2012 (9) TMI 449 - HC - Income Tax

Taxation on cessation of liability to repay a loan - Held that - As decided in Mahindra and Mahindra Ltd. v. CIT 2003 (1) TMI 71 - BOMBAY HIGH COURT the cessation of liability to repay a loan taken to purchase a capital asset does not result in a revenue receipt. Further, the amount of Rs.29.17 lacs was not taxable u/s 41(1) as the same was not an expenditure incurred in the earlier years thus the cesation of liability is not taxable either under Section 41(1) or 28(iv) - in favour of assessee.

Summary

Issues involved:
1. Whether the benefit of cessation of liability to repay a loan liability is taxable under Section 41(1) of the Income Tax Act?
2. Whether the benefit of cessation of liability to repay a loan liability is taxable under Section 28(iv) of the Income Tax Act?

Analysis:

Issue 1:
The appellant challenged the Tribunal's decision regarding the taxability of the benefit from the cessation of liability to repay a loan under Section 41(1) of the Income Tax Act. The respondent-assessee had a liability to repay a loan taken for a car, which was later taken over by the holding company. The Assessing Officer added the loan amount back to the income of the assessee as taxable under Section 41(1). However, the Commissioner of Income Tax (Appeals) allowed the appeal, stating that the extinguishment of the loan for a capital asset like a car is not a revenue receipt and thus not taxable. The Tribunal upheld this decision, citing a previous court ruling in a similar matter. The appellant argued that a subsequent court ruling should apply, where the waiver of a loan for trading activity was considered taxable income. The court clarified that the previous ruling applied as the loan in question was for a capital asset, not for trading activities. The court also confirmed that Section 28(iv) of the Act does not apply when a benefit is received in cash or money. Consequently, the court dismissed the appeal as the issue was covered by the previous court ruling.

Issue 2:
The second issue revolved around the taxability of the loan amount under Section 28(iv) of the Income Tax Act. The appellant contended that the loan amount written off should be taxable as a benefit arising from business. However, the court reiterated that Section 28(iv) applies only when a benefit is received in kind, not in cash or money. The court referred to a previous ruling to support this interpretation. As the issue was already covered by the previous court ruling, the court dismissed both questions of law, resulting in the dismissal of the appeal without costs.