2016 (10) TMI 530 - AT - Income Tax

Addition of principal amount of loan waived by the lender on account of one time settlement of loan - Held that - CIT (A) has considered the depth of the stand taken by the assessee and the facts of the case and has rightly come to the conclusion that the said loan was taken for the purpose of long term investments and the learned CIT (A) has also taken note of the decisions of the Hon ble jurisdictional High Court rendered in the case of (i) Solid Containers Ltd. Vs. DCIT 2008 (8) TMI 156 - BOMBAY HIGH COURT and (ii) Mahindra & Mahindra Ltd. Vs. CIT 2003 (1) TMI 71 - BOMBAY High Court and the learned CIT (A) after considering the submissions recorded from Para 4.1 to 4.12 of his order has rightly come to the conclusion that the AO was not correct in taxing the aforesaid waiver of loan by treating the same as revenue receipt. No new material has been brought on record by the revenue to rebut/controvert the findings of the learned CIT (A). Disallowance of interest - Held that - In the absence of any valid explanation/evidence supporting the assessee s claim, the learned CIT (A) has rightly confirmed the action of the AO The learned CIT (A) while reaching to this conclusion has also appreciated the detailed submission of the assessee wherein it has been specifically recorded that the loan amount has been advanced to the assessee s sister concerns can be treated as investment made with deposit with the sister concerns. Since, it is not the business activity of the assessee Company as can be seen from the records that this can be invested in the market. It has also been noted by the learned CIT (A) that the assessee was not in a position to adduce any evidence to prove that the business prospect of the assessee are inseparably linked with its sister concerns. Therefore, while rightly appreciating the order of the AO, the learned CIT (A) has confirmed the action of the AO in disallowing the interest expenses because the assessee has advanced interest-free loans to its subsidiaries without showing that there was any business exigency for the same. In view of this, we find no reason to interfere with the findings of the learned CIT (A).

Summary

Issues Involved:
1. Deletion of the addition of ?8,41,34,321/- being the disallowance of the principal amount of loan waived off.
2. Disallowance of interest of ?14,65,654/- incurred during the year.

Issue-wise Analysis:

1. Deletion of the Addition of ?8,41,34,321/-:

The Revenue's appeal contested the deletion of the addition of ?8,41,34,321/-, which was the disallowance of the principal amount of loan waived off by the lender on account of a one-time settlement. The Revenue argued that the loan waiver should be considered a revenue receipt under section 28(iv) of the Income Tax Act as held in the case of Solid Container Ltd. Vs. DCIT (308 ITR 417).

The Tribunal analyzed the order of the CIT (A), which concluded that the loan was acquired for the acquisition/investment in capital assets, and thus, its waiver cannot be termed as a revenue receipt. The CIT (A) referred to various judicial pronouncements, including the Bombay High Court's decision in Solid Container Ltd. Vs. DCIT and Mahindra & Mahindra Ltd. Vs. CIT, and the Delhi High Court's decision in Jubiliant Securities Pvt. Ltd., which supported the view that the waiver of a loan taken for capital investment does not result in a revenue receipt.

The Tribunal upheld the CIT (A)'s decision, stating that the loan was for long-term investments and not for trading purposes. The Tribunal found no new material from the Revenue to rebut the findings of the CIT (A) and thus dismissed the Revenue's appeal on this ground.

2. Disallowance of Interest of ?14,65,654/-:

The assessee's cross-objection challenged the disallowance of interest of ?14,65,654/- incurred during the year. The CIT (A) had confirmed the AO's disallowance, noting that the advances extended by the assessee to its subsidiaries were not for business purposes and the assessee failed to provide valid proof or explanation to support its claim.

The Tribunal reviewed the CIT (A)'s detailed analysis and submissions. The CIT (A) had concluded that the interest-free loans to subsidiaries were not linked to the business activities of the assessee and thus, the interest expenses could not be justified. The Tribunal agreed with the CIT (A)'s findings, noting the lack of evidence from the assessee to prove any business exigency for the advances. Consequently, the Tribunal dismissed the cross-objection raised by the assessee.

Conclusion:

The Tribunal dismissed both the Revenue's appeal and the assessee's cross-objection, upholding the CIT (A)'s decisions on both issues. The waiver of the principal loan amount was deemed a capital receipt, not taxable as revenue, and the disallowance of interest expenses was confirmed due to the lack of business purpose for the interest-free loans to subsidiaries.