2010 (11) TMI 43 - HC - Income Tax

Waiver of loan amount - Scope of section 28(iv) - benefit or perquisite, whether convertible into money or not - application of section 41(1) - loan amount waived under One Time Settlement Scheme (OTS) - In view of the loss suffered, the assessee went before the Board for Industrial and Financial Reconstruction (BIFR). In case No.77 of 1992, the BIFR has held that the assessee was a sick Industrial Company. The BIFR in pursuant to the said conclusion, sanctioned a scheme for revival/rehabilitation. The State Bank of India has waived the outstanding due of principle amount of Rs.5 crores and the interest outstanding for another sum of Rs.2 crores. The assessee did not pay the interest for the preceded three years to the assessment year and has paid a sum of Rs.5 crores from the date of receipt of the loan. - Held that - 41(1) has no application at all to the present case on hand which is also not the case of the revenue as well - in as much as the provision contained under Section 28(i) having been not defined as income under Section 2(24) of the Act, the same would not par take the character of the income and therefore, it is not assessable to tax. In other words, only an income as defined under Section 2(24) alone can be made assessable to tax. It is a well established principle of law that all receipts are not income and therefore liable to be taxed. A receipt cannot be taxed unless it is a revenue receipt. Hence in view of the admitted fact the receipt involved in the present case is a capital receipt it cannot be taxed. Further Section 37(1) of the Income Tax Act specifically deals with the capital expenditure which cannot be allowed in computing income. - Question of law answered in favor of assessee

Issues Involved:
1. Interpretation of Section 28(iv) of the Income Tax Act, 1961.
2. Applicability of the decision in CIT v. T.V. Sundaram Iyengar and Sons Ltd.
3. Classification of the principal loan amount waived by the bank under the One Time Settlement Scheme (OTS) as a revenue receipt.
4. Adequacy of the Tribunal's consideration of submissions made by the appellant.
5. Judicial application and reasoning by the Tribunal in affirming the views of lower tax authorities.

Detailed Analysis:

1. Interpretation of Section 28(iv) of the Income Tax Act, 1961:
The primary issue was whether the sum of Rs. 5,07,78,410/- waived by the bank under the OTS should be considered as a revenue receipt under Section 28(iv) of the Income Tax Act, 1961. The court concluded that Section 28(iv) pertains to the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession. The court observed that Section 28(iv) applies to benefits in kind and not to money transactions. Since the transaction in question involved a waiver of a loan, which is a monetary transaction, Section 28(iv) was deemed inapplicable.

2. Applicability of the decision in CIT v. T.V. Sundaram Iyengar and Sons Ltd.:
The Tribunal's reliance on the decision in CIT v. T.V. Sundaram Iyengar and Sons Ltd. was challenged. The court noted that the facts of the present case differed significantly from the Sundaram Iyengar case, where the money received by the assessee in the course of carrying on his business became his own money by the operation of law. In contrast, the present case involved a loan taken for purchasing capital assets, which was not a trading transaction. Thus, the court held that the Sundaram Iyengar case was not applicable to the facts of the present case.

3. Classification of the principal loan amount waived by the bank under the OTS as a revenue receipt:
The court examined whether the principal loan amount waived could be classified as a revenue receipt. It was established that the loan was obtained for acquiring capital assets, and thus, the transaction was capital in nature. The court emphasized that a waiver of such a loan does not change its character from capital to revenue. Therefore, the waiver of the principal loan amount could not be treated as a revenue receipt.

4. Adequacy of the Tribunal's consideration of submissions made by the appellant:
The court found that the Tribunal failed to adequately consider the submissions and grounds raised by the appellant. The Tribunal's order lacked detailed reasoning and merely followed the Sundaram Iyengar decision without addressing the specific arguments and evidence presented by the appellant. This failure amounted to a denial of justice and was not in accordance with the principles of natural justice.

5. Judicial application and reasoning by the Tribunal in affirming the views of lower tax authorities:
The court criticized the Tribunal for not applying its judicial mind properly and for failing to provide objective reasons for affirming the views of the lower tax authorities. The Tribunal's approach was deemed arbitrary, and the court reiterated the necessity for a reasoned order supported by sufficient reasons for its conclusions. The lack of detailed reasoning and consideration of relevant case law and facts rendered the Tribunal's order unsustainable.

Conclusion:
The court allowed the appeal, setting aside the orders passed by the authorities below. It concluded that the substantial questions of law were answered in favor of the assessee and against the revenue. The waiver of the principal loan amount under the OTS was not assessable as a revenue receipt under Section 28(iv) of the Income Tax Act, 1961, and the Tribunal's reliance on the Sundaram Iyengar decision was misplaced. The court emphasized the importance of reasoned orders and proper judicial application in tax matters.

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