Remission of Liability by order of BIFR is a Capital Liability, cannot be brought to Tax as Business Income: ITAT [Read Order]

The Chennai bench of the Income Tax Appellate Tribunal (ITAT) has held that remission of liability by order of the Board for Industrial and Financial Reconstruction (BIFR) is a capital liability, and cannot be brought to tax as business income.

The appellant, M/s. Arcot Textiles Mills Ltd was a sick company as declared by the Board for Industrial and Financial Reconstruction (BIFR). The BIFR has allowed certain relief and concessions to the appellant in respect of various liabilities. The assessee company has credited its profit & loss account a sum towards remission of capital liability, however, excluded the sum from profits/income in the statement of total income.

The BIFR has directed the income-tax department to exempt the assessee company from the application of provisions of section 41(1) of the Income Tax Act, 1961.  But, the Assessing Officer by relying on the Supreme Court decision in CIT Vs TVS Sundaram Iyengar & Sons invoked provisions of section 41(1) of the Act and assessed remission of liability under the provisions of section 41(1) of the Income Tax Act, 1961 alleging that even remission of capital liability would become income of the assessee when it becomes assessee’s own money. Aggrieved by the assessment order, the assessee preferred an appeal before the CIT(A), which upheld the assessment, hence assessee preferred an appeal before ITAT.

The counsel for the assessee submitted that once there is a specific direction from the BIFR for excluding relief granted to the liability u/s.41(1) of the Act, the Assessing Officer has erred in invoking provisions of section 41 (1) of the Act as the order of the BIFR is binding on the Assessing Officer.

The Coram of Mr. G. Manjunatha, Accountant Member, and Mr. Anikesh Banerjee, Judicial Member has observed that the amount credited to profit & loss account towards remission of liability by the order of BIFR is a capital liability and thus, remission of such liability cannot be brought to tax u/s.41(1) of the Income Tax Act, 1961.

By relying on the decision of the Supreme Court in the case of CIT Vs Mahindra & Mahindra Ltd the Tribunal further held that “waiver of loan for acquiring capital assets cannot be treated as remission of trading liability and brought to tax u/s.41(1) of the Income Tax Act, 1961 or under section 28(iv) of the Income Tax Act, 1961. Therefore, we are of the considered view that the Assessing Officer has erred in assessing cessation of liability towards unsecured loans availed from financial institutions in terms of order of the BIFR u/s.41(1) of the Income Tax Act, 1961”. The Tribunal directs the AO to delete additions made towards remission/cessation of liability u/s.41(1) of the Act to the extent of Rs.2,55,53,342/-.

Mr. R.Venkata Raman, C. A appeared for the appellant and Mr. G.Johnson appeared for the respondent.

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