2019 (7) TMI 788 - AT - Income Tax

Addition towards loans waived off - loans were taken from the shareholders / directors - failure to prove source of loan taken from shareholder / director - Whether loans waived were not taken for the purpose of acquisition of capital assets and waiver of principal portion of loan is not taxable - Assessing Officer found that the outgoing shareholders had taken over some of the assets and liabilities of the company to effect the takeover of the Company by the existing Directors. - set off the accumulated loss of the company against their loan outstanding HELD THAT - Following the decision Solid Containers Ltd. vs. DCIT 2008 (8) TMI 156 - BOMBAY HIGH COURT where the principle enunciated in the case of CIT vs T.V. Sundaram Iyengar Sons Ltd. 1996 (9) TMI 1 - SUPREME COURT has been applied, we held that the principal amount of loan, which is taken for the purpose of business or trading activity, on its waiver by the creditor, would constitute income chargeable to tax under the Act - if the loan is utilized for the purpose of acquiring any capital asset, the same, on its waiver, would not constitute income chargeable to tax as held in the case of Mahindra Mahindra Ltd. vs CIT 2018 (5) TMI 358 - SUPREME COURT and CIT vs. Tosha International Ltd 2008 (9) TMI 31 - HIGH COURT DELHI either under section 41(1) or 28(iv) or 2(24). In the instant case, it would be the duty of the assessee to prove and establish that the amount of loan taken from the Directors/shareholders was utilized for the purpose of business. If on an enquiry and verification, it transpires that the assessee had utilized the loan for the purpose of its business activity or trading activity, the amount of loan to the extent it has been waived by the Directors/shareholders shall be deemed to be the assessee s income chargeable to tax as per the decision in the case of Solid Containers Ltd. vs DCIT (supra) where the principle laid down by the Supreme Court in the case of CIT vs. T.V. Sundaram Iyengar Sons Ltd.(supra) has been applied and followed. It was found that there was no details furnished by the assessee as to how the loan amount was utilized or applied or for the purpose for which the loan was raised. Hence, we remit this issue to the file of the Assessing Officer for fresh consideration.- Appeal filed by the revenue is treated to be allowed for statistical purposes.

Summary

Issues Involved:
1. Deletion of addition towards loans written off.
2. Taxability of waiver of principal portion of loan not taken for acquisition of capital assets.
3. Applicability of Supreme Court decision in CIT vs Mahindra and Mahindra.
4. Taxability of loan waiver as business income.
5. Applicability of Bombay High Court decision in Solid Containers vs CIT.

Issue-wise Detailed Analysis:

1. Deletion of Addition Towards Loans Written Off:
The Revenue challenged the deletion of ?1,59,25,662/- towards loans written off by the CIT(A). The CIT(A) had deleted this addition, arguing that the waiver of loan by the Director of the Company was on the capital account and had never been claimed as expenditure. Therefore, the provisions under section 41(1) could not be invoked.

2. Taxability of Waiver of Principal Portion of Loan Not Taken for Acquisition of Capital Assets:
The Revenue argued that the loans waived were not taken for the acquisition of capital assets and thus should be taxable. The CIT(A) held that the waiver of the principal portion of the loan did not constitute taxable income as it was not related to any trading or revenue liability.

3. Applicability of Supreme Court Decision in CIT vs Mahindra and Mahindra:
The Revenue contended that the CIT(A) erroneously relied on the Supreme Court decision in CIT vs Mahindra and Mahindra, which dealt with the waiver of loans taken for the purchase of capital assets. The CIT(A) found that the waiver of the loan was not taxable under section 41(1) or section 28(iv) as it was not a trading liability but a capital receipt.

4. Taxability of Loan Waiver as Business Income:
The Revenue argued that the waiver of loans should be treated as taxable income since the amount was retained in the business. The CIT(A) disagreed, stating that the waiver of loans by the Directors was on the capital account and not related to the trading operations. The ITAT noted that the principle laid down in T.V. Sundaram Iyengar & Sons Ltd. (222 ITR 344) would apply if the loan was used in the course of business, making it taxable.

5. Applicability of Bombay High Court Decision in Solid Containers vs CIT:
The Revenue cited the Bombay High Court decision in Solid Containers vs CIT, arguing that the waiver of loans initially not taxable could become taxable if retained in the business. The CIT(A) distinguished the facts of the present case from Solid Containers, noting that the loans waived were not part of the trading operations but were capital receipts.

Conclusion:
The ITAT directed the Assessing Officer to verify the utilization of the loan amounts. If the loans were used for business purposes, the waiver would be taxable as per the principles in T.V. Sundaram Iyengar & Sons Ltd. and Solid Containers vs CIT. The appeal by the Revenue was allowed for statistical purposes, and the issue was remitted back for fresh consideration.