2023 (6) TMI 1209 - AT - Income Tax

Loan waiver in One Time Settlement deemed taxable income under Income Tax Act

The Tribunal dismissed the appeal, affirming that the waiver of the principal loan amount in a One Time Settlement is taxable income under Sections 28(iv) ... Taxability of loan waiver as business income - Waiver of debt and characterisation as capital or revenue receipt - Section 28(iv) of the Income tax Act - Section 2(24)(xvii) - waiver/concession treated as income (applicable from AY 2016 17) - Accounting treatment - credit of waiver to profit & loss account - Distinction between loans for acquisition of capital assets and loans for working capital (Mahindra & Mahindra) - T.V. Sundaram principle - change of character to income when amount becomes assessee's own moneyTaxability of loan waiver as business income - Waiver of debt and characterisation as capital or revenue receipt - Section 28(iv) of the Income tax Act - Section 2(24)(xvii) - waiver/concession treated as income (applicable from AY 2016 17) - Accounting treatment - credit of waiver to profit & loss account - Distinction between loans for acquisition of capital assets and loans for working capital (Mahindra & Mahindra) - T.V. Sundaram principle - change of character to income when amount becomes assessee's own money - Whether the principal portion of the loan waived under the One Time Settlement is assessable as business income for A.Y.2016 17 - HELD THAT: - The Tribunal held that the loans were borrowed to further the assessee's micro finance business (Master Facility Agreement clause 3: funds to be applied for making micro loans) and thus were working capital in nature rather than loans for acquisition of capital assets. The assessee had credited the entire waiver amount to its profit and loss account and offered only the interest component to tax; this accounting treatment was an uncontroverted factual finding. The Tribunal distinguished the Supreme Court decision in Mahindra & Mahindra (which concerned loans for acquisition of capital assets) and observed that Mahindra is not applicable where loans are for business/working capital. Relying on the principle in T.V. Sundaram that amounts arising in the course of trading may change character and become income when they become the assessee's own money, and on decisions of High Courts and Tribunals holding that waiver of loans taken for trading/business purposes results in taxable income under Section 28(iv), the Tribunal affirmed that the waived principal part constitutes income. The Tribunal further accepted the reasoning that, from AY 2016 17, the expanded definition of income under Section 2(24)(xvii) (waiver/concession in cash or kind) supports taxing such waiver where the statutory amendment is attracted. Applying these legal principles to the material facts - working capital purpose, waiver credited to P&L, and the statutory position for the relevant year - the Tribunal sustained the addition made by the Assessing Officer and upheld the CIT(A)'s conclusion. [Paras 13, 14, 15, 16, 21]Addition of the waived principal was upheld as taxable business income; the appeal is dismissed.Final Conclusion: The Tribunal dismissed the assessee's appeal for A.Y.2016 17, holding that the principal portion of the loan waived under the One Time Settlement, being a waiver of a loan taken for business (working capital), and having been credited to the profit and loss account, is taxable as business income under Section 28(iv) and is supported by the statutory position from Section 2(24)(xvii) for the relevant year. Issues Involved:1. Delay in filing the appeal.2. Taxability of waiver of principal loan amount under One Time Settlement (OTS).3. Applicability of Sections 28(iv) and 41(1) of the Income Tax Act.4. Applicability of Section 2(24)(xviii) of the Income Tax Act.Summary:1. Delay in Filing the Appeal:The assessee filed the appeal with a delay of 5 days citing the Covid-19 pandemic as the reason. The Tribunal condoned the delay after considering the condonation application and affidavit.2. Taxability of Waiver of Principal Loan Amount:The assessee, a company engaged in micro-financing, had availed a rupee term loan from Citi Bank, guaranteed by Blue Orchard Micro Finance (BOMF). Due to financial constraints, the assessee entered into a One Time Settlement (OTS) with BOMF, paying a reduced amount. The Assessing Officer (AO) added the waived principal amount of Rs.14,89,99,689 to the total income, treating it as a revenue receipt.3. Applicability of Sections 28(iv) and 41(1) of the Income Tax Act:The CIT(A) upheld the AO's decision, stating that the waiver of the loan is taxable under Section 28(iv) as a business income since the loan was for working capital purposes and not for acquiring capital assets. The CIT(A) distinguished this case from the Supreme Court decision in Mahindra & Mahindra, which dealt with loans for capital assets.4. Applicability of Section 2(24)(xviii) of the Income Tax Act:The CIT(A) also invoked Section 2(24)(xviii), which includes any assistance in the form of a waiver as income. Since the loan was for business purposes, the waiver was considered taxable income under this section for the assessment year 2016-17.Tribunal's Decision:The Tribunal dismissed the appeal, agreeing with the CIT(A) that the waiver of the principal amount, which was credited to the profit and loss account, results in income and is taxable. The Tribunal found that the waiver of the loan taken for trading purposes is taxable under Sections 28(iv) and 2(24)(xviii) of the Income Tax Act, and the decision of the Supreme Court in Mahindra & Mahindra was not applicable as it dealt with loans for capital assets. The appeal was dismissed, and the addition to the income was upheld.