2023 (9) TMI 26 - AT - Income Tax

Addition on account of waiver of loan - business income OR capital receipt - waiver of loan which was for acquiring plant and machinery - AO treated the waiver of loan amount and waiver of Purchase Price as Income of the Assessee u/s 28(iv) - assessee had claimed depression on the plant and machinery purchased from Kennametal Inc. However, the assessee has not paid for the said Plant and Machinery, but claimed depreciation on it without paying for it - HELD THAT - Hon ble Supreme Court IN Mahindra Mahindra Ltd 2018 (5) TMI 358 - SUPREME COURT has held that to invoke Section 28(iv) the benefit which is received has to be in some form other than in the shape of money. In the Case of Mahindra Mahindra, the company Mahindra Mahindra had received cash loan. However, in the case of the assessee, the assessee had received Equipment valuing US 3,66,000/- due to purchase of equipment. The assessee had not received any cash Loan of US 3,66,000/-. In this case, the assessee had purchased the equipment, for which assessee had not paid. Thus, what actually, assessee had received was equipment, for which, the assessee had not paid anything. Thus, receipt of equipment, is a benefit, which is not in the form of cash. The assessee has also received benefit in the form of depreciation. Therefore, the amount of US 3,66,000/- which is the Purchase Price of the Machinery, equipment is a benefit received by the assessee, hence, it is taxable u/s. 28(iv) of the Act. Thus, we uphold the order of the AO with reference to US 366000/-, in principle, that US 3,66,000/- is taxable u/s 28(iv) of the Act. The assessee had claimed that it was a loan, however, we have held that it was not a loan but assessee had received Machinery and Equipment. Hence, Ground No.3 of the assessee is dismissed. Loan - Kennametal Inc USA had advanced Cash Loan of Rupees equivalent to US 5,00,000/- to Assessee DHL. There was a promissory note.This Loan is independent of the Equipment sold by Kennametal Inc USA to assessee valuing US 3,66,000/-. The Loan was in addition to the equipment sold. Vide, the Master Agreement Kennametal Inc has waived the cash Loan of US 5,00,000/- which was advanced to the assessee vide Loan Agreement dated 13 th March, 1995. The AO has treated the said cash loan of US 5,00,000/- also as income u/s 28(iv). The said Loan of US 500000/- was a cash Loan. Therefore it is held that the waiver of cash Loan of Rupees equivalent to US 5,00,000/- is not income within the purview of Section 28(iv) of the Act. Hence, the AO is directed to delete the impugned addition qua US 5,00,000/-. Adoption of exchange rate - Assessee has entered in its books of account the value of equipment in Rupees based on the exchange rate applicable on the date of receipt of equipment. The benefit received by the assessee is equipment, hence, while arriving at the value of the said benefit, the exchange rate applicable on the date of receipt of the equipment is to be considered. The AO shall take the Conversion rate on the date of receipt of the Equipment and not the date of waiver. Therefore, while converting the US 3,66,000/-into Rupees, the AO shall consider the rate of exchange applicable on the date of receipt of the equipment. Accordingly, the Ground number 4 is allowed for statistical purpose.

Summary

Issues Involved:
1. Opportunity of being heard.
2. Addition on account of waiver of loan as business income.
3. Waiver of loan for acquiring plant and machinery.
4. Adoption of exchange rate for loan waiver.

Summary:

1. Opportunity of Being Heard:
The Assessee contended that the Commissioner of Income Tax (Appeals) ['CIT(A)'] erred in passing the order without providing an opportunity of being heard. However, the Assessee later chose not to press this ground, and it was dismissed as not pressed.

2. Addition on Account of Waiver of Loan as Business Income:
The Assessee argued that the CIT(A) wrongly confirmed the addition of INR 3,63,72,000 (correct amount INR 2,75,00,000) as business income under section 28(iv) of the Income Tax Act, 1961, instead of treating it as a capital receipt. The Tribunal held that the waiver of US$ 3,66,000, which was the purchase price of machinery, constituted a benefit arising from business and was taxable under section 28(iv). However, the waiver of the cash loan of US$ 500,000 was not considered income under section 28(iv) following the Supreme Court's decision in the Mahindra & Mahindra case.

3. Waiver of Loan for Acquiring Plant and Machinery:
The Assessee submitted that INR 1,53,72,000 was waived for acquiring plant and machinery and should be treated as a capital receipt. The Tribunal found that the amount of US$ 3,66,000 was not a loan but a business liability for the purchase of plant and machinery. The waiver of this amount was taxable under section 28(iv) as it provided a business benefit.

4. Adoption of Exchange Rate for Loan Waiver:
The Assessee contended that the total amount of loan waiver should be INR 2,75,00,000, based on the exchange rate at the date of receipt of equipment, not the date of waiver. The Tribunal directed the Assessing Officer to consider the exchange rate applicable on the date of receipt of the equipment for converting US$ 3,66,000 into Rupees. This ground was allowed for statistical purposes.

Order:
The appeal was partly allowed, with specific directions to the Assessing Officer regarding the exchange rate for the loan waiver and the exclusion of the cash loan waiver from taxable income under section 28(iv). The decision was pronounced on 31st March 2023.