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) and 2(24)(xviii) of the Income Tax Act. The Tribunal agreed with the CIT(A) that the waiver, treated as a revenue receipt, constitutes income and is subject to taxation, distinguishing it from cases involving loans for capital assets. The delay in filing the appeal was condoned due to the Covid-19 pandemic, but the decision regarding the taxability of the waived amount was upheld.

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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.

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