2025 (8) TMI 423 - AT - Income Tax

ITAT Allows Additional Ground on Loan Waiver Non-Taxability Under Section 41(1) and Section 28(iv)

The ITAT Mumbai upheld the CIT(A)'s admission of the assessee's additional ground regarding non-taxability of the waiver of a working capital loan, ... Additional claim of non-taxability of receipts by way of additional ground raised before the CIT(A) - amount of waiver of working capital loan by the bank which was offered to income chargeable to tax in the return of income - main contention raised by the ld. CIT-DR was that assessee has itself credited the write-back of working capital loan as income in the profit and loss account and offered to tax in the return of income, now assessee cannot take a plea that it is not taxable without filing the return of income u/s.139(1) or by making a claim in the revised return filed u/s.139(5) HELD THAT:- We find that the Hon’ble Jurisdictional High Court in the case of Pruthvi Brokers and Shareholders Pvt. Ltd [2012 (7) TMI 158 - BOMBAY HIGH COURT] after considering the judgment of Goetze India [2006 (3) TMI 75 - SUPREME COURT] and NTPC [1996 (12) TMI 7 - SUPREME COURT (LB)] and various other judgments of the Hon’ble Supreme Court, held that there is a long line of authorities to establish that assessee is entitled to raise additional ground not merely in terms of legal submissions but also additional claims not made in the return of income filed by it. Further the Hon’ble Supreme Court in the case of Wipro Finance Ltd. [2022 (4) TMI 694 - SUPREME COURT] wherein fresh claim was made before the ITAT that loss arising out of forex fluctuation which was capitalised in the return of income was claimed as revenue expenses before the Tribunal. In this regard the Hon’ble Supreme Court rejecting the arguments raised by ld. ASG on behalf of the Revenue that, since assessee in its return of income has taken the conscious plea with regard to part of the claim, then it was not open for the assessee to treat for the first time before the ITAT that the entire claim must be treated as revenue expenditure. Thus, there is no infirmity in the order of the ld. CIT(A) in admitting the additional claim but also here in this case the ld. CIT(A) had duly followed the process laid down by CBDT by asking the remand report from the ld. AO to examine the claim on merits. Accordingly, the order of the CIT(A) admitting the additional ground is confirmed and the ground Nos.1 to 3 raised by the Revenue are dismissed. Write-back of working capital loan which was included as income and offered to tax while filing the return of income - It has not been disputed even by the ld. CIT DR that the principles laid down in the case of Mahindra & Mahindra Ltd. [2018 (5) TMI 358 - SUPREME COURT] is squarely applicable in the case of the assessee, because here in this case the working capital loan was never debited to the trading account or to the profit and loss account in any of the preceding assessment year. It was neither on account of trading liability or other liability. Section 41(1) clearly stipulates that only on remission of claiming liability can be subjected to tax. Here in this case admittedly, waiver of loan amount is not a trading liability and hence, assessee’s case does not fall u/s. 41(1). Secondly, in so far as applicability of Section 28(iv) of the Act, it provides that, income which can be taxed shall arise from business or profession and additionally for the applicability of Section, the value of benefits which arises from the business should be in some other form rather than in the form of money. In the present case it is a matter of record that amount of Rs. 3,55,240/- having received is cash receipt due to waiver of loan. Therefore, the conditions of Section 28(iv) are not applicable. Further the Hon’ble Bombay High Court in the case of Essar Shipping Ltd. [2020 (3) TMI 791 - BOMBAY HIGH COURT] in the issue of waiver of loan whether can be brought to tax u/s.28(iv) after following the principle laid down by the Hon’ble Supreme Court in the case of Mahindra & Mahindra Ltd. (supra) had decided this issue in favour of the assessee as held this amount would be construed to be cash receipt in the hands of the assessee and cannot be taxed under section 28(iv). Decided against revenue. ISSUES: Whether the appellate authority (CIT(A)) erred in admitting additional grounds of appeal not claimed in the original return of income, particularly regarding exemption from taxation of waived working capital loan.Whether the benefit arising from waiver of working capital loan pursuant to a resolution plan approved by NCLT under Insolvency and Bankruptcy Code (IBC) constitutes taxable income under the Income Tax Act.Whether the provisions of Section 41(1) of the Income Tax Act apply to the waiver of working capital loan which was not previously claimed as a deduction by the assessee.Whether the provisions of Section 28(iv) of the Income Tax Act apply to the waiver of working capital loan, treating it as a benefit or perquisite arising from business.Whether the waiver of working capital loan can be treated as capital receipt and thereby excluded from taxable income.Whether the assessee's claim for exemption on the waived loan can be entertained at the appellate stage despite not being claimed in the original return or revised return.Whether the Assessing Officer is obliged to allow carry forward and set off of losses arising from the non-taxability of the waived loan amount as determined on appeal. RULINGS / HOLDINGS: The appellate authority did not err in admitting the additional ground regarding non-taxability of the waived working capital loan, having followed the procedure laid down by CBDT Circular No.33 of 2023 and after seeking the Assessing Officer's comments; the power of appellate authorities to entertain additional grounds not claimed in the original return is upheld.The benefit arising from waiver of working capital loan pursuant to NCLT-approved resolution plan is a capital receipt and not taxable as income under the Income Tax Act.Section 41(1) does not apply because the assessee had not claimed any deduction or allowance in respect of the waived loan amount in any previous year, and waiver does not amount to cessation of trading liability.Section 28(iv) does not apply as the waived loan amount was received in cash or money form; the provision applies only to benefits or perquisites other than in the form of money arising from business or profession.The waiver of working capital loan is correctly treated as a capital receipt and excluded from taxable income, consistent with the ratio in Mahindra & Mahindra Ltd. vs. CIT and other binding precedents.The assessee is entitled to raise the claim for exemption at the appellate stage even if not made in the original or revised return, as supported by Supreme Court and High Court decisions including National Thermal Power Co. Ltd. vs. CIT and Wipro Finance Ltd. vs. CIT.The Assessing Officer is directed to allow carry forward and set off of losses arising from the non-taxability of the waived loan amount as determined on appeal. RATIONALE: The legal framework includes Sections 28(iv) and 41(1) of the Income Tax Act, governing taxation of benefits arising from business and remission or cessation of trading liabilities respectively.Section 41(1) applies only where a deduction or allowance has been claimed in earlier years for loss, expenditure, or trading liability, and subsequently a remission or cessation of such liability occurs; here, no such deduction was claimed for the waived loan.Section 28(iv) applies to benefits or perquisites arising from business other than in cash or money; since the waiver results in cash receipt, it falls outside this provision.Binding Supreme Court precedent in Mahindra & Mahindra Ltd. vs. CIT clarifies that waiver of loan principal does not attract taxation under Sections 28(iv) or 41(1) where no prior deduction was claimed, and the benefit is in cash form.Appellate authorities have plenary power under Section 254 of the Income Tax Act to entertain additional grounds of appeal, including fresh claims not made in the original return, provided procedural safeguards such as seeking Assessing Officer's comments are followed, as affirmed by Supreme Court and various High Courts.The CBDT Circular No.33 of 2023 prescribes the procedure for admission of additional grounds of appeal, which was duly followed by the appellate authority in this case.Judicial precedents distinguish the present case from cases where loan waiver was treated as taxable income due to prior deductions or trading liability, reinforcing the capital receipt treatment here.There is no doctrinal shift; the judgment reaffirms established legal principles and the binding effect of authoritative Supreme Court and High Court decisions on the issues of loan waiver taxation and appellate jurisdiction.