2016 (4) TMI 954 - HC - Income Tax

Loan waiver under settlement scheme taxable as income under Income Tax Act Section 28(iv)

The court held that the waiver of the principal loan amount under a one-time settlement scheme is taxable as income under Section 28(iv) of the Income Tax ... Value of any benefit or perquisite arising from business - waiver or remission of liability as a benefit taxable under Section 28(iv) - remission or cessation of trading liability taxable under Section 41(1) - inclusive definition of 'income' under Section 2(24) - characterisation of loan waiver as capital receipt versus revenue receipt - accounting effect of waiver on liabilities and capital reservesValue of any benefit or perquisite arising from business - inclusive definition of 'income' under Section 2(24) - characterisation of loan waiver as capital receipt versus revenue receipt - accounting effect of waiver on liabilities and capital reserves - Taxability of the principal loan amount waived by the bank under a one time settlement scheme - HELD THAT: - The Court rejected the broad proposition in Iskraemeco Regent Limited that Section 28(iv) has no application to transactions involving money. Section 28(iv) taxes 'the value of any benefit or perquisite, whether convertible into money or not, arising from business'; a waiver of a portion of a loan confers a benefit with a monetary value and therefore falls within that language. The Court noted that the definition of 'income' in Section 2(24) is inclusive and that Section 41(1) contemplates taxation where remission or cessation of liability yields a benefit. Accounting practice shows that waiver reduces the liability in the balance sheet and increases capital reserves (or is reflected in profit and loss), thereby manifesting a realisable benefit to the assessee. For these reasons the Court held that waiver of a loan may amount to a taxable benefit under Section 28(iv)/related provisions and answered the substantial questions of law in favour of the Revenue.Principal loan waiver under the one time settlement is capable of constituting a taxable benefit and the questions of law are answered in favour of the Revenue.Remission or cessation of trading liability taxable under Section 41(1) - remand for fresh consideration of factual/quantification issue - Treatment of the payment/addition of Rs.1,20,26,254/- (book entry/payment) - remand by Tribunal - HELD THAT: - The Tribunal had remanded the issue concerning the disallowance/addition of the payment in question back to the Assessing Officer for fresh consideration. The High Court records that there is no appeal against that remand order and accordingly that factual/quantification issue remains subject to fresh adjudication by the Assessing Officer as remanded by the Tribunal.The question relating to the disallowance/addition of the said payment was remanded to the Assessing Officer for fresh consideration and was not decided on the merits by this Court.Final Conclusion: The appeal by the Revenue is allowed on the legal question: waiver of a portion of a loan can amount to a taxable benefit under Section 28(iv)/related provisions; the factual/quantification issue remitted by the Tribunal remains under remand to the Assessing Officer. Issues Involved:1. Taxability of the principal loan amount waived by the bank under a one-time settlement scheme.2. Applicability of Section 28(iv) of the Income Tax Act to the waiver of the principal loan amount.Detailed Analysis:Issue 1: Taxability of the Principal Loan Amount Waived by the BankThe primary issue was whether the principal loan amount waived by the bank under a one-time settlement scheme is exigible to tax. The assessee had filed a return of income for the assessment year 2006-07, admitting a total loss. The Assessing Officer (AO) found that the assessee had accepted a one-time settlement scheme with Indian Bank, which involved a waiver of &8377; 10.50 Crores. The AO treated the difference of &8377; 1,20,67,406/- as income under Section 28(iv).The Commissioner of Income Tax (Appeals) found that the one-time settlement scheme lapsed as the assessee did not comply with the payment terms initially but later complied in the financial year 2006-07. The First Appellate Authority held that the interest waived was eligible to tax under Section 41(1) but deleted the addition of &8377; 1,67,74,868/-. The Income Tax Appellate Tribunal (ITAT) confirmed the order of the First Appellate Authority, stating that the term loan was used for acquiring capital assets, and followed the decision in Iskraemeco Regent Limited, which held that Section 28(iv) does not apply to the waiver of principal amounts of loans.Issue 2: Applicability of Section 28(iv) of the Income Tax ActThe court examined whether the waiver of the principal amount would constitute income under Section 28(iv) of the Income Tax Act. Section 28(iv) includes 'the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession' as income. The court also considered Section 41(1), which deals with profits chargeable to tax concerning the receipt of a benefit in respect of a trading liability by way of remission or cessation of the liability.The court analyzed various decisions, including T.V.Sundaram Iyengar & Sons Ltd., Solid Containers Ltd., Logitronics P Ltd., and Rollatainers Ltd. In these cases, the courts held that if a loan was taken for acquiring a capital asset, waiver thereof would not amount to income exigible to tax. However, if the loan was for trading purposes and treated as such from the beginning in the books of account, the waiver thereof may result in income, especially when transferred to the profit and loss account.The court noted that the decision in Iskraemeco Regent Limited, which was followed by the First Appellate Authority and the ITAT, held that Section 28(iv) has no application to loan transactions involving money. However, the court found this reasoning incorrect. The waiver of a portion of the loan would certainly tantamount to the value of a benefit, which may arise from business. The court emphasized that the absence of the prefix 'the' to the word 'business' in Section 28(iv) makes a significant difference.The court also discussed the accounting practices, stating that the amount of loan is always treated as a liability and gets reflected in the balance sheet. When a portion of the loan is waived, the total amount of loan shown on the liabilities side of the balance sheet is reduced, and the amount shown as Capital Reserves is increased to the extent of the waiver. Alternatively, the waived portion of the loan is shown as a capital receipt in the profit and loss account.Conclusion:The court concluded that the questions of law are liable to be answered in favor of the Revenue. The waiver of the principal loan amount under the one-time settlement scheme constitutes a taxable receipt under the definition of 'income.' The appeal filed by the Revenue was allowed, and the court held that the waiver of a portion of the loan is taxable under Section 28(iv) of the Income Tax Act.