2013 (9) TMI 890 - HC - Income Tax

Cessation of loan liability - waiver of loan - addition under section 41(1) - one time settlement scheme Held that - Rs.4.93 Crores stand waived off in furtherance to One Time Settlement resulting in cessation of liability could not be treated as revenue receipt under Section 41(1) of the Act Reliance has been placed upon the judgment in the case Iskraemeco Rent Limited Vs CIT reported in 2010 (11) TMI 43 - Madras High Court , wherein it has been held that assessee had taken loan for purchase of capital asset and later on the loan was waived off by the Bank, it does not amount to a benefit arising out of business and it is also not even remission of the liability, which could attract Section 41(1) of the Act Decided against the Revenue.

Summary

Issues:
- Appeal against the order of the Income Tax Appellate Tribunal regarding the assessment year 2006-07.
- Questions of law raised:
1. Cessation of liability under section 41(1) of the Income Tax Act.
2. Taxability of cessation of liability due to a one-time settlement with creditors under Section 28(iv) and Section 41(1) of the Income Tax Act.

Analysis:

1. The respondent, engaged in manufacturing medical devices, filed its return of income as 'Nil' for the assessment year 2006-07. The Commissioner of Income Tax-I directed the Assessing Officer to determine the taxability of Rs.4,93,97,793/- under Section 41(1) and Section 28(iv) of the Income Tax Act. The Assessing Officer observed that the company's operations were suspended in May 2002, and the factory was taken over by a creditor for unpaid dues. The assessee opted for a one-time settlement, settling for Rs.185 lakhs against outstanding dues. An amount of Rs.9,93,97,793/- was written back in the notes under 'debtors and creditors'. The Assessing Officer added this amount to the total income, which was later deleted by the Commissioner of Income Tax (Appeals).

2. The Revenue challenged this deletion before the Income Tax Appellate Tribunal. The Tribunal, after considering the facts and submissions, held that the amount waived off due to the one-time settlement could not be treated as a revenue receipt under Section 41(1) of the Act. Referring to a previous decision, the Tribunal noted that the waiver of a loan for the purchase of a capital asset does not constitute a benefit arising from business or a remission of liability under Section 41(1) of the Act.

3. The High Court, in its judgment, noted that the issue was similar to a previous decision and found no question of law arising in the present case. Citing the decision in the case of Iskraemeco Rent Limited Vs CIT, the Court held that the cessation of liability due to a one-time settlement does not attract Section 41(1) of the Income Tax Act. Consequently, the Tax Case (Appeal) was dismissed with no costs.

This detailed analysis of the judgment highlights the key issues raised, the factual background, the legal arguments presented, and the final decision rendered by the High Court, providing a comprehensive understanding of the case.