2022 (6) TMI 1028 - AT - Income Tax

Revision u/s 263 - addition made u/s 41(1) on account of cessation of liability - HELD THAT - The excess amount as received by the assessee over and above WDV of the asset has been offered as well as accepted as Short-Term Capital Gain. Thought the Bank Liabilities were crystalized at Rs.43 Crores, however, SPV was obligated to repay any amount received by it over and above Rs.43 Crores. It would not be correct to say that the bank liabilities were ultimately settled at Rs.43 Crores and the balance amount was waived-off. Therefore, the provisions of Sec.41(1) could not be held to be applicable in such a case in the hands of the assessee. As it was held by Hon ble Supreme Court 2018 (5) TMI 358 - SUPREME COURT that waiver of loan by the creditor is neither taxable as perquisite u/s 28(iv) nor taxable as remission / cessation of liability u/s 41(1) of the Act. Further, Sec.28(iv) would not apply to waiver of loan since the waiver could not be termed as income u/s 2(24). The decision in CIT V/s Ramaniyam Homes (P) Ltd. ( 2016 (4) TMI 954 - MADRAS HIGH COURT as referred to by ld. CIT-DR, has already been reversed by Hon ble Supreme Court in the case of CIT V/s Mahindra Mahindra Ltd. (supra). The last aspect of the matter is that the receivables of Rs.93.45 Crores have been liquidated at Rs.46.59 Crores (Rs.43 Crores of Bank Liability Rs.3.59 Crores receivable by the assessee) and therefore, the balance amount of Rs.46.86 Crores was to be treated as bad-debts or business loss which would clearly be allowable as deduction to the assessee. We are of the considered opinion that Ld. CIT(A) has capture the issue in correct perspective. The conclusion drawn in the impugned order are based on binding judicial precedents. Therefore, finding no reason to interfere in the same, we dismiss the appeal of the revenue.

Summary

Issues Involved:
1. Cessation of bank liability and applicability of Section 41(1) of the Income Tax Act.
2. Taxability under Section 28(iv) of the Income Tax Act.
3. Treatment of bad debts or business loss.
4. Remission of liability in the hands of the Special Purpose Vehicle (SPV).

Detailed Analysis:

1. Cessation of Bank Liability and Applicability of Section 41(1):
The primary issue revolves around whether the cessation of bank liability amounting to Rs.46.05 Crores should be taxed under Section 41(1) of the Income Tax Act. The Tribunal initially noted that the liability was transferred to a Special Purpose Vehicle (SPV) under a tripartite agreement, which indicated no liability in the hands of the assessee. The Commissioner of Income Tax (Appeals) [CIT(A)] held that there was no cessation of liability for the assessee, as the liability had been transferred to the SPV. However, the Tribunal, guided by its previous order, did not independently verify this finding, leading to the High Court remanding the matter back for fresh consideration.

Upon fresh adjudication, it was noted that the assessee assigned its receivables and bank liabilities to the SPV at book value. The liability was crystalized at Rs.43 Crores, but the SPV was to pay any amount received over Rs.43 Crores to the banks. Therefore, there was no actual remission of liability in the hands of the assessee, and Section 41(1) was not applicable.

2. Taxability under Section 28(iv):
The Tribunal and CIT(A) both concluded that Section 28(iv) would not apply to the waiver of bank loans as these loans were utilized for acquiring capital assets, which were then given on hire purchase or lease. The waiver of such loans falls within the capital field and is not taxable under Section 28(iv). This conclusion aligns with the decision of the Hon’ble High Court of Madras in Iskraemeco Regent Ltd. and the Supreme Court in Mahindra & Mahindra Ltd., which held that waiver of loan by the creditor is neither taxable as perquisite under Section 28(iv) nor as remission/cessation of liability under Section 41(1).

3. Treatment of Bad Debts or Business Loss:
The CIT(A) also accepted the alternative contention that the balance amount of Rs.46.86 Crores, resulting from the liquidation of receivables at Rs.46.59 Crores against the original Rs.93.45 Crores, should be treated as bad debts or business loss. This amount was allowable as a deduction to the assessee.

4. Remission of Liability in the Hands of the SPV:
For the assessment year 2009-10, the revenue's appeal against the SPV (URMPL) was based on the bad debt written off by the Bank of Ceylon amounting to Rs.381.98 Lacs. The Tribunal directed the Assessing Officer to verify the correct figures and recompute the income, as the amount payable to the Bank of Ceylon was much lower than claimed. The addition was initially deleted by CIT(A) since it was already taxed in the hands of the original assessee, India Cement Capital Ltd.

Conclusion:
The Tribunal dismissed the revenue’s appeal for the assessment year 2006-07, confirming that there was no remission of liability in the hands of the assessee and the provisions of Section 41(1) were not applicable. The waiver of bank loans was also not taxable under Section 28(iv) as it was in the capital field. For the assessment year 2009-10, the matter was remanded back to the Assessing Officer to verify the correct figures and recompute the income, thus allowing the appeal for statistical purposes. The appeal of the assessee for the same year was allowed, directing the deletion of the impugned additions.