2024 (4) TMI 356 - HC - Income Tax

Addition u/s 41(1) - interest waived by the Bank - HELD THAT - The object and purpose of Section 41(1) of the Act 1961 is to ensure that an assessee does not get away with a double benefit once by way of deduction and another by not being taxed on the benefit received by him in the later year; vide Commissioner vs. Mahindra And Mahindra 2018 (5) TMI 358 - SUPREME COURT ITAT has allowed the appeal of the Revenue merely on an observation in paragraph 8 of the impugned order that once the assessee has debited interest in the profit and loss account then the assessee has already taken benefit of interest in its account whether he has taken the benefit of the Income Tax Act is not the relevant issue for consideration. This finding of the Tribunal is totally misconceived and is in complete ignorance of the express provisions of Section 41(1)(a). The first requirement of Section 41(1) is that the allowance or deduction is made in respect of the loss expenditure or a trading liability incurred by the assessee. The other requirement is that the assessee has subsequently obtained any amount in respect of such loss or expenditure or obtained a benefit in respect of such trading liability by way of a remission or cessation thereof. Even if for argument sake it is assumed that the aforesaid first requirement is satisfied yet the other requirement in assessee s case is not satisfied as the appellant assessee has neither subsequently obtained any amount in respect of the bank interest debited in his books of account in the A.Y. 1991-92 1992-93 and 1993-94 nor waiver of interest on bank loan in the A.Y. 2003-04 is remission or cessation of a trading liability. Law laid down in Mahindra And Mahindra (Supra) is applicable on facts of the present case that waiver of loan amounts to cessation of liability other than trading liability. Hence Section 41(1)(a) of the Act 1961 is not attracted on facts of the present case. Thus Tribunal has committed manifest error of law to hold that the interest waived by the bank was chargeable to tax in the hands of the appellant assessee for the assessment year 2003-04 u/s 41(1). Consequently the impugned order of the ITAT deserves to be set aside and the order of the CIT(A) deserves to be affirmed - Decided in favour of assessee.

Summary

Issues Involved:
1. Interpretation of Section 41(1) of the Income Tax Act, 1961 regarding the taxability of waived interest.
2. Applicability of Section 41(1) concerning the carry forward of business losses filed beyond the prescribed time.

Summary:

Issue 1: Interpretation of Section 41(1) of the Income Tax Act, 1961
The core issue was whether the interest of Rs. 23,52,984/- waived by the bank was chargeable to tax u/s 41(1) for the assessment year 2003-04. The Tribunal had held that the waived interest was taxable since the assessee had debited the interest in its profit and loss account, thus benefiting from it. However, the High Court clarified that Section 41(1)(a) applies only if the allowance or deduction has been made in the assessment. Since no such deduction was made in the relevant assessment years (1991-92, 1992-93, 1993-94) due to the late filing of returns, Section 41(1)(a) was not applicable. The High Court emphasized that the purpose of Section 41(1) is to prevent double benefits, which was not the case here.

Issue 2: Applicability of Section 41(1) concerning the carry forward of business losses filed beyond the prescribed time
The assessee had filed returns for the years 1991-92, 1992-93, and 1993-94 beyond the time allowed u/s 139(1)/139(3), and thus the losses were not allowed to be carried forward. The High Court noted that the CIT(A) had found no allowance or deduction made for any year in respect of the loss, expenditure, or trading liability. The Tribunal's decision to tax the waived interest was based on the incorrect assumption that the benefit of interest was already taken in the accounts, ignoring the fact that the returns were filed late and no benefit was derived under the Income Tax Act.

Conclusion:
The High Court set aside the Tribunal's order, affirming the CIT(A)'s decision that the waived interest was not chargeable to tax u/s 41(1) since no deduction was made in the assessment years due to the late filing of returns. The appeal was allowed in favor of the assessee, answering the substantial question of law in their favor and against the revenue.