The Pr. Commissioner Of Income Tax-3,Mumbai v. M/S. Sicom Ltd

R.M. AMBERKAR(Private Secretary) IN THE HIGH COURT OF JUDICATURE AT BOMBAYO.O.C.J. INCOME TAX APPEAL NO. 1692 OF 2017 The Pr. Commissioner of Income Tax-3,Mumbai..Appellant Versus M/s. SICOM Ltd ..Respondent ................... Mr. Sham Walve a/w Mr. Pritesh Chatterjee for the Appellant Mr. Sham Walve a/w Mr. Pritesh Chatterjee for the Appellant Mr. Nishant Thakkar a/w Mr. Hiten Chande i/by PDS Legal for theRespondent Mr. Nishant Thakkar a/w Mr. Hiten Chande i/by PDS Legal for theRespondent ................... CORAM : UJJAL BHUYAN & MILIND N. JADHAV, JJ. DATE : JANUARY 21, 2020. P.C.: 1.Heard learned counsel for the parties. 2.This appeal under Section 260A of the Income Tax Act,1961 ("the Act" for short) has been preferred by therevenue against the order dated 6.12.2016 passed by theIncome Tax Appellate Tribunal, "E" Bench, Mumbai ("theTribunal"for short) in Income Tax Appeal No.1685/Mum/2009 for the assessment year 2003-04. 3.The appeal has been preferred on the followingquestions which are projected as substantial questions oflaw:- (A) Whether on the facts and circumstances of the case and inlaw, the Tribunal was justified in holding that the CIT(A) wascorrect in deleting Rs. 114.98 crores on account of remissionof loan by Govt. of Maharashtra relying upon the decision inthe case of M/s. Mahindra & Mahindra Ltd Vs. CIT 261 ITR501 whereas the fact of the present case is entirely ondifferent footing than the case of M/s. Mahindra & MahindraLtd?law, the Tribunal was justified in holding that the CIT(A) wascorrect in deleting Rs. 114.98 crores on account of remissionof loan by Govt. of Maharashtra relying upon the decision inthe case of M/s. Mahindra & Mahindra Ltd Vs. CIT 261 ITR501 whereas the fact of the present case is entirely ondifferent footing than the case of M/s. Mahindra & MahindraLtd? (B) Whether on the facts and circumstances of the case and inlaw, the Tribunal was justified in holding that CIT(A) wascorrect in deleting Rs. 114.98 crores on account of remissionof loan by Government of Maharashtra u/S. 41(1)/28(iv)without considering that the waiver of liability u/S. 41(1)/28(iv)is in character of stock-in-trade and certainly a trading liability?law, the Tribunal was justified in holding that CIT(A) wascorrect in deleting Rs. 114.98 crores on account of remissionof loan by Government of Maharashtra u/S. 41(1)/28(iv)without considering that the waiver of liability u/S. 41(1)/28(iv)is in character of stock-in-trade and certainly a trading liability? (C) Whether on the facts and circumstances of the case and inlaw, the Tribunal was justified in holding that CIT(A) wascorrect in deleting Rs. 114.98 crores on account of remissionof loan by Government of Maharashtra in view of the decisionof the Madras High Court in the case of CIT, Chennai Vs. M/s.Ramaniyam Homes Pvt Ltd in Tax Case (Appeal) No. 278 of2014 dated 22.4.2016 wherein it is held that the waiver ofprincipal of amount would constitute income falling u/S. 28(iv)of the Act , being the benefit arising for the business?law, the Tribunal was justified in holding that CIT(A) wascorrect in deleting Rs. 114.98 crores on account of remissionof loan by Government of Maharashtra in view of the decisionof the Madras High Court in the case of CIT, Chennai Vs. M/s.Ramaniyam Homes Pvt Ltd in Tax Case (Appeal) No. 278 of2014 dated 22.4.2016 wherein it is held that the waiver ofprincipal of amount would constitute income falling u/S. 28(iv)of the Act , being the benefit arising for the business? 4.In the assessment proceedings, Assessing OfÏcerconsidered the issue of waiver of loan by Government ofMaharashtra. The Assessing OfÏcer vide the assessmentorder dated 12.12.2005 held that an amount of Rs. 114.98crores covered by the loan given by the Government ofMaharashtra is taxable under Sections 28(iv) and 41(1) ofthe Act. Accordingly, the said amount was treated as incomeof the assessee for the year under consideration and addedback to the total income of the assessee. 5.This was challenged by the assessee before the firstappellate authority i.e Commissioner of Income Tax(Appeals)-XXXII, Mumbai. The first appellate authority byorder dated 25.9.2008 relied upon the Governmentresolution dated 30.9.2002 and took the view that only anamount of Rs. 46 crores remained interest bearing debt whilethe residual debt of Rs. 184 crore continued to be interestfree debt from the Government of Maharashtra. Followingthe decision of this Court in Mahindra & Mahindra Ltd Vs. Commissioner of Income Tax[1], the first appellateauthority accepted the contention of the assessee that the1[2003] 261 ITR 501 onus of establishing that the receipts were chargeable to taxwas on the Assessing OfÏcer and held that the aforesaiddecision in Mahindra and Mahindra Ltd (supra) squarelyapplies to the facts of the present case; the entire sum of Rs.114.98 crores represented principal amount payable to theGovernment of Maharashtra and no part thereof comprisedof waiver of any interest liability. Accordingly, the firstappellate authority held that the sum in question i.e Rs.114.98 crore was not chargeable to tax either under Section41(1) of the Act or under Section 28(iv) of the Act. 6.In further appeal before the Tribunal, Tribunal by itsimpugned order dated 6.12.2016 extensively referred to thedecision of the first appellate authority and confirmed thesame by taking the view that there was no reason tointerfere with the order of the first appellate authority.Relevant portion of the order passed by the Tribunal is asunder:- "12. We have gone through the orders of authorities below andfound that after considering various judicial pronouncementsincluding Bombay High Court and also considering the decisionrelied on by the AO, the CIT(A) has reached to the conclusion thatneither the provisions of Section 41(1) is applicable nor assessee’sfound that after considering various judicial pronouncementsincluding Bombay High Court and also considering the decisionrelied on by the AO, the CIT(A) has reached to the conclusion thatneither the provisions of Section 41(1) is applicable nor assessee’s income was liable to tax u/s.28(iv) of the IT Act. The CIT(A) has alsocalled remand report and after considering the same and applyingvarious proposition of the law, reached to the conclusion thatremission of loan would not be chargeable to tax either u/s.41(1) oru/s.28(iv) of the IT Act. The detailed finding so recorded by CIT(A)has not been controverted by DR by bringing any positive material onrecord. Accordingly, we do not find any reason to interfere in theorder of the CIT(A) deleting the addition made on account ofremission of loan." 7.Submissions made by learned counsel for the partieshave been considered. 8.The first appellate authority had followed the decisionof this Court in Mahindra & Mahindra Ltd (supra) in deletingthe addition made by the Assessing OfÏcer on account ofremission of loan. The decision of this Court in Mahindra andMahindra (supra) was contested by the revenue before theSupreme Court in Commissioner Vs. Mahindra And Mahindra Ltd[2]. The issue before the Supreme Court waswhether waiver of loan by the creditor is taxable asperquisite under Section 28(iv) of the Act or taxable asremission of liability under Section 41(1) of the Act.Supreme Court held as under:- "10. The term “loan” generally refers to borrowing something, 2[2018] 404 ITR 1 7.Submissions made by learned counsel for the partieshave been considered. 8.The first appellate authority had followed the decisionof this Court in Mahindra & Mahindra Ltd (supra) in deletingthe addition made by the Assessing OfÏcer on account ofremission of loan. The decision of this Court in Mahindra andMahindra (supra) was contested by the revenue before theSupreme Court in Commissioner Vs. Mahindra And Mahindra Ltd[2]. The issue before the Supreme Court waswhether waiver of loan by the creditor is taxable asperquisite under Section 28(iv) of the Act or taxable asremission of liability under Section 41(1) of the Act.Supreme Court held as under:- "10. The term “loan” generally refers to borrowing something, 2[2018] 404 ITR 1 especially a sum of cash that is to be paid back along with theinterest decided mutually by the parties. In other terms, the debtor isunder a liability to pay back the principal amount along with theagreed rate of interest within a stipulated time. 11.It is a well-settled principle that creditor or his successor mayexercise their “Right of Waiver” unilaterally to absolve the debtorfrom his liability to repay. After such exercise, the debtor is deemedto be absolved from the liability of repayment of loan subject to theconditions of waiver. The waiver may be a partly waiver i.e., waiverof part of the principal or interest repayable, or a complete waiver ofboth the loan as well as interest amounts. Hence, waiver of loan bythe creditor results in the debtor having extra cash in his hand. It isreceipt in the hands of the debtor/assessee. The short but cogentissue in the instant case arises whether waiver of loan by the creditoris taxable as a perquisite under Section 28(iv) of the IT Act or taxableas a remission of liability under Section 41(1) of the IT Act. 12.The first issue is the applicability of Section 28(iv) of the IT Actin the present case. Before moving further, we deem it apposite toreproduce the relevant provision herein below:- “28. Profits and gains of business or profession.—Thefollowing income shall be chargeable to income-tax under thehead “Profits and gains of business profession”- (iv) the value of any benefit or perquisite, whether convertibleinto money or not, arising from business or the exercise of aprofession; 13. On a plain reading of Section 28(iv) of the IT Act, prima facie,it appears that for the applicability of the said provision, the incomewhich can be taxed shall arise from the business or profession. Also,in order to invoke the provision of Section 28(iv) of the IT Act, the benefit which is received has to be in some other form rather than inthe shape of money. In the present case, it is a matter of record thatthe amount of Rs. 57,74,064/- is having received as cash receipt dueto the waiver of loan. Therefore, the very first condition of Section28(iv) of the IT Act which says any benefit or perquisite arising fromthe business shall be in the form of benefit or perquisite other than inthe shape of money, is not satisfied in the present case. Hence, inour view, in no circumstances, it can be said that the amount of Rs57,74,064/- can be taxed under the provisions of Section 28(iv) of theIT Act. 14.Another important issue which arises is the applicability of theSection 41(1) of the IT Act. The said provision is re-produced asunder: “41. Profits chargeable to tax.- (1) Where an allowance ordeduction has been made in the assessment for any year inrespect of loss, expenditure or trading liability incurred by theassessee (hereinafter referred to as the first-mentionedperson) and subsequently during any previous year,- 14.Another important issue which arises is the applicability of theSection 41(1) of the IT Act. The said provision is re-produced asunder: “41. Profits chargeable to tax.- (1) Where an allowance ordeduction has been made in the assessment for any year inrespect of loss, expenditure or trading liability incurred by theassessee (hereinafter referred to as the first-mentionedperson) and subsequently during any previous year,- (a) the first-mentioned person has obtained, whether in cashor in any other manner whatsoever, any amount in respect ofsuch loss or expenditure or some benefit in respect of suchtrading liability by way of remission or cessation thereof, theamount obtained by such person or the value of benefitaccruing to him shall be deemed to be profits and gains ofbusiness or profession and accordingly chargeable to income-tax as the income of that previous year, whether the businessor profession in respect of which the allowance or deductionhas been made is in existence in that year or not; or " 15. On a perusal of the said provision, it is evident that it is a sinequa non that there should be an allowance or deduction claimed by the assessee in any assessment for any year in respect of loss,expenditure or trading liability incurred by the assessee. Then,subsequently, during any previous year, if the creditor remits orwaives any such liability, then the assessee is liable to pay tax underSection 41 of the IT Act. The objective behind this Section is simple.It is made to ensure that the assessee does not get away with adouble benefit once by way of deduction and another by not beingtaxed on the benefit received by him in the later year with referenceto deduction allowed earlier in case of remission of such liability. It isundisputed fact that the Respondent had been paying interest at 6 %per annum to the KJC as per the contract but the assessee neverclaimed deduction for payment of interest under Section 36(1)(iii) ofthe IT Act. In the case at hand, learned CIT (A) relied upon Section41(1) of the IT Act and held that the Respondent had receivedamortization benefit. Amortization is an accounting term that refers tothe process of allocating the cost of an asset over a period of time,hence, it is nothing else than depreciation. Depreciation is areduction in the value of an asset over time, in particular, to wear andtear. Therefore, the deduction claimed by the Respondent inprevious assessment years was due to the deprecation of themachine and not on the interest paid by it. 16. Moreover, the purchase effected from the Kaiser JeepCorporation is in respect of plant, machinery and tooling equipmentswhich are capital assets of the Respondent. It is important to notethat the said purchase amount had not been debited to the tradingaccount or to the profit or loss account in any of the assessmentyears. Here, we deem it proper to mention that there is differencebetween ‘trading liability’ and ‘other liability’. Section 41(1) of the ITAct particularly deals with the remission of trading liability. Whereasin the instant case, waiver of loan amounts to cessation of liabilityother than trading liability. Hence, we find no force in the argument ofthe Revenue that the case of the Respondent would fall under Section 41(1) of the IT Act." 8.1. Finally the Supreme Court summed up the decision inthe following manner :- "17.To sum up, we are not inclined to interfere with the judgmentand order passed by the High court in view of the following reasons: (a) Section 28(iv) of the IT Act does not apply on the presentcase since the receipts of Rs 57,74,064/- are in the nature ofcash or money. (b)Section 41(1) of the IT Act does not apply since waiverof loan does not amount to cessation of trading liability. It is amatter of record that the Respondent has not claimed anydeduction under Section 36(1)(iii) of the IT Act qua thepayment of interest in any previous year. Section 41(1) of the IT Act." 8.1. Finally the Supreme Court summed up the decision inthe following manner :- "17.To sum up, we are not inclined to interfere with the judgmentand order passed by the High court in view of the following reasons: (a) Section 28(iv) of the IT Act does not apply on the presentcase since the receipts of Rs 57,74,064/- are in the nature ofcash or money. (b)Section 41(1) of the IT Act does not apply since waiverof loan does not amount to cessation of trading liability. It is amatter of record that the Respondent has not claimed anydeduction under Section 36(1)(iii) of the IT Act qua thepayment of interest in any previous year. 18.In view of above discussion, we are of the considered viewthat these appeals are devoid of merits and deserve to be dismissed.Accordingly, the appeals are dismissed. All the other connectedappeals are disposed off accordingly, leaving parties to bear theirown cost." 9.On careful examination of the matter, we are of theconsidered opinion that the decision of the Supreme Court asextracted above, is squarely applicable to the facts of thepresent case. 10. Consequently, we do not find any merit in the appeal towarrant admission. Appeal is accordingly dismissed butwithout any order as to cost. [ MILIND N. JADHAV, J. ] [ UJJAL BHUYAN, J. ] Digitallysigned byRavindraRavindra M.AmberkarM.Date:Amberkar2020.01.2711:49:10+0530