Income Tax Act, 1961 – ss. 28(iv) and 41(1) – Waived of loan amount, taxability – Sum of Rs. 57,74,064/- due by assessee to a Company – Later on waiver of loan by creditor-lender – Whether taxable as a perquisite u/s. 28(iv) or taxable as a remission of liability u/s. 41(1) – Held: Amount of Rs. 57,74,064/- is received as cash receipt due to the waiver of loan – The very first condition of s. 28
(iv) that 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 – Hence, the amount of Rs 57,74,064/- cannot be taxed under the provisions of s. 28 (iv) – Section 41(1) deals with the remission of trading liability, waiver of loan amounts to cessation of liability other than trading liability – Thus, s. 41(1) does not apply.
Dismissing the appeals, the Court
HELD: 1.1 Creditor or his successor may exercise their “Right of Waiver” unilaterally to absolve the debtor from his liability to repay. After such exercise, the debtor is deemed to be absolved from the liability of repayment of loan subject to the conditions of waiver. The waiver may be a partly waiver i.e., waiver of part of the principal or interest repayable, or a complete waiver of both the loan as well as interest amounts. Hence, waiver of loan by the creditor results in the debtor having extra cash in his hand. It is receipt in the hands of the debtor/assessee. [Para 11][957-F]
1.2 On a plain reading of Section 28 (iv) of the Income Tax Act, 1961, 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), the benefit which is received has to be in some other form rather than in the shape of money. In the instant 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) 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 instant case. Hence, 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. [Para 13][958-C-E]
1.3 On a perusal of the s.41(1) of the IT Act, it is evident that it is a sine qua non that there should be an allowance or deduction claimed by the assessee in any assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee. Then, subsequently, during any previous year, if the creditor remits or waives any such liability, then the assessee is liable to pay tax under Section 41 of the IT Act. The objective behind this Section is simple. It is made to ensure that the assessee does not get away with a double benefit once by way of deduction and another by not being taxed on the benefit received by him in the later year with reference to deduction allowed earlier in case of remission of such liability. The respondent had been paying interest at 6 % per annum to the KJC as per the contract but the assessee never claimed deduction for payment of interest under Section 36 (1) (iii) of the IT Act. In the instant case, CIT (A) relied upon Section 41 (1) of the IT Act and held that the respondent had received amortization benefit. Amortization is an accounting term that refers to the process of allocating the cost of an asset over a period of time, hence, it is nothing else than depreciation. Depreciation is a reduction in the value of an asset over time, in particular, to wear and tear. Therefore, the deduction claimed by the respondent in previous assessment years was due to the deprecation of the machine and not on the interest paid by it. [Para 15][959-B-E]
1.4 Moreover, the purchase effected from the KJC is in respect of plant, machinery and tooling equipments which are capital assets of the Respondent. 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. 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, the case of the respondent would not fall under Section 41 (1) of the IT Act. [Para 16][959-F-H]
1.5 The judgment and order passed by the High Court is not interfered with in view of the following reasons: Section 28(iv) of the IT Act does not apply on the instant case since the receipts of Rs 57,74,064/- are in the nature of cash or money; and Section 41(1) does not apply since waiver of loan does not amount to cessation of trading liability. The respondent has not claimed any deduction under Section 36(1)(iii) of the IT Act qua the payment of interest in any previous year. [Para 17][960-A-B]
As published in the Supreme Court Reports, Supreme Court of India. Text from the Indian Supreme Court Judgments open data set (Dattam Labs), CC BY 4.0.
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