4 Cessation of liability – waiver of loans availed by assessee from DEG, Germany – in nature of capital liability – hence, the provision of section 41(1) was not applicable.

4.  Cessation of liability –  waiver of loans availed by assessee from DEG,
Germany – in nature of capital liability – hence, the provision of section
41(1) was not applicable.

CIT-4 vs. Rieter India Pvt. Ltd. [ Income tax Appeal no 477 of 2015
dated : 18/08/2017 (Bombay High Court)].

[ACIT vs. Rieter India Pvt. Ltd. [dated 24/07/2014 ; AY : 2003-04 ;
Mum. ITAT ]

The
assessee company had obtained the term loan from DEG, Germany in the course of
the FY: 1994-95 and 1995-96. The term loan from DEG, Germany has been approved
by the RBI.

The
said RBI approval reveals that the assessee was permitted to raise foreign
currency loan from DEG, Germany for financing the import of capital equipments
for manufacturing of textile spinning machinery and components.

Further,
even the loan agreement with DEG, Germany reflects financing of the project
undertaken by the assessee of manufacturing textile spinning machinery and
components thereof. The said agreement also shows that the loan raised from
DEG, Germany was a long term means of finance for the purposes of funding assessee’s
project of manufacturing textile spinning machinery and components for textile
industries.

The
assessee had placed the list of machineries which have been acquired from
Spindle Fabrik Suessen, Germany and the respective invoices thereof. The
financial statements of the assessee as on 31.03.1995 reveals that a liability
of Rs.32.75 crore was outstanding as a part of current liabilities of Rs.42.60
crore against the name of Spindle Fabrik Suessen, Germany, against the
machineries acquired. The aforesaid position is not disputed by the Revenue.
The loan from DEG, Germany was received on 30.09.1995 and was utilised for
payment of the outstanding liability towards acquisition of fixed assets of
Rs.32.75 crore, apart from meeting other liabilities. It is not in dispute that
assessee has utilied the loan raised from DEG, Germany for payment of Rs.32.75
crore to Spindle Fabrik Suessen, Germany, which was a liability outstanding
against acquisition of fixed assets from the said concern.

The
Dept. contented that discharge of such liability of Spindle Fabrik Suessen,
Germany cannot be treated as utilisation of term loan from DEG, Germany for
acquisition of fixed assets, because the assets already stood acquired prior to
that date.

The
Tribunal held that the payment made by the assessee to Spindle Fabrik Suessen,
Germany towards outstanding liability against acquisition of fixed assets of
Rs.32.75 crore, which is out of the loan funds from DEG, Germany is to be understood as utilisation of loan funds towards
acquisition of capital assets. Therefore, it has to be understood that the loan
availed from DEG, Germany was utilised for the purposes of acquisition of
capital assets, to the above extent.

Further,
the Tribunal held that the subsequent waiver of such an amount,  cannot be said to be waiver of a loan raised
for trading activity. The waiver of the principal amount of term loan granted
by DEG, Germany of Rs.29,63,27,000/- was with respect to a loan which was
granted as well as utilised for purchase of capital assets, namely, plant &
machinery. Considered in the aforesaid factual backdrop, the waiver of the
principal amount of loan utilised for acquisition of capital assets and not for
the purposes of trading activity and accordingly the issue was covered in
favour of the assessee by the judgment of the Hon’ble Bombay High Court in
the case of Mahindra and Mahindra Ltd. (2003) 261 ITR 501 (Bom).

The
High Court agreed with the conclusion arrived at by ITAT,  the same to be in consonance with the
principle of law laid down by the Division Bench of this Court in the case of Mahindra
& Mahindra Ltd. vs. CIT, (2003) 261 ITR 501. The Revenue in support
of the appeal, however, urged that the Tribunal ignored the law laid down in
another Judgement reported in Solid Containers Ltd. vs. DCIT, 308 ITR 417.
However, the court held that the facts and circumstances involved in the
present case were not identical to those considered in Solid Containers (supra).
The court observed  that such facts as
are disclosed in the records of the present case are closer to that of Mahindra
& Mahindra and not Solid Containers. The assessee relied upon a latest
order passed in ITXA No. 1803 of 2014 dated 07^th August 2017, Commissioner
of Income Tax9 vs. M/s. Graham Firth Steel Products (I) Ltd. In the
above view, the appeal of revenue was dismissed.