is rendered by this very Bench. Therefore, it is not necessary to repeat the discussion all over again. Suffice to state that after considering the aforesaid submissions of Mr. Vohra, we are unable to agree with the same and find no reason to deviate the view we have taken in the aforesaid decision in Logitronics (supra). We would, however, like to add that the Tribunal in the impugned judgment has discussed at length both the decision of this Court in CIT Vs. Phool Chand and CIT Vs. Tosha International Ltd (supra) and held that they are not applicable in the instant case. In the case of Phool Chand (supra) the relevant facts are that the assessee had purchased goods in an earlier year from M/s Narsinghdass Banarsidass, the payment in respect of which was made by M/s Janaki Dass Banarasi Dass. The amount was subsequently waived. The case of the revenue was that the amount so paid should be taken towards purchase of cloth and, therefore, it represents a trading liability. This Court came to the conclusion that this conclusion was rather farfetched. The cloth was purchased from M/s Narsinghdass Banarsidass and the debt represented a trading debt. However, so far as M/s Janaki Dass Banarsi Dass is concerned, the payment made by it was not for the purpose of purchase of stock-in-trade. Therefore, it was held that the liability was not a trading liability and the amount waived could not be brought to tax in the hands of the assessee.
16. Thus, the entire judgement rested on the premise that the liability in question was not a trading liability. Coming to the case of Tosha International Ltd. (supra) the facts are that the assessee was engaged in manufacturing of black and white picture tubes. It ran into huge losses and ultimately became a sick company and was so registered with the BIFR. Under one time settlement Scheme, the banks and financial institutions required the assessee to pay 60% of the amount towards the principal and waived the entire interest amount. The question before the Court was whether waiver of the principal amount of amount ` 10.48 crore, credited to the capital reserve account, constituted income? The Court came to the conclusion that the amount is not covered by the provision contained in Section 41(1). It was also mentioned that the principles enunciated in the case of Mahindra and Mahindra Ltd. are fully applicable. Again, it was a case where the loan was on capital account and not for trading purposes. Even in the instant case, as far as term loans are concerned, waiver thereof by the financial institutions has not been treated as income at the hands of the assessee. It is only the writing off loans on cash credit account which was received for carrying out the day to day operations of the assessee which is treated as “income” in the hands of the assessee. The judgment of the Bombay High Court in „Solid Containers‟ and that of Madras High Court in „Aries Advertisement‟ are directly on this issue. The Tribunal has rightly applied the said judgments wherein the view taken is the same as taken by this
Court in Logitronics.
17. Insofar as the decision in Jindal Equipment Leasing & Consultancy Services Ltd. is concerned, that was a case where the assessee was an investment company registered with the Reserve Bank of India as a Non Banking Financial Company (NBFC). In the return for the assessment year 2003-04, it had shown a loan of Rs. 6,80,3 1,189 payable to M/s Jindal Steel & Power Ltd. (JSPL). It is the JSPL which had return of a sum of Rs. 1,46,53,065 in its books of account. On that premise, the Assessing Officer had treated the same as income of the assessee on the ground that the creditor had written of the said amount and, therefore, it was no more the liability of the assessee and to this extent it was the assessee‟s gain and added the same under Section 41 (1) of the Act. The plea of the assessee in that case was that JSPL had done it unilaterally and without the knowledge of the assessee. The CIT (A) confirmed the addition made by the Assessing Officer in term of Section 41 (1) read with Section 28(i) of the Act. The ITAT deleted the addition holding that Section 41(1) of the Act had no application. In the appeal preferred by the Revenue, it did not press the applicability of Section 41(1) of the Act or Section 28 (i) of the of the Act but took a totally different stand namely the said waiver was to be treated as income under Section 28 (iv) of the Act. No doubt, this Court held that the amount written of in the books of accounts by JSPL was in the nature of value of any benefit or perquisites, whether convertible into money or not and, therefore, could not be treated „profits and gains from business‟. However, no other aspects were looked into or discussed. The nature of loan taken by the said assessee, which was waived by the JSPL, namely whether it was on capital account or in the trading field was not the aspect looked into. In fact, neither there was any material on this aspect nor it was argued. This Court had relied upon the judgment of Bombay High Court in Mahindra and Mahindra 261 ITR 501. When we go through the said judgment of the Bombay High Court, it becomes clear that in that case, the loan arrangement in its entirety was not obliterated and more importantly the purchase consideration related to capital asset.
18. In any case, even if we hold that Section 28(iv) of the Act is not applicable, Section 41 (i) of the Act is clearly applicable.
19. We, therefore, answer the question in the negative i.e. against the assessee and dismiss this appeal.
AUGUST 30, 2011