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2019 (7) TMI 167 - AT - Income TaxGain on Assignment of Loan Obligation - whether constitutes income chargeable to lax in the hands of appellant? - u/s 28(iv) or u/s 41(1) - HELD THAT - Surplus arising from assignment of loan is not covered by the provisions of section 41(1) and consequently can not be brought to tax either u/s 28(iv) or u/s 41(1) - the surplus has resulted from the assignment of liability as the assessee has entered into tripartite agreement under which the loan was to be repaid by the third party in consideration of payment of net present value (NPV) of future liability. Thus surplus resulting from assignment of loan at present value of future liability is not cessation or extinguishment of liability as the loan is to be repaid by the third party and therefore can not be brought to tax in the hands of the assessee. Similar issue has been decided by the special bench Mumbai in the case Sulzer India Ltd Vs JCIT 2010 (11) TMI 728 - ITAT MUMBAI which has upheld by Bombay High Court in the case of CIT Vs Sulzer India Ltd 2014 (12) TMI 267 - BOMBAY HIGH COURT The view taken by the Bombay High Court has been affirmed by CIT Vs Balkrishan Industries Ltd 2017 (11) TMI 1626 - SUPREME COURT wherein it has been surplus resulting from the payment of net present value of future liability is cessation/extinguishment of liability and therefore can not be taxed as trading receipt. The said decision was rendered in the context of surplus made by the assessee when it chose to pay the net present value of the liability which was to be discharged after seven years is paid at present value of future liability under a scheme floated by the State Govt. Under the scheme the sales tax collected under deferred scheme to incentivize the industry was to be paid after certain years but the Govt came with another scheme offering the industry to pay the present value of that sales tax liability to be discharged in future. Applying the same analogy to the assessee case we hold that the assessee has assigned the loan by paying the present value of future liability and the surplus is not taxable as it is not cessation or extinguishment of liability. The decisions relied by the ld DR are also perused and found to be not applicable to the present case. We direct the AO to delete the addition. - Decided in favour of assessee.
Issues Involved:
1. Whether the "Gain on Assignment of Loan Obligation" constitutes "income" chargeable to tax. 2. Applicability of Section 41(1) of the Income Tax Act. 3. Relevance of the Supreme Court decision in CIT v. T.V. Sundaram Iyengar & Sons Ltd. 4. Whether the gain should be treated as a capital receipt or income from other sources. 5. Confirmation of penalty under Section 271(1)(c) of the Income Tax Act. Detailed Analysis: 1. Whether the "Gain on Assignment of Loan Obligation" constitutes "income" chargeable to tax: The assessee argued that the "Gain on Assignment of Loan Obligation" is a capital receipt and not income chargeable to tax. The Assessing Officer (AO) and CIT(A) held that the gain of ?11.64 crores arising from the assignment of a loan obligation to Champion Pictures Pvt. Ltd. (CPPL) constitutes income and should be taxed. The AO relied on Supreme Court decisions that broaden the definition of "income," including CIT vs Karthikeyan and CIT vs Kadambande, concluding that any gain or benefit should be brought to tax. 2. Applicability of Section 41(1) of the Income Tax Act: The AO applied Section 41(1), arguing that the loan assignment resulted in the cessation of liability, creating a taxable benefit. However, the assessee contended that Section 41(1) was not applicable as no deduction or allowance was claimed for the loan in any assessment year. The Tribunal agreed with the assessee, emphasizing that the loan was used for purchasing shares, a capital transaction, and not for trading purposes, thus not fulfilling the conditions of Section 41(1). 3. Relevance of the Supreme Court decision in CIT v. T.V. Sundaram Iyengar & Sons Ltd.: The AO and CIT(A) relied on the decision in CIT vs T.V. Sundaram Iyengar & Sons Ltd., where unclaimed deposits became taxable as trade surplus. The Tribunal distinguished this case, noting that the assessee’s transaction involved the purchase of shares, not trading operations. The Tribunal also referenced the Supreme Court decision in CIT vs Mahindra & Mahindra Ltd., which clarified that waiver of loan for acquiring capital assets is not taxable under Section 28(iv) or Section 41(1). 4. Whether the gain should be treated as a capital receipt or income from other sources: The Tribunal concluded that the gain from the assignment of the loan liability should be treated as a capital receipt. It was noted that the loan was used for purchasing shares, a capital investment, and not for the business of trading in shares. The Tribunal cited the decision in CIT vs Mahindra & Mahindra Ltd., affirming that such gains are not taxable under Section 28(iv) or Section 41(1). 5. Confirmation of penalty under Section 271(1)(c) of the Income Tax Act: Since the Tribunal allowed the appeal of the assessee, deleting the addition of ?11.64 crores, the penalty imposed under Section 271(1)(c) for concealment of income was also deleted. Conclusion: The Tribunal allowed the appeal, setting aside the CIT(A)'s order and directing the AO to delete the addition of ?11.64 crores. The gain on the assignment of the loan obligation was treated as a capital receipt, not taxable under Sections 28(iv) or 41(1). Consequently, the penalty under Section 271(1)(c) was also deleted.
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