Capital Receipt / Waiver of loan [not chargeable to tax u/s 41(1)] to be excluded in 115JB computation – Mum ITAT


JSW Steel Limited v ACIT (ITA No.923/Bang/2009 dated 13.01.2017) (Mumbai ITAT)

BACKGROUND:

– Assessee had availed term loans from various Indian and foreign financial institutions and banks for setting up of integrated steel plants.  The assessee had utilized the above loans to pay the purchase price of the imported plant and machinery for setting up of the Steel plants. The loans were repayable over various maturity dates up to 2010.
– After setting up the steel plants, the assessee had incurred huge loss due to economic recession in general and steel industry in particular and was under severe financial crisis. Accordingly, the assessee entered into a financial restructuring package.
– After negotiations with the foreign lenders, the assessee entered into agreements to settle the dues, pursuant to which the principal and interest payable were reworked and part of the principal and interest amounts were waived.
– Accordingly, the entire sum of was credited to the Profit and Loss account as an exceptional item on account of waiver of the principal and interest payable thereon with a specific note in ‘Notes to Account’ that the exceptional item represents waiver of dues on settlement.
– During the course of assessment proceedings, the assessee contended that since the waiver of principal amount of borrowing was utilized on capital account, therefore, it is a capital receipt not taxable while computing the income of the assessee and hence the amount waived has not been offered to tax as per section 41(1).
– Further, the assessee by way of a note in the computation gave a caveat that the amount of Rs.314.14 crores which represents capital receipt is not in the nature of profit and gains of business and therefore, is not includable in the book profit under section 115JB.
– The Assessing Officer, however, while computing the book profit in the assessment order considered the figure as given in the profit & loss account and did not agree to reduce the aforesaid waiver of dues.

– On appeal, the CIT(A) rejected the assessee’s contentions stating that that assessee is required to prepare its profit & loss account in accordance with Part II & III of VIth Schedule of the Companies Act,1956 and the book profit so arrived is to be taken at the basis for MAT calculation subject to certain specific adjustments of amount/data prescribed in the Explanation-1 thereto. The assessee in its computation of book profit once has adopted the said amount as the part of the book profit then the same has to be accepted as such.

ASSESSEE’S CONTENTIONS:

  • Firstly, the exclusion of capital receipt though credited to the profit & loss account is in accordance with Part II & III of VIth Schedule of the Companies Act, 1956 as only the ‘working results’ of the company is required to be considered for the purpose of computing the book profit under the provisions of section 115JB; and
  • Secondly, the waiver of loan is a ‘capital receipt’ because it was taken for the purchase of capital assets and hence it does not fall within the definition of income under the provisions of the Income Tax Act.
  • Once the particular receipt is not recognized as income at all under the charging provisions of Sections 4 & 5, there is no question of taxing the same under any other provisions of the Act.
  • Referring to theAS-5 and AS-9, it was submitted that such waiver of a loan amounts to gain resulting from discharge of an obligation which is not considered as revenue, therefore, such a waiver of loan amount cannot be treated as revenue as per accounting standards.
  • Reliance is placed on Hon’ble Supreme Court in the case of Indo Rama Synthetics (I) Ltd. vs. CIT, (2011) 330 ITR 363 (SC) wherein it has been held that object of the MAT provision is to bring out the ‘real profits’ of the companies.

DEPARTMENT’S ARGUMENTS

  • Once the assessee itself has credited the waiver amount to the profit & loss account, then neither the Assessing Officer nor the assessee can tinker with such profit & loss account. In support of it, he strongly relied upon the decision of Hon’ble Supreme Court in the case of Apollo Tires Ltd. vs. ACIT, reported in 255 ITR 273.
  • The notes appended to the profit & loss account cannot be read into because ultimately the results shown by the assessee are to be reckoned and considered for the profit & loss account disclosed in the books.
  • In all the judgments relied upon by the assessee, had made a claim for deduction from the book profit in the computation of book profit itself and not when assessee himself has shown as a part of Profit & Loss Account and offered it as a book profit.

HELD:

  • It needs to be first determined, whether the amount of waiver of loan is taxable under the normal provisions of the Income Tax Act, 1961 or not. It is axiomatic that under the Income Tax Act only those receipts which are in the nature of income can alone be subject to tax and such a nature of income should fall within the charging section as provided under the Act.
  • Generally the waiver of remission of a liability cannot be regarded as income in the hands of the assessee unless it is a trading liability and if the waiver of a loan is on capital account then certainly it cannot be reckoned as income or revenue, which is clearly evident from the relevant provisions of section 41(1).
  • Thus, waiver of loan taken for acquisition of a capital asset and on capital account cannot be taxed u/s 41(1), as it is neither on revenue account nor a remission of a trading liability so as to attract tax in the year of remission.
  • The purpose and legislative intent behind introduction of provisions of section 115J/115JA/115JB was to take care of the phenomenon of prosperous zero tax companies which had continued but were paying no income tax even though they had profits and were declaring dividends. It was therefore, sought that minimum corporate tax should be paid by these prosperous companies and accordingly, MAT was introduced.
  • Spl. Bench in case of Sutlej Cotton Mills Ltd. vs. ACIT and Cochin Bench of ITAT in the case of ACIT vs. Nilgiri Tea Estate Ltd., reported in (2014) 65 SOT 14 has held that an item of income which does not come within the purview of the Income Tax cannot be subjected to tax under any other provision of the Act.
  • The provisions contained in Part II read with section 211 of the Companies Act, 1956 mainly requires a broad disclosure of the exceptional items or non-recurring transactions referred to therein and if for some reason or the other they have been accounted for in the profit & loss account then those provisions do not require that those items must necessarily be accounted as a part of the profit & loss account. The aforesaid provision cannot be so read so as to require that every non-recurring transaction or transaction of an exceptional nature to be debited/credited to the Profit & Loss account.
  • Clause 3 of AS-9 gives illustration of the items which are specifically not to be included within the definition of ‘Revenue’. It clearly excludes the cases of remission of liability, because it is nothing but gains realised from discharge of an obligation at less than carrying amount, which herein this case is gain on account of waiver of part of obligation to repay the loan.
  • Further, Accounting Standard – 5 also states that, extra-ordinary items should be disclosed separately in the profit and loss account. The objective of AS-5 is to prescribe the classification and disclosure requirements.
  • A con-joint reading of the above accounting standards suggests that, there are two types of compulsions while preparing annual accounts, one are accounting compulsions and second are disclosure compulsions.
  • The disclosure compulsions merely require the assessee to disclose the material items in the Profit & Loss account. A mere disclosure of an extraordinary item in the profit & loss account statement does not mean that the said item represents the ‘working result’ of the company, when the accounting standard, especially AS-9 clearly provides that remission of a liability is not to be recognized as revenue, then it has to be reckoned that it cannot be treated as revenue for the purpose of either net profit or consequently book profit.
  • The primary purpose of preparing the Profit &Loss account in Part II of the Companies Act is to find out the result of the company, during the period covered by the profit & loss account and the exceptional nature items are required to be disclosed separately.
  • capital surplus on account of waiver of loan in no way can be recorded as operational profit or profit which is to be included in the profit & loss account.
  • Further it is quite pertinent to note that, clause (ii) of Explanation -1 of section 115JB is also an indicator of the intention of the legislature (in relation to exempt income credited to Profit and Loss A/c).
  • When the said clause requires exclusion from the book profit all that amount of income which are exempt and are not in the nature of income, if any such amount is credited to the profit & loss account, then on same logic it would be inconceivable that this provision intends that ‘book profit’ should include something which is in the nature of a capital surplus on account of waiver of a loan.
  • The object of enacting of section 115J, 115JA & 115JB was never to fasten any tax liability in respect of something which is not an income at all or even if it was income but is not taxable under the normal provisions of the Act.
  • As regard the decision of the Hon’ble Apex Court in the case of Apollo Tyres as relied upon the Ld. CIT D.R., this judgment does not envisage that a receipt which is not taxable as book profit nor reckoned as part of net profit as per profit & loss account should be taxed under u/s 115JB, just because it has been credited to profit & loss.
  • On perusal of the several decisions, at the outset, it may appear that on similar nature of issues there are divergent views of various benches of the Tribunal, however, one common point/ratio permeating through all the decisions, which can be deduced is that, if an assessee company is in receipt of a ‘capital receipt’ which is not chargeable to tax at all, that is, it does not fall within any of the charging section or can be classified under any heads of income under the Income Tax Act, then same cannot be treated as part of net profit as per Profit & Loss account or reckoned as ‘working result’ of the company of the relevant previous year and consequently, cannot be held to be taxable as ‘book profit’ under MAT in terms of section 115JB.

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