[2020]

117 taxmann.com 236 (Visakhapatnam -

Trib.)/[2020] 183 ITD 586 (Visakhapatnam - Trib.)[05-06-
2020]

Income Tax : Where in terms of one time settlement,

creditor bank waived off principal amount of loan
payable by assessee, said amount could not be
brought to tax under section 41(1) because assessee
never claimed same as deductible expenditure in
earlier assessment years

■■■

[2020] 117 taxmann.com 236 (Visakhapatnam - Trib.)

IN THE ITAT VISAKHAPATNAM BENCH
Income Tax Officer
v.
Sri Vasavi Polymers (P.) Ltd.*
V. DURGA RAO, JUDICIAL MEMBER
AND D.S. SUNDER SINGH, ACCOUNTANT MEMBER
IT APPEAL NO. 606 (VIZ.) OF 2018
[ASSESSMENT YEAR 2013-14]
JUNE 5, 2020

Section 41(1) of the Income-tax Act, 1961 - Remission or

cessation of trading liability (Loan) - Assessment year
2013-14 - During relevant year, assessee received certain
benefit as a result of one time settlement of loan with
creditor bank - In course of assessment, Assessing Officer
brought principal amount of loan waived off to tax under
section 41(1) - Commissioner (Appeals) deleted said
addition - Whether an amount can be brought to tax under
section 41(1) when benefit received by assessee relating to
such expenditure has been claimed and allowed in earlier
years - Held, yes - Whether, since, in instant case, assessee
never claimed principal amount of loan as deductible
expenditure in earlier assessment years, benefit received in
respect of same could not be brought to tax under section
41(1) - Held, yes [Para 7] [In favour of assessee]
CASES REFERRED TO

SHRM Food & Allied Services (P.) Ltd. v. ITO [IT Appeal No. 657
(Mum.) of 2009] (para 3), ITO v. Tini Pharma Ltd. [IT Appeal No.
669 (Hyd.) of 2016, dated 23-5-2018] (para 3), CIT v. Mahindra &
Mahindra Ltd. [2018] 93 taxmann.com 32/255 Taxman 305/404
ITR 1 (SC) (para 3), Solid Containers Ltd. v. Dy. CIT [2009] 178
Taxman 192 (Bom.) (para 5), Rollatainers Ltd. v. CIT [2011] 15
taxmann.com 111/203 Taxman 31 (Mag.)/339 ITR 54 (Delhi) (para
5) and CIT v. Ramaniyam Homes (P.) Ltd. [2016] 68 taxmann.com
289/239 Taxman 486/384 ITR 530 (Mad.) (para 5).
S. Ravi Shankar Narayan for the Appellant. Y.A. Rao for the
Respondent.
ORDER

D.S. Sunder Singh, Accountant Member - This appeal is filed
by the revenue against the order of the Commissioner of Income-
tax (Appeals) [CIT(A)]-9, Hyderabad in ITA No.10300/CIT(A)-9,
Hyd/2017-18, dated 09.08.2018 for the Assessment Year (A.Y.)
2013-14. With the delay of 1 day. The department has filed
condonation petition and submitted that the delay was due to the
administrative reasons beyond the control of the department,
hence requested to condone the delay and admit the appeal.
After hearing both the parties, we condone the delay and admit
the appeal.
2. All the grounds of appeal are related to the addition made by
the Assessing Officer (AO) for a sum of Rs.1,70,00,000/- u/s 41(1)
of the Income-tax Act, 1961 (in short 'Act') which was deleted by
the Ld.CIT(A). During the course of assessment proceedings, the
AO found that the assessee had received the benefit of
Rs.1,70,00,000/- as a result of one time settlement of loan by the
Indian Overseas Bank. The assessee was due to Indian Overseas
Bank, Visakhapatnam in respect of term loan & OCC for a sum of
Rs. 4.3 crores which included the interest subsidy as well as the
working capital loan. The interest of Rs.43,81,572/- was added
back to income and taxed u/s 43B of the Act. However, the sum of
Rs.1.7 crores which represent the waiver of working capital loan
was added as income u/s 41(1) of the Act in the assessment order
made u/s 143(3) of the Act.
3. Against the order u/s 143(3), the assessee went on appeal
before the CIT(A) and the Ld.CIT(A) deleted the addition
following the order of Hon'ble ITAT Mumbai in the case of SHRM
Food & Allied Services (P.) Ltd. v. ITO I.T.A.Nos.657/Mum/2009,
595/Mum/2008 & 1116/Mum/2013 and ITAT Hyderabad in the
case of ITO v. Tini Pharma Ltd. [IT Appeal No. 669 (Hyd.) of 2016,
dated 23-5-2018] and also the decision of Hon'ble Apex Court in
the case of CIT v. Mahindra & Mahindra Ltd. [2018] 93
taxmann.com 32/255 Taxman 305/404 ITR 1.
4. Against which the department has filed appeal before this
Tribunal. The department has raised following grounds in this
appeal:

1. The Ld. CIT(A) erred on both facts and law in deleting

the addition made by the AO of Rs. 1.70 crores on
account of benefit of waiver of OCC loan amount
received by the assessee during the year.
2. The Ld. CIT(A) ought to have appreciated that the OCC
facility was availed by assessee for working capital
requirements and waiver of any such OCC loan amount
either partly or fully is a revenue receipt u/s. 28(i) of the
I.T. Act, in view of the decision of the Apex Court in the
case of CIT v. T.V. Sundaramlyengar and Sons Ltd. (222
ITR 344).
3. The Ld. CIT(A) ought to have further considered that the
assessee itself carried the loan amount waived of Rs.
1.70 crore to any 'other reserve' instead of capital
reserve under the head 'reserves and surplus' in the
balance sheet as on 31.03.2013 and therefore such
benefit is liable to be assessed as income u/s. 28(i) of the
I.T. Act.

4. The Ld. CIT(A) ought to have also appreciated that the

OCC loan facility, a part of which was waived during the
 year, was not taken directly or indirectly for the purpose
of acquisition of any capital asset though the assessee
claimed that the part of the OCC loan was utilized
indirectly for repayment of old term loans availed by the
assessee from SBI.
5. The appellant craves leave to add or delete or substitute
or amend any ground of appeal before and/or at the time
of hearing of the appeal.
5. During the appeal hearing, the Ld.DR submitted that the
amount of Rs.1,70,00,000/- represent waiver of working capital
loan which was used for day-to-day running of the business,
therefore, submitted that the same required to be brought to tax
u/s 28(i) of the Act. The Ld.DR relied on the following decisions :

(a) Hon'ble High Court of Bombay in the case of Solid

Containers Ltd. v. Dy. CIT [2009] 178 Taxman 192.
(b) Hon'ble High Court of Delhi in the case of Rollatainers
Ltd. v. CIT [2011] 15 taxmann.com 111/203 Taxman 31
(Mag.)/339 ITR 54.
(c) Hon'ble High Court of Madras in the case of CIT v.
Ramaniyam Homes (P.) Ltd. [2016] 68 taxmann.com
289/239 Taxman 486/384 ITR 530.
6. On the other hand, the Ld.AR submitted that the AO made
addition u/s 41(1) of the Act, but not under section 28(i) of the
Act. The amount waived by the bank was relating to working
capital loan which is not covered u/s 41(1) of the Act. The AO
disallowed the interest debited to Profit and Loss account in the
year, therefore, there is no trading liability claimed by the
assessee representing the working capital in the earlier years,
hence, argued that there is no case for taxing the waiver of
working capital u/s 41(1) of the Act, therefore, argued that the
Ld.CIT(A) has rightly deleted the addition and no interference is
called for. The Ld. AR further argued that the AO's case is the
addition u/s 41(1) of the Act, but not the case of section 28(i)/(iv)
of the Act, hence, submitted that the department's grounds and
arguments with regard to taxing the waiver under section
28(i)/(vi) are not relevant to the addition made and the same
should not be considered since, neither the AO nor the Ld. CIT(A)
considered the issue u/s 28(i) of the Act. The Ld.AR relied on the
decisions relied upon by the Ld. CIT(A).
7. We have heard both the parties and perused the material
placed on record. The AO made the addition u/s 41(1) of the Act,
but not u/s 28 of the Act. As per section 41(1) of the Act, trading
liability or expenditure or the loan which was already claimed as
incurred by the assessee and subsequently during any previous
year received the benefit in respect of such trading liability by
way of remission or cessation of liability is deemed to be profits
and gains of the business or profession and accordingly
chargeable to tax as the income of the previous year. From
section 41(1), it is observed that there must be trading liability or
expenditure or loss which was incurred by the assessee in the
earlier years and allowed the same as deduction to tax the same
u/s 41(1). The twin conditions required to be satisfied for taxing
the benefit received by the assessee. i.e., the expenditure should
be Revenue expenditure or the loss incurred and the same ought
to have been allowed as deduction. The benefit received by the
assessee should be relating to such expenditure which was
claimed and allowed in the earlier years. In the instant case, the
trading liability or the expenditure or deduction was claimed by
the assessee in respect of interest paid on the OCC loan. In
respect of principal amount, though the assessee has gained the
benefit by way of one time settlement the same cannot be
brought to tax u/s 41(1) because the OCC loan represents the
principal which was never claimed as expenditure. The AO also
did not make out a case that the principal amount was debited to
the Profit & Loss account in the earlier years. Therefore there is
no case for making addition u/s 41(1) in respect of the principal
amount. The Hon'ble Supreme Court in the case of CIT v.
Mahindra & Mahindra Ltd. (supra) considered the similar issue
and held as under :
"15. On a perusal of the said provision, it is evident that it is a
sine qua 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 or waives any such liability, then the
assessee is liable to pay tax under section 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 a double
benefit once by way of deduction and another by not being
taxed on the benefit received by him in the later year with
reference to deduction allowed earlier in case of remission of
such liability. It is undisputed fact that the Respondent had
been paying interest at 6% per annum to the KJC as per the
contract but the assessee never claimed deduction for
payment of interest under section 36(1)(iii) of the IT Act. In
the case at hand, learned CIT(A) relied upon section 41(1) of
the IT Act and held that the Respondent had received
amortization benefit. Amortization is an accounting term that
refers to the process of allocating the cost of an asset over a
period of time, hence, it is nothing else than depreciation.
Depreciation is a reduction in the value of an asset over time,
in particular, to wear and tear. Therefore, the deduction
claimed by the Respondent in previous assessment years was
due to the deprecation of the machine and not on the interest
paid by it.
16. Moreover, the purchase effected from the Kaiser Jeep
Corporation is in respect of plant, machinery and tooling
equipments which are capital assets of the Respondent. It is
important to note that the said purchase amount had not
been debited to the trading account or to the profit or loss
account in any of the assessment years. Here, we deem it
proper to mention that there is difference between 'trading
liability' and 'other liability'. section 41(1) of the IT Act
particularly deals with the remission of trading liability.
Whereas in the instant case, waiver of loan amounts to
cessation of liability other than trading liability. Hence, we
find no force in the argument of the Revenue that the case of
the Respondent would fall under section 41(1) of the IT Act.
17. To sum up, we are not inclined to interfere with the
judgment and 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

present case since the receipts of Rs. 57,74,064/-
are in the nature of cash or money.
(b) Section 41(1) of the IT Act does not apply since
waiver of loan does not amount to cessation of
trading liability. It is a matter of record that the
Respondent has not claimed any deduction under
section 36(1)(iii) of the IT Act qua the payment of
interest in any previous year.
The Hon'ble Supreme Court also considered the issue with
regard to taxing the remission of liability u/s 28(iv) and decided
the issue against the revenue and in favour of the assessee, since,
the receipt was in the nature of cash or money. The Hon'ble
Supreme Court held that section 28(iv) of the Act has no
application since the receipt was in the nature of cash or money.
In the instant case what the assessee has received was remission
of liability which was in the form of cash or money and the
difference amount of principal which was settled by onetime
payment was never debited to Profit & Loss account. Therefore,
the decision of Hon'ble Supreme Court is squarely applicable in
the instant case. The Ld.DR relied on the decision of Hon'ble
Delhi High Court in the case of Rollatainers Ltd. (supra) and the
decision of Hon'ble High Court of Madras in the case of
Ramaniyam Homes (P.) Ltd.. (supra), the judgments were
delivered prior to the judgment of Hon'ble Supreme Court in the
case of Mahindra and Mahindra (supra) and the Hon'ble High
Courts have no occasion to consider the decision of Hon'ble
Supreme Court. Therefore, we do not find any reason to interfere
with the order of the Ld.CIT(A) and accordingly, we uphold the
same. The appeal of the revenue is dismissed.
8. In the result, appeal of the revenue is dismissed.
SG

*In favour of assessee.

In favour of assessee