2014 (11) TMI 715 - AT - Income Tax

Tribunal remands case for loan bifurcation review. Term loan waiver non-taxable; working capital loan waiver taxable.

The tribunal set aside the CIT(A)'s order and remanded the case to the Assessing Officer for re-evaluation. The Assessing Officer was directed to verify ... Addition of waiver of loans – Loans granted as one time settlement by BIFR order - AO was of the view that the sum is to be treated as income u/s 28(iv) of the Act - Held that:- The company was declared a sick company which was registered under BIFR and in terms of BIFR order, there was a onetime settlement of outstanding loan of ₹ 941.27 lacs, which was settled for payment of ₹ 300.72 lakhs - there was a waiver of ₹ 640.55 lacs - Following the decision in Logitronics P. Ltd. Vs. CIT and Ant. [2011 (2) TMI 12 - DELHI HIGH COURT] - CIT(A) ignored the fact that the amount was ₹ 3,00,72,095/- was paid by the assessee and so the balance amount comes to ₹ 2,39,46,429/- and erroneously held that ₹ 5,40,60,301/- is taxable - when there is a waiver of loan by financial institution as far as the 'term loan' is concerned, it cannot be treated as 'income' at the hands of the assesse - Whereas, waiver or writing off loans on 'working capital' which was received for carrying out day to day operations of the assessee, will be treated as 'income' in the hands of the assesse - To that extent, CIT(A) has been correct in bifurcating the loan into 'Term Loan' and 'Working Capital Loan' - the onetime settlement of outstanding loan was to the tune of ₹ 941.27 lacs and it comprised of the term loan of ₹ 401.08 lacs and working capital loan of ₹ 540.19 lacs and the assessee infused payment of ₹ 300.72 lacs to the banks - Though there was waiver of ₹ 640.55 lacs comprising of the term loan and working capital loan, the AO had erroneously added the entire amount of ₹ 640.55 lacs as the income of the assessee. When a loan which is the term loan is waived by a financial institution, then, that amount pertaining to the term loan shall not treated as income in the hands of the assessee; whereas if the loan which is waived is the working capital loan which is used for day to day operations of the assessee, then that loan amount which is waived will be treated as 'income' in the hands of the assesse – thus, the order of the CIT(A) is set aside and the matter is remitted back to the AO for verification – Decided in favour of assessee. Issues Involved:1. Legality of the Assessing Officer's order.2. Assessment of income at Rs. 6,40,55,000/- against NIL declared by the assessee.3. Addition of Rs. 6,40,55,000/- on account of loan waiver under the one-time settlement scheme.4. Denial of set-off of unabsorbed depreciation and losses of earlier years.Issue-wise Detailed Analysis:1. Legality of the Assessing Officer's Order:The appellant contended that the order passed by the Assessing Officer was flawed both legally and factually. The tribunal found that this ground was general in nature and did not require separate adjudication, thus treating it as dismissed for statistical purposes.2. Assessment of Income at Rs. 6,40,55,000/-:The Assessing Officer assessed the income of the appellant at Rs. 6,40,55,000/- as opposed to NIL declared by the assessee. This was based on the waiver of secured loans under a one-time settlement with State Bank of Patiala and Kotak Mahindra Bank. The tribunal noted that the CIT(A) had partially upheld this addition by confirming Rs. 540.19 lacs as taxable income, while directing verification of Rs. 401.08 lacs claimed as term loan.3. Addition of Rs. 6,40,55,000/- on Account of Loan Waiver:The main contention was whether the waiver of loans amounting to Rs. 6,40,55,000/- could be treated as taxable income under Section 28(iv) of the Income Tax Act. The tribunal referred to various case laws, including the Delhi High Court's decision in Logitronics P. Ltd. v. CIT, which clarified that the taxability of waived loans depends on the purpose of the loan. If the loan was for acquiring a capital asset, its waiver is not taxable. However, if it was for trading purposes, the waiver might be taxable.The tribunal observed that the CIT(A) had correctly bifurcated the loan into 'Term Loan' and 'Working Capital Loan'. The term loan waiver should not be treated as income, while the working capital loan waiver should be. However, the tribunal found an error in the CIT(A)'s calculation, noting that the actual waiver amounted to Rs. 2,39,46,429/- after considering the payment of Rs. 300.72 lacs by the assessee.4. Denial of Set-off of Unabsorbed Depreciation and Losses:The appellant argued that the Assessing Officer erred in not allowing the set-off of unabsorbed depreciation and losses from earlier years. The tribunal did not provide a detailed analysis on this issue, indicating that it would be addressed upon remand.Conclusion:The tribunal set aside the CIT(A)'s order and remanded the matter back to the Assessing Officer for re-evaluation. The AO was directed to verify the bifurcation of the loan into 'Term Loan' and 'Working Capital Loan' and to consider the payment of Rs. 300.72 lacs made by the assessee. The term loan waiver should not be treated as income, while the working capital loan waiver should be. The appeal was allowed for statistical purposes.Order Pronounced:The order was pronounced in the open court on 30.6.2014.