2023 (5) TMI 1366 - AT - Income Tax

Bank loan waiver not taxable under section 41(1) without prior deduction claim

ITAT Mumbai dismissed revenue's appeal regarding waiver of loan liability under section 41(1). The assessee, facing heavy business losses and ... Cessation of trading liability u/s. 41(1) - due to heavy business losses and non realization of export proceeds from overseas clients, Assessee could not repay the entire - whether the waiver of certain part of principal loan taken from the banks, taken for post shipment credit for a period between the time shipments is sent and the time when the shipment is received by the other party? - HELD THAT:- The condition for invoking of section 41(1) (a) is that, where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee and subsequently during any previous year, any benefit, whether in terms of money or not, in lieu of such loss, expenditure or trading liability shall be chargeable to income-tax as the income of that previous year. Here in case of the Assessee, the loan was never part of profit & loss account in any of the previous year and was capital in nature. Hon’ble Supreme Court in the case of Mahindra and Mahindra Ltd [2018 (5) TMI 358 - SUPREME COURT] while deciding the issue of waiver of loan, held that for invoking the provision of section 41(1), it is sine-qua-non that allowance of deduction should be claimed by the Assessee in any assessment for any year, in respect of loss, expenditure or trading liability incurred by the Assessee and then subsequently, if the creditor remits or waives any such liability then assessee liable to pay tax u/s. 41 of the Act. Objective behind this section is to ensure that assessee does not get way with the double benefit. Here in this case the loan taken by the assessee was neither an expenditure nor trading liability and therefore waiver of such loan which otherwise was capital in nature, the provision of section 41 (1) cannot be invoked. Waiver of loan amount considered as a benefit u/s 28(iv) - Section 28 (iv) also does not apply, as benefit on waiver of loan was not in the kind of money, i.e., cash receipt. Thus, the Ld. CIT (A) has rightly followed the principle laid down by the Hon’ble Apex Court. This principle has been retreated in several judgments on waiver of loan including the judgment of Gujarat State Financial Corporation [2020 (4) TMI 32 - GUJARAT HIGH COURT] And SLP by the department has been dismissed as reported by the Ld. CIT(A) [2021 (2) TMI 1349 - SC ORDER] Accordingly, the order of the CIT (Appeals) is confirmed and the grounds raised by the Revenue dismissed. Issues:- Whether waiver of loan amount taken by the Assessee should be treated as income and taxed under section 41(1) of the Income Tax Act.- Whether the waiver of loan amount can be considered as a benefit under section 28(iv) of the Income Tax Act.Analysis:1. Revenue's Appeal - Deletion/Addition under Section 41(1):- The Revenue appealed against the deletion of sums under section 41(1) for the AYs 2013-14 & 2014-15.- The loans were taken for working capital needs, and due to financial crisis, the Assessee approached banks for a one-time settlement.- The Assessing Officer (AO) invoked section 41(1)(a), treating the waived amount as income of the Assessee.- The CIT(A) held that the loan amount was not part of the profit & loss account and was capital in nature, citing relevant judgments.2. Applicability of Section 28(iv) and Section 41(1):- The Tribunal analyzed the applicability of Section 28(iv) and Section 41(1) of the IT Act.- Section 28(iv) requires the benefit to arise from the business and not in the form of money, which wasn't satisfied in this case.- Section 41(1) mandates an allowance or deduction claimed by the assessee, which was not the case with the loan in question.- The Tribunal concluded that waiver of the loan did not amount to cessation of trading liability and hence, section 41(1) did not apply.3. Judicial Precedents and Supreme Court's Decision:- The Tribunal referred to the Supreme Court's decision in the case of Mahindra and Mahindra Ltd regarding the waiver of loans.- It highlighted the distinction between trading liability and other liabilities under Section 41(1) of the IT Act.- The Tribunal held that the loan waiver was not a trading liability and therefore, the provision of section 41(1) could not be invoked.4. Final Decision and Dismissal of Appeals:- The Tribunal confirmed the order of the CIT(A) and dismissed the Revenue's appeals.- The waiver of loan amount was considered capital in nature, and neither section 41(1) nor section 28(iv) applied.- The cross objections filed by the Assessee were allowed, supporting the CIT(A)'s order.This detailed analysis of the judgment highlights the key legal issues, the arguments presented by both parties, the application of relevant sections of the Income Tax Act, and the Tribunal's decision based on judicial precedents and legal principles.