2019 (6) TMI 915 - AT - Income Tax

Waiver of loan amount - Characterization of receipt - Applicability of provisions of section 28 (iv) and 41(1) or of section 56(2)(vi) - HELD THAT - Addition u/s 28(1) - The loan was taken for the purpose of business but the same was never taken in the course of business or to say that the loan sourced was not linked to the trading receipts or the like. Similarly the waiver of the loan amount was not in the course of business or in exercise of a profession. A part of the amount was waived by the bank in a one-time settlement because there were little chances of recovery of the entire amount. This one-time settlement was not done as part of the business activity of the assessee, rather, the transaction of the loan and waiver was a separate transaction. Under the circumstances, the waiver of part of the loan amount cannot be said to be a benefit or perquisite arising from business or profession to the assessee. Addition u/s 41(1) - The loan in question was not the trading liability of the assessee and, hence, the bank has not waived any loss / expenditure of trading liability of the assessee. What has been waived is a part of the loan amount in one-time settlement as the loan asset has been declared as NPA and there were little chances of the recovery of the loan. Moreover, the assessee did not take any benefit in the shape of allowance or deduction in earlier years of such principal loan amount which has been waived. Under the circumstances, the provisions of Section 41(1) are not applicable to the facts and circumstances of the case. Addition u/s 56(2)(vi) - It was not a simple case of waiver without consideration, rather, the consideration of the waiver was the condition of depositing immediately the remaining part of the loan i.e. ₹ 140 lacs and performance of certain other formalities as per the agreement. It is not just a case where the bank has simply waived or remitted the loan amount, rather the bank to secure payment of ₹ 140 lacs, which otherwise the bank was feeling difficult to recover, was the consideration for settlement of the loan account. Hence, the amount received by the assessee as waiver or remission of loan amount cannot be said to be without consideration. Hence, in our view, the provisions of section 56(2)(vi) are not applicable to the case in hand. Neither the remission of the aforesaid amount in the facts and circumstances of the case is taxable as business income or as income from other sources . Moreover, it is not a case where other party / banker out of his free will had decided to give some benefit to the assessee, rather, the settlement was arrived at by the bank out of compulsion. The other party in this case is a nationalized bank, hence, it cannot be said that the waiver was a sham transaction or a colourful device to give benefit to the assessee. Under the circumstances, though the assessee has got some benefit by way of waiver of the principal amount but the same cannot be termed as income of the assessee exigible to tax. However, it is made clear that our observations made above are in the peculiar facts and circumstances of this case and, hence, cannot be simply applied in each and every type of waiver of the loan amount. Whether the assessee had earned profit or incurred losses in the business activity, it has no relevancy so far as the source of capital is concerned which, in fact, was a loan from the bank on interest. Since the assessee was running into losses, hence the waiver of part of the loan in a settlement, is towards the capital receipt of the assessee and cannot be said to be out of business activity nor the same can be said to be in the nature of trading receipts. In view of this, we do not find any justification on the part of the lower authorities in taxing the amount or part of the loan amount waived in one time settlement by the bank. The addition made by the AO and confirmed by the Ld. CIT(A) is accordingly ordered to be deleted. - Decided in favour of assessee.

Summary

Issues Involved:
1. Addition of ?1,85,44,140.00 under section 28(iv) of the Income-tax Act, 1961, due to waiver of loan on settlement with the bank.
2. Applicability of sections 28(iv), 41(1), and 56(2)(vi) of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Addition of ?1,85,44,140.00 under section 28(iv) of the Income-tax Act, 1961:
- The assessee, a proprietor of M/s Mack Hosiery, had taken a loan from Punjab National Bank, which became a non-performing asset (NPA). The bank settled the debt at ?1,40,00,000, waiving ?4,34,05,687, including the principal and interest.
- The Assessing Officer initially added the whole waiver amount to the taxable income under sections 28(iv), 41(1), and 56(2) of the Act.
- The CIT(A) confirmed the addition concerning the principal amount of ?2,38,93,001 but directed verification of whether the interest and other expenses were claimed as expenditure in earlier years.
- Upon verification, it was found that the interest amount was not claimed as expenditure, leading to its deletion from taxable income. The CIT(A) bifurcated the waiver amount on a pro-rata basis, treating ?1,85,44,140 as a waiver of cash credit loan, taxable under section 28(iv) as it was utilized for trading purposes.

2. Applicability of sections 28(iv), 41(1), and 56(2)(vi) of the Income-tax Act, 1961:
- Section 28(iv): The Tribunal analyzed that the waiver of the loan was not a benefit or perquisite arising from business or profession. The loan was taken for business purposes but not in the course of business. The waiver was a separate transaction and not a business activity, hence not taxable under section 28(iv).
- Section 41(1): This section applies if an allowance or deduction was made in earlier years for a trading liability that has been remitted or ceased. The Tribunal found that the loan was not a trading liability but an independent loan transaction. The waiver was not for any trading liability, and no deduction was claimed for the principal loan amount in earlier years, making section 41(1) inapplicable.
- Section 56(2)(vi): This section taxes any sum of money received without consideration by an individual or HUF. The Tribunal noted that the loan was advanced for consideration of interest and the waiver was part of a one-time settlement, not without consideration. Hence, section 56(2)(vi) was not applicable.

Conclusion:
- The Tribunal concluded that the remission of the loan amount was neither taxable as business income nor as income from other sources. The waiver was part of a settlement due to the bank's compulsion and not a sham transaction. The addition made by the Assessing Officer and confirmed by the CIT(A) was ordered to be deleted, allowing the appeal of the assessee.