2010 (12) TMI 876 - AT - Income Tax

Addition - Waiver of term loan - assessee had taken loans from State Bank of India for its operation and due to circumstances which were beyond its control, it could not repay the loan and the bank came forward with one time settlement and settled the loan - assessee has received deposits in the course of trading transactions and the assessee had treated them as capital receipt and not offered them to tax in the earlier years - Held that - the reduction of the liability on account of term loan and other loans payable to the bank under one time settlement scheme, does not result into income to the assessee either u/s.28(i) or u/s.28(iv) or u/s.41(1) of the Income-tax Act, 1961 - Decided in favor of assessee. Continuance of business - When the assessee filed returns of income before the department, wherein it is clear that the assessee had revived its business, the Revenue cannot overlook the evidences and hold that the business can never be revive - it was not a complete breakdown of business but it was a case of mere lull in business due to some restrictions of prawn farming by the Hon ble Supreme Court and also the facts demonstrate that there is revival of business - Therefore, the decision of Hindustan Chemical Works (1979 -TMI - 36807 - BOMBAY High Court) squarely apply to the present case. - Decided in favour of the assessee

Issues Involved:
1. Addition of loan waiver by the bank as income.
2. Allowability of business expenses after the stoppage of business operations.

Detailed Analysis:

1. Addition of Loan Waiver by the Bank as Income:

The primary issue is whether the waiver of loans by the State Bank of India should be treated as taxable income under sections 28(i), 28(iv), or 41(1) of the Income-tax Act, 1961. The assessee argued that the waiver of the principal amount of the loan, which was capital in nature, should not be considered as income. The Assessing Officer had added the waived amount as income, but the first appellate authority dismissed the assessee's appeal, leading to the current appeal.

The Tribunal held that the principal amount received from the bank towards term loans and working capital loans was capital in nature. The remission or reduction of such capital liability does not result in a revenue receipt and thus cannot be taxed under section 28(i). The Tribunal relied on the jurisdictional High Court decision in Mahindra and Mahindra Ltd. vs. CIT, which held that the waiver of a principal loan amount, which was used for acquiring capital assets, does not constitute business income. The Tribunal also referred to the Cochin Bench decision in Accelerated Freeze and Drying Co. Ltd. vs. DCIT, which supported the non-taxability of waived term loans as they were capital liabilities and not trading liabilities.

The Tribunal concluded that the waiver of term loans and other loans payable to the bank under a one-time settlement scheme does not result in income to the assessee under sections 28(i), 28(iv), or 41(1). Therefore, the addition made by the Assessing Officer was deleted, and grounds 1 to 3 of the assessee's appeal were allowed.

2. Allowability of Business Expenses After Stoppage of Business Operations:

The second issue pertains to the allowability of business expenses claimed by the assessee during the period when its business operations were temporarily suspended due to restrictions imposed by the Supreme Court on prawn farming. The Assessing Officer had disallowed these expenses, and the first appellate authority upheld this disallowance, stating that the business had permanently closed down.

The Tribunal found that the assessee had not permanently closed its business but had only temporarily suspended operations due to legal restrictions. The Tribunal noted that the assessee had resumed its business activities in subsequent years, as evidenced by the income declared and returns filed for the financial years ending on 31st March 2005 and 31st March 2006.

The Tribunal held that the temporary suspension of business does not warrant the disallowance of regular business expenses. It relied on the decision of the jurisdictional High Court in Hindustan Chemical Works Ltd. vs. CIT, which allowed the deduction of regular business expenses incurred during a temporary suspension of business.

Therefore, the Tribunal allowed the claim for business expenses, overturning the first appellate authority's decision. Grounds 4 to 9 of the assessee's appeal were allowed.

Conclusion:

The appeal of the assessee was allowed in its entirety. The Tribunal held that the waiver of loans by the bank does not constitute taxable income under sections 28(i), 28(iv), or 41(1) and that the business expenses incurred during the temporary suspension of business operations are allowable deductions.

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