2013 (3) TMI 674 - AT - Income Tax

Summary

Issues Involved:
1. Deletion of disallowance of term loan waiver amounting to Rs. 1,74,13,729/-.
2. Nature of the loan as working capital or capital in nature.
3. Applicability of Section 41(1) of the Income Tax Act.

Summary:

Issue 1: Deletion of disallowance of term loan waiver amounting to Rs. 1,74,13,729/-

The revenue contended that the Commissioner of Income Tax(Appeals) erred in deleting the disallowance of term loan waiver amounting to Rs. 1,74,13,729/-. The Commissioner overlooked the fact that the term loan was taken as working capital and hence connected with the business activity of the assessee, resulting in a taxable business profit.

Issue 2: Nature of the loan as working capital or capital in nature

The assessee argued that the loan was of a capital nature to the extent of the principal amount, with no interest element involved as the interest was already written off. The Commissioner of Income Tax(Appeals) accepted this contention, holding that only the interest element could be taxed if it had been claimed and allowed as a deduction in earlier years. Consequently, the addition made by the Assessing Officer was deleted.

Issue 3: Applicability of Section 41(1) of the Income Tax Act

The Tribunal examined whether the waiver of the loan under the BIFR scheme constituted a remission or cessation of trading liability u/s 41(1). It was noted that the liability reduction was part of the rehabilitation scheme for a sick industrial undertaking, not a trading liability remission. The Tribunal referenced multiple cases, including Commissioner of Income-tax v. Shree Pipes Limited (301 ITR 240) and Commissioner of Income-tax v. Tosha International Ltd. (331 ITR 440), concluding that the reduction of liability under the BIFR scheme does not result in income to the assessee either u/s 28(i), u/s 28(iv), or u/s 41(1) of the IT Act.

Conclusion:

The Tribunal upheld the order of the Commissioner of Income Tax(Appeals), finding no error or illegality. The appeal filed by the revenue was dismissed.

Order Pronouncement:

Order pronounced in the Open Court on this 26th day of MAR 2013.