2016 (3) TMI 582 - AT - Income Tax

Waiver of loan amount - Scope of section 28(iv) - Addition under the regular provisions of the Act and under section 115JB on account of waiver of loans by the National Housing Bank - waiver of principal portion of the refinance loan by the National Housing Bank - Held that - Under a one-time settlement entered into between the assessee and the bank, the bank accepted the ad-hoc payment of ₹.5 crores made by the assessee and waived a sum of ₹.5,07,78,410/- being the remaining principal and a sum of ₹2,02,60,247, the outstanding interest. However, in the instant case, the assessee has entered into a onetime settlement of refinance loan with National Housing Bank. The assessee has shown a loss after depreciation and tax at ₹.4,18,41,839/- on a total receipt of ₹.2,65,18,784/-. Against this loss of ₹.4,18,41,839/-, the assessee has adjusted a sum of ₹.5,77,40,964/- which represents waiver of refinance loan of National Housing Bank, resulting in a profit of ₹.1,58,99,125/-. However, the amount of ₹.5,77,40,964/- representing waiver of refinance loan of National Housing Bank has not been considered both for normal computation and for the purpose of computation of book profit under section 115JB of the Act. Since the waiver of loan is nothing but income of the assessee within the meaning section 28(iv) of the Act, and the same was availed during the course of regular business, the waiver of the principal portion of the loan clearly forms benefits assessable to tax under section 28(iv) of the Act. Therefore, the reliance placed by the assessee in the case of Iskraemeco Regent Ltd. v. CIT (2010 (11) TMI 43 - Madras High Court) has no application to the facts of the present case. CIT(A) confirmed the addition made by the Assessing Officer rightly - Decided against assessee

Summary

Issues Involved: Confirmation of addition of Rs. 5,77,40,964/- under section 28(iv) of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Background and Facts of the Case:
The assessee, engaged in the housing finance business, filed its return of income declaring a loss and claimed a refund. The return was processed under section 143(1) of the Income Tax Act. Subsequently, the case was reopened, and notices were issued under sections 148, 142(1), and 143(2) of the Act. The Assessing Officer (AO) observed that the assessee had shown a significant loss but adjusted this loss with a waiver of refinance loan from the National Housing Bank, resulting in a profit. The AO questioned why this waiver amount should not be treated as income and subjected to tax.

2. Assessee's Submission:
The assessee explained that the waiver of Rs. 5,77,40,964/- was part of a one-time settlement with the National Housing Bank, representing the principal amount, not related to any loss, expenditure, or trading liability allowed as a deduction in previous years. Therefore, it argued that the waiver amount should not be considered income under section 41(1) of the Act.

3. Assessing Officer's Decision:
The AO concluded that the waiver of the refinance loan was a benefit arising from the business and should be taxed under section 28(iv) of the Act, not section 41(1). Consequently, the AO added the waiver amount to the total income of the assessee for normal computation and for the purpose of book profit under section 115JB of the Act.

4. Commissioner of Income Tax (Appeals) [CIT(A)] Decision:
The assessee appealed to the CIT(A), arguing that the waiver was a reduction in liability, not income, and that the loan was never debited to the P&L account nor claimed as a deduction in earlier years. The CIT(A) upheld the AO's decision, stating that the waiver of the loan, being part of the business activity, was taxable under section 28(iv) of the Act. The CIT(A) also referenced judicial pronouncements supporting the view that waiver of loans received during the regular course of business is taxable.

5. Tribunal's Analysis and Conclusion:
The Tribunal reviewed the submissions and the facts, noting that the waiver of the refinance loan was part of the assessee's regular business activities. The Tribunal agreed with the CIT(A) that the waiver of the principal portion of the loan constituted a benefit accrued to the assessee under section 28(iv) and was liable for tax. The Tribunal distinguished the present case from the case of Iskraemeco Regent Ltd. v. CIT, where the waiver was under different circumstances. The Tribunal found no infirmity in the CIT(A)'s order and dismissed the appeal, confirming the addition made by the AO.

Final Judgment:
The appeal filed by the assessee was dismissed, and the addition of Rs. 5,77,40,964/- under section 28(iv) of the Income Tax Act was confirmed. The Tribunal pronounced the order on 3rd February 2016 at Chennai.