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Issues Involved:
1. Confirmation of addition on account of waiver of loan amounting to Rs. 2,95,06,700. 2. Confirmation of disallowance of deduction under section 80HHC. Issue-wise Detailed Analysis: 1. Confirmation of Addition on Account of Waiver of Loan Amounting to Rs. 2,95,06,700: During the assessment proceedings, the Assessing Officer (AO) noticed that the assessee had received a loan amounting to Rs. 2,95,06,700 from Mr. D.A. Butler, a foreign promoter in the company. After Mr. Butler's death, this loan was waived by his estate, with the waiver duly approved by the RBI. The AO treated the waiver as income under section 41(1) of the Income-tax Act, considering it as casual and non-recurring income. The AO relied on the Supreme Court decisions in P. Krishna Menon v. CIT [1959] 35 ITR 48 and CIT v. G.R. Karthikeyan [1993] 201 ITR 866, which held that voluntary payments without legal claims could be treated as revenue in character. The assessee argued that the waiver of a loan by a foreign shareholder should not be taxed under section 41(1) as it was a capital receipt, not a revenue receipt. The assessee cited the Supreme Court decision in Cadell Weaving Mill Co. P. Ltd. v. CIT [2001] 249 ITR 265, affirmed by CIT v. D.P. Sandu Bros. Chembur P. Ltd. [2005] 273 ITR 1, which held that capital receipts are not taxable unless specifically included under capital gains. The Tribunal's Accountant Member agreed with the assessee, stating that the nature of the receipt at the time of the loan was capital, and waiver of the loan did not change its nature. Thus, it could not be treated as casual income under section 10(3). The Judicial Member, however, disagreed, relying on the Supreme Court decisions in P. Krishna Menon and G.R. Karthikeyan, and held that the waiver constituted income as per section 2(24). The Third Member, resolving the difference, agreed with the Accountant Member, emphasizing that the receipt was capital in nature and could not be taxed as casual or non-recurring income. The Third Member distinguished the cited Supreme Court cases and relied on the Bombay High Court decision in Mahindra and Mahindra Ltd. v. CIT [2003] 261 ITR 501, which held that waiver of a loan used for purchasing capital assets does not constitute business income. 2. Confirmation of Disallowance of Deduction Under Section 80HHC: The Tribunal examined clause (iv) of section 115JB, which allows reduction of book profit by the amount of profits eligible for deduction under section 80HHC, subject to conditions specified. The Tribunal noted that if there are brought forward losses, they must be adjusted against business profits before allowing deduction under section 80HHC, in line with the Supreme Court decisions in Motilal Pesticides (I) P. Ltd. v. CIT [2000] 243 ITR 26 and CIT v. Kotagiri Industrial Co-operative Tea Factory Ltd. [1997] 224 ITR 604. The Tribunal found that since the assessee was not eligible for deduction under section 80HHC, the same could not be reduced on a notional basis from the book profits for the purpose of section 115JB. Consequently, the Tribunal upheld the disallowance of the deduction under section 80HHC. Conclusion: The appeal was partly allowed. The addition on account of waiver of loan was deleted, while the disallowance of deduction under section 80HHC was confirmed.
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