2019 (2) TMI 105 - AT - Income Tax

Remission of unsecured loans taxable u/s 41(1) - Held that - It appears from the record that the assessee had obtained unsecured loan from Metrix Logistic Co. Ltd. in the F.Y. 2004-05 and there were transactions of fresh loans and also repayment of above during the period of F.Y. 2004-05 to F.Y. 2010-11. Such loan was interest free and was unsecured which was obtained for the purpose of acquiring fixed assets by the company from time to time. The balance outstanding of loan amount to the tune of ₹ 2,56,86,457/- during the year under appeal was written off by the company on account of outstanding unsecured loan taken from Metrix Logistic Co. Ltd. from the books of account of the appellant company and corresponding accounting entries were passed. Such written off amount credited to the Profit and Loss account of the company is capital in nature the same was not included as income in the return of income for the year under appeal but the same was added to the total income of the assessee since not offered to tax though characterized as capital income as observed by the AO. We are of the opinion that such waiver of loan for acquiring capital assets cannot be taxed as perquisite u/s 28(iv) as receipt in the hand of the assessee in the form of cash on money neither can be taxed as a remission of liability under section 41(1) since such waiver of loan was not account of liability other than trading liability as rightly followed by the Learned CIT(A). However, whether such loan were utilized for acquiring fixed assets or not no such discussion was not available in the assessment order. CIT(A) directed the Learned AO to verify this particular aspect of the matter by the order impugned before us with a further direction thus in the event it is found to be correct the impugned addition to be deleted to the extent of loans utilized for capital purposes. No infirmity in the impugned order passed by the first appellate authority so as to warrant interference. The question is accordingly answered in the affirmation i.e. in favour of the assessee.

Summary

Issues Involved:
1. Taxability of written-off loan amount as capital receipt.

Detailed Analysis:

Issue 1: Taxability of written-off loan amount as capital receipt

The appeal and cross objection were filed against the order passed by the Commissioner of Income Tax (Appeals) for the Assessment Year 2011-12. The assessee disclosed a loan amount written off as capital receipt, arguing it was not taxable. The Assessing Officer (AO) issued a show-cause notice questioning the non-taxability of the amount. The assessee explained that the loan was taken for purchasing fixed assets, and since the creditor was wound up, the loan was written off. The AO considered the written-off amount as income and added it to the total income. However, the CIT(A) deleted this addition based on precedents stating that if a loan obtained for capital purposes is written off, it is not taxable. The Tribunal observed that the loan was utilized for acquiring fixed assets and directed the AO to verify this aspect. Relying on the judgment by the Bombay High Court, the Tribunal concluded that the written-off loan for acquiring capital assets cannot be taxed as a perquisite or remission of liability. The Tribunal upheld the CIT(A)'s decision, confirming that the written-off loan for capital assets was not taxable. The cross objection by the assessee was dismissed as not pressed.

In conclusion, the Tribunal dismissed the revenue's appeal on merit and the assessee's appeal as not pressed, affirming the non-taxability of the written-off loan amount as a capital receipt.

This detailed analysis covers the taxability issue of the written-off loan amount as a capital receipt, highlighting the arguments presented by both parties, the AO's decision, the CIT(A)'s ruling, and the Tribunal's final judgment based on relevant legal precedents and provisions.