2007 (2) TMI 348 - AT - Income Tax

Nature Of Income - Applicability of section 28(iv) - Addition on account of remission of foreign currency loan - Term Benefit Or Perquisite - HELD THAT - In the present case also the assessee has created capital reserve which itself is indicative of nature of this amount even at the time of such a write-off as being of capital nature. Here, no material has been brought on record to say that loan so received was in the nature of revenue grant or subsidy or assistance originally or it was convertible into such type of receipts in the situation of the assessee not being in position of paying back the same, hence, its character of loan at all points cannot be doubted. We would further like to mention that the income as such or by way of retained earning is capable of being distributed or used for the purpose of the business and in the present case, the loan taken earlier have been repaid, therefore it cannot be distributed as retained earnings directly or indirectly, hence, on this count also the address of capital reserve created by the assessee cannot be termed as income. All the receipts mentioned in section 28 have inherently of income nature except in case or receipt under a Key Man Insurance Policy which is a recovery of expenditure already allowed as deduction. Hence, prima facie, the loan received by an assessee in the course of business is not envisaged an income. Now, coming to specific provisions of sub-section (iv) of section 28 it is also in connection with the value of any benefit or perquisite arising from business which means that such benefit or perquisite should be in the nature of income from the very beginning or it must have characteristics of income before it becomes chargeable at a later stage, if the original transaction is completed as designed. As stated that no material has been brought on record to show that the loan agreements provided for such waiver at subsequent stages, hence, this receipt cannot be construed as a benefit within the meaning of section 28( iv ) of the Act. In the present case, the assessee has not such special right or privilege. The only privilege which he enjoyed was regarding no liability to pay any interest as the funds were interest-free, hence, assessee derived benefit to this extent only and had it been a case of interest being payable by the assessee originally which was waived subsequently, in part or toto, the same would have been a benefit u/s 28(iv) surely. We are further of the opinion that provisions of section 28(iv) can be applied in a number of situations but the bottom-line or crucial fact would always be circumvention of income by taking or receiving income in other forms. To conclude, we hold that the order of the CIT(A) is not correct in law and accordingly, we quash the same and direct the Assessing Officer not to charge the amount of loan waived by the lender as income of the assessee. Thus, this ground of the assessee stands accepted. In the result, appeal filed by the assessee is allowed.

Summary

Issues Involved:
1. Confirmation of addition of Rs. 92,45,618 on account of remission of foreign currency loan.

Issue-wise Detailed Analysis:

1. Confirmation of Addition of Rs. 92,45,618 on Account of Remission of Foreign Currency Loan:

The primary issue in this case revolves around whether the remission of a foreign currency loan amounting to Rs. 92,45,618 should be considered taxable income under section 28(iv) of the Income Tax Act. The assessee had initially filed a return declaring nil income, which was accepted. However, a notice under section 148 was later issued by the Assessing Officer (AO), who opined that 50% of the interest-free foreign currency loan written off by the assessee and credited to the capital reserve account was taxable. The AO relied on the Supreme Court decision in CIT v. T.V. Sundaram Iyengar & Sons Ltd. [1996] 222 ITR 344, contending that the loan remission constituted income.

The assessee argued that the loan was of a capital nature and not taxable under section 28(iv), as it was not a benefit or perquisite arising from business. The CIT(A) upheld the AO's decision, stating that the remission made the assessee richer and was thus a benefit in the ordinary course of business. The assessee then appealed to the ITAT.

The assessee's counsel argued that the case was covered by the jurisdictional High Court's decision in Mahindra & Mahindra Ltd. v. CIT [2003] 261 ITR 501 (Bom.), which held that a loan taken for importing capital assets and subsequently waived could not be taxed under section 28(iv). The counsel also cited CIT v. Chetan Chemicals (P.) Ltd. [2004] 267 ITR 770 (Guj.), which emphasized that section 28(iv) applies only to benefits not in cash or money. The remission was directly transferred to the capital reserve without affecting the P&L account, distinguishing it from the T.V. Sundaram Iyengar case. The counsel also referred to various tribunal decisions supporting the view that waiver of a loan principal does not constitute income under section 28(iv).

The Departmental Representative argued that the Mahindra & Mahindra decision did not consider the T.V. Sundaram Iyengar ruling and emphasized that the money was received in the course of business, thus taxable. However, the ITAT noted that the T.V. Sundaram Iyengar case involved unclaimed balances credited to the P&L account, whereas the present case involved a positive act of remission with the amount credited to the capital reserve.

The ITAT held that the remission of the loan did not change its capital nature to revenue nature. Accepting the CIT(A)'s view would render the distinction between capital and revenue receipts meaningless. The ITAT also noted that no material indicated the loan was a revenue grant or subsidy, maintaining its capital nature. The ITAT further stated that section 28(iv) applies to benefits or perquisites of an income nature from the outset, which was not the case here. The remission did not constitute a benefit or perquisite under section 28(iv).

The ITAT concluded that the order of the CIT(A) was incorrect in law and directed the AO not to charge the loan remission as income. The appeal filed by the assessee was allowed.