The Delhi High Court observed that Section 41 (1) of the Income Tax Act, 1961 applicable to the presence of remission of liability and upheld the order of the Income Tax Appellate Tribunal ( ITAT ).
The appellant/assessee, Valley Iron and Steel Co Ltd the order passed by the ITAT [“Tribunal”]. During assessment proceedings, it emerged that Rs.14,00,000/- had been credited to the account of the appellant/assessee. On enquiry, it was found that ostensibly, the said amount was received by the appellant/assessee as a loan from an entity named Gee Wire Pvt. Ltd [“GWPL”]. A loan agreement was produced. A perusal of the loan agreement shows that it was printed on the letterhead of the appellant/assessee.
The purpose of the loan appeared to be the remission of liabilities against fixed assets/capital goods and not for the routine operational requirements of the appellant/assessee. It appeared that this purpose has been incorporated with a strategic plan in mind, which is, if the loan is not to be repaid for any eventuality, i.e., if there is remission of liability, it would then not be treated, in law, as a taxable amount as facially the remission of liability would be on capital and not on revenue account.
As per the terms of the loan agreement, the appellant/assessee was not obliged to pay any interest to the lender i.e., GWPL. Furthermore, the appellant/assessee could pay the loan amount after four years in three annual instalments, as per “mutual consent”.
The Assessing Officer ( AO ) doubted the genuineness of the loan transaction and hence added the amount to the income of the appellant/assessee by taking recourse to Section 68 of the Income Tax Act,1961 [“Act”].
The view taken by the AO has been confirmed by the Commissioner of Income Tax Appeals [“CIT(A)”] via his order. Mr Abhimanyu Jhamba, the counsel, who appeared on behalf of the appellant/assessee, says that “the triple test” enunciated by the courts for discharging the onus stood satisfied. According to Mr Jhamba, the identity, creditworthiness, and genuineness of the transaction were established.
It was stated that the appellant/assessee could not go beyond the production of the aforementioned loan agreement, as the name of the lender i.e., GWPL, was struck off from the Register of Companies in and about August 2018.
Further argued that since there was remission of liability, the provisions of Section 41(1) of the Act came into play, which is an aspect that was not fully appreciated by the statutory authorities.
Mr Vipul Agarwal, senior standing counsel, who appeared on behalf of the respondent/revenue, submitted that no interference was called for with the impugned order. It was contended by Mr Agarwal that the appellant/assessee had failed to discharge its onus as regards the genuineness and creditworthiness of the lender i.e., GWPL.
It was found that since the lender was a private limited company, it was perhaps open to the appellant/assessee i.e., the borrower, to produce the erstwhile directors to establish the genuineness of the loan agreement. None of these steps were taken by the appellant/assessee.
A division bench comprising Justice Rajiv Shakdher and Justice Girish Kathpalia observed that “the initial onus was not discharged by the appellant/assessee. Besides this, the argument advanced that since there was remission of liability Section 41(1) of the Act would apply and not the provisions of Section 68 of the Act, as rightly held by the Tribunal, is an untenable submission.”
“Since the genuineness of the loan transaction was doubted, no liability, in law, fructified requiring remission.”, the bench held while upholding the order.
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