Waiver of cash loan not income within the purview of section 28(iv)

Seco Tools India Private Limited Vs ACIT (ITAT Pune)

ITAT Pune held that waiver of cash loan by holding company is not income within the purview of section 28(iv) of the Income Tax Act. Accordingly, addition unsustainable.

Facts- The assesse company was known by the name Drillco Hertel Limited. The company is a subsidiary of Kennametal Inc USA, which was holding 50% shares of the assessee company, whereas, Mr J.K.Khanna along with his family members was holding 50% shares of the assessee company as per the Joint Venture Agreement.

For the relevant assessment year, Kennametal Inc USA had advanced a Cash Loan of US$ 5,00,000/- to assessee. Later, Kennametal Inc USA waived the cash Loan of US$ 5,00,000/- advanced to the assesse.

AO treated the same as income u/s 28(iv) of the Income Tax Act, 1961. CIT(A) upheld the order of AO. Being aggrieved, the present appeal is filed.

Conclusion- Held that the said Loan of US $ 500000/- was a cash Loan. Therefore, respectfully following Hon’ble Supreme Court’s decision in the case of CIT Vs Mahindra & Mahindra, it is held that the waiver of cash Loan of Rupees equivalent to US $5,00,000/- is not income within the purview of Section 28(iv) of the Act. Hence, the AO is directed to delete the impugned addition qua US$ 5,00,000/-.

FULL TEXT OF THE ORDER OF ITAT PUNE

This appeal filed by the Assessee is directed against the order of ld.Commissioner of Income Tax(Appeals)-4, Pune dated 20.02.2020 for the A.Y.1998-99. The Assessee has raised the following grounds of appeal:

“1. Ground 1

On the facts and circumstances of the case, and in law, the Ld.Commissioner of Income Tax (Appeals) [‘CIT(A) ’] has erred in passing the order without giving any opportunity of being heard to the Appellant.

The Appellant prays that, since no opportunity of being heard was provided, the order passed by the Ld. CIT(A) to be considered invalid and void and the same should be quashed.

2. Ground 2:

On the facts and circumstances of the case, and in law, the Ld. CIT(A) has erred in confirming an addition on account of waiver of loan of INR 3,63, 72,000 [correct amount is Rs.2, 75,00,000] as business income in the hands of the Company under section 28(iv) of the Income Tax Act, 1961 (‘the Act’), instead of treating it as a capital receipt not liable to tax.

It is prayed that the addition made by the Ld. AO and confirmed by the Ld. CIT(A) be deleted.

3. Ground 3

Without prejudice to the ground no. 2, the appellant submits that on the facts and circumstances of the case, and in law, the Ld. CIT(A) has erred in not appreciating that an amount of Rs. 1,53, 72,000 was on account of waiver of loan which was for acquiring plant and machinery and hence, the said amount could not be treated as a revenue receipt taxable u/s. 28(iv) of the Act and the said amount was to be treated as a capital receipt not taxable at all.

4. Ground 4

Without prejudice to the above grounds, the appellant submits that on the facts and circumstances of the case, and in law, the Ld. CIT(A) has erred in confirming the action of the ld. A. O. in adopting the total amount of loan waiver at INR 3,63, 72,000 by adopting the exchange rate as on the date of loan waiver, instead of considering an amount of INR 2,75,00,000 which was actual amount of loan recorded in the books of the Appellant.

The aforesaid grounds are independent of and without prejudice to each other. The appellant craves leave to add, amend, alter, withdraw, modify and/or substitute, and to withdraw the above ground of appeal.”

2. Brief facts of the case:

In this case the assessee company had filed return of Income for A.Y.1998-99 declaring Loss of Rs.1,47,68,969/- on 30/11/1998. During the year F.Y.1997-98, the assessee company was known by the name Drillco Hertel Limited and it had filed return of Income by the name Drillco Hertel Limited. The Kennametal Inc USA was holding 50% shares of the assessee company and Mr.J.K.Khanna along with his family members was holding 50% shares of the assessee company as per the Joint Venture Agreement dated 11/06/1992.

2.1 On 06/06/1995, the Assessee Company entered into an Equipment Supply Agreement with Kennametal Inc USA. As per the said Equipment Supply Agreement the Kennametal Inc USA agreed to sale its second-hand plant and machinery to assessee for a total purchase price of US$5,00,000/-. As per the said Equipment Supply Agreement, Clause-3.2, the DHL(assessee) shall pay Kennametal Inc the purchase price six years from the date of the equipment shipment. List of equipment was given in Schedule A. However, the Kennametal Inc supplied equipment valuing only US$3,66,000/- during A.Y.1995-96. The assessee claimed depreciation on the said plant and machinery.

2.2 The Kennametal Inc USA also gave US$ 5,00,000/- as loan, separately vide Loan Agreement dated 13^th March, 1995 to the assessee.

2.3 Vide Master Agreement dated 16/11/1998, entered between Kennametal Inc USA, Mr.J.K.Khanna and Drilco Hertel Limited, the Kennametal Inc USA agreed to sale and Khanna agreed to purchase entire shareholding of Kennametal Inc USA in the company Drilco Hertel Limited at a sale price of Rs. 1 per share ( face value of share was Rs. 10 per share). The relevant clauses of the said Master Agreement was as under :

3.1. Kennametal agrees to sell and Khanna agree to purchase the shares which represents the entire shareholding of Kennametal in the company at a sale price of Rs.1/- with the sale to be effective on the closing date and for the consideration set out in clause 4 below.

3.2….

3.3 Kennametal, its subsidiaries and affiliates , hereby waive payment of all amounts due and payable under the Equipment Supply Agreement, the Loan Documents, the amount advances by Kennametal Singapore Ltd to the company and the outstanding account balance of the Company as of October 31, 1998for Goods and Products purchased from Kennametal ,its subsidiaries and affiliates……..(emphasis supplied)

2.4 In the assessment order the AO treated the waiver of loan amount of US$500000/- and waiver of Purchase Price of US$ 366600/- as Income of the Assessee u/s 28(iv) of the Act. Aggrieved by the order of the AO, the assessee filed appeal before the Commissioner of Income Tax (appeal). The Ld.CIT(A) upheld the order of the AO. Aggrieved by the order of the Ld.CIT(A), the assessee filed appeal before the ITAT vide appeal number ITA 690/Pune/2004 . The ITAT Pune vide order dated 31/1/2008 in ITA 690/Pune /2004 set aside the issue to Ld.CIT(A) as under :

Quote , “ We are however not inclined to go into the question whether the income waiver was of the income nature or not ,as this aspect of the matter has not been discussed at all by any of the authorities below. In the interest of justice, however, we deem it fit and proper to remit the matter to the file of the CIT(A) to decide by way of a speaking order and after giving due and fair opportunity of hearing to the assessee. ” Unquote.

2.5 The Ld.CIT(A) again confirmed the order of the AO. Aggrieved by the order of the Ld.CIT(A) dated 20/02/2020, the assessee company has filed appeal before this Tribunal.

Submission of the Authorised Representative of Assessee:

3. The Ld.AR for the assessee submitted paper book. The Ld.AR submitted that the waiver of loan and waiver of purchase price of machinery is a capital receipt and assessee has credited it to Capital Reserve account. Ld.AR submitted that waiver of purchase price of machinery is like waiver of loan only as the assessee was granted a period of six years to pay the price of machinery. The Ld.AR relied on the Hon’ble Supreme Court’s decision in the case of Mahindra and Mahindra 404 ITR 1 (SC), Compaq Electric Ltd, 1001 com 400(SC), and Hon’ble Bombay High Court’s decision in Essar Shipping Ltd Vs CIT 426 ITR 220(BOM).

3.1 Ld.AR vehemently submitted that the loan was cash loan hence outside the domain of Section 28(iv) and 41 of the Act.

Departmental Representative’s Submission:

4. The Ld.DR strongly supported the order of the AO and ld.CIT(A). Ld.DR submitted that there are two separate agreements, one is purchase of Plant and Machinery and another is Loan . The assessee had claimed depression on the plant and machinery purchased from Kennametal Inc. However, the assessee has not paid for the said Plant and Machinery, but claimed depreciation on it without paying for it. The Ld.DR submitted that the case law relied by the AR are not applicable to the facts of the case as all the case laws are on the issue of waiver of Loan but in the case of the assessee it is waiver of the purchase price of the Machinery. Ld.DR also submitted that the Kanna Family had purchased the shares at a price of Rs. 1 per share only vide the Master Agreement. All these transactions has to be seen in totality.

Findings and Discussion:

5. We have heard both the parties and perused the record. Our discussion is in two parts one regarding Sale of equipment of US$3,66,000 and another Cash Loan of US$500000.

Equipment Sale :

6. It is a fact that the Kennametal Inc sold Plant and Machinery of US$3,66,000/- to the assessee on the terms that the purchase price will be paid by the assessee six years from the date of shipment of It is also a fact that assessee had claimed depreciation on the said Plant and Machinery of US$3,66,000/-. Relevant part of the Equipment Supply Agreement are reproduced here as under :

6.1 Equipment Supply Agreement :

2. Sale

Kennametal agrees to Sell and DHL, agree to purchase the equipment on the terms and consideration set forth herein:

3. Consideration and mode of Payment:

3.1 In consideration thereof DHL agrees to purchase the equipment for a total purchase price of US$ 5,00,000/- which amount both parties acknowledge and approve to be the fair market value for the equipment( the purchase price).

3.2 DHL shall pay Kennametal, the purchase price six years from the date of shipment of the equipment by Kennametal to DHL.

3.4 The payment of the Purchase Price shall be non-interest bearing.

6.2 Subsequently, the Kennametal Inc, USA vide Master Agreement dated 16/11/1998 agreed to waive the amount of US$3,66,000, which was the Sale Price of the Machinery, equipment. Thus, the Kennametal Inc has waived the Sale Price of US$3,66,000/- . Thus, the US$3,66,000/- was not loan but it was a business liability on account of Purchase of Plant and Machinery. The relevant clause of the Master Agreement is reproduced as under :

Clause 3.3 : Kennametal, its subsidiaries and affiliates hereby waive payment of all amounts due and payable under the equipment Supply Agreement,………….

6.3 Thus, in the Equipment Supply Agreement the amount is clearly referred as “Purchase Price”. The amount which was outstanding and which was waived was “Purchase Price”. Thus, this was not a Loan . The Master Agreement refers to the waivers of outstanding on account of Goods and Products purchased from Kennametal.

Section 28(iv) is reproduced here as under :

“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;”

6.4 Section 28(iv) refers to “any benefit” arising from business. In this, Kennametal Inc USA, has waived US$ 3,66,000/- which was Purchase Price of the equipment. Thus, by waiver of US$3,66,000/-, the assessee has received benefit, whether convertible into money or not. There is no doubt that this “benefit” has arisen out of business of the assessee. It is also an admitted fact that the assessee has claimed depreciation for the equipment valuing US $ 3,66,000/-. In this case, the assessee, has not paid the Purchase Price for the equipment but claimed the depreciation. We had requested the Ld.AR to submit copy of Balance Sheet, P&L for A.Y.1996-97; however, the Ld.AR could not file the same. The assessee has claimed depreciation on the impugned Equipment, as noted by Ld. CIT(A) in his order as under :

6.5 Thus, as mentioned in the order of Ld.CIT(A), the assessee has claimed total depreciation of Rs. 1,15,46,612/- on the impugned equipment. The depreciation has been claimed by the assessee without paying a single rupee. The depreciation is reduced from the gross total income of the assessee, which reduces the tax liability of the assessee.

6.6 The Hon’ble Supreme Court in the case of Commissioner Vs Mahindra & Mahindra Ltd 404 ITR 1(SC) has held as under :

Quote, “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 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.” Unquote.

6.7 Thus, Hon’ble Supreme Court has held that to invoke Section 28(iv) the benefit which is received has to be in some form other than in the shape of money. In the Case of Mahindra & Mahindra, the company Mahindra & Mahindra had received cash loan. However, in the case of the assessee, the assessee had received Equipment valuing US $3,66,000/- due to purchase of equipment. The assessee had not received any cash Loan of US $ 3,66,000/-. In this case, the assessee had purchased the equipment, for which assessee had not paid. Thus, what actually, assessee had received was equipment, for which, the assessee had not paid anything. Thus, receipt of equipment, is a benefit, which is not in the form of cash. The assessee has also received benefit in the form of depreciation. Therefore, the amount of US$3,66,000/- which is the Purchase Price of the Machinery, equipment is a benefit received by the assessee, hence, it is taxable u/s.28(iv) of the Act. Thus, respectfully following the Hon’ble Supreme Court in the case of Mahindra & Mahindra (supra) we uphold the order of the AO with reference to US $3 66000/-, in principle, that US $ 3,66,000/- is taxable u/s 28(iv) of the Act.

6.8 The assessee had claimed that it was a loan, however, we have held that it was not a loan but assessee had received Machinery and Equipment. Hence, Ground No.3 of the assessee is dismissed.

Loan:

7. There were two Separate Agreements namely, Equipment Supply Agreement dated 6^th June 1995 and Loan Agreement dated 13^th March, 1995. Vide Equipment Supply Agreement dated 6th June, 1995 the Kennametal Inc USA sold Equipment to assessee. Then, there was a separate Loan Agreement dated 13^th March 1995. These two agreements were independent of each other. These are two independent transactions and hence, these independent transactions has to be considered separately. The terms of the Loan Agreement dated 13^th March, 1995, are reproduced here as under :

Relevant Terms of Loan Agreement:

……Kennametal extended to DHL a cash loan of Rupees equivalent to US $ 500000 as evidenced by certain Promissory Note of even date herein between Kennametal and DHL

7.1 Thus, the Kennametal Inc USA had advanced Cash Loan of Rupees equivalent to US $5,00,000/- to Assessee DHL . There was a promissory note.

7.2 This Loan is independent of the Equipment sold by Kennametal Inc USA to assessee valuing US$3,66,000/-. The Loan was in addition to the equipment sold.

7.3 Vide, the Master Agreement dated 16/11/1998, Kennametal Inc has waived the cash Loan of US $ 5,00,000/- which was advanced to the assessee vide Loan Agreement dated 1 3^th March, 1995 . The AO has treated the said cash loan of US $5,00,000/- also as income u/s 28(iv).

7.4 The said Loan of US $ 500000/- was a cash Loan. Therefore, respectfully following Hon’ble Supreme Court’s decision in the case of CIT Vs Mahindra & Mahindra (supra), it is held that the waiver of cash Loan of Rupees equivalent to US $5,00,000/- is not income within the purview of Section 28(iv) of the Act. Hence, the AO is directed to delete the impugned addition qua US $ 5,00,000/-.

7.5 Therefore, the appeal of the assessee is partly allowed as discussed above.

Ground No.4 :

8. It was submitted by the Ld.AR that the assessee has entered in its books of account the value of equipment in Rupees based on the exchange rate applicable on the date of receipt of equipment. The benefit received by the assessee is equipment, hence, while arriving at the value of the said benefit, the exchange rate applicable on the date of receipt of the equipment is to be considered. The AO shall take the Conversion rate on the date of receipt of the Equipment and not the date of waiver. Therefore, while converting the US $3,66,000/-into Rupees, the AO shall consider the rate of exchange applicable on the date of receipt of the equipment. Accordingly, the Ground number 4 is allowed for statistical purpose.

8.1 We had asked the Ld. AR to submit copy of the Balance Sheet, Annual report of the assessee for the year in which these equipment were received by the assessee. Accordingly, the Ld.AR was given time. However, the Ld.AR could not submit the same. Accordingly, the Ground No.4 is allowed for statistical purpose.

Ground No.1 :

9. The Ld.AR submitted that the assessee will not like to press for the Ground No.1. Accordingly, the Ground No.1 is dismissed as not

10. Accordingly, in above terms, the appeal of the assessee is partly allowed.

Order pronounced in the open Court on 3 1^st March, 2023.