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Judgment
The present appeal has been filed by the Department u/s 260A of the income tax Act, 1961 against the judgment and order dated 18.01.2008, passed by the Income Tax Appellate Tribunal, Lucknow in Appeal No. I.T.A. No. 1195/Luc/2006, for the assessment year 2002-03. On 05.11.2008, a Coordinate Bench of this Court has admitted the appeal on the following substantial question of law:--
Whether on the fact and circumstances of the case the Income Tax Appellate Tribunal was justified in holding that the provision of Section 41(1) of the income tax Act, 1961 is not applicable.
The brief facts of the case are that the assessee is a State Industrial Investment Corporation, which was established for promoting industrial growth in the State of U.P. It is engaged in providing financial assistance to industrial units by way of equity participation, term lending and by way of loan on lease of assets. During the assessment year under consideration, the assessee-Corporation had shown non refundable interest free unsecured loan of Rs. 26,02,50,000/- from the U.P. Government. The Assessing Officer (AO) opined that since the assessee-Corporation has utilized the said loan in the business activity, so the same will have to be treated as capital receipt. Hence, he made the addition, which was deleted by the first appellate authority as well as by the Tribunal vide its impugned order. Still not being satisfied, the Department has filed the present appeal.
With this background, Sri D.D. Chopra, learned counsel for the Department, at the strength of written submission had justified the order passed by the AO. He submits that the intention of the assessee was to get this loan amount into profit & loss account, hence, the conversion of loan into non refundable interest free unsecured loan is of revenue amount. So it is taxable. He further submits that State Government is 10096 shareholder in the assessee-company and there is no outside participation in the equity, the only way the State Government can recoup the loss is either to increase the share capital of the assessee or to grant another loan. The State Government had granted loan of Rs. 33.53 crores to the assessee and the assessee was unable to make the repayment. In these circumstances, the assessee had requested the State Government vide letter dated 31.03.2002 to permit to adjust the interest bearing loan against losses in profit and loss account. As a result, the State Government converted part of the loan as non refundable interest free unsecured loan to the extent of Rs. 26.03 crore. This is clearly a cessation/remission of trading liability and assessable u/s 41(1) of the Act. Lastly, he made a request that the impugned order passed by the Tribunal may kindly be set aside where the addition was deleted.
On the other hand, Sri S.K. Garg, learned counsel for the assessee has justified the impugned order. He submits that the State Government is 100% shareholder in the company since the assessee is granting the loan in various forms and providing financial assistance to industrial units in the State, it often suffers loss on account of non recovery of financed money. The State Government has converted the part of the loan as non-refundable interest free unsecured loan to the extent of Rs. 26.03 crores. The assessee has in fact not created in the same profit & loss account, as such, in the balance-sheet. This conversion is a remission or cessation of any trade liability, hence, it is not taxable u/s 42(1) of the Act. It is not a revenue receipt and because tax cannot be charged merely by looking the intention of the assessee, there must be some income. For this purpose, he has relied on the ratio laid down in the case of Commissioner of Income Tax Vs. Sahara India Savings and Investment Corporation Ltd., .
After hearing both the parties and on perusal of the record, it appears that the controversy is pertaining to the applicability of Section 41(1) of the Act on a sum of Rs. 26.03 crores which was converted by the State Government i.e., non-refundable interest free unsecured loan. Section 41(1) of the Act on reproduction, reads as under:--
Profits chargeable to tax.-- (1) Where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee (hereinafter referred to as the first-mentioned person) and subsequently during any previous year,-
(a) the first-mentioned person has obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtained by such person or the value of benefit accruing to him shall be deemed to be profits and gains of business or profession and accordingly chargeable to income tax as the income of that previous year, whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not; or
(b) the successor in business has obtained, whether in cash or in any other manner whatsoever, any amount in respect of which loss or expenditure was incurred by the first-mentioned person or some benefit in respect of the trading liability referred to in clause (a) by way of remission or cessation thereof, the amount obtained by the successor in business or the value of benefit accruing to the successor in business shall be deemed to be profits and gains of the business or profession, and accordingly chargeable to income tax as the income of that previous year.
Explanation 1.-- For the purposes of this sub-section, the expression "loss or expenditure or some benefit in respect of any such trading liability by way of remission or cessation thereof" shall include the remission or cessation of any liability by a unilateral act by the first mentioned person under clause (a) or the successor in business under clause (b) of that sub-section by way of writing off such liability in his accounts.
Explanation 2.-- For the purposes of this sub-section, "successor in business" means,--
(i) where there has been an amalgamation of a company with another company, the amalgamated company;
(ii) where the first-mentioned person is succeeded by any other person in that business or profession, the other person;
(iii) where a firm carrying on a business or profession is succeeded by another firm, the other firm;
(iv) where there has been a demerger, the resulting company.
In the instant case, no claim of loss expenditure of trade liability was made by the assessee in respect of the loan granted by the State Government. Therefore, question of considering the said loan cannot be considered as revenue receipt. For the purpose, we agree with the observation of the CIT(A) that the conversion of the loan given by the State Government into non refundable interest free unsecured loan was on capital account.
Originally, when the loan was granted, it was of capital account. By converting it into non-refund able interest free unsecured loan, it remain part of the capital account as appears from the balance-sheet of the assessee. The assessee has merely changed the description of the loan as per the direction of the State Government and no way it has treated it as a revenue receipt in its books of account.
In the instant case, the State Government is 100% shareholder in the assessee-company. In fact, the present case is regarding the conversion of the capital of one amount to another amount. So, conversion cannot be taxed, only when specifically provided in a book of statute, but there is no provision in the Act that on conversion of one capital from another capital will be treated as revenue receipt. When it is so, then we find no reason to interfere with the impugned order passed by the Tribunal. The same is hereby sustained along with reasons mentioned therein.
The answer to the substantial question of law is in favour of the assessee and against the revenue. In the result, the appeal filed by the appellant-Department is hereby dismissed.