TaxTMI 
TaxTMI 
2019 (7) TMI 788
X X X X Extracts X X X X
X X X X Extracts X X X X
....sue as to whether the waiver of principal portion of loan which was taken for purchase of capital assets is taxable in the hands of the borrower and is not applicable to the facts of the present case. 4. The CIT(A) failed to appreciate that the loans taken from the shareholders in the present case were towards funding the working capital requirements of the assesses company and ought to have appreciated that upon waiver the amount of loan was retained in the business by the assessee and therefore constitutes taxable income of the assessee company. 5. The CIT(A) ought to have followed the decision of the Bombay High Court in the case of Solid Containers vs CIT (308 ITR 407) wherein it was held that the amount which initially did not fall within the scope of the provisions rendering it liable to tax, subsequently upon waiver have become the assessee's income being part of the trading of the assessee. 3. The facts of the case are that the assessee-company was started as a private limited Company on 13.6.1996 and converted to public limited Company on 11.2.200S. The Company was initially incorporated by Mr S.R.Nair, Mrs.Saleena Nair and Mr. Venkitachalam. Mr. Venkitachalam lef....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ital constitute the net worth of the Company. Accordingly, it was noticed that by reducing the loss, the company had gained that much money. According to the Assessing Officer, the assessee could not prove the source of credit of Rs. 20 lakhs on 11.11.2014 as loan from Smt. Saleena Nair. The assesses failed to substantiate the amount of Rs. 90 lakhs credited to Shaleena's account on 6.11.2014, which was transferred to assessee's account on 7.11.2014 accounted as loan. So, the entire amount of Rs. 11000000/- brought into assessee's business as loan from Smt. Shaleena Nair was treated as assessee's own money and whatever liability was outstanding as on 1.4.2014, apart from Director's loan, it was met by the assessee's own money. Hence, the Assessing Officer assessed the amount of Rs. 15925662/- added to the Reserve & Surplus during the year as loan waiver as income of the assessee. 4. On appeal, the CIT(A) observed that three outgoing shareholders Shri S.R.Nair, Srnt.Shleena Nair and M/s Peso Infrastructure Pvt Ltd waived the loan given to the assessee company of Rs. 31,08,832/-, Rs. 1,14,87,737/- and Rs. 15,37,304/- respectively totalling to Rs. 1,61,33,873/....
X X X X Extracts X X X X
X X X X Extracts X X X X
....62/- which the assessing officer had added stating that cessation of liability is taxable. The CIT(A) after considering the facts in detail allowed the claim of the assessee based on the latest decision of the Apex Court in Mahindra & Mahindra (404 ITR 1). Regarding the contention of the revenue that loan waived which was not taken for purchase of capital asset would constitute income, as per judgment of the Apex Court in the case of CIT Vs T V Sundaram lyengar and Sons Ltd. (222 ITR 344), deposit received during the course of business which was no longer repayable was assessed as income. In the assessee's case the waiver was loan from directors and not deposit received in the course of business. 6.1 The Ld. AR submitted that the issues in the case relied on by the CIT (A) are different and, therefore, not applicable in the present case .In this case, the Apex Court had considered the applicability of section 28(iv) in relation to loan waived. With regard to the question of application of section 28 (iv) in relation to waiver of loan, the Apex Court had held in the case of Mahindra and Mahindra (supra) that section 28 (iv) of the IT Act cannot be applied in the case considered ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of this amount which is credited to the Reserve and Surplus account is income chargeable to tax under the Act. According to the Assessing Officer the assessee derived benefit by way of waiver of loans in the course of running of its business activities and therefore, the amount to that extent waived by the Directors is includible in the hands of the assessee as business income. In our opinion, there cannot be any dispute with regard to the contention of the assessee that the waiver of this amount of loan is not hit by Section 41(1) of the Act. In other words, no dispute has been raised by the AO with regard to the applicability of the provisions of section 41(1) of the Act. In this situation, now the question arises as whether the waiver of the above loan can be treated as business income in view of the principles laid down in the case of T.V. Sundaram Iyengar & Sons (222 ITR 344). In the present case, in order to decide the question as to whether the decision of Supreme Court in the case of T.V. Sundaram Iyengar & Sons (supra) is applicable to the present case, we deem it necessary on our part to dwell upon the facts of the present case, particularly to find out the nature and pur....
X X X X Extracts X X X X
X X X X Extracts X X X X
....at case and, therefore, the amount, which was initially did not fall within the scope of the provisions rendering it liable to tax, subsequently have become the assessee's income being part of the trading of the assessee. Further, the assessee because of this transaction became richer by the amount, which had been transferred and/or retained in the Reserve and Surplus account of the assessee. The following observation of Hon'ble Apex Court in T.V. Sundaram Iyengar & Sons Ltd.'s case has been noted by Hon'ble Bombay High Court in the case of Solid Containers Ltd. vs DCIT (308 ITR 417): "22. The principle laid down by Atkinson J. applies in full force to the facts of this case. If a common sense view of the matter is taken, the assessee because of the trading operation had become richer by the amount, which is transferred to its profit and loss account. The moneys had arisen out of ordinary trading transactions. Although the amounts received originally were not of income nature, the amounts remained with the assessee for a long period unclaimed by the trade parties. By lapse of time, the claim of deposit became time barred and the amount attained a totally different quality. It bec....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ry and the waiver could not constitute business. The facts of the present case are entirely different inasmuch as it was a loan taken for trading activity and ultimately, upon waiver the amount was retained in business by the assessee. Thus, the principle stated by the Supreme Court in the case of T.V. Sundaram Iyengar & Sons ltd. (supra) would be squarely applicable to the facts of the present case. The amount which initially did not fall within the scope of the provisions rendering it liable to tax subsequently have become the assessee's income being part of the trading of the assessee. Similar view was also taken by a Bench of Madras High Court in the case of CIT vs Aries Advertising (P) Ltd. (2002) 255 ITR 510. The court took the view that the assessee because of trading operation became richer by the amount which had been transferred and or retained in the Profit and Loss Account of the assessee." 7.4 In the case of CIT vs Aries Advertising P. Ltd., 255 ITR 510 (Mad), an amount of Rs. 1,77,886/-, being the balance due to Printers; Block Makers and Souvenir publishers by the erstwhile firm of an outstanding more than three years had been transferred to general reserve since th....