Case Law Details

Case Name : Sh. Jai Pal Gaba Vs ITO (ITAT Chandigarh)
Appeal Number : ITA No. 244/CHD/2018
Date of Judgement/Order : 16/05/2019
Related Assessment Year : 2007-08
Courts : All ITAT (6378) ITAT Chandigarh (146)

Sh. Jai Pal Gaba Vs ITO (ITAT Chandigarh)

The very language of the section 28(iv) speaks about the value of any benefit or perquisite arising from business or exercise of a profession. Now considering the facts and circumstances of the case, though, the loan was taken for the purpose of business but the same was never taken in the course of business or to say that the loan sourced was not linked to the trading receipts or the like. Similarly the waiver of the loan amount was not in the course of business or in exercise of a profession. A part of the amount was waived by the bank in a one-time settlement because there were little chances of recovery of the entire amount. This one-time settlement was not done as part of the business activity of the assessee, rather, the transaction of the loan and waiver was a separate transaction. Under the circumstances, the waiver of part of the loan amount cannot be said to be a benefit or perquisite arising from business or profession to the assessee.

As per section 41(1) of the Act, the assessee must have taken an allowance or deduction in earlier assessment year in respect of loss, expenditure or trading liability which has been remitted or ceased to exist in the relevant year to constitute the same as taxable income of the assessee. The loan in question though was taken by the assessee for the purpose of business / trading activity, however, in our view, the same was not out of the trading activity of the assessee. The liability of loan was not created or incurred in the course of business, rather, it was an independent loan transaction of the assessee with the bank and the assessee was not involved in any business activity with the bank. As submitted by the Ld. Counsel for the assessee, the assessee was not in a business of taking / lending of the loan and, hence, the amount of loan received by the assessee for the business of hosiery was not part of the trading activity of the assessee. Though, grant of loan on interest may be the part of banking business of the Lender Bank, but to take loan is not the business activity of the assessee. So far as the assessee is concerned, the loan in question was not the trading liability of the assessee and, hence, the bank has not waived any loss / expenditure of trading liability of the assessee. What has been waived is a part of the loan amount in one-time settlement as the loan asset has been declared as NPA and there were little chances of the recovery of the loan. Moreover, the assessee did not take any benefit in the shape of allowance or deduction in earlier years of such principal loan amount which has been waived. Under the circumstances, the provisions of Section 41(1) of the Act are not applicable to the facts and circumstances of the case.

Admittedly, the loan was advanced by the banker for a consideration of interest. Advancement of loan cannot be said to be without consideration. However, later on due to losses, the loan become NPA. The bank, after considering the remote possibility of recovery of the said loan, thought it prudent to go for one time settlement with the loanee. Thereafter, the terms and conditions were settled and as per the terms and conditions, in the event of the loanee paying an amount of 140 lacs immediately, out of which 125 lacs to be deposited in third party account, which would be acceptable on the approval of the one-time settlement and execution of ‘compromise agreement’ at the cost of the loanee, the remaining of the loan was agreed to be waived /sacrificed by the bank. It was not a simple case of waiver without consideration, rather, the consideration of the waiver was the condition of depositing immediately the remaining part of the loan i.e. 140 lacs and performance of certain other formalities as per the agreement. It is not just a case where the bank has simply waived or remitted the loan amount, rather the bank to secure payment of 140 lacs, which otherwise the bank was feeling difficult to recover, was the consideration for settlement of the loan account. Hence, the amount received by the assessee as waiver or remission of loan amount cannot be said to be without consideration. Hence, in our view, the provisions of section 56(2)(vi) are not applicable to the case in hand.

FULL TEXT OF THE ITAT JUDGEMENT

The present appeal has been preferred by the assessee against the order dated 28.12.2017 of the Commissioner of Income Tax (Appeals)-1, Ludhiana [hereinafter referred to as CIT(A)].

2. The assessee in this appeal has taken following grounds of appeal:-

1. Addition, in respect of Settlement of Loan, amounting to 1,85,44,140.00, under section 28 (iv) of the Income-tax Act, 1961.

1.1 On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in confirming the addition made by the Assessing officer, after re-computation thereof, for a sum of 1,85,44,140.00 in respect of waiver of loan on settlement with the bank by invoking the provisions of section 28 (iv) of the Act and some of the judicial pronouncements.

1.2 The Ld. CIT(A) and Assessing officer failed to appreciate the details submissions made by the appellant and the rule of law laid down in various decisions relied upon by the appellant in this behalf.

2. That the appellant craves the right to add, amend or delete any grounds of appeal before it is finally disposed off.

3. The brief facts relating to the issue are that the assessee presently is a Proprietor of M/s Mack Hosiery, which concern was earlier a Partnership firm constituted in the year 1988 and dissolved on 30.09.2002, which was taken over by the assessee as his proprietorship concern along with assets and liabilities whatsoever. The loan to the firm taken from M/s Punjab National Bank (PNB) was also owed up / taken over by the assessee in his proprietorship concern.

4. The assessee owed 3,78,93,001/-, split into term loan of 84,83,001/- and cash credit limit of 2,94,10,000/- as on 31.12.2006 which had become non-performing assets (NPA). Accumulated interest for the period of NPA i.e. from 1.4.2003 to 31.12.2006 of 1,93,64,729/- was neither booked by the bank as its income nor claimed by the assessee as its expenditure. Apart from that, there were certain other liabilities such as legal expenditure and valuation charges for the NPA period amounting to 1,47,857/- which were also not claimed as expenditure by the assessee. The total liability to the bank of the assessee was 5,74,05,687/-. The bank inOne time settlement programme settled the whole debt at of 1,40,00,000/-, thus, waiving principal amount of loan of 2,38,93,001/-and interest along with legal and valuation expenses amounting to 1,95,12,686/-, total waiver of 4,34,05,687/-.

5. In the first round, the Assessing officer by invoking the provisions of section 28 (iv), 41(1), 56(2) of the Income-tax Act, 1961 (in short ‘the Act’) added the whole amount of waiver of Rs. 4,34,05,687/- to the taxable income of the assessee vide order dated 29.12.2009 u/s 143(3) of the Act.

6. Being aggrieved by the above order of the Assessing officer, the assessee filed an appeal before the CIT(A), Ludhiana. The Ld. CIT(A) vide his order dated 10.12.2010 confirmed the addition w.r.t. waiver of Principal amount of 2,83,93,001/- by relying upon the judgement of the Hon’ble Bombay High Court in ‘Solid Containers Limited Vs. DCIT’ 308 ITR 417 (Bom.) and ‘T.V.Sundram Iyengar & Sons Limited’ 222 ITR 344 (SC)’ and based his decision on the sec (s), 28 (iv), 41 (1), 56(2) (vi) of the I.T. Act. Further, w.r.t. addition on account of waiver of interest and legal / valuation charges of 1,95,12,686/-, the Ld. CIT(A) directed the Assessing officer to verify whether such interest and other expenses were claimed by the assessee in earlier years or not, and if it would be found that no interest was claimed as expense in respect of aforesaid amount of interest waived by the bank, provisions of section 41(1) of the Act would not be applicable and addition would stand deleted. However, if it is found that assessee has claimed the expenditure, addition would be sustained. The relevant part of the order of the CIT(A) dated 10.12.2010 is reproduced as under:-

“… that the principal amount of loan of 2,38,93,001/-is taxable u/s 28 as well as u/s 41(1) of the Act. Without prejudice to the above, aforesaid amount is also taxable u/s 56(2)(vi) according to which where any amount of money aggregate value of which exceeds 50,000/- is received, without consideration, by an individual or HUF, in any previous year from any person or persons on or after the first day of April, 2006, the whole of aggregate value of such sum shall be chargeable to income tax under the head ‘income from other sources’. The assessee has received amount of 2,39,93,001/- on account of waiver of loan by PNB and the same is also taxable under section 56(2) (vi) of the Act. In view of the discussion above, addition of , 2,38,93,001/- is upheld.”

8. Being aggrieved by the confirmation of addition of 2,38,93,001/-by the CIT(A), the assessee filed appeal before this Tribunal. Simultaneously, department also filed an appeal before this Tribunal contending that the CIT(A) Ludhiana had crossed his jurisdiction while directing AO to verify whether in earlier years the assessee had claimed the expenditure on interest on loan that was waived by Bank. That the CIT(A) has no jurisdiction to restore or set aside an issue to Assessing officer as per sub section 1 of section 251 of the Act.

9. Disposing of the appeals i.e. Appeal No. ITA No. 154/Chd/2011 (assessee’s appeal) and appeal No. ITA No.291/Chd/2011 (Department’s appeal), the Tribunal directed as under:-

“Therefore, we set aside the order of CIT(A) and restore the matter to the file with a direction to record a finding and if facts are not coming out of the assessment order, he may call for remand report, but the finding has to be recorded by him. Therefore, issue may be adjudicated after finding out whether interest was claimed as expenditure or not, as far as capital waiver addition is concerned, this issue should also go back to the file of the CIT(A) because it has not been clearly determined whether loan was taken as term loan or as cash credit loan. Therefore, Ld. CIT(A) should re-examine the issue and decide the same in the light of the decision of the Hon’ble Karnataka High Court in the case of Compaq Electric Ltd (supra) and Hon’ble Bombay High Court in the case of Sold Containers ((supra).”

10. In compliance of the order of the Tribunal dated 10.12.2010, the Ld. CIT(A) adjudicated both the issues. So far as the issue whether the amount of interest and certain other legal expenses and valuation charges were claimed as expenditure or not in earlier years, the Ld. CIT(A) verified and found that such interest amount of 1,95,12,686/- was never claimed as expenditure by the assessee. So he deleted the addition on this account. Regarding the issue relating to the principal loan, the Ld. CIT(A), in the absence of any specific allocation of the waived amount by the bank, considering the suggestion of the Assessing officer in the remand report bifurcated on pro-rata basis the total waiver amount of loan of 1,40,00,000/- between ‘term loan’ and ‘cash credit loan’. The Ld. CIT(A) accordingly calculated the waiver of term loan at 53,48,860/- and waiver of cash credit loan at 1,85,44,140/-. The Ld. CIT(A) further held that the waiver of term loan calculated on pro-rata basis amounting to 53,48,860/- since taken for acquiring a capital asset would not result in income exigible to tax. However, the amount of waiver of cash credit loan amounting to 1,85,44,140/- since was in respect of working capital loan utilized for trading purposes, hence, as per the provisions of section 28 (iv) of the Act, the same was in the nature of Revenue receipt. He, therefore, relying upon the decision of the Hon’ble Bombay High Court in the case of Solid Containers Ltd (supra) treated the same as taxable income of the assessee. The Ld. CIT(A) held that the aforesaid working capital loan of 1,85,44,140/- resulted in a benefit to the assessee in the shape of remission of a liability, therefore, directed the Assessing officer to restrict the addition to 1,85,44,140/- as against the total addition of 2,38,93,001/- made by the Assessing officer

11. Aggrieved by the above order of the CIT(A), the assessee has come in appeal before us.

12. We have heard the rival contentions and have gone through the record. At the outset, Ld. Counsel for the assessee has submitted that neither the provisions of section 28 (iv) and 41(1) nor of section 56(2)(vi) of the Income Tax Act were applicable to the facts of the present case. He has therefore, submitted that the Assessing officer as well as the Ld. CIT(A) have not correctly appreciated the proposition of law laid down by the Hon’ble Supreme Court in the case of V. Sundram Iyengar & Sons Limited’ (supra) and Hon’ble Madras High Court in the case of CIT Vs. Aries Advertising (P) Ltd. 255 ITR 510 (Mad.) and by the Hon’ble Bombay High Court in the case of Solid Containers Ltd., (supra). He has further submitted that the decision of the Hon’ble Karnataka High Court in the case of ‘CIT Vs. Compaq Electric Ltd.’ (66 DTR 38) can be applied to the facts of the present case.

The Ld. DR, on the other hand, has relied upon the findings of the CIT(A).

13. To proper adjudicate the issue, we will consider the applicability of sections 28 (iv, 41(1) and 56(2)(vi) of the Act separately. The relevant part of the provisions of section 28 (iv) is reproduced as under:-

Section 28 (iv) and its applicability in the instant case: 

“Profits and gains of business or profession.

28. The following income shall be chargeable to income-tax under the head “Profits and gains of business or profession,—

…..

(iv) the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession”

14. The Ld. Counsel for the assessee has submitted that the language of the section is very much clear which prescribes that such value of any benefit or perquisite must arise from business or profession. That taking of loans is not regular business of the assessee. That except in money lending business, such waiver of loan cannot be treated as income arising from business.

Whereas the Ld. DR has relied on the findings of the Ld. CIT(A) to state that it constitutes a benefit to the assessee and that the assessee has become richer by the said amount and, hence, the said amount squarely falls within the purview of section 28 (iv) of the Act.

15. We have considered the rival submissions. The very language of the section speaks about the value of any benefit or perquisite arising from business or exercise of a profession. Now considering the facts and circumstances of the case, though, the loan was taken for the purpose of business but the same was never taken in the course of business or to say that the loan sourced was not linked to the trading receipts or the like. Similarly the waiver of the loan amount was not in the course of business or in exercise of a profession. A part of the amount was waived by the bank in a one-time settlement because there were little chances of recovery of the entire amount. This one-time settlement was not done as part of the business activity of the assessee, rather, the transaction of the loan and waiver was a separate transaction. Under the circumstances, the waiver of part of the loan amount cannot be said to be a benefit or perquisite arising from business or profession to the assessee.

“Section 41 (1) and its applicability in the instant case: 

Properties chargeable to tax –

“41. (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

(b) the successor in business has obtained, whether in cash or in any other manner whatsoever, any amount in respect of which loss or expenditure was incurred by the first-mentioned person or some benefit in respect of the trading liability referred to in clause (a) by way of remission or cessation thereof, the amount obtained by the successor in business or the value of benefit accruing to the successor in business shall be deemed to be profits and gains of the business or profession, and accordingly chargeable to income-tax as the income of that previous year.

Explanation 1.—For the purposes of this sub-section, the expression “loss or expenditure or some benefit in respect of any such trading liability by way of remission or cessation thereof” shall include the remission or cessation of any liability by a unilateral act by the first-mentioned person under clause (a) or the successor in business under clause (b) of that sub-section by way of writing off such liability in his accounts.

Explanation 2.—For the purposes of this sub-section, “successor in business” means,—

(i) where there has been an amalgamation of a company with another company, the amalgamated company;

(ii) where the first-mentioned person is succeeded by any other person in that business or profession, the other person;

(iii) where a firm carrying on a business or profession is succeeded by another firm, the other firm;

(iv) where there has been a demerger, the resulting company.

16. The Ld. counsel for the assessee has submitted that not only from reading of above provision but also as settled by law by Courts, Section 41(1) of the Act comes into operation on the following conditions:-

1) The assessee had incurred a trading liability and;

2) This trading liability has been allowed as deduction in an earlier year (s) and;

3) Later on, such liability has either been remitted or has ceased to exist.

17.  The Ld. Counsel for the assessee has submitted that in the instant case, no such trading liability had been remitted or ceased to exist, hence, the provisions of section 41(1) do not have any application.

18. The Ld. DR, on the other hand, has relied on the findings of the CIT(A) and has submitted that the aforesaid waiver of the working capital loan is a remission of liability and, hence, the same was taxable under the provisions of section 41(1)of the Act.

19. After considering the rival submissions, we find force in the submissions of the Ld. Counsel for the assessee. As per section 41(1) of the Act, the assessee must have taken an allowance or deduction in earlier assessment year in respect of loss, expenditure or trading liability which has been remitted or ceased to exist in the relevant year to constitute the same as taxable income of the assessee. The loan in question though was taken by the assessee for the purpose of business / trading activity, however, in our view, the same was not out of the trading activity of the assessee. The liability of loan was not created or incurred in the course of business, rather, it was an independent loan transaction of the assessee with the bank and the assessee was not involved in any business activity with the bank. As submitted by the Ld. Counsel for the assessee, the assessee was not in a business of taking / lending of the loan and, hence, the amount of loan received by the assessee for the business of hosiery was not part of the trading activity of the assessee. Though, grant of loan on interest may be the part of banking business of the Lender Bank, but to take loan is not the business activity of the assessee. So far as the assessee is concerned, the loan in question was not the trading liability of the assessee and, hence, the bank has not waived any loss / expenditure of trading liability of the assessee. What has been waived is a part of the loan amount in one-time settlement as the loan asset has been declared as NPA and there were little chances of the recovery of the loan. Moreover, the assessee did not take any benefit in the shape of allowance or deduction in earlier years of such principal loan amount which has been waived. Under the circumstances, the provisions of Section 41(1)of the Act are not applicable to the facts and circumstances of the case.

Section 56 (2) (vi) of Act 1 and its applicability in the instant case.  

Income from other sources :

“56 (2) In particular, and without prejudice to the generality of the provisions of sub-section (1), the following incomes, shall be chargeable to income-tax under the head “Income from other sources”, namely :—

…….

(vi) where any sum of money, the aggregate value of which exceeds fifty thousand rupees, is received without consideration, by an individual or a Hindu undivided family, in any previous year from any person or persons on or after the 1st day of April, 2006 but before the 1st day of October, 2009, the whole of the aggregate value of such sum”

20. The Ld. Counsel for the assessee in this respect has submitted that the invoking of provisions of section 56(2)(vi) is wrong since the substance of the provisions inserted by Taxation Laws (Amendment) Act, 2006 w.e.f 01.04.2007, is for the governance of gift transactions without consideration with a limit of 50,000/-. In spite of the applicability of the provisions of sec. 68, section 56(2)(vi) was introduced with the objective to curb the mal-practice being followed by the assessees to bring their own undisclosed income to the economic system through other persons without paying due taxes there on. That initially, in 2004, section 56(2) (v) was brought as a measure to plug revenue leakages. That in case in hand, where there is waiver of loan from Bank, it cannot be said that purpose for which such provision was brought to statute book is being attained by taxing this sum. Even that section 56(2)(vi) is applicable only on Individuals and HUFs and not applicable on other persons as defined in sec. 2(31) of Income Tax Act 1961. That in the case in hand, the assessee is sole proprietor, whereas, in some other cases assessee may be partnership firm, body corporate or some other person. By virtue of provisions of this section, the assessee who is a person other than Individual and HUF cannot be brought to tax net. That this discriminatory treatment to tax Individuals and HUFs for waiver of loan is not correct interpretation of the provisions contained in the Statute.

21. The Ld. DR, on the other hand, has submitted that the assessee is an individual, hence the assessee clearly falls under the provisions of section 56(2)(vi) of the Act. That the assessee was under loan liability to the bank and that the waiver of remission of the liability of the part of the loan amount constitutes receipt in the hands of the assessee, which as per the provisions of section 56(2)(vi) is liable to the taxed as ‘income from other sources’.

22. We have considered the rival submissions. The argument of the Ld. counsel is that the assessee cannot be discriminated as an individual vis-à-vis partnership firm or a company, as the provisions of section 56(2)(vi) are applicable only on individual and HUF and that in the facts and circumstances of the case the loan was originally taken by firm and had the assessee not taken over the firm and the loan liability as such, the provisions of section 56(2)(vi) would not have been applicable on the firm. We are not convinced with the above argument of the Ld. Counsel for the assessee. The provisions of the fiscal Statue are to be strictly interpreted. If a particular provision has been made applicable to a particular class of people or assessees that has to be applied accordingly.

So far as the argument of the Ld. Counsel for the assessee that waiver of loan does not constitute a receipt, we are again not in agreement with the Ld. Counsel for the assessee regarding this contention also. Simply to say that the waiver of the loan amount does not constitute a receipt, in our view, will not be appropriate as it may lead to absurd, confusing and unintended interpretation. In our view, if the donor gives to a donee certain amount directly or indirectly it does not make a difference. To elaborate further, if the donor firstly, give some amount as a loan and then waive of or relinquish the right to recover the said amount, then, in our view, on the date of such remission or relinquishment, the nature of such loan changes from loan to receipt / gift. Any other interpretation given in this respect may be exploited to come out of and defeat the purpose of section 56(2)(vi) of the Act.

23. However, the moot point which remains under consideration is that if the loan waiver received by the assessee was not a benefit or perquisite under the provisions of section 28(iv) of the Act and neither the same was remission or cessation of business or trading liability u/s 41(1) of the Act, can the same be termed as a receipt and taxed as ‘income from other sources’ under the provisions of section 56(2)(vi) of the Act. A perusal of the above reproduced provisions of section 56 (2)(vi) of the Act reveals that the amount received by the individual or HUF should be ‘without consideration’

Now, we have to see whether the part of the loan amount waived was ‘without consideration’ or not. Admittedly, the loan was advanced by the banker for a consideration of interest. Advancement of loan cannot be said to be without consideration. However, later on due to losses, the loan become NPA. The bank, after considering the remote possibility of recovery of the said loan, thought it prudent to go for one time settlement with the loanee. Thereafter, the terms and conditions were settled and as per the terms and conditions, in the event of the loanee paying an amount of 140 lacs immediately, out of which 125 lacs to be deposited in third party account, which would be acceptable on the approval of the one-time settlement and execution of ‘compromise agreement’ at the cost of the loanee, the remaining of the loan was agreed to be waived /sacrificed by the bank. It was not a simple case of waiver without consideration, rather, the consideration of the waiver was the condition of depositing immediately the remaining part of the loan i.e. 140 lacs and performance of certain other formalities as per the agreement. It is not just a case where the bank has simply waived or remitted the loan amount, rather the bank to secure payment of 140 lacs, which otherwise the bank was feeling difficult to recover, was the consideration for settlement of the loan account. Hence, the amount received by the assessee as waiver or remission of loan amount cannot be said to be without consideration. Hence, in our view, the provisions of section 56(2)(vi) are not applicable to the case in hand.

24. In view of the above discussion, neither the remission of the aforesaid amount in the facts and circumstances of the case is taxable as ‘business income’ or as ‘income from other sources’. Moreover, it is not a case where other party / banker out of his free will had decided to give some benefit to the assessee, rather, the settlement was arrived at by the bank out of compulsion. The other party in this case is a nationalized bank, hence, it cannot be said that the waiver was a sham transaction or a colourful device to give benefit to the assessee. Under the circumstances, though the assessee has got some benefit by way of waiver of the principal amount but the same cannot be termed as income of the assessee exigible to tax. However, it is made clear that our observations made above are in the peculiar facts and circumstances of this case and, hence, cannot be simply applied in each and every type of waiver of the loan amount.

25. Now, coming to the reliance placed on various case laws in this case. The thrust of arguments of the Departments is that if the loan is for a trading activity then the waiver of the loan will be a trading receipt exigible to tax and if the loan is for capital assets, the waiver of the loan will tantamount to capital receipt. Though both the parties have cited various decisions of various courts of law, however, the base decision which has been relied upon by both the parties is the decision of the Hon’ble Supreme Court in the case of case of ‘T.V.Sundram Iyengar & Sons Limited’ 222 ITR 344 (SC). The facts of the said case were that the deposits were taken by the assessee during the course of trade from customers and adjustments were made against these deposits in the course of trade. The unclaimed surplus retained by the assessee was treated as trade receipt. After considering the fact and various case laws the Hon’ble Supreme Court concluded as under;-

“The principle laid down by Atkinson, J. applies in full force to the facts if this case. If a common sense view if 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.”

26. So the conclusion arrived at by the Hon’ble Supreme Court was that since the amount received by the assessee was deposits from the customers, not being in the nature of security deposits, in the course of his business which later on was transferred by the assessee to its profit and loss account, the Hon’ble Supreme Court held that even though the deposits were treated as capital receipts, the same had become trading receipts on transfer of the same into profit and loss account of the assessee. What is relevant in this respect is that receipts were received by the assessee in the course of its business or to say trading operations and the assessee by way of transfer of the said amount into the profit and loss account had become richer by that amount and the said amount has been retained by the assessee in its business.

However, in the case before us, the loan amount was never received by the assessee in the course of business but from the bank as a loan for carrying on or to say for the purpose of business. There is a clear difference between the term ‘in the Course of business’ and ‘for the purpose of business’. Though, the banker was in the business of lending money and receiving interest but to take loan on interest was not the business of the assessee. The business of the assessee admittedly was the ‘hosiery business’. The said loan amount was not a trading receipt received from the customers or from the parties with whom the assessee was in business activity. Even on waiver of the loan amount out of the settlement under compulsive circumstances, neither the assessee had become richer nor it can be said that the said amount was retained by the assessee in the business as his own money. The underlined transaction was not an integral part of the business activity of the assessee. It is a case where the assessee had taken loan, part of the loan was used for capital assets in the shape of machinery etc. and the other part of the loan amount was used for trading assets / activities. The bank in this case while arriving at one time settlement did consider as to which part of the loan amount was used by the assessee for capital assets and which part of the loan amount was used for trading activity. The purpose of the loan, so far as the bank is concerned, was to get interest income on the loan advanced, though, for the security of the loan or otherwise the bank had given the loan for specific purposes, i.e. for capital assets or for trading activity separately. However, since the motive for settlement was recovery of the Non Performing assets, hence, the bank clubbed and taken into consideration the entire defaulting amount against the assessee and settled for a receipt of certain sum out of the total amount outstanding against the assessee. Under the circumstances, for the purpose of waiver or settlement, it was irrelevant for the bank whether the loan was on account of trading activity or capital assets of the assessee. An example in this respect can be given of a partnership firm where the partners contribute capital. From whatever source they contribute the capital i.e. either by taking loan from bank or out of their own assets, is immaterial so far as the utility / usage of the said capital by the partnership firm is concerned. Out of the total capital contribution, the partnership firm may use part of such capital towards capital assets and part of the said amount towards trading activity. However, any income or loss in the business of one partnership firm has no relevancy with the source of capital contributed by the partners. Similar is the case with the company. In the present case also, whether the assessee had earned profit or incurred losses in the business activity, it has no relevancy so far as the source of capital is concerned which, in fact, was a loan from the bank on interest. Since the assessee was running into losses, hence the waiver of part of the loan in a settlement, is towards the capital receipt of the assessee and cannot be said to be out of business activity nor the same can be said to be in the nature of trading receipts. In view of this, we do not find any justification on the part of the lower authorities in taxing the amount or part of the loan amount waived in one time settlement by the bank. The addition made by the Assessing officer and confirmed by the Ld. CIT(A) is accordingly ordered to be deleted.

In the result, the appeal of the assessee is, hereby, allowed.

Order dictated and pronounced in the Open Court on 16.05.2019

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