Tuesday, 9 July 2013

Whether when assessee has not been allowed any deduction u/s 43B in earlier years, provisons of Sec 41(1) will not apply in case of grant of waiver of interest - YES: ITAT

THE issue before the Bench are - Whether when the assessee has not been allowed any deduction u/s 43B in earlier years, provisons of Sec 41(1) will not apply in case of grant of waiver of interest to the assessee and Whether when the waiver of interest is a cash benefit, the provisions of Sec 28(iv) do not apply. And the verdict goes in favour of the assessee.
Facts of the case
Assessee is engaged in the business of manufacture of integrated circuits. The assessee had filed return of income for the assessment year 2005-06 declaring total loss of Rs.49,11,440/-.
The return was processed under section 143(1) of the Income Tax Act, 1961 and no scrutiny assessment under section 143(3) of the Act has been passed. However, during the course of scrutiny proceedings for the assessment year 2006-07, it was found that the assessee had received some interest waiver and the same was not offered for tax and the assessment was reopened. Even in the year under consideration assessment was reopened based on 2006-07 assessment. During assessment proceedings, the Assessing Officer observed that the assessee has received waiver of interest as One Time Settlement [OTS] to the extent of Rs.3,43,59,395/- during the assessment year 2005-06 and as per the provisions of section 43B interest payable on loans taken from financial institution can be claimed only on payment basis. In this case, since, the financial institutions have waived the interest payable by the assessee company, there was benefit accrued to the assessee, which has not offered to tax. Since the financial institutions had waived the interest, the question of payment did not arise and hence assessee’s claim of deduction of Rs.3,43,59,395/- towards waiver of interest under OTS required to be taxed. Accordingly, the income to the extent of Rs.3,43,59,395/- was taxed.
On appeal, the CIT(Appeals) observed that the waiver of the interest, which was not allowed as deduction in earlier assessment cannot be taxed under section 41(1). Therefore, interest payable to the banks to the extent they had not been allowed as deduction in earlier assessment cannot be taxed under section 41(1) of the Act. Accordingly, the CIT(Appeals) directed the Assessing Officer to verify the same and delete. In so far as section 28(iv) was concerned, he observed that if the loans were utilized for acquisition of capital assets, then the loan as well as the interest on such loans waived will be in the capital field and cannot be taxed under section 41(1) or under section 28(iv). However, if the loans were utilized for working capital requirement, the amount of interest on such loans waived may be assessed as revenue receipt and directed the Assessing Officer to consider the same and pass fresh order.
On appeal, the Tribunal held that,
++ in this case, the assessee has received waiver of interest as OTS to the extent of Rs.3,43,59,395/- during the assessment year 2005-06. The claim of the assessee under section 43B was not allowed by the Assessing Officer in earlier years. Therefore, the case of the assessee is that when the assessee received waiver of interest and the Assessing Officer in earlier years relating to the same receipt not allowed benefit under section 43B, the provisions of section 41(1) have no application. We find that there is a force in the argument of Counsel for the assessee for the reason that to apply section 41(1), the assessee should have claimed earlier year any benefit and allowed by the Assessing Officer. In the present case, the Assessing Officer has not allowed deduction under section 43B to the assessee. Therefore, section 41(1) of the Act cannot be applied in assessee’s case.
++ in so far as application of section 28(iv) is concerned, the Counsel for the assessee has submitted that waiver of interest received by the assessee is a cash benefit and section 28(iv) do not apply in view of the case law relied on by the assessee. We also find that in the case of Iskraemeco Regent Ltd. v. CIT, the High Court has observed that section 28(iv) of the Act speaks about the benefit or perquisite received in kind. Such a benefit or perquisite received in kind other than in cash would be an income as defined under section 2(24) of the Act. In other words, any transaction which involves money, section 28(iv) has got no application;
++ in so far as the case law relied on by the Revenue in one of the grounds M/s. Protex Engineer Company Pvt. Ltd., the facts are entirely different. In that case, the assessee has received the excess amount or advance receipt against supply etc. received in earlier years. The Bombay High Court has held that section 28(iv) applies to the facts of the case

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