2022 (7) TMI 554 - AT - Income Tax

Addition u/s 41(1) - Principal amount waived off by the bank which was utilized for trading activity is capital amount - whether loan borrowed from HSBC and Yes Bank which was settled during the year as one time settlement, was actually utilized for purchase of computer software and advance to a subsidiary company for acquisition of shares? - HELD THAT - As it is clear that loans borrowed from HSBC and Yes Bank are utilized on the capital front. The assessee has also furnished the details of payments made to subsidiary and how the subsidiary has utilized these payments for acquiring controlling interest in another company. Therefore, it is clear from the material placed on record that the loans which was borrowed from HSBC and Yes Bank is for the purpose of acquisition of shares and for purchase of computer software. Since loans have been actually utilized for the above said purpose, which are on the capital front and when the same is written off during the year on a one time settlement, it is nothing but capital receipt and not a revenue receipt. In this context, we rely on the judgment in the case of CIT v. Mahindra Mahindra 2018 (5) TMI 358 - SUPREME COURT - Since the relevant extract of the Hon ble Apex Court judgment has been extracted in the impugned order of the CIT(A), the same is not reproduced. Therefore, we see no reason to interfere with the order of the CIT(A) and uphold the same as correct and in accordance with law - Decided against revenue.

Issues Involved:
1. Whether the principal amount waived off by the bank, which was utilized for trading activity, is considered a capital amount not liable for tax.
2. Whether the entire amount of principal outstanding should be allowed instead of the amount used by the assessee for the purchase of software and development work.

Detailed Analysis:

Issue 1: Principal Amount Waived Off by the Bank
The primary issue is whether the principal amount of Rs. 119,39,96,966 waived off by the bank should be considered a capital receipt not liable for tax under section 41(1) of the Income Tax Act. The assessee argued that the waived amount was the principal loan utilized on the capital front, specifically for the purchase of software and acquisition of shares, and therefore should not be taxed. The Assessing Officer (A.O.) disagreed, citing the Supreme Court's decision in Karam Chand Thapar, which states that an amount initially not received as a trading receipt but subsequently credited to the Profit & Loss Account becomes taxable as income.

CIT(A)'s Decision:
The CIT(A) sided with the assessee, referencing the Supreme Court's ruling in CIT v. Mahindra & Mahindra, which held that loans utilized on the capital front and later waived off are considered capital receipts and not taxable. The CIT(A) concluded that the waiver of the principal amount of the loan on a one-time settlement with the bank is purely a capital receipt, as the loan retains its character as a liability.

Tribunal's Analysis:
The Tribunal reviewed the material on record and confirmed that the loans from HSBC and Yes Bank were used for purchasing computer software and advancing to a subsidiary for acquiring shares. The Tribunal agreed with the CIT(A) that since the loans were utilized for capital purposes, the waiver of the principal amount is a capital receipt and not taxable. The Tribunal upheld the CIT(A)'s order, referencing the Supreme Court's decision in CIT v. Mahindra & Mahindra to support this conclusion.

Issue 2: Amount of Principal Outstanding Allowed
The second issue concerns whether the entire principal amount of Rs. 119,39,96,966 should be allowed instead of Rs. 42,33,68,614, which the assessee used for purchasing software and development work. The A.O. added back the entire amount under section 41(1), arguing that it should be taxed as income.

CIT(A)'s Decision:
The CIT(A) allowed the entire principal amount, emphasizing that the waiver of the principal portion of the loan by the banks does not change its character to a revenue receipt. The CIT(A) relied on the Supreme Court's judgment in CIT v. Mahindra & Mahindra, which supports the view that such a waiver is a capital receipt.

Tribunal's Analysis:
The Tribunal examined the details provided by the assessee, including the utilization of the loan for capital purposes like purchasing software and advancing to a subsidiary. The Tribunal confirmed that the loans were indeed used on the capital front and, therefore, the waiver of the principal amount is a capital receipt. The Tribunal found no reason to interfere with the CIT(A)'s decision and upheld it as correct and in accordance with the law.

Conclusion:
The appeal filed by the Revenue was dismissed. The Tribunal upheld the CIT(A)'s decision that the waiver of the principal amount of the loan is a capital receipt and not taxable under section 41(1) of the Income Tax Act. The entire principal amount of Rs. 119,39,96,966 was allowed as a capital receipt, affirming the CIT(A)'s order.

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