Rollatainers Ltd. v. CIT - Taxpublishers.in

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The Tax Publishers2012 TaxPub(DT) 0235 (Del-HC) : (2012) 043 (I) ITCL 0461 : (2011) 339 ITR 0054 INCOME TAX ACT, 1961 --Business income--Profits chargeable to tax under section 41(1)Waiver of working capital loan (cash credit) by bank--The assessee was a public limited company, which was 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. During the relevant previous year, due to poor financial position and erosion of entire net worth, the assessee-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. 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 incomeÃ¢â‚¬. Therefore, in order to arrive at the correct taxable income, revised the original wrong claim by making a request before the AO 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 AO denied the aforesaid request of the assessee 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). On further appeal by the assessee, the Commissioner (Appeals) entertained the aforesaid revised claim preferred by the assessee 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 Rs. 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. The Tribunal has held that waiver of working capital loan utilized towards day-to-day business operations (and not for capital assets) resulted in manifest in the revenue field and hence, taxable in the year of waiver. *Held:* Tribunal has justified in holding that waiver of working capital loan (cash credit) was chargeable to tax under section 41(1) even if provision of section 28(iv) was not applicable. All the arguments advanced by the learned counsel were raised before this Court in Logitronics as well. Predicated on the same judgments on which Mr. Vohra has now relied upon. The judgment in Logitronics 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 one has taken in the aforesaid decision in Logitronics. One would, however, like to add that the Tribunal in the impugned judgment has discussed at length both the decision of this Court in CIT v. Phool Chand and CIT v. Tosha International Ltd. and held that they are not applicable in the instant case. In the case of Phool Chand 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 farfetched. The cloth was purchased from M/s N Banarsidass and the debt represented a trading debt. However, so far as M/s J. 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. [Paa 15Tosha International Ltd. 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 Rs. 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. [Para 16] In any case, even if section 28(iv) is not applicable, section 41(1) is held to be clearly applicable. [Para 18] SUBSCRIBE FOR FULL CONTENT

The Tax Publishers2012 TaxPub(DT) 0235 (Del-HC) : (2012) 043 (I) ITCL 0461 : (2011) 339 ITR 0054

INCOME TAX ACT, 1961

--Business income--Profits chargeable to tax under section 41(1)Waiver of working capital loan (cash credit) by bank--The assessee was a public limited company, which was 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. During the relevant previous year, due to poor financial position and erosion of entire net worth, the assessee-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. 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 incomeÃ¢â‚¬. Therefore, in order to arrive at the correct taxable income, revised the original wrong claim by making a request before the AO 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 AO denied the aforesaid request of the assessee 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). On further appeal by the assessee, the Commissioner (Appeals) entertained the aforesaid revised claim preferred by the assessee 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 Rs. 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. The Tribunal has held that waiver of working capital loan utilized towards day-to-day business operations (and not for capital assets) resulted in manifest in the revenue field and hence, taxable in the year of waiver. Held: Tribunal has justified in holding that waiver of working capital loan (cash credit) was chargeable to tax under section 41(1) even if provision of section 28(iv) was not applicable.

All the arguments advanced by the learned counsel were raised before this Court in Logitronics as well. Predicated on the same judgments on which Mr. Vohra has now relied upon. The judgment in Logitronics 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 one has taken in the aforesaid decision in Logitronics. One would, however, like to add that the Tribunal in the impugned judgment has discussed at length both the decision of this Court in CIT v. Phool Chand and CIT v. Tosha International Ltd. and held that they are not applicable in the instant case. In the case of Phool Chand 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 farfetched. The cloth was purchased from M/s N Banarsidass and the debt represented a trading debt. However, so far as M/s J. 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. [Paa 15Tosha International Ltd. 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 Rs. 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. [Para 16] In any case, even if section 28(iv) is not applicable, section 41(1) is held to be clearly applicable. [Para 18]