2016 (4) TMI 131 - HC - Income Tax

Court rules loan waiver not taxable income under Income Tax Act Section 28(iv)

The court held that the waived loan amount did not constitute income under Section 28(iv) of the Income Tax Act as the protection provided to the creditor ... Amount of loan waived - whether it does not constitute the income of the assessee in the context of Section 28[iv] - Held that:- The protection given to the British National by the agreement dated 26.06.2000, cannot be treated as a consideration. The Customs Department was not bound by such an undertaking given by the two Indian Nationals. At the most it was a promise on the part of the Indian Nationals to protect the British National against any claim from the Customs Department. It was a promise to hedge the risk that may fall upon the British National. Once the loan is written off and the person writing off the loan, does not stand to benefit, in any concrete manner, except to the extent that he will be protected against any statutory claim, the same cannot be treated as revenue income. Decided against the appellant/Department. Issues:1. Whether the waived loan amount constitutes the income of the assessee under Section 28(iv) of the ActRs.2. Whether the remission of the loan borrowed for purchasing a capital asset qualifies as a casual and non-recurring receipt for the assesseeRs.Analysis:1. The case involved a Limited Company where a British National, along with two Indian citizens, formed the company and brought in foreign funds. Subsequently, the British National agreed to waive the loan amount advanced to the company in exchange for protection against liabilities arising from non-fulfillment of export obligations. The Assessing Officer treated the waived loan amount as revenue income for the company, a decision upheld by the Commissioner of Income Tax [Appeals] but reversed by the Income Tax Appellate Tribunal. The appellant/Department argued citing CIT Vs. T.V.S. SUNDARAM IYENGAR AND SONS LIMITED, while the respondent/assessee relied on ISKRAEMECO REGENT LIMITED Vs. COMMISSIONER OF INCOME TAX. The Court noted that the decision in TVS Sundaram Iyengar and Sons Limited was not directly applicable to the present case as the protection given to the British National in this scenario did not constitute a consideration. The Court concluded that once the loan is written off, and the person writing off the loan does not stand to benefit significantly except for protection against statutory claims, it cannot be treated as revenue income. Thus, the questions of law were answered against the appellant/Department.2. The Court specifically addressed the second question of law raised in the case, which concerned whether the remission of the loan borrowed for purchasing a capital asset should be considered a casual and non-recurring receipt for the assessee. The Court emphasized that the protection provided to the British National through the agreement was merely a promise by the Indian Nationals to shield him from potential claims by the Customs Department, serving as a risk hedge. As the loan write-off did not result in concrete benefits for the British National beyond statutory protection, it was deemed not to constitute revenue income. Consequently, the Court dismissed the Tax Case Appeal, affirming the decision in favor of the respondent/assessee.