Tinna Finex Ltd., New Delhi vs Department Of Income Tax

Department by : Sh. J.P. CHANDREKAR, Sr. DR Assessee by : Sh. VED JAIN, FCA & SH. ASISH GOEL, CA

Date of Hearing : 17-06-2015 Date of Order : 26-06-2015

ORDER

PER H.S. SIDHU : JM This appeal by the Revenue is directed against the Order of the Ld. Commissioner of Income Tax (Appeals)-XIX, New Delhi dated 02.4.2012 pertaining to assessment year 2009-10.

2. The grounds of appeal raised by the Revenue read as under:-

1. "Ld. CIT(A) erred in law and on the facts of the case in

deleting the addition made by the AO amounting to

Rs.5,64,85,956/- by holding that section 41(1) of the

I.T. Act, 1961 was not applicable to this case.

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ITA NO. 3584/Del/2012

2. Ld. CIT(A) erred in law and on the facts of the case in

not exercising his powers conferred on him by virtue

of section 251(1)(a) of the Income Tax Act, 1961 to

confirm the addition. He could have considered other

provisions of the Act to uphold the addition, if in' his

opinion provisions of section 41(1) of the I.T. Act, 1961

were not applicable to this case.

3. "Ld. CIT(A) erred in law and on the facts of the case in

not sustaining the addition at least to the extent the

assessee increased its reserve. The amount of Rs.

4.56 crores ( i.e. Rs.5.64 crores - Rs.82.65 lakh -

Rs.25.40 lakh ) has been transferred to the reserve

account without paying tax on it which is definitely a

benefit arising from the business of the assessee

which is taxable under section 28(iv) of the I.T. Act

1961.

4. "The appellant craves to add, alter, amend and withdraw any ground of appeal before or during the course of hearing of the appeal."

3. The brief facts of the case are that the e-Return

declaring NIL income was filed on 29.9.2009 and the same was

processed u/s. 143(1) of the I.T. Act, 1961 (hereinafter called "the

Act") and later on picked up under CASS for scrutiny by issuing of

2 ITA NO. 3584/Del/2012

notice u/s. 143(2) of the Act and the same was duly served on the

assessee. In response to same, Assesse's Authorised Representative

of the Assessee attended the hearings.

3.1 The assessee company is engaged in the business of Finance

and Export. However, during the year, there was no business

activity except receipt of interest and some hire charges etc. As

against gross receipts of Rs. 6,54,900/- the assessee company has

claimed expenditure of Rs. 10,83,949/- working out on loss of

Rs. 4,29,049/-. During the assessment proceedings the AO observed

that the amount of secured and unsecured loans appearing at

Rs.5,64,85,956/- as on 31.03.2008 was reduced to NIL as on

31.03.2009. The assessee was asked to explain the change. The

assessee submitted that there was a family settlement between the

group members and the assets and liabilities were reallocated. Copy

of the Memorandum of Family settlement was filed. The assessee

explained that the assessee company transferred its investment in

Tinna Overseas Ltd. costing Rs.82.65 Iakh and investment in

Pratham Road Technologies Ltd. costing Rs.25.40 lakh in favour of

BKS Group and in turn, liability of secured and unsecured loan

ofRs.5.64 crores was discharged by Tinna Overseas Ltd. The

assessee submitted that the difference of these figures i.e. 5.64

crores - 82.65 lakh - 25.40 lakh = Rs.4.56 crores was credited to the

reserve account of the assessee. The assessee further submitted

3 ITA NO. 3584/Del/2012

that there was no trading transaction involved in these transactions

and therefore the provisions of section 41(1) of the I.T. Act were not

attracted. The AO invoked the provisions of section 41(1) of the I.T.

Act and made addition of Rs.5,64,85,956/- to the income of the

assessee and completed the assessment u/s. 143(3) of the Act vide

order dated 28.12.2011.

4. Against the above assessment order the assessee appealed

before the Ld. CIT(A) who deleted the addition made by the AO by

holding that as there was a family settlement and the addition was

not covered under section 41(1) of the Act vide impugned Order

dated 02.4.2011.

5. Against the above order the Revenue is in appeal before us.

6. Ld. DR relied upon the order of the AO and reiterated the

contentions raised by the Revenue in its grounds of appeal.

7. On the contrary, ld. Counsel of the assessee relied upon the

order of the Ld. CIT(A).

8. We have heard both the parties and perused the relevant

records, orders of the revenue authorities and written synopsis filed

by the assessee through Paper Book wherein assessee has stated

that provisions of section 41(1) of the Act are not applicable

4 ITA NO. 3584/Del/2012

to the facts of the present case, hence, the impugned order of the

Ld. CIT(A) may be upheld.

8.1 We find that Ld. CIT(A) has adjudicated the issue in dispute as

under:-

"As per the scheme of arrangement approved by the honorable High Court of Delhi vide order dated 07.11.1997 read with Memorandum of Understanding (MOU) dated 2nd April, 1997 and Addendum dated 3rd & 15th December, 1997 among the company, Tinna Oils & Chemicals Ltd. and Archer Daniels Midland Singapore Pte Ltd., movable assets, liabilities and investment of spin off division Of Tinna Oil & Chemicals Limited, as per its audited Balance Sheet as on 31/3/1997 got vested with the appellant company i.e. Tinna Finex Limited (for short TFL). Besides this 91,10,170 equity shares of Rs.1 0/- each fully paid up in Tinna Finex Limited were allotted to existing share holders of Tinna Oils & Chemicals Limited, in the ratio of 1: 1 as per the scheme (Notes on accounts no.3b to the Audited balance sheet as on 31/3/1998) (PB-164).

The total amount due to the Banks as per Sch-C of secured loan and note no. 2 of notes on accounts to the audited balance sheet as on 31.3.1998 of the appellant company were Rs. 11.22 Crores (PB-152).

Tinna Group of companies were being run as a family business between Mr. Bhupinder Kumar Sekhri, Mr. Vijay Sekhri & Mr. Anil Kumar Sekhri and their family members. In the year 2008, disputes arose among the family members and the matter was referred to Hon'ble Company Law Board (CLB). A broader

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family settlement was arrived before the CLB vide its order dated 5.1.2009. It was followed by a Memorandum of Family settlement signed by all the family members on 27.03.2009. Subsequently, Scheme of arrangement dated 17.05.2009 was filed before the Hon'ble CLB and the same was approved by the Hon'ble CLB vide its order dated 9th June, 2009 (PB ... 8-

73).

Before the Family Settlement on 05.01.2009 the appellant company was a subsidiary company of Tinna Overseas Limited. M/s Tinna Overseas Limited (for short TOL) was a corporate Guarantor for these loans. The appellant company paid off part of the Bank's liabilities mentioned above out of its own sources and the balance amount of Rs.5.64 crores was paid by way of taking secured/unsecured loans from the erstwhile holding company Tinna Overseas Ltd.

The amount of Rs.5.64 crores was paid directly by TOL to the banks during the period 12.09.2002 to 31.05.2003. The total amount paid by TOL and debited to TFL as a loan was Rs.7.35 crores. Out of this total amount, an amount of Rs.1. 71 crores was paid back by TFL to TOL and the balance outstanding on the date of Family Settlement was Rs.5.64 crore, which was written off by TOL as per Scheme of arrangement dated 17.05.2009, para 4.2.1 page 19, and was debited by TOL to its Reserve & Surplus Account as appearing in the audited final accounts of TOL for the F. Y. 2008-09 (Page No.8, Schedule F

(e) and Schedule B (iii) total amount Rs. 25,48,25,973/-) (PB ..

132).

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ITA NO. 3584/Del/2012

The amount of loans taken from holding company Tinna Overseas Limited and outstanding as on 31/3/2008 were as under:

Secured Loans Rs. 4,10,00,000/-

Unsecured Loans Rs. 1,54,85,956/-

Total Loans Rs. 5,64,85,956/-

As per the scheme of arrangement duly approved by the Hon'ble company law board, the said amount was written off as under:

Total Loans (As above) Rs. 5,64,85,956/-

Less: Investment in shares held by appellant Company in:

--Tinna Overseas Ltd. Rs.82,65,000/-

-- Pratham Road Technologies & Construction Ltd. Rs.25,40,250/- Rs. 1,08,05,250/-

Net loan amount Rs. 4,56,80,706/-

Amount payable to Tinna Overseas Ltd. Rs. 36,095/-

Net amount of loan from Tinna Overseas Ltd.

W/back Rs. 4,56,44,611/-

(Schedule 'A' to audited Balance sheet as on 31/3/2009)

As such, as per family settlement, a sum of Rs.4,56,44,611 / - has been credited to Reserve & Surplus by the appellant company

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and as per clause 4.9 of the scheme of arrangement, Tinna Overseas Limited reduced its Reserve & Surplus accordingly.

Section 41(1) of the Income tax Act, 1961 says that any loss, expenditure or trading liability incurred by the assessee and subsequently recovered by him is taxable as income in the year of recovery and it is applicable not only to the assessee who claimed such deduction but also to his "successor in business". It covers any person who succeeds to the business of another, viz in the case of companies amalgamating company, in the case of firms, the succeeding firm and the resulting company in the case of demerger.

In this case AO has not proved that there was recovery of any loss or expenditure or trading liability which was allowed as deduction while computing the income in earlier years. On merits as well as on legal grounds there is no scope for invoking provisions of S. 41(1) in the appellant's case.

In the appellant's case the borrowed funds from its erstwhile holding company were utilized to pay off its Bank liabilities. In the case of CIT vs. Jubilant Securities Pvt. Ltd. ITA No. 503 of 2010 (Delhi High Court), it was held that when money borrowed was not utilized in its business, the borrowed amount cannot be taken as part of circulating capital and to be treated as a trading receipt.

Whenever an amount is borrowed and utilized for paying off its liabilities and the borrowed amount was waived; the same cannot be brought into tax net either in terms of S.41(1) or 28(iv) of the IT Act. This proposition was laid down in the following cases 'which are referred to by the AR in the submissions:

⦁ Govindbhai C. Patel vs. DCIT (ITA No. 1675/ Ahd/2009, dated

30.10.2009) (ITAT, Ahmedabad)

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⦁ CIT vs. Phool Chand Jiwan Ram (131 ITR 17) (Del.) ⦁ CIT vs. Compaq Electric Ltd. (ITA No. 172 of 2011 dated

18.10.2011) (Bangalore)

⦁ CIT vs. Chetan Chemicals Pvt. Ltd. (267 ITR 770) (Guj.) ⦁ CIT vs. Tosha International Ltd. (176 Taxman 187) (Del.) ⦁ Mahindra & Mahindra Ltd. vs. CIT (261 ITR 501) (Born.)

⦁ CIT-3 vs. M/s Cipla Investments Ltd. (ITA No. 6988 of 2010,

dated 07.02.2012) (HC of Bombay)

The AO has not disputed the facts brought on record by the appellant company. The liability of Rs.5,64,85,956 as on 1.01.2009 in favour of M/ s Tinna Overseas Ltd., was no longer required. to be paid in view of the settlement. Similarly the appellant had foregone the investment in the shares and loan totalling to Rs.1,08,41,345 as per the terms of the settlement. The net gain to the appellant is Rs. 4,56,44,611. The appellant has clearly established that the adjustments are on capital side and there is no case for invoking provisions of S.41(1) since the liability waived by the creditor was never claimed as revenue expenditure. In the light of the above facts and legal position brought on record, the addition made by the AO cannot be sustained. (Relief Rs. 5,64,85,956/-)."

8.2 We find that the Assessee filed Return of Income claiming net loss of Rs. 4,29,049/- on 29.9.2009 and engaged in the business of Finance and Exports, however, there are no business during the year & assessee earned only interest sums & sums were charging of Rs. 6,54,900/- and has claimed expenses of Rs. 10,83,949/- & loss of

9 ITA NO. 3584/Del/2012

Rs. 4,29,049 has been claimed. During the year under consideration assessee has credited amount of Rs. 4.56 Cr to the reserves & surplus. We further note that in consideration thereof the company issued 91,10,170 shares of RS. 10/- each and also takeover the bank loan of Rs. 11.22 Crores. The assessee company was a subsidiary of Tinna Overseas Ltd (Tal). Tinna Overseas Ltd was a corporate guarantor for the bank loan. The company paid off part of the bank loan and since it was not able to pay part of the bank loan of Rs. 5.64 Crore, the Tinna Overseas Ltd being guarantor, paid off this loan during the year 2002-03. Accordingly the bank loan got substituted with the loan from Tinna Overseas Ltd and continued till 2009. In the year 2009, consequent to order passed by the company Law Board, the above loan was written off after adjustment of investments held by appellant company of Rs. 108,05,250/-. Thus, there was net loan of Rs. 4,56,44,611/- which got written off and was credited to Reserves and Surplus account.

8.3 After going through the provisions of section 41(1) of the

income tax act, we find that the same are not applicable to the facts

of the assessee case. We also find that the AO has made the

addition of Rs. 5.64 crore by invoking provision of sec. 41(1) of the

income tax without stating how the provision are applicable to the

assessee's case. Mere cessation of liability does not result into fit

case of sec. 41 (1) of the I.T. Act. Assessee has submitted that

assessee was not incurred any loss/expenditure/trading liability

which is subsequently recovered by him is taxable as income in the

year of recovery. We find that the assesse is squarely covered by

the following judgments wherein it has been held that whenever, an

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amount is borrowed towards capital account and the loan is waived

off, the same cannot be brought to tax net either in terms of sec-41

(1) or 28(iv) of the Act. The same observation was mentioned by the

Ld. CIT(A) in his impugned order at page no. 11 and Ld. CIT(A) also

placed reliance the following cases on this issue:

ii) CIT vs. Toshalnternational Ltd. (176 Taxaman 187)

(Del.)

iii) Govind Bhai C Patel Vs DCIT (ITA No. 1675/Ahd/2009)

dated 30.10.2009 (ITAT Ahmedabad)

iv) CIT vs. Phool Chand Jiwan Ram (131 ITR 17) (Del.)

v)CIT vs. Compaq Electric Ltd. (ITA No. 172 of 2011 dated

18.10.2011) (Karnatka HC)

vi) CIT vs. Chetan Chemicals Pvt. Ltd. (267 ITR 770) (Guj.)

vii) Mahindra & Mahindra Ltd. vs. CIT (261 ITR 501)

(Bom.)

viii)CIT-3 vs. M/s Cipla Investments Ltd. (ITA No. 6988 of

2012, dated 07.02.2012) (HC of Bombay)

8.4 We further note that it is well settled law that where no

deduction/allowance has been made in respect of loss, exp/liability

in the assessment year or in any earlier years, cessation of such

11 ITA NO. 3584/Del/2012

liability cannot be taxed under section 41(1) of the Income Tax Act.

To support this finding, we place reliance on the following

judgments:-

i. CIT-III Vs. Shivali Constructions P Ltd 355 ITR 218(0)

Dated 01.5.2013, (Delhi High Court)

ii. CIT-II Vs National Dairy Development Board -Gujarat HC

49 Taxman.com 316 (ITA Appeal No. 195 of 2014) dated.

6.5.2014.

8.5 In view of the above, we find that the AO has not disputed the

facts brought on record by the assessee company. In our opinion,

the liability of Rs.5,64,85,956/- as on 1.01.2009 in favour of M/s

Tinna Overseas Ltd., was no longer required to be paid in view of the

settlement. Similarly the assessee had foregone the investment in

the shares and loan totaling to Rs.1,08,41,345/- as per the terms of

the settlement. The net gain to the assessee is

Rs. 4,56,44,611/-. The assessee has clearly established that the

adjustments are on capital side and there is no case for invoking

provisions of S.41(1) since the liability waived by the creditor was

never claimed as revenue expenditure.

8.6 Keeping in view of the facts and circumstances and the

precedents, as explained aforesaid, we find considerable cogency

in the finding of the Ld. CIT(A) that the addition made by the AO

12 ITA NO. 3584/Del/2012

cannot be sustained. Therefore, we do not see any reason to

interfere with the finding of the Ld. CIT(A) on the issue in dispute,

hence, we uphold the same

9. In the result, the appeal of the Revenue is dismissed.

Order pronounced in the Open Court on 26/06/2015.

Sd/- Sd/-

[N.K. SAINI] [H.S. SIDHU] ACCOUNTANT MEMBER JUDICIAL MEMBER Date 26/06/2015 "SRBHATNAGAR" Copy forwarded to: - 1. Appellant - 2. Respondent - 3. CIT 4. CIT (A) 5. DR, ITAT TRUE COPY By Order,

Assistant Registrar, ITAT, Delhi Benches

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