2020 (4) TMI 32 - HC - Income Tax

Cessation of liability - Additions u/s. 41(1) - waiver towards outstanding principal loan amount - waiver of outstanding principal loan amount is a capital receipt or not? - Tribunal deleting the addition made by the Assessing Officer and confirmed by the CIT(A) by considering the amount as capital receipt - HELD THAT - CIT(A) has agreed to the submissions of the respondent-assessee that addition cannot be made under Section 41(1) but has considered that the respondent was paying interest on the loan taken by it which was claimed by it as expenditure in profit and loss account, and therefore, it was borrowing with interest which was waived. CIT(A) has applied the ratio of T.V.Sundaram Iyengar and Sons Ltd 1996 (9) TMI 1 - SUPREME COURT to hold that the quality and nature of receipt for income-tax purposes is fixed once and for all, when the receipt is received and that subsequent operation can change its nature, is not absolute and that in given cases by reason of subsequent events, the amount which initially was not received as trading receipts may be regarded as business income - as considered by the CIT(A) that if the loan was for the trading purpose and was treated as such from the very beginning in the books of account, the waiver thereof may result in the income. It was, therefore, held that the waiver of the loan should be taxable under the provisions of Section 2(24) read with Section 28(iv) of the Act. Aforesaid findings given by the CIT(A) are contrary to the facts of the case as the amount credited to capital reserve by the assessee pertains to principal amount borrowed without there being any component of interest embedded therein. In that view of the matter the dictum in case of Mahindra and Mahindra Ltd 2003 (1) TMI 71 - BOMBAY HIGH COURT would be applicable and as such neither Section 28(iv) of the Act nor Section 41(1) of the Act would be applicable so as to tax the amount of waiver of loan comprising of principal amount in the ends of the assessee. We are in agreement with the findings given by the Tribunal. The question of law raised in this appeal cannot be termed as substantial question of law.

Summary

Issues Involved:
1. Whether the waiver of a principal loan amount is a capital receipt or taxable under Section 41(1) of the Income Tax Act, 1961.
2. Applicability of Section 28(iv) and Section 41(1) of the Income Tax Act, 1961 to the waiver of a loan.

Detailed Analysis:

1. Waiver of Principal Loan Amount as Capital Receipt:

The core issue revolves around the waiver of a principal loan amount of ?8,07,35,116 by IDBI Ltd. and its tax implications. The Assessing Officer (AO) added this amount to the income under Section 41(1) of the Income Tax Act, 1961, arguing that it constituted a trading liability. The CIT (Appeals) upheld this addition, relying on the Supreme Court's decision in T.V. Sundaram Iyengar and Sons Ltd. and the Bombay High Court's decision in Solid Container Limited. The CIT (Appeals) reasoned that since the loan was used for business purposes, its waiver should be treated as income.

However, the Tribunal, citing the Madras High Court's decision in Iskraemeco Regent Ltd. and the Bombay High Court's decision in Mahindra and Mahindra Ltd., held that the waiver of the principal loan amount does not constitute a trading receipt and is not taxable under Section 41(1) as it was never claimed as a deduction by the assessee.

2. Applicability of Section 28(iv) and Section 41(1) of the Income Tax Act:

The CIT (Appeals) argued that the waiver of the loan should be taxable under Section 2(24) read with Section 28(iv) of the Act, considering the loan was for trading purposes. The CIT (Appeals) stated that the waiver of the loan resulted in a benefit to the assessee, which should be taxable.

However, the Tribunal disagreed, emphasizing that Section 28(iv) applies only to benefits or perquisites received in kind and not in the form of money. Since the waiver was a monetary transaction, Section 28(iv) was not applicable. Furthermore, the Tribunal noted that Section 41(1) applies only when a deduction has been claimed in respect of a trading liability, which was not the case here as the principal loan amount was never claimed as a deduction.

The Tribunal's decision was aligned with the Supreme Court's ruling in Mahindra and Mahindra Ltd., which clarified that waiver of a loan does not amount to cessation of a trading liability and thus is not taxable under Section 41(1).

Conclusion:

The High Court agreed with the Tribunal's findings, concluding that the waiver of the principal loan amount by IDBI under the One Time Settlement Scheme does not constitute a trading receipt. The amount was never claimed as a deduction by the assessee, and therefore, it does not give rise to profits chargeable to tax under Section 41(1). The High Court dismissed the appeal, stating that the question of law raised could not be termed as a substantial question of law.

Final Judgment:

The High Court dismissed the Tax Appeal, agreeing with the Tribunal that the waiver of the principal loan amount is not taxable under Section 41(1) or Section 28(iv) of the Income Tax Act, 1961. The findings of the CIT (Appeals) were deemed contrary to the facts, and the Tribunal's decision was upheld. No costs were ordered.