Waiver of loan not cessation of trading liability u/s 41(1). Section 28 (iv) not apply to cash benefits-SC

Waiver of loan not cessation of trading liability u/s 41(1). Provision of Section 28 (iv) do not apply to benefits received in cash-Supreme Court

The instant appeal(s) were filed by the Income Tax Department (Revenue/appellant) against the judgment passed by the High Court whereby the Division Bench of the High Court answering the Reference Applications and confirming findings passed by the Income Tax Appellate Tribunal (Tribunal/ITAT) in favour of the Respondent assessee.

ABCAUS Case Law Citation:
ABCAUS 2318 (2018) (05) SC

Waiver of loan not cessation of trading liability u/s 41(1)

Waiver of loan not cessation of trading liability u/s 41(1)

The respondent was a a company registered under the Companies Act, 1956. Way back, in order to expand its product line, it entered into an agreement with a foreign company (seller) for purchase of required tools and other equipments.

The seller company agreed to provide loan to the Respondent at the rate of 6% interest repayable after 10 years in installments. For this purpose, the Respondent took proper approvals from EBI and concerned Ministry. Later on, the seller company was taken over by another company who agreed to waive the principal amount of loan advanced to the Respondent.

The respondent claimed the amount of waiver as exempt from tax being capital receipt. However, the Income Tax Officer/AO (ITO/AO) concluded that with the waiver of the loan amount, the credit represented income and not a liability. Accordingly, the ITO, held that the amount of loan waived was taxable under Section 28 of the Income Tax Act, 1961 (Act).

CIT (Appeals) held that held that the respondent had received amortization benefit and he dismissed the appeal of the respondent assessee and upheld the order of the ITO with certain modifications. The Tribunal set aside the order passed by CIT (Appeals) and decided the case in favour of the Respondent. The High Court confirmed certain findings of the Tribunal in favour of the Respondent.

The question for consideration before the Hon’ble Supreme Court was as to whether the amount of loan due by the respondent to the foreign company which later on waived off by the lender constituted taxable income of the Respondent or not?

The Revenue contended that since the amount was waived off, it actually amounted to income at the hands of the Respondent in the sense that an amount which ought to be paid by it is now not required to be paid. As a result, it was as a perquisite within the ambit of Section 28(iv) and, alternatively within Section 41 of the Act.

The Hon’ble High Court observed that a plain reading of Section 28 (iv) of the Act, prima facie, it appears that for the applicability of the said provision, the income which can be taxed shall arise from the business or profession. Also, in order to invoke the provision of Section 28 (iv), the benefit which is received has to be in some other form rather than in the shape of money.

It was noted that the amount was received as cash receipt due to the waiver of loan. Therefore, the very first condition of Section 28 (iv) of the Act was not satisfied

It was further observed that a perusal of the provisions of section 41(1)makes it evident that it is a sine qua non that there should be an allowance or deduction claimed by the assessee in any assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee. Then, subsequently, during any previous year, if the creditor remits or waives any such liability, then the assessee is liable to pay tax under Section 41 of the Act.

It was observed that the respondent had been paying interest to the seller as per the contract but the assessee never claimed deduction for payment of interest under Section 36(1)(iii) of the Act. The Hon’ble Supreme Court opined that the “amortization” is an accounting term that refers to the process of allocating the cost of an asset over a period of time, hence, it is nothing else than depreciation. Therefore, the deduction claimed by the Respondent in previous assessment years was due to the deprecation of the machine and not on the interest paid by it.

The Hon’ble Supreme Court further observed that the purchase of plant, machinery and tooling equipments were capital assets of the Respondent and the same had not been debited to the trading account in any of the assessment years. The Apex Court clarified that there is difference between ‘trading liability’ and ‘other liability’. Section 41 (1) of the Act particularly deals with the remission of trading liability. Whereas in the instant case, waiver of loan amounted to cessation of liability other than trading liability.

The Hon’ble Supreme Court rejected the argument of the Revenue that the waiver of loan could be taxed under the provisions of Section 28 (iv) or it would fall under Section 41 (1) of the IT Act. The appeals were accordingly dismissed.

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