TMI Blog2019 (6) TMI 915X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee. What has been waived is a part of the loan amount in one-time settlement as the loan asset has been declared as NPA and there were little chances of the recovery of the loan. Moreover, the assessee did not take any benefit in the shape of allowance or deduction in earlier years of such principal loan amount which has been waived. Under the circumstances, the provisions of Section 41(1) are not applicable to the facts and circumstances of the case. Addition u/s 56(2)(vi) - It was not a simple case of waiver without consideration, rather, the consideration of the waiver was the condition of depositing immediately the remaining part of the loan i.e. ₹ 140 lacs and performance of certain other formalities as per the agreement. It is not just a case where the bank has simply waived or remitted the loan amount, rather the bank to secure payment of ₹ 140 lacs, which otherwise the bank was feeling difficult to recover, was the consideration for settlement of the loan account. Hence, the amount received by the assessee as waiver or remission of loan amount cannot be said to be without consideration. Hence, in our view, the provisions of section 56(2)(vi) a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lowing grounds of appeal:- 1. Addition, in respect of Settlement of Loan, amounting to ₹ 1,85,44,140.00, under section 28 (iv) of the Income-tax Act, 1961. 1.1 On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in confirming the addition made by the Assessing officer, after re-computation thereof, for a sum of ₹ 1,85,44,140.00 in respect of waiver of loan on settlement with the bank by invoking the provisions of section 28 (iv) of the Act and some of the judicial pronouncements. 1.2 The Ld. CIT(A) and Assessing officer failed to appreciate the details submissions made by the appellant and the rule of law laid down in various decisions relied upon by the appellant in this behalf. 2. That the appellant craves the right to add, amend or delete any grounds of appeal before it is finally disposed off. 3. The brief facts relating to the issue are that the assessee presently is a Proprietor of M/s Mack Hosiery, which concern was earlier a Partnership firm constituted in the year 1988 and dissolved on 30.09.2002, which was taken over by the assessee as his proprietor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s claimed as expense in respect of aforesaid amount of interest waived by the bank, provisions of section 41(1) of the Act would not be applicable and addition would stand deleted. However, if it is found that assessee has claimed the expenditure, addition would be sustained. The relevant part of the order of the CIT(A) dated 10.12.2010 is reproduced as under:- that the principal amount of loan of ₹ 2,38,93,001/- is taxable u/s 28 as well as u/s 41(1) of the Act. Without prejudice to the above, aforesaid amount is also taxable u/s 56(2) (vi) according to which where any amount of money aggregate value of which exceeds ₹ 50,000/- is received, without consideration, by an individual or HUF, in any previous year from any person or persons on or after the first day of April, 2006, the whole of aggregate value of such sum shall be chargeable to income tax under the head income from other sources . The assessee has received amount of ₹ 2,39,93,001/- on account of waiver of loan by PNB and the same is also taxable under section 56(2) (vi) of the Act. In view of the discussion above, addition of ₹, 2,38,93,001/- is upheld. 8. B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accordingly calculated the waiver of term loan at ₹ 53,48,860/- and waiver of cash credit loan at ₹ 1,85,44,140/-. The Ld. CIT(A) further held that the waiver of term loan calculated on pro-rata basis amounting to ₹ 53,48,860/- since taken for acquiring a capital asset would not result in income exigible to tax. However, the amount of waiver of cash credit loan amounting to ₹ 1,85,44,140/- since was in respect of working capital loan utilized for trading purposes, hence, as per the provisions of section 28 (iv) of the Act, the same was in the nature of Revenue receipt. He, therefore, relying upon the decision of the Hon'ble Bombay High Court in the case of Solid Containers Ltd (supra) treated the same as taxable income of the assessee. The Ld. CIT(A) held that the aforesaid working capital loan of ₹ 1,85,44,140/- resulted in a benefit to the assessee in the shape of remission of a liability, therefore, directed the Assessing officer to restrict the addition to ₹ 1,85,44,140/- as against the total addition of ₹ 2,38,93,001/- made by the Assessing officer. 11. Aggrieved by the above order of the CIT(A), the assessee has co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 15. We have considered the rival submissions. The very language of the section speaks about the value of any benefit or perquisite arising from business or exercise of a profession. Now considering the facts and circumstances of the case, though, the loan was taken for the purpose of business but the same was never taken in the course of business or to say that the loan sourced was not linked to the trading receipts or the like. Similarly the waiver of the loan amount was not in the course of business or in exercise of a profession. A part of the amount was waived by the bank in a one-time settlement because there were little chances of recovery of the entire amount. This one-time settlement was not done as part of the business activity of the assessee, rather, the transaction of the loan and waiver was a separate transaction. Under the circumstances, the waiver of part of the loan amount cannot be said to be a benefit or perquisite arising from business or profession to the assessee. Section 41 (1) and its applicability in the instant case : Properties chargeable to tax - 41. (1) Where an allowance or deduction has bee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... resulting company. 16. The Ld. counsel for the assessee has submitted that not only from reading of above provision but also as settled by law by Courts, Section 41(1) of the Act comes into operation on the following conditions:- 1) The assessee had incurred a trading liability and; 2) This trading liability has been allowed as deduction in an earlier year (s) and; 3) Later on, such liability has either been remitted or has ceased to exist. 17. The Ld. Counsel for the assessee has submitted that in the instant case, no such trading liability had been remitted or ceased to exist, hence, the provisions of section 41(1) do not have any application. 18. The Ld. DR, on the other hand, has relied on the findings of the CIT(A) and has submitted that the aforesaid waiver of the working capital loan is a remission of liability and, hence, the same was taxable under the provisions of section 41(1)of the Act. 19. After considering the rival submissions, we find force in the submissions of the Ld. Counsel for the assessee. As per section 41(1) of the Act, the assessee must hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the 1st day of October, 2009, the whole of the aggregate value of such sum 20. The Ld. Counsel for the assessee in this respect has submitted that the invoking of provisions of section 56(2)(vi) is wrong since the substance of the provisions inserted by Taxation Laws (Amendment) Act, 2006 w.e.f 01.04.2007, is for the governance of gift transactions without consideration with a limit of ₹ 50,000/-. In spite of the applicability of the provisions of sec. 68, section 56(2)(vi) was introduced with the objective to curb the mal-practice being followed by the assessees to bring their own undisclosed income to the economic system through other persons without paying due taxes there on. That initially, in 2004, section 56(2) (v) was brought as a measure to plug revenue leakages. That in case in hand, where there is waiver of loan from Bank, it cannot be said that purpose for which such provision was brought to statute book is being attained by taxing this sum. Even that section 56(2)(vi) is applicable only on Individuals and HUFs and not applicable on other persons as defined in sec. 2(31) of Income Tax Act 1961. That in the case in hand, the assessee is sole prop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quishment, the nature of such loan changes from loan to receipt / gift. Any other interpretation given in this respect may be exploited to come out of and defeat the purpose of section 56(2)(vi) of the Act. 23. However, the moot point which remains under consideration is that if the loan waiver received by the assessee was not a benefit or perquisite under the provisions of section 28(iv) of the Act and neither the same was remission or cessation of business or trading liability u/s 41(1) of the Act, can the same be termed as a receipt and taxed as income from other sources under the provisions of section 56(2)(vi) of the Act. A perusal of the above reproduced provisions of section 56 (2)(vi) of the Act reveals that the amount received by the individual or HUF should be without consideration Now, we have to see whether the part of the loan amount waived was without consideration or not. Admittedly, the loan was advanced by the banker for a consideration of interest. Advancement of loan cannot be said to be without consideration. However, later on due to losses, the loan become NPA. The bank, after considering the remote possibility of recovery ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctivity then the waiver of the loan will be a trading receipt exigible to tax and if the loan is for capital assets, the waiver of the loan will tantamount to capital receipt. Though both the parties have cited various decisions of various courts of law, however, the base decision which has been relied upon by both the parties is the decision of the Hon'ble Supreme Court in the case of case of T.V.Sundram Iyengar Sons Limited 222 ITR 344 (SC). The facts of the said case were that the deposits were taken by the assessee during the course of trade from customers and adjustments were made against these deposits in the course of trade. The unclaimed surplus retained by the assessee was treated as trade receipt. After considering the fact and various case laws the Hon'ble Supreme Court concluded as under;- The principle laid down by Atkinson, J. applies in full force to the facts if this case. If a common sense view if the matter is taken, the assessee, because of the trading operation, had become richer by the amount which if transferred to its profit and loss account. The moneys had arisen out if ordinary trading transactions. Although the amounts receive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the assessee. What is relevant in this respect is that receipts were received by the assessee in the course of its business or to say trading operations and the assessee by way of transfer of the said amount into the profit and loss account had become richer by that amount and the said amount has been retained by the assessee in its business. However, in the case before us, the loan amount was never received by the assessee in the course of business but from the bank as a loan for carrying on or to say for the purpose of business. There is a clear difference between the term in the Course of business and for the purpose of business . Though, the banker was in the business of lending money and receiving interest but to take loan on interest was not the business of the assessee. The business of the assessee admittedly was the hosiery business . The said loan amount was not a trading receipt received from the customers or from the parties with whom the assessee was in business activity. Even on waiver of the loan amount out of the settlement under compulsive circumstances, neither the assessee had become richer nor it can be said that the said amount was retained ..... X X X X Extracts X X X X X X X X Extracts X X X X
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