2015 (7) TMI 836 - AT - Income Tax

Addition u/s 41(1) - assessee submitted that there was a family settlement between the group members and the assets and liabilities were reallocated - CIT(A) deleted the addition - Held that - After going through the provisions of section 41(1) of the income tax act, we find that the same are not applicable to the facts of the assessee case. We also find that the AO has made the addition of ₹ 5.64 crore by invoking provision of sec. 41(1) of the income tax without stating how the provision are applicable to the assessee s case. Mere cessation of liability does not result into fit case of sec. 41 (1) of the I.T. Act. Assessee has submitted that assessee was not incurred any loss/expenditure/trading liability which is subsequently recovered by him is taxable as income in the year of recovery. We find that the assesse is squarely covered by the following judgments wherein it has been held that whenever, an amount is borrowed towards capital account and the loan is waived off, the same cannot be brought to tax net either in terms of sec-41 (1) or 28(iv) of the Act. See CIT vs. Tosha lnternational Ltd. 2008 (9) TMI 31 - HIGH COURT DELHI & CIT vs. Phool Chand Jiwan Ram (1980 (4) TMI 29 - DELHI High Court) We further note that it is well settled law that where no deduction/allowance has been made in respect of loss, exp/liability in the assessment year or in any earlier years, cessation of such liability cannot be taxed under section 41(1) of the Income Tax Act. The assessee has clearly established that the adjustments are on capital side and there is no case for invoking provisions of S.41(1) since the liability waived by the creditor was never claimed as revenue expenditure. - Decided in favour of assessee.

Summary

Issues Involved:

1. Applicability of Section 41(1) of the Income Tax Act, 1961.
2. Ld. CIT(A)'s exercise of powers under Section 251(1)(a) of the Income Tax Act, 1961.
3. Taxability under Section 28(iv) of the Income Tax Act, 1961.

Detailed Analysis:

1. Applicability of Section 41(1) of the Income Tax Act, 1961:

The primary issue in this case was whether the addition of Rs. 5,64,85,956/- made by the AO under Section 41(1) of the Income Tax Act, 1961, was justified. The AO observed that the assessee's secured and unsecured loans amounting to Rs. 5,64,85,956/- as on 31.03.2008 were reduced to NIL by 31.03.2009 due to a family settlement. The AO invoked Section 41(1) and added the amount to the income of the assessee, arguing that it was a trading liability that had ceased to exist.

The CIT(A) deleted the addition, holding that the family settlement did not attract the provisions of Section 41(1). The Tribunal upheld this decision, noting that the borrowed funds were used to pay off bank liabilities and were not trading liabilities. It was emphasized that Section 41(1) applies only when there is a recovery of a trading liability that was previously allowed as a deduction. The Tribunal cited several precedents, including CIT vs. Jubilant Securities Pvt. Ltd. and Mahindra & Mahindra Ltd. vs. CIT, to support the view that the waiver of a loan used for capital purposes does not attract Section 41(1).

2. Ld. CIT(A)'s Exercise of Powers under Section 251(1)(a) of the Income Tax Act, 1961:

The Revenue contended that the CIT(A) erred by not exercising his powers under Section 251(1)(a) to confirm the addition using other provisions of the Act if Section 41(1) was deemed inapplicable. The Tribunal found no merit in this argument, noting that the CIT(A) had correctly applied the law and the facts to conclude that the addition was not sustainable under Section 41(1). The Tribunal emphasized that the CIT(A) had no obligation to explore other provisions once it was clear that Section 41(1) did not apply.

3. Taxability under Section 28(iv) of the Income Tax Act, 1961:

The Revenue also argued that the benefit arising to the assessee from the family settlement should be taxable under Section 28(iv) of the Act. The Tribunal rejected this argument, noting that the benefit in question was not a trading receipt but a capital adjustment. The Tribunal reiterated that Section 28(iv) applies to benefits arising from business or profession, and in this case, the waiver of the loan was a capital transaction, not a business transaction.

Conclusion:

The Tribunal concluded that the AO's addition of Rs. 5,64,85,956/- under Section 41(1) was not justified as the liability waived was not a trading liability. The CIT(A)'s decision to delete the addition was upheld, and the appeal of the Revenue was dismissed. The Tribunal also clarified that the CIT(A) was not required to consider other provisions of the Act once it was established that Section 41(1) did not apply. The benefit arising from the family settlement was deemed a capital adjustment, not taxable under Section 28(iv).