Kothari Sugars and Chemicals Limited, CHENNAI v. ACIT, CHENNAI

IN THE INCOME TAX APPELLATE TRIBUNAL BENCH C CHENNAI (BEFORE SHRI U.B.S. BEDI JUDICIAL MEMBER AND SHRI ABRAHAM P. GEORGE ACCOUNTANT MEMBER) .. I.T.A. NO. 1076/MDS/2010 ASSESSMENT YEAR : 2005-06 M/S KOTHARI SUGARS AND CHEMICALS LIMITED KOTHARI BUILDINGS 115 M.G.ROAD NUNGAMBAKKAM CHENNAI 600 034. PAN : AABCK2495F (APPELLANT) V. THE ASSISTANT COMMISSIONER OF INCOME TAX COMPANY CIRCLE II(4) CHENNAI 600 034. (RESPONDENT) APPELLANT BY : SHRI R. VIJAYARAGHAVAN SHRI SAROJ KUMAR PARIDA RESPONDENT BY : SHRI B. SRI NIVAS O R D E R PER ABRAHAM P. GEORGE ACCOUNTANT MEMBER : IN THIS APPEAL FILED BY THE ASSESSEE ITS GRIEVANC E IS THAT A LOAN WAIVER OF ` 1 49 25 000/- WAS CONSIDERED AS INCOME IN ITS HAND S BY THE A.O. AND THIS WAS CONFIRMED BY THE CIT(APPEALS) . AS PER THE ASSESSEE ITS CASE WAS COVERED BY THE DECISION OF H ON'BLE GUJARAT HIGH COURT IN THE CASE OF CIT V. CHETAN CHEMICALS P VT. LTD. (2004) 267 ITR 770 (GUJ.) AND THAT OF HON'BLE BOMBAY HIGH COURT IN THE I.T.A. NO. 1076/MDS/10 2 CASE OF MAHINDRA AND MAHINDRA LTD. V. CIT (2003) 26 1 ITR 501 (BOM.). 2. FACTS APROPOS ARE THAT ASSESSEE MANUFACTURING SU GARS AND CHEMICALS HAD IN THE RELEVANT PREVIOUS YEAR CREDITE D A SUM OF ` 1 11 73 43 000/- TO ITS PROFIT AND LOSS ACCOUNT AS RELIEF FOR ONE TIME SETTLEMENT OF DEBTS. OUT OF THIS SUM PRINCIPAL AM OUNT WAIVED WAS ` 1 49 25 000/- AND INTEREST WAIVED WAS ` 1 10 24 18 000/-. THE WAIVER WAS EFFECTED BY M/S ICICI BANK. THE A.O. PU T THE ASSESSEE ON NOTICE THAT THE SAID SUM WOULD BE CONSIDERED AS ITS INCOME UNDER THE HEAD PROFITS AND GAINS OF BUSINESS IN VIEW OF SECTION 28(IV) OF THE INCOME-TAX ACT 1961 (IN SHORT THE ACT). AS SESSEE BY RELYING ON THE DECISION OF HON'BLE MADRAS HIGH COURT IN THE CA SE OF CIT V. GANESA CHETTIAR (1982) 133 ITR 103 (MAD.) SUBMITTED THAT WAIVER OF LOAN DID NOT CONSTITUTE ANY INCOME AS IT WAS CAPITA L RECEIPT. RELIANCE WAS ALSO PLACED BY THE ASSESSEE ON THE DECISION OF ITAT CHENNAI BENCHE IN THE CASE OF RANGA STRUCTURALS V. ITO (199 3) 44 ITD 154 (MAD.). THE A.O. DISTINGUISHED THESE TWO DECISIONS RELIED ON BY THE ASSESSEE. ACCORDING TO HIM IN THE CASE OF P. GANE SA CHETTIAR (SUPRA) THE SUM PAID TO THE ASSESSEE WAS IN SETTLE MENT OF HIS CLAIM IN PARTNERSHIP BUSINESS TOWARDS HIS SHARE OF CAPITA L AND IT HAD NOT I.T.A. NO. 1076/MDS/10 3 EFFECTED ANY LOAN WAIVER AS IN THE ASSESSEES CASE. IN SO FAR AS RANGA STRUCTURALS (SUPRA) OF THE TRIBUNAL WAS CONCE RNED THE A.O. WAS OF THE OPINION THERE WAS ONLY A REMISSION OF T HE ISSUES BACK TO THE FILE OF THE A.O. PLACING RELIANCE ON THE DECIS ION OF HON'BLE BOMBAY HIGH COURT IN THE CASE OF SOLID CONTAINERS L TD. V. DCIT (2009) 308 ITR 417 (BOM.) AND THAT OF HON'BLE APEX COURT IN THE CASE OF CIT V. T.V. SUNDARAM IYENGAR & SONS (1996) 222 ITR 344 (SC) THE A.O. CAME TO AN OPINION THAT THE PRINCIPAL AMOUNT WAIVED BY THE BANK HAD TO BE TAXED UNDER SECTION 28(IV) OR SE CTION 41(1) OF THE ACT. HE THEREFORE MADE AN ADDITION IN RESPECT OF PRINCIPAL AMOUNT OF ` 1 49 25 000/-. 3. IN ITS APPEAL BEFORE THE CIT(APPEALS) SUBMISSIO N OF THE ASSESSEE WAS THAT THE RATIO OF THE DECISION OF HON' BLE APEX COURT IN THE CASE OF T.V. SUNDARAM IYENGAR & SONS (SUPRA) DI D NOT APPLY IN ASSESSEES CASE SINCE THERE THE AMOUNTS WERE TRADE DEPOSITS RECEIVED WHICH WERE WRITTEN BACK IN THE PROFIT AND LOSS ACCOUNT. ON THE OTHER HAND ACCORDING TO THE ASSESSEE DECISION OF HON'BLE GUJARAT HIGH COURT IN THE CASE OF CHETAN CHEMICALS PVT. LTD. (SUPRA) AND THAT OF HON'BLE BOMBAY HIGH COURT IN THE CASE O F MAHINDRA AND MAHINDRA LTD. (SUPRA) APPLIED ON FACTS HERE AND TH E LOAN WAIVER I.T.A. NO. 1076/MDS/10 4 AMOUNTS WERE NOT TAXABLE IN ITS HAND. LD. CIT(APPE ALS) HOWEVER WAS NOT INCLINED TO ACCEPT THE VIEW CANVASSED BY TH E ASSESSEE. ACCORDING TO HIM DECISION OF BOMBAY HIGH COURT IN THE CASE OF SOLID CONTAINERS LTD. (SUPRA) WAS DIRECTLY APPLICABLE. I N SO FAR AS THE CASE OF CHETAN CHEMICALS PVT. LTD. (SUPRA) OF THE HON'BL E GUJARAT HIGH COURT RELIED ON BY THE ASSESSEE OPINION OF THE CIT (APPEALS) WAS THAT THERE IT WAS REMISSION OF LOAN BY THE CREDITORS AND WAS NOT ANY BENEFIT ARISING OUT OF BUSINESS. ACCORDING TO THE LD. CIT(APPEALS) HON'BLE APEX COURT IN THE CASE OF T.V. SUNDARAM IYE NGAR & SONS (SUPRA) HAD HELD THAT IF AN AMOUNT WAS RECEIVABLE I N THE COURSE OF TRADING TRANSACTIONS EVEN THOUGH IT WAS NOT TAXABL E IN THE YEAR OF RECEIPT AS REVENUE IN CHARACTER THE AMOUNT WOULD CHANGE ITS CHARACTER WHEN IT BECAME ASSESSEES OWN MONEY BECAU SE OF LIMITATION OR BY MEANS OF ANY OTHER STATUTORY OR CO NTRACTUAL LAW. HE IN A NUTSHELL CONFIRMED THE ADDITION MADE BY THE A .O. 4. NOW BEFORE US ASSAILING DECISION OF AUTHORITIES BELOW THE ASSESSEE SUBMITTED THAT THE LOAN RECEIVED FROM ICIC I BANK WAS A TERM LOAN AND NOT A PART OF TRADING TRANSACTION. A CCORDING TO LEARNED A.R. THE DECISION OF HON'BLE APEX COURT IN THE CAS E OF T.V. SUNDARAM IYENGAR & SONS (SUPRA) APPLIED ONLY WHERE THE ORIGINAL I.T.A. NO. 1076/MDS/10 5 RECEIPTS AROSE OUT OF TRADING TRANSACTIONS. IT WAS ARGUED THAT HERE THE LOAN FROM M/S ICICI BANK WAS NOT PART OF ANY TRADIN G TRANSACTION. IT WAS FURTHER SUBMITTED THAT THE LOAN GIVEN BY THE BA NK WOULD NEVER BE IN THE NATURE OF TRADING TRANSACTION BUT ONLY IN TH E CAPITAL FIELD. A QUERY WAS RAISED BY THE BENCH TO THE LEARNED A.R. A S TO WHY THE CREDIT WAS MADE IN PROFIT AND LOSS ACCOUNT IF IT WA S A CAPITAL RECEIPT. TO THIS THE REPLY WAS THAT THE NATURE OF ENTRY THA T WAS TO BE PASSED ON REMISSION OF A LOAN WAS ONLY A DECISION OF THE C OMPANY AND THIS DID NOT IN ANY CASE ALTER THE CHARACTER OF THE TRAN SACTION. ACCORDING TO HIM IT WAS IN THE CAPITAL FIELD AND IT WOULD NO T HAVE RESULTED IN ANY INCOME AS MENTIONED IN SECTION 28(IV) OF THE ACT. FURTHER AS PER THE LEARNED A.R. SECTION 41(1) ALSO HAD NO APPLICATION SINCE ADMITTEDLY THESE WERE NOT AMOUNTS ON WHICH ANY ALLOWANCE OR DE DUCTION WAS CLAIMED OR GIVEN TO THE ASSESSEE IN RESPECT OF ANY YEAR. LEARNED A.R. PLACING A COPY OF THE DECISION OF HON'BLE JURI SDICTIONAL HIGH COURT IN THE CASE OF M/S ISKRAEMECO REGENT LTD. V. CIT IN TAX CASE (APPEAL) NO.812 OF 2010 DATED 23 RD NOVEMBER 2010 SUBMITTED THAT THEIR LORDSHIP IN THIS PARTICULAR DECISION CONSIDER ED THE EFFECT OF THE LOAN WAIVED VIS--VIS THE DECISION OF THE HON'BLE A PEX COURT IN THE CASE OF T.V. SUNDARAM IYENGAR & SONS (SUPRA) AND TH E DECISIONS OF HON'BLE BOMBAY HIGH COURT IN THE CASE OF SOLID CONT AINERS LTD. I.T.A. NO. 1076/MDS/10 6 (SUPRA) AS WELL AS MAHINDRA AND MAHINDRA LTD. (SUPR A) AND HAD COME TO A CONCLUSION THAT WHERE THE TRANSACTION WAS ORIG INALLY A LOAN TRANSACTION WHEN WAIVER WAS MADE OF SUCH LOAN NEI THER SECTION 28(IV) NOR SECTION 41(1) APPLIED. 5. PER CONTRA THE LEARNED D.R. SUBMITTED THAT IN T HE FIRST PLACE THE DECISION OF HON'BLE JURISDICTIONAL HIGH COURT IN TH E CASE OF M/S ISKRAEMECO REGENT LTD. (SUPRA) DID NOT APPLY SINCE IN THAT CASE THERE WAS A LOAN TAKEN FOR A PURCHASE OF CAPITAL ASSET WH EREAS THIS ASPECT WAS NOT CLEAR HERE. FURTHER ACCORDING TO HIM ASS ESSEE ITSELF HAD CREDITED THE AMOUNT TO PROFIT AND LOSS ACCOUNT AND NOT TO CAPITAL RESERVE ACCOUNT AND THERE WAS A CLEAR IMPLICATION T HAT THE LOANS WERE OBTAINED IN THE TRADING FIELD. 6. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL C ONTENTIONS. IN THE FIRST PLACE WE FIND FROM THE ASSESSMENT ORDER THAT THERE IS NOTHING MENTIONED WHATSOEVER REGARDING THE NATURE O F LOAN WHICH WAS WAIVED. THE NARRATION GIVEN IN ASSESSMENT ORDE R WITH REGARD TO ONE TIME SETTLEMENT OF DEBTS OF ` 1 11 73 43 000/- WAS AS UNDER:- PRINCIPAL AMOUNT WAIVED ` 1 49 25 000 INTEREST ON TERM LOAN WAIVED BY ICICI BANK ` 1 10 24 18 000 ` 1 11 73 43 000 I.T.A. NO. 1076/MDS/10 7 OF COURSE THE INTEREST WAIVED WAS MENTIONED AS IN RELATION TO A TERM LOAN BUT THAT BY ITSELF WOULD NOT BE SUFFICIENT TO COME TO A CONCLUSION THAT THE PRINCIPAL WAIVED WAS ALSO A PART OF ANY TE RM LOAN. NOTHING COMES OUT FROM RECORDS WHETHER THE PRINCIPAL AMOUNT WAIVED WAS RELATING TO ANY OVERDRAFT FACILITIES UTILIZED IN TH E REGULAR TRADING ACTIVITY OR ANY SUM WHICH WAS RECEIVED FOR ACQUIRING FIXED A SSETS. IF WE LOOK AT THE DECISION OF HON'BLE JURISDICTIONAL HIGH COUR T IN THE CASE OF M/S ISKRAEMECO REGENT LTD. (SUPRA) NO DOUBT IT HAD CON SIDERED THE EFFECT OF HON'BLE APEX COURT JUDGEMENT IN THE CASE OF T.V. SUNDARAM IYENGAR & SONS (SUPRA) AS WELL AS THE EFFECT OF HON 'BLE BOMBAY HIGH COURTS DECISION IN THE CASE OF SOLID CONTAINERS LT D. (SUPRA) AND MAHENDRA AND MAHENDRA LTD. (SUPRA). TWO ASPECTS CO ME OUT FROM THE DECISION OF HON'BLE JURISDICTIONAL HIGH COURT. THE PRINCIPAL LOAN AMOUNT FOR WHICH THE LOAN WAIVER WAS MADE ON ONE TI ME SETTLEMENT SCHEME WAS USED BY THE ASSESSEE FOR PURCHASE OF CAP ITAL ASSETS. SECOND IS THAT THE ASSESSEE THERE HAD CREDITED THE AMOUNT IN ITS CAPITAL RESERVE ACCOUNT ON ONE TIME SETTLEMENT I.E . DIRECTLY TO ITS BALANCE SHEET AND NOT TO THE PROFIT AND LOSS ACCOUN T. NO DOUBT HON'BLE JURISDICTIONAL HIGH COURT HELD THAT GRANT O F A LOAN BY A BANK COULD NOT BE TERMED AS A TRADING TRANSACTION AND IT COULD NOT ALSO BE NOT CONSTRUED IN THE COURSE OF BUSINESS. BUT AS H ELD BY THE HON'BLE I.T.A. NO. 1076/MDS/10 8 APEX COURT IN THE CASE OF CIT V. SUN ENGINEERING WO RKS PVT. LTD. (1992) (198 ITR 297) (SC) OBSERVATIONS OF THE COURT HAS TO BE UNDERSTOOD ONLY IN THE LIGHT OF QUESTIONS BEFORE TH E COURT AND IT IS NOT PROPER TO PICK OUT A WORD OR A SENTENCE DIVORCED FR OM THE CONTEXT OF THE QUESTION POSED BEFORE THE COURT AND TREAT IT TO BE THE COMPLETE LAW DECLARED BY THE COURT. THE DICTUM EVOLVING OUT OF THE DECISION OF THE HON'BLE JURISDICTIONAL HIGH COURT WOULD CLEARLY BE APPLICABLE ONLY WHERE THAT THE LOAN TAKEN BY THE ASSESSEE WAS USED FOR THE PURPOSE OF INVESTMENT IN CAPITAL ASSETS AND ON ONE TIME SET TLEMENT CREDIT MADE TO THE CAPITAL RESERVE ACCOUNT AND NOT TO THE PROFIT AND LOSS ACCOUNT. IT WAS UNDER SUCH CIRCUMSTANCES IN OUR O PINION THEIR LORDSHIP CAME TO THE CONCLUSION THAT THE GRANT OF L OAN BY THE BANK TO THE ASSESSEE CANNOT BE TERMED AS TRADING TRANSACTIO N OR DONE IN THE COURSE OF BUSINESS OF THE ASSESSEE. NO DOUBT HERE ALSO THE ASSESSEE WAS NOT TRADING IN MONEY BUT NEVERTHELESS IF IT HAD USED THE SUMS RECEIVED FROM THE BANK FOR THE PURPOSE OF ITS WORKING CAPITAL REQUIREMENT THEN IT WOULD BE HAVING A VERY CLOSE N EXUS TO THE TRADING ACTIVITY. AS ALREADY MENTIONED BY US THE FACTS IN THIS REGARD ARE NOT CLEAR FROM THE ORDER OF THE A.O. OR FROM THE ORDER OF THE CIT(APPEALS). OF COURSE THE DECISION OF HON'BLE APEX COURT IN TH E CASE OF T.V. SUNDARAM IYENGAR & SONS (SUPRA) MAY NOT HAVE ANY AP PLICABILITY IF I.T.A. NO. 1076/MDS/10 9 THE LOANS WERE RAISED FOR THE PURPOSE OF FINANCING CAPITAL ASSETS BUT IN OUR OPINION IF IT WAS RAISED FOR FINANCING ITS TRADING ACTIVITY THEN THE SAID DECISION WOULD HAVE AN IMPLICATION AND A VERY CRUCIAL IMPLICATION. NO DOUBT LOANS AS GENERALLY UNDERST OOD WOULD NOT CONSTITUTE TRADING RECEIPT. BUT NEVERTHELESS IF THE AMOUNTS RECEIVED BY THE ASSESSEE AS LOAN WERE TOWARDS ITS WORKING CA PITAL REQUIREMENT IT WOULD TAKE A COMPLEXION FROM THE TR ADING ACTIVITY THAT IT PERFORMED. HENCE IN THE INTEREST OF JUSTICE W E ARE OF THE OPINION THAT THE MATTER REQUIRES A RE-LOOK BY ON THE BASIS OF VARIOUS DECISIONS OF THE COURTS RELIED ON BY BOTH THE PARTIES BEFORE US ESPECIALLY SO SINCE THE FACTS ARE NOT CLEAR WHICH WOULD HELP US T O GIVE A DEFINITE DECISION ON THE MATTER. HENCE WE SET ASIDE THE OR DERS OF THE AUTHORITIES BELOW AND REMIT THE MATTER BACK TO THE FILE OF THE A.O. FOR MAKING A FACTUAL VERIFICATION AS REGARDS NATURE OF LOAN WHICH WAS WAIVED BY THE BANK AND THEREAFTER APPLY THE LAW IN THIS REGARD AS ELUCIDATED BY THE HON'BLE JURISDICTIONAL HIGH COURT IN THE CASE OF M/S ISKRAEMECO REGENT LTD. (SUPRA). NEEDLESS TO SAY AS SESSEES COUNSEL WILL BE FREE TO PRODUCE ANY OTHER DECISION OF HIGHER AUTHORITIES IF AVAILABLE AT THE TIME OF HEARING AND DUE REGARD HAS TO BE GIVEN BY THE A.O. TO SUCH DECISION WHILE ADJUDICATI NG THE ISSUE. I.T.A. NO. 1076/MDS/10 10 8. IN THE RESULT THE APPEAL FILED BY THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. THE ORDER WAS PRONOUNCED IN THE COURT ON 25 TH FEBRUARY 2011. SD/- SD/- (U.B.S. BEDI) (ABRAHAM P. GEORGE) JUDICIAL MEMBER ACCOUNTANT MEMBER CHENNAI DATED THE 25 TH FEBRUARY 2011. KRI. COPY TO: (1) APPELLANT (2) RESPONDENT (3) CIT(A)-III CHENNAI (4) CIT CHENNAI-I CHENNAI (5) D.R. (6) GUARD FILE