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TMI Blog2022 (4) TMI 583X X X X Extracts X X X X X X X X Extracts X X X X ..... so 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' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nds may be reversed and that of Assessing officer may be restored. 5. The appellant craves the right to add, alter, amend and / .or delete any of the grounds that may be urged. 2. The facts are that the assessee is a private limited company in the business of manufacturing of DBR equipments for railways. It filed its return of income during the year declaring a nil income on 23.09.2014. Same has been revised on 19.05.2015 declaring loss of ₹ 15,23,278/-. The case was selected under CASS under Limited Scrutiny category and notice was served u/s 143(2) of Income tax Act. The assessment was completed u/s 143(3) of Income tax Act by making an addition of ₹ 2,55,35,871. 3. In the profit and loss account drawn by the assessee company for the financial year ending 31.3.2014, it claimed waiver of loan of ₹ 2,55,35,871 as income. In the computation, this income was claimed as exempt from tax and same was shown as a capital receipts. The AO treated the said income as the value of benefit or perquisite arising from business u/s 28(iv) of Income tax Act. The assessee made its submissions wherein it contested that the said amount of ₹ 2,55,35,871 is a capital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or working capital requirement for taxability u/s. 28(iv) of the Act, the AO relied on T.V. Sundaram Iyengar [1996] 222 ITR 344. According to the CIT(A), as per this decision, it is to be ascertained whether loan is a trading liability or working capital requirement. In that case, the issue pertained to unclaimed security deposit directly taken from customer and not waiver of working capital loan. The Supreme Court held that the security deposit directly taken from customer is directly connected to trading activity whereas in the assessee s case it is in the nature of working capital loan. According to the CIT(A), the unsecured loan in the nature of borrowings for working capital is in the nature of finance transaction and therefore waiver of such working capital loan is different factually and thus this decision relied on by the AO is not applicable to assessee s case. 7. The assessee placed reliance on the Supreme Court decision in the case of CIT v. Mahindra Mahindra Ltd. [2018] 93 taxmann.com 32 (SC). According to the CIT(A), in this case relief was given as the loan was taken for acquisition of capital asset whereas in the present case loan is obtained for working ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o day business of the assessee and the condition laid down in section 28(iv) is not complied with. As per section 28(iv) of the Act, the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession is chargeable to income tax as part of income from business/profession and it is deemed to be income u/s. 2(24) of the Act. The clause does not apply to receipt in cash. To apply this provision, the assessee should have appropriated the sum in question to its Profit Loss account. According to the ld. DR, in the present case the assessee appropriated the sum to Profit Loss account and it represents income of the assessee. Further, it is admitted fact that unsecured loan availed by the assessee has been used in day to day affairs of the assessee company not being acquisition of any capital asset which indicates that assessee has obtained the unsecured loan for its business activity or trading operation. As such, once the assessee transferred the amount to Profit Loss account as income, though it was not originally income in nature, but because of the subsequent action of the assessee it becomes assessed income when t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ( iiia ), ( iiib ), ( iiic ), ( iv ) and ( v ) of section 28, capital gains under section 45, profit and gains of business in accordance with section 44, winning from lotteries, races, etc., and any sum received by the assessee from his employee as contribution to any provident fund so set up. Waiver of principal amount of tax by no stretch of imagination can be treated as income within the meaning of section 2(24) of the Act. However, in that case, the court has not considered the Supreme Court judgment in the case of T.V. Sundaram Iyengar (supra) . 14. In the case of Tosha International Ltd. (176 Taxman 187)(Del), the assessee has not got any deduction on account of acquisition of capital assets as the same was reflected in the balance sheet and not in the profit and loss account, and also the remission of principal amount of loan so obtained from the bank was not claimed as an expenditure or trading liability in any of the earlier previous years. In that case the assessee had acquired capital assets and the decision of Hon'ble Bombay High Court in the case of Mahindra Mahindra Ltd. (supra) was applied. Therefore, the decision of Tribunal in the case of Tosha Interna ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted. The Hon'ble High Court further found that the principal amount of loan had been foregone as a part of take over arrangement, to which the assessee was not a party, and the waiver of principal amount was unexpected, and in the circumstances, such waiver would not constitute business income. The Hon'ble High Court further held that in order to apply section 41(1), the assessee should have obtained a deduction in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee. The assessee had not obtained such allowance or deduction in respect of expenditure or trading liability. In the circumstances, it was held that section 41(1) of the Act was not applicable. The Hon'ble High Court further held that even assuming that the assessee had got deduction of allowance, section 41(1) was not applicable because such deduction was not in respect of loss, expenditure or trading liability. It was lastly held that the tooling constitutes capital asset and not stock-in-trade. From the said decision, it is evident that the loan was obtained for payment of consideration for import of plant and machinery, which constitute capital asset and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssioner relying upon the judgment of the Hon'ble Supreme Court in the case of T.V. Sundaram Iyengar Sons Ltd. (supra). The Tribunal observed that Hon'ble Supreme Court in the case of T.V. Sundaram Iyengar Sons Ltd. (supra) held that if the amount is received in the course of trading transactions, even though it is not taxable in the year of receipt, as being of capital character, the amount changes its character when the amount becomes assessee's own money because of limitation or by any other statutory or contractual right. Where the assessee received deposits in the course of trading transactions, the amount of such credit balances, which were barred by limitation and which were returned back by the assessee to the profit and loss account, were to be assessed as the assessee's income. On further appeal before the Hon'ble High Court, the Hon'ble High Court held that the assessee can hardly derive any advantage from the case of Mahindra Mahindra Ltd. (supra) as in that case, a clear finding was recorded that the purchase consideration was related to capital assets; the toolings were in the nature of dies and the assessee was a manufacturer of heavy veh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and be treated as taxable income. In other words, the principle appears to be that if an amount is received in course of a trading transaction, even though it is not taxable in the year of receipt as being of revenue character, the amount changes its character when the amount becomes if assessee's own money because of limitation or by any other statutory or contractual right. When such a thing happens, common sense demands that the amount should be treated as income of the assessee. 23. In the present case, the money was received by the assessee in course of carrying on his business. Although it was treated as deposit and was of capital nature, at such point of time, it was received by efflux of time the money has become the assessee's own money. What remains after adjustment of the deposits had not been claimed by the customers. The claims of the customers have become barred by limitation. The assessee itself has treated the money as its own money and taken the amount to its profit and loss account. There is no explanation from the assessee why the surplus money was taken to its profit and loss account even if it was somebody else's money. In fact, as Atkinson, J. p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 308 ITR 417 (Bom). 21. In the case of Aries Advertising (P.) Ltd. ( supra ) an amount of ₹ 1,77,886, being the balance due to Printers; Block Makers and Souvenir publishers by the erstwhile firm of an outstanding more than three years had been transferred to general reserve since these amounts had remained unclaimed for a long period of time. It was held by the Hon'ble High Court that in the case of unclaimed balance written back, if a common sense view of the matter is taken, the assessee, because of the trading operation, becomes richer by the amount, which it has transferred to its general reserve account. The money had arisen out of ordinary trading transactions. Although the amounts received originally were not of income nature, but subsequently, it becomes the assessee's income when the amount was written off in the accounts. In this case, the Hon'ble Madras High Court has also observed that once the assessee transferred any amount to the general reserve, it treated the same as the profit. In this connection, reference was made to the decision of Hon'ble Apex Court in the case of Vazir Sultan Tobacco Ltd. v. CIT [1981] 132 ITR 559 , where it ..... X X X X Extracts X X X X X X X X Extracts X X X X
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