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2009 (5) TMI 622 - AT - Income TaxRevision or cessation of trading liability - Business income - term loans from three banks - Whether the loan waiver credited in its general reserve account to be taxable income u/s 28(iv) or u/s 41(1) - defaulter in making the repayments of the instalments of term loans along with interest mainly due to its bad financial position - assessee has arrived at an agreement for One Time Settlement with the banks and there was a partial waiver of the principal loan amounts and this waiver cannot be treated as income u/s 41(1) and contended that waiver of amounts in capital accounts cannot be treated as the income of the assessee even u/s 28. HELD THAT - It is a trite law that the nomenclature given by an assessee to a particular account in its books of account is not the sole test to decide the real character of that account. The Supreme Court has held in the case of Kedarnath Jute Mfg. Co. Ltd. v. CIT 1971 (8) TMI 10 - SUPREME COURT that bad accounting effects neither in favour of the assessee nor against the revenue. Therefore the fact that the assessee has credited loan waiver amount in its general reserve does not influence the process of determining the exact nature of the issue. Applicability of section 28(iv) - It is clear that the High Court while delivering its judgment in the case of Solid Containers Ltd. 2008 (8) TMI 156 - BOMBAY HIGH COURT has not dissented in any way from the earlier decision in the case of Mahindra Mahindra Ltd. 2003 (1) TMI 71 - BOMBAY HIGH COURT . On the other hand the Court further reiterated the ratio laid down in the judgment of Hon ble High Court of Bombay in the case of Mahindra Mahindra Ltd. (supra) that the loan availed for acquiring capital assets when waived cannot be treated as assessable income. Therefore it is not possible to hold that as far as the loan waiver of capital account is concerned the decision of the Bombay High Court in the case of Solid Containers Ltd. (supra) clashes with the judgment of the same Court in the case of Mahindra Mahindra Ltd. (supra). We find that for the purpose of section 28(iv) the loan waiver amount credited by the assessee in its general reserve account is covered by the judgment in the case of Mahindra Mahindra Ltd. 2003 (1) TMI 71 - BOMBAY HIGH COURT and therefore the said waiver amount cannot be held as taxable. Whether section 41(1) operates against the contentions of the assessee or not? - The Supreme Court in the case of Polyflex (India) (P.) Ltd. v. CIT 2002 (9) TMI 4 - SUPREME COURT has examined the constitution of section 41(1). The Court has pointed out that section 41(1) consists of two main ingredients ( a ) loss or expenditure and ( b ) trading liability. The two ingredients of section 41(1) the court held have to be read independently. As the first ingredient relates to loss or expenditure and the second ingredient relates to remission or cessation of trading liability. The Court has categorically ruled that the words remission or cessation thereof shall apply only on a trading liability. There is no doubt that the term loan availed by the assessee from three banks were not in the nature of trading liability but were in the nature of capital liability. Therefore the waiver of loan liability was not the waiver of any trading liability. The waiver of capital liability would not become income u/s 41(1) on the ground of remission or cessation thereof. Obviously it is again to be stated that the term loan availed by the assessee on capital account was not in the nature of any loss or expenditure. The Delhi High Court in the case of CIT v. Phool Chand Jiwan Ram 1980 (4) TMI 29 - DELHI HIGH COURT and Bombay High Court in the case of Mahindra Mahindra Ltd. (supra) have held that section 41(1) would be applied only if the assessee has obtained any deduction or allowance in respect of any expenditure or loss which is recouped subsequently in whatsoever manner meaning thereby if the assessee has not obtained any such allowance or deduction section 41(1) would not be attracted at all. There is no doubt in the present case that the assessee never had the benefit of deduction of the term loan availed by it from the banks on capital account. Therefore section 41(1) has no application to the facts of the present case. Therefore we find that the waiver amount of term loan availed by the assessee does not partake the character of assessable income either u/s 28(iv) or u/s 41(1). The decision of the Apex Court in the case of T.V. Sundaram Iyengar Sons Ltd. 1996 (9) TMI 1 - SUPREME COURT relied on by the lower authorities is distinguishable on facts. The decision relied on by the Addl. Commissioner in the case of Solid Containers Ltd. (supra) is also not applicable to the present case for the reason that the said decision does not differ from the ratio laid down in the decision of the Bombay High Court in the case of Mahindra Mahindra Ltd. (supra). We direct AO to exclude the amount in computing the assessable income of the assessee for the impugned AY 2005-06. In the result the appeal filed by the assessee is allowed.
Issues Involved:
1. Whether the principal amount of bank loan waived can be treated as income. 2. Applicability of Section 28(iv) of the Income-tax Act, 1961. 3. Applicability of Section 41(1) of the Income-tax Act, 1961. Issue-wise Detailed Analysis: 1. Whether the principal amount of bank loan waived can be treated as income: The assessee-company, engaged in sea food exports, had availed term loans from three banks and settled these loans under a One Time Settlement (OTS) scheme, resulting in a waiver of Rs. 10.36 crores. The Assessing Officer (AO) treated this waiver as income, arguing it resulted in business gains. The assessee contended that the waiver of principal loan amounts could not be treated as income under Section 41(1) of the Income-tax Act, 1961, as it was not a trading liability. The CIT (Appeals) upheld the AO's view, treating the waiver as income under Section 28(iv). 2. Applicability of Section 28(iv) of the Income-tax Act, 1961: Section 28(iv) seeks to charge the value of any benefit or perquisite arising from business as income. The Bombay High Court in Mahindra & Mahindra Ltd. v. CIT [2003] 261 ITR 501 clarified that Section 28(iv) applies to benefits in kind, not cash transactions. The waiver of the loan, being a cash transaction, does not fall under Section 28(iv). The court also noted that the loan was used to purchase capital assets, making the waiver a capital account transaction, not revenue. The Tribunal concluded that the waiver of the principal loan amount does not constitute taxable income under Section 28(iv). 3. Applicability of Section 41(1) of the Income-tax Act, 1961: Section 41(1) applies to the remission or cessation of trading liabilities. The Supreme Court in Polyflex (India) (P.) Ltd. v. CIT [2002] 257 ITR 343 ruled that Section 41(1) pertains to trading liabilities, not capital liabilities. The assessee's loan was a capital liability, not a trading liability, and thus, its waiver does not attract Section 41(1). Additionally, the assessee did not claim any deduction for the loan amount, further excluding the applicability of Section 41(1). The Tribunal agreed that the waiver of the term loan does not constitute income under Section 41(1). Conclusion: The Tribunal directed the exclusion of the waiver amount of Rs. 10,36,02,957 from the assessee's taxable income for the assessment year 2005-06, concluding that the waiver does not constitute taxable income under either Section 28(iv) or Section 41(1). The appeal filed by the assessee was allowed.
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