2008 (9) TMI 31 - HC - Income Tax

Remission of principal loan credited to capital reserve not income under s.41(1), s.28(iv) or s.2(24)

COMMISSIONER OF INCOME TAX DELHI (CENTRAL) - II Versus TOSHA INTERNATIONAL LTD.

The HC dismissed the revenue's appeal, upholding the Tribunal and CIT(A) that remission of the principal loan amount credited to capital reserve under a ... Remission of the principal amount of loan - credited to the Capital Reserve Account - sick company and registered with the BIFR under one time settlement scheme - manufacturing of black and white picture tubes - Commissioner deleted the addition by observing that the remission of the principal amount of loan did not amount to income u/s 41 (1) nor u/s 28 (iv) nor u/s 2(24) - HELD THAT:- The revenue went in appeal before the Tribunal against the order of the Commissioner of Income Tax (Appeals) with regard to the deletion. We note that the Tribunal has examined the case in detail and particularly from the standpoint of the provisions of Section 41 (1) of the said Act. The Tribunal has observed as under:- 'As per our considered view, for attracting the provisions of Section 41 (1), the first requisite condition to be satisfied is that the assessee should have got deduction or benefit of allowance in respect of loss, expenditure or trading liability incurred by it and subsequently during any previous year, the assessee should have received any amount in respect of such loss, expenditure or trading liability by way of remission or cessation thereof. The remission would become income only if the assessee has claimed deduction in respect of expenditure or trading liability.' We see no reason to interfere with the conclusions of the Tribunal as the same have been rendered on a correct appreciation of law. The principles enunciated in Mahindra and Mahindra Limited v. [2003 (1) TMI 71 - BOMBAY HIGH COURT] are fully applicable and we see no reason to take a different view. Appeal is dismissed. Issues:1. Treatment of waiver of principal amount by a sick company under one-time settlement scheme as income for assessment.2. Interpretation of provisions of Section 41(1) of the Income Tax Act, 1961 in relation to remission of principal amount of loan.3. Applicability of the decision in Mahindra and Mahindra Ltd. v. CIT: 261 ITR 501(Bom) to the present case.Analysis:1. The appeal pertains to the treatment of a sick company's waiver of the principal amount under a one-time settlement scheme as income for assessment. The company, engaged in manufacturing black and white picture tubes, faced significant losses and was registered with the BIFR. The financial institutions and banks required the company to pay 60% of the principal amount due and waived the entire interest payment. The Assessing Officer contended that the waiver of the principal amount should be treated as income since the loans ceased to exist, resulting in a cessation of liability. However, the Commissioner of Income Tax (Appeals) disagreed, stating that the remission of the principal amount did not fall under Section 41(1) or other relevant sections of the Income Tax Act, 1961.2. The revenue appealed to the Tribunal against the Commissioner's decision. The Tribunal analyzed the case in detail, focusing on the provisions of Section 41(1) of the Income Tax Act. The Tribunal emphasized that for Section 41(1) to apply, the assessee must have claimed a deduction in respect of the loss, expenditure, or trading liability. In this case, since the company had not claimed any deduction for the acquisition of capital assets financed by the loan, the remission of the principal amount did not attract Section 41(1). Additionally, the Tribunal noted that the waiver of interest had been treated appropriately by the company, further supporting the conclusion that the remission did not constitute income.3. The High Court upheld the Tribunal's decision, citing the principles established in Mahindra and Mahindra Ltd. v. CIT: 261 ITR 501(Bom). The Court agreed that since no deduction had been claimed for the loan used to purchase capital assets, Section 41(1) was not applicable to the remission of the principal amount. Therefore, the waiver of the principal amount did not amount to income under the Income Tax Act. The Court found no reason to deviate from the Tribunal's interpretation and concluded that no substantial question of law arose for consideration, ultimately dismissing the appeal.