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2022 (9) TMI 1514 - AT - Income TaxRectification of mistake u/s 254 - Income chargeable to tax - Waiver of Principal amounts of loan/borrowings - one time settlement (OTS) with banks and financial institutions - Assessee also received waiver of interest due on the aforesaid loans - While the principal amount waived was claimed as not taxable in the return of income the interest component that was waived on the loans were offered to tax by the Assessee u/s.41(1) - HELD THAT - In the case of CIT v. T.V. Sundaram Iyengar Sons Ltd 1996 (9) TMI 1 - SUPREME COURT the court observed that the moneys had arisen out of ordinary trading transactions. The assessee had received certain deposits from customers in the course of carrying on his business which were originally treated as capital receipts. Since these credit balances standing in favour of assessee s customers were not claimed by the customers the assessee transferred such amounts to its profit and loss account. The assessee did not include such amounts in its total income. The Court held that although the amounts received originally were not of income nature the amounts remained with the assessee for a long period unclaimed by the trade parties. By lapse of time the claim of the deposit became time barred and the amount attained a totally different quality. It became a definite trade surplus. Although it was treated as deposit and was of capital nature at the point of time it was received by efflux of time the money has become the assessee s own money. What remains after adjustment of the deposits has not been claimed by the customers. The claims of the customers have become barred by limitation. Here we see the concept of changing of character of receipt by efflux of time and the action of the assessee of crediting it to profit loss account which shows that the assessee treats it as revenue as in the present case where receipts have been shown as extraordinary items in the profit and loss account (Note 14 of notes to Profit Loss Account). It is based on these decisions that the AO made the impugned additions in AY 2005-06 2006-07. Waiver of working capital loan was taxable. Therefore the view taken by the Tribunal in it s order 2022 (1) TMI 1399 - ITAT BANGALORE cannot be said to be an unsustainable view. The tribunal has given reason as to why waiver of principal portion of working capital loan is taxable and has taken a conscious decision after considering the Tribunal s order for AY 2005-06 . It is no doubt true that to the extent the waiver of loan was towards term loan it was not taxable as was held by the Tribunal in it s earlier order for AY 2005-06. Therefore to the extent that the Tribunal order dated 21.1.2022 holding that the waiver of principal of loan availed for capital account purpose is not taxable. Whether any mistake can be rectified in exercise of powers u/s.254(2)? - The Hon ble Supreme Court in the case of CIT Vs. Saurashtra Kutch Stock Exchange case 2008 (9) TMI 11 - SUPREME COURT has held that non-consideration of the decision of the jurisdictional high court/Supreme Court constitutes mistake apparent from record and is rectifiable within the meaning of section 254(2) of the Act. It can be said that in the case of Reliance Telecom 2021 (12) TMI 211 - SUPREME COURT the Hon ble Supreme Court based its conclusion by holding that a detailed order was passed and issue decided and such order cannot be recalled in exercise of powers of rectification u/s.254(2) of the Act. By doing so it has not diluted the ration laid down in the case of Saurashtra Stock Exchange 2008 (9) TMI 11 - SUPREME COURT or Honda Siel 2007 (11) TMI 8 - SUPREME COURT and the power to rectify orders which do not follow binding decision of Supreme Court or High Court or earlier order of Tribunal in Assessee s own case. The mistake apparent on the record of the tribunal is in not distinguishing the nature of loan waived in AY 2005-06 from the one waived in AY 2006-07 which mistake is apparent from the details of the loan waived In the given facts and circumstances we are of the view that there is a mistake apparent on the face of record which requires to be rectified.
Issues Involved:
1. Rectification of mistake apparent in the order of the Tribunal dated 21.1.2022. 2. Taxability of waiver of principal amounts of term loans and working capital loans. 3. Taxability of waiver of interest on loans under Section 41(1) of the Income Tax Act. 4. Applicability of Supreme Court and High Court judgments on the taxability of loan waivers. Issue-wise Detailed Analysis: 1. Rectification of Mistake Apparent in the Order: The Assessee filed a Miscellaneous Petition (MP) under Section 254(2) of the Income Tax Act, 1961, seeking rectification of a mistake in the Tribunal's order dated 21.1.2022. The Assessee contended that the Tribunal's decision for AY 2006-07 did not follow its earlier order for AY 2005-06, which accepted the Assessee's claim that the waiver of principal amounts of both term loans and working capital loans constituted a capital receipt and was not taxable. The Tribunal acknowledged the mistake and rectified the order by substituting paragraphs 6, 7, and 8 with new ones, clarifying the taxability of loan waivers based on the nature of the loans. 2. Taxability of Waiver of Principal Amounts of Term Loans and Working Capital Loans: The Tribunal initially accepted the Assessee's claim for AY 2005-06 that the waiver of the principal amount of term loans was a capital receipt and not taxable. However, for AY 2006-07, the Tribunal erroneously treated the waiver of working capital loans as taxable. The Tribunal rectified this by distinguishing between term loans and working capital loans, holding that the waiver of principal portions of term loans is not taxable, while the waiver of working capital loans is taxable under Section 28(iv) of the Act, following the Bombay High Court's decision in Solid Containers Ltd. v. DCIT. 3. Taxability of Waiver of Interest on Loans under Section 41(1): The Tribunal observed that the waiver of interest on loans is taxable under Section 41(1) only if the interest was allowed as a deduction in any earlier assessment year. The Tribunal remanded the issue to the Assessing Officer (AO) to verify whether the interest waiver was allowed as a deduction in earlier years and to determine the purpose of the loans (whether for capital or trading purposes) to decide the taxability of the waiver. 4. Applicability of Supreme Court and High Court Judgments: The Assessee argued that the Tribunal's observations were contrary to the Supreme Court's judgment in The Peerless General Finance & Investment Co. Ltd. Vs. CIT and other relevant cases, which held that loans repayable by the Assessee cannot be considered as revenue receipts. The Tribunal acknowledged this and rectified its order, aligning it with the Supreme Court's decisions in Mahindra & Mahindra Ltd. and T.V. Sundaram Iyengar & Sons Ltd., which distinguish between capital and revenue receipts based on the purpose of the loan and the nature of the waiver. Conclusion: The Tribunal rectified its earlier order to correctly reflect the taxability of loan waivers based on the nature of the loans and the purpose for which they were availed. The waiver of principal amounts of term loans was held to be a capital receipt and not taxable, while the waiver of working capital loans was taxable as revenue receipts. The issue of interest waiver was remanded to the AO for verification. The Tribunal's rectification aligned its decision with relevant Supreme Court and High Court judgments. The MP filed by the Assessee was partly allowed, and the order was pronounced in the open court on 5th Sept, 2022.
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