Case Law Details
Share Microfin Ltd Vs DCIT (ITAT Hyderabad)
ITAT Hyderabad held that waiver of the principal amount, which was taken for trading purpose, which is credited to the profit & loss account results in income in the hands of assessee and accordingly taxable.
Facts- During the course of assessment proceedings, the AO noted from the computation statement that the assessee company has claimed an amount of Rs.14,89,99,689/- as gain in One Time Settlement (OTS) of the term loan borrowings and reduced the same from computation.
From the details furnished by the assessee, he noted that the assessee company has availed rupee term loan of Rs.25.92 crores from Citi Bank against which guarantee was provided by Blue Orchard Micro Finance, Luxembourg (BOMF). Subsequently, the assessee company was referred to the Corporate Debt Restructuring (CDR) to restructure its outstanding debts. Being a non-CDR lender, Citibank invoked the stand-by letter of Credit issued by Citibank International on behalf of BOMF and appropriated the outstanding rupee term loan and closed the account. Thus, BOMF became a creditor to the assess company. Later, as per the settlement agreement between the assessee company and BOMF, out of the total principal amount, assessee company paid final settlement amount of Rs.4.20 crores only. The assessee company stated that out of the total gain of Rs.18,10,78,268/- the principal component was not brought to tax as the same is capital in nature.
However, AO made addition of the principal amount of Rs. 14,89,99,689/- to the total income of the assessee. CIT(A) upheld the addition. Being aggrieved, the present appeal is filed.
Conclusion- We find the Hon’ble Delhi High Court in the case of Logitronics (P) Ltd vs. CIT (2011) 197 Taxman 394 has held that when the loan is taken for trading purpose and not for acquisition of capital asset and is also treated as such in the beginning in the Books of Account, waiver thereof results in income and more so when it was transferred to profit and loss account.
Held that we are of the considered opinion that the waiver of the principal amount of Rs.14,89,99,689/-, which was taken for trading purpose and credited to the profit & loss account of the assessee, results in income in the hands of the assessee and therefore, the learned CIT (A) is fully justified in upholding the action of the Assessing Officer in bringing the same amount to tax in the hands of the assessee.
FULL TEXT OF THE ORDER OF ITAT HYDERABAD
This appeal filed by the assessee is directed against the order dated 23003.2020 of the learned CIT (A)-3, Hyderabad relating to A.Y.2016-17.
2. There is a delay of 5 days in filing of this appeal by the assessee for which the assessee has filed a condonation application along with an affidavit explaining the reasons for such delay. The reasons given therein is due to the prevailing Covid 2019 pandemic. After considering the contents of the condonation application explaining the reasons filed along with the affidavit, the delay in filing of the appeal by the assessee is condoned and the appeal is admitted for adjudication.
3. Facts of the case, in brief, are that the assessee is a company engaged into providing financial services via micro financing. It filed its return of income on 27.09.2016 which was subsequently revised on 26.10.2017 admitting total loss of Rs.307,12,55,288/-. The case was selected for scrutiny and statutory notice u/s 143(2) and 142(1) were issued from time to time to which the AR of the assessee appeared before the AO and filed the requisite details.
4. During the course of assessment proceedings, the AO noted from the computation statement that the assessee company has claimed an amount of Rs.14,89,99,689/- as gain in One Time Settlement (OTS) of the term loan borrowings and reduced the same from computation. From the details furnished by the assessee, he noted that the assessee company has availed rupee term loan of Rs.25.92 crores from Citi Bank against which guarantee was provided by Blue Orchard Micro Finance, Luxembourg (BOMF). Subsequently, the assessee company was referred to the Corporate Debt Restructuring (CDR) to restructure its outstanding debts. Being a non-CDR lender, Citibank invoked the stand-by letter of Credit issued by Citibank International on behalf of BOMF and appropriated the outstanding rupee term loan and closed the account. Thus, BOMF became a creditor to the assess company. Later, as per the settlement agreement between the assessee company and BOMF, out of the total principal amount, assessee company paid final settlement amount of Rs.4.20 crores only. The assessee company stated that out of the total gain of Rs.18,10,78,268/- the principal component was not brought to tax as the same is capital in nature.
4.1 However, to AO did not accept the contention of the assessee. He noticed that the amounts borrowed are for working capital purposes and the same was settled in OTS Scheme. When such amounts resulted in a gain by way of reduction of liability, the same partakes the character of revenue receipt and therefore, should be taxed. He, accordingly, made addition of the principal amount of Rs.14,89,99,689/- to the total income of the assessee.
4.2 Before the CIT (A), the assessee submitted that the waiver of the loan is not arising out of the cessation/remission of the trading liability. Further, the assessee has not claimed any allowance or deduction in respect of the micro financing loan in the computation of income under the head “profits and gains of business of profession”. It was accordingly submitted that the waiver of the loan by the creditor is not taxable as a pre-requisite u/s 28(iv) of the Act or taxable out of the cessation/remission of the liability u/s 41(1) of the Act. The decision of the Hon’ble Supreme Court in the case of CIT vs. Mahindra & Mahindra (404 ITR 1) was relied upon.
5. However, the CIT (A) was not satisfied with the arguments advances by the assessee and upheld the action of the Assessing Officer by observing as under:
“7.7 I have carefully considered the submissions and the contentions of the assessee, and examined the same in the light of the facts and circumstances of the case. Also, I have perused the relevant provisions of the statute and the case laws on this subject.
7.8 At the outset, the moot question involved in this appeal is framed as under:
Whether, in the given facts and circumstances of the case, as per the provisions of the statute applicable to the impugned AY 2016-17, the principal portion of the loan waived under the 0TS agreement is assessable to tax as business income of the assessee?
7.9 Before adjudicating the legal issue/ moot question, it is worthwhile to understand the background facts of the case, including the nature of the loan availed by the assessee.
7.10 As seen from the details and the documentary evidence placed on record, the assessee, being a Non-Banking Financial Company (‘NBFC’ for short), had availed rupee term loan from the Citi Bank, India to the extent of Rs.25,92,00,000/- during the FY 2009-10 relevant to the AY 2010-11, vide Facility Agreement dated 09.10.2009. Further, the said loan was guaranteed by a non-resident investor i.e., M/s. B8OME, and the Citi Bank, London, in turn, gave standby Letter of Credit to the Citi Bank, India, to disburse the rupee term loan to the assessee. Accordingly, the assessee entered into a guarantee fee agreement with M/s. BOMF on 07.10.2009.
7.11 However, due to operational constraints imposed by the enactment of the AP Micro Finance institutions (Regulation of the money lending) Act, 2010, the assessee was referred to the Corporate Debt Restructuring (‘CDR’ for short) Cell, so as to restructure its outstanding debt. At this juncture, it may be noted that, though most of the lenders of the Assessee had restructured their debt ds per the CDR, the Citi Bank, India did not join the CDR scheme. Instead, it invoked the SBCL and appropriated the amount towards the outstanding rupee term loan of Rs.25,92,00,000/- and closed the account in October 2011.
7.12 In view of this, M/s. BOMF stepped into the shoes of the lender and approached the CDR cell. However, the RBI clarified that there is no provision for a foreign lender to be a part of the CDR System. Accordingly, M/s. BOMF made a demand on the assessee to repay the entire amount of the loan. But, the assessee was unable to make the repayment of the loan amount due to the CDR scheme. As a consequence, M/s. BOMF filed a case before the Hon’ble AP High Court, Hyderabad, for the winding up of the assessee on the ground that the assessee was unable to repay the debts.
7.13 Meanwhile, during the pendency of the court case, the assessee and M/s. BOMF had entered into the negotiations to settle the dispute outside the court. Accordingly, they have agreed for settlement, vide Settlement Agreement dated 25.11.2015 (supra). As per the terms of the Settlement Agreement, both the parties had agreed for the OTS for Rs.44,20,00,000/-as against the outstanding loan amount of Rs.25,92,00,000/ .Thus, after considering the net amount of the interest payable, the assessee credited a sum of Rs.18,25,77,061/- to the Profit & Loss a/c under the head “Income from other sources’ towards gain on OTS of the term loan barrowing, which included the interest component of Rs.3,20, 78,579/-, apart from the loan / principal component of Rs.14,89,99,689/-.
7.14 Now, coming to the nature of the loan barrowed by the assessee, it is clearly evident from the documentary evidence placed on the record that the same has not been barrowed towards the acquisition of the capital assets of the assessee company. On the other hand, as seen from the Master Facility. Agreement dated 09.10.2009, at Para No.3, the assessee, being the barrower, shall apply the loans for the purpose of making micro loans. As such, it is an admitted fact that the assessee has utilized the loans for the purpose of working capital, though the nomenclature of the loan is stated to be a term loan.
7.15 At this juncture, it may be noted that the issue of taxability of the waiver of the loan has been the subject matter of judicial scrutiny for a quite some time. To be precise, the Department took a viewpoint that the waiver of the loan was chargeable to tax either u/s.28(iv) of the Act, or u/s. 41(1) of the Act. However, the Hon’ble Supreme Court in the case of Mahindra and Mahindra Limited (supra) has settled a party of the issue, wherein it has been held that in a case of a term loan barrowed for acquisition of capital assets, any interest waiver relating to the principal amount cannot be brought to tax either u/s. 28{iv) of the Act, or u/s. 41(1) of the Act.
7.16 While doing so, the Hon’ble Supreme Court has held that, for applying the provisions of sec.28(iv) of the Act, the benefit must have been received by the assessee in some other form / kind rather than in the shape of money. However, in a case of the waiver of the loan, the amount was received in the form of cash, and, therefore, the same cannot be considered as the income within the meaning of sec.28 (iv) of the Act, observed by the court. In regard to bringing the same to tax u/s.41(1) of the Act, the court has held that there must have been an allowance or deduction which was claimed by the assessee earlier, and, subsequently, the creditor remits or waives off the liability. The head note of the judgment (93 taxmann.com 32 (SC)) is reproduced below for ready reference.
“Waiver of loan for acquiring capital assets cannot be taxed as perquisite under section 28(iv) as receipt in hands of debtor/assessee are in form of cash/money and it also cannot be taxed as a remission of liability under section 41(2) as waiver of loan does not amount to cessation of trading liability.”
(Emphasis Supplied)
7.17 As seen from the above, it is clearly evident that the Hon’ble Supreme Court has decided the issue only with respect to the waiver of the loan taken for acquiring a capital asset, and there was no occasion on the part of the court to adjudicate the issue wherein the loan was taken for the purpose of the working capital. In view of this, I am of the considered opinion that the decision of the Hon’ble Supreme Court in the case of Mahindra and Mahindra Limited (supra) would be applicable only in the event of the waiver of the loan obtained by the assessee for acquiring the capital assets.
7.18 On the other hand, insofar as the waiver of the loan taken for the purpose of the business, whether termed as a working capital or otherwise, but not for the purpose of acquisition of a capital asset, the waiver of the loan is still taxable u/s. 28(iv) of the Act. At this juncture, I have carefully perused all the other decisions relied upon by the assessee, including the decision of Hon’ble ITAT, Hyderabad, but | am of the considered view that, due to distinguishable facts and circumstances of the case, the same are not applicable to the instant case.
7.19 In this regard, I would like to place the reliance upon the decisions of various High Courts and the Hon’ble Supreme Court involving identical set of facts and legal issues, as given below. 1. (Emphasis supplied) CIT VS. Ramaniyam Homes P. Ltd (2016) 384 ITR 530 (Mad.)
2. Solid Containers Ltd Vs. DCIT (2009) 178 Taxman 192 (Bom.)
3. Logitronics P. Ltd Vs. CIT (2011) 333 ITR 386 (Del)
4. Roll Containers Ltd Vs. CIT (2011) 339 ITR 54 (Del): and
5. CIT Vs. TV Sundaram lyengar & Sons Ltd (1996) 88 Taxman 429 (SC)
7.20 As seen from the above, it is clearly evident that the waiver of the loans other than loans barrowed for acquiring the capital assets is subject to the tax u/s. 28(iv) of the Act.
7.21 Be that as it may, even otherwise the waiver of the loan is subject to tax by virtue of newly inserted clause (xviii) of sub-sec. (24) of sec.2 of the Act. To be precise, the definition of income as provided u/s. 2(24) of the Act, was amended by the Finance Act, 2015 with effect from 01.04.2016 i.e.. the AY 2016-17 onwards. Accordingly, the income includes any assistance in the form of the subsidy, or the grant given by the Central or State Government or any authority or body or any agency, shall be considered as the income of the assessee, except where the subsidy or the grant or the reimbursement is considered for the determination of actual cost of the asset. The relevant portion of the statute is reproduced below for ready reference.
2(24)(xvii) of the Act:
“assistance in the form of a subsidy or grant or cash incentive or duty drawback or waiver or concession or reimbursement (by whatever name called) by the Central Government or a State Government or any authority or body or agency in cash or kind or grant other than the subsidy to the assessee reimbursement which is taken into account of determination of the actual cost of the asset in accordance with the provisions of Explanation 10 to clause (1) of section 43 25 (Emphasis supplied)
7.22 Thus, the waiver of the loan originally obtained for the purpose of doing the business, excluding the loan availed for acquisition of the capital asset, would be chargeable to tax as income. In the instant case, it is an admitted fact that the assessee had availed the loan for doing the business of micro finance rather than acquisition of any capital asset for the business. Thus, I am of the considered opinion that the assessee’s case would squarely fall u/s.2(24)(xvii) of the Act. Accordingly, since the impugned AY involved is 2016-17, the addition made by the A0 is by sustained applying the provisions of sec.2(24)(xviil) of the Act.
8.0 SUMMARY:
8.1 In view of the above, notwithstanding the decision of the due to Hon’ble Supreme Court in the case Mahindra and Mahindra Limited (supra), distinguishable facts of the case, the addition made by the AO is sustained both u/s. 28(iv) of the Act and u/s. the grounds of 2(24)(xviii) of the Act. Hence, appeal raised by the assessee on this issue are dismissed.”
6. Aggrieved with such order of the learned CIT (A), the assessee is in appeal before the Tribunal by raising the following grounds:
1. On the facts and circumstances of the case the learned CIT(Appeals) has erred in law, by confirming the addition of Rs. 14.89,99,689/- representing one time settlement arising out of waiver of dues of term loan by the lender, overlooking the fact that the receipt is of capital in nature.
2. The Ld CIT(A) has erred in invoking provisions of Section 2(24)(xvii), which is neither a part of assessee grounds of appeal nor arising out of AOs order nor following due process legally contemplated. Hence addition confirmed on such basis is legally wrong and has to be deleted.
3. That in any case the provisions of Section 2(24)(xvii) are not at all applicable to the facts and circumstances of the assessee case, hence the addition made invoking Section 2(24)(xviii) is wrong and bad in law and to be deleted.
4. That the provisions of section 28(iv) are not at all applicable to the facts and circumstances of the assessee case, as there is no benefit or perquisite arising to the assessee hence the addition made invoking Section 28(iv) is wrong and bad in law and to be deleted.
5. On the facts and circumstances of the case the Ld. CIT(A) has erred on facts in confirming the order of the AO making an addition of a sum of Rs. 14,89,99,689 to the returned income and reduced the loss on the ground that waiver of loan (principal) under an one-time settlement agreement, assumes the character of revenue receipts and hence should be treated as taxable income.
6. The one-time settlement offered to the assessee of the term loan based on the scheme against erosion of capital. The waiver of such term loan has reduced the erosion of capital under the scheme, it will remain as capital transaction, and it can never be treated as revenue.
7. Reliance is placed on the following judicial pronouncements:
a) CIT Vs Sundaram lyengar (T.V.) and Sons Ltd (1 996) 222 IT R 344 (SC)
b) JSW Steels vs. ACIT, ITA No.9
c) ITO vs. TiniPharma Ltd., Hyderabad ((TA No. 669/HYD2016) d) ITO Vs
Gold Chick Hatcheries & Food Ltd., Hyderabad ([TA No. 668/HYD/2016)”
7. The learned Counsel for the assessee strongly opposed the order passed by the CIT (A) in confirming the disallowance made by the Assessing Officer. He submitted that as per the One Time Settlement (OTS) claim dated 25.11.2015, the assessee paid an amount of Rs.4.20 crores to Blue Orchid Finance (BOF) out of the total amount of Rs.24.23 crores which consisted of principal outstanding of Rs.19.09 crores and interest of 5.14 crores. He submitted that the assessee did not offer the gain due to waiver of principal amount of Rs.14.90 crores treating the same as capital receipt. He submitted that the Assessing Officer added the amount of Rs.14.89 crores on the ground that the waiver of the amount borrowed for working capital is a revenue receipt. However, he has not referred to any particular section while adding back the same. He submitted that the learned CIT (A) relying on the decision of the Hon’ble Supreme Court in the case of Mahindra & Mahindra (Supra) erroneously held that the same amount is waiver of the principal amount u/s 28(iv) and section 41(1) of the Act. He submitted that the learned CIT (A) while deciding the issue went by the Head Note of the said decision without applying his mind properly. Referring to the decision of the Hon’ble Supreme Court in the case of Mahindra & Mahindra (Supra), he submitted that the question before the Court was whether the benefit was in cash or in kind. Since the benefit was in cash, it was ruled that Section 28(iv) is not applicable. It was held that the issue whether the loan was applied for capital or revenue expenditure is not relevant in so far as Sec 28(iv) is concerned. It was accordingly held that section 28(iv) is not applicable because benefit is in cash and not in kind.
8. Referring to the provisions of section 41(1)(a), he submitted that the same is also not applicable to the facts of the present case. So far as various decisions relied on by the Revenue are concerned, he submitted that all these decisions were relating to the period before the pronouncement of the decision in the case Mahindra & Mahindra (Supra) by the Hon’ble Supreme Court. He submitted that as per the provisions of section 41(1) of the Act, the profits are chargeable to tax only when the assessee 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. He submitted that the term loan borrowed by the assessee cannot be equated to the assessee claiming any loss, expenditure or trading liability as deduction in any of the earlier years. It is not the case of the Assessing Officer or the CIT (A) that any benefit of such liability was claimed by the assessee in any assessment year. Therefore, the waiver of the term loan, which is upon settlement by a third party, cannot by any stretch of imagination be connected to any loss or expenditure or trading liability contemplated under the provisions of section 41(1). Therefore, the loan waiver cannot be taxed as business profits.
9. Referring to the decision of the Vizag Bench of the Tribunal in the case of ITO vs. Sri Vasavi Polymers (2020) 117 com 236, he submitted that the Tribunal, relying on the decision of the Hon’ble Supreme Court in the case of Mahindra & Mahindra (Supra) held that gain on OTS is not taxable even though, in this case borrowings were utilized for working capital.
9.1 Referring to the decision of the Coordinate Bench of the Tribunal in the case of TINI PHARMA Ltd vide ITA No.669/Hyd/16, he submitted that in this case also the loan was taken for working capital and packing credit and the Tribunal had held that waiver of loan is in the nature of capital receipt and the appeal filed by the assessee was allowed. Relying on various other decisions, he submitted that the order of the CIT (A) being not in accordance with law should be set aside and the disallowance/addition made by the Assessing Officer should be deleted. He also relied on the following decisions:
a) Tirunelveli Motor Bus Service Co. vs. CIT (1970) 78 ITR 55 S.C
b) CIT vs. Gujarat State Financial Corporation (2020) 122 Taxmann.com 101 (Guj.)
c) CIT vs. Gujarat State Financial Corporation (2021) 126 Taxmann.com 154.
d) CIT vs. Pasupati Spinning Weaving Mills Ltd (2017) 79 Taxmann.com 400
10. The learned DR, on the other hand, heavily relied on the order of the Assessing Officer and the CIT (A). He also relied on the following decisions:
a) CIT vs. T.V. Sundaram Iyengar & Sons Ltd (1996) 88 Taxman 429 (SC)
b) CIT vs. Ramaniyam Homes (P) Ltd (2016) 68 com 289
c) Solid Containers Ltd vs. DCIT (2009) 178 Taxman 192)
d) Logitronics (P) Ltd vs. CIT (2011) 197 Taxman 394.
e) Rollatainers Ltd vs. CIT (2011) 15 com 111
11. We have heard the rival arguments made by both the sides, perused the orders of the AO and the learned CIT (A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us by both sides. We find the assessee in the instant case had borrowed loan of Rs.25.92 crores from Citibank for which the BOMF stood as guarantor. Since the assessee could not meet the liabilities, the Citibank invoked the guarantee clause and the BOMF made the payments and accordingly stood in the shoes of the lender. Since the assessee company suffered heavy losses, the company entered into a scheme of merger/demerger, arrangement with Asmitha Microfin Limited (AML) by which there was a transfer of assets/liabilities between the two companies and the liability of the assessee was determined at Rs.24.23 crores consisting of principal outstanding at Rs.19.09 crores and interest of Rs.5.14 crores. The assessee and the BOMF arrived at a One-Time Settlement (OTS) on 25th Nov.2015 for an amount of Rs.4.20 crores for principal and Rs.5.14 crores for interest. We find that out of the total principal of Rs.19.09 crores, the assessee paid an amount of Rs.4.20 crores, but the balance principal amount of Rs. 14,89,99,689/- which was waived was not brought to tax by treating the same as capital in nature.
12. We find the CIT (A) upheld the action of the Assessing Officer, the reasons of which have already been reproduced in the preceding paragraph. It is the submission of the learned Counsel for the assessee that provisions of sec 28(iv) and 41(1)(a) are not applicable to the facts of the present case in view of the decision of the Hon’ble Supreme Court in the case of Mahindra & Mahindra (Supra), the decision of the Vizag Bench of the Tribunal in the case of ITO vs. Sri Vasavi Polymers (Supra)and the decision of the Coordinate Bench of the Tribunal in the case of TINY PHARMA Ltd (Supra) and various other decisions.
13. We do not find any force in the above argument of the learned Counsel for the assessee. The assessee in the instant case is a non-banking finance company and was advancing loans to various entities. It has availed loan from Citi Bank which is for the business of the assessee company and not for acquiring any capital asset like Plant & Machinery, land & building etc., A perusal of the Master Facility Agreement (MAF), copy of which is placed at page 21 to 56 of the Paper Book, shows that the assessee is a Micro-Finance Institution and is seeking to borrow funds to be used to make loan to borrowers in accordance with its micro finance program. We find at Cl.3 of the MAF, the purpose has been mentioned as under:
“3. PURPOSE
The Borrower shall apply all amounts borrowed by it under the Facility (or, as the case may be, Facilities) for the purpose of making Micro-loans, subject at all times to the terms and conditions of this Agreement and for no other purpose whatsoever. The lender shall be under no obligation to monitor or verify the application of amounts borrowed hereunder”.
14. Nowhere it has been mentioned that the loan so obtained is a term loan. Therefore, the amount that has been advanced by Citi Bank to the assessee was in the nature of working capital loan. We find the assessee in the instant case has credited the entire amount of loan waiver of Rs.18,10,78,268/- to the Profit & Loss Account, a factual finding given by the CIT (A) at Para 7.3 of the order and not controverted by the learned Counsel for the assessee. For the sake of clarity, para 7.3 of the CIT (A)’s order is reproduced as under:
“7.3 As far as the accounting of the loan waiver in the books, the assessee credited the entire amount of the loan waiver of Rs.18,10,78,268/- to the Profit & loss a/c. However, for the purpose of taxation, the principal component of Rs.14,89,99,689/- was reduced and the interest component of Rs.3,20,78,579/- was retained as forming part of the income”.
15. We find the Hon’ble Supreme Court in the case of T.V. Sundaram Iyengar & Sons Ltd (Supra) while holding that if an amount is received in the course of trading transaction, even though it is not taxable in the year of receipt being of revenue character, the amount changes its character when the amount becomes the assessee’s own money because of limitation or by any other statutory or contractual right. When such a thing happens, commonsense demands that the amount should be treated as income of the assessee. The relevant observation of the Hon’ble Supreme Court reads as under:
“The principle laid down by Atkinson, J. applies in full force to the facts if this case. If a common sense view of 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 received originally was not of income nature, the amounts remained with the assessee for a long period unclaimed by the trade parties. By lapse of long time, the claim of the deposit became time barred and the amount attained a totally different quality. It became a definite trade surplus. Atkinson, J. pointed out that in Tattersall’s case no trading asset was created. Mere change of method of book-keeping had taken place. But, where a new asset came into being automatically by operation of law, common sense demanded that the amount should be entered in the profit and loss account for the year and be treated income. In other words, the principle appears to be that of an amount is received in course of trading transaction, even though it is not taxable in the year of receipt as being of revenue character, the amount changes its character when the amount becomes the assessee’s won money because of limitation or by any other statutory or contractual right. When such a thing happens, common sense demands that the amount should be treated as income of the assessee.
In the present case, the money was received by the assessee in course of carrying on his business. Although it was treated as deposit and was of capital nature at the point of time it was received, by influx of time the money had become the assessee’s own money. What remains after adjustment of the deposits had not been claimed by the customers. The claims of the customers have become barred by limitation. The assessee itself has treated the money as its own money and taken the amount in its profit and loss account. There is no explanation from the assessee why the surplus money was taken to its profit and loss account even if it was somebody else’s money. In fact, as Atkinson, J. pointed out that what the assessee did was the common-sense way of dealing with the amounts.
Under these circumstances we dispose of the appeals as under:-
The question proposed to be raised is treated as referred under Section 256(2). The question is answered in the negative and in favor of the Revenue. There will be no order as to costs.”
16. We find the Hon’ble Delhi High Court in the case of Logitronics (P) Ltd vs. CIT (2011) 197 Taxman 394 has held that when the loan is taken for trading purpose and not for acquisition of capital asset and is also treated as such in the beginning in the Books of Account, waiver thereof results in income and more so when it was transferred to profit and loss account
17. We find the Hon’ble Madras High Court in the case of CIT v. Ramaniyam Homes (P) Ltd (384 ITR 530) has held that the waiver of principal amount would constitute income falling u/s 28(iv) of the Act being benefit arising from the business and accordingly would be taxable. The relevant observation of the Hon’ble Madras High Court reads as under:
“39. Therefore, it is not the actual receipt of money, but the receipt of a benefit or perquisite, which has a monetary value, whether such benefit or perquisite is convertible into money or not, which is what is covered by Section 28(iv). Say for instance, a gift voucher is issued, enabling the holder of the voucher to have dinner in a restaurant, it is a benefit of perquisite, which has a monetary value. If the holder of the voucher is entitled to transfer it to someone else for a monetary consideration, it becomes a perquisite convertible into money. But, irrespective of whether it is convertible into money or not, it should have a monetary value so as to attract Section 28(iv). A monetary transaction, in the true sense of the term, can also have a value. Any number of instances where a monetary transaction confers a benefit or perquisite that would have a value, can be conceived of. There may be cases where an incentive is granted by the supplier, waiving a portion of the sale price or granting a rebate or discount of a portion of the price to be paid, when the payments scheduled over a period of time, are made promptly. It is needless to point out that in such cases, the prompt payment of money itself brings forth a benefit in the form of an incentive or a rebate or a discount in the price of the product. We do not know why it should not happen in the case of waiver of a part of the loan. Therefore, the finding recorded in paragraph 27.1 of the decision in Iskraemeco Regent Limited that Section 28(iv) has no application to any transaction, which involves money, is a sweeping statement and may not stand in the light of the express language of Section 28(iv). In our considered view, the waiver of a portion of the loan would certainly tantamount to the value of a benefit. This benefit may not arise from “the business” of the assessee. But it certainly arises from “business”. The absence of the prefix “the” to the word “business” makes a world of difference.
40. We shall now turn our attention to the distinction sought to be made between the waiver of a portion of the loan taken for the purpose of acquiring capital assets on the one hand and the waiver of a portion of the loan taken for the purpose of trading activities on the other hand.
41. It appears that in so far as accounting practices are concerned, no such distinction exists. Irrespective of the purpose for which, a loan is availed by an assessee, the amount of loan is always treated as a liability and it gets reflected in the balance sheet as such. When a repayment is made in monthly, quarterly, half yearly or yearly instalments, the instalment is divided into two components, one relating to interest and another relating to a portion of the principal. To the extent of the principal repaid, the liability as reflected in the balance sheet gets reduced. The interest paid on the principal amount of loan, will be allowed as deduction, in computing the income under the head “profits and gains of business or profession”, as per the provisions of the Act.
42. But, Section 36(1)(iii) makes a distinction. The amount of interest paid in respect of capital borrowed for the purpose of business or profession is allowed as deduction under Section 36(1)(iii), in computing the income referred to in Section 28. But, the proviso thereunder states that any amount of interest paid in respect of capital borrowed for acquisition of an asset for extension of existing business or profession, whether capitalised in the books of account or not for any period beginning from the date on which the capital was borrowed for the acquisition of the asset, till the date on which such asset was put to use, shall not be allowed as deduction.
43. Therefore, it is clear that the moment the asset is put to use, then the interest paid in respect of the capital borrowed for acquiring the asset, could be allowed as deduction. When the loan amount borrowed for acquiring an asset gets wiped off by repayment, two entries are made in the books of account, one in the profit and loss account where payments are entered and another in the balance sheet where the amount of unrepaid loan is reflected on the side of the liability. But, when a portion of the loan is reduced, not by repayment, but by the lender writing it off (either under a one time settlement scheme or otherwise), only one entry gets into the books, as a natural entry. A double entry system of accounting will not permit of one entry. Therefore, when a portion of the loan is waived, the total amount of loan shown on the liabilities side of the balance sheet is reduced and the amount shown as Capital Reserves, is increased to the extent of waiver. Alternatively, the amount representing the waived portion of the loan is shown as a capital receipt in the profit and loss account itself. These aspects have not been taken note of in Iskraemeco Regent Ltd.
44. In view of the above, the questions of law are liable to be answered in favour of the Revenue/appellant. Accordingly, they are answered in favour of the appellant/Revenue and the appeal filed by the Revenue is allowed. No costs.”
18. So far as the decision of the Hon’ble Supreme Court in the case of Mahindra & Mahindra is concerned, we find the said decision is distinguishable and not applicable to the facts of the present case since in that case the loan was obtained for capital assets. The Hon’ble Supreme Court at placetum 16 of the order has observed as under:
“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.”
19. However, in the instant case, as mentioned earlier, the assessee itself has credited the waiver of the amount of Rs.18,10,78,268/- to the Profit & Loss A/c and offered only the interest component of Rs.3,20,78,679/- to tax and did not offer the amount of Rs.14,89,99,689/- treating the same as capital in nature.
20. So far as the other decisions of the Coordinate Benches of the Tribunal are concerned, the same in our opinion are also not applicable to the facts of the present case in view of the decision of the Hon’ble Supreme Court in the case of T.V. Sundaram Iyengar & Sons (Supra), the decision of the Hon’ble Delhi High Court and the decision of the Hon’ble Madras High Court cited (Supra).
21. In view of the above discussion, we are of the considered opinion that the waiver of the principal amount of Rs.14,89,99,689/-, which was taken for trading purpose and credited to the profit & loss account of the assessee, results in income in the hands of the assessee and therefore, the learned CIT (A) is fully justified in upholding the action of the Assessing Officer in bringing the same amount to tax in the hands of the assessee. The grounds raised by the assessee are accordingly dismissed.
22. In the result, appeal filed by the assessee is dismissed.
Order pronounced in the Open Court on 12th June, 2023.
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