2007 (7) TMI 346 - AT - Income Tax

Cessation of liabilities - remission of principal amount of loan - sick company - manufacturing of black and while picture tube - CIT(A) deleted addition on gains arising on account of cessation of liabilities as the assessee has gained from the waiver of principal amount - HELD THAT - In the instant case, the assessee has not got any deduction on account of acquisition of capital assets as the same has been reflected in the balance sheet and not in the P L a/c, and also the remission of the principal amount of loan so obtained from the bank and financial institution had not been claimed as expenditure or trading liability in any of the earlier previous year. So far as waiver of interest is concerned, the assessee company itself has treated the same either as income or has not claimed the same as expenditure in the computation of income filed before the lower authorities. The provision of s. 28(iv) applies to the value of benefit or perquisites whether convertible into money or not, arising from business, but does not apply for benefit received in cash or money; as held in Mahindra Mahindra Ltd. 2003 (1) TMI 71 - BOMBAY HIGH COURT , the waiver of principal amount of loan also does not come under the definition of income as contained u/s 2(24) of the Act. The definition of income as contained u/s 2(24) speaks as to what are the items to be included under the definition of income. It includes profits and gains, dividend, voluntary contribution received by a trust, value of any perquisite or profit in lieu of salary, special allowance or benefit granted to the assessee to meet his personal expenses, benefit or perquisite of directors, any sum chargeable under cls. (iiia), (iiib), (iiic), (iv) and (v) of section 28, capital gains u/s 45, profit and gains of business in accordance with s. 44, winnings from lotteries, races, etc., and any sum received by the assessee from his employee as contribution to any provident fund so set up. Waiver of principal amount of tax by no stretch of imagination can be treated as income within the meaning of s. 2(24) of the Act. Thus, we do not find any infirmity in the order of the CIT(A) for deleting the addition made on account of waiver of principal amount of loan - In the result, the appeal of the Revenue is dismissed.

Summary

Issues:
Appeal against deletion of addition on account of gains arising from cessation of liabilities.

Analysis:
The case involved an appeal by the Revenue against the order of CIT(A) regarding the addition of gains arising from the cessation of liabilities for the assessment year 2001-02 under section 143(3) of the IT Act, 1961. The main contention was the deletion of an addition of Rs. 10,47,93,857 made on account of gains from the waiver of the principal amount of a loan. The assessee, a sick company, had negotiated a one-time settlement with financial institutions and banks, resulting in the waiver of a substantial amount of interest. The Revenue argued that the waiver of the principal amount should also be treated as income since the assessee had benefited from the loans in its trading activity and depreciation claims. The AO added the waived principal amount to the assessee's income, leading to the appeal.

The CIT(A) deleted the addition, stating that the remission of the principal amount of a loan does not qualify as income under various sections of the IT Act, including s. 41(1), s. 28(iv), and s. 2(24). The Tribunal carefully considered the arguments and case law presented. It noted that for s. 41(1) to apply, the assessee must have claimed a deduction related to the loss, expenditure, or trading liability for which the remission occurred. Since the assessee had not claimed any deduction for the principal amount of the loan, the Tribunal held that s. 41(1) did not apply. Additionally, the waiver of the principal amount did not fall under the definitions of income provided in s. 28(iv) or s. 2(24) of the Act. The Tribunal cited a relevant case to support its interpretation that the waiver of the principal amount of a loan does not constitute income under the specified sections of the IT Act.

Ultimately, the Tribunal upheld the CIT(A)'s decision to delete the addition made on account of the waiver of the principal amount of the loan. The appeal by the Revenue was dismissed, concluding the legal proceedings on this matter.