ITAT Cochin
Before Dr. O. K. Narayanan (AM) and
N. Vijayakumaran (JM)
ITA No. 971/Coch./2008
A.Y. : 2005-06. Decided on : 5-5-2009
Counsel for assessee/revenue : R. Sreenivasan/
C. Karthikeyan Nair
Income-tax Act, 1961 — S. 28(iv) and S. 41(1) — Whether
reduction in the liability availed by the assessee on the basis of One Time
Settlement Scheme in respect of its outstanding term loans is to be treated as
taxable u/s.28(iv) or u/s.41(1) — Held, No.
Per Dr. O. K. Narayanan :
Facts :
The assessee company, engaged in the business of sea food
exports, had availed term loans from three banks, viz. ICICI Bank Ltd.,
Standard Chartered Bank Ltd., and Sumitomo Mitsui Banking Corporation,
Hongkong. These term loans were availed by the assessee for the purpose of
acquiring capital assets to be deployed in the manufacturing system of the
assessee company. Due to bad financial position the assessee defaulted on
payment of installments and interest. The total amount of loans that remained
payable to the banks amounted to Rs.3486.03 lakhs.
During the previous year relevant to the assessment year
under appeal, the assessee reached an agreement with the three bankers for One
Time Settlement (OTS) of its loan liability whereby the loan liability of
Rs.3486.03 lakhs was settled on payment of Rs.2450 lakhs resulting in a waiver
of loan amount of Rs.1036.03 lakhs. This principal amount of loan waived by
the banks was credited by the assessee to General Reserve Account and was not
offered for tax.
The AO held that waiver resulted in earning gain for the
assessee company in the course of carrying on of its business. He further held
that u/s.2(24)(i) both ‘profits’ and also ‘gains’ are income; it is a mandate
of S. 28 to levy income-tax not only on the profits of the business but even
on the gains of a business. He, therefore, held that In the light of the
definitions attributed to the expressions ‘income’ and ‘gains’, the waiver
benefit enjoyed by the assessee company should be treated as income of the
assessee from business. The AO relied on a decision of the Supreme Court (SC)
in the case of T. V. Sundaram Iyengar & Sons. He, accordingly, included the
amount of Rs.1036.03 lakhs in computation of assessable income under the head
‘Income from Business’.
The CIT(A) held that waiver amount was rightly charged
u/s.28(iv) of the Act. She also observed that the decision of the SC in the
case of T. V. Sundaram Iyengar & Sons is analogous in facts and the ratio of
the said decision was applicable to the assessee’s case. She dismissed the
appeal.
Aggrieved, the assessee preferred an appeal to the
Tribunal.
Held :
The Tribunal stated that the facts of the assessee’s case
are quite different from the facts considered by the SC in the case of T. V.
Sundaram Iyengar and Sons Ltd. and therefore the said decision does not become
applicable to the present case of the assessee.
The Tribunal noted that the Bombay High Court while
delivering its judgment in the case of Solid Containers Ltd. has not dissented
in any way from the earlier decision in the case of Mahindra and Mahindra Ltd.
It observed that in the case of Solid Containers Ltd. the Court has reiterated
the ratio laid down in the judgment of the High Court of Bombay in the case of
Mahindra and Mahindra Ltd., that the loan availed for acquiring capital
assets, when waived, cannot be treated as assessable income. Therefore, it
held that it is not possible to hold that as far as the loan waiver of capital
account is concerned, the decision of the Bombay High Court in the case of
Solid Containers Ltd. clashes with the judgment of the same court in the case
of Mahindra and Mahindra Ltd.
The Tribunal held that since the loan waiver amount
credited by the assessee in its general reserve account is covered by the
judgment of the Bombay High Court in the case of Mahindra and Mahindra Ltd.,
the said waiver amount cannot be held as taxable.
The Tribunal noted that the SC has in the case of Polyflex
(India) Pvt. Ltd. examined the constitution of S. 41(1) and categorically
ruled that the words ‘remission or cessation thereof’ apply only to a trading
liability. Since the term loans availed by the assessee from the three banks
were not in the nature of trading liability but were in the nature of capital
liability, it held that the waiver thereof would not become income u/s.41(1)
on the ground of remission or cessation thereof. It also noted that the
assessee never had the benefit of deduction of the term loan availed by it
from the banks on capital account. Also, the term loans availed were not in
the nature of any loss or expenditure. Therefore, it held that S. 41(1) had no
application to the present case.
The Tribunal found the issue raised to be squarely covered
by the judgment of SC in the case of Polyflex (India) Pvt. Ltd., the decision
of the Bombay High Court in the case of Mahindra and Mahindra Ltd., decision
of the Delhi High Court in the case of Phool Chand Jiwan Ram and the decision
of the jurisdictional High Court in the case of Cochin Co. Ltd.
