Business Laws

COURTROOM

| Updated on September 19, 2021

Acknowledged as debt

A liability that appears in the balance sheet of a company is tantamount to acknowledging it as debt. This principle was upheld by the Income Tax Appellate Tribunal, Bangalore bench, in an interesting case involving the applicability of Section 41 (1) of Income Tax Act, in the case of Deputy Commissioner Of Income Tax VsKarnataka Agro Industries.

In business, there are circumstances where a person might have incurred a liability, but later on he need not have to pay it for one or other reason. The Income Tax Act brings to tax such liabilities which are no more payable.

Karnataka Agro Industries had received ₹6 crore from the government of Karnataka as advance for supply of goods and the amount was shown as a liability. Subsequently, the company closed down and the ₹6 crore was adjusted against some other receivables.

But the Income Tax department wanted to treat the ₹6 crore as income under Section 41 (1). “The liability cannot be construed to have been extinguished and assumed the character of income as envisaged in Section 41(1) of the IT Act,” said Member (J), George K.

The Tribunal relied upon an earlier judgment of the Delhi High Court, in the case of CIT Vs Shri Vardhman Overseas, wherein it was held that the liability appearing in the balance sheet amounted to acknowledgement of debt. In the view of the judgment, ITAT dismissed the appeal filed by revenue.

Fresh cause of action

The non-payment of an amount awarded under a decree, judgment or an arbitral award gives rise to a fresh cause of action to initiate insolvency proceedings under the Insolvency and Bankruptcy Code (IBC), the Supreme Court held in a judgment in the case of Dena Bank Vs C Shivkumar Reddy.

When the financial creditor (Reddy) failed to pay up ₹52 crore which the Debts Recovery Tribunal had asked him to pay, Dena Bank took the matter to the NCLT. The respondent argued that the case was being brought to the NCLT under IBC after the period of limitation, which is three years from the date the debt became NPA.

It was observed by the Supreme Court that as per Section 18 of Limitation Act, 1963, an acknowledgement of a subsisting liability made in writing had the effect of commencing a fresh period of limitation from the date on which the acknowledgement is signed. Such acknowledgement need not be accompanied by a promise to pay expressly or even by implication. However, the acknowledgement must be made before the relevant period of limitation has expired.

The judgment will act as a sigh of relief for the financial creditors who were granted a favourable decision in recovery litigation or arbitral proceedings, and yet have failed to receive their dues. “Such financial creditors can now seek recourse under the IBC to resolve the insolvency of the corporate debtor,” said lawyer Vasanth Rajasekaran of Phoenix Legal.

Loan is capital

In another case, between the Income Tax department and Echon Industries, Ahmedabad, the ITAT held that if a loan is waived, the loan amount does not become an ‘income’ that could be taxed.

In holding this view, the Tribunal relied on a decision of the Supreme Court, in a similar dispute between the Income Tax department and Mahindra & Mahindra, which held that a waived loan could not be brought to tax as it was on a capital account and not in the nature of an ‘income’.

To withhold or not to

You are an Indian company and you advertise your products abroad. When you make the payment for the advertisements, should you or should you not withhold tax?

This question came up before the Income Tax Appellate Tribunal, Bangalore, in the case of Myntra Designs Pvt Ltd Vs Deputy Commissioner of Income Tax (International Taxation). Myntra had advertised with Facebook, Ireland, a non-resident company. The case was similar to another one, involving Urban Ladder Home Décor Solutions Pvt Ltd. In both cases, the Income Tax department had taken a view that the payments towards advertisements were in the nature of ‘royalty’, and hence taxable in India; therefore, the advertising companies ought to have withheld tax before payment.

The ITAT cited Supreme Court decisions in similar cases, where the apex court had made it clear that the test of whether something was a royalty or not, was really whether what was paid for resulted in a taxable income in India.

The facts prevailing in the instant cases are identical with the facts of Urban Ladder Home Décor Solutions Pvt Ltd with regard to the payments made to Facebook, Ireland towards advertisement charges. Accordingly, in view of said decision, present Tribunal held that, the payments made by the Assessee the non-resident company Facebook, Ireland, cannot be considered as “royalty payments” and hence, they do not give rise any income chargeable in India under Indian IT Act in all the three years under consideration.

In that view of the matter, there is no requirement to deduct tax at source from those payments under Section 195 of the Act. Hence, the Assessee cannot be considered as an Assessee in default under Section 201 (1) of the IT Act. Accordingly, the orders passed by CIT (A) for the years under consideration are set aside and the AO is directed to delete the demand raised under Section 201 (1) of the IT Act and also the consequential interest charged under Section 201 (1A) of the IT Act in all the three years under consideration.

No moratorium for individuals

In the judgment in the case of Anjali Rathi Vs Today Homes & Infrastructure, the Supreme Court has upheld the right of petitioners to move against the directors of a corporate debtor, even though a moratorium has been declared under Section 14 of the IBC.

The Supreme Court has clarified that the moratorium is only under for the corporate debtor and not for the directors/management of the corporate debtor.

In coming to this conclusion, the Court relied upon an earlier, three-member bench of the Supreme Court in the case of P. Mohanraj Vs Shah Bros. Ispat, in which it was held that proceedings could be initiated against persons mentioned in the Section 141 (1) and (2) of the Negotiable Instruments Act.

Published on September 19, 2021

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