Loan waiver never claimed as expenditure cannot be taxed u/s 41(1)

PCIT Vs Gujarat State Financial Corporation (Gujarat High Court)

Conclusion: Loan amount which was never claimed by assessee as expenditure, waiver of same could not amount to cessation of trading liability and was not chargeable to tax under section 41(1).

Held:  AO held that waiver of loan amount would be considered as cessation of trading liability and such loan amount was income of assessee under section 41(1).  It was held that CIT(A) has agreed to the submissions of assessee that addition could not be made under Section 41(1). However, CIT(A) had considered that assessee was paying interest on the loan taken by it which was claimed by it as expenditure in profit and loss account, and therefore, it was borrowing with interest which was waived. Therefore, the CIT(A) had applied the ratio of T.V.Sundaram Iyengar and Sons Ltd to hold that the quality and nature of receipt for income­ tax purposes was fixed once and for all, when the receipt was received and that subsequent operation could change its nature, wa not absolute and that in given cases by reason of subsequent events, the amount which initially was not received as trading receipts may be regarded as business income. It was considered by the CIT(A) that if the loan was for the trading purpose and was treated as such from the very beginning in the books of account, the waiver thereof might result in the income. It was, therefore, held that the waiver of the loan should be taxable under the provisions of Section 2(24) read with Section 28(iv) of the Act. 11. However, aforesaid findings given by the CIT(A) were contrary to the facts of the case as the amount credited to capital reserve by assessee pertained to principal amount borrowed without there being any component of interest embedded therein. In that view of the matter the dictum in case of Mahindra and Mahindra Ltd  would be applicable and as such neither Section 28(iv)  nor Section 41(1) would be applicable so as to tax the amount of waiver of loan comprising of principal amount in the hands of assessee.

FULL TEXT OF THE HIGH COURT ORDER /JUDGEMENT

1. This Tax Appeal is filed under Section 260A of the Income Act, 1961 (for short the “Act­1961”) at the instance of Revenue and is directed against the order dated 04.04.2019 passed by the Income Tax Appellate Tribunal, Ahmedabad Bench ‘A’, Ahmedabad (for short “the Tribunal”)in the ITA No.1547/Ahd/2014 for the A.Y. 2009­10.

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