Sections 2(47), 45, 50 – Taking over of the possession of the capital asset by the secured lendor does not amount to transfer of asset and short term capital gain on such transfer cannot be charged. A restraint on dealing with the assets in any manner resulting in from issuance of notice for recovery is merely a prohibition against private alienation and does not pass any title to the authority which held a lien or charge on the aforesaid class of assets.
Facts:
The assessee company was engaged in the business of manufacture and trade of synthetic yarn and freight forwarding. The assessee filed its return of income declaring a Nil income. The assessee submitted that it had borrowed loans from various financial institutions to purchase capital assets prior to 1999. When it ran into losses and upon its net worth being fully eroded, it became sick as per provisions of Sick Industrial Companies (Special Provisions) Act, 1985 (SICA). In the meanwhile, the assessee was served a notice u/s. 13(2) of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) from Stressed Assets Stabilization Fund (SASF) (a financial institution which had taken over the loans advanced by IDBI Bank Ltd) who was authorised to act on behalf of self and all the secured lenders of the assessee. The SASF took over physical possession of the secured movable and immovable assets of the assessee u/s. 13(4) of SARFAESI on 28.9.2007.
The assets of the assessee were sold by SASF sometime in March, 2008 for a sale price of Rs. 10 crore. The principal amount of loans outstanding to the secured lenders amounted to Rs. 97.42 crore, of which Rs. 24.46 crore was due on account of unpaid principal amount of borrowings utilised for working capital. It was stand of the assessee that the amount of Rs. 24.46 crore being the unpaid amount of working capital borrowings can form part of its taxable income and Rs. 72.96 crore (Rs 97.42 crore minus Rs. 24.46 crore) on account of unpaid principal amount of borrowings utilised for creation of depreciable fixed assets cannot form part of taxable income.
The Assessing Officer (AO) added a sum of Rs. 61,73,27,400 to the total income of the assessee as short term capital gain on the ground that the assets of the assessee have been sold for a certain consideration and in return the assessee has received as benefit waiver of entire loan of Rs. 97.42 crore outstanding in its books. Since the WDV of the assets as per books was Rs 11.23 crore the AO charged Rs 61.73 crore as short term capital gains.
Aggrieved the assessee preferred an appeal to CIT(A) who confirmed the action of the AO.
Aggrieved, the assessee preferred an appeal to the Tribunal.
Held:
The AO erred in applying the provisions of section 2(47) of the Act in considering that the secured lendor acquires title to the secured assets of the assessee company on taking over of possession of assets of the assessee by overlooking the fact that what the secured lenders acquired on taking over of the possession of the secured assets were merely a special right to execute or implement the recovery of its dues from dealing with those assets of the assessee company. Had the assessee company tendered the amounts payable to the secured lenders before the date of sale of such assets without any further act, deed or thing being required to be carried out or completed towards title of the assets, the assessee company could have regained or taken possession of the secured assets from the secured lenders.
The ownership rights in the assets did not at any stage stand transferred to the secured lenders by taking over the possession of the secured assets. Thus, the sale consideration received by the secured lender actually belonged to the borrower which by operation of law remained retained by the secured lenders to recover their costs, dues, etc. Further, if the consideration to the assessee is to be considered as the sale amount received by the lending banks, then, the loans waived by such banks (availed by the assessee for the purchase of capital assets such as land, building, plant and machinery, etc) was nothing but a capital receipt not liable for tax since neither the provisions of section 28(iv) nor section 41(1) of the Act are attracted.
This ground of appeal of the assessee was allowed.
