2015 (4) TMI 225 - HC - Income Tax

Loan waived by the banks in favour of the respondent assessee in one time settlement - whether the principal amounts of loans retained by the assessee on account of one time settlement, constituted its income as per section 28(iv) though not under Section 41(1) - Tribunal deleted the addition - tribunal's order held that on perusal of the loan agreement insofar as loan from ICICI Bank is concerned was for purchasing machinery and availed by the assessee - Held that - This Court has consistently taken a view that the loan amount written off would not come within the purview of section 28(iv) of the Income Tax Act. The view taken by this Court in the case of Mahindra and Mahindra Ltd. Vs. the Commissioner of Income Tax (2003 (1) TMI 71 - BOMBAY High Court ) and Solid Containers Ltd. Vs. Dy. Commissioner of Income Tax (2008 (8) TMI 156 - BOMBAY HIGH COURT)would enable the tribunal and equally us to conclude that the loan written off would not be taxable under Section 28(iv) of the Act. That issue specifically came up for consideration in the matter of Mahindra and Mahindra and it was held that the said provision would apply only when a benefit or perquisite is received in kind and has no application where benefit is received in cash or money. Following this decision in the case of Commissioner of Income Tax Vs. Xylon Holdings Pvt. Ltd. 2012 (9) TMI 449 - BOMBAY HIGH COURT this Court held that the waiver would not come within the purview of Section 28(iv) of the Income Tax Act. Having perused this decision and in the peculiar facts and circumstances of the present case we are of the view that the tribunal has rightly upheld the order of the Commissioner. It has concluded that the factual and legal position enables it to hold that the direction of the First Appellate Authority cannot be said to be perverse. The view taken by him as termed by the tribunal is rational and judicious. More so, when the assessee company is a BIFR unit and it is in the process of revival, therefore, the banks waived loan as well as interest component due from the assessee. Equally, the loan sanctioned by ADCB and subsequently waived off has also been offered to tax. It is only in the ICICI bank's case that the tribunal took the above view and which we do not find as perverse or vitiated by a error of law apparent on the face of record. - Decided in favour of assessee.

Summary

Issues:
1. Taxability of loan waiver under Section 28(iv) of the Income Tax Act, 1961.
2. Classification of waived loan as capital receipt.
3. Application of Section 41(1) in the case of loan waiver.

Analysis:
1. The primary issue in this case revolves around the taxability of a loan waiver under Section 28(iv) of the Income Tax Act, 1961. The appellant, representing the revenue, argued that the waiver of a loan should be considered as income under this section, as it constitutes a benefit arising from business activities. The tribunal had deleted the addition made on account of the loan waiver, leading to the appeal. The appellant contended that the waiver should be treated as income as per Section 28(iv), despite not falling under Section 41(1) of the Act.

2. The appellant's counsel highlighted that the waiver of the loan should not be considered a capital receipt, emphasizing that the waiver represented a taxable benefit in the hands of the firm. The argument focused on the distinction between the waiver of loans used for purchasing assets like machinery, asserting that such waivers should not be treated as capital receipts. The tribunal's decision in this regard was a key point of contention, leading to the formulation of substantial legal questions by the appellant.

3. The application of Section 41(1) in the context of loan waivers was also debated during the proceedings. The appellant raised concerns about the tribunal's approach in ignoring the fact that the loan, used to purchase assets on which depreciation was claimed, should be considered under the provisions of Section 41(1). This issue was crucial in determining the tax implications of the loan waiver and whether it should be classified as a revenue receipt.

4. The arguments presented by both sides reflected differing interpretations of the Income Tax Act and relevant case law. While the appellant stressed the taxability of the loan waiver as per Section 28(iv), the respondent contended that the waiver, particularly in the case of ICICI bank, did not result in a revenue receipt. The respondent's position was supported by consistent views taken by the court in similar cases, emphasizing that the waiver of loans for acquiring capital assets should not be taxable under Section 28(iv).

5. The court, after considering the submissions and perusing the relevant documents, concluded that the tribunal had rightly upheld the order of the Commissioner. The court agreed with the tribunal's reasoning that the waiver of loans, especially in the context of a company undergoing revival, should not be treated as taxable income under Section 28(iv). The court referenced previous judgments to support its decision, highlighting that the loan waiver did not fall within the purview of the Income Tax Act's provisions. Consequently, the appeal was dismissed, emphasizing the rationality and legality of the tribunal's decision in the given circumstances.