By TIOL News Service

NEW DELHI, JULY 31, 2017: THE ISSUE BEFORE THE COURT IS - Whether when the amount of loan waived off has been credited to capital reserve and the interest amount has been written off in the P&L Account, the same does not deserves addition if the loan was obtained for purpose of purchasing fixed assets. YES is the verdict.

Facts of the case:

The Revenue preferred the present appeal challenging the order, whereby the ITAT had deleted the addition made by AO on account of 'amount transferred to: capital reserve' ignoring the fact that the said amount was a revenue receipt in the hands of the assessee and therefore the provision of Section 41 (1) of the I-T Act was applicable.

On appeal, the HC held that,

++ this Court has perused the decision in Logitronics P. Ltd. v. CIT which holds that if a loan was taken for acquiring a capital asset, waiver thereof would not amount to income exigible to tax. On the other hand, if the loan was for trading purpose and was treated as such from the very beginning in the books of account, the waiver thereof may result in income, more so when it was transferred to the profit and loss account. On the facts of the present case, it appears that the above decision is not helpful to the Revenue because of the categorical finding of the ITAT is that the loan availed by the Assessee from IFCI was for carrying out the manufacturing activities by the unit set up by Assessee in Palakad, Kerala. The ITAT has returned a finding that "the loan was for the purchase of capital asset." The Assessee's counsel has also placed before the Court a copy of the sanction letter from IFCI, evidencing the fact that the term loan was utilised for purchasing fixed assets. He has also placed before the Court a copy of the audited balance sheet and Profit & Loss account (P&L Account) for the financial year 2006-07 evidencing that the waived off amount has been credited to capital reserve and the interest amount has been written off in the P&L Account. Consequently, the ratio of the decision of this Court in CIT v. Pasupati Spinning Weaving Mills Ltd. squarely covers to this appeal and the only question framed in this appeal is accordingly answered in the negative. It is held that the ITAT did not err in deleting the addition of Rs.22.90 crores made by the AO on account of "amount transferred to capital reserve."

(See 2017-TIOL-1436-HC-DEL-IT)