2003 (1) TMI 71 - HC - Income Tax

Waived promissory-note for capital tooling not taxable under s.28(iv) or as income on cessation under s.41(1)

Mahindra And Mahindra Ltd. Versus Commissioner of Income-Tax.

HC upheld the Tribunal's finding that the waived promissory-note liability related to capital tooling purchases, not benefits in kind or trading ... Taxability of the written-off loan amount as income - loan repayment - remission of liability under section 41(1) - benefit of perquisite in cash - HELD THAT:- There was one contract of purchase of the tools and that purchase consideration was paid vide promissory notes. The Tribunal further concluded that section 28(iv) of the Act is applicable only to benefits or perquisites received by the assessee in kind. Therefore, according to the Tribunal, in this case, section 28(iv) was not applicable because benefit of waiver was not received by the assessee in kind. The Tribunal further took the view that even section 41(1) of the Act was not applicable because there was no cessation of trading liability. That the assessee had never incurred the trading liability. That the assessee had bought the toolings as capital assets. In the circumstances, section 41(1) of the Act had no application. The Tribunal further took the view that, in the present case, we are concerned with the purchase consideration relating to a capital asset and, therefore, section 28(iv) was not applicable. The Tribunal took the view that the purchases effected were in respect of plant and machinery and tooling equipment which represented capital assets. That the amount has not been debited to trading account or the profit and loss account in any of the assessment years and, therefore, remission of that liability cannot be treated as income under section 41(1) of the Act. The Tribunal held that the toolings bought by the assessee were not stock-in-trade. In the circumstances, the Tribunal took the view that section 41(1) of the Act was not applicable. Being aggrieved by the decision of the Tribunal, the Department has come to this court by way of reference vis-a-vis the above questions under section 256(1) of the Act. Issues Involved:1. Taxability of the written-off loan amount as income.2. Applicability of Section 41(1) of the Income-tax Act concerning depreciation on machinery/toolings.3. Classification of the waiver of loan repayment as related to capital assets or stock-in-trade.4. Applicability of Section 28(iv) of the Income-tax Act to the waiver of the loan repayment.Detailed Analysis:Issue 1: Taxability of the Written-off Loan Amount as IncomeThe core issue was whether the sum of Rs. 57,74,064, due by the assessee to Kaiser Jeep Corporation (KJC) and subsequently written off, constituted taxable income. The Income-tax Officer initially considered this amount as part of business income under Section 28, arguing that the loan arose from business dealings and its waiver converted the liability into income. However, the Tribunal concluded that the waiver of the loan did not constitute income under Section 28(iv) since the benefit was not received in kind. The High Court upheld this view, emphasizing that the waiver was unexpected and part of a take-over arrangement by American Motor Corporation (AMC), to which the assessee was not a party. Therefore, the waiver did not constitute business income.Issue 2: Applicability of Section 41(1) Concerning Depreciation on Machinery/ToolingsThe question was whether the assessee, having obtained depreciation on the cost of machinery and toolings, was taxable under Section 41(1) due to the cost being forgone by KJC. The Commissioner of Income-tax (Appeals) initially held that the waiver amounted to remission of trading liability and was taxable under Section 41(1). However, the Tribunal found that Section 41(1) was not applicable since the assessee had not incurred a trading liability but had acquired capital assets. The High Court agreed, noting that the assessee had not obtained a deduction for the loan amount in previous years, and thus, Section 41(1) did not apply.Issue 3: Classification of the Waiver of Loan RepaymentThe Tribunal held that the waiver of the loan repayment was related to capital assets, not stock-in-trade, and thus, it was not a remission of liability under Section 41(1). The High Court supported this view, stating that the toolings were capital assets used for manufacturing and not trading goods. Consequently, the waiver of the loan did not constitute a trading liability remission.Issue 4: Applicability of Section 28(iv)The Tribunal ruled that Section 28(iv) of the Income-tax Act, which applies to benefits or perquisites received in kind, was not applicable to the waiver of the loan repayment since the benefit was not received in kind but in cash. The High Court upheld this interpretation, reiterating that Section 28(iv) does not apply to cash receipts and the benefit received by the assessee was not in the nature of income.Additional Judgments:Reference Application No. 1708 of 1982:1. Deduction of Initial Contribution to Superannuation Fund: The Tribunal's decision to allow 100% deduction was upheld in view of the Supreme Court's judgment in CIT v. Sirpur Paper Mills.2. Expenditure on Tea and Soft Drinks: The court chose not to answer this question due to the minimal amount involved (Rs. 20,000).3. Roads as Plant: The Supreme Court's judgment in CIT v. Gwalior Rayon Silk Mfg. Co. Ltd. was cited, holding that roads are buildings, not plants, thus the question was answered in favor of the Department.4. Donation to Education Society: The Tribunal's finding that the donation was for staff welfare and allowable as business expenditure was upheld.Reference Application No. 1561 of 1982:The Tribunal's disallowance of gratuity liability under Section 40A(7) was upheld based on the Supreme Court's judgment in Shree Sajjan Mills Ltd. v. CIT.Conclusion:The High Court answered all questions in favor of the assessee and against the Department, except for the classification of roads as plant and the disallowance of gratuity liability, which were decided in favor of the Department. The reference was disposed of with no order as to costs.