The sum paid was also not in the nature of compensation because there was no obligation on M/s Gillette Company USA,
under any contract to compensate the assessee. Under these facts we do
not find infirmity in the decision of the first appellate authority in
treating the amount of Rs. 108.49 crores out of an aggregate addition of
Rs. 118.49 crores made by the AO as capital receipt and hence not
chargeable to tax. In this regard we also find support from the
decisions relied upon by the Ld. AR in the cases of Smartalk (P) Ltd. (supra) and General Electrodes & Equipment Ltd. (Supra) wherein under almost identical circumstances addition made has been deleted. In the case of Smartalk (P) Ltd. (supra) before ITAT Bombay Bench, the assessee had received certain loan from a foreign bank.
The shares were transferred subject to fulfilling guarantee obligation
of the transferee. The amount of loan paid by shareholder to discharge
guarantee obligation was not assessable as income or as remission of
liability or as benefit derived from business, held the Tribunal.
Likewise in the case of General Electrodes & Equipments Ltd. (supra) before Hon’ble Bombay High Court, collaboration agreement between assessee Co. arranged through foreign bank
for bank guarantee for Rs. 10 lakhs to enable assessee to obtain loan
of like amount from an Indian Bank. Subsequently foreign Co. paid Rs. 5
lakhs to foreign bank in part extinction
of liability. ITO held that payment was in course of carrying on of
assessee’s business and assessable as income. The Tribunal held that the
payment was made by foreign Co. to foreign bank and not to assessee,
the payment amounted to discharge foreign Co.’s liability, foreign Co.
was to be released of all financial obligations in relation to affairs
of assessee, benefit obtained by the assessee was not in the course of
carrying on of business and thus value of benefit was not assessable as
income. The Hon’ble High Court dismissed the appeal preferred by the
revenue against the order of the Tribunal. Almost similar facts of the
case before us in the present case are these as the assessee Co. was
incurring losses and was unable to pay of the loans it had obtained from
the bankers, the Gillette Co. U.S.A. considered it prudent to satisfy its own liability as a guarantor for the loans. It was only in such circumstances, Gillette
Co. U.S.A. remitted the sum to discharge of its own liability and hence
it is not correct that the assessee Co. obtained any subsidy or grants in aid or compensation as a result of remittance of a sum to the banks. The Delhi Bench of the Tribunal in the case of Lurgi India Ltd. (supra)
relied upon by the Ld. AR has held that the receipt of Rs. 13.00 crores
by an assessee as a non-refundable grant from its parent company was a
capital receipt, despite the fact that the payment was made to
compensate the assessee for trading loss since it did not stem from any
business consideration. The finding of the Ld. CIT (A) on the issue is
thus upheld.
ITAT DELHI BENCH ‘D’
Luxor Writing Instruments (P.) Ltd.
v.
Deputy Commissioner of Income-tax,Circle 4(1), New Delhi
IT Appeal Nos. 1108 & 2386 (Delhi.) OF 2007
[ASSESSMENT YEAR 2002-03]
[ASSESSMENT YEAR 2002-03]
SEPTEMBER 21, 2012
ORDER
I.C. Sudhir, Judicial Member - The revenue in their grounds to the appeal has raised following issues:
1. “Whether, on the facts
and in the circumstances of the case, the learned CIT (Appeals) was
justified in allowing the relief of Rs. 108,49,67,917/- remitted by Gillette
USA for repayment of its debts pursuant to sales of its entire
shareholding in the assessee company to Newell as capital receipt
without appreciating the fact that Gillette was neither its shareholder nor it increased the shareholding of Gillette USA or its subsidiaries in the assessee company.
2. Whether, on the facts
and in the circumstances of the case, the learned CIT (Appeals) was
justified in restricting the addition on account of sum remitted by M/s Gillette
Co. USA to the assessee company for payment of its debts at Rs.
118,09,00,129/- to Rs. 9,59,32,212/- crores whereas the component of
remittance to bank account of the assessee company has been treated as
revenue receipt and the component remitted directly to Bank of America
for the same purpose has been treated as capital receipt.”
2. The assessee has questioned first appellate order on the following grounds:-
1. “That the learned
Commissioner of Income Tax (Appeals) has grossly erred both in law and
on facts in upholding the addition of sum of Rs. 9,59,32,212.66
representing the amount remitted by M/s. Gillette, USA for repayment of loans of the assessee company.
1.1 That mere fact that the aforesaid sum had been credited to the bank account
of the appellant company could not in law or fact be held to be a valid
basis for concluding that such sum represents income of the appellant
company, particularly when it is undisputed that the aforesaid sum had
been utilized for repayment of debts by the appellant company.
1.2 That the learned
Commissioner of Income Tax (Appeals) has failed to appreciate that, sums
remitted were voluntary payments and, were not received by the assessee
for any services rendered to M/s. Gillette, USA, which could not be
taxed as income of the appellant company. In fact, the learned Assessing
Officer has admitted that sum was remitted without any quid pro quo and, therefore could not be held as income under the Act.
2. That the learned
Commissioner of Income Tax (Appeals) has further erred both in law and,
on facts in confirming the addition of sum of Rs. 3,34,85,700/-
representing the amount of loan waived by M/s. Gillette, USA.
2.1 That the learned
Commissioner of Income Tax (Appeals) has confirmed the aforesaid
addition by erroneously and, arbitrarily concluding that, “it was
although originally a capital receipt in the shape of loan, however
since the appellant does not have to repay the sum received, it changes
the character of receipt to revenue receipt.”
2.2 That the learned
Commissioner of Income Tax (Appeals) has also failed to appreciate that,
the judgment of Hon’ble Delhi High Court in the case of CIT v. Phool
Chand Jiwan Ram reported in 131 ITR 37
was fully applicable to the facts of the case of the appellant and,
therefore, there was no valid justification or basis to sustain the
aforesaid addition.
3. That the various
adverse findings recorded by the learned CIT(Appeal) are totally and
wholly arbitrary in as much as he has filed to appreciate the
submissions and evidence filed by the appellant during the course of
appellate proceedings.
4. That the learned
Commissioner of Income Tax (Appeals) has further erred in confirming the
levy of interest u/s 234B and 234C of the Act.”
3. The relevant facts are that on 19.3.1996 a joint venture agreement was drawn between (1) Gillette
India (P) Ltd. (GIPL), and (2) Jain group comprising of members of one
Mr. D.K. Jain’s family (Jain Family) and JHPL Holdings (P) Ltd. (JHPL).
The joint venture was formed to carry on the business of manufacture and
marketing of writing instruments and the stationery products in India
through an existing company, namely the assessee company, which was
incorporated on 8.3.95, whose promoter/shareholders were Jain group. By a
letter dated 19.3.1996, M/s Gillette Company USA, holding company of GIPL gave an undertaking inter alia that, assessee company will be the exclusive vehicle through which Gillette will undertake in India the business in the field of writing instruments and stationery products including introduction of new products and / or new brand in that field, and the Gillette will not undertake directly or indirectly any activities in competition with the assessee company in India.
4. As a result of the above arrangement, the assessee company has been engaged in the business of manufacture and distribution of writing instruments and stationery products. The equity share capital of the assessee company was held equally by Jain Group and GIPL and its affiliates.
5. The funds required by the assessee company for its business were financed out of interest bearing loans raised from Gillette Diversified Operations (P) Ltd. and affiliate of ‘GIPL’.
6. The assessee company raised a
loan of Rs. 66 crores from Bank of America in Financial year 2000 –
2001, which was primarily utilized to repay the loans/debts of the
company as per details given below.
|
-
|
Gillette Diversified Operations Pvt. Ltd. |
-
|
Rs. 47.25 cr |
|
-
|
Repayment of ECB to The Gillette Co, USA |
-
|
Rs. 4.78 cr |
|
-
|
Payment of Supplier’s Credit to The Gillette Co. |
-
|
Rs. 1.78 cr |
|
-
|
Repayment of loan to India promoters |
-
|
Rs. 9.50 cr. |
7. In the financial year 2001-02
the assessee company further borrowed an amount of Rs. 20 crores from
Bank of America which was primarily utilized to further repay the loans /
debts of the company as per details given below.
|
-
|
Gillette Diversified Operations Pvt. Ltd. |
-
|
Rs. 7.00 cr |
|
-
|
Repayment of ECB to The Gillette Co, USA |
-
|
Rs. 4.30 cr |
|
-
|
Repayment of loan to The ANZ Grindlays Bank |
-
|
Rs. 8.50 cr |
8. The funds were raised from banks against the corporate guarantee of M/s Gillette company USA.
9. Besides, the loan was raised
of USD 2.3 Million from M/s Gillette Company USA under the External of
Commercial Borrowing scheme of Reserve Bank of India.
10. In the year 2001 Gillette
Company USA sold its business of writing instruments to Newell
Rubbermaid inc. USA (Newell). As part of such sale of business to Newell
the shareholding of GIPL in assessee company was also sought to be
transferred to Newell. For this purpose various agreements were executed
between GIPL, Jain Group on 17.1.2001 whereby Newell was also made a
party (Assignment Agreements), wherein the Jain Group had given consent
to transfer of shares by GIPL and its affiliates to Newell.
11. In the year 2002 Newell
expressed its unwillingness to acquire the shareholding of the Gillette
Group in the assessee company though agreed under the assignment
agreement. Newell however, took over the writing instrument business of
the Gillette Company USA in the rest of the World. Since the assessee
company was incurring losses, Gillette Company USA considered it prudent
to get itself discharged from the security provided by it in respect of
loan taken by the assessee company. In furtherance thereto in March,
2002 Gillette Company USA, the holding company, thus remitted a sum of
money to Bank of America, New Delhi Branch to LWIL account, specifically
for the benefit of the banks including Banks of America, Standard
Chartered Bank, Canara Bank etc. for obtaining the release of its
corporate guarantee. The bankers after receipt of money had released the
corporate guarantee of Gillette Company USA. Pursuant to the aforesaid,
total sums remitted by Gillette USA aggregated to Rs.
120,08,40,830.47/- comprising of Rs. 97,06,00,000/- as per FIRC and Rs.
23,02,40,830.47/- as per FIRC. Out of the aforesaid sums of Rs.
120,08,40,830.47/- sums aggregating to Rs. 108,49,67,916.81/- was
directly appropriated for the benefit of 3 banks, as per the amendment
to the master agreement dated 26.03.2002, namely :
|
(a)
|
Bank of America | Rs. 96,35,08,609.81/- |
|
(b)
|
Standard Chartered Bank | Rs. 2,14,59,307.00/- |
|
(c)
|
Canara Bank | Rs. 10,00,00,000.00/- |
|
|
Total | Rs. 108,49,67,916,81/- |
12. The balance amount of Rs.
11,58,72,913.66/- i.e. difference between Rs. 120,08,40,830.47/- and Rs.
108,49,67,916.81/- was credited to the bank account of the assessee in
the following manner.
|
(a)
|
CA (LWIL) | Rs. 70,91,390.19/- |
|
(b)
|
CA (LWIL) | Rs. 8,88,40,822.47/- |
|
(c)
|
CC (LWIL) | Rs. 1,99,40,701.00/- |
|
|
Total | Rs. 11,58,72,913.66/- |
13. Out of the aforesaid a sum of
Rs. 1,99,40,701.00/- was already credited to the profit and loss
account and was offered as income. However, the balance amount of Rs.
9,59,32,212.66/- was utilized for repayment of debts. Thus out of total
sum remitted of Rs. 120,08,40,830.47/- a sum of Rs. 1,99,40,701.00/- was
credited to the profit and loss account and the balance sum of Rs.
118,08,00,129.47/- was remitted for repayment of debts. Out of this sum
of Rs. 118,08,00,129.47/- the said sum of Rs. 108,49,67,916.81/- was
directly appropriated for the benefit of 3 banks and the balance amount
of Rs. 9,58,32,212.66/- was credited to the bank account of the assessee
and utilized for repayment of loans.
14. The Gillette Company USA
waived its claim to the foreign currency loans advanced by it to the
assessee company for working capital under the External Commercial
Borrowings Scheme.
15. On 30.10.2002 the assessee
filed return of income declaring a loss of Rs. 34,58,93,385/-. On
2.3.2005 assessment u/s 143 (3) was framed at income of Rs.
54,95,90,790/- by making an addition of Rs. 118,09,00,129/- representing
sums remitted by M/s Gillette Company, USA as they were held in the
nature of subsidy or grant, and was thus a revenue receipt.
16. The Ld. CIT (A) vide its
order dated 24.1.2007 held that the sum remitted by M/s Gillette
Company, USA, to the extent of Rs. 108.49 crores is a capital receipt
not chargeable to tax but Rs. 11.58 crores which has been credited to
the bank account of the assessee, is to be treated as business income of
the assessee but the same is restricted by a sum of Rs. 9.59 Crore as
Rs. 1.99 was already credited by the assessee to the profit and loss
account and was offered to tax.
17. Now the issues involved in the cross-appeals are as under:
1. “As to whether in a
case where a guarantor who is also a holding company of the shareholder
in the assessee company, repaid the loan of Rs. 108.49 crores advanced
by the bank to the assessee company to discharge itself of its liability
under the corporate guarantee, could such sum be regarded as income of
the assessee company?
2. As to whether further
sum of Rs. 9.59 crores remitted by the said guarantor to discharge the
liabilities of the assessee company could be treated as income and does
not represent capital receipt?
3. As to whether the
further waiver of loan of Rs. 3.43 crores by the said guarantor could be
treated as income and does not represent capital receipt?”
Issue nos.-1 & 2
18. The issues involved in ground
nos. 1 and 2 of the appeal preferred by the revenue and the ground nos.
1, 1.1 and 1.2 of the appeal preferred by the assessee are connected.
We have already discussed the relevant facts in the previous paragraphs.
The AO made addition of Rs. 118.09 crores representing the sum remitted
by M/s Gillette Company, USA to the assessee company. The Ld. CIT (A)
deleted Rs. 108.49 crores out of the said addition which has been
questioned by the revenue in their appeal. The remaining sum of Rs. 9.59
crores out of the said addition has been sustained by the Ld. CIT (A)
on the ground that the Gillette Co. USA, the assessee company of the
joint venture, GIL paid the said sum to the credit of the assessee’s
account rejecting the claim that the said sum was not in the nature of
the income as it did not arise in the course of carrying on its business
and cannot be taxed u/s 28 (1) (iv) of the Act. This action of the Ld.
CIT (A) has been questioned by the assessee in ground nos. 1, 1.1 and
1.2 of the appeal preferred by it.
19. In support of the grounds of
the appeal of the revenue the Ld. DR has basically placed reliance on
the assessment order. He submitted that there was no disruption in the
business of assessee. The copy of memorandum of understanding (MOU), was
not produced before the AO. The same was produced only before the Ld.
CIT (A). He referred page nos. 463 to 465 of paper book Volume III i.e.
copy of memorandum of understanding (MOU) dated 5.1.2002 in support. The
Ld. DR submitted that the said MOU culminated into master agreement
dated 4.3.2002 which was amended on 26.3.2002. The Ld. DR submitted that
the nature of payment was revenue in nature as rightly held by the AO.
He submitted that nature of the instruction received by the Bank of
America USA by fax was to be seen. He referred page nos. 96, 97,.100
& 101 of the paper book Volume no. 1 in this regard. He submitted
that neither the agreement nor payment to the bank were voluntary. The
loan was for working capital. He referred page nos. 54 to 61 & 62 to
64 of the paper book Volume no. 1. i.e. copies of letter dated
13.06.1997 from Reserve Bank of India, and letters from Bank of America
for credit facility. There was no necessity of entering into the
guarantee and the guarantor comes in picture when loanee fails to pay.
He referred page nos. 307 to 309 of the paper book Volume no. II. i.e.
query raised by the Ld. CIT (A). The Ld. DR submitted further that the
Ld. CIT (A) should have considered the contentions of the AO including
the remand report in its entirety. He submitted further that nature of
document is required to be considered and not the nomenclature of the
material. Likewise nature of receipt is more important. Every receipt is
income unless it is specifically excluded. He placed reliance on the
following decisions:
1. S.B. Sugar Mills Ltd. v. CIT [1987] 166 ITR 783 (SC)
2. KettlewellBullen& Co. Ltd. v. CIT [1964] 53 ITR 261 (SC)
3. S. KumarsTyre Mfg. Co. Ltd. v. Dy.CIT[1997] 61 ITD 326 (Indore)
4. Mahindra & Mahindra Ltd. v. CIT [2003] 261 ITR 501
5. Killick Nixon & Co. v. CIT [1967] 66 ITR 714 (SC)
6. CIT v. New JehangirValeil Mills Co. Ltd. 37 ITR 151 (SC) (sic)
7. SreenivasaPitty& Sons v. CIT [1988] 173 ITR 306
8. Sahney Steel & Press Works Ltd. v. CIT [1997] 228 ITR 253
9. CIT v. H.H. Maharani Seth v. ParvathiBayi[1998] 232 ITR 678 (Ker)
10. Raghunarayan Rice Mills v. CIT [1970] 75 ITR 682 (Orissa)
11. Hoshiarpur Electric Supply Co. v. CIT [1961] 41 ITR 608 (SC)
12. Mrs. ShielaKaushik v. CIT[1981] 131 ITR 435
13. Delhi Stock Exchange Association Ltd. v. CIT [1961] 41 ITR 495 (SC)
14. CIT v. Nova Promoters &Finlease (P) Ltd. [2012] 342 ITR 169
15. Bombay Oil Industries Ltd. v. Dy. CIT [2002] 82 ITD 626 (Mum)
16. Karanpura Development Co. Ltd. v. CIT [1962] 44 ITR 362 (SC)
17. SenairamDoongarmall v. CIT [1961] 42 ITR 392 (SC)
18. CIT v. G.R. Karthikeyan[1993] 201 ITR 866
19. CIT v. Smt. Shanti Meattle[1973] 90 ITR 385 (All.)
20. CIT v. AvinashPasricha[2001] 251 ITR 360
21. Logitronics (P.) Ltd. v. CIT [2011] 333 ITR 386
22. National Cement Mines Industries Ltd. v. CIT [1961] 42 ITR 69 (SC)
20. The Ld. AR tried to justify
the first appellate order on the issue raised in the ground of appeal
preferred by the revenue. He submitted that the Ld. CIT (A) should have
deleted the entire addition of Rs. 118,09,00,129/- made by the AO. He
reiterated the submissions made before the authorities below in this
regard. He submitted that the Gillette Company, USA had no interest in
the assessee company. As the assessee company was incurring losses,
Gillette Company, USA found it prudent to get itself discharged from the
security produced by it in respect of the loans raised by the assessee
company. In order to do so in March, 2002 Gillette Company, USA, the
holding company voluntarily remitted a sum of money to Bank of America,
New Delhi branch to LWIL account, especifically for the benefit of the
banks including Banks of America, Standard Chartered Bank, Canara Bank
etc. for obtaining the release of its corporate guarantee. The bankers
on receipt of money released the corporate guarantee of Gillette
Company, USA. Thereafter, Gillette’s guarantee was no more available to
the assessee company and the bank withdrew the loan facilities to the
assessee company. Pursuant to the aforesaid, total sums remitted by M/s
Gillette Company, USA aggregated to Rs. 120,08,40,830.47/- comprising of
Rs. 97,06,00,000/- as per FIRC made available at page no. 93 of the
paper book and Rs. 23,02,40,830.47/- as per FIRC at page no. 94 of the
paper book Volume I. Out of aforesaid sum of Rs. 120,08,40,830.47/-, a
sum aggregating to Rs. 108,49,67,916.81/- was directly appropriated for
the benefit of 3 banks as per the amendment to the master agreement
dated 26.3.2002. The balance mount of Rs. 11,58,72,913.66/- i.e.
difference between Rs. 120,08,40,830.47/- and Rs. 108,49,67,916.81/- was
credited to the bank account of the assessee. Out of the aforesaid sum
Rs. 1,99,40,701/- was credited to the profit and loss account and
offered as income. However, the balance amount of Rs. 9,59,32,212.66/-
was utilized for repayment of debts, details of which have been made
available at page no. 93 of the paper book. The AO made addition of Rs.
118,09,00,129/- representing sums remitted by Gillette Company, USA,
holding it in the nature of subsidy or grant and was thus held as a
revenue receipt. The Ld. CIT (A) has held that the sum remitted by
Gillette Company, USA, to the extent of Rs. 108.49 crores is a capital
receipt not chargeable to tax but Rs. 11.58 crores which was credited to
the bank account of the assessee has been treated by him as business
income of the assessee however, same has been restricted by a sum of Rs.
9.59 crore as Rs. 1.99 crore was already remitted by the assessee to
its profit and loss account. He submitted that return of income was
filed by the assessee declaring a loss of Rs. 34,58,93,385/- against
which the AO has assessed an income of Rs. 54,95,90,790/- by making the
said addition of Rs. 118,09,00,129/-. The Ld. AR referred page nos. 93
& 94 (copies of FIRC) of the paper book Volume 1, page nos. 185,293
(written submissions before Ld. CIT (A)) of the paper book Volume no. 2
and page no. 392 to 426 (agreements) of the paper book Volume no. 3. He
also referred page nos. 62 to 92 (loan agreements) of paper Book – I,
page No. 45 (letter of offer from Gillette Co. USA dated 4.12.1996)
Paper Book – I, page nos. 46 to 53 (application for approval to RBI
dated 4/11.3.1997) of Paper Book I, page nos. 54 to 60 (approval dated
13.6.1997 from RBI) Paper Book-I, page no. 61 (letter dated 23.7.1998
from Ministry of Finance) Paper Book- I, and page nos. 72 to 74 (letter
dated 24.4.2001 from Ministry of Commerce & Industry) Paper Book – I
etc. He placed reliance on the following decisions:
1. CIT v. General Electrodes &Equipments Ltd. [1985] 155 ITR 78
2. Ms. PayalKapurv. Asstt. CIT [2006] 98 ITD 19 (Delhi)
3. Smartalk (P) Ltd. v. ITO [2009] 119 ITD 13 (Mum.)
4. ShyamTelelink Ltd. v. ITO [2006] 99 ITD 576 (Delhi)
21. In support of the grounds 1,
1.1 & 1.2 of the appeal preferred by the assessee, the Ld. AR
submitted that the Ld. CIT (A) has sustained the addition of Rs. 9.59
crores only on the basis that the amount of Rs. 9.59 crores stood
credited in the assessee’s bank account. Infact there was no difference
wherein the credit has been made in the assessee’s bank account of Rs.
9.59 crores or credit made of Rs. 108.49 crores. It appears that the Ld.
CIT (A) gave such finding since the aforesaid amount of Rs. 108.49
crores was the sum remitted to the bank account without recourse to
assessee would have a different character. He fails to appreciate that
so far as the nature of remittance is concerned the same would remain
the same, as the amount was remitted by Gillette Co. USA for the purpose
of discharging of their obligations as a guarantor and the balance sum
was paid to the assessee specifically for the purpose of repayment of
its debt. He submitted whether the mode of repayment of debts was by way
of discharging of their liability as guarantor or for repayment of
debts, the same would not affect the capital nature of the receipt. By
no stretch of imagination it could be regarded that an amount remitted
to the assessee to discharge its obligation to the creditors, could be
regarded as revenue receipt since the receipt did not accrue or arise or
stem from any commercial and business transaction. Infact, there was no
business relationship between the assessee company and Gillette
Company, USA. He cited following decisions in support:
1. Handicrafts & Handlooms Exports Corpn. of India Ltd. v. CIT [1982] 10 Taxman 232 (Delhi)
2. CIT v. Stewarts & Lloyds of India Ltd .[1987] 165 ITR 416
3. Addl. CIT v. Handicrafts & Handloom Exports Corpn. [1982] 133 ITR 590
4. Dy. CIT v. Lurgi India Co. Ltd. [2008] 114 ITD 1 (Delhi)
22. The Ld. AR submitted further
that when an assessee discharges its liability from sums receive by it,
it is a case where the amount received by it is applied by it to
discharge its liability. There is a distinction between liability
ceasing to exist and where a liability is discharged from the amount
available to it, which is the application of receipt and as such Section
41 (1) of the Act has no application. In fact, assessee company had
committed an error when it offered a sum of Rs. 1.99 crores as income
under misconception of law by failing to appreciate that such receipt
represented capital and was not liable to tax. Mere fact that sum
received of Rs. 1.99 crores was not utilized for repayment of
liabilities could not be a ground in law to regard the same as its
income as it is a well settled position of law that every receipt is not
income, submitted the Ld. AR while placing reliance on the following
decisions:
1. ParimisettiSeetharamamma v. CIT [1965] 57 ITR 532 (SC)
2. CIT v. N. Swamy[2000] 241 ITR 363
3. Dilip Kumar Roy v. CIT [1974] 94 ITR 1 (SC)
4. KishinchandChellaram v. CIT [1980] 125 ITR 713
23. The Ld. AR submitted further
that a debt waved or forgone can notpartake the character of income
either under Section 41 (1) or Section 28 of the Act. He placed reliance
on the following decisions:
- CIT v. Phool Chand Jiwan Ram [1981] 131 ITR 37
- Dy. CIT v. Tosha International Ltd. [2008] 116 TTJ 941 (Delhi),
- CIT v. Tosha International Ltd. [2009] 176 Taxman 187 (Delhi)
- CIT v. Goyal MG Gases Ltd. (Del) [ITA No. 364,365,368,369,370 & 923/2007]
- Mahindra & Mahindra Ltd (supra)
- CIT v. AVM Ltd. [1984] 146 ITR 355
- CIT v. P GanesaChettiar[1982] 133 ITR 103
- Fidelity Textiles (P) Ltd v. Asstt. CIT [IT Appeal No. 1960 (Mds.) of 2005, dated 29-8-2006]
- Comfund Financial Services (I) Ltd v. Dy. CIT [1998] 67 ITD 304 (Bang),
- CIT v. Comfund Financial Services [2000] 245 ITR 143
- Accelerated Freez& Drying Co. (P) Ltd v. Dy. CIT [2009] 31 SOT 442 (Cochin)
- Deepak Fertilisers& Petrochemicals Corpn. Ltd. v. Dy. CIT [2009] 116 ITD 372 (Mum)
- Cipla Investments Ltd. v. ITO [2009 33 SOT 317 (Mum)
- Helios Food Improvers (P) Ltd. v. Dy. CIT [2007] 14 SOT 546 (Mum)
- Nirmala P. Athavale v. ITO [2009] 118 ITD 373 (Mum.)
- Mindteck (India) Ltd. v. ITO [2010] 122 ITD 486 (Mum.)
- Prism Cement Ltd. v. Jt. CIT [2006] 101 ITD 103 (Mum.)
- CIT v. Aries Advertising (P) Ltd. [2005] 125 Taxman 969 (Mum)
- ITO v. Ahuja Graphic Machinery (P) Ltd. [2007] 109 ITD 71 (Mum) (TM)
- Sunanda Capital Services Ltd v. Jt. CIT [2009] 28 SOT 484 (Mum)
- CIT v.Chetan Chemicals (P) Ltd .[2004] 139 Taxman 301 (Guj.)
- Velocient Technologies Ltd. v. ITO [2010] 123 ITD 188 (Delhi)
- CIT v. Jindal Equipments Leasing & Consultancy Services Ltd. [2010] 325 ITR 87 (Delhi)
24. Ld. AR submitted that there
have been substantial amendments in Section 56 (2) of the Act and yet,
even after the insertion of Section 56(2) (viia) in the Act by Finance
Act 2010 w.e.f. 1.6.2010, such receipts are not eligible to tax. Under
these facts the Ld. CIT (A) was not justified in sustaining the addition
of Rs. 9,59,32,212.66/- representing the amount remitted by M/s
Gillette Company, USA for repayment of loans of the assessee company.
The Ld. AR also asserted that a subsidy can only be granted by
Government and not by Private Individual. Subsidy is a grant of money
from a Government to a Private enterprise considered as a beneficial to
the company. He cited following decisions:
- CIT v. Grace Paper Industries (P.) Ltd. [1990] 183 ITR 591 approved by SC in CIT v. P J Chemicals Ltd. [1994] 210 ITR 830
- ShriAmbica Mills Ltd. v. Textile Labour Association AIR 173 SC 1081
25. In rejoinder the Ld. DR
submitted that all receipt unless exempt is income and placed reliance
on the decision of Hon’ble Allahabad High Court in the case of Smt. Shanti Meattle (supra).
He submitted that the payment is in the nature of subsidy and not
subsidy. He also pointed out that waiver of payment was made to the
assessee through Bank and not to the Bank as held by the Ld. CIT (A).
The payment was made only out of the agreement, submitted the Ld. DR.
26. We have considered the above
submissions in view of the orders of the authorities below, material
available on record and the decisions relied upon. An undisputed fact
remained that a total sums aggregating to Rs. 120,08,40,830.47/- was
remitted by M/s Gillette Company, USA. The said amount was comprising of
Rs. 97,06,00,000/- as per FIRC made available at page no. 93 of the
paper book Volume 1 and Rs. 23,02,40,830.47/- as per FIRC, made
available at page no. 94 of the same paper book Volume 1. Out of the
aforesaid sum of Rs. 120,08,40,830.47/-, sums aggregating to Rs.
108,49,67,916.81/- was directly appropriated for the benefit of 3 banks
i.e. Bank of America (Rs. 96,35,08,609.81/-, – page no. 93), Standard
Chartered Bank (Rs. 2,14,59,307.00/- -, page no. 94), and Canara Bank
(Rs. 10,00,00,000.00/-, page no. 94) as per the amendment to the master
agreement dated 26.3.2002. The balance amount of Rs. 11,58,72,913.66/-
i.e. difference between Rs. 120,08,40,830.47/- and Rs.
108,49,67,916.81/- was credited to the bank account of the assessee in
following manner:
| (a) | CA (LWIL) | Rs. 70,91,390.19/- (page no.93) |
| (b) | CA (LWIL) | Rs. 8,88,40,822.47/- (page no. 94) |
| (c) | CC (LWIL) | Rs. 1,99,40,701.00/-(page no. 94) |
| Total | Rs. 11,58,72,913.66/- |
27. Out of the aforesaid sum Rs.
1,99,40,701.00/- had been credited to the profit and loss account and
offered as income. However the balance amount of Rs. 9,59,32,212.66/-
was utilized for repayment of debts for which details were furnished by
the assessee before the Ld. CIT (A). The raising of loans for its
business by the assessee from banks against the corporate guarantee of
M/s Gillette Company, USA is well supported by the sanction letter of
Bank of America, New Delhi, dated 6.11.2001, a reference of which has
been made by the Ld. CIT (A) at page no. 30 of the first appellate order
with this observation that Bank of America, USA had extended credit to
Bank of America, New Delhi on the basis of corporate guarantee provided
to it by M/s Gillette Company USA. A copy of this letter has been made
available at page nos. 88 and 89 of the PB-I. The Bank of America, New
Delhi had extended short-term loans to the assessee only after receiving
the debit authority from Bank of America, New York favouring Bank of
America, New Delhi. The Bank of America, New Delhi had extended the loan
to LWIL on the basis of the credit provided by the Bank of America, New
York. Similarly loans from other banks namely Standard Chartered Bank
and Canara Bank were provided. Besides, a loan of USD 2.3 million was
also raised from M/s Gillette Company USA under the External Commercial
Borrowing Scheme of Reserve Bank of India. The Gillette Co. USA later on
waived its claim to this foreign currency loans advanced by it to the
assessee.
28. As stated hereinabove that on
March 19th, 1996 a joint venture agreement was entered between M/s
Gillette India Pvt. Ltd. (GIPL) a subsidiary of M/s Gillette Company
USA, members of one Mr. D.K. Jain family (Jain Family) and JHPL Holdings
pvt. Ltd. (JHPL) to incorporate the assessee company for carrying on
the business of manufacture and distribution of writing instruments and
stationery products in India. The share capital of assessee company was
thus allotted to Jain Family, JHPL, JIPL and its affiliates. In the year
2001 Gillette Company USA, sold its business of writing instruments to
Newell, USA. The share holding of the GIPL in LWIL was also sought to be
transferred to Newell. For this purpose various agreements were
executed between GIPL, and Jain Family on 17.1.2001, whereby Newell was
also made a party (Assignment Agreement ) and wherein the Jain Family
had given consent to transfer of shares by GIPL and its affiliates to
Newell and Newell had also been granted an approval by the Ministry of
Commerce and Industry, Department of Industrial Policy and Promotion
vide letter dated 24.4.2001 for acquisition of shares of the assessee
company from Gillette Group. In the year 2002 Newell expressed its
unwillingness to acquire the share holding of the Gillette Group in the
assessee company. In other words Newell, desired not to join or become a
part to the joint venture agreement. In furtherance to its decision of
Newell a memorandum of understanding dated 5.1.2002 was executed between
M/s Gillette Company USA, Newell, Jain Family and the assessee company.
This memorandum of understanding culminated into a master agreement
dated 4.3.2002. A copy of the said master agreement dated 4.3.2002 has
been made available at page no. 392 to 416 of the paper book Volume III.
The contents of clause no. 4 thereof are relevant for adjudicating the
issue involved. The said clause is being reproduced herein for a ready
reference:
“4 Further Consideration
4.1 M/s Gillette and Newell agree to pay the sums as set fort below:
(a) Newell shall pay to
the Jain Family (as per details previously notified by Mr.D.K. Jain), at
Closing the consideration and compensation of USD 10,000,000:
(b) At the Closing M/s
Gillette shall deposit into an escrow account the sum of USD 25,000,000,
a portion of which sum shall be released to pay indebtedness owed by
LWIL to the Bank of America, Barakhamba Road, New Delhi, and thereby
secure the release and discharge of the corporate guarantee (s) given by
M/s. Gillette to the said bank to guarantee credit facilities extended
by the said bank to LWIl. The remainder of the escrowed funds shall be
released to WLIL. Satisfaction of the LWIL indebtedness to Bank of
America shall be without recourse to LWIL or to the Jain Group; and
(c) M/s. Gillette shall previous year to Ms. Pooja Jain, at Closing, a sum of USD 1,000,000, by way of compensation.
29. The above Clause no. 4 of the
master agreement dated 4.2.2002 was further amended vide amendment to
the master agreement dated 26.3.2002, which reads as under:
“4 Further Consideration
4.1 On the Closing Date, M/s Gillette, Newell and / or LWIL agree to pay the sums as set forth below:
(a) Newell shall pay to
the Jain Family (As per details previously notified by Mr. D.K. Jain),
at Closing, the consideration and compensation of USD 10,000,000;
(b) M/s Gillette shall
cause to be remitted a sum of Rs. USD 24,744,299.00 to the Bank of
America, Barakhamba Road, New Delhi to be disbursed as follows:
(i) Rupee
equivalent of USD 20,000,000.00 (United States Dollars twenty million
only) to be paid to the Bank of America, Barakhamba Road, New Delhi in
full and final settlement of the amounts owing at closing to the said
Bank by LWIL and thereby secure the release and discharge of the
corporate guarantee(s) given by M/s Gillette to the said bank to
guarantee credit facilities extended by the said bank to LWIL;
(ii) United States
Dollar equivalent to Indian Rupees 21,459,307.00 (Rupees twenty million
four hundred fifty nine thousand three hundred and seven only) to be
paid to Standard Chartered Grindlays Bank in full and final settlement
of the amounts owing at Closing to the said Bank by LWIL;
(iii) United States
Dollar equivalent to Indian Rupees 100,000,000, (Rupees one hundred
million only) to be paid to Canara Bank in full and final settlement of
the amounts owing at closing to the said Bank by LWIL;
(iv) United States Dollar
equivalent to Indian Rupees 19,940,701 (Rupees nineteen million nine
hundred forty thousand seven hundred only) towards settlement of claims
made by LWIL against supplies made by M/s. Gillette; and
(v) The balance amount, if any, shall be credited to LWIL’s account maintained with Bank of America, New Delhi.”
(c) M/s Gillette shall previous year to Ms. Pooja Jain, at Closing, a sum of USD 1,000,000, by way of compensation.”
30. In pursuant to the aforesaid
terms of the agreement a total sum of Rs. 120,08,40,830.47/- was
remitted by M/s Gillette Company USA, in the manner discussed above. A
copy of master agreement dated 26.3.2002 has been made available at page
nos. 417 to 426 of paper book Volume 2. The claim of the assessee
remained that remittance of Rs. 118.09 crores and waiver of loan of Rs.
3.40 crores by M/s Gillette Company USA, constitute capital receipt. The
AO did not agree and concluded that the remittance of Rs. 118.09 crores
is a revenue receipt since the same is in the nature of subsidy or
grant- in- aid and the waiver of loan is income of the assessee company,
since the loan had been utilized for working capital purpose. The
amount of remittance of Rs. 118.09 crores consisted of (a) Rs. 108.49
crores remitted by M/s Gillette company USA, and proportionately
directed for the benefit of 3 banks and (b) Rs. 11.58 crores was
remitted by M/s Gillette Company USA and credited to the bank account of
the assessee. The Ld. CIT (A) held that both the aforesaid sums cannot
be held to be subsidy. In his view the subsidy is only in connection
with the payment of incentives which are granted by the government and
not by a private individual. In this regard he has taken strength from
the decision of Hon’ble Supreme Court in the case of Shri. Ambika Mills Ltd. (supra). In this regard he has also relied upon the decision of Hon’ble Delhi High Court in the case of Handicrafts and Handloom Export Corporation of India Ltd. (supra)
holding that there is a basic difference in grant made by the
Government or from public generally to the assessee in a particular line
of business but in a case where private party agreeing to make good the
loss incurred by an assessee on account of mutual relationship that
subsidized between them it was held that such payments by private party
are in the nature of voluntary payment and do not stem from any business
circumstances and hence, cannot be termed as “subsidy.” We find that
there is no scope of any debate on the finding of the Ld. CIT (A) that
the amount remitted was not subsidy. The Ld. CIT (A) has also tried to
distinguish the decision of Hon’ble Supreme Court in the case ofSahney Steel & Press Works Ltd. (supra)
and rightly so, that the decision relied upon by the AO is not
applicable since in the present case no subsidy was received by the
assessee. In the present case except the amount to the extent of Rs.
11.58 crores, the remitted amount have not been received by the assessee
and was directly appropriated for the 3 Banks. The undisputed fact also
remained that M/s Gillette Company USA had provided primary security in
the shape of corporate guarantee for the grant of loan to the assessee
company and the amount had been paid to the bankers for discharge of
such corporate guarantee directly. Only dispute remained that as to
whether the remittance was in respect of any interest held by the
assessee. The fact that the amount had been paid to the bank for
discharge of the stated corporate guarantee itself suggests that the sum
remitted was not in the nature of profit but a capital receipt. There
is no material to support the finding of the AO that the amount was paid
to improve the financial position of the assessee company by
discharging its liabilities and enabling the assessee to earn income. We
find that the amount of Rs. 108.49 crores was remitted by Gillette
Company USA, directly to the bankers as per the master agreement amended
and to discharge its own liability. As we have discussed above about
the master agreement and have reproduced relevant clause of the
agreement hereinabove in the previous paragraphs, there is nothing to
suggest that the amount Rs. 108.49 crores was remitted to the assessee
to improve the financial position of the assessee company by discharging
liability and enabling the assessee to earn income. Thus such finding
of the AO is contrary to the material on record. The AO has further held
that the sum has been received as a result of breach of contract hence
it was a revenue receipt. No such fact is emerging from the record of
the present case that the amount in question was remitted due to breach
of contract between M/s Gillette Company USA, and the assessee company.
The remittance was made in furtherance to fulfilment of the contract
with Bank of America with M/s Gillette Company USA. The sum paid was
also not in the nature of compensation because there was no obligation
on M/s Gillette Company USA, under any contract to compensate the
assessee. Under these facts we do not find infirmity in the decision of
the first appellate authority in treating the amount of Rs. 108.49
crores out of an aggregate addition of Rs. 118.49 crores made by the AO
as capital receipt and hence not chargeable to tax. In this regard we
also find support from the decisions relied upon by the Ld. AR in the
cases of Smartalk (P) Ltd. (supra) and General Electrodes & Equipment Ltd. (Supra) wherein under almost identical circumstances addition made has been deleted. In the case of Smartalk (P) Ltd. (supra)
before ITAT Bombay Bench, the assessee had received certain loan from a
foreign bank. The shares were transferred subject to fulfilling
guarantee obligation of the transferee. The amount of loan paid by
shareholder to discharge guarantee obligation was not assessable as
income or as remission of liability or as benefit derived from business,
held the Tribunal. Likewise in the case of General Electrodes &Equipments Ltd. (supra)
before Hon’ble Bombay High Court, collaboration agreement between
assessee Co. arranged through foreign bank for bank guarantee for Rs. 10
lakhs to enable assessee to obtain loan of like amount from an Indian
Bank. Subsequently foreign Co. paid Rs. 5 lakhs to foreign bank in part
extinction of liability. ITO held that payment was in course of carrying
on of assessee’s business and assessable as income. The Tribunal held
that the payment was made by foreign Co. to foreign bank and not to
assessee, the payment amounted to discharge foreign Co.’s liability,
foreign Co. was to be released of all financial obligations in relation
to affairs of assessee, benefit obtained by the assessee was not in the
course of carrying on of business and thus value of benefit was not
assessable as income. The Hon’ble High Court dismissed the appeal
preferred by the revenue against the order of the Tribunal. Almost
similar facts of the case before us in the present case are these as the
assessee Co. was incurring losses and was unable to pay of the loans it
had obtained from the bankers, the Gillette Co. U.S.A. considered it
prudent to satisfy its own liability as a guarantor for the loans. It
was only in such circumstances, Gillette Co. U.S.A. remitted the sum to
discharge of its own liability and hence it is not correct that the
assessee Co. obtained any subsidy or grants in aid or compensation as a
result of remittance of a sum to the banks. The Delhi Bench of the
Tribunal in the case of Lurgi India Ltd. (supra) relied
upon by the Ld. AR has held that the receipt of Rs. 13.00 crores by an
assessee as a non-refundable grant from its parent company was a capital
receipt, despite the fact that the payment was made to compensate the
assessee for trading loss since it did not stem from any business
consideration. The finding of the Ld. CIT (A) on the issue is thus
upheld.
The decisions relied upon by the Ld. DR are having distinguishable facts, hence are not helpful to the revenue. In the case of S.B. Sugar Mills Ltd. (supra)
the assessee was paid for relinquishment of his interest in the
property out of a mutual settlements and the receipt was held
assessable. In the present case before us assessee has not been paid due
to its relinquishment of interest in the business or otherwise. In the
case of KettleWellBullen& Co. (supra) it was held that
what the assessee was paid was to compensate it for loss of a capital
asset and was not, therefore, in the nature of a revenue receipt. In the
present case before us amount remitted was not compensation. In the
case of S.KumarsTyres Mfg. Co. Ltd. (supra) the
compensation was received consequent to premature termination of
agreement which was held revenue receipt liable to be assessed as such.
In the case of CIT v. Indonippon Chemicals Co. Ltd. [2003] 112 Taxman 555 (Bom.)it
was held that being the final authority on question of fact, the
Tribunal was bound to consider all the evidence and the arguments raised
by the parties. Similar view has been expressed in the cases of Sreenivasa Pitty (supra) and H.H. Maharani SethuParvatiBai(supra). In the case of Nova Promoters &Finlease (P) Ltd. (supra)
The Hon’ble Delhi High Court has been pleased to hold that the Tribunal
ought to have seen the modus operandi behind the entry provider. In the
case of CIT v. Chuharmal Manghandas[1990] 18 ITR 216 (MP)
the issue was regarding change in the constitution of firm on the death
of the partner and the inclusion of his wife. In the case of Raghunarayan Rice Mills (supra)
the issue raised was allowability of business expenditure in the case
of payments amounted to settlement of the contract otherwise than of
actual delivery within the meaning of Explanation -2 to Section 24 of
the Indian Income Tax Act 1922. In the case of Delhi Stock Exchange Association Ltd. (supra)
the question was where the admission fees received by the company from
the members and the authorized assistants were taxable in the hands of
the company. In the case of Mrs. ShielaKaushik (supra) the issue was regarding annual value of warehouse based on standard rent. In the case of Karanpura Development Co. Ltd. (supra) the issue was as to whether Salami received from sublessee was income or capital. In the case of Bombay Oil Industries Ltd. (supra)
the issue was as to whether on facts it was cleared that entire
transaction was given a facede of sale/purchase wherein no actual
transfer of funds took place. In the case of G.R. Kartikeyan (supra)
the issue was taxability of prize received in car race for testing
skill and endurance. Similar view has been expressed by the Hon’ble High
Court of Delhi in the case of AvinashPasricha (supra). In the case of Smt. Shanti Meattley (supra)
the issue was the taxability of payments received by wife and children
under agreement to live apart from husband. We however, find that the
ratio laid down by the Hon’ble Jurisdictional High Court of Delhi in the
case of Logitronics (P) Ltd. (supra) is applicable in the
present case. In that case it was held by the Hon’ble High Court that
if a loan was taken for acquiring a capital asset, waiver thereof would
not amount to any income assessable to tax. On the other hand, if the
loan was for trading purpose and was treated as such from the very
beginning in the books of account waiver thereof may result in income
more so when it was transferred to the profit or loss account. We find
that the Ld. CIT (A) in the present case has decided the taxability of
the amount remitted by Gillette Co. USA keeping in mind as to whether
those amount has been transferred to the profit or loss account of the
assessee or not.
Ground nos. 1 & 2 of the appeal preferred by the revenue are accordingly rejected.
31. We also do not find infirmity
in the finding of the Ld. CIT (A) regarding sustaining the addition of
Rs. 9.58 crores questioned by the assessee before us. The Ld. CIT (A)
has sustained this addition out of the addition of Rs. 118.09 crores on
the basis that M/s Gillette Company USA, had paid the said amount to the
credit of the assessee’s account. The contention of the assessee
questioning the addition in ground nos. 1, 1.1 & 1.2 of the appeal
preferred by it remained that the Ld. CIT (A) while sustaining the
addition has failed to appreciate the claim of the assessee that the
said sum was not in the nature of the income as it did not arise in the
course of carrying on its business hence, cannot be taxed u/s 28 (1)
(iv) of the Act. It was also contended that the sum received is beyond
the scope of Section 5 of the IT Act. There is no dispute that an amount
of Rs. 11.58 crores out of Rs. 118.09 crores was credited to the bank
account of the assessee. Since the assessee had already credited a sum
of Rs. 1.99 crores to its profit and loss account, and offered to tax,
the Ld. CIT (A) restricted the addition to Rs. 9.58 crores. Since the
amount was credited to the bank account of the assessee hence, in
absence of any contrary and satisfactory explanation by the assessee, we
are of the view that Ld. CIT (A) has rightly treated this amount as
income of the assessee. The same is upheld. The ground nos. 1, 1.1 &
1.2 of the appeal of the assessee are thus rejected Issue no. 3 (Ground
nos. 2, 2.1 & 2.2 (Assessee)
32. We have already discussed the
relevant facts relating to the issue herein above in previous
paragraphs. In brief the AO did not agree with the explanation of the
assessee that the waiver of loan of Rs. 3.34 crores by M/s Gillette
Company USA, constitutes capital receipt and he made addition of this
amount of Rs. 3.34 crores in the income of the assessee. The Ld. CIT (A)
has upheld this action of the AO with this observation that although
originally the amount was received as a capital receipt in the shape of
loan however, since the assessee now does not have to repay the sum
received, it charges the character of the receipt to revenue receipt. In
this regard the Ld. CIT (A) has placed reliance on the decision of
Hon’ble Supreme Court in the case of CIT v. Karam Chand Thapar[1996] 222 ITR 112 holding
that subsequent even must be as such that a different quality is
imprinted on the receipt. The Ld. CIT (A) accordingly held that the act
of waiver of loan is a subsequent event, which imprints a different
quality on receipt. The Ld. CIT (A) held that the decision of Hon’ble
Delhi High Court in the case of Phool Chand Jiwan Ram (supra)
relied upon by the Ld. AR is inapplicable to the facts of the present
case as in the present case waiver has not been made for discharging its
own liability by Gillette Company USA.
33. The Ld. AR reiterated the
submissions of assessee made before the authorities below on the issue.
He submitted that the waiver was by the holding company of the
shareholder, hence Section 41 (1) of the Act is inapplicable
irrespective of the manner of the utilization of the loan. He submitted
that the authorities below have erred in holding that the sum was
utilized for the purpose of business. He submitted that the amount was
not transferred in the profit and loss account of the assessee. He
placed reliance on the following decisions:
a. Phool Chand Jiwan Ram (supra)
b. CIT v. Jagatjit Industries Ltd. [2010] 191 Taxman 54 (Delhi)
c. Mahindra & Mahindra Ltd. (supra)
d. Tosha International Ltd. (supra)
e. Jindal Equipments Leasing & Consultancy Services Ltd. (supra)
34. The Ld. AR while concluding his arguments submitted that decision of Hon’ble Delhi High Court in the case of Jagatjit Industries Ltd. (supra) is fully applicable in the present case.
35. The Ld. DR on the other hand
tried to justify the orders of the authorities below on the issue. He
placed reliance on the decision of Hon’ble Delhi High Court in the case
of Logitronics (P.) Ltd. (supra)
36. Having gone through the
decisions relied upon by the parties especially the decision of Hon’ble
Jurisdictional High Court of Delhi, in the case of Jagatjit Industries Ltd. (supra) we find that the facts in the case of Jagatjit Industries Ltd. (supra)
are more or less similar to the facts of the present assessee before
us. In that case the issue was as to whether 21% of the said gain should
be treated as revenue receipt because of the reason that 21% of the
capital was to be utilized for general corporate uses. The Hon’ble High
Court observed that undisputedly the entire money collected in foreign
exchange represented share capital. Even use of the share capital raised
i.e. how this money is to be utilized, would be of no consequence. Even
if money is raised by issuance of equity share domestically, the money
thus collected as share capital is treated as share capital receipt.
Obviously, for setting up or for expansion of business, part of the said
share capital raised can be utilized for acquiring assets and from
other part, the other expenses can be made treating the same as working
capital. It was held by the Hon’ble High Court that merely because the
part of the share capital is used as working capital that has never been
treated as revenue receipt, the same cannot be treated as revenue
receipt. The Hon’ble High Court has been pleased to affirm the order of
the Tribunal holding that relevant consideration would be to see the
source of funds under which it was held and not the ultimate utilization
of the funds. Similar view has been expressed by the Hon’ble Bombay
High Court in the case of Mahindra & Mahindra Ltd. (supra).
There the loan was granted by foreign company and interest on loan was
deducted u/s 36 of the Act. The principal amount of loan was
subsequently waived. It was held that the amount is not assessable u/s
28 (iv) of the Act. It was not remission of liability, hence amount was
not assessable u/s 41 (1) of the Act. The assessee had paid interest at
6% over a period of 10 years on Rs. 57,74,064/-. In respect of that
interest, the assessee never got deduction u/s 36 (1) (iii) or Section
37. It was held that in order to apply Section 41 (1), an assessee
should have obtained a deduction in the assessment for any year in
respect of loss expenditure or trading liability incurred by the
assessee. In absence of that Section 41 (1) of the Act was not
applicable. Secondly, even assuming that the assessee had got deduction
on loans Section 41 (1) was not applicable because such deduction was
not in respect of loss, expenditure or trading liability. Lastly, it was
held that the tooling constitutes capital assets and not stock in
trade, therefore, Section 41 (1) of the Act was not applicable. Likewise
the ratio laid down by the Hon’ble Delhi High Court in the case of Logitronics (P.) Ltd. (supra)
relied upon by the Ld. DR is fully applicable in the present case
before us. In that case the Hon’ble High Court has been pleased to hold
that if a loan was taken for acquiring a capital asset, waiver thereof
would not amount to any income exigible to tax. On the other hand, if
the loan was for trading purpose and was treated as such from the very
beginning in the books of account the waiver thereof may result in
income more so when it was transferred to the profit and loss accounts,
held the Hon’ble High Court. While holding so the Hon’ble Delhi High
Court has been pleased to refer several decisions including the decision
of Hon’ble Supreme Court in the case of Karam Chand Thapar (supra)
relied upon by the Ld. CIT (A) in the present case. We thus reach to
the conclusion that unless it is examined in the present case as to what
was the purpose of taking the loan amount which was waived, the
taxability of the waived amount as income cannot be adjudicated upon.
Since this material aspect of the facts has remained to be examined by
the authorities below before holding the waived amount as income
exigible to tax, we to meet the end of justice, while setting aside the
orders of the authorities below remand the matter to the file of the
A.O. with direction to adjudicate upon the issue afresh in view of the
decision of the Hon’ble Delhi High Court in the case of Logitronics (P.) Ltd. (supra)
as discussed above after affording proper opportunity of being heard to
the assessee. In result the ground nos. 2, 2.1 & 2.2 are allowed
for statistical purpose. The issue involved therein is now to be decided
by the AO.
37. Consequently appeal preferred by the revenue is dismissed and that preferred by the assessee is partly allowed.
