2023 (9) TMI 1016 - AT - Income Tax

Additions u/s 41 r.w.s 28(i) - Deemed income - waiver of loan - Floating Rate Notes - To be treated as loan for business purpose or for purchase of capital asset - AO held that the amount of waiver of loan was taxable under section 28(i) and 28(iv) and 41(1) - Whether Commissioner of income-tax (Appeals) has erred is not appreciating that floating Rates notes is a loan raised by the assessee for trading purpose and waiver thereof is taxable? - HELD THAT - The facts of the present case are identical to the facts in the case of CIT Vs. Mahindra Mahindra 2018 (5) TMI 358 - SUPREME COURT . In the case under consideration, the assessee had issued FRN. The FRNs are debt instruments carrying interest as mentioned in the subscription agreement. However, these FRN s were redeemed at a value less than the Face Value. Thus, what assessee had done by issuing the FRN was that it had raised a loan. Since these FRNs were cash receipts it is held that the amount is not taxable u/s 28(iv) and 41(1) - AO has also invoked section 28(i) to tax the amount - However, assessee is not in the business of lending and borrowing. Assessee is in the business of construction, therefore, waiver of loan amount is not business income of the assessee. AO has mentioned in the assessment order that since the Loan was utilized to purchase the land, waiver of loan is business income. We do not agree with this proposition of the AO. We ask simple question to ourselves, is the repayment of loan allowed as business deduction? the answer is obvious no, similarly the waiver of Loan is also not business income taxable u/s 28(i) of the Act. Hence, it is not taxable under section 28(i) of the Act. Grounds of appeal raised by the Revenue are dismissed.

Summary

Issues Involved:
1. Taxability of waiver of loan amount under Section 28(i), 28(iv), and 41(1) of the Income Tax Act.
2. Determination of whether the waiver of Floating Rate Notes (FRNs) constitutes a capital receipt or business income.
3. Applicability of judicial precedents cited by both the Revenue and the Assessee.

Detailed Analysis:

Issue 1: Taxability of Waiver of Loan Amount
The Revenue contended that the waiver of Rs. 1,43,71,02,003/- on redemption of Floating Rate Notes (FRNs) should be taxable under Section 28(i), 28(iv), and 41(1) of the Income Tax Act. The Assessing Officer (AO) held that this amount was taxable as it constituted income from a waiver of loans during the course of normal business activities. However, the Commissioner of Income Tax (Appeals) [CIT(A)] disagreed, stating that the waiver of FRNs, which are akin to debentures, is a capital receipt and not taxable as business income. The CIT(A) emphasized that the FRNs were part of the capital structure and not trading liabilities. Consequently, the waiver did not fall under the purview of Sections 28(i), 28(iv), or 41(1) of the Income Tax Act.

Issue 2: Determination of Waiver of FRNs as Capital Receipt or Business Income
The CIT(A) concluded that the FRNs issued by the assessee were of a capital nature, and their redemption below face value resulted in a capital receipt. The CIT(A) relied on various judicial precedents to support this view, stating that the waiver of a capital liability does not constitute business income. The CIT(A) also noted that the funds raised through FRNs were used for acquiring land and not for creating any trading assets. Therefore, the waiver of the loan amount was credited to the capital reserve and not to the profit and loss account, reinforcing the argument that it was a capital receipt.

Issue 3: Applicability of Judicial Precedents
The CIT(A) and the Tribunal considered several judicial precedents to determine the taxability of the waiver amount. The CIT(A) cited cases such as ICDS (Karnataka HC), Sulzer India Ltd (Bombay HC), and Reliance Industries (Mumbai ITAT) to support the view that the waiver of a capital liability is not taxable. The Tribunal also referred to the Supreme Court decision in CIT Vs. Mahindra & Mahindra, which held that waiver of a loan does not amount to cessation of a trading liability and is not taxable under Section 41(1) of the Income Tax Act. The Tribunal found that the facts of the present case were identical to those in Mahindra & Mahindra, where the waiver of a loan was considered a capital receipt and not taxable as business income.

Conclusion:
The Tribunal upheld the CIT(A)'s decision, concluding that the waiver of Rs. 1,43,71,02,003/- on redemption of FRNs is a capital receipt and not taxable under Sections 28(i), 28(iv), or 41(1) of the Income Tax Act. The Tribunal dismissed the Revenue's appeal, agreeing with the CIT(A) that the waiver of the loan amount did not constitute business income and was not taxable. The Tribunal also distinguished the case from the Supreme Court decision in T.V. Sundram Iyengar & Sons, noting that the facts were different as the latter involved a trading liability, whereas the present case involved a capital liability.