TMI Blog2009 (5) TMI 622X X X X Extracts X X X X X X X X Extracts X X X X ..... . CIT [ 1971 (8) TMI 10 - SUPREME COURT] that bad accounting effects neither in favour of the assessee nor against the revenue. Therefore, the fact that the assessee has credited loan waiver amount in its general reserve does not influence the process of determining the exact nature of the issue. Applicability of section 28(iv) - It is clear that the High Court while delivering its judgment in the case of Solid Containers Ltd.[ 2008 (8) TMI 156 - BOMBAY HIGH COURT] has not dissented in any way from the earlier decision in the case of Mahindra Mahindra Ltd.[ 2003 (1) TMI 71 - BOMBAY HIGH COURT] . On the other hand, the Court further reiterated the ratio laid down in the judgment of Hon ble High Court of Bombay in the case of Mahindra Mahindra Ltd. (supra), that the loan availed for acquiring capital assets, when waived, cannot be treated as assessable income. Therefore, it is not possible to hold that as far as the loan waiver of capital account is concerned, the decision of the Bombay High Court in the case of Solid Containers Ltd. (supra), clashes with the judgment of the same Court in the case of Mahindra Mahindra Ltd. (supra). We find that for the purpose of sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ). The decision of the Apex Court in the case of T.V. Sundaram Iyengar Sons Ltd.[ 1996 (9) TMI 1 - SUPREME COURT] relied on by the lower authorities is distinguishable on facts. The decision relied on by the Addl. Commissioner in the case of Solid Containers Ltd. (supra) is also not applicable to the present case for the reason that the said decision does not differ from the ratio laid down in the decision of the Bombay High Court in the case of Mahindra Mahindra Ltd. (supra). We direct AO to exclude the amount in computing the assessable income of the assessee for the impugned AY 2005-06. In the result, the appeal filed by the assessee is allowed. - N. VIJAYAKUMARAN AND DR. O.K. NARAYANAN, JJ. R. Sreenivasan for the Petitioner. C. Karthikeyan Nair for the Respondent. ORDER Dr. O.K. Narayanan, Accountant Member. - This is an appeal filed by the assessee. The relevant assessment year is 2005-06. The appeal is directed against the order of the CIT (Appeals)-IV, Kochi, dated 18-8-2008. The appeal arises out of the assessment completed under section 143(3) of the Income-tax Act, 1961. 2. The assessee-company is engaged in the business of sea food ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nature of income within the meaning of section 2(24)( i ). The definition of the income provided in the above section which is in an inclusive nature postulates that both profits and gains are the income to be treated as profits and gains of business. In the law relating to taxation of business profits, section 28( i ) provides the meaning of profits and gains of business or profession as "the profits and gains of any business or profession which was carried on by the assessee at any time during the previous year". The Assessing Officer held the view that it is a mandate of section 28 to levy income-tax not only on the profits of the business but even on the gains of a business. In the light of the definitions attributed to the expressions "income" and "gains", the waiver benefit enjoyed by the assessee-company should be treated as the income of the assessee from business. 6. The assessee explained that the assessee has arrived at an agreement for One Time Settlement with the banks and there was a partial waiver of the principal loan amounts and this waiver cannot be treated as income under section 41(1) of the Income-tax Act, 1961. Regarding the contention of the assessing aut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... siness transactions. In the present case, it is not so. The assessee submitted before the CIT (Appeals) that the waiver benefits cannot be taxed under section 28( iv ). The assessee-company further relied on the judgment of the Bombay High Court in the case of Mahindra Mahindra Ltd. ( supra ) and that of Gujarat High Court in the case of Chetan Chemicals (P.) Ltd. ( supra ). In the light of the above judgments, the assessee argued that the loan taken by company from banks do not amount to trading liability and the waiver amount cannot be assessed as income either under section 28( iv ) or under section 41(1) of the Act. The assessee further explained that the waiver of the loan amount could not be considered as a non-recurring receipt as there is no actual receipt but only waiver. The Assessing Officer had relied on a decision of the Supreme Court in the case of CIT v. T.V. Sundaram Iyengar Sons Ltd. [1996] 222 ITR 344. The assessee-company sought to distinguish the above decision by stating in the case of T.V. Sundaram Iyengar Sons Ltd. ( supra ), the said company had treated unpaid sundry creditors as income by transferring those amounts to its profit and loss acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he capital account and the waiver of any amount from that capital account cannot be treated as a revenue item so as to bring it to taxation in the nature of income. 12. The learned Chartered Accountant, submitted that this issue has been exhaustively dealt in by the Hon ble High Court of Bombay in the case of Mahindra Mahindra Ltd. ( supra ). He explained that in the said case, loan granted by a foreign company for importing of capital assets were subsequently waived and the question arose whether waiver benefit could be assessed under section 28( iv ) or under section 41(1) as remission of liability. In that case the assessee-company also did not deduct interest on the loan availed from the foreign company. What the foreign company waived was the principal amount of loan. The court held that the assessee continued to pay interest at 6 per cent for a period of 10 years on the loan amount and the agreement for purchase of toolings was entered into much prior the approval of the loan arrangement given by the Reserve Bank of India, and therefore, the loan agreement, in its entirety, was not obliterated by such waiver. The Court further observed that the purchase consideration ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sets necessary for the business. Whether capital account or revenue account , the loan advanced availed from the banks were used for the purpose of the business of the assessee and therefore the benefit arising to the assessee out of the waiver of such loans, should be in the nature of benefits arising to the assessee in the course of carrying on of the business. The learned Additional Commissioner therefore submitted that while applying the provisions of law contained in section 28, there is no substantive distinction between the funds reflected in capital account or in revenue account. 16. In support of his arguments, the learned Additional Commissioner relied on another judgment of the Bombay High Court in the case of Solid Containers Ltd. v. Dy. CIT [2009] 308 ITR 417 where the Court has held that loan taken for trading activity and ultimately, upon waiver the amount was retained in the business of the assessee, the amount waived has become assessee s income liable for taxation. In that case, the assessee had taken a loan for business purposes, which was written back and directly credited to the reserve account, as a result of the consent terms arrived at in a sui ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter they were treated to be profits, as has happened in this case, changed character and, therefore, could be held to be income particularly because the assessee had become richer by reason of such amount having been treated as a profit and further having been transferred to the general reserve." The learned Additional Commissioner, therefore, concluded that the appeal filed by the assessee is liable to be dismissed. 18. We heard both sides in detail and the various arguments in the light of the judicial pronouncements explained before us. 19. First we will marshal the facts of the present case. The assessee had availed term loans from three banks, viz., ICICI Bank Ltd., Standard Chartered Bank Ltd. and Sumitomo Mitsui Banking Corporation (SMBC), Hong Kong. These term loans were availed by the assessee-company for the purpose of acquiring capital assets necessarily to be deployed in the manufacturing system of the assessee-company. The assessee-company became defaulter in making the repayments of the instalments of term loans along with interest mainly due to its bad financial position. At that point of time, may be for the reasons of recession in business and industry, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nge Association Ltd. v. CIT [1961] 41 ITR 495. The Supreme Court has held in the case of Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 that bad accounting effects neither in favour of the assessee nor against the revenue. Therefore, the fact that the assessee has credited loan waiver amount in its general reserve does not influence the process of determining the exact nature of the issue. 22. The facts of the case having made clear, the question is the reduction in the liability availed by the assessee on the basis of One Time Settlement Scheme in respect of its outstanding term loans, whether to be treated as taxable income under section 28( iv ) or under section 41(1) of the Act. 23. Let us first examine the applicability of section 28( iv ). The section seeks to charge the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession, as profits and gains of business or profession. Therefore, what is to be examined is whether the waiver of loan would amount to a perquisite so as to be taxable as such under section 28 of the Act. The Bombay High Court in the case of Mahindra Mahindra Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r securing the toolings from the American company. Later on the American company was taken over and as a term thereof it had been agreed to waive the principal amount of loan advanced to the assessee. The assessing authority came to the conclusion that with the waiver of the loan, the credits represented income and not a liability and, therefore, liable for taxation under section 28 of the Income-tax Act. The Tribunal held that section 28( iv ) was not applicable because benefit of waiver was not received by the assessee in kind. The Tribunal also took the view that even section 41(1) of the Act was not applicable because there was no cessation of trading liability. The findings of the Tribunal have been upheld by the High Court in the above case. 25. The CIT (Appeals) has relied on the judgment of the Supreme Court in the case of T.V. Sundaram Iyengar Sons Ltd. ( supra ) in order to bring home the point that the benefit of remission of loan liability availed by the assessee-company amounts to benefits as construed in section 28( iv ) of the Act and, therefore, liable to be taxed. In fact, the lower authorities have chosen to rely only on the above decision to justify the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in the case of T.V. Sundaram Iyengar Sons Ltd. ( supra ). 27. It is true that the Bombay High Court has held as argued by the learned Additional Commissioner, in its decision rendered by Bombay High Court in the case of Solid Containers Ltd. ( supra ). But it should not be lost sight that the Court while delivering its judgment in the case of Solid Containers Ltd. ( supra ) has also considered the earlier decision of the Bombay High Court in the case of Mahindra Mahindra Ltd. ( supra ), which squarely covered the case of the assessee. The Bombay High Court took a view different from the view taken in the case of Mahindra Mahindra Ltd. ( supra ), after distinguishing the facts of the case in Solid Containers Ltd. ( supra ) In respect of that, the Court held as follows : ". . . Secondly, the purchase consideration related to capital assets. The toolings were in the nature of dyes and the assessee was a manufacturer of heavy vehicles. The import was that of plant and machinery and the waiver could not constitute business. The facts of the present case are entirely different inasmuch it was a loan taken for trading activity and ultimately, upon waiver the amo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re of any loss or expenditure. The Delhi High Court in the case of CIT v. Phool Chand Jiwan Ram [1981] 131 ITR 37 and Bombay High Court in the case of Mahindra Mahindra Ltd. ( supra ) have held that section 41(1) would be applied only if the assessee has obtained any deduction or allowance in respect of any expenditure or loss which is recouped subsequently in whatsoever manner meaning thereby if the assessee has not obtained any such allowance or deduction, section 41(1) would not be attracted at all. There is no doubt in the present case that the assessee never had the benefit of deduction of the term loan availed by it from the banks on capital account. Therefore, section 41(1) has no application to the facts of the present case. 33. The contention of the revenue that the waiver of loan would be hit by section 41(1) if the loan amount is utilized in acquiring a capital asset on which the assessee has obtained depreciation allowance under section 32(1) of the Act was also not accepted by the Court. The Hon ble High Court of Kerala in the case of CIT v. Cochin Co. Ltd. [1990] 52 Taxman 178 has specifically held that payments on loan taken to purchase machinery can ..... X X X X Extracts X X X X X X X X Extracts X X X X
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