Rollatainers Ltd. vs Commissioner Of Income Tax
2011 Latest Caselaw 4211 Del

*                IN THE HIGH COURT OF DELHI AT NEW DELHI

+                                 ITA 127 OF 2011

%                                Judgment reserved on: 29.7.2011
                                 Judgment Delivered On: 30.8.2011

ROLLATAINERS LTD.                                . . . APPELLANT
                            Through: Mr. Ajay Vohra, Advocate with Ms.
                                     Kavita Jha and Mr. Somnath Shukla,
                                     Advocates.
                                 VERSUS

COMMISSIONER OF INCOME TAX              . ..RESPONDENT
                  Through: Mr. Abhishek Maratha, Sr. Standing
                           Counsel.

CORAM :-

        HON‟BLE MR. JUSTICE A.K. SIKRI
        HON‟BLE MR. JUSTICE M.L. MEHTA
        1.       Whether Reporters of Local newspapers may be allowed to see
                 the Judgment?
        2.       To be referred to the Reporter or not?
        3.       Whether the Judgment should be reported in the Digest?

A.K. SIKRI, J.

1. This appeal was admitted on 8th July, 2011 on the following

substantial question of law:-

"Whether on the facts and circumstances of the case, the Tribunal erred in law in holding that ` 2,05,42,468/- being the principal amount of working capital loans granted in the form of cash credit limits by the bank and subsequently waived off, constitutes taxable income of the appellant?"

The appellant is a public limited company, which is engaged in the

business of, inter alia, manufacturing of Lined and Flexible

Cartons/packing material, automatic packing machines, weighing

machines, trading of machines, spares and leasing of machines.

2. During the relevant previous year, due to poor financial position and

erosion of entire net worth, the appellant company approached Board of

Industrial Financial Reconstruction (BIFR) for being declared as a sick

company in terms of provisions of the Sick Industrial Companies (Special

Provisions) Act, 1985 (SICA). In pursuance thereof, the appellant

company was declared sick by BIFR under the said Act. Due to adverse

financial position, the company also approached the Corporate Debt

Restructuring Cell (CDR Cell) for settlement of outstanding dues of various

financial Institutions/Banks. The CDR Cell approved the reworked

Restructuring Package, pursuant to which different financial institutions

and Banks waived off the part of their respective out standings,

comprising of principal and interest dues.

3. According to the appellant, during the course of assessment

proceedings, the appellant realized that it had wrongly credited the total

waiver received from banks/financial institutions, to the profit and loss

account, under the head „miscellaneous income‟. Therefore, in order to

arrive at the correct taxable income, revised the original wrong claim by

making a request before the assessing officer for revision of the

computation of income originally filed, by reduction of principal amount of

loans (term loans as well as working capital loans) waived by the banks

from the taxable income. The assessing officer denied the aforesaid

request of the appellant on the ground that revision of claim made in the

original return of income could not be entertained otherwise than by way

of revised return, which was required to be filed within the time limit

prescribed under Section 139 (5) of the Act.

4. On further appeal by the assessee, the CIT (A) entertained the

aforesaid revised claim preferred by the appellant and decided the issue

on merits, inter alia, holding that the principal amount of loans waived by

the banks, including waiver of principal amount of ` 2,05,42,468 against

working capital loans in the form of cash credit limits, did not constitute

taxable income. On further appeal filed by the Revenue before the

Tribunal, the Tribunal partly allowed the appeal filed by the Revenue.

5. The Tribunal has held that waiver of working capital loan utilized

towards day to day business operation (and not for capital assets)

resulted in manifest in the revenue field and hence taxable in the year of

waiver. On arriving at this view, the Tribunal referred to and relied upon

the decision of the Bombay High Court in the case of Solid Containers Ltd.

Vs. Deputy CIT and Another (2009) 308 ITR 417 (Bom.). The Madhya

Pradesh High Court in the case of Aries Advertising Pvt. Ltd. (2002) 255

ITR 510. The Tribunal first found as a fact that insofar as term loans are

concerned, these were taken for the purchase of capital assets from time

to time. In respect of these term loans, the Tribunal concluded that these

monies did not come in the possession of the assessee on account of any

trading transaction; the receipt were capital in nature, being loan

payable over a period of time alongwith interest. Therefore, on writing off

the loans, any benefit or perquisites arises to the assessee in the revenue

field. Thus waiver of these loans is not treated as income of the assessee.

However, the Tribunal has taken different view in the case of loan written

off in cash credit account.

6. Thus, on writing off the said loans/part loans, benefit had arisen to

the assessee. As per the Tribunal, when the money/loan was received in

the course of carrying on business even if it was treated as loan at the

time of receipt which was of capital nature on the waiver had become

assessee‟s own money which was even taken to profit and loss account.

This benefit was in the revenue field as the money had been borrowed for

day to day affairs and not for the purchase of machinery. Thus, the loans

were for the circulating capital and not the fixed capital.

7. In this appeal filed by the assessee, we are concerned with the

waiver of the loan in respect of cash credit which is stated income in

revenue field by the Tribunal and the appeal has been admitted on this

question of law. Mr. Vohra, learned counsel appearing for the

appellant/assessee fairly stated that the issue is answered against the

assessee by a decision dated 18th February, 2011 of this Court in the case

of Logitronics Pvt. Ltd. Vs. Commissioner of Income Tax & Anr. (ITA

1623/2010). He, however, made a benevolent plea that the said decision

required reconsideration as it was in conflict with the earlier decision

rendered by this Court.

8. Before we consider the submissions of Mr. Vohra on this aspect, it

would be apposite to discuss the judgment of this Court in Logitronics

(supra). That was also a case where certain amount of loan and interest

was waived by the financial institution as it had become Non Performing

Asset (NPA) for the bank in view of the guidelines of the Reserve Bank

of India. On waiver the principal amount written off was directly taken to

balance sheet under the head capital reserve, was not offered for

taxation. The Assessing Officer treated the said waiver of principal

amount of loan as „income‟ within the meaning of Section 2 (24) of the

Income-Tax Act, exigible to tax. The CIT (A) deleted the addition holding

that it was not an income and provisions of Section 28 (iv) as well as

Section 41 (1) of the Act were not applicable. The Tribunal, however,

reversed the decision of the CIT (A) giving inter alia following reasons:-

"(a) Since the Tribunal in the case of Tosha International Ltd. (supra) proceeded to decide the issue on the premise that loan was utilized to acquire capital assets, decision of the Tribunal as upheld by this Court would apply to the cases where the loan obtained is utilized for acquiring capital assets.

(b) In the case of Mahindra & Mahindra Ltd. Vs. Commissioner of Income Tax [261 ITR 501(Bom.)], loan was to purchase plant and machinery - dies, tools, etc., i.e., capital assets. It was on these facts that waiver of principal amount of loan was held to be neither covered by Section 28(iv) nor Section 41 (1) of the Act.

(c) In the case of Tosha International Ltd. (supra), neither the Tribunal nor this Court considered the issue from the stand point of principal laid down by the Supreme Court in the case of Commissioner of Income Tax Vs. T.V. Sundaram Iyengar and Sons Ltd. [(1966) 222 ITR 344.

(d) In Solid Containers Ltd. Vs. Deputy Commissioner of Income Tax [(2009) 308 ITR 417], the Bombay High Court applying the decision in T.V. Sundaram Iyengar and Sons Ltd. (supra) distinguished its decision in Mahindra & Mahindra Ltd. (supra) and has held that on waiver of loan taken for business purposes, the amount is retained in the business and as such, the amount that initially did not have the character of income becomes income liable to tax.

(e) Decisions rendered in Commissioner of Income Tax Vs. P. Ganesh Chettiar [(1982) 133 ITR 103 (Mad.) and

Commissioner of Income Tax Vs. Phool Chand Jiwan Ram [(1981) 131 ITR 37 (Del.) were of no assistance to the appellant because the same were rendered prior to judgment of the Supreme Court in T.V. Sundaram Iyengar and Sons Ltd. (supra).

9. Against the orders of the Tribunal, appeal was preferred by the said

assessee and this Court vide orders dated 18th February, 2011 affirmed

the order of the Tribunal.

10. The Court first discussed the scheme of the Act on this aspect and

observed that Under Section 4 of the Act, the charging Section, the

charge of income tax is upon the "total income of the previous year". The

term „income‟ is defined under Section 2(24) of the Act. In general, all

receipts of revenue nature, unless specifically exempted are chargeable

to tax. Loan taken is not normally a kind of receipt which will be treated

as income. However, when a part of that loan is waived by the creditor,

some benefit accrues to the assessee. Question is what would be the

character of waiver of part of loan at the hands of the assessee? Waiver

definitely gives some benefit to the assessee. Whether it is to be treated

as capital receipt? If it is so, then only capital gain tax would be

chargeable under Section 45 of the Act. Or else, whether remission of

loan is no income at all?

11. In this context, Section 41(1) read with Section 59 of the Act would

become relevant and these provisions have been brought within the

sweep of taxation even the remission of debt/liability as income of the

order in remission or such waiver amounts to provide or gains of business

or provision liable to be taxed under Section 28 of the Act. The Court

thereafter took into consideration various decision in extenso discussing

the ration of those judgments and summarized the principle laid down in

those judgments in the following manner:-

"In the context of waiver of loan amount, what follows from the reading of the aforesaid judgment is that the answer would depend upon the purpose for which the said loan was taken. If the loan was taken for acquiring the capital asset, waiver thereof would not amount to any income exigible to tax. On the other hand, if this loan was for trading purpose and was treated as such from the very beginning in the books of account, as per Sundaram Iyengar (T.V.) and Songs Ltd. (supra), the waiver thereof may result in the income moreso when it was transferred to Profit and Loss account."

12. The Submissions of Mr. Vohra was that the aforesaid extracted

passage did not state the correct principle of law. According to him, it is

settled law that all receipts are not income. Receipt of loan is a

transaction on capital account i.e. the receipt of sum of money by way of

loan which is repayable does not amount to income. Therefore, waiver of

loan would be of capital account with no indicia of income. He further

submitted that Section 41 (1) of the Act was not applicable as following

conditions need to be satisfied before this section is invoked:-

(i) An allowance or deduction has been claimed in any earlier assessment year(s) with respect to a trading liability;

(ii) Benefit by way of remission or cessation is obtained in respect of such trading liability in succeeding year (s).

13. According to him in case of waiver of principal amount of loan, no

income accrues as the transaction is of capital account and does not

constitute income. He referred to the judgment of this Court in CIT Vs.

Phool Chand, 131 ITR 37 and CIT Vs. Tosha International Ltd. 176 Taxman

187 (del.) in support of this proposition.

14. His further submission was that Section 28 (iv) of the Act was

equally not applicable. According to him, in terms of the aforesaid

section, the value of any benefit or perquisite arising from business,

whether convertible into money or not, is taxable under the head "profits

and gains of business or profession" The said section does not

contemplates bringing to tax benefits in cash or money. The waiver of

principal amount of loan, being benefit received in cash would, at the

threshold do not constitute income under Section 28 (iv) of the Act and

for that reason, it was not necessary to go into the purpose for which the

loan was utilized. Further, in order that Section 28 (iv) of the Act is

attracted, the benefit must be arising from business and not in the course

of business. The said section is intended to bring to tax the benefit in the

kind of „arising from business‟ and not any and every benefit which arises

in the course of carrying on business. The appellant is engaged in the

business of manufacturing and trading of packing materials. The

appellant cannot be said to be in the business of borrowing money. The

moneys borrowed constitute source of funds from which the business of

the appellant is carried on. The waiver of loan outstanding did not arise

from the business of the appellant. Consequently, since the business

carried on by the appellant was not the source of alleged benefit, Section

28(iv) of the Act has no application. He also argues that the judgment of

Supreme Court in CIT Vs. T.V. Sundaram Iyengar and Sons Ltd. 222 ITR

344 was not applicable. Likewise, the decision of Bombay High Court in

Solid Containers (supra) had no application.

15. All the arguments advanced by the learned counsel were raised

before this Court in Logitronics (supra) as well. Predicated on the same

judgments on which Mr. Vohra has now relied upon. The judgment in

Logitronics (supra) is rendered by this very Bench. Therefore, it is not

necessary to repeat the discussion all over again. Suffice to state that

after considering the aforesaid submissions of Mr. Vohra, we are unable to

agree with the same and find no reason to deviate the view we have

taken in the aforesaid decision in Logitronics (supra). We would, however,

like to add that the Tribunal in the impugned judgment has discussed at

length both the decision of this Court in CIT Vs. Phool Chand and CIT Vs.

Tosha International Ltd (supra) and held that they are not applicable in

the instant case. In the case of Phool Chand (supra) the relevant facts

are that the assessee had purchased goods in an earlier year from M/s

Narsinghdass Banarsidass, the payment in respect of which was made by

M/s Janaki Dass Banarasi Dass. The amount was subsequently waived.

The case of the revenue was that the amount so paid should be taken

towards purchase of cloth and, therefore, it represents a trading liability.

This Court came to the conclusion that this conclusion was rather far-

fetched. The cloth was purchased from M/s Narsinghdass Banarsidass

and the debt represented a trading debt. However, so far as M/s Janaki

Dass Banarsi Dass is concerned, the payment made by it was not for the

purpose of purchase of stock-in-trade. Therefore, it was held that the

liability was not a trading liability and the amount waived could not be

brought to tax in the hands of the assessee.

16. Thus, the entire judgment rested on the premise that the liability in

question was not a trading liability. Coming to the case of Tosha

International Ltd. (supra) the facts are that the assessee was engaged in

manufacturing of black and white picture tubes. It ran into huge losses

and ultimately became a sick company and was so registered with the

BIFR. Under one time settlement Scheme, the banks and financial

institutions required the assessee to pay 60% of the amount towards the

principal and waived the entire interest amount. The question before the

Court was whether waiver of the principal amount of amount ` 10.48

crore, credited to the capital reserve account, constituted income? The

Court came to the conclusion that the amount is not covered by the

provision contained in Section 41(1). It was also mentioned that the

principles enunciated in the case of Mahindra and Mahindra Ltd. are fully

applicable. Again, it was a case where the loan was on capital account

and not for trading purposes. Even in the instant case, as far as term

loans are concerned, waiver thereof by the financial institutions has not

been treated as income at the hands of the assessee. It is only the

writing off loans on cash credit account which was received for carrying

out the day to day operations of the assessee which is treated as

"income" in the hands of the assessee. The judgment of the Bombay

High Court in „Solid Containers‟ and that of Madras High Court in „Aries

Advertisement‟ are directly on this issue. The Tribunal has rightly applied

the said judgments wherein the view taken is the same as taken by this

Court in Logitronics.

17. Insofar as the decision in Jindal Equipment Leasing & Consultancy

Services Ltd. is concerned, that was a case where the assessee was an

investment company registered with the Reserve Bank of India as a Non

Banking Financial Company (NBFC). In the return for the assessment year

2003-04, it had shown a loan of ` 6,80,31,189 payable to M/s Jindal Steel

& Power Ltd. (JSPL). It is the JSPL which had return of a sum of `

1,46,53,065 in its books of account. On that premise, the Assessing

Officer had treated the same as income of the assessee on the ground

that the creditor had written of the said amount and, therefore, it was no

more the liability of the assessee and to this extent it was the assessee‟s

gain and added the same under Section 41 (1) of the Act. The plea of

the assessee in that case was that JSPL had done it unilaterally and

without the knowledge of the assessee. The CIT (A) confirmed the

addition made by the Assessing Officer in term of Section 41 (1) read

with Section 28(i) of the Act. The ITAT deleted the addition holding that

Section 41(1) of the Act had no application. In the appeal preferred by

the Revenue, it did not press the applicability of Section 41(1) of the Act

or Section 28 (i) of the of the Act but took a totally different stand namely

the said waiver was to be treated as income under Section 28 (iv) of the

Act. No doubt, this Court held that the amount written of in the books of

accounts by JSPL was in the nature of value of any benefit or perquisites,

whether convertible into money or not and, therefore, could not be

treated „profits and gains from business‟. However, no other aspects

were looked into or discussed. The nature of loan taken by the said

assessee, which was waived by the JSPL, namely whether it was on capital

account or in the trading field was not the aspect looked into. In fact,

neither there was any material on this aspect nor it was argued. This

Court had relied upon the judgment of Bombay High Court in Mahindra

and Mahindra 261 ITR 501. When we go through the said judgment of the

Bombay High Court, it becomes clear that in that case, the loan

arrangement in its entirety was not obliterated and more importantly the

purchase consideration related to capital asset.

18. In any case, even if we hold that Section 28(iv) of the Act is not

applicable, Section 41 (i) of the Act is clearly applicable.

19. We, therefore, answer the question in the negative i.e. against the

assessee and dismiss this appeal.

(A.K. SIKRI) JUDGE

(M.L. MEHTA) JUDGE AUGUST 30, 2011 skb