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2016 (4) TMI 954 - MADRAS HIGH COURT

2016 (4) TMI 954 - MADRAS HIGH COURT - [2016] 384 ITR 530 - Waiver of loan amount - Scope of section 28(iv) - Principal loan amount waived by the bank under the one time settlement scheme - eligibility or non eligibility to tax - whether the waiver of principal amount would constitute income falling under Section 28(iv) of the Income Tax Act being the benefit arising for the business? - Held that:- What is treated as income chargeable to income tax under the head 'profits and gains of business o .....

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ave dinner in a restaurant, it is a benefit of perquisite, which has a monetary value. If the holder of the voucher is entitled to transfer it to someone else for a monetary consideration, it becomes a perquisite convertible into money. But, irrespective of whether it is convertible into money or not, it should have a monetary value so as to attract Section 28(iv). A monetary transaction, in the true sense of the term, can also have a value. Any number of instances where a monetary transaction c .....

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product. We do not know why it should not happen in the case of waiver of a part of the loan. Therefore, the finding recorded in paragraph 27.1 of the decision in Iskraemeco Regent Limited [2010 (11) TMI 43 - Madras High Court ] that Section 28(iv) has no application to any transaction, which involves money, is a sweeping statement and may not stand in the light of the express language of Section 28(iv). In our considered view, the waiver of a portion of the loan would certainly tantamount to th .....

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ment is made in monthly, quarterly, half yearly or yearly instalments, the instalment is divided into two components, one relating to interest and another relating to a portion of the principal. To the extent of the principal repaid, the liability as reflected in the balance sheet gets reduced. The interest paid on the principal amount of loan, will be allowed as deduction, in computing the income under the head "profits and gains of business or profession", as per the provisions of the Act. - .....

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ng from the date on which the capital was borrowed for the acquisition of the asset, till the date on which such asset was put to use, shall not be allowed as deduction. - Therefore, it is clear that the moment the asset is put to use, then the interest paid in respect of the capital borrowed for acquiring the asset, could be allowed as deduction. When the loan amount borrowed for acquiring an asset gets wiped off by repayment, two entries are made in the books of account, one in the profit .....

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an shown on the liabilities side of the balance sheet is reduced and the amount shown as Capital Reserves, is increased to the extent of waiver. Alternatively, the amount representing the waived portion of the loan is shown as a capital receipt in the profit and loss account itself. - Decided in favour of revenue - Tax Case (Appeal) No. 278 of 2014 - Dated:- 22-4-2016 - V. Ramasubramanian And T. Mathivanan, JJ. For the Appellant : Mr. T. Ravikumar, Senior Standing Counsel - IT For the Respondent .....

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ng the course of its business is not exigible to tax? 2. Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal ought to have seen that the waiver of principal amount would constitute income falling under Section 28(iv) of the Income Tax Act being the benefit arising for the business?" 2. Heard Mr.T.Ravikumar, learned Senior Standing Counsel appearing for the Revenue and Mrs.Dr.Anita Sumanth, learned counsel for the respondent/assessee. 3. The assessee .....

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e amount had to be paid on or before 30.4.2006. The company paid only a sum of ₹ 93,89,000/-. 5. The Assessing Officer was of the view that since the assessee accepted the One Time Settlement Scheme, they should have shown the entire interest waived by the bank as income under Section 41(1) on accrual basis during the relevant assessment year. The Assessing Officer found that the total amount waived was ₹ 10.50 Crores and that as per the assessees accounts, the total interest and pri .....

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id. Though the assessee was to have paid the entire amount of ₹ 10.50 Crores by 30.4.2006, they paid an amount of ₹ 17.21 lakhs only. Therefore, the One Time Settlement sanctioned, lapsed. However, in the financial year 2006-07 (Assessment Year 2007-08), the appellant complied with the terms of One Time Settlement and obtained a No Due Certificate from the bank. Under such circumstances, the First Appellate Authority held that the merer acceptance of the conditional offer of the Indi .....

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him the relevant ledger accounts and the confirmation from the bank as on 31.3.2006. Thereafter, the first Appellate Authority held that it was wrong on the part of the Assessing Officer to conclude that the payment of ₹ 93,89,844/- was just a book entry. The first Appellate Authority concluded that it was evident from the records that the appellant actually paid ₹ 1,20,26,254/- during the financial year 2005-06. 8. On the issue of addition of ₹ 4,79,45,628/- under Section 28(i .....

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sue, the Tribunal remanded the matter back to the Assessing Officer for a fresh consideration. There is no appeal either by the assessee or by the Revenue, on the order of remand relating to the said issue. 10. On the only remaining issue namely the deletion of the principal portion of the term loan waived by the bank, the Tribunal held in para 12 of its order that the term loan had admittedly been used by the assessee for acquiring capital assets. Therefore, the Tribunal followed the decision o .....

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apital assets. When the assessee became a sick industrial undertaking, they approached the BIFR. Under a Scheme of Rehabilitation sanctioned by the BIFR, a one time settlement was arrived at between the assessee and the Bank. The assessee credited the waiver of principal amount to the capital reserve account in the balance sheet treating it as capital in nature. But, the Assessing Officer treated the amount as income under Section 28(iv) read with Section 2(24). The assessee's appeal was dis .....

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is Court held that Section 28(iv) has no application to loan transactions and that therefore, it cannot be termed as income taxable as a receipt. 13. However, drawing our attention to the definition of the expressions "income" and "total income" under Sub-sections (24) and (45) of Section 2 and the provisions of the charging Section 4 as well as the relevant provisions of Sections 28(iv), 41(1) and 59, it is contended by Mr.T.Ravikumar, learned Standing Counsel for the Depart .....

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] and (iv) Rollatainers Ltd. v. CIT [339 ITR 54]. 15. In so far as the decision of this Court in Iskraemeco Regent Limited, on the basis of which the Commissioner (Appeals) as well as the Tribunal decided the dispute in favour of the assessee is concerned, it is submitted by Mr.T.Ravikumar, learned Standing Counsel for the Department that the Supreme Court has already granted leave to the Department and the decision of this Court is the subject matter of Civil Appeal No.5751 of 2011 on the file .....

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f the Act to include several things, some of which that may be of relevance for the case on hand, are as follows: (a) any sum chargeable to income tax under Clauses (ii) and (iii) of Section 28 or Section 41 or Section 59; (b) any sum chargeable to income tax under Clause (iiia) of Section 28; (c) any sum chargeable to income tax under Clause (iiib) of Section 28; (d) any sum chargeable to income tax under Clause (iiic) of Section 28; and (e) any sum chargeable to income tax under Clause (iv) of .....

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ng such year, or (iii) accrues or arises outside India during such year. 20. Under Section 4(1), income tax shall be charged in respect of the total income of the previous year of every person. It must be noted at this stage that while the expression "total income" is defined in Section 2(45) to mean what is referred to in Section 5, the expression "income" is defined in Section 2(24) to include the list of things provided in various clauses. In other words, the definition of .....

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trading liability, by way of remission or cessation of the liability. Section 41(1) requires to be extracted and hence, it is extracted as follows: "Section 41: (1) Where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee (hereinafter referred to as the first-mentioned person) and subsequently during any previous year (a) the first-mentioned person has obtained, whether in cash or in any other .....

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hat year or not; or (b) the successor in business has obtained, whether in cash or in any other manner whatsoever, any amount in respect of which loss or expenditure was incurred by the first-mentioned person or some benefit in respect of the trading liability referred to in clause (a) by way of remission or cessation thereof, the amount obtained by the successor in business or the value of benefit accruing to the successor in business shall be deemed to be profits and gains of the business or p .....

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f such liability in his accounts. Explanation 2. - For the purposes of this sub-section, "successor in business" means (i) where there has been an amalgamation of a company with another company, the amalgamated company; (ii) where the first-mentioned person is succeeded by any other person in that business or profession, the other person; (iii) where a firm carrying on a business or profession is succeeded by another firm, the other firm; (iv) where there has been a demerger, the resul .....

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loss account. The Income Tax Officer took the view that these amounts represented surplus that had arisen as a result of trade transactions and that therefore, the amounts had the character of income. Therefore, the Assessing Officer added these amounts as the income of the assessee for the purpose of assessment. The Commissioner (Appeals) deleted these additions and the same was upheld by the Tribunal. On an application under Section 256(2) to the High Court, the High Court held that the issue .....

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if the deposits were originally of a capital nature, their character will not change merely by lapse of time and even when the amount was taken to the profit and loss account of the assessee. The reasoning behind the second view was that the origin of the amount may be the business activity of the assessee, but every receipt need not be an income. 25. The question that was actually taken up for consideration by the Supreme Court in T.V.Sundaram Iyengar & Sons was as to whether the deposits, .....

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his own, it would not alter that character. The Supreme Court noted that this test laid down by Lord Greene formed the basis of several judgments delivered by our courts. 26. After taking note of the principle of law laid down by Lord Greene, the Supreme Court considered a few decisions of different High Courts as well as the Supreme Court, where the Courts distinguished the decision in Morley. Thereafter, the Supreme Court pointed out that the amounts in question were not in the nature of secur .....

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ch distinguished the decision in Morley. On the basis of the said opinion, the Supreme Court held that the assessee became richer, by the amount, which it transferred to its profit and loss account and that those monies had arisen out of ordinary trading transactions. The Supreme Court observed that although the amounts received originally were not of income nature, the amounts remained with the assessee for a long period unclaimed by the trade parties and that by lapse of time, the claim became .....

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ight. When such a thing happens, commonsense demands that the amount should be treated as income of the assessee." 28. In Solid Containers Limited Vs. D.C.I.T. [308 ITR 417], a Bench of the Bombay High Court was concerned with a case, in which, a loan obtained by the assessee during the previous year for business purposes was written back as a result of the consent terms between the parties. The assessee claimed that the loan was the capital receipt and was not claimed as deduction from the .....

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[261 I.T.R. 501] to the effect that in relation to such transactions, Section 28(iv) was not attracted. But, the Bombay High Court followed the decision in T.V.Sundaram Iyengar & Sons and rejected the claim of the assessee. 29. In Logitronics, the Delhi High Court was concerned with the very same questions that we are called upon to deal with in this case. In the case before the Delhi High Court, the assessee availed a loan from the State Bank of India, but failed to discharge its liability. .....

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tion. The Assessing Officer looked at the expanded meaning of the expression 'income' under Section 2(24) and held that the principal amount of loan written off was nothing but gain/income in the hands of the assessee by relying upon Section 28(iv) and 41(1). The assessee's first appeal was allowed by the Commissioner, but his order was reversed by the Income Tax Appellate Tribunal, forcing the assessee to file a tax case appeal before the High Court of Delhi. 30. In Logitronics, two .....

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(2) Whether waiver of loan, a subsequent event has the effect of changing the nature and character of loan, a capital receipt into a trading receipt and therefore, the ratio of the judgment of the Honourable Supreme Court in CIT Vs. T.V. Sundaram Iyengar & Sons Limited [(1996) 222 ITR 344], wherein unclaimed deposits received in the course of trading transaction were held to be taxable is applicable to waiver of loan?" 31. Before proceeding with the discussion on the substantial questi .....

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started with the decision of the Supreme Court in T.V.Sundaram Iyengar & Sons and after analysing the same in great detail, the Delhi High Court took note of the decision of this Court in Iskraemeco Regent Limited, on which, heavy reliance is placed in this case by the assessee. 33. On the basis its analysis of the decision of this Court in Iskraemeco Regent Limited, the Delhi High Court came to the conclusion in paragraph 23 of the report that 'in the context of waiver of loan amount, .....

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iners, the Delhi High Court was again concerned with a case where in terms of a corporate debt restructuring package worked out between the assessee and the bank, a portion of the principal and interest were waived. The Income Tax Appellate Tribunal held that the waiver of the working capital loan utilised towards the day-to-day business operations resulted in manifest in the revenue field and hence, was taxable in the year of waiver. 35. Finding on facts that the term loans in question were tak .....

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from the beginning in the books of account, the waiver thereof may result in the income, more so when it is transferred to the profit and loss account. 37. But, the Delhi High Court, both in Logitronics as well as in Rollatainers, did not take note of one fallacy in the reasoning given in paragraph 27.1 of the decision of this Court in Iskraemeco Regent Limited. In paragraph 27.1 of the decision in Iskraemeco Regent Limited, this Court held that Section 28(iv) speaks only about a benefit or per .....

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o income tax under the head 'profits and gains of business or profession' under Section 28(iv), is "the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession." 39. Therefore, it is not the actual receipt of money, but the receipt of a benefit or perquisite, which has a monetary value, whether such benefit or perquisite is convertible into money or not, which is what is covered by Section 28(iv). Say for .....

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n also have a value. Any number of instances where a monetary transaction confers a benefit or perquisite that would have a value, can be conceived of. There may be cases where an incentive is granted by the supplier, waiving a portion of the sale price or granting a rebate or discount of a portion of the price to be paid, when the payments scheduled over a period of time, are made promptly. It is needless to point out that in such cases, the prompt payment of money itself brings forth a benefit .....

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an would certainly tantamount to the value of a benefit. This benefit may not arise from "the business" of the assessee. But, it certainly arises from "business". The absence of the prefix "the" to the word "business"makes a world of difference. 40. We shall now turn our attention to the distinction sought to be made between the waiver of a portion of the loan taken for the purpose of acquiring capital assets on the one hand and the the waiver of a portion .....

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rest and another relating to a portion of the principal. To the extent of the principal repaid, the liability as reflected in the balance sheet gets reduced. The interest paid on the principal amount of loan, will be allowed as deduction, in computing the income under the head "profits and gains of business or profession", as per the provisions of the Act. 42. But, Section 36(1)(iii) makes a distinction. The amount of interest paid in respect of capital borrowed for the purpose of busi .....

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