Vildirect: IncomeTax-caselaws-1970-VIL-328--DT

1970-VIL-328--DT

GUJRAT HIGH COURT

R/TAX APPEAL NO. 745 of 2019

Date: 01.01.1970

THE PRINCIPAL COMMISSIONER OF INCOME TAX-1

MEDICAL TECHNOLOGIES LIMITED

JUDGMENT

PER: HONOURABLE MS.JUSTICE HARSHA DEVANI

1. By this appeal under section 260A of the Income Tax Act, 1961 (hereinafter referred to as “the Act”), the appellant – revenue has challenged the order dated 03.06.2019 made by the Income Tax Appellate Tribunal, Ahmedabad Bench (C) (hereinafter referred to as “the Tribunal”) in ITA No. 3328/Ahd/2016 by proposing the following question, stated to be a substantial question of law:

“Whether the Appellate Tribunal has erred in law and on facts in deleting the addition of Rs. 4,42,95,650/- made by the Assessing Officer being the amount of unsecured interest free loans taken from M/s. Matrix Logistics Pvt. Ltd. invoking the provisions of Section 41(1) of the Act?”

2. The assessment year is 2013-14 and the relevant accounting period is the previous year i.e. 2012-13.

2.1 During the course of assessment proceedings, the Assessing Officer noticed that the assessee had credited Rs. 4,42,95,650/- in the profit and loss account being the interest free unsecured loan obtained from Matrix Logistics Private Limited in the previous year, the liability of which, ceased to exist on account of winding up of Matrix Logistics Private Limited by the order of the Gujarat High Court. The assessee had excluded the amount of Rs. 4,42,95,650/- in the computation of income contending that it was a capital receipt and could not be brought to tax. The Assessing Officer noticed that the assessee company was formed with the main object of carrying business of providing technological support services and the business of manufacturing and trading of medical support. It was further noticed that during the year under consideration, the assessee had not carried out any of the above business activities but was involved in the business of purchase and sale of shares of the Group Company and investment in mutual fund and earned dividend income and interest income etc. The assessee had regularly taken unsecured loans for its share business as investment and the shares held by the company could only be treated as stock-in-trade and any amount obtained which was used for purchase of shares was not a capital receipt but it was treated as revenue receipt. According to the Assessing Officer, if it was a capital receipt, the assessee was free to directly credit in capital reserve, instead of that, the assessee had credited the amount in profit and loss account. The assessee had submitted that the loan was obtained from Matrix Logistics Private Limited and after the winding up order, there was no liability to repay the loan which shows that the liability of Rs. 4,42,95,650/- became null and void by virtue of order of the High Court. The Assessing Officer was of the view that the assessee had become richer by an amount of Rs. 4,42,95,650/- and that, the assessee had failed to prove that the loan amount, taken from Matrix Logistics Private Limited was used for purchase of capital asset and that, on the contrary, it was established that the loan amount was used for purchase of shares, that is, for trading purpose in the business of the assessee, and held that the waiver of such loan was required to be taxed as income under section 41(1) of the Act on account of cessation of liability.

2.2 The assessee carried the matter in appeal before the Commissioner (Appeals), who held that sections 41(1) and 28(iv) of the Act were not applicable to the facts of the case and deleted the addition made by the Assessing Officer.

2.3 The revenue carried the appeal before the Tribunal but did not succeed.

3. Mrs. Mauna Bhatt, learned Senior Standing Counsel for the appellant, reiterated the grounds set out in the memorandum of appeal.

4. From the facts as emerging from the record, it is an admitted position that in the year under consideration, the assessee was not carrying any business activity in terms of the main object of the assessee company. It is further revealed that while assessee had borrowed monies from Matrix Logistics Private Limited, it had not claimed any deduction or allowance in respect of the same. It is an admitted position that the assessee had not claimed any deduction in respect of the unsecured loans from Matrix Logistics Private Limited. It is, under these circumstances, that the Commissioner (Appeals) as well as the Tribunal have found that the conditions of sub-section (1) of section 41 of the Act have not been satisfied in the present case. The Supreme Court, in Kedarnath Jute Manufacturing Co. Ltd. v. CIT, (1971) 82 ITR 363, has held that the accounting entries cannot be determinative of the nature of receipt and what can be added to income under section 41(1) of the Act is something in respect of which, deduction has been allowed in the past. An essential prerequisite for invoking section 41(1) of the Act is that an allowance or deduction should have been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee and it is only when the assessee derives any benefit in respect of waiver of such liability that the provisions of section 41(1) can be invoked. In CIT v. Mahindra & Mahindra Ltd., (2018) 302 CTR 213 (SC), the Supreme Court has held that it is a well settled principle that creditor or his successor may exercise his right of waiver unilaterally to absolve the debtor from his liability to repay. After such exercise, the debtor is deemed to be absolved from the liability of repayment of loan subject to the conditions of waiver. Hence, the waiver of loan by the creditor results in the debtor having extra cash in his hand. It is receipt in the hands of the debtor/assessee. The court held that on a perusal of sub-section (1) of section 41 of the Act, it is evident that there 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 Act. The objective behind the 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.

5. In the facts of the present case, since the assessee has not claimed any allowance or deduction in respect of the unsecured loan obtained by it from Matrix Logistics Private Limited in any previous year, the provisions of sub-section (1) of section 41 of the Act would not apply. The Tribunal has, therefore, rightly applied the decisions of the Supreme Court in Kedarnath Jute Manufacturing Co. Ltd. v. CIT and CIT v. Mahindra & Mahindra Ltd. (supra) to the facts of the present case. No infirmity can therefore be found in the impugned order passed by the Tribunal, so as to give rise to a question of law, much less, a substantial question of law, warranting interference. The appeal, therefore, fails and is, accordingly, summarily dismissed.

DISCLAIMER: Though all efforts have been made to reproduce the order accurately and correctly however the access, usage and circulation is subject to the condition that VATinfoline Multimedia is not responsible/liable for any loss or damage caused to anyone due to any mistake/error/omissions.