Waiver of loan by the creditor: Taxability as a perquisite under Section 28 (iv) vs taxability as a remission of liability under Section 41 (1)
- During the course of assessment proceedings, the Assessing Officer found that the Assessee had received the benefit of Rs.1.70 crores as a result of one time settlement of loan by the Indian Overseas bank. The Assessee was due to Indian Overseas Bank, Visakhapatnam in respect of term loan & OCC for a sum of Rs. 4.30 crores which included the interest subsidy as well as the working capital loan. The interest of Rs.43.81 lakhs was added back to income and taxed under section 43B of the Act. However, the sum of Rs.1.70 crores which represented the waiver of working capital loan was added as income under section 41(1) of the Act in the assessment order made under section 143(3) of the Act.
- From the perusal of section 41(1), it was observed that there must be trading liability or expenditure or loss which was incurred by the Assessee in the earlier years and allowed the same as deduction to tax the same under section 41(1). The twin conditions required to be satisfied for taxing the benefit received by the Assessee. i.e., the expenditure should be Revenue expenditure or the loss incurred and the same ought to have been allowed as deduction. The benefit received by the Assessee should be relating to such expenditure which was claimed and allowed in the earlier years.
- In the instant case, the trading liability or the expenditure or deduction was claimed by the Assessee in respect of interest paid on the OCC loan. In respect of principal amount, though the Assessee had gained the benefit by way of one time settlement the same cannot be brought to tax under section 41(1) because the OCC loan represents the principal which was never claimed as expenditure. The Assessing Officer also did not make out a case that the principal amount was debited to the Profit & Loss account in the earlier years. Therefore, there was no case for making addition under section 41(1) in respect of the principal amount.
- Reliance was placed on the decision of the Hon’ble Supreme Court in the case of CIT Vs. Mahindra & Mahindra Ltd, wherein it was concluded that, on a perusal of the said provision, it was evident that it was 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. The objective behind this section was simple. It was made to ensure that the assessee does not get away with a double benefit once by way of deduction and another by not being taxed on the benefit received by him in the later year with reference to deduction allowed earlier in case of remission of such liability. It was an undisputed fact that the Respondent had been paying interest at 6% per annum to Kaiser Jeep Corporation as per the contract but the assessee never claimed deduction for payment of interest under Section 36 (1)(iii) of the Income Tax Act.
- In the case at hand, the Commissioner of Income Tax (Appeals) relied upon Section 41(1) of the Act and held that the Assessee had received amortization benefit. Amortization is an accounting term that refers to the process of allocating the cost of an asset over a period of time, hence, it was nothing else than depreciation. Depreciation is a reduction in the value of an asset over time, in particular, to wear and tear. 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 had also considered the issue with regard to taxing the remission of liability under section 28(iv) and decided the issue against the revenue and in favour of the assessee, since, the receipt was in the nature of cash or money. The Hon’ble Supreme Court concluded that section 28(iv) of the Act had no application since the receipt was in the nature of cash or money.
- In the instant case, what the Assessee had received was remission of liability which was in the form of cash or money and the difference amount of principal which was settled by onetime payment was never debited to Profit & Loss account. Therefore, the decision of Hon’ble Supreme Court was squarely applicable in the instant case. Moreover, the purchase effected from the Kaiser Jeep Corporation was in respect of plant, machinery and tooling equipments which were capital assets of the Assessee. It was important to note that the said purchase amount had not been debited to the trading account or to the profit or loss account in any of the assessment years. There was a difference between ‘trading liability’ and ‘other liability’. Section 41(1) of the Income Tax Act particularly deals with the remission of trading liability. Whereas in the instant case, waiver of loan amounts to cessation of liability other than trading liability. Hence, it was inferred that neither does section 28(iv) nor does section 41(1) apply to the waiver of the amount of loan.