2016 (4) TMI 954 - HC - Income Tax

Waiver of loan amount - Scope of section 28(iv) - Principal loan amount waived by the bank under the one time settlement scheme - eligibility or non eligibility to tax - whether the waiver of principal amount would constitute income falling under Section 28(iv) of the Income Tax Act being the benefit arising for the business? - Held that - What is treated as income chargeable to income tax under the head profits and gains of business or profession under Section 28(iv), is the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession. Therefore, it is not the actual receipt of money, but the receipt of a benefit or perquisite, which has a monetary value, whether such benefit or perquisite is convertible into money or not, which is what is covered by Section 28(iv). Say for instance, a gift voucher is issued, enabling the holder of the voucher to have dinner in a restaurant, it is a benefit of perquisite, which has a monetary value. If the holder of the voucher is entitled to transfer it to someone else for a monetary consideration, it becomes a perquisite convertible into money. But, irrespective of whether it is convertible into money or not, it should have a monetary value so as to attract Section 28(iv). A monetary transaction, in the true sense of the term, can also have a value. Any number of instances where a monetary transaction confers a benefit or perquisite that would have a value, can be conceived of. There may be cases where an incentive is granted by the supplier, waiving a portion of the sale price or granting a rebate or discount of a portion of the price to be paid, when the payments scheduled over a period of time, are made promptly. It is needless to point out that in such cases, the prompt payment of money itself brings forth a benefit in the form of an incentive or a rebate or a discount in the price of the product. We do not know why it should not happen in the case of waiver of a part of the loan. Therefore, the finding recorded in paragraph 27.1 of the decision in Iskraemeco Regent Limited 2010 (11) TMI 43 - Madras High Court that Section 28(iv) has no application to any transaction, which involves money, is a sweeping statement and may not stand in the light of the express language of Section 28(iv). In our considered view, the waiver of a portion of the loan would certainly tantamount to the value of a benefit. This benefit may not arise from the business of the assessee. But, it certainly arises from business . The absence of the prefix the to the word business makes a world of difference. It appears that in so far as accounting practices are concerned, no such distinction exists. Irrespective of the purpose for which, a loan is availed by an assessee, the amount of loan is always treated as a liability and it gets reflected in the balance sheet as such. When a repayment is made in monthly, quarterly, half yearly or yearly instalments, the instalment is divided into two components, one relating to interest and another relating to a portion of the principal. To the extent of the principal repaid, the liability as reflected in the balance sheet gets reduced. The interest paid on the principal amount of loan, will be allowed as deduction, in computing the income under the head profits and gains of business or profession , as per the provisions of the Act. But, Section 36(1)(iii) makes a distinction. The amount of interest paid in respect of capital borrowed for the purpose of business or profession is allowed as deduction under Section 36(1)(iii), in computing the income referred to in Section 28. But, the proviso thereunder states that any amount of interest paid in respect of capital borrowed for acquisition of an asset for extension of existing business or profession, whether capitalised in the books of account or not for any period beginning from the date on which the capital was borrowed for the acquisition of the asset, till the date on which such asset was put to use, shall not be allowed as deduction. Therefore, it is clear that the moment the asset is put to use, then the interest paid in respect of the capital borrowed for acquiring the asset, could be allowed as deduction. When the loan amount borrowed for acquiring an asset gets wiped off by repayment, two entries are made in the books of account, one in the profit and loss account where payments are entered and another in the balance sheet where the amount of unrepaid loan is reflected on the side of the liability. But, when a portion of the loan is reduced, not by repayment, but by the lender writing it off (either under a one time settlement scheme or otherwise), only one entry gets into the books, as a natural entry. A double entry system of accounting will not permit of one entry. Therefore, when a portion of the loan is waived, the total amount of loan shown on the liabilities side of the balance sheet is reduced and the amount shown as Capital Reserves, is increased to the extent of waiver. Alternatively, the amount representing the waived portion of the loan is shown as a capital receipt in the profit and loss account itself. - Decided in favour of revenue

Summary

Issues Involved:
1. Taxability of the principal loan amount waived by the bank under a one-time settlement scheme.
2. Applicability of Section 28(iv) of the Income Tax Act to the waiver of the principal loan amount.

Detailed Analysis:

Issue 1: Taxability of the Principal Loan Amount Waived by the Bank

The primary issue was whether the principal loan amount waived by the bank under a one-time settlement scheme is exigible to tax. The assessee had filed a return of income for the assessment year 2006-07, admitting a total loss. The Assessing Officer (AO) found that the assessee had accepted a one-time settlement scheme with Indian Bank, which involved a waiver of &8377; 10.50 Crores. The AO treated the difference of &8377; 1,20,67,406/- as income under Section 28(iv).

The Commissioner of Income Tax (Appeals) found that the one-time settlement scheme lapsed as the assessee did not comply with the payment terms initially but later complied in the financial year 2006-07. The First Appellate Authority held that the interest waived was eligible to tax under Section 41(1) but deleted the addition of &8377; 1,67,74,868/-. The Income Tax Appellate Tribunal (ITAT) confirmed the order of the First Appellate Authority, stating that the term loan was used for acquiring capital assets, and followed the decision in Iskraemeco Regent Limited, which held that Section 28(iv) does not apply to the waiver of principal amounts of loans.

Issue 2: Applicability of Section 28(iv) of the Income Tax Act

The court examined whether the waiver of the principal amount would constitute income under Section 28(iv) of the Income Tax Act. Section 28(iv) includes "the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession" as income. The court also considered Section 41(1), which deals with profits chargeable to tax concerning the receipt of a benefit in respect of a trading liability by way of remission or cessation of the liability.

The court analyzed various decisions, including T.V.Sundaram Iyengar & Sons Ltd., Solid Containers Ltd., Logitronics P Ltd., and Rollatainers Ltd. In these cases, the courts held that if a loan was taken for acquiring a capital asset, waiver thereof would not amount to income exigible to tax. However, if the loan was for trading purposes and treated as such from the beginning in the books of account, the waiver thereof may result in income, especially when transferred to the profit and loss account.

The court noted that the decision in Iskraemeco Regent Limited, which was followed by the First Appellate Authority and the ITAT, held that Section 28(iv) has no application to loan transactions involving money. However, the court found this reasoning incorrect. The waiver of a portion of the loan would certainly tantamount to the value of a benefit, which may arise from business. The court emphasized that the absence of the prefix "the" to the word "business" in Section 28(iv) makes a significant difference.

The court also discussed the accounting practices, stating that the amount of loan is always treated as a liability and gets reflected in the balance sheet. When a portion of the loan is waived, the total amount of loan shown on the liabilities side of the balance sheet is reduced, and the amount shown as Capital Reserves is increased to the extent of the waiver. Alternatively, the waived portion of the loan is shown as a capital receipt in the profit and loss account.

Conclusion:

The court concluded that the questions of law are liable to be answered in favor of the Revenue. The waiver of the principal loan amount under the one-time settlement scheme constitutes a taxable receipt under the definition of "income." The appeal filed by the Revenue was allowed, and the court held that the waiver of a portion of the loan is taxable under Section 28(iv) of the Income Tax Act.