2025 (4) TMI 135 - AT - Income Tax

Debt forgiveness under settlement agreement cannot be taxed under Section 28(iv) as monetary benefit not benefit in kind

ITAT Hyderabad ruled that debt forgiveness under a settlement agreement cannot be taxed under Section 28(iv) as it constitutes monetary benefit, not ... Benefit derived from ‘debt forgiveness’ on account of Settlement Agreement - Whether be brought to tax u/s 28(iv)? - CIT(A) held that the amount received by the assessee as advance was in terms of money and not as any non-monetary benefit. Further, the same is not held as cession of liability by the AO himself. HELD THAT:- In order to invoke provisions of Section 28(iv) of the Act, there should be a business connection between the benefit and the business and further, the benefit which is received should be in kind or some other form other than the shape of money. Since the benefit derived by the assessee in the form of money is monetary benefit, in our considered view, the provisions of Section 28(iv) of the Act, cannot be applied and this principle is supported by the decision of case of CIT Vs. Mahindra and Mahindra Ltd [2018 (5) TMI 358 - SUPREME COURT] As held by the Hon'ble Supreme Court in the above case, there is no scope for applicability of Section 41(1) of the Act, because in order to apply provisions of Section 41(1) of the Act, the first mentioned person has obtained, whether in cash or in any manner whatsoever any amount in respect of such loss or expenditure or some benefit in respect of such trade and liability by way of remission or cession of liability thereof, the amount obtained by such person or the value of benefit shall be deemed to be profits and gain of business or profession and accordingly, chargeable to tax as the income of that previous year whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not. On a perusal of the said provisions, it is evident that it is a sine qua non there should be any allowance or deduction claimed by the assessee in any assessment for any assessment year in respect of loss or expenditure or trading liability and further subsequently during any previous year, if the creditor remits or waives off any such liability, then the assessee is liable to pay tax u/s 41(1) of the Act. In the present case, the benefit derived by the assessee in pursuant to Settlement Agreement dt.13.01.2010 is a debt forgiveness being loans received from Smith Group of Companies and therefore, the same cannot be treated as trading liability to invoke provisions of Section 41(1). In any case, it is not the case of the Assessing Officer that the provisions of Section 41(1) of the Act, is applicable, because the AO never invoked Section 41(1) of the Act. Benefit derived by the assessee on account of ‘debt forgiveness’ as business profits u/s 28(i) - We are of the considered view that the benefit derived by the assessee on account of debt forgiveness in pursuant to Settlement Agreement dt.13.01.2010, is not a business profit, as specified in Section 28(iv) of the Act i.e., the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession and therefore, in our considered view, there is no error in the findings recorded by the CIT(A) to delete the addition made by the AO towards benefit derived by the assessee on account of ‘debt forgiveness’ as business profits under Section 28(i) of the Act. Thus, we are inclined to uphold the findings of LD.CIT(A) and dismiss the appeal filed by the Revenue. Assessment u/s 153A - disallowance of expenditure - It is an admitted fact that a search and seizure operation u/s 132 of the Act was conducted on 09.04.2014 and as on the date of search, the assessment for A.Y. 2011-12 has been completed/ unabated, because the time limit for issuance of notice u/s 143(2) of the Act, has expired on 30.09.2012 i.e., before the date of search on 09-04-2014. Once the assessment is unabated / concluded as on the date of search, the assessee cannot make any fresh claim of deduction towards expenditure, unless the said claim is based on incriminating material found as a result of search and this principle is supported in the case of DCIT Vs. M/s. Sew Infrastructure Limited. [2024 (10) TMI 1144 - ITAT HYDERABAD] In the present case, since the assessment is unabated / concluded as on the date of search, the assessee cannot make fresh claim of deduction towards any expenditure, if such claim is not based on any incriminating material found as a result of search. Since the fresh claim made by the assessee is not based on any incriminating material found as a result of search, in our considered view, the fresh claim towards expenditure cannot be allowed as deduction. We direct the AO to exclude the income declared by the assessee and assessed by the AO towards ‘debt forgiveness’ as income for the assessment year 2011-12. Once the income has been excluded for the assessment year 2011-12, then loss declared by the assessee would increase to that extent. Therefore, even if disallowance of expenditure is taken into account, it is only reducing the loss as reported by the assessee, but it does not lead to an assessment of income of Rs. 27,55,09,803 as computed by the AO. Therefore, on this count also the addition made by the AO towards disallowance of expenditure cannot be sustained. Since the fresh claim made by the assessee towards income and expenditure is not in accordance with the provisions of Section 153A in our considered view, the expenditure claimed by the assessee and disallowed by the AO cannot be sustained. Thus, we direct the AO to delete the addition made towards disallowance of expenditure. ISSUES PRESENTED and CONSIDERED1. Whether the benefit derived from 'debt forgiveness' as per the Settlement Agreement dated 13.01.2010 should be taxed under Section 28(iv) of the Income Tax Act, 1961 for the assessment year 2010-11.2. Whether the assessee can make a fresh claim of deduction towards expenditure in the return of income filed in response to notice under Section 153A of the Act for the assessment year 2011-12.ISSUE-WISE DETAILED ANALYSISIssue 1: Taxability of Debt Forgiveness under Section 28(iv)Relevant Legal Framework and Precedents: The core legal question revolves around the applicability of Section 28(iv) of the Income Tax Act, which concerns the taxability of any benefit or perquisite arising from business or the exercise of a profession, provided it is not in the form of money. The decision of the Hon'ble Supreme Court in CIT vs. Mahindra & Mahindra Ltd. was pivotal, establishing that monetary benefits do not fall under Section 28(iv).Court's Interpretation and Reasoning: The Tribunal noted that the benefit derived by the assessee was in the form of debt forgiveness, which is monetary. Thus, Section 28(iv) was deemed inapplicable as the section pertains to non-monetary benefits.Key Evidence and Findings: The Settlement Agreement dated 13.01.2010 between the assessee and Smith Group resulted in the forgiveness of a monetary debt. The Tribunal found that this forgiveness was recorded as a monetary transaction in the books of the assessee.Application of Law to Facts: The Tribunal applied the precedent set by the Supreme Court in Mahindra & Mahindra, concluding that since the benefit was monetary, it could not be taxed under Section 28(iv).Treatment of Competing Arguments: The Revenue argued for the application of Section 28(iv), asserting that the benefit arose from business activities. However, the Tribunal rejected this, emphasizing the monetary nature of the benefit.Conclusions: The Tribunal upheld the CIT(A)'s decision to delete the addition made by the Assessing Officer, confirming that the debt forgiveness was not taxable under Section 28(iv).Issue 2: Fresh Claims in Returns Filed under Section 153ARelevant Legal Framework and Precedents: The issue pertains to whether fresh claims for deductions can be made in returns filed under Section 153A following a search. The Tribunal referred to the decision in DCIT Vs. M/s. Sew Infrastructure Limited, which outlines that fresh claims are not permissible in concluded assessments unless based on incriminating material found during the search.Court's Interpretation and Reasoning: The Tribunal held that since the assessment for AY 2011-12 was concluded as of the search date, the assessee could not make fresh claims unless they were based on incriminating material.Key Evidence and Findings: The Tribunal noted that the assessee's fresh claims were not based on any incriminating material discovered during the search.Application of Law to Facts: Applying the principles from the Sew Infrastructure case, the Tribunal concluded that the fresh claims made by the assessee were invalid.Treatment of Competing Arguments: The Revenue argued against allowing fresh claims, citing the principle that concluded assessments cannot be reopened for the assessee's benefit. The Tribunal agreed with this stance.Conclusions: The Tribunal directed the Assessing Officer to disregard the fresh claims made by the assessee, thereby reverting to the original return filed.SIGNIFICANT HOLDINGSCore Principles Established: The Tribunal reinforced the principle that Section 28(iv) does not apply to monetary benefits, as established in Mahindra & Mahindra. Additionally, it confirmed that fresh claims in returns filed under Section 153A are impermissible in concluded assessments unless based on incriminating material.Final Determinations on Each Issue: The Tribunal dismissed the Revenue's appeal for AY 2010-11, upholding the CIT(A)'s decision that the debt forgiveness was not taxable under Section 28(iv). For AY 2011-12, the Tribunal also dismissed the Revenue's appeal, confirming that the assessee's fresh claims were invalid.