- (1.) The present appeal has been filed by the Department under Section 260A of the Income-tax Act, 1961 against the judgment and order dated 18.01.2008, passed by the Income Tax Appellate Tribunal, Lucknow in Appeal No. I.T.A. No. 1195/Luc/2006, for the assessment year 2002-03. On 05.11.2008, a Coordinate Bench of this Court has admitted the appeal on the following substantial question of law:-- Whether on the fact and circumstances of the case the Income Tax Appellate Tribunal was justified in holding that the provision of Section 41(1) of the Income-tax Act, 1961 is not applicable.
(2.) The brief facts of the case are that the assessee is a State Industrial Investment Corporation, which was established for promoting industrial growth in the State of U.P. It is engaged in providing financial assistance to industrial units by way of equity participation, term lending and by way of loan on lease of assets. During the assessment year under consideration, the assessee-Corporation had shown non refundable interest free unsecured loan of Rs. 26,02,50,000/- from the U.P. Government. The Assessing Officer (AO) opined that since the assessee-Corporation has utilized the said loan in the business activity, so the same will have to be treated as capital receipt. Hence, he made the addition, which was deleted by the first appellate authority as well as by the Tribunal vide its impugned order. Still not being satisfied, the Department has filed the present appeal.
(3.) With this background, Sri D.D. Chopra, learned counsel for the Department, at the strength of written submission had justified the order passed by the AO. He submits that the intention of the assessee was to get this loan amount into profit & loss account, hence, the conversion of loan into non refundable interest free unsecured loan is of revenue amount. So it is taxable. He further submits that State Government is 10096 shareholder in the assessee-company and there is no outside participation in the equity, the only way the State Government can recoup the loss is either to increase the share capital of the assessee or to grant another loan. The State Government had granted loan of Rs. 33.53 crores to the assessee and the assessee was unable to make the repayment. In these circumstances, the assessee had requested the State Government vide letter dated 31.03.2002 to permit to adjust the interest bearing loan against losses in profit and loss account. As a result, the State Government converted part of the loan as non refundable interest free unsecured loan to the extent of Rs. 26.03 crore. This is clearly a cessation/remission of trading liability and assessable under Section 41(1) of the Act. Lastly, he made a request that the impugned order passed by the Tribunal may kindly be set aside where the addition was deleted.;