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2022 (4) TMI 583 - AT - Income TaxIncome from waiver of loan - income changeable to tax or not? - brought to tax under section 28(iv) of the Act or under section 41(1) - income was claimed as exempt from tax and same was shown as a capital receipts - AO treated the said income as the value of benefit or perquisite arising from business u/s 28(iv) - HELD THAT - In the instant case, the assessee has not claimed any deduction on account of acquisition of capital asset as the same has been reflected in the balance sheet. Remission of principal amount of loan so obtained from related parties had not been claimed as expenditure or trading liability in any of the earlier previous years so far as the waiver of the same cannot fall into the provisions of section 41(1) - the provisions of section 28(iv) applies to the value of benefit or perquisite whether convertible into money or not, arising from business, but it does not apply to benefit received in cash or money, as held in the case of Mahindra Mahindra Ltd. 2003 (1) TMI 71 - BOMBAY HIGH COURT waiver of principal amount of loan also does not come under the definition of income as contained under section 2(24). In the light of the above decision of Hon'ble Bombay High Court in the case of Mahindra Mahindra Ltd. (supra), it is clear that in the case where capital assets are acquired by obtaining a loan, and subsequently, the loan amount is waived by the other party, the principal amount of loan waived by the other party cannot be brought to tax under section 28(iv) of the Act or under section 41(1) of the Act. In the present case, the money was received by the assessee in the course of carrying on business. Although it was treated as unsecured loan from related parties under the head long term borrowings , and on its waiver the parties have not claimed the same. The assessee itself as treated it as its own money and taken to Profit Loss account. There is no explanation as to why the assessee has taken it to Profit Loss account even it was somebody else s money. At this stage, it is appropriate to refer to the decision of Aries Advertising (P.) Ltd. 2002 (2) TMI 84 - MADRAS HIGH COURT and Solid Containers Ltd. 2008 (8) TMI 156 - BOMBAY HIGH COURT As following the decision of Hon'ble Bombay High Court in the case of Solid Containers Ltd. (supra) where the principle enunciated by the Hon'ble Supreme Court in the case of T.V. Sundaram Iyengar Sons Ltd. 1996 (9) TMI 1 - SUPREME COURT has been applied, we held that the principal amount of loan, which is taken for the purpose of business or trading activity, on its waiver by the creditor, would constitute income chargeable to tax under the Act. However, if the loan is utilized for the purpose of acquiring any capital asset, the same on its waiver, would not constitute income changeable to tax as held by Hon'ble Bombay High Court in the case of Mahindra Mahindra Ltd. (supra) and Hon'ble Delhi High Court in the case of Tosha International Ltd. . 2008 (9) TMI 31 - HIGH COURT DELHI either under section 41(1) or 28(iv) or 2(24) of the Act - Decided against revenue.
Issues Involved:
1. Whether the waiver of a loan amounting to ?2,55,35,871 should be treated as income under Section 28(iv) of the Income Tax Act. 2. Whether the waiver of the loan can be considered a capital receipt and thus not taxable. 3. Applicability of Section 41(1) of the Income Tax Act in the context of the waiver of the loan. 4. Whether the waiver of the loan should be treated as a trading liability or a working capital requirement. Issue-wise Detailed Analysis: 1. Treatment of Loan Waiver under Section 28(iv): The primary issue was whether the waiver of ?2,55,35,871 should be treated as income under Section 28(iv) of the Income Tax Act. The Assessing Officer (AO) treated the waived loan as the value of benefit or perquisite arising from business, thus taxable under Section 28(iv). However, the CIT(A) disagreed, observing that for Section 28(iv) to apply, the benefit must be in a form other than money. Since the waiver amount was received in cash, Section 28(iv) was deemed inapplicable. The CIT(A) relied on the Supreme Court decision in CIT v. Mahindra & Mahindra Ltd., where it was held that for invoking Section 28(iv), the benefit must not be in the form of money. 2. Loan Waiver as Capital Receipt: The assessee argued that the waived loan was a capital receipt and thus not taxable. The CIT(A) supported this view, citing the Karnataka High Court's judgment in CIT v. Compaq Electric Ltd., which held that the waiver of a loan, where no deduction or allowance was claimed in previous years, amounts to a capital receipt. The CIT(A) further noted that the loan in question was an unsecured loan used for working capital, not for acquiring any capital asset, hence reinforcing the stance that it should be treated as a capital receipt. 3. Applicability of Section 41(1): The AO initially considered the waiver under Section 41(1), which deals with the remission or cessation of trading liabilities. However, the CIT(A) found that Section 41(1) was not applicable as the assessee had not claimed any deduction in respect of the loan in previous years. The CIT(A) emphasized that the remission would only become income under Section 41(1) if the assessee had claimed a deduction for the expenditure in its Profit & Loss account, which was not the case here. 4. Loan as Trading Liability or Working Capital Requirement: The AO argued that the loan was a trading liability, citing the Supreme Court decision in T.V. Sundaram Iyengar & Sons Ltd. However, the CIT(A) distinguished this case, noting that the loan was for working capital purposes, not a trading liability. The CIT(A) pointed out that the Supreme Court in Mahindra & Mahindra Ltd. had clarified that Section 28(iv) does not apply to benefits received in cash. Since the loan waiver was in cash and used for working capital, it did not fall under Section 28(iv). Conclusion: The Tribunal upheld the CIT(A)'s order, agreeing that the loan waiver should not be treated as income under Section 28(iv) or Section 41(1). The Tribunal emphasized that the loan waiver, being a capital receipt and received in cash, did not constitute taxable income under the Income Tax Act. The appeal by the revenue was dismissed, affirming the CIT(A)'s decision. Pronouncement: The judgment was pronounced in the open court on April 7, 2022.
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