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Facts
The assessee availed loans for business purposes, and a portion of the principal loan amounting to Rs. 14,44,13,224 was waived by the lender under a One Time Settlement. The Assessing Officer treated this waiver as taxable income under Section 28(iv), but the CIT(A) deleted the addition.
Held
The Tribunal held that Section 28(iv) of the Income Tax Act, 1961 applies only to benefits or perquisites in kind, not in money. Since the loan waiver was in monetary terms, it did not attract Section 28(iv). The Revenue also failed to provide evidence for Section 41(1) applicability.
Key Issues
Whether the waiver of a principal loan amount is a taxable receipt under Section 28(iv) of the Income Tax Act, 1961, and whether the CIT(A) exceeded powers under Section 251(1)(a) by not adjudicating an issue.
Sections Cited
28(iv), 41(1), 251(1)(a), 36(1)(iii)
AI-generated summary — verify with the full judgment below
सुनवाई की तारीख/Date of Hearing : 19/05/2025 उदघोषणा की तारीख/Date of Pronouncement : 28/05/2025 आदेश/Order PER LALIET KUMAR, J.M: This is an appeal filed by the Revenue against the order of the Ld. CIT, Appeal, Addl/JCIT(A) Prayagraj dt. 14/02/2024 pertaining to Assessment Year 2020-21. 2. In the present appeal the Revenue has raised the following grounds:
1. Whether on the facts and circumstances of the case, the Ld. CIT(A) has not erred in allowing the appeal of the assessee by holding that the principal amount of Rs. 14,44,13,224/- out of total loan waived is not a taxable receipt u/s 28(iv) of the Income Tax Act, 1961?
2. Whether on the facts and circumstances of the case, the Ld. CIT(A) has not erred in following the judgment of the Hon'ble Apex Court in the case of Mahindra & Mahindra Ltd. (2018) without appreciating the fact that the loan taken by the assessee was for working capital and waiver of it was a taxable receipt under the Income Tax Act, 1961?
3. Whether the Ld. CIT(A) was justified in passing the order without adjudicating the issue at hand. As per Section 251(1)(a), the power of CIT(A) to set aside the case to the file of the AO has been taken away by Finance Act, 2001 w.e.f. 01.06.2001, and that the directions of the CIT(A) to the AO in para 9.5 of the Order virtually amount to setting aside the issue?
4. It is prayed that the order of the Ld. CIT(A) be set aside and that of the Assessing Officer be restored. 3. Brief facts of the case are that the assessee had availed various loans from IDBI Bank for business purposes, including for working capital requirements. During the year under appeal, a portion of the loan amounting to Rs.14,44,13,224/- was waived by the lender pursuant to a One Time Settlement (OTS). The Ld. AO treated this waiver as taxable income under Section 28(iv) of the Income Tax Act, 1961, holding it to be a benefit arising from the assessee's business, and added the said amount to the total income.
4. The assessee carried the matter in appeal before the Ld. CIT(A), who deleted the addition by primarily relying upon the judgment of the Hon’ble Supreme Court in the case of Mahindra & Mahindra Ltd. [(2018) 404 ITR 1 (SC)]. The Ld. CIT(A) held that the waiver of loans, on the facts of the case would not fall within the ambit of Section 28(iv) as the benefit arising is monetary in nature, and not in kind.
5. The Revenue is aggrieved by the deletion and contends that the Ld. CIT(A) erred in applying the aforesaid judgment to the facts of the present case. It was argued that the waiver of principal amount of such loan resulted in a trading receipt, taxable under the provisions of the Act.
6. On the other hand, the Ld. AR supported the findings of the Ld. CIT(A). It was submitted that IDBI Bank had settled the outstanding loan dues under an OTS for Rs.33,69,64,341/- as against the total outstanding dues of Rs.48,13,77,630.05, thereby waiving Rs.14,44,13,289/-. Our attention was drawn to page 46 of the paper book, specifically Note 34.1(a) of the standalone financial statements for the year ending 31.03.2020, which mentions the waiver of Rs.14.43 crores on principal and Rs.10.04 crores on interest. The Ld. AR stated that waiver of interest was already offered to tax and the same is not the subject matter of present appeal before us.
6.1 The Ld. AR further submitted that the waived principal amount of Rs.14.44 crores was credited to the Profit & Loss Account, and the OTS was executed for six different loan accounts vide bank letter dated 08.08.2019. The Ld. AR reiterated that this was a waiver of principal liability and not a trading receipt, and therefore, could not be taxed under Section 28(iv). Considering the cited decision of Hon’ble Apex Court in case of Mahindra & Mahindra Ltd. (supra).
6.2 In support of his submissions, the Ld. AR strongly relied upon the judgment of the Hon’ble Supreme Court in Mahindra & Mahindra Ltd. (supra), wherein it was categorically held that waiver of loans does not constitute a taxable income under Section 28(iv), as the benefit is in the form of money. Furthermore, it was also clarified that Section 41(1) would not apply to such cases where the loan was not originally allowed as a deduction or trading liability in earlier years.
6.3 The Ld. AR also placed reliance on several judicial precedents which have taken a consistent view on the issue, including decisions of the Bombay High Court in Essar Shipping Ltd. (426 ITR 220) and Vibhadeep Investments, the Chandigarh Bench of the ITAT in Jai Pal Gaba, the Bangalore Bench of the ITAT in Kaptronics Pvt. Ltd., the Mumbai Bench in Tikona Trust, the Visakhapatnam Bench in Sri Vasavi Polymers, and the Karnataka High Court in I.G. Petrochemicals Ltd., among others. These judgments uniformly hold that waiver of principal amount of a loan is a capital receipt and not liable to tax under Sections 28(iv) or 41(1).
The Ld. DR, per contra, controverted the arguments and reiterated that since the waiver of principal loan should be regarded as taxable trading receipts.
We have heard the rival contentions and perused the material available on record. The central issue for adjudication is whether waiver of 4 principal loan amounts to a taxable receipt under Section 28(iv) of the Act or not. The Hon’ble Supreme Court in Mahindra & Mahindra Ltd. (supra) has conclusively held that for Section 28(iv) to apply, the benefit or perquisite must be other than in the form of money. In the present case, the waiver of Rs.14.44 crores is in respect of principal loan liability, and the benefit accrued to the assessee is entirely in monetary terms. Therefore, as per this decision, this waiver could not be brought to tax u/s 28(iv).
8.1 Further, there is no material brought on record by the Revenue to demonstrate that the assessee had claimed this and principal loan amount as an allowable deduction or expenditure in any earlier year so as to attract the provisions of Section 41(1). In the absence of such evidence, this plea could not be accepted.
8.2 The Hon'ble Supreme Court in Mahindra & Mahindra Ltd. (supra) held that section 28(iv) applies only where the benefit or perquisite is in kind and not in money. In the present case, the benefit arises due to waiver of loan in monetary terms and hence does not fall within the scope of section 28(iv). Further, no case has been made out by the Revenue to demonstrate applicability of Section 41(1). The relevant observations of the Hon'ble Supreme Court are as under: 12. The first issue is the applicability of Section 28 (iv) of the IT Act in the present case. Before moving further, we deem it apposite to reproduce the relevant provision herein below:— '28. Profits and gains of business or profession.— The following income shall be chargeable to income-tax under the head "Profits and gains of business profession",— (iv) the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession; 13. On a plain reading of Section 28 (iv) of the IT Act, prima facie, it appears that for the applicability of the said provision, the income which can be taxed shall arise from the business or profession. Also, in order to invoke the provision of Section 28 (iv) of the IT Act, the benefit which is received has to be in some other form rather than in the shape of money. In the present case, it is a matter of record that the amount of Rs. 57,74,064/- is having received as cash receipt due to the waiver of loan. Therefore, the very first condition of Section 28 (iv) of the IT Act which says any benefit or perquisite arising from the business shall be in the form of benefit or perquisite other than in the shape of money, is not satisfied in the present case. Hence, in our view, in no 5 circumstances, it can be said that the amount of Rs 57,74,064/- can be taxed under the provisions of Section 28 (iv) of the IT Act.
Another important issue which arises is the applicability of the Section 41 (1) of the IT Act. The said provision is re-produced as under: "41. Profits chargeable to tax.- (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 manner whatsoever, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtained by such person or the value of benefit accruing to him shall be deemed to be profits and gains of business or profession and accordingly chargeable to income-tax as the income of that previous year, whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not; or 15. On a perusal of the said provision, it is evident that it is a sine qua non that there should be an allowance or deduction claimed by the assessee in any assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee. Then, subsequently, during any previous year, if the creditor remits or waives any such liability, then the assessee is liable to pay tax under Section 41 of the IT Act. The objective behind this Section is simple. It is made to ensure that the assessee does not get away with a double benefit once by way of deduction and another by not being taxed on the benefit received by him in the later year with reference to deduction allowed earlier in case of remission of such liability. It is undisputed fact that the Respondent had been paying interest at 6 % per annum to the KJC as per the contract but the assessee never claimed deduction for payment of interest under Section 36 (1) (iii) of the IT Act. In the case at hand, learned CIT (A) relied upon Section 41 (1) of the IT Act and held that the Respondent had received amortization benefit. Amortization is an accounting term that refers to the process of allocating the cost of an asset over a period of time, hence, it is nothing else than depreciation. Depreciation is a reduction in the value of an asset over time, in particular, to wear and tear. Therefore, the deduction claimed by the Respondent in previous assessment years was due to the deprecation of the machine and not on the interest paid by it.
8.3 We find that the amount of Rs.14.44 crores (or Rs.1444.13 lakhs), being the waived portion of the principal loan, was received by the assessee purely in monetary form. Accordingly, the fundamental condition for invoking Section 28(iv) of the Act — that the benefit or perquisite must be in a form other than money — stands unfulfilled. Therefore, the provisions of Section 28(iv) are not attracted in the present case. Further, the Revenue has not brought on record any evidence to demonstrate the applicability of Section 41(1). Therefore, we find no justification to interfere with the findings recorded by the Ld. CIT(A). Accordingly, we uphold the deletion of the addition and confirm the order of the Ld. CIT(A) on this issue.
As regards Ground No. 3, which challenges the powers of the Ld. CIT(A) under Section 251(1)(a) of the Act, we have perused the contents of paragraph 9.5 of the impugned order. While certain observations or directions therein may prima facie appear to be in the nature of a remand, a careful reading of the entire order reveals that the Ld. CIT(A) has recorded a clear and conclusive finding on the non-taxability of the loan waiver. The reference to the Assessing Officer in the said paragraph was merely by way of a precautionary observation, and does not amount to setting aside the matter for fresh adjudication. Therefore, the Ld. CIT(A) has not transgressed the limitations imposed by Section 251(1)(a) of the Act. The objection raised by the Revenue in this regard is found to be without merit and is accordingly rejected.
In view of the above, we do not find any infirmity in the order passed by the Ld. CIT(A). The appeal filed by the Revenue is, accordingly, dismissed.
In the result, the appeal of the Revenue is dismissed.