Sanjay Arora, A. M.:
1. This is an Appeal by the Assessee directed against the Order by the Commissioner of Income Tax (Appeals)-22, Mumbai ('CIT(A)' for short) dated 29.12.2011, partly allowing the assessee's appeal contesting its assessment u/s.143(3) of the Income Tax Act, 1961 ('the Act' hereinafter) for the assessment year (A.Y.) 2008-09 vide order dated 16.12.2010. The appeal raises five issues per its five grounds, which we shall take up in seriatim.
2. The first issue is with regard to the addition in the sum of Rs.28,04,95,352/- u/s.41(1) r.w.s. 28(iv) of the Act on account of the waiver of old loans allowed to the 2
assessee by the lender, IDBI, as a part of a one-time settlement under its Securities Asset Stabilisation Fund (SASF). The assessee's principal grievance before us, to no rebuttal by the ld. Departmental Representative (DR), was that the said amount stands assessed de hors and without regard to the details of the various loans comprised in the one-time settlement, and for which the ld. Authorized Representative (AR), the assessee's counsel, would advert our attention to pgs.7, 80 and 101 of the assessee's paper-book (PB). Of the nine loans that stood waived, bearing a total liability of Rs.44.66 crores, i.e., including interest and liquidated damages, only two loans were for working capital purposes, while the balance seven were term loans for acquisition of capital assets. In fact, of the two, one of the working capital loans, outstood only at an amount of Rs.0.24 lacs as on 01.04.2002, so that in effect there was only one working capital loan, granted on 29.12.1998 for Rs.840 lacs, in the loans waived.
3. We have heard the parties, and perused the material on record. The Revenue, it is claimed, has proceeded on the basis that none of the loans waived by Industrial Development Bank of India (IDBI) are for acquiring capital assets, while the facts on record reveal otherwise. As we discern, the Revenue cannot be said to be oblivious of the fact that the loans that stood partly waived off by the IDBI under its rehabilitation scheme were pre-dominantly term loans; rather, adverting to the fact that depreciation had been claimed on the assets acquired thereby. The said argument, in our view, rather than assisting the Revenue, further depletes its case inasmuch as it only implies that the nature of the benefit arising on the waiver of the loan is independent of the manner of the utilization thereof. In fact, the apex court has time and again, i.e., in the context of the fact situation of the various cases, as in the case of CIT vs. Tata Iron and Steel Co. Ltd.  231 ITR 285 (SC), sought to clarify that the cost of an asset is independent of the loan obtained to acquire it, so that it would not in any manner alter with the manner and mode of repayment of the loan, or its non-repayment. That is, the raising of capital - borrowed or otherwise, is a matter distinct and separate from its application, so that the waiver of a loan should bear the same character irrespective of the asset wherein the same stands deployed. So however, the hon'ble jurisdictional high court has time and again unequivocally held that while the waiver of a term loan, applied in capital assets - depreciable or otherwise, would be a capital receipt and, thus, not income by definition, that of a working capital loan, utilized for working capital purposes, i.e., for running the business, would bear a different character, i.e., of a trade receipt, and is therefore assessable as business income u/s.28. This view stands again reiterated by it as recently as in CIT vs. Xylon Holdings Pvt. Ltd.  90 DTR 205 (Bom), adverting to its earlier decisions in Mahindra and Mahindra Ltd. vs. CIT  261 ITR 501 (Bom) and Solid Containers Ltd. vs. Deputy CIT  308 ITR 417 (Bom). Further, though the hon'ble court in Solid Containers Ltd. (supra) explained its decision with reference to the incidence of retention of the (working capital) loan funds, since waived, in business, which condition may not obtain, as in the instant case, where the assessee is inflicted with serious sickness, in our view this would not make a material change. This is as the said loss would only signify the absorption of the funds and, further, is available for set off against the income of the assessee for the same as well as the subsequent years. The assessment of income on account of waiver of loan, on the other hand, is due to it no longer representing a liability, so that the corresponding capital becomes the assessee's own capital. That is, there is a change in character on waiver. The Revenue has, thus, in proceeding in the manner it has, acted contrary not only to the facts borne out by material on record, but also to the law as explained by the hon'ble jurisdictional high court. The matter would, per force the obtaining facts, have to be restored back to the file of the assessing authority for an adjudication in accordance with the law after allowing the assessee a reasonable opportunity to present its case. The assessee shall be at liberty to plead and substantiate its case on all aspects of the matter. We decide accordingly.
4. The second issue concerns the disallowance u/s.14A. The assessee's case before us, as before the ld. CIT(A), was that no disallowance toward interest shall arise as the investment in shares was made in the f.y. 1994-95, whereat the assessee had sufficient capital. Secondly, the working of the average investment for the purpose of rule 8D, which may apply, is wrongly made, and toward which the assessee has moved the rectification application. The Revenue's case, on the other hand, is based on the application of rule 8D inasmuch as the onus to show that the same is not applicable in the facts and circumstances of the case is on the assessee, which it has not, so that the rule shall apply by default.
5. We have heard the parties, and perused the material on record. The funds, besides being fungible, are in a state of dynamic flux in an entity as a commercial entity. As such, even as the assessee may have had adequate funds for investment in shares in the year of their acquisition (which though would need to be exhibited), depletion of capital over time, as on account of continuing losses, may result it in being financed wholly or partly in time by borrowed capital. The onus to establish its claim is on the assessee, failing which rule 8D would apply. The matter is, accordingly, restored back to the file of the A.O., who shall also address the assessee's grievance qua the mistake claimed to have inflicted his working. We decide accordingly.
6. The assessee's third ground in fact represents its alternate claim for allowing deduction u/s.43B on payment of interest to IDBI, at Rs.834.19 lacs. The entire waiver of Rs.2804.95 lacs out of the outstanding demand of Rs.4466.07 lacs being considered as towards principal, the assessee contends in the alternative that to the extent of payment, interest on term loans may be allowed to it inasmuch as no deduction in its respect stood claimed or allowed, being unpaid, in view of section 43B(e).
7. We have heard the parties. The assessee's argument is unexceptional. It was, on query, clarified by the ld. AR that no break-up of the waiver had been provided by IDBI. If that be so, the entire outstanding having been considered as a single outstanding sum, the various components thereof, and resultantly of the amount paid, would need to be ascertained on some reasonable basis, as for example proportionately. From the assessee's point of view, if no deduction on account of interest (or liquidated damages) 5
has been claimed or allowed, whether on account of non-payment or otherwise, no income on its write back in accounts on waiver shall arise. To the extent of the amount attributable thereto, deduction u/s. 36(1)(iii) would ensue where not claimed on accrual on account of application of section 43B(e). The treatment accorded by the assessee in its books of account would also be relevant. This matter shall also, therefore, be adjudicated by the A.O., i.e., along with the assessee's first ground before us and, accordingly, stands remitted to him for the purpose. We decide accordingly.
8. The next ground is in respect of loss on fire, disallowed as capital expenditure. The said loss, on verification of details, was found to be on account of capital work-in- progress (Rs.48.40 lacs); WDV of plant and machinery (Rs.19.50 lacs), besides on sale of a structure (Rs.149.43 lacs), arising on the sale of structure to its sister concern, M/s. Harsh EOU Estates Pvt. Ltd. The same was disallowed as being capital in nature. The ld. CIT(A) confirmed the loss, holding as under:
"6.3 I have gone through the assessment order, perused the submissions made by the appellant and also discussed the case with the A.R. of the appellant. During appellate proceedings, the appellant was asked to furnish the details of insurance claim received from Insurance company along with inspection report detailing the assets destroyed and its valuation. In response, the assessee has furnished copy of Survey report which is merely a draft being unsigned. No details from the Insurance company regarding the assets destroyed and its valuation have been produced before me. Accordingly, I do not find any force in the contention of the appellant and the treatment of loss as capital in nature by A.O. is upheld."
9. We have heard the parties, and perused the material on record. 9.1 The matter has been decided by the first appellate authority in the absence of the adequate details. On merits, we firstly observe that the total amount under reference is at Rs.2,17,32,987/-, i.e., including both the loss on fire as well as the loss on sale of structure. The two would, therefore, need to be considered separately, which has not been, both for want of details as well as due application. In fact, the total loss claimed is at Rs.2.67 crores (para 5.1 of the assessment order), so that the nature and the quantum of the amount already allowed is also not clear.
9.2. Further, the assessee has since received an insurance claim at Rs.99,53,155/-, so that the loss arising to the assessee on fire would stand reduced to that extent. The assessee is following accrual method of accounting, which is even otherwise mandatory on it, so that the amount/s as claimed or anticipated to be realized against insurance contract/s ought to have been factored by it in accounts, and only the balance amount/s claimed as it's share of the loss sustained. Further, the fact that the same (insurance claim) stands offered as income for the subsequent year (A.Y. 2009-10), as stated before us, is to no moment inasmuch as the income has to be assessed for each year separately, and it being assessed for another year would not operate to not bring it to tax in the year in which it arises or accrues. In fact, as afore-said, no part of it could be said to be income inasmuch as it only goes to reduce the loss sustained, whether on capital or revenue account, and which brings us to the next part of our discussion. Further on, the loss, apart from that in respect of stock-in-trade, assessed by the insurance company at Rs.44,12,907/- (and against which the assessee has received a claim for Rs.29,04,826/- / PB pgs.263-264), is in respect of capital asset/s destroyed in fire. The loss of capital asset would be a capital expenditure by definition. In fact, the insurance claim received against the loss/destruction of a capital asset itself would reveal the dichotomy or the internal inconsistency in the assessee's stand of the impugned loss on fire as being not on capital account. Simply put, the capital asset/s is insured against a defined loss, and on the same being sustained, compensated against. The same, rather, being only moneys payable, as defined under Explanation to section 32(iii), would go to reduce the written down value (WDV) of the relevant block of assets u/s.43(6)(c).
9.3. Further, the assessee also claims to have incurred expenditure toward restoring the assets to their normative state, so that the same is in the nature of repairs. It is, firstly, not clear as to if the impugned loss contains such expenditure. Further, if and to the extent so, so that the assessee has incurred expenditure in restoring the asset/s destroyed to its normative working condition, the said expenditure, as reduced by the insurance claim received/receivable in its respect, would be a revenue expenditure arising in the normal course of business, though on account of an abnormal event of a fire. The WDV (of the relevant block of assets) would stand to be increased only where and to the extent there is an up-gradation on account of the expenditure incurred beyond the previously assessed standard of performance, i.e., in the operational capacity or capability, including as to the unexpired lifespan of the relevant asset. This is an increase in WDV and, simultaneously, reduction therein, could only be on account and to the extent of an increase in value of the capital structure, the profit making apparatus, or, as the case may be, an impairment or depletion therein. To the extent there is no such increase or decrease, there can be no addition or reduction in the value of the relevant block of assets. Rather, the WDV, being statutorily defined, reduction therein could only be on account of moneys payable.
9.4 The loss on the sale of structure, as it would appear to us, is on a different footing, so that where and to the extent in relation to a capital asset, forming part of the firm's capital structure, would be on capital account, even as stated by the authorities below.
9.5 The matter, in view of the foregoing, is largely indeterminate. Accordingly, we only consider it fit and proper that the matter is restored for afresh adjudication to the file of the A.O. per a speaking order after allowing the assessee a reasonable opportunity to state its case. The A.O. shall, in doing so, have regard to our foregoing observations.
10. The fifth and the last ground of the appeal relates to the assessment of interest received at Rs.1,48,318/- as income from other sources, as against business income returned by the assessee. The same was not accepted by the Revenue following the precedents, as in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. vs. CIT  227 ITR 172 (SC) and South India Shipping Corpn. vs. CIT  240 ITR 24 (Mad).
11. The matter was not specifically argued before us. We shall nevertheless decide the same on the basis of the law, adopting the facts as borne out by the material on record, inasmuch as the said ground was not specifically stated by the ld. AR as not pressed. No material has been placed on record to establish that the interest earned is on deposits that ought to be necessarily made on account of business exigencies, so that interest to that extent stands earned as incident to the business. In its absence, the same, as per the settled law, would be assessable u/s.56. We, therefore, find no infirmity in the said assessment and, accordingly, decline interference. We decide accordingly.
12. In the result, the assessee's appeal is partly allowed for statistical purposes.