IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH: D: NEW DELHI
BEFORE SHRI GEORGE GEORGE K, JUDICIAL MEMBER
AND SHRI B.C. MEENA, ACCOUNTANT MEMBER
ITA No. 1397/Del/2013
Assessment Year 2008-09
Rajasthan Petro Synthetics Ltd. vs. ACIT
307, Surya Complex 21, Circle-15(1)
Veer Savarkar Block New Delhi.
Shakarpur, Vikas Marg,
New Delhi 110 092
(PAN AAACR1304F)
(Appellant) (Respondent)
Appellant by : Shri Sanjeev Deora, CA, Shri Rakesh Jain
Respondent by : Shri Sunil Bajpai, DR
ORDER
PER GEORGE GEORGE K, JUDICIAL MEMBER
This appeal of the assessee company is directed against the order of
the CIT (A)-XVIII, New Delhi dated 13.12.2012. The relevant assessment year is
2008-09.
2. The assessee company has, in its concise grounds, among others, raised
the following two issues in an elaborate and narrative manner, the substance of
which, are as under:
(1) That the CIT (A) has erred in sustaining the addition of Short Term Capital
Gains [STCG] of Rs.61,73,27,440/- as made by the AO; &
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(2) That the CIT(A) has also erred in denying the benefit of set off of brought
forward unabsorbed depreciation from the AYs 1997-98 to 2001-02 and
also upholding the addition of Rs.51,21,95,551/- made by the AO.
3. Briefly stated, the facts of the case are as under:
The assessee is a Public Limited Company. It is engaged in the business
of manufacture and trade of synthetic yarn and freight forwarding. The assessee
had filed its return of income for the assessment year under dispute on
30.9.2008 and, subsequently, revised its return of income on 2.3.2010 declaring
a `Nil' income. The assessee's return of income was originally processed u/s
143(1) of the act and, subsequently, subjected to scrutiny. During the course of
assessment proceedings, the assessee had submitted that it had borrowed loans
from various financial institutions to purchase capital assets prior to 1999.
According to the assessee, when it ran into losses and upon its net worth was
being fully eroded, it became sick as per the provisions of Sick Industrial
Companies (Special Provisions) Act, 1985 [SICA]. In the meanwhile, the
assessee was served a Notice u/s 13(2) of the Securitization and Reconstruction
of Financial Assets and Enforcement of Security Interest Act, 2002 [SARFAESI]
from Stressed Assets Stabilization Fund [SASF] (a financial trust that had taken
over the loans advanced by IDBI Bank Limited] who was authorised to act for
self and on behalf of all secured lenders of the assessee The SASF took over
physical possession of the secured movable and immovable assets of the
assessee u/s 13(4) of SARFAESI on 28.9.2007. The assets of the assessee
company were sold by SASF sometime in March, 2008 for a sale price of Rs.10
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crores. The Principal amount of loans outstanding to the secured lenders
amounted to Rs.97.42 crores, of which, Rs.24.46 crores was due on account of
unpaid principal amount of borrowings utilized for purchase of working capital
assets. It was stand of the assessee that the amount of Rs.24.46 crores being
the unpaid amount of working capital borrowings as part of its taxable income
and Rs.72.96 crores [Rs.97.42 crores Rs.24.46 crores] on account of unpaid
principal amount of borrowings utilized for creation of depreciable fixed assets
not to be formed as part of taxable income. The assessment was, however,
concluded on 12.12.2010 u/s 143(3) of the Act by making an addition of
Rs.59.56 crores which was, subsequently, rectified on 21.2.2011 by reducing the
assessed income at Rs.35.09 crores. The additions made by the AO which are
subject matter of this appeal being as follows:
(i) addition of STCG of Rs.61,73,27,400/- [net after gave effect to
rectification order dated 21.2.2011 passed by the AO];
(ii) denial of the benefit of Rs.26,63,33,506/- being claim for set off of
brought forward unabsorbed depreciation pertaining to the AYs 1997-
98 to 2001-02.
4. On an appeal by the assessee, the CIT (A) dismissed the assessee's
appeal for the following reasons:
Short term Capital Gains:
"4.5............................................................................................................
................................................................................................
In the case under consideration, the assessing officer has taken recourse to section
48 and 50 and held that as depreciated assets had been transferred; therefore, the
difference between the full value of consideration received and the WDV of the
assets was to be taxed as short term capital gains. The appellant has claimed that
taking over of assets does not amount to transfer of assets and short term capital
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gain cannot be charged on this transfer. However, this view of the appellant is not
supported by the decision of the Hon'ble Supreme Court in the case of CIT v. Attili
N. Rao, 252 ITR 880, as per which a property of the assessee has been mortgaged
by the Excise Department which was lying with them as security for amounts of kist
due to the State. The Hon'ble supreme Court reversing the decision of the High
Court held `what was sold at the auction was the immoveable property belonging to
the assessee and the price realised, therefore, belonged to the assessee. From that
price, the State deducted its dues towards kist. Capital gains have to be computed
on the full price (less admissible deductions).
In the case of the appellant, during the year under consideration, the
property/assets of the appellant company have been sold for a certain
consideration, in return the appellant has received as benefit the waiver of the
entire loan outstanding in its books amounting to Rs.97.42 crores. Thus, the full
value of consideration for the appellant is Rs.97.42 crores. Since the WDV of the
assets as per the books of the appellant company was Rs.11.23 crore, the decision
of the assessing officer to charge short term capital gains of Rs.61.73 crores is
upheld."
Set off of brought forward unabsorbed deprecation:
Extensively quoting the assessee's claim and also extracting the
operational portion of the findings of the Hon'ble Mumbai Tribunal (SB) in Times
Guaranty Ltd (ITA Nos. 4917 & 4918], the CIT (A) had observed thus
"5.2.........................................................................................................
...................................................................................................
(On page 17) Since the appellant's claim falls within the assessment year 1997-98
to 2001-02 for which the change of law was applicable, the unabsorbed
depreciation as held by the assessing officer cannot be allowed to be carried
forward. The appellant further claim that the second proviso which later became
the proviso to section 32(2) of the act provided that the time limit of eight
assessment years specified in sub-clause (b) shall not apply in the case of a
company for the assessment years that it was a sick industrial company as it was
registered as a sick industrial company under SICA on August 16, 1999 and was
discharged by way of abatement of proceedings before BIFR on January 16, 2008
is also not accepted as the appellant was declared sick under SICA by the Hon'ble
BIFR only after its hearing held on March 21, 2001 i.e., assessment year 2001-02.
The proviso would, therefore, be applicable in the case of the appellant only after
assessment year 2001-02, for which, the claim of the unabsorbed depreciation has
already been allowed by the assessing officer........"
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5. Aggrieved, the assessee has come up before us with the present appeal.
During the course of hearing, the learned AR reiterated what has been submitted
before the first appellate authority. In furtherance, it was submitted that the CIT
(A) had erred in dismissing the assessee's appeal without considering and
appreciating full facts and prevailing legal position in the matter. Also, it was
argued, that the CIT (A) had erred in holding that a unilateral waiver of principal
amount of term loan by the lenders to the assessee upon such amount becoming
irrecoverable results in income assessable in the hands of the assessee in the
nature of short term capital gains. The learned AR had, further, argued that the
CIT (A) erred in upholding the addition on such account completely over-looking
the fact that the aforesaid waiver of borrowings availed by the assessee to
purchase and install capital assets at its factory site does not in any manner be
interpreted to result in the transfer of assets of the assessee as STCG of the
assessee. The learned AR had also disputed the stand of the CIT (A) to place
reliance on the Supreme Court's judgment (supra) to justify her action as the
issue before the Hon'ble Court was on a different footing. With regard to the
denial of benefit of set off of brought forward unabsorbed depreciation from the
AYs 1997-98 to 2001-02 by the CIT (A) and erroneously upholding the addition
of Rs.51.21 crores made by the AO, it was the stand of the learned AR that the
CIT (A) had grossly ignored the fact that once the Circular No.14 of 2001
clarified that the restriction of 8 years for carry forward and set off of
unabsorbed depreciation had been dispensed with, the unabsorbed deprecation
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from AYs 1997-98 up-to the AY 2001-02 got carried forward to the AY 2002-03
and became part thereof and has, thus, overlooked the fact that the
accumulated depreciation came to be governed by the provisions of s. 32(2) as
amended by Finance Act, 2001 and this was available for carry forward and set
off against the profits and gains of subsequent years without any limit
whatsoever. To strengthen his submission on both the issues, the learned AR
had placed strong reliance, among others, on the following case laws, namely:
(1) Transcore v. Union of India in Appeal No.3228 of 2006 dt.29.11.2006;
(2) CIT v. Attili N.Rao (2001) 252 ITR 0880 (SC);
(3) General Motors India Pvt. Ltd v. DCIT Appl.
No.1773/2012/GUJ/23/8/2012
(4) The Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act 2002.
5.1. In view of the above, it was pleaded that the twin issues urged by the
assessee (supra) require to be allowed in its favour.
6. On the other hand, the learned D R supported the stand of the authorities
below on both the issues under consideration. It was submitted that as there
was no any infirmity in the action of the AO as well as the CIT (A), the plea of
the assessee on both the counts deserve to be rejected.
7. We have carefully considered the rival submissions, perused the relevant
materials on record and also the case laws/Act on which the learned A R placed
reliance. The moot question now requires to be addressed to is: Whether the
taking over of the possession and control over of the assets of the borrower (the
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assessee) by the secured lender(s) tantamount to transfer of assets from the
borrower in default to the secured lenders?
7.1. When the secured lender takes over the possession of mortgaged assets,
the lender who was never the owner of the assets does not become or acquire
ownership of the said assets. The only situation in which the secured lenders
acquire ownership interest in the assets is when the secured lenders appropriate
the asset to their own books of account and reflect the same as their assets for
which the secured lenders are required to observe due process of law and,
admittedly, such process of law was not followed in the instant case.
7.1.1. The Securitization and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 20002 [SARFAESI] provides that if the dues
of the secured lenders are not fully satisfied with the sale proceeds of the
secured assets, the secured lender may file an application to the Debt Recovery
Tribunal having jurisdiction or a Court of competent jurisdiction, as the case may
be, for recovery of the balance amount from the borrower in default. The
secured lender, at no stage of the process of sale of the assets, does acquire any
right of ownership in the secured assets and the actions taken by the secured
lender in pursuance of the provisions of SARFAESI were actions otherwise
statutorily permitted to be taken by the secured lenders to prevent frittering
away of value in the mortgaged assets. Section 13 (2) of SARFAESI subscribes
that `Where any borrower who is under a liability to a secured creditor under a
security agreement makes any default in repayment of secured debt or any
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instalment thereof, and his account in respect of such debt is classified by the
secured creditor as non-performing asset, then, the secured creditor may
require the borrower by notice in writing to discharge in full his liabilities to the
secured creditor within sixty days from the date of notice failing which the
secured creditor shall be entitled to exercise all or any of the rights under sub-
section (4)." Thus, the requirement for the secured lenders is to issue notice to
the borrower for repayment of dues before taking over possession, but not for
taking over ownership, of the mortgaged assets. On receipt of such a notice for
repayment, the borrower is placed under restraint from dealing with mortgaged
assets in any manner whatsoever and on failure of the borrower to discharge
his/its liability within the time provided in the said notice, the rights vested with
the secured lenders extend:
(i) To take possession of the secured assets of the borrower, including the
right to transfer by way of lease, assignment or sale for realising the
secured asset;
(ii) To take over the management of the business of the borrower including
the right to transfer by way of lease, assignment or sale for realising
the secured asset;
(iii) To appoint any person [hereafter referred to as the manager] to
manage the secured assets the possession of which has been taken
over by the secured lender; &
(iv) To require any time by notice in writing, any person who has acquired
any of the secured assets from the borrower to pay the secured lender
so much of the money as is sufficient to pay the secured debt.
7.1.2. It is apparent that taking over of possession under this clause is for the
purpose of enforcement of security interest as it is essential to see what the
security interest is a special interest in the secured asset and not a proprietary or
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ITA No. 1397/Del/13
general interest. A right to foreclose the secured asset is available only in the
cases specified u/s 67(a) of the Transfer of Property Act, 1882. As mortgage by
way of conditional of simple mortgage, hypothecation or pledge will not give to
the secured lender any more than a special interest, i.e., right to sell the
property and, therefore, the taking of possession by the secured lender is only
preparatory to the sale of the property and not an end by itself.
7.1.3. In view of the above proposition as prevailing, the latter part of the
clause (1) above reading `including the right to transfer by way of lease,
assignment or sale for realising the secured asset' is only a surplus age.
7.1.4. The issue of whether recourse to take possession of the secured assets
of the borrower under section 13(4) of SARFAESI comprehends the power to
take actual possession of the immovable property came up for deliberation
before the Hon'ble Supreme Court in the case of M/s. Transcore v. Union of India
& Another in Civil Appeal Nos.1374/06, 2841/06, 3225/06, 3226/06 and 908/06
dated 29.11.2006. After analysing the provisions of sections 13 and 17 of
SARFAESI Act as well Rules extensively, the Hon'ble Apex Court was of the view
that
"The word possession is a relative concept. It is not an absolute concept. The
dichotomy between symbolic and physical possession does not find place in the Act.
As stated above, there is a conceptual distinction between securities by which the
creditor obtains ownership of or interest in the property concerned (mortgages)
and securities where the creditor obtains neither an interest in nor possession of
the property but the property is appropriated to the satisfaction of the debt
(charges). Basically, the NPA Act deals with the former type of securities under
which the secured creditor, namely, the bank/FI obtains interest in the property
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ITA No. 1397/Del/13
concerned. It is for this reason that the NPA Act ousts the intervention of the
courts/tribunals..............."
Further it was held by the Hon'ble Supreme Court as follows
"...............Therefore, it cannot be said that if possession is taken before
confirmation of sale, the rights of the borrower to get the dispute adjudicated upon
is defeated by the authorised officer taking possession. As stated above, the NPA
Act provides for recovery of possession by non-adjudicatory process, therefore, to
say that the rights of the borrower would be defeated without adjudication would
be erroneous. Rule 8, undoubtedly, refers to sale of immovable secured asset.
However, Rule 8(4) indicates that where possession is taken by the authorised
officer before issuance of sale certificate under Rule 9, the authorised officer shall
take steps for preservation and protection of secured assets till they are sold or
otherwise disposed of. Under Section 13(8),if the dues of the secured creditor
together with all costs, charges and expenses incurred by him are tendered to the
creditor before the date fixed for sale or transfer, the asset shall not b e sold or
transferred. The costs, charges and expenses referred to in Section 13(8) will
include costs, charges and expenses which the authorised officer incurs for
preserving and protecting the secured assets till they are sold or disposed of in
terms of Rule 8(4). Thus, Rule 8 deals with the stage anterior to the issuance of sale
certificate and delivery of possession under Rule 9. Till the time of issuance of sale
certificate, the authorised officer is like a court receiver under Order XL, Rule 1
CPC..............."
7.1.5. In a nutshell, the Hon'ble Supreme Court had held that the word
`possession' is a relative concept and not an absolute concept and, therefore,
drawing of dichotomy between symbolic and actual possession does not find
place in the scheme of the NPA Act read with the 2002 Rules. Hence, possession
taken may be either actual or constructive'.
7.1.6. The judgment of the Hon'ble Supreme Court in the case of CIT v. Attili N Rao
reported in (2001) 252 ITR 880 (SC) relied on by the CIT(A) is clearly distinguishable
since the issue for consideration before the Hon'ble Court was on the different footing.
The issue before the Hon'ble Court, in brief, was that the assessee who carried on
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ITA No. 1397/Del/13
abkari business had mortgaged immovable property belonging to him to the
Excise Department of the State Government as security for amounts of `kist' due
to the State. On sale by the State Government of the immovable property by
auction, a sum of Rs.5.62 lakhs was realised wherefrom the Government
deducted Rs.1.29 lakhs due towards kist and paid over the balance to the
assessee. In computing the capital gains from the sale of the property, the
assessee sought deduction of Rs.1.29 lakhs. The Tribunal upheld the claim on
the ground that there was a clear charge or mortgage over the property and the
amount realised under the charge or mortgage was an amount which never
reached the assessee but reached the Government by overriding title. On a
reference, the High Court held that by the mortgage an interest was created in
favour of the State and when the property was sold by auction its value had to
be reduced to the extent of the interest created in favour of the State. On
appeal, the Hon'ble Supreme Court had held as under:
"4............................................................................................................
....................................................................................We are of the view
that the Tribunal and the High Court were in error. What was sold by the State at
the auction was the immovable property that belonged to the assessee. The price
that was realised therefor belonged to the assessee. From out of that price, the
State deducted its due towards `kist' and interest due from the assessee and paid
over the balance to him. The capital gain that the assessee made was on the
immovable property that belonged to him. Therefore, it is on the full rice realised
[less admitted deductions] that the capital gain and the tax thereon has to be
computed... ..."
7.1.7. The claim of the present assessee under consideration is that taking
over of assets does not amount to `transfer' of assets and short term capital gain
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ITA No. 1397/Del/13
on such transfer cannot be charged. Therefore, the case law relied on by the
CIT(A) has no relevance to the issue under dispute.
7.1.8. Reverting to the main issue, the prevailing legal position is that a
restraint on dealing with the assets in any manner resulting in from issuance of
notice for recovery is merely a prohibition against private alienation and does not
pass any title to the authority which held a lien or charge on the aforesaid class
of assets. The taking over possession of mortgaged assets by the secured
lenders facilitate them to deal with the assets as part of protection of their rights
in and over the subject assets, but, not resulting in the title and ownership
passing over or vested with the secured lenders. Thus, taking over of possession
of mortgaged assets merely converts the legal ability of the secured lenders to
take possession of mortgaged assets into physical possession.
7.1.9. Moreover, the purpose of exercise of powers referred to in section 13(4)
of SARFAESI is for the realisation of security and, therefore, after taking over the
possession of assets, the secured creditors should arrange to sell the secured
assets of the borrower for realising their outstanding liabilities.
Section 13 of SARFAESI provides the following:
"(5) any payment made by any person referred to in clause (d) of the sub-section
(4) to the secured creditor shall give such person a valid discharge as if he has
made payment to the borrower;
(6) any transfer of secured asset after taking possession thereof or takeover of
management under sub-section (4), by the secured creditor or by the manager on
behalf of the secured creditors shall vest in the transferee all rights in, or in
relation to, the secured asset transferred as if the transfer had been made by the
owner of such secured asset;
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(7) where any action has been taken against a borrower under the provisions of sub-
section (4), all costs, charges and expenses which, in the opinion of the secured
creditor, have been properly incurred by him or any expenses incidental thereto,
shall be recoverable from the borrower and the money which is received by the
secured creditor shall, in the absence of any contract to the contrary, be held by him
in trust, to be applied, firstly, in payment of such costs, charges and expenses and
secondly, in discharge of the dues of the secured creditor and the residue of the
money so received shall be paid to the person entitled thereto in accordance with his
rights and interests.
(8) If the dues of the secured creditor together with all costs, charges and expenses
incurred by him are tendered to the secured creditor at any time before the date fixed
for sale or transfer, the secured asset shall not be sold or transferred by the secured
creditor, and no further step shall be taken by him for transfer or sale of that secured
asset."
7.1.10. Based on the above referred provisions of SARFAESI Act, the following
points emerge, namely:
(i) For enforcement of security interest, the secured lender take the
possession of the assets after serving notices under sections 13(2)
and 13(4) of SARFAESI Act;
(ii) The second lender then takes steps to sell the assets so possessed.
However, the secured lender, at no stage, does acquire any title over
the assets, but, merely holds it till its dues are settled either by the
borrower before the date of sale or transfer or from the sale proceeds
of the assets;
(iii) Costs incurred by the secured lender in connection with the sale of the
secured assets can be recovered from the borrower;
(iv) If the dues of the secured lender are not completely settled out of sale
proceeds realised from sale of such secured assets, the secured
lender can file an application before the Debt Recovery Tribunal for
recovery of the balance amount(s) from the borrower;
(v) If the dues of the secured lender together with all costs, charges and
expenses incurred by it, are tendered to the secured lender at any time
before the date fixed for sale or transfer, the secured asset shall not be
sold or transferred by the secured lender and no further step shall be
taken by him for transfer or sale of that secured asset.
7.1.11. Taking all the above facts and circumstances of the issue and also the
judgment of the Hon'ble Supreme Court (supra), we are of the view that the AO
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ITA No. 1397/Del/13
had erred in applying the provisions of s. 2 (47) of the Act in considering that the
secured lender acquire title to the secured assets of the assessee company on
taking over of possession of assets of the assessee by overlooking the fact that
what the secured lenders acquired on taking over of possession of the secured
assets were merely a special right to execute or implement the recovery of its
dues from dealing with those assets of the assessee company. Had the
assessee company tendered the amounts payable to the secured lenders before
the date of sale of such assets without any further act, deed or thing being
required to be carried out or completed towards title of assets, the assessee
company could have regained or taken possession of the secured assets from
the secured lenders.
7.1.12. As the position of law is very clear, we are of the view that the
ownership rights in the assets did not at any stage stand transferred to the
secured lenders by taking over the possession of secured assets. Thus, the sale
consideration received by the secured lender(s) actually belonged to the
borrower which by operation of law remained retained by the secured lenders to
recover their costs, dues etc.,
7.1.13. Further, if the consideration to the assessee is to be considered as the
sale amount received by the lending banks, then, the loans waived by such
banks [availed by the assessee for the purchase of capital assets such as land,
building, plant and machinery etc.,] was nothing but a capital receipt not liable
for tax since neither the provisions of s. 28(iv) nor s. 41(1) of the Act is
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ITA No. 1397/Del/13
attracted. For the above proposition, we would like to refer to the judicial
precedents on the issue as under:
(i) Mahindra and Mahindra Ltd v. CIT (2003) 261 ITR 0501 (Bom):
The assessee manufactured jeeps. In June, 1964, it entered into an
agreement with an American company which agreed to sell to the assessee dies,
welding equipment and die models tooling for production of special types of
jeeps by the assessee in India. The price of the tooling was agreed at $ 6,50,000
c.i.f., Bombay. The import of the tooling was approved by GOI. Since the
assessee could not secure foreign exchange, the American company agreed to
provide a loan of the said amount repayable after ten years in instalments with
interest at 6%. Approval of the GOI, the assessee had received the loan
amount. In February, 1976, the American Company was taken over and as a
term thereof, it had been agreed to waive the principal amount of loan advanced
to the assessee and to cancel the promissory notes as and when they matured.
In its return of income for the AY 1976-77, the assessee had shown an amount
of Rs.57.74 lakhs as cessation of its liability towards the American Company.
However, the AO took a stand that with the waiver of the loan; the credits
represented income and not a liability. When the issue reached the Hon'ble
Court for consideration, the Hon'ble Court had held as under:
"(i) that there were two important facts which had been overlooked by the
assessing officer. Firstly, the assessee continued to pay interest at 6 per cent for a
period of ten years on the loan amount. The agreement for purchase of toolings
was entered into much prior to the approval of the loan arrangement given by the
Reserve Bank of India. Therefore, the loan agreement, in its entirety, was not
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ITA No. 1397/Del/13
obliterated by such waiver. Secondly, the purchase consideration related to capital
assets. The toolings were in the nature of dies. The assessee was a manufacturer
of heavy vehicles and jeeps. It required these dies for expansion. Therefore, the
import was that of plant and machinery. The consideration paid was for such
import. In the circumstances, section 28(iv) was not attracted. Lastly, the
principal amount of loan had been forgone as a part of takeover arrangement to
which the assessee was not a party. The waiver of the principal amount was
unexpected in the circumstances, such waiver would not constitute business
income.
(ii) that in order to apply section 41(1), an assessee should have obtained a
deduction in the assessment for any year in respect of loss, expenditure or trading
liability incurred by the assessee. The assessee had not obtained such allowance or
deduction in respect of expenditure or trading liability. The assessee had paid
interest at 6 per cent over a period of ten years on Rs.57,75,064/-. In respect of
that interest, the assessee never got deduction under section 36(1)(iii) or section
37. In the circumstances, section 41(1) of the Act was not applicable. Secondly,
even assuming that the assessee had got deduction on allowance section 41(1) was
not applicable because such deduction was not in respect of loss, expenditure or
trading liability. Lastly, the toolings constituted capital assets and not stock-in-
trade. Therefore, taking into account all the above facts section 41(1) of the Act
was not applicable."
(ii) CIT v. Tosha International Ltd. ITA No.1143/2008 Dt:23.9.2008 Delhi HC:
Briefly, the assessee was engaged in the manufacturing of black and white
picture tubes. The assessee company ran into huge losses and it ultimately
became a sick company and registered with the BIFR. Under the one time
settlement scheme, the FIs and banks required the assessee to pay 60% of the
amount due towards principal and waived the entire interest payment. There
was no dispute with regard to waiver of interest payment, but, the AO took an
objection in respect to the waiver of the principal amount of Rs.10.47 crores
which the assessee had directly credited to the Capital Reserve Account.
According to the AO, the assessee had derived benefit on the basis of either
depreciation or utilizing the working capital which would have formed part of the
earlier year's income and since the loans ceased to exist, this amounted to
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ITA No. 1397/Del/13
cessation of liability and, therefore, it has to be treated as an income. When the
issue finally placed before the Hon'ble High Court for its ruling, the Hon'ble Court
had held as under:
"4. We see no reason to interfere with the conclusions of the Tribunal as the same
have been rendered on a correct appreciation of law. The principles enunciated in
Mahindra and Mahindra Limited v. CIT 261 ITR 501 (Bom) are fully applicable
and we see no reason to take a different view."
Denial of the benefit of set off of brought forward unabsorbed depreciation from
the AYs 1997-98 to 2001-02 and also upholding the addition of Rs.51,21,95,551/-
made by the AO.
8. The AO had held that the carry forward unabsorbed depreciation for the
period 1996-97 till 2001-02 would be determined by the provisions of s. 32(2) of
the Act and on this basis though the assessee had claimed benefit of unabsorbed
depreciation for the AYs 1996-97 to 2007-08, the assessee was not allowed to
set off of unabsorbed depreciation for the AYs 1997-98 to 2001-2002.
Aggrieved, the assessee took up the issue before the CIT (A). After due
consideration of the assessee's submissions, the CIT (A) rejected the assessee's
plea for the reasons recorded in her findings under dispute (supra).
8.1. Before us, it was the stand of the assessee that the CIT (A) had grossly
ignored the fact that once the Circular No.14 of 2001 clarified that the restriction
of 8 years for carry forward and set off of unabsorbed depreciation had been
dispensed with, the unabsorbed deprecation from AYs 1997-98 up-to the AY
2001-02 got carried forward to the AY 2002-03 and became part thereof and
has, thus, overlooked the fact that the accumulated depreciation came to be
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governed by the provisions of s. 32(2) as amended by Finance Act, 2001 and this
was available for carry forward and set off against the profits and gains of
subsequent years without any limit whatsoever.
8.2. We have duly considered the assessee's submission on the issue. The
learned D.R present was heard. The AO had allowed the unabsorbed
depreciation to the extent of Rs.2,49,74,566/- pertaining to the AYs 1996-97 and
2000-01 and denied unabsorbed deprecation to the extent of Rs.50.18 crores for
the AYs 1997-98 to 2001-02. Prior to the Finance Act (No.2) of 1996,
unabsorbed depreciation could be carry forward indefinitely. However, the
Finance Act (No.2) of 1996 had restricted the period of carry forward and set off
of unabsorbed deprecation to eight years from the AY 1997-98. Subsequently, s.
32(2) of the Act was amended by Finance Act, 2001 i.e., w. e. f. the assessment
year 2002-03 to restore the status quo as it was prevailed prior to the Finance
Act (No.2) of 1996, as a result of which, restricting of the period of eight years
was removed. In substance, the effect of the amendment is that the
unabsorbed depreciation to an assessee as on 1.4.2002 [A Y 2002-03] has to be
dealt with in accordance with s. 32(2) of the Act as amended by the Finance Act,
2001 and not by s. 32(2) of the Act as it stood before the said amendment.
Thus, the provisions of s. 32(2) of the Act as amended by the Finance Act, 2001
would allow the unabsorbed depreciation allowance pertaining to the AYs 1997-
98, 1998-99, 1999-2000 and 2000-01 to be carried forward for set off
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indefinitely. As such, the assessee company is entitled to set off of brought
forward unabsorbed deprecation for the AYs 1997-98 to 2001-02.
8.2.1. Moreover, the legal position as prevails in the case of the assessee
company is that the provision relating to allowing set off of unabsorbed
depreciation u/s 32(2) of the Act as amended by the Finance Act, 1996 provides
that the current depreciation becomes eligible for set off against the business
income and against income under any other head. The carry forward time is
also restricted to eight assessment years succeeding the AY in which it was first
computed. Further, the aforesaid changed law was applicable up-to the AY
2001-02. The second proviso which later became the proviso to s. 32 (2) of the
Act provides that the time limit of eight assessment years specified in sub-clause
(b) shall not apply in the case of a company for the assessment years that if it
was a sick industrial company. Incidentally, the present assessee company was
registered as a sick industrial company under SICA on 16.8.1999 and was
discharged by way of abatement of proceedings before BIFR on 16.1.2008.
8.2.2. To strengthen our view on the above findings, we would like to refer to
the judgment of the Hon'ble Gujarat High Court in the case of General Motors
India Pvt. Ltd v. DCIT reported in 354 ITR 244 (Guj).
Briefly, the assessee company is a private limited company and engaged
in manufacturing and trading of automobiles and its parts under the brand name
`Chevrolet'. The assessee filed its return of income for the AY 2006-07, declaring
a total income at Re. Nil. The Transfer Pricing Officer passed an order by
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directing the AO to make an addition of Rs.53.15 crores to the total income of
the assessee. Being aggrieved by the TPO's direction, the assessee filed its
objection before the Dispute Resolution Panel [DRP]. The DRP directed the AO
to make additions under various heads, but, allowed unabsorbed depreciation of
AY 1997-98 of Rs.43.6 crores and accepted the total income at Re. Nil.
Subsequently, the assessment was re-opened u/s 147 of the Act on the ground
that the unabsorbed depreciation pertaining to AY 1997-98 of Rs.43.60 crores
was wrongly allowed to be set off against the income of AY 2006-07 though s.
32(2) of the Act as amended by the Finance Act No.2, 1996, the unabsorbed
deprecation for the AY 1997-98 could be carried forward up-to a maximum
period of 8 years from the year in which it was first computed and, therefore,
brought forward depreciation was eligible for carry forward and set off against
the income for AY 2005-06 only. Finally, when the issue reached the Hon'ble
High Court for consideration, the Hon'ble Court had ruled that the assessee was
eligible to carry forward of unabsorbed depreciation and set off against the
profits and gains of subsequent years without any limit by the provisions of s.
32(2) as amended by the Finance Act, 2001. The operational and relevant
portions of the judgment of the Hon'ble Court are reproduced as under:-
" 30. The last question which arises for consideration is that whether the
unabsorbed depreciation pertaining to A.Y. 1997-98 could be allowed to
be carried forward and set off after a period of eight years or it would be
governed by Section 32 as amended by Finance Act 2001? The reason
given by the Assessing Officer under section 147 is that Section 32(2) of
the Act was amended by Finance Act No. 2 of 1996 w.e.f. A.Y. 1997-98
and the unabsorbed depreciation for the A.Y. 1997-98 could be carried
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forward up to the maximum period of 8 years from the year in which it
was first computed. According to the Assessing Officer, 8 years expired in
the A.Y. 2005-06 and only till then, the assessee was eligible to claim
unabsorbed depreciation of A.Y. 1997-98 for being carried forward and set
off against the income for the A.Y. 2005-06. But the assessee was not
entitled for unabsorbed depreciation of Rs. 43,60,22,158/- for A.Y. 1997-
98, which was not eligible for being carried forward and set off against
the income for the A.Y. 2006-07.
31. Prior to the Finance Act No. 2 of 1996 the unabsorbed depreciation
for any year was allowed to be carry forward indefinitely and by a
deeming fiction became allowance of the immediately succeeding year.
The Finance Act No. 2 of 1996 restricted the carry forward of unabsorbed
depreciation and set-off in a limit of 8 years, from the A.Y. 1997-98.
Circular No. 762 dated 18.2.1998 issued by the Central Board of Direct
Taxes (CBDT) in the form of Explanatory Notes categorically provided,
that the unabsorbed depreciation allowance for any previous year to
which full effect cannot be given in that previous year shall be carried
forward and added to the depreciation allowance of the next year and be
deemed to be part thereof.
32. So, the unabsorbed depreciation allowance of A.Y. 1996-97 would be
added to the allowance of A.Y. 1997-98 and the limitation of 8 years for
the carry-forward and set off of such unabsorbed depreciation would start
from A.Y. 1997-98.
33. We may now examine the provisions of section 32(2) of the Act
before the amendment by Finance Act 2001. The section prior to its
amendment by Finance Act, 2001, read as under :-
"Where in the assessment of the assessee full effect cannot be given to
any allowance under clause (ii) of sub-section (1) in any previous year
owning to there being no profits or gains chargeable for that previous
year or owing to the profits or gains being less than the allowance, then
the allowance or the part of allowance to which effect has not been given
(hereinafter referred to as unabsorbed depreciation allowance), as the
case may be :-
(i) shall be set off against the profits and gains, if any, of any , of any
business or profession carried on by him and assessable for that
assessment year :
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(ii) if the unabsorbed depreciation allowance cannot be wholly set off
under clause (i), the amount not so set off shall be set off from the
income under any other head, if any , assessable for that assessment
year;
(iii) if the unabsorbed depreciation allowance cannot be wholly set off
under clause (i) and Clause (ii) the amount of allowance not so set off
shall be carried forward to the following assessment year and
(a) it shall be set off against the profits and gains, if any, of any business
or profession carried on by him and assessable for that assessment year;
(b) if the unabsorbed depreciation allowance cannot be wholly so set off,
the amount of unabsorbed depreciation allowance not so set off shall be
carried forward to the following assessment year not being more than
eight assessment years immediately succeeding the assessment year for
which the aforesaid allowance was first computed:
Provided that the time limit of eight assessment years specified in sub
clause (b) shall not apply in case of a company for the assessment year
beginning with the assessment year relevant to the previous year in which
the said company has become a sick industrial company under sub-section
(1) of section 17 of the Sick Industrial Company (Special Provisions) Act,
1985 (1 of 1986) and ending with the assessment year relevant to the
previous year in which the entire net worth of such company becomes
equal to or exceeds the accumulated losses.
Explanation For the purposes of this clause, `net worth' shall have the
meaning assigned to it in clause (ga) of sub-section (1) of section 3 of the
Sick Industrial Companies (Special Provisions) Act, 1985."
34. The aforesaid provision was introduced by Finance (No. 2) Act, 1996
and further amended by the Finance Act, 2000. The provision introduced
by Finance (No. 2) Act was clarified by the Finance Minister to be
applicable with prospective effect.
35. Section 32(2) of the Act was amended by Finance Act, 2001 and the
provision so amended reads as under :-
"Where, in the assessment of the assessee, full effect cannot be given
to any allowance under sub-section (1) in any previous year, owing to
there being no profits or gains chargeable for that previous year, or owing
to the profits or gains chargeable for that previous year, owing to the
profits or gains chargeable being less than the allowance, then, subject to
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ITA No. 1397/Del/13
the provisions of sub-section (2) of section 72 and sub-section (3) of
section 73, the allowance or the part of the allowance to which effect has
not been given, as the case may be, shall be added to the amount of the
allowance for depreciation for the following previous year and deemed to
be part of that allowance, or if there is no such allowance for that
previous year, be deemed to b e allowance of that previous year, and so
on for the succeeding previous year."
36. The purpose of this amendment has been clarified by Central Board
of Direct Taxes in the Circular No. 14 of 2001. The relevant portion of the
said Circular reads as under :-
"Modifications of provisions relating to depreciation
30.1 Under the existing provisions of section 32 of the Income-tax Act,
carry forward and set off of unabsorbed depreciation is allowed for 8
assessment years.
30.2 With a view to enable the industry to conserve sufficient funds to
replace plant and machinery, specially in an era where obsolescence takes
place so often, the Act has dispensed with the restriction of 8 years for
carry forward and set off of unabsorbed depreciation. The Act has also
clarified that in computing the profits and gains of business or profession
for any previous year, deduction of depreciation under section 32 shall be
mandatory.
30.3 Under the existing provisions, no deduction for depreciation is
allowed on any motor car manufactured outside India unless it is used (i)
in the business of running it on hire for tourists, or (ii) outside in the
assessee's business or profession in another country.
30.4 The Act has allowed depreciation allowance on all imported motor
cars acquired on or after 1st April, 2001.
30.5. These amendments will take effect from the 1st April, 2002, and
will, accordingly, apply in relation to the assessment year 2002-03 and
subsequent years."
37. The CBDT Circular claries the intent of the amendment that it is for
enabling the industry to conserve sufficient funds to replace plant and
machinery and accordingly the amendment dispenses with the restriction
of 8 years for carry forward and set off of unabsorbed depreciation. The
amendment is applicable from assessment year 2002-03 and subsequent
years. This means that any unabsorbed depreciation available to an
assessee on 1st day of April, 2002 (A.Y. 2002-03) will be dealt with in
accordance with the provisions of section 32(2) as amended by Finance
Act, 2001 and not by the provisions of section 32(2) as it stood before the
said amendment. Had the intention of the Legislature been to allow the
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ITA No. 1397/Del/13
unabsorbed depreciation allowance worked out in A.Y. 1997-98 only for
eight subsequent assessment years even after the amendment of section
32(2) by Finance Act, 2001 it would have incorporated a provision to that
effect. However, it does not contain any such provision. Hence keeping in
view the purpose of amendment of section 32(2) of the Act, a purposive
and harmonious interpretation has to be taken. While construing taxing
statutes, rule of strict interpretation has to be applied, giving fair and
reasonable construction to the language of the section without leaning to
the side of assessee or the revenue. But if the legislature fails to express
clearly and the assessee becomes entitled for a benefit within the ambit of
the section by the clear words used in the section, the benefit accruing to
the assessee cannot be denied. However, circular No. 14 of 2001 had
clarified that under section 32(2), in computing the profits and gains of
business or profession for any previous year, deduction of depreciation
under section 32 shall be mandatory. Therefore, the provisions of section
32(2) as amended by Finance Act, 2001 would allow the unabsorbed
depreciation allowance available in the A.Y. 1997-98, 1999-2000, 2000-01
and 2001-02 to be carried forward to the succeeding years, and if any
unabsorbed depreciation or part thereof could not be set off till the A.Y.
2002-03 then it would be carried forward till the time it is set off against
the profits and gains of subsequent years.
38. Therefore, it can be said that current depreciation is deductible in
the first place from the income of the business to which it relates. If such
depreciation amount is larger than the amount of the profits of that
business, then such excess comes for absorption from the profits and
gains from any other business or business, if any, carried on by the
assessee. If a balance is left even thereafter, that becomes deductible
from out of income from any source under any of the other heads of
income during that year. In case there is a still balance e left over, it is to
be treated as depreciation for such succeeding year the unabsorbed
depreciation is added to the current depreciation for such succeeding
year, the unabsorbed depreciation becomes the depreciation allowance for
such succeeding year. We are of the considered opinion that any
unabsorbed depreciation available to an assessee on 1st day of April, 2002
(A.Y. 2002-03) will be dealt with in accordance with the provisions of
section 32(2) as amended by Finance Act, 2001. And once the Circular No.
14 of 2001 clarified that the restriction of 8 years for carry forward and
set off of unabsorbed depreciation had been dispensed with, the
unabsorbed depreciation form A.Y. 1997-98 upto the A.Y. 2001-02 got
carried forward to the assessment year 2002-03 and became part thereof,
it came to be governed by the provisions of section 32(2) as amended by
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ITA No. 1397/Del/13
Finance Act 2001 and were available for carry forward and set off against
the profits and gains of subsequent years, without any limit whatsoever. "
8.2.3. Further, the Hon'ble Gujarat Court in the case of CIT v. Gujarat
Themis Biosyn Ltd in Tax Appeal No.3 of 2014 dated 24.2.2014 decided the issue
in favour of the assessee in conformity with the judgment of the earlier Bench of
the same Court in the case of General Motors India P. Ltd (supra)
8.2.4. Considering all the relevant facts and circumstances of the issue as
deliberated upon in the foregoing paragraphs and also inconsonance with the
judgment of the Hon'ble Gujarat High Court in General Motors India Pvt. Ltd
(supra), we are of the view that the assessee company is eligible for carry
forward and set off of unabsorbed depreciation for all the assessment years
under reference. It is ordered accordingly.
9. In the result, the assessee appeal is allowed.
Pronounced in the open court on 22nd August, 2014.
sd/- sd/-
(B.C. MEENA) ( GEORGE GEORGE K)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Date 22nd August, 2014
*Veena
Copy of order forwarded to:
1. Appellant
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ITA No. 1397/Del/13
2. Respondent
3. CIT(A)
4. CIT
5. DR
By Order
Asstt. Registrar, ITAT
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