2020 (6) TMI 401 - AT - Income Tax

Addition u/s 41(1) or u/s 28 - waiver of working capital loan - assessee had received the benefit 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 which included the interest subsidy as well as the working capital loan - Addition deleted by the Ld.CIT(A) - HELD THAT - 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 has gained the benefit by way of one time settlement the same cannot be brought to tax u/s 41(1) because the OCC loan represents the principal which was never claimed as expenditure. AO also did not make out a case that the principal amount was debited to the Profit Loss account in the earlier years. Therefore there is no case for making addition u/s 41(1) in respect of the principal amount. In MAHINDRA AND MAHINDRA LTD. THRG. M.D. 2018 (5) TMI 358 - SUPREME COURT considered the issue with regard to taxing the remission of liability u/s 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 held that section 28(iv) has no application since the receipt was in the nature of cash or money. In the instant case what the assessee has 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 is squarely applicable in the instant case.The appeal of the revenue is dismissed.

Summary

Issues:
Appeal against CIT(A)'s order deleting addition made under section 41(1) of the Income Tax Act, 1961 for a sum of Rs. 1,70,00,000.

Analysis:
1. The appeal was filed by the revenue against the CIT(A)'s order for the Assessment Year 2013-14, seeking condonation of a 1-day delay, which was allowed. The issue revolved around the addition made by the Assessing Officer (AO) under section 41(1) of the Act, which was later deleted by the CIT(A).

2. The AO found that the assessee received Rs. 1.7 crores as a waiver of working capital loan, which was added as income under section 41(1) of the Act. However, the CIT(A) deleted this addition based on precedents set by ITAT Mumbai and ITAT Hyderabad, along with the decision of the Hon'ble Apex Court in the case of Mahindra & Mahindra.

3. The revenue raised grounds challenging the deletion of the addition by the CIT(A), arguing that the waiver of the loan amount should be assessed as income under section 28(i) of the Act. They contended that the loan amount waived should have been carried to 'other reserve' instead of capital reserve, making it liable to be assessed as income.

4. During the appeal hearing, the Departmental Representative (DR) argued that the waived amount should be taxed under section 28(i) of the Act, citing various High Court decisions. However, the Appellate Representative (AR) countered, stating that the waiver related to working capital loan not covered under section 41(1) of the Act and that the AO's case did not fall under section 28(i) of the Act.

5. The Tribunal analyzed the provisions of section 41(1) of the Act, emphasizing the need for a trading liability or expenditure incurred by the assessee in earlier years to tax the benefit received. The Tribunal referred to the decision of the Hon'ble Supreme Court in the case of CIT Vs. Mahindra & Mahindra Ltd to support their conclusion that the waiver of the principal amount did not fall under section 41(1) since it was not claimed as expenditure earlier.

6. The Tribunal further highlighted that the waiver of the loan was not a cessation of trading liability and thus did not warrant taxation under section 41(1) or section 28(i) of the Act. They dismissed the revenue's appeal, upholding the CIT(A)'s decision based on the legal principles and precedents cited.

7. Ultimately, the Tribunal dismissed the revenue's appeal, affirming the CIT(A)'s order. The decision was based on the interpretation of relevant sections of the Income Tax Act and the application of legal precedents, leading to the conclusion that the waiver of the working capital loan did not fall under the purview of section 41(1) or section 28(i) of the Act.

This detailed analysis of the judgment provides a comprehensive understanding of the legal issues involved and the reasoning behind the decision delivered by the Appellate Tribunal.