The Delhi Bench of Income Tax Appellate Tribunal (ITAT) has deleted addition holding that the provisions of Section 41(1) of the Income Tax Act would be attracted only if some trading liability has been written back.
In assessee’s case (Shriram Industries Ltd) additions had been made by the AO in A. Y. 2005-06 is regarding the waiver of loan amount arising out of NCDs which were allotted by the assessee to Morgan Stanley in the public offer made in F. Y. 1993-94. The facts on this issue remain undisputed that in the public offer so made for Rs. 58.01 Crores, these funds were to be utilised for the modernisation of its existing plants/manufacturing facilities.
The assessee actually utilised these funds for the above purpose, which was noted from the Audited Balance Sheet for the F. Y. 1994-95 and as against issue of 58.01 Crores, assessee had actually spent 64.80 Crores. The Director’s Report also certified that the right issue of PCDs/NCDs had been utilised for the purpose as mentioned in the offer letter.
The assessee, Pradeep Dinodia had argued that the ground was pure legal ground and goes to the jurisdiction of making an assessment and should be decided as per the
judgement of Delhi High Court in the case of RRJ Securities and many other judgments on this legal proposition.
Dilip Singh Kothari, on behalf of the revenue submitted that possibility of some of the proceeds from the issue of NCDs had been used in the working capital could not be ruled out and therefore the amount written back by the assessee on account of waiver of loan should be treated as taxable under Section 41(1) of the Income Tax Act and order of AO on this issue should be upheld.
The two-member Bench of G. S. Pannu, (President), and Amit Shukla, (Judicial Member) referred to the decision of Supreme Court in the case of Mahindra & Mahindra wherein the Court, after discussing the various provisions as contained in Section 41(1) and also under Section 28 of the Income Tax Act, held that there was a difference in trading liability and other liability.
The provisions of Section 41(1) of the Income Tax Act were attracted only if some trading liability is written back. If the amount of loan was utilised towards acquisition of capital assets, then the provisions of section 41(1) of the Income Tax Act would not be attracted.
The Bench allowed the appeal filed by the assessee holding that no addition could be made under Section 41(1) of the Income Tax Act and the amount being the amount waived by Morgan Stanley, could not be brought to tax.
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