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2010 (4) TMI 1125 - AT - Income TaxTaxability of income - Waiver of the principal amount - Purpose of business or trading activity or acquiring any capital asset - AO held that since this loan amount was related to the business of the assessee, the same would be assessable under the head Business therefore, brought the said amount to tax as income includible in the assessee's total income - CIT(A) decided this issue in favour of the assessee by holding that the provisions of s. 2(24) or s. 28(i) or 28(iv) and s. 41(1) are not applicable to the present case. Being aggrieved, the Revenue is in appeal. Assessee had taken or obtained loan from the SBI, and later, as a result of compromise between the assessee and SBI, the outstanding liability towards interest payable on loan amount was waived. Thus, there is no dispute with regard to the waiver of interest includible in the total income of the assessee for the year under consideration. However, a dispute has arisen between the Department and the assessee with regard to waiver of the principal amount HELD THAT - In the light of the discussions, and following the decision of Hon'ble Bombay High Court in the case of Solid Containers Ltd. vs. Dy. CIT 2008 (8) TMI 156 - BOMBAY HIGH COURT where the principle enunciated by the Hon'ble Supreme Court in the case of CIT vs. T.V. Sundaram Iyengar Sons Ltd. 1996 (9) TMI 1 - SUPREME COURT has been applied, we held that the principal amount of loan, which is taken for the purpose of business or trading activity, on its waiver by the creditor, would constitute income chargeable to tax under the Act. However, if the loan is utilized for the purpose of acquiring any capital asset, the same, on its waiver, would not constitute income chargeable to tax as held by Hon'ble Bombay High Court in the case of Mahindra Mahindra Ltd. vs. CIT 2003 (1) TMI 71 - BOMBAY HIGH COURT and Hon'ble Delhi High Court in the case of CIT vs. Tosha International Ltd. 2008 (9) TMI 31 - HIGH COURT DELHI either u/s. 41(1) or 28(iv) or 2(24). The assessee has not brought any material or evidences on record to show that the loan taken by the assessee from bank in cash credit account, CTL account and WCTL account was utilized for the purpose of acquiring any capital asset. On the other hand, the material available on record including the notes to the accounts indicates that the assessee has obtained the loan or credit facility by way of hypothecation of finished goods, semi-finished goods, raw material, book debts, receivable claims, securities, and rights by way of first charge, which indicates that the assessee have obtained the loan facility for its business activity or trading operations. However, this aspect of the matter, whether the whole of the loan amount has been utilized either for the purpose of acquiring capital asset or for the purpose of business activity or trading activity, has not been looked into or examined by the authorities below nor the assessee has established that the loan amount was utilized only for the purpose of acquiring capital asset. We, therefore, restore this issue back to the file of the AO for his fresh adjudication with a direction to the assessee to furnish all the details and particulars of loan, and the purpose for which the loan taken from bank was utilized. In the result, this appeal filed by the Revenue is treated to be allowed for a statistical purpose in the manner as indicated above.
Issues Involved:
1. Taxability of the principal amount of loan waived by the bank. 2. Applicability of Section 41(1) of the Income Tax Act, 1961. 3. Applicability of Section 28(iv) of the Income Tax Act, 1961. 4. Applicability of Section 2(24) of the Income Tax Act, 1961. 5. Relevance of judicial precedents in determining the taxability of waived loan amounts. Issue-wise Detailed Analysis: 1. Taxability of the Principal Amount of Loan Waived by the Bank: The primary issue in this case is whether the principal amount of Rs. 2,91,42,213 waived by the bank should be treated as taxable income. The assessee argued that this amount should not be included in the profit and loss account but should be credited to the capital reserve. The Assessing Officer (AO) initially accepted this argument but later included the waived amount as income, citing that it provided a benefit to the assessee. 2. Applicability of Section 41(1) of the Income Tax Act, 1961: The AO and the CIT(A) both examined whether the waived principal amount falls under the purview of Section 41(1), which deals with the remission or cessation of trading liabilities. The AO accepted that Section 41(1) was not applicable since the principal amount of the loan had not been allowed or deducted as an expense in earlier years. This was supported by the judicial precedents in CIT vs. Tosha International Ltd. and Mahindra & Mahindra Ltd. vs. CIT. 3. Applicability of Section 28(iv) of the Income Tax Act, 1961: Section 28(iv) pertains to the value of any benefit or perquisite arising from business. The CIT(A) concluded that Section 28(iv) does not apply to the waived loan amount since the benefit was received in cash or money, not in kind. This conclusion was supported by the decision in Mahindra & Mahindra Ltd. vs. CIT. 4. Applicability of Section 2(24) of the Income Tax Act, 1961: Section 2(24) defines "income" under the Act. The AO argued that the waived loan amount should be treated as income under this section. However, the CIT(A) and the Tribunal found that the waived amount does not fit within the definition of income under Section 2(24), as it was not a trading receipt or a benefit arising from business operations. 5. Relevance of Judicial Precedents: Several judicial precedents were considered in this case: - CIT vs. Tosha International Ltd.: The Tribunal and the High Court held that the waiver of the principal amount of loan does not constitute income under Section 41(1) or 28(iv) or 2(24) if the loan was used for acquiring capital assets. - Mahindra & Mahindra Ltd. vs. CIT: The Bombay High Court ruled that the waiver of a loan used for purchasing capital assets does not constitute taxable income. - Solid Containers Ltd. vs. Dy. CIT: The Bombay High Court applied the principle from CIT vs. T.V. Sundaram Iyengar & Sons Ltd., holding that the waiver of a loan taken for trading activities constitutes taxable income. - CIT vs. Aries Advertising (P) Ltd.: The Madras High Court held that unclaimed balances written back to the profit and loss account constitute taxable income. Conclusion and Directions: The Tribunal concluded that the principal amount of the loan waived by the bank could be taxable if it was used for business or trading activities but not if it was used for acquiring capital assets. The case was remanded to the AO for fresh adjudication to determine the purpose for which the loan was utilized. The AO was directed to provide the assessee with an opportunity to furnish details about the loan utilization. If the assessee fails to provide these details, the AO should assume that the loan was used for business or trading activities and treat the waived amount as taxable income accordingly. Result: The appeal filed by the Revenue was allowed for statistical purposes, with the matter being remanded to the AO for further examination and fresh adjudication based on the directions provided.
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