2022 (1) TMI 1399 - AT - Income Tax

Accrual of income - Waiver of term loan - nature of receipt - addition made by the AO by holding that the principal amount of loan/borrowings taken by the assessee from banks and which were waived off by the banks was income of the assessee - HELD THAT - So far as the term loans were concerned these were taken by the assessee for the purpose of capital assets from time to time. With regard to this loan the amount did not come into the possession of the assessee on account of any trading transaction; the receipts were capital in nature being loan repayable over a period of time along with interest. Therefore on waiver of this term loan no benefit or perquisites arose to the assessee in the revenue field. On the other hand it is a capital receipt. Thus the waiver of the term loan cannot be treated as income of the assessee. However waiver of overdraft letter of credit pre-shipment advance export bills benefit had arisen to the assessee. These loans were received in the course of carrying on business of the assessee even if it was treated as loan at the time of receipt of said loan and waiver of said amount will result in revenue receipt and to be liable for tax. Since it was the money had been borrowed for day-to- day affairs and not for purchase any capital assets the said loan were not term loan taken for the acquisition or purchase of capital assets. On the other hand it is used as a circulating capital not as a fixed capital and the money was used in ordinary course of business in carrying the day-to-day affairs of the assessee. Being so writing off the over draft cash credit letter of credit pre-shipment advance and export bills etc. which was received for carrying out the day-to-day operation of the assessee and waiver of the same to be treated as income of the assessee u/s 28(iv) of the Act. Similarly interest waiver if any and if it is allowed as a deduction in any earlier assessment years then only the waiver of such interest could be treated as revenue receipt liable to tax u/s 41(1) of the Act. With this observation we remit this issue in dispute to the file of AO for reconsideration. Appeal filed by the assessee is partly allowed for statistical purposes.

Summary

Issues Involved:

1. Validity of the CIT(A)'s order.
2. Applicability of principles laid down by higher courts.
3. Relevance of the Supreme Court judgment in T.V. Sundaram Iyengar and Sons Limited.
4. Excessiveness and arbitrariness of the addition made by the Assessing Authority.
5. Taxability of the waiver of the principal amount of loan/borrowings as income.

Issue-wise Detailed Analysis:

1. Validity of the CIT(A)'s Order:
The assessee contended that the CIT(A) erred in passing the impugned order. The grounds of appeal raised by the assessee were primarily argumentative and related to the addition of Rs.1,45,22,33,521/- made by the AO. The CIT(A) upheld the assessment order, which included the principal amounts of loan/borrowings waived off by the banks as income of the assessee.

2. Applicability of Principles Laid Down by Higher Courts:
The assessee argued that the CIT(A) failed to follow the principles laid down by the Gujarat High Court in CIT Vs Chetan Chemicals Private Limited and the Karnataka High Court in CIT vs Compaq Electric Limited and CIT Vs Industrial Credit and Development Syndicate Limited. However, the CIT(A) distinguished these cases, noting that they were rendered on different facts. The CIT(A) relied on the Supreme Court's decision in T.V. Sundaram Iyengar & Sons Ltd. and the Bombay High Court's decision in Solid Containers Ltd., which supported the taxability of the waiver of the principal portion of the loan under section 28(iv) of the Act.

3. Relevance of the Supreme Court Judgment in T.V. Sundaram Iyengar and Sons Limited:
The CIT(A) observed that the judgment in T.V. Sundaram Iyengar and Sons Limited was relevant and applicable to the case. The Supreme Court held that if an amount is received in the course of trading transactions and becomes the assessee's own money due to limitation or other statutory rights, it should be treated as income. The CIT(A) applied this principle to the waiver of the principal amount of the loan, treating it as taxable income.

4. Excessiveness and Arbitrariness of the Addition Made by the Assessing Authority:
The assessee contended that the addition made by the Assessing Authority was excessive, arbitrary, and unreasonable. However, the Tribunal found that the CIT(A) had correctly upheld the addition based on the applicable legal principles and precedents.

5. Taxability of the Waiver of the Principal Amount of Loan/Borrowings as Income:
The Tribunal examined the provisions of section 41(1) and section 28(iv) of the Income Tax Act, 1961. It noted that for an amount to be taxable under section 41(1), there must have been an allowance or deduction in earlier years in respect of loss, expenditure, or trading liability. The Tribunal observed that the principal portion of the loan, which was received by the assessee in the capital field, was not in the course of trading activity and was not a surplus from trade. Therefore, it was a capital receipt, and the waiver of the same was not taxable. However, the waiver of overdraft, letter of credit, pre-shipment advance, and export bills, which were received for carrying out day-to-day operations, was treated as income under section 28(iv). The Tribunal remitted the issue of interest waiver to the AO for reconsideration, directing that if the interest was allowed as a deduction in earlier years, the waiver should be treated as a revenue receipt liable to tax.

Conclusion:
The appeal filed by the assessee was partly allowed for statistical purposes. The Tribunal upheld the CIT(A)'s order regarding the principal loan waiver as a capital receipt, not taxable. However, it directed the AO to reconsider the taxability of the interest waiver and the waiver of loans used for day-to-day operations. The order was pronounced in the open court on 21st Jan, 2022.