2023 (6) TMI 1209 - AT - Income Tax

Nature of receipt - one time settlement arising out of waiver of dues of term loan by the lender - Revenue or capital receipt - HELD THAT - We find the Hon ble Supreme Court in the case of T.V. Sundaram Iyengar Sons Ltd 1996 (9) TMI 1 - SUPREME COURT while holding that if an amount is received in the course of trading transaction, even though it is not taxable in the year of receipt being of revenue character, the amount changes its character when the amount becomes the assessee s own money because of limitation or by any other statutory or contractual right. When such a thing happens, commonsense demands that the amount should be treated as income of the assessee. Assessee itself has credited the waiver of the amount to the Profit Loss A/c and offered only the interest component to tax and did not offer the amount treating the same as capital in nature. The waiver of the principal amount which was taken for trading purpose and credited to the profit loss account of the assessee, results in income in the hands of the assessee and therefore, the learned CIT (A) is fully justified in upholding the action of the AO in bringing the same amount to tax in the hands of the assessee. The grounds raised by the assessee are accordingly dismissed.

Summary

Issues Involved:

1. Delay in filing the appeal.
2. Taxability of waiver of principal loan amount under One Time Settlement (OTS).
3. Applicability of Sections 28(iv) and 41(1) of the Income Tax Act.
4. Applicability of Section 2(24)(xviii) of the Income Tax Act.

Summary:

1. Delay in Filing the Appeal:
The assessee filed the appeal with a delay of 5 days citing the Covid-19 pandemic as the reason. The Tribunal condoned the delay after considering the condonation application and affidavit.

2. Taxability of Waiver of Principal Loan Amount:
The assessee, a company engaged in micro-financing, had availed a rupee term loan from Citi Bank, guaranteed by Blue Orchard Micro Finance (BOMF). Due to financial constraints, the assessee entered into a One Time Settlement (OTS) with BOMF, paying a reduced amount. The Assessing Officer (AO) added the waived principal amount of Rs.14,89,99,689 to the total income, treating it as a revenue receipt.

3. Applicability of Sections 28(iv) and 41(1) of the Income Tax Act:
The CIT(A) upheld the AO's decision, stating that the waiver of the loan is taxable under Section 28(iv) as a business income since the loan was for working capital purposes and not for acquiring capital assets. The CIT(A) distinguished this case from the Supreme Court decision in Mahindra & Mahindra, which dealt with loans for capital assets.

4. Applicability of Section 2(24)(xviii) of the Income Tax Act:
The CIT(A) also invoked Section 2(24)(xviii), which includes any assistance in the form of a waiver as income. Since the loan was for business purposes, the waiver was considered taxable income under this section for the assessment year 2016-17.

Tribunal's Decision:
The Tribunal dismissed the appeal, agreeing with the CIT(A) that the waiver of the principal amount, which was credited to the profit and loss account, results in income and is taxable. The Tribunal found that the waiver of the loan taken for trading purposes is taxable under Sections 28(iv) and 2(24)(xviii) of the Income Tax Act, and the decision of the Supreme Court in Mahindra & Mahindra was not applicable as it dealt with loans for capital assets. The appeal was dismissed, and the addition to the income was upheld.