2015 (1) TMI 390 - HC - Income Tax

Deemed income u/s 41 - waiver of loan - Swedish Company waived the loan stating to be as part of discharge of obligations under the Scheme of amalgamation - Held that - The agency, which advanced the loan, has written-off the same. The fact that the writing-off the loan was as part of the obligation under the Scheme framed under B.I.F.R, would certainly become important, for keeping the entire amount outside the purview of the trade activity. The waiver of loan has only resulted in cessation of the liability on the part of the respondent to repay it. The entire controversy is as to whether such a cessation has the effect of transforming the loan amount, into income. It is too primary to refer to Section 14 of the Act to identify the sources or categories of income. However, the necessity is felt only as a step in the elimination process. The amount received as a loan for revival of a sick company does not fall into any of the categories of income under Section 14 of the Act. It safely becomes part of the capital. The Act does not provide for levy of tax on capital. A loan advanced to a Company as part of a scheme framed by B.I.F.R for its revival, can, by no stretch of imagination, be treated as its trade receipt. It has already been mentioned that, at the most, it can be treated as part of the capital. The writing-off such loan would, if at all, result in the fluctuation of the value of the capital assets. Though in a remote sense, the situation can be compared to the one of the increase in the market value of a land owned by a company/assesee. - if loan was taken by an assessee, not being for trading purpose and it is written-off, to certain extent, it would result in fluctuation in the asset value, and the amount cannot be treated as an item of income. The judgment of the Supreme Court in T.V.Sundaram Iyengars case 1996 (9) TMI 1 - SUPREME Court was in relation to deposits received by the assessee in the course of its trade. - The facts of the present case are totally different. Firstly, the respondent did not enter the loan amount in the profit and loss account, before, or after it was written-off. Secondly, it was not a trade receipt. - waiver of loan is not taxable - Decided against Revenue.

Summary

Issues:
1. Interpretation of Section 41 of the Income Tax Act regarding treatment of loan waiver as income.
2. Application of legal principles from Commissioner of Income Tax v. T. V. Sundaram Iyengar 222 ITR 344.
3. Assessment of loan waiver amount of Rs. 70,00,000 as income for the assessment year 1994-95.
4. Reversal of order passed by the Commissioner under Section 263 of the Act.
5. Appeal against the Tribunal's decision under Section 260-A of the Act.

Issue 1: Interpretation of Section 41 of the Income Tax Act regarding treatment of loan waiver as income:
The case involved a company that received a loan from a Swedish company for restructuring and later had the loan waived as part of an obligation under a scheme. The judgment analyzed Section 41 of the Act, emphasizing that if an amount received by an assessee in the course of trade, with a claimed deduction for repayment, ceases to have the obligation to repay, it should be treated as income. However, in this case, the loan was not received in the course of trade or business, making it part of the capital rather than income. The waiver of the loan only resulted in the cessation of the liability to repay, not transforming it into income.

Issue 2: Application of legal principles from Commissioner of Income Tax v. T. V. Sundaram Iyengar 222 ITR 344:
The judgment referred to the legal principles established in the T. V. Sundaram Iyengar case, where deposits received in the course of trade, upon the cessation of the liability to repay, were treated as income. However, in the present case, the loan amount was not a trade receipt, and the company did not enter it into the profit and loss account before or after the waiver. The court distinguished the facts from the T. V. Sundaram Iyengar case, concluding that the loan waiver amount should not be treated as income.

Issue 3: Assessment of loan waiver amount of Rs. 70,00,000 as income for the assessment year 1994-95:
The Assessing Officer initially assessed the company's income at Rs. 1,82,46,846, including the loan waiver amount. Subsequently, the Commissioner invoked Section 263 of the Act to reassess the company's liability to pay income tax on the waived loan amount. The Tribunal later reversed this order, stating that the loan was not a trade receipt and should not be treated as income.

Issue 4: Reversal of order passed by the Commissioner under Section 263 of the Act:
The Commissioner's order under Section 263, holding the company liable to pay tax on the loan waiver amount, was challenged by the company. The Tribunal allowed the company's appeal, emphasizing that the loan was not received in the course of trade or business, and the waiver did not constitute income. The court upheld the Tribunal's decision, dismissing the appeal against the Commissioner's order.

Issue 5: Appeal against the Tribunal's decision under Section 260-A of the Act:
The Revenue appealed against the Tribunal's decision under Section 260-A of the Act, arguing that the loan amount deserved to be treated as income since the company benefited from retaining it. However, the court upheld the Tribunal's decision, stating that the loan waiver did not meet the criteria under Section 41 of the Act for treatment as income. The appeal was dismissed, with no order as to costs.

This comprehensive analysis of the judgment from the Andhra Pradesh High Court provides a detailed understanding of the legal interpretation and application of relevant provisions in the Income Tax Act concerning the treatment of loan waivers as income.