8. [2019] 201
TTJ (Mum.) 1009 Cable
Corporation of India Ltd. vs. DCIT ITA Nos.:
7417/Mum/2010 & 7369/Mum/2012 A.Y.: 2000-01 Date of order:
30th April, 2019
Section 41(1)
r.w.s. 28(iv) – Where assessee assigned its loan obligation to a third party by
making a payment in terms of present value of future liability, surplus
resulting from assignment of loan was not cessation or extinguishment of
liability as loan was to be repaid by third party –The same could not be
brought to tax in the hands of the assessee
FACTS
The assessee
company was engaged in the business of manufacturing and sales of cables.
During the year the assessee borrowed interest-free loan of Rs. 12 crores from
a company, MPPL, which was to be repaid over a period of 100 years. The said
loan was utilised for the purchase of shares by the assessee and not for its
line of activity / business. Thereafter, a tripartite agreement was entered
into between the assessee, MPPL and CPPL under which the obligation of repaying
the above-mentioned loan of Rs. 12 crores was assigned to CPPL at a discounted
present value of Rs. 0.36 crores. The resultant difference of Rs. 11.64 crores
was credited by the assessee to the profit and loss account as ‘gain on
assignment of loan obligation’ under the head income from other sources.
However, while computing the taxable income, the assessee reduced the said
amount from the taxable income on the ground that the same constituted a
capital receipt in the hands of the assessee and was not taxable.
The AO observed that the lender, MPPL, had
accepted the arrangement of assignment of loan to CPPL and CPPL had started
paying the instalments to MPPL as per the said tripartite agreement. Thus, the
liability of the assessee was ceased / extinguished; as such, the provisions of
section 41(1) were applicable to this case. He further observed that the
assessee during the course of his business borrowed funds to the tune of Rs. 12
crores and assigned the same to CPPL for Rs. 0.36 crores, thus the resultant
benefit of Rs. 11.6 crores by cessation of liability was a trading surplus and
had to be taxed. The AO further observed that the assessee himself had credited
Rs. 11.64 crores to the profit and loss account as gain on assignment of loan
under the head income from other sources. On appeal, the Commissioner (Appeals)
upheld the AO’s order.
HELD
The Tribunal
held that the assessee was in the line of manufacturing and trading of cables
and not the purchase and sale of shares and securities. It was apparent from
the facts that the loan was utilised for the purpose of purchase of shares
which was not a trading activity of the assessee. The liability of the loan of
Rs. 12 crores to be discharged over a period of 100 years was assigned to the
third party, viz., CPPL, by making a payment of Rs. 0.36 crores in terms of the
present value of the future liability and the surplus resulting from the
assignment of the loan liability was credited to the profit and loss account
under the head income from other sources; but while computing the total income,
the said income was reduced from the income on the ground that the surplus of
Rs. 11.64 crores represented capital receipt and, therefore, was not taxable.
It was true that both companies, MPPL and CPPL, were amalgamated with the
assessee later on with all consequences. So the issue was whether the surplus
Rs. 11.64 crores resulting from the assignment of loan to CPPL under the said
tripartite agreement between the assessee, MPPL and CPPL was a revenue receipt
liable to tax or a capital receipt as has been claimed by the assessee.
The purchase of
shares by the assessee was a non-trading transaction and was of capital nature.
The surplus resulting from the assignment of loan as referred to above was not
resulting from trading operation and therefore was not to be treated as revenue
receipt. The provisions of section 41(1) were not applicable to the said
surplus as its basic conditions were not fulfilled. In other words, the
assessee had not claimed it as deduction in the profit and loss account in the
earlier or in the current year. In order to bring an allowance or deduction
within the ambit of section 41(1), it was necessary that a deduction /
allowance was granted to the assessee.
In the instant
case, the loan was utilised for purchasing shares which was a capital asset in
the business of the assessee and the surplus resulting from assignment of loan
was a capital receipt not liable to be taxed either u/s 28(iv) or u/s 41(1).
Accordingly, the surplus arising from assignment of loan was not covered by the
provisions of section 41(1) and consequently could not be brought to tax either
u/s 28(iv) or u/s 41(1). Further, the surplus had resulted from the assignment
of liability as the assessee had entered into a tripartite agreement under
which the loan was to be repaid by the third party in consideration of payment
of net present value (NPV) of future liability. Thus, the surplus resulting
from assignment of loan at present value of future liability was not cessation
or extinguishment of liability as the loan was to be repaid by the third party
and, therefore, could not be brought to tax in the hands of the assessee.
Therefore, the order of the Commissioner (Appeals) was set aside and the AO was
directed to delete the addition of Rs. 11.64 crores.
