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Facts
Mithi Software Technologies Private Limited, the assessee, filed an appeal against an assessment for A.Y. 2014-15. The Assessing Officer (AO) and CIT(A) made an addition of Rs. 75 lakhs on the waiver of non-convertible debentures, treating it as a revenue receipt taxable under sections 28(iv) or 41(1) of the Income Tax Act, 1961. The assessee contended it was a capital receipt and the debentures were for capital purposes. Additionally, the AO disallowed the set-off of brought forward business losses of Rs. 1,09,60,556 and unabsorbed depreciation of Rs. 1,03,38,647, despite them being declared in the return of income.
Held
The tribunal, relying on the Supreme Court's decision in CIT Vs. Mahindra & Mahindra Ltd., held that the waiver of debentures, being a receipt in the nature of money, is not taxable under Section 28(iv). It also found Section 41(1) inapplicable as no prior deduction for interest on these debentures was claimed. Consequently, the addition of Rs. 75 lakhs was deleted. The tribunal further directed the AO to allow the set-off of brought forward business losses and unabsorbed depreciation, stating that the CIT(A)'s demand for further proof was unwarranted given the details in the return of income. Ground No.3 (general) was dismissed.
Key Issues
Whether the waiver of non-convertible debentures is taxable as a revenue receipt under Section 28(iv) or 41(1) of the Income Tax Act, 1961; and whether the assessee is entitled to set off brought forward business losses and unabsorbed depreciation.
Sections Cited
Income Tax Act, 1961, Section 250, Section 143(3), Section 28(iv), Section 41(1), Section 72, Section 32(2), Section 271(1)(c), Section 36(1)(iii)
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Income Tax Appellate Tribunal, PUNE BENCHES “SMC” :: PUNE
Before: MS.ASTHA CHANDRA & DR.DIPAK P. RIPOTE
ORDER
PER DR. DIPAK P. RIPOTE, AM:
This appeal filed by the Assessee against the order of ld.Addl./Joint Commissioner of Income Tax(Appeal), Agra passed under section 250 of the Income Tax Act, 1961 for the A.Y.2014-15 dated 25.08.2025 emanating from the assessment order u/s.143(3) of Income Tax Act, 1961 dated 30.12.2016. The Assessee has raised the following grounds of appeal : “On the facts and circumstances of the case and in law the learned Commissioner of Income Tax(Appeals) has erred :
Ground No.1 :
In upholding the addition of Rs.75,00,000 being waiver of non- convertible debentures on grounds that it is a revenue receipt taxable u/s.28(iv)/41(1) of the Income-tax Act, 1961. i. the debentures were capital borrowings from SIDBI Venture Capital Ltd and utilized for financing the business structure and not for trading activity ii. the waiver of such capital liability does not give rise to taxable income iii. the learned CIT(A) has not clearly specified the exact section under which the addition is sustained, indicating uncertainty by invoking both section 28(iv) and 41(1) simultaneously, which are mutually exclusive in nature. iv. The addition sustained by the CIT(A) is not justified, based on mere presumptions and surmises, and therefore needs to be deleted.
Ground No.2 :
In confirming the AO’s action of not allowing set-off of brought forward business loss of Rs 1,09,60,556 and unabsorbed depreciation of Rs.1,03,38,647, though duly declared in the RETURN OF INCOME, available and claimed as per law u/s 72 and 32(2). The appellant pleads that the denial of such set-off is contrary to the provisions of the Act and principles of natural justice and ought to be allowed.
Ground No.3 :
The appellant pleads for directions allowing the appeal and craves leave to, add to, alter, amend, modify or withdraw any or all grounds of appeal
.” 2 Findings & Analysis :
2. We have heard both the parties and perused the records. In this case, as per assessment order, Assessee is a Company. It had e- filed Return of Income for A.Y.2014-15 on 24.09.2014 declaring total income at Rs.NIL, after claiming loss of Rs.51,01,433/-. Assessee’s case was selected for scrutiny. During the scrutiny proceedings, Assessing Officer observed that debenture holders of the Assessee-Company had waived off their right in debenture payable of Rs.75 lakhs. Assessee treated it as capital receipt. The Assessing Officer disagreed with submission of assessee. The relevant paragraph 3.2 and 3.3 of the Assessment Order are reproduced here as under : “3.2 It was brought to the attention of the assessee, that if the debentures were issued for capital transaction such as acquisition of assets then the debt waived by the debenture holders is capital receipt not subject to tax. The assessee was given numerous opportunities to prove that the funds received through issue of debentures in the year 2004 are actually utilized for acquiring capital assets & none of the expenses were debited to Profit & Loss account.
3.3 However the assesse has failed to submit any documentary evidence to prove that the funds received through issue of debentures were actually utilized for acquiring capital assets. Hence, the waiver of debenture debt by the debenture holders is treated as revenue receipt & 2.1 Thus, Assessing Officer made an addition of Rs.75 lakhs without referring to any section. Aggrieved by the same, Assessee filed appeal before the ld.CIT(A). Ld.CIT(A) confirmed the addition stating that Assessee failed to discharges its onus that borrowed funds were utilized for creation of capital structure. Therefore, ld.CIT(A) held that waiver is taxable under section 28(iv) or Section 41(1) of the Act.
2.2 Thus, even the ld.CIT(A) was not sure about the applicability of the section.
2.3 Aggrieved by the order of the ld.CIT(A), Assessee filed appeal before this Tribunal.
2.4 Thus, the question before us is whether the waiver of debentures of Rs.75 lakhs is taxable or not! Admittedly, debentures of Rs.75 lakhs were issued to SIDBI Venture Capital Limited during F.Y.2004-05. Assessee explained that it was a long term borrowing duly reflected in balance sheet. Ld.AR relied on the decision of Hon’ble Supreme Court in the decision of CIT Vs. Mahindra & 4 Mahindra Ltd., in [2018] 404 ITR 1 (SC) order dated 24.04.2018. Ld.AR also relied on the following decisions : I.G. Petrochemicals Ltd., [2023] 155 taxmann.com 45(Karnataka) DCIT Vs. Ramani Exports [2023] 153 taxmann.com 465 (Mumbai Tribunal) ITAT Pune Bench decision in Seco Tools India Private Limited Vs. Addl.CIT in ITA No.445/PUN/2020
The ld.AR submitted that in all the above decisions, the decision of Hon’ble Supreme Court(supra) in the case CIT Vs. Mahindra & Mahindra Ltd., has been followed.
On a specific query raised by Bench, ld.AR specifically submitted no interest pertaining to debentures of Rs.75 lakhs have been debited to Profit and Loss Account in any of the years. This fact pleaded by ld.AR has not been rebutted by ld.Departmental Representative(ld.DR) for the Revenue.
Hon’ble Supreme Court in the decision of CIT Vs. Mahindra & Mahindra Ltd., has held as under : “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 5 [A] 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 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 6
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.
16. Moreover, the purchase effected from the Kaiser Jeep Corporation is in respect of plant, machinery and tooling equipments which are capital assets of the Respondent. It is important to note that the said purchase amount had not been debited to the trading account or to the profit or loss account in any of the assessment years. Here, we deem it proper to mention that there is difference between 'trading liability' and 'other liability'. Section 41 (1) of the IT Act particularly deals with the remission of trading liability. Whereas in the instant case, waiver of loan amounts to cessation of liability other than trading liability. Hence, we find no force in the argument of the Revenue that the case of the Respondent would fall under Section 41 (1) of the IT Act.
To sum up, we are not inclined to interfere with the judgment and order passed by the High court in view of the following reasons:
(a) Section 28(iv) of the IT Act does not apply on the present case since the receipts of Rs 57,74,064/- are in the nature of cash or money.
(b) Section 41(1) of the IT Act does not apply since waiver of loan does not amount to cessation of trading liability. It is a matter of record that the Respondent has not claimed any deduction under Section 36 (1) (iii) of the IT Act qua the payment of interest in any previous year.
18. In view of above discussion, we are of the considered view that these appeals are devoid of merits and deserve to be dismissed. Accordingly, the appeals are dismissed. All the other connected appeals are disposed off accordingly, leaving parties to bear their own cost.”
5.1 Thus, Hon’ble Supreme Court held that Section 28(iv) does not apply on the receipts which are in the nature of money.
In the present case, Assessee had borrowed loan of Rs.75 lakhs. Therefore, respectfully following Hon’ble Supreme Court’s decision(supra), Hon’ble Karnataka High Court(supra) and ITAT Mumbai, we hold that Section 28(iv) of the Act, is not applicable in the case of the Assessee. Hence, no addition can be made u/s.28(iv) of Rs.75 lakhs.
As far as applicability of Section 41(1) is concerned, the ld.AR specifically submitted that no interest was debited to profit and loss account. Ld.DR for the Revenue has not rebutted this fact. Neither the Assessing Officer, nor the ld.CIT(A) has brought on record any evidence to prove that any of the interest pertaining to Rs.75 lakhs was debited to profit and loss account. Therefore, respectfully following Hon’ble Supreme Court(supra), we hold that no addition can be made u/s.41(1) of Rs.75 lakhs. 9 7.2 Accordingly, Ground No.1 raised by the assessee is allowed.
Ground No.2 8. Ld.AR for the Assessee pleaded that Assessing Officer has not allowed set-off of brought forward business loss and unabsorbed depreciation. Ld.AR filed a Chart as under : Sr Assessment Year Date of Filing Loss From Loss From No Business Depreciation 1 2006-2007 28.11.2006 4,539,159 9,299,377 2 2007-2008 Nil Nil Nil 3 2008-2009 29.09.2008 640,332 217,097 4 2009-2010 21.09.2009 1,045,984 404,611 5 2010-2011 Nil Nil Nil 9 2011-2012 13.09.2011 Nil 58,221 6 2012-2013 Nil Nil Nil 7 2013-2014 Nil Nil Nil 9 2014-2015 Nil 4,742,081 359,352 Total loss 10,967,556 10,338,658 Carried Forward to Future years
The Assessing Officer made an addition of Rs.75 lakhs to the returned income of Rs.NIL and determined the total income at Rs.24,05,570/-. Assessing Officer has not uttered a single word regarding not allowing carry forward of losses, set-off of losses and 10 [A] carried forward of unabsorbed depreciation. This ground was raised before ld.CIT(A). However, ld.CIT(A) merely brushed aside the ground stating that assessee has not furnished credible proof. We failed to understand what kind of credible proof ld.CIT(A) was looking for. This is sheer lack of application of mind by ld.CIT(A). In the assessment order in the very first sentence, Assessing Officer has admitted that Assessee had claimed loss of Rs.51,01,433/-. On perusal of the Return of Income filed by Assessee, it is distinctly evident that there was a loss to be carried forward as per Schedule CFL of the Return of Income. Also, Schedule-UD of Return of Income gives the unabsorbed depreciation. Once these facts are on record, there was reason for denying the carried forward of losses and unabsorbed depreciation. In these facts and circumstances of the case, we direct the ld.Assessing Officer to allow the carried forward of losses and unabsorbed depreciation claimed by Assessee in the Return of Income. Accordingly, Ground No.2 raised by the assessee is allowed.
Ground No.3 is general in nature and does not need any adjudication, hence, dismissed.