Delhi High Court: Waiver of loan, used for acquiring capital asset not to be treated as income

CIT v. Jubilant Securities Pvt. Ltd., decided on 18^th February, 2011

ITA No.503 of 2010

Assessment Year: 2004-05

Question/s before the Hon’ble Tribunal:

Whether learned ITAT erred in deleting the addition of Rs. 25 lacs made by the Assessing Officer on account of Unsecured Loan Written Back is applicable to waiver of loan?"

Relevant facts: The AO found that the assessee had credited a sum of `25,00,000/- in Profit and Loss Account on account of remission of liability with respect of certain unsecured loans appearing in its financial results. This amount represented loan taken from one M/s. Sail Holdings Pvt. Ltd. more than ten years ago. Since there was no communication from the party and no claim was made for so many years the loan was written back. It was treated as capital receipt and was reduced from taxable income in the computation of assessable income for the assessment year in question. The AO was of the view that the assessee had treated such write off (Loan Written Back) as receipt of a capital nature without explaining as to how and in what manner such cash credited were transferred to the Profit and Loss Account.

Dismissing the appeal of the department, the Hon’ble Court held that:

Para 23: “In the context of waiver of loan amount, what follows from the reading of the aforesaid judgment is that the answer would depend upon the purpose for which the said loan was taken. If the loan was taken for acquiring the capital asset, waiver thereof would not amount to any income exigible to tax. On the other hand, if this loan was for trading purpose and was treated as such from the very beginning in the books of account, as per Sundaram Iyengar (T.V.) and Songs Ltd. (supra), the waiver thereof may result in the income, more so when it was transferred to Profit and Loss account.”

The decision is available here.

Mumbai ITAT: There are no tax withholding obligations from payments on account of brokerage on sale of mutual fund units

Jain Investment v. Income Tax Officer, on 24^th January, 2011

Assessment Year: 2006-07

Question/s before the Hon’ble Tribunal: “Whether or not the CIT(A) was justified in upholding the impugned disallowance of Rs 2,87,409, in respect of sub brokerage paid on sale of mutual fund units, on the ground that the assessee failed to discharge his tax withholding obligations in respect of the payments made for such sub brokerage?”

Relevant facts: During the course of assessment proceedings, the Assessing Officer noticed that the assessee has claimed a deduction of Rs 2,87,409 in respect of the brokerage paid. The Assessing Officer noted that the assessee has not deducted tax at source, as required under section 194H, from these payments. Accordingly, the Assessing Officer invoked section 40(a)(ia) to disallow the payments so made by the assesse.

Upholding the appeal of the assessee, the Hon’ble Tribunal held that:

Para 7: “In view of my findings that there were no tax withholding obligation from payments on account of brokerage on sale of mutual fund units, the very foundation of impugned disallowance ceases to hold good in law. The disallowance u/s.40(a)(ia) can only be made when there is a tax withholding requirement, and assessee fails to comply with the said requirement. That is not the case before me. Accordingly, I uphold the grievance of the assessee and direct the Assessing Officer to delete the impugned disallowance.”

The decision is available here.

King Prawns Ltd. v. ITO, ITA No.60/Mum/2010 by Hon’ble ITAT, Mumbai (AY 2004-05)

Date of Decision: 14^th December, 2010

The question to be considered in this appeal was inter-alia, whether the reduction of liability on account of term loan and other loans payable to a bank under one time settlement results into income to the assessee under section 28(i) or section 28(iv) or section 41(1) of the Income Tax Act, 1961.

For the interpretation of section 28(i), the Hon’ble Tribunal referred to the case of Mahindra & Mahindra v. CIT, (2003) 261 ITR 501 (Bom.) rendered by the Hon’ble Bombay High Court and concluded at para 10 that:

“The term loans received were definitely on capital account and related to capital assets. The waiver of such term loan does not constitute business and the waiver cannot be held as income u/s.28(i).”

Coming to the provisions of section 28(iv), the Hon’ble Tribunal referred to a coordinate bench judgment in Accelerated Freez & Drying Co. Ltd. Vs. DCIT, (2009) 31 SOT 442 (Cochin).

The Freez (supra) judgment noted at para 23 that:

“Section 28(iv) seeks to charge the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession, as profits and gains of business or profession. Therefore, what is to be examined is whether the waiver of loan would amount to a perquisite so as to be taxable, as such, under section 28. The Bombay High Court in the case of Mahindra & Mahindra Ltd. Vs. CIT [2003] 261 ITR 501/128 Taxman 394, has explained that section 28(iv) seeks to charge the value of any benefit or perquisite, meaning thereby that the benefit must be in kind; the Court further held that waiver of loan is in respect of money transaction and, therefore, would not be in nature of any benefit or perquisite as construed in section 28(iv)” (emphasis supplied)

On account of section 41(1), the Freez (supra) judgment was again referred and applied. The relevant parts of Freez judgment are reproduced hereinbelow:

Para 30: “The Supreme Court in the case of Polyflex (India) (P.) Ltd. v. CIT [2002] 257 ITR 343/124 Taxman 374 has examined the constitution of section 41(1). The Court has pointed out that section 41(1) consists of two main ingredients: (a) loss or expenditure and (b) trading liability. The two ingredients of section 41(1) have to be read independently. As the first ingredient relates to loss or expenditure and the second ingredient relates to remission or cessation of trading liability, the Court has categorically ruled that the words `remission or cessation thereof’ shall apply only to a trading liability.”

Para 31: “There was no doubt that the term loans availed by the assessee from three banks were not in nature of trading liability but were in nature of capital liability. Therefore, waiver of loan liability was not waiver of any trading liability. The waiver of capital liability would not become income under section 41(1) on the ground of remission or cessation thereof.”

Since in the given case, the remission was also of a capital liability, the same was not held to be a revenue receipt.

The judgment conclusively noted on this issue at para 14:

Para 14: “In view of the above discussion, we hold that the reduction of the liability on account of term loan and other loans payable to the bank under one time settlement scheme, does not result into income to the assessee either u/s.28(i) or u/s.28(iv) or u/s.41(1) of the Income-tax Act, 1961. Accordingly, ground nos.1 to 3 of the assessee’s appeal, are allowed.”

The discussion pertaining to addition of certain amounts being disallowance of business expenditure has not been discussed in this post.

The judgment is available here.