?IN THE HIGH COURT OF JUDICATURE AT MADRAS %DATED: 23/11/2010 *CORAM HON'BLE MR.JUSTICE F.M.IBRAHIM KALIFULLA AND HON'BLE MR.JUSTICE M.M.SUNDRESH +TC.A.812 OF 2010 #Iskraemeco Regent Limited $Commissioner of Income Tax !FOR PETITIONER : N.K.Poddar ^FOR RESPONDENT : K.Subramaniam :ORDER IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED 23.11.2010 CORAM THE HONOURABLE MR. JUSTICE F.M.IBRAHIM KALIFULLA AND THE HONOURABLE MR. JUSTICE M.M.SUNDRESH TAX CASE (APPEAL) NO.812 OF 2010 M/s.Iskraemeco Regent Limited (Originally Seahorse Industries Ltd and Subsequently Iskraemeco Seahorse Ltd) 126, K.Sathanoor Road Trichirapalli  620 021. Tamil Nadu .. Appellant Versus The Commissioner of Income Tax-I 4, Williams Road Cantonment Trichy  620 001. Tamil Nadu .. Respondent PRAYER: Tax Case Appeal filed Under Section 260-A of the Income-Tax Act, 1961, against the order of the Income Tax Appellate Tribunal "B" Bench, Chennai, passed in I.T.A.No.1901/Mds/2009, dated 26.03.2010 for the assessment year 2001-02. For Appellant : Shri.N.K.Poddar Senior Counsel for Shri.P.Rajkumar For Respondent : Shri.K.Subramaniam Senior Standing Counsel for Income Tax Department * * * * * J U D G M E N T M.M.SUNDRESH, J This appeal has been preferred by the assessee, challenging the order of the Income Tax Appellate Tribunal, "B" Bench, Chennai, dated 26.03.2010, in ITA No.1901/Mds/2009 for the assessment year 2001-02, confirming the order passed by the Commissioner of Income Tax (Appeals) which in turn has confirmed the order of the Assessing Officer by raising the following substantial questions of law: "(i)Whether the learned Tribunal misdirected itself in law, and it adopted a wholly erroneous approach, in interpreting the provisions of Section 28(iv) of the Income Tax Act, 1961, to hold that the sum of Rs.5,07,78,410/- representing the principal loan amount, waived by the bank under the One Time Settlement Scheme (OTS), and credited by the appellant assessee to its Capital Reserve Account, in its Balance Sheet drawn as at 31st March, 2001, is assessable to tax as a revenue receipt in the assessment for the assessment year 2001-02; and whether the findings of the learned Tribunal to this effect were wholly unreasonable, based on irrelevant considerations, contrary to the facts and evidence on record and/or otherwise perverse? (ii)Whether the decision of the Hon'ble Supreme Court in CIT v. T.V.Sundaram Iyengar & Sons Ltd. [(1996) 222 ITR 344 (SC)], applied by the learned Tribunal in passing its said impugned order dated 26th March, 2010, has any application whatsoever, in the facts and circumstances of the instant case, and particularly in relation to Section 28(iv) of the said Act? (iii)Whether on a correct interpretation of Section 28(iv) of the Income Tax Act, 1961, the Tribunal ought to have held that the principal amount of loan waived by the Bank under the OTS, not being a trading liability and also not being a "benefit or perquisite, whether convertible into money or not", the expression used in the said section, did not constitute revenue receipt and/or business income of the appellant assessee assessable to tax in its assessment for the assessment year 2001-02? (iv)Whether the disposal of the said appeal by the learned Tribunal, through its said impugned order dated 26th March, 2010, without recording and dealing with the submissions made on behalf of the appellant assessee with reference to the undisputed facts on records, was wholly unreasonable, improper, irregular and unfair, amounted to denial of justice, and was not in accordance with law? (v)Whether the Tribunal misdirected itself in law in disposing of the said appeal without applying its judicial mind properly to the essential matters on record including the submissions made with reference to several case decisions cited on behalf of the appellant assessee, and without giving objective reasons for its affirmation of the views of the lower tax authorities?" 2.Facts in brief:- 2.1.The asessee has been engaged in the business of development, manufacturing and marketing of Electro-Mechanical and Static Energy Meters. For the purchase of capital assets both by way of import as well as in the local market, as also fund based and non-fund based credit facility, through cash credit account, for import of capital assets as well as for meeting the working capital requirements, a term loan was provided by the State Bank of India, Commercial Branch, Trichy. 2.2.In view of the loss suffered, the assessee went before the Board for Industrial and Financial Reconstruction (BIFR). In case No.77 of 1992, the BIFR has held that the assessee was a sick Industrial Company. The BIFR in pursuant to the said conclusion, sanctioned a scheme for revival / rehabilitation. The State Bank of India has waived the outstanding due of principle amount of Rs.5 crores and the interest outstanding for another sum of Rs.2 crores. The assessee did not pay the interest for the preceded three years to the assessment year and has paid a sum of Rs.5 crores from the date of receipt of the loan. 2.3.Therefore under the one time settlement scheme with the State Bank of India entered into between the assessee and the State Bank of India there was a full settlement between the parties by accepting the adhoc payment of Rs.5 crores made by the assessee, with the waiver of another sum of Rs.5,07,78,410/- as the remaining principle amount and a sum of Rs.2,02,60,247/- as the outstanding interest amount. The assessee credited the waiver of principle amount to the "Capital Reserve Account" in the balance sheet treating it as capital in nature and the waiver of interest of Rs.2,02,60,247/- was credited in its "Profit and Loss Account" for the financial year ending 31.03.2001 corresponding to the assessment year 2001-02. The assessee filed its return declaring its total income assessable at Rs.45,160/- after setting off the carried forward business losses and unabsorbed depreciation. 2.4.The return was processed under section 143(1) of the Income Tax Act and by subsequent order under section 154 of the said Act, total income was rectified. Again for the purpose of giving effect to the order of the Commissioner of Income Tax (Appeals) for the assessment year 1995-96, the assessment made for the assessment year 2001-02 was revised and the total income was quantified at Rs.82,23,530/-. 2.5.A notice under section 148 of the Income Tax Act was issued by the Assessing Officer on the ground that the assessee has wrongly credited a sum of Rs.5,07,78,410/- in the Capital Reserve account in its balance sheet for the assessment year 2001-02. Therefore, the said account is sought to be assessed in as much as it being a waiver of principle loan amount, the same is assessable under Section 28(iv) of the Income Tax Act. Accordingly, after hearing the objections of the assessee, an order was passed under section 147 of the Income Tax Act holding that the said amount should be construed as income assessable to tax. 2.6.The appeals filed by the assessee before the Commissioner of Income Tax (Appeals) and the Tribunal were dismissed by holding that the said issue is no longer res integra in as much as the same has already been concluded by the judgment of the Honourable Supreme Court in COMMISSIONER OF INCOME TAX v. SUNDARAM IYENGAR (T.V.) AND SONS LTD. [[1996] 222 ITR 344]. Assailing the said orders passed by the authorities, the assessee has preferred this appeal by raising the above mentioned substantial questions of law. 3.Heard Shri.N.K.Poddar, learned Senior Counsel for Shri.P.Rajkumar appearing for the appellant / assesee and Shri.K.Subramaniam, learned Senior Standing Counsel appearing for the respondent / revenue. 4.Submissions of the Assessee:- 4.1.Shri.N.K.Poddar, learned senior counsel appearing for the assessee submitted that it is not in dispute that the assessee had obtained loan from the State Bank of India for the purchase of fixed assets. The assets purchased by the assessee both within the country and outside the country are admittedly capital assets. The term loan amount is completely utilised towards the purchase of capital assets. Therefore the transaction between the assessee and the Bank is a pure loan transaction and the same can never be termed as a trading transaction. 4.2.Further, in as much as the loan was obtained for the purchase of capital assets, the same would only amount to a capital receipt and not revenue receipt. The assessee has been doing the business in manufacturing and marketing of Electro-Mechanical and Static Energy Meters and it is not involved in any business involving the transaction of money lending. A loan given to buy a capital assets cannot be a trading transaction leading to a trading liability. 4.3.The learned senior counsel submitted that in as much as the Assessing Officer has not gone behind the loan arrangement and the loan arrangement in its entirety was not obliterated by the waiver, considering the fact that the assessee has paid a sum of Rs.5 crores and the waiver was only in respect of the remaining principle amount of term loan and also the outstanding interest, Section 43(B) of the Income Tax Act has no application, since it would apply only to a business transaction. 4.4.The learned senior counsel strenuously contended that all the authorities have committed a grave error in mechanically applying the judgment rendered by the Honourable Apex Court in COMMISSIONER OF INCOME TAX v. SUNDARAM IYENGAR (T.V.) AND SONS LTD. [(1996) 222 ITR 344] that without appreciating the factual scenario that the loan has been obtained towards the purchase of capital assets and not for a business transaction. The learned senior counsel further submitted that the loan has not been received in the course of trading transaction as in the case of the judgment referred supra and therefore, the same has got no application. It is his further submission that admittedly the facts involved in the judgment referred above would disclose that the transaction therein was a trading transaction as against the facts involved herein. 4.5.The learned senior counsel placed reliance upon the judgment of the Honourable Division Bench of the Bombay High Court in MAHINDRA AND MAHINDRA LTD. v. COMMISSIONER OF INCOME TAX [(2003) 261 ITR 501] wherein, the reliance has been made to the Honourable Division Bench of the Gujarat High Court in COMMISSIONER OF INCOME TAX v. ALCHEMIC PVT. LTD. [(1981) 130 ITR 168]. It is also submitted that the judgment of the Division Bench of the Gujarat High Court has also been approved by the Honourable Apex Court in COMMISSIONER OF INCOME TAX v. MAFATLAL GANGABHAI AND CO. (P.) LTD. [(1996) 219 ITR 644]. 4.6.The learned senior counsel placed reliance upon the subsequent Division Bench of the Bombay High Court in SOLID CONTAINERS LTD. v. DEPUTY COMMISSIONER OF INCOME TAX [(2009) 308 ITR 417] and submitted that, in a case where a transaction involves a purchase related to capital assets namely towards the plant and machinery, a waiver made for the said amount would not constitute a business. Therefore, based upon the above said judgment, the learned senior counsel submitted that in view of the admitted position that there is no dispute regarding the genuineness of the transaction between the assessee and the State Bank of India being a transaction of loan for the purpose of capital assets, the waiver made for the part of the said sum cannot be made exigible to tax. 4.7.The further submission of the learned senior counsel of the petitioner is to the effect that the reasoning of the authorities that, Section 28(iv) of the Income Tax Act would be applicable to a money transaction is totally misconceived and contrary to the provision itself. The learned senior counsel submitted that Section 28(iv) provides for chargeablity of profits and gains of business or profession with relation to the value of any benefit or perquisite arising out of business or the exercise of profession and therefore the same would not include the money transaction. It is the specific case of the learned senior counsel that a reading of Section 28(iv) of the Income Tax Act would make it clear that it would cover only transactions other than money transactions. Since in the present case on hand, the transaction involved being a loan transaction, and therefore being a transaction of money, Section 28(iv) of the Income Tax Act has no application. 4.8.The learned senior counsel also submitted that Section 41(1) of the Income Tax Act also does not apply in as much as it mandates that there has to be an actual allowance or deduction made for the purpose of computing under the said section. In as much as there is no allowance or deduction already in the present case on hand, the question of application of Section 41(1) also does not arise for consideration. The learned senior counsel further contended that, that is the reason why the Assessing Officer has rightly taken the view that Section 41(1) has got no application to the present case on hand. 4.9.In support of his contention, the learned senior counsel placed reliance upon the following judgments, COMMISSIONER OF INCOME TAX v. GANESA CHETTIAR (P.) [(1982) 133 ITR 103], COMMISSIONER OF INCOME TAX v. A.V.M. LTD. [(1984) 146 ITR 355], COMMISSIONER OF INCOME TAX v. ALCHEMIC PVT. LTD. [(1981) 130 ITR 168], COMMISSIONER OF INCOME TAX v. MAFATLAL GANGABHAI AND CO. (P.) LTD. [(1996) 219 ITR 644], and DEPUTY COMMISSIONER OF INCOME TAX (ASSESSMENT) v. GARDEN SILK MILLS LTD. [(2010) 320 ITR 720] and submitted that Section 28(iv) has no application to a money transaction and therefore, the orders passed by the authorities cannot be sustained. In so far as the scope of Section 41(1) of the Income Tax Act is concerned, the learned senior counsel has made reliance upon the judgments in POLYFLEX (INDIA) PVT. LTD. v. COMMISSIONER OF INCOME TAX [(2002) 257 ITR 343] and TIRUNELVELI MOTOR BUS SERVICE CO. P. LTD. v. COMMISSIONER OF INCOME TAX [(1970) 78 ITR 55]. 4.10.The learned senior counsel submitted that a combined reading of Section 41(1) of the Income Tax Act read with Section 28(iv) would show that the words "whether no cash or any other manner as mentioned in Section 41(1) has not been incorporated under section 28(iv) which is indicative of the fact that section 28(iv) does not cover a cash transaction. The learned senior counsel also made substantial reliance on the judgments rendered by the various Tribunals/High Courts on the identical issues and submitted that, even though the orders passed by the Tribunals/High Courts are not binding on this Court, the same may be taken as part of his arguments in support of his contentions. The learned senior counsel submitted that in as much as the Tribunals/High Courts in the various parts of the country have taken the similar view, the same view will have to be adopted in the present case on hand as well. 4.11.Finally, the learned senior counsel submitted that the authorities committed an error by holding against the assessee by making reliance upon the judgment of the Honourable Apex Court in COMMISSIONER OF INCOME TAX v. SUNDARAM IYENGAR (T.V.) AND SONS LTD. [(1996) 222 ITR 344] without applying their mind to the facts of the case as well as the facts involved therein. The said orders passed by the authorities would amount to non-application of mind and therefore, they are arbitrary in nature. The learned senior counsel made reliance upon the judgment of the Honourable Apex Court rendered in COMMISSIONER OF CENTRAL EXCISE, BANGALORE v. SRIKUMAR AGENCIES AND OTHERS [(2009) 1 SCC 469] and submitted that a judgment cannot be read as a statute and has to be made applicable to the facts and consideration of each case and the ratio laid down therein will have to be applied to the facts and circumstances of each case. Therefore, the learned senior counsel submitted that the orders passed by the authorities will have to be set aside and the appeal will have to be allowed. 5.Submissions of the Revenue:- 5.1.Shri.K.Subramaniam, learned Senior Standing Counsel appearing for the revenue submitted that the appeal filed by the assessee has been rejected by the Commissioner of Income Tax (Appeals) not on the ground of applicability under Section 28(iv) of the Income Tax Act, 1961. Similarly, the Tribunal has not considered the applicability of the said section, therefore in as much as Section 28(iv) of the Income Tax, 1961 having no applicability to the case on hand, the relevant provision that is applicable is Section 28(i) of the said Act. In the judgment of the Honourable Apex Court in COMMISSIONER OF INCOME TAX v. SUNDARAM IYENGAR (T.V.) AND SONS LTD. [(1996) 222 ITR 344], the applicability of Section 28(iv) has not been considered. As found by the authorities, Section 41(1) of the Income Tax Act is also not applicable and therefore, the findings rendered by the authorities below will have to be seen in the context of the provisions contained in Section 28(i) of the Income Tax Act, 1961. 5.2.The learned Senior Standing Counsel further submitted that the ratio laid down by the Honourable Apex Court in COMMISSIONER OF INCOME TAX v. SUNDARAM IYENGAR (T.V.) AND SONS LTD. [[1996] 222 ITR 344]. still holds good. The judgment of the Honourable Apex Court has been followed subsequently in COMMISSIONER OF INCOME TAX v. RAJASTHAN GOLDEN TRANSPORT CO. (P.) LTD. [(2001) 249 ITR 723] and also by a Division Bench of this Court in COMMISSIONER OF INCOME TAX v. SUNDARAM INDUSTRIES LTD. [(2002) 253 ITR 396] as well as in COMMISSIONER OF INCOME TAX v. ARIES ADVERTISING PVT. LTD. [(2002) 255 ITR 510]. Therefore, when the ratio laid down by the Honourable Apex Court in COMMISSIONER OF INCOME TAX v. SUNDARAM IYENGAR (T.V.) AND SONS LTD. [[1996] 222 ITR 344] having not been overruled and the same still covers the field, the authorities below have rightly applied the same in rejecting the case of the assessee. 5.3.The learned Senior Standing Counsel also submitted that, it is not in dispute that the amount has been borrowed by the assessee for the purpose of his business. When the said amount is used for business, the question as to whether it has been used for the purchase of capital assets or revenue receipts is immaterial. The assessee having become richer by the settlement, the said transaction would par take the character of the income assessable to tax. Even assuming an amount is utilised towards the capital assets, it would take the character of a revenue receipt, subsequently. The learned senior standing counsel has also made reliance upon Section 36(1)(iii) of the Income Tax Act dealing with the deduction for interest of the borrowal. According to the learned senior standing counsel, the borrowal and waiver are in the course of business during which the benefit accrues to the assessee is taxable. If the amount received in pursuant to a business or a contractual liability, then it is taxable as income. 5.4.The learned Senior Standing Counsel made reliance upon the judgment of the Division Bench of the Delhi High Court in JAY ENGINEERING WORKS LTD. v. COMMISSIONER OF INCOME-TAX [(2009) 311 ITR 299]. The learned senior standing counsel sought to distinguish the judgment relied upon on behalf of the assessee by submitting that the facts involved in those cases are different and that some of the judgments have been rendered prior to the ratio laid down by the Honourable Apex Court in COMMISSIONER OF INCOME TAX v. SUNDARAM IYENGAR (T.V.) AND SONS LTD. [[1996] 222 ITR 344]. Further, the orders passed by various Tribunals are not binding on this Court. Therefore, the learned senior standing counsel submitted that the appeal will have to be dismissed. 6.The facts involved in this case are not in dispute. The assessee entered into a loan transaction with the State Bank of India. The loan has been obtained for the purpose of acquiring capital assets which fact also is not in dispute. The assessee has paid part of the principle and interest amount for the earlier years. There was a settlement under the One Time Settlement Scheme (OTS) by which a settlement has been arrived at between the Bank and the assessee by accepting the adhoc payment of 5 crores made by the assessee already with the waiver of another sum of Rs.5,07,78,410/- as the outstanding principle amount. Further, a sum of Rs.2,02,60,247/- as the interest amount respectively. 7.The loan transaction between the assessee and the Bank and the subsequent settlement by way of rehabilitation process through the BIFR is also not in dispute. It is not the case of the revenue that the above said transactions are not genuine and colourable. The authorities have also not gone behind the transactions but proceeded on the footing that the transactions are true and genuine. The assessee has credited the waiver of principle amount to the "Capital Reserve Account" in the balance sheet treating it as capital in nature and the waiver in its "Profit and Loss Account". 8.The Assessing Officer has applied the provisions contained in Section 28(iv) and held that the amount waived in the "Capital Reserve Account" represents the value of benefit. Accordingly, he treated the said amount as income coming under the purview of Section 28(iv) read with Section 2(24) of the Income Tax Act. In so far as the applicability of Section 41(1) of the Income Tax is concerned, it was held that the said issue is irrelevant to the facts of the case. 9.Challenging the order passed by the Assessing Officer, the assessee filed an appeal before the Commissioner of Income Tax (Appeals) contending that Section 28(iv) of the Income Tax Act, 1961, does not have any application in as much as the assessee is not involved in the business of money transaction and the amount borrowed has been utilised towards the purchase of the capital assets. The assessee has relied upon the various judgments of this Honourable High Court, Supreme Court and High Court of Bombay, Gujarat and Delhi apart from the orders passed by the various Tribunals and contended that the ratio laid down by COMMISSIONER OF INCOME TAX v. SUNDARAM IYENGAR (T.V.) AND SONS LTD. [[1996] 222 ITR 344] does not apply to the facts of the case as held in those judgments. A detailed written submissions have also been made along with the grounds of the appeal. A similar exercise has also been done by the assessee before the Tribunal. However, both the Commissioner of Income Tax (Appeals) and the Tribunal have rejected the appeals filed by the assessee by merely following the judgment of the Honourable Apex Court in COMMISSIONER OF INCOME TAX v. SUNDARAM IYENGAR (T.V.) AND SONS LTD. [[1996] 222 ITR 344] referred supra. Therefore, with these admitted facts, the substantial questions of law raised in this appeal will have to be considered. 10.A perusal of the definition of Section 2(24) of the Income Tax Act, which defines "income" would include the value of any benefit or perquisite, whether convertible into money or not, that would arise from the business. In order to appreciate the issue involved, it is relevant to extract the necessary provisions of the Income Tax Act, 1961. "2(24)"income" includes- (i)profits and gains; (vd)the value of any benefit or perquisite taxable under clause (iv) of section 28;" 11.Section 28(iv) of the Income Tax Act, 1961 comes under the heading "Profit and Gains of business or profession" and the same is extracted herein: "28(iv)the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession." 12.Similarly, Section 41(1) of the Income Tax Act, 1961 deals with "profits chargeable to tax" and the same is extracted herein: "41(1).Where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee (hereinafter referred to as the first- mentioned person) and subsequently during any previous year,- (a)the first-mentioned person has obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtained by such person or the value of benefit accruing to him shall be deemed