SUMMARY OF CASE LAW
Remission of a debt by the lender which was not
claimed and allowed as a deduction to the borrower
in any manner in any earlier previous year cannot
be brought to tax either under section 41(1) or
under section 28(iv) of Income-tax Act, 1961.
CASE LAW DETAILS
Decided by: ITAT, `C’ BENCH, MUMBAI,
In The case of: Cipla Investments Ltd. v. ITO ,
Appeal No.: ITA No. 1996/Mum/2008,
Decided on: August 28, 2009
RELEVENT PARAGRAPH
9. We have considered the issue.
As the facts indicate the holding company
has advanced funds to the assessee company
in 1998 which was received as share application money,
later on transferred to unsecured loan.
The amounts were utilised in investments and
the incomes thereon were offered under the head
‘capital gains’ and not as ‘business income’.
As rightly held by the CIT(A), provisions of
section 41(1) invoked by the A.O. does not apply.
For attracting the provisions of section 41(1)
the first requisite condition to be satisfied
is that the assessee should have got the deduction
or benefit or allowance in respect of loss, expenditure
or trading liability incurred by it and consequently,
during any previous year the assessee should have
received any amount in respect of such loss,
expenditure or trading liability by way of
remission or cessation thereon.
The remission would become income
only when the assessee has
claimed deduction earlier. In the instant case
the assessee has not got any deduction on account
of acquisition of capital assets as the same has
been reflected in the Balance Sheet and not in
the P 8s L Account and hence, applicability of
provisions of section 41(1) are not there.
The CIT(A)’s order to that extent is correct both
on facts and on law. However, the wrongly invoked
the provisions of section 28. We are not sure how
the provisions of section 28 will apply.
It is the contention of the assessee that
the assessee has not done any trading activity
nor shown any income as business income on the
investments made. The findings of the CIT(A)
that the amount was received in the course of
its business is against his findings given while
considering the addition under section 41(1).
The assessee’s business activity may comprise
investment in shares and securities, but as
far as computation of income is concerned the
profit and loss in that transactions are said
to be under the head ‘capital gains’ but not
as ‘business income’, hence, the gain earned by
the assessee in the course of business in
investment and advance of loans is in the capital
field but cannot be on the revenue field.
As rightly held by various decisions above,
remission of a debt by the holding company
which was not claimed and allowed as a deduction
in any manner in any earlier previous year could
not be brought to tax either under section 41(1)
or under section 28(iv). There is no benefit or
perquisite arising to the assessee in this regard.
Moreover, the assessee has to write off the amount
in the books of account and the amount was still
outstanding at the end of the year.
As rightly pointed out by the learned counsel
the decision of the Hon’ble Bombay High Court
in the case of Solid Containers Ltd. (supra)
does not apply to the facts of the case and
moreover similar to the decision of
the Hon’ble Bombay High Court
in the case of Mahindra and Mahindra Ltd. vs. CIT 261 ITR 501.
The loans availed for acquiring the capital asset,
i.e. shares, when waived cannot be treated as assessable
income for invoking the provisions of section 28.
Since the original receipt was undoubtedly on account
of capital nature, its waiver does not have the quality
of changing the same into a revenue receipt.
In view of these facts and also the various
principles laid down in the case law relied
upon by the learned counsel, we are of the
opinion that the learned CIT(A) erred in treating
the amount as taxable income in the hands of the
assessee under section 28 of the Act. On the facts
of the case, we are of the opinion that the provisions
of section 28 does not apply and the amount is not taxable
under the provisions of the Act. Accordingly the assessee’s
grounds are allowed.
Assessing Officer is directed to deleted the amount.
Friday, September 25, 2009
Wednesday, September 23, 2009
Fast-track restructuring is even in lenders' interest
Like an animate person, the health of a corporate is also subject to innumerable bacteria and viruses. However, the Sick Industrial Companies (Special Provisions) Act 1985 (SICA) which provides for revival and rehabilitation of sick companies, have been quite ineffective. The BIFR setup under SICA has virtually become a boon for defaulting borrowers.
The SICA has in fact been misused by the defaulting borrowers to get immunity from legal action. The liquidation procedure under the Companies Act, 1956 also has not helped in expediting the process of quick death and release of national resources getting blocked in liquidation.
Debt Recovery Tribunals also could not expedite the process.
The Securitisation and Reconstruction of Financial Assets
and Enforcement of Securities Act, 2002 (SRFESI)was
a bold step and it addressed the problem of banks
and financial institutions in recovering their debts
but could not deal with issue of reviving the health
of the corporate affected by bacteria or virus.
I think the new modern bankruptcy code being contemplated
by the government of India is a step in the right direction.
This bankruptcy law proposes to provide for a mechanism
of diagnosis and treatment. Obviously, a time period has to
be provided for during which such exercise would be carried out.
During this period, the right of the lenders under the SRFESI
Act to take possession of the assets of a defaulting borrower
has to be suspended.
The objective of bankruptcy law is to revive the health
of the corporate and during this treatment everyone
concerned including the lenders have to co-operate.
If during this process of revival, the secured lenders
take away the secured assets, the treatment in the
form of restructuring can’t continue. Suspension of this
right of the secured lenders is not going to adversely
the lenders. In any case, even if restructuring is not found feasible,
fast-track liquidation under the proposed bankruptcy law will
ensure that the secured lenders get hold of the assets secured to them.
The new bankruptcy law should be structured in a manner
so that it is litigation free. Further, as the trigger of the
bankruptcy code is pressed, the entire assets and management
of the corporate should vest in a trust. The process of diagnosis
and treatment should be managed through professionals.
Vesting of entire assets and the management in the hands
of a trust comprising of professionals will ensure avoidance of
any misuse of the provisions of bankruptcy law or diversion of
any asset to the detriment of the lenders. Such bankruptcy law
will go a long way in ensuring that the national resources do
not get unnecessarily locked up and are put back in use at the
earliest. To safeguard the interest of the secured lenders and to
ensure efficiency of the new set-up, a period of not more
than a year be allowed for restructuring or revival and in case
of failure, the secured lenders should get back the right to take
possession of assets secured to it.
Satyam and Maytas Infra are two live examples
that demonstrate how quick diagnosis can help in
reviving the health of corporates infected by deadly
viruses. A strong, effective and efficient bankruptcy law
is vital to the growth of the economy.
*(Institute of Chartered Accountants of India)
Monday, September 21, 2009
Banks shy away from revealing big defaulters' names
| |||||||||||
DRT throws out ANZ suit against loan guarantor
suit filed by the erstwhile ANZ Grindlays Bank (which got merged with Standard Chartered Bank) against an alleged guarantor of a loan. | |||||
| The Mumbai police followed the DRT ruling — announced on July 15 — and submitted a report on August 27 against the foreign bank for failing to follow laid down procedures while appointing the guarantor. | |||||
| The case is a landmark one as it sets a precedent for individuals to bring to book financial institutions. | |||||
| The case had been pending before the Mumbai High Court as well as the DRT for over a decade. | |||||
| The DRT-I judge dismissed the suit filed by the erstwhile ANZ Grindlays Bank against Surendra Mor for defaulting, by repeatedly failing (on 11 occasions since 2002) to submit original documents related to the loan. | |||||
| A final date was set for July 7 when the DRT gave the bank a last chance to produce the original documents failing which the suit would be dismissed with costs in Mor’s favour. | |||||
| Counsel for Standard Chartered, Mahesh Shukla (of Little and Co) who appeared before the DRT told : “We will move an application for restoration of the case before the DRT. The presiding officer (judge) is likely to impose a cost upon us for the default. We will then submit our claim affidavit and compilation of original documents while seeking a restoration of the case.” | |||||
| Police sub-inspector Vishwas Jatak, who submitted the police report based on the complaint of cheating made by Mor against the bank (a copy of his report is available with , told this paper, “The investigations are complete and I have submitted my report to the deputy commissioner of police Naval Bajaj. It was found that even though Mor was not even an income-tax payee, he was made a guarantor to the loan issued to a third party by ANZ.” | |||||
| Jatak added that even the terms of the loan (read overdraft facility) offered by the bank were clear that it was extended against a collateral security of shares by the borrower and there was no requirement for the guarantor. | |||||
| “Moreover, the bank has repeatedly failed to appear before the police, despite repeated oral and written missives sent to them,” the police report said. | |||||
| Mor, who had been waging a legal battle against the bank, said, “The DRT, which is a fast track forum for banking institutions to recover their outstandings from debtors, has in this instance favoured the individual against the institution. The scheme under which the loan was issued against securities had no requirement for a guarantor but still I was induced to issue a guarantee. Within a fortnight, I revoked it as I came to know that the bank manager was playing some mischief. The people on whose behalf the guarantee was obtained by the bank also denied knowledge of any guarantee which was fraudulently obtained.” |
Sunday, September 20, 2009
Thursday, September 17, 2009
Petition in HC wants closure of StanChart's India operations
The Delhi High Court has issued notice to
Standard Chartered Bank on a petition,
which alleged non-payment Rs 1.5 lakh by
the foreign bank as directed by the DRT and
sought winding up of the lender's India operations.
A single member bench of Justice S K Mishra has directed
the foreign bank to file its reply within four weeks on a
petition filed by three persons in a property case.
The petition followed StanChart's alleged failure to pay
a cost of Rs 1.5 lakh to the persons as per the judgement
of the Debt Recovery Tribunal (DRT) in New Delhi.
The DRT in its ruling on May 15 quashed two notices of the
Bank on taking possession of the two properties located in
Nizamuddin West in New Delhi under the Securitisation
and Reconstruction of Financial Assets and Enforcement
of Security Interest Act. The DRT also asked the bank to
pay Rs 1.5 lakh along with 18 per cent interest to the persons.
However, according to the petition filed by advocate
Gajendra Giri, the bank neither paid the amount nor
returned the property papers of his client D S Sawhney's home.
"Standard Chartered Bank has illegally withheld property
documents despite the fact that nothing is due against the
said property and thus bank has cheated them and is
illegally withholding the documents nor it paid the cost
amount as directed by the DRT," contended the petitioner.
Giri contended that as per sections 45 A, 45 B of the Banking
Regulation Act and the Companies Act, if a banking company
fails to pay debt or refuses to pay any lawful demand
"within two working days" then the High Court has
the power to order winding up of the bank.
Sunday, September 13, 2009
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