2020 (4) TMI 491 - HC - Income Tax

Addition u/s 41(1) - waiver of unsecured interest free loans taken - accounting entries to be determinative of the nature of receipt or not ? - HELD THAT - In the year under consideration, the assessee was not carrying any business activity in terms of the main object of the assessee company - while assessee had borrowed monies from Matrix Logistics Private Limited, it had not claimed any deduction or allowance in respect of the same - As decided in Kedarnath Jute Manufacturing Co. Ltd. v. CIT 1971 (8) TMI 10 - SUPREME COURT the accounting entries cannot be determinative of the nature of receipt and what can be added to income under section 41(1) of the Act is something in respect of which, deduction has been allowed in the past In CIT v. Mahindra Mahindra Ltd 2018 (5) TMI 358 - SUPREME COURT on a perusal of sub-section (1) of section 41 of the Act, it is evident that there is a sine qua non that there should be an allowance or deduction claimed by the assessee in any assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee. Then, subsequently, during any previous year, if the creditor remits or waives any such liability, then the assessee is liable to pay tax under section 41 of the Act. In the facts of the present case, since the assessee has not claimed any allowance or deduction in respect of the unsecured loan obtained by it from Matrix Logistics Private Limited in any previous year, the provisions of sub-section (1) of section 41 of the Act would not apply. The Tribunal has, therefore, rightly applied the decisions of the Supreme Court in Kedarnath Jute Manufacturing Co. Ltd. v. CIT and CIT v. Mahindra Mahindra Ltd. (supra) to the facts of the present case.- Decided against revenue

Summary

Issues:
Challenge to deletion of addition of interest-free loans under Section 41(1) of the Income Tax Act.

Analysis:
The appellant, the revenue, challenged the deletion of an addition of ?4,42,95,650 made by the Assessing Officer under Section 41(1) of the Income Tax Act. The loan in question was interest-free and unsecured, obtained from a company that was later wound up by a court order. The Assessing Officer argued that since the loan liability ceased to exist due to the winding up of the lending company, the amount should be treated as income under Section 41(1) of the Act. The appellant contended that the loan amount was used for trading purposes, specifically for purchasing shares, and not for capital assets. The Commissioner (Appeals) and the Tribunal both ruled in favor of the assessee, stating that the conditions of Section 41(1) were not met as no deduction had been claimed in previous assessments for the unsecured loans. The Tribunal cited precedents like Kedarnath Jute Manufacturing Co. Ltd. v. CIT and CIT v. Mahindra & Mahindra Ltd. to support their decision. The court emphasized that for Section 41(1) to apply, there must have been an allowance or deduction claimed by the assessee in a previous assessment for the liability in question, which was not the case here. Therefore, the Tribunal's decision was upheld, and the appeal was dismissed.

In conclusion, the High Court dismissed the appeal by the revenue, upholding the Tribunal's decision to delete the addition of the interest-free loans under Section 41(1) of the Income Tax Act. The court reiterated that since the assessee had not claimed any deduction in previous assessments for the unsecured loans, the provisions of Section 41(1) did not apply in this case. The court relied on established legal principles and precedents to support their decision, emphasizing the requirement of a prior allowance or deduction for the liability in question to invoke Section 41(1). The judgment highlighted the importance of preventing double benefits for the assessee and ensuring tax liability in cases of remission of such liabilities. Therefore, the Tribunal's decision was found to be in accordance with the law, and the appeal was summarily dismissed.