2015 (11) TMI 385 - HC - Income Tax

Taxability of the amount waived by the mutual funds/financial institutions/debenture holders as a concession for the financial restructuring of the assessee - ITAT allowed assessee claim - Held that - Indisputably, the amount of principal waived by the financial institutions cannot be taxed under section 41(1) of the Act as the same had not been debited to the profit and loss account in the earlier years nor had been claimed as a deduction from taxable income. The Tribunal had, accordingly, allowed the claim of the assessee. The Tribunal had further noted that the Commissioner of Income-tax (Appeals) had considered the appellant s claim on the merits and that action had not been challenged by the Revenue. The Tribunal held that under the circumstances, the Revenue s contention could not be upheld. The learned counsel for the Revenue stated that since the order of the Commissioner of Income-tax (Appeals) was in its favour, there was no question of the Revenue filing an appeal and the observation made by the Tribunal in this regard was ex facie erroneous. The observation made by the Tribunal was with respect to the Revenue s contention that the assessee s claim could not be considered on the merits. It is, in this context, that the Tribunal observed that the Commissioner of Income-tax (Appeals) s action of examining the assessee s claim on the merits had not been challenged. The said observations do not relate to the decision of the Commissioner of Income-tax (Appeals) on the merits of the assessee s claim. In the aforesaid circumstances, we are not inclined to entertain the present appeal. - Decided against revenue

Summary

Issues:
Taxability of waived amount by mutual funds/financial institutions/debenture holders as a concession for financial restructuring.

Analysis:
The Revenue appealed against the Tribunal's order allowing the assessee's appeal regarding the taxability of a sum waived by mutual funds/financial institutions/debenture holders. The assessee declared nil income after adjusting brought forward losses but faced scrutiny by the Assessing Officer, who made certain disallowances related to prior period expenses. The controversy arose when the waived amount of Rs. 1,26,49,144, including interest and principal, was treated as a revenue receipt by the AO, leading to a tax assessment.

The Commissioner of Income-tax (Appeals) upheld the taxability, stating that the waiver was related to the assessee's business and was credited in the profit and loss account. The assessee successfully appealed to the Tribunal, which allowed the claim and emphasized the right to make fresh claims before the Commissioner of Income-tax (Appeals) without further investigation into facts. The Revenue argued that as no claim was made before the AO, the CIT(A) decision was invalid. However, an office note indicated the assessee's claim for treating the waived principal amount as a capital receipt.

The Tribunal clarified that the waived principal amount could not be taxed under section 41(1) as it was not debited in previous years or claimed as a deduction. It also noted that the CIT(A)'s consideration of the claim was not challenged by the Revenue. The High Court dismissed the Revenue's appeal, emphasizing that the CIT(A) had examined the claim on its merits, and the Tribunal's observation regarding the Revenue's contention was not erroneous. The court declined to entertain the appeal, leaving open the question of whether the AO could entertain a claim during assessment proceedings.

In conclusion, the High Court upheld the Tribunal's decision, dismissing the Revenue's appeal and clarifying that the waived principal amount was not taxable under section 41(1) due to its capital nature, as claimed by the assessee.