TaxTMI 
TaxTMI 
2023 (6) TMI 1209
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....via micro financing. It filed its return of income on 27.09.2016 which was subsequently revised on 26.10.2017 admitting total loss of Rs.307,12,55,288/-. The case was selected for scrutiny and statutory notice u/s 143(2) and 142(1) were issued from time to time to which the AR of the assessee appeared before the AO and filed the requisite details. 4. During the course of assessment proceedings, the AO noted from the computation statement that the assessee company has claimed an amount of Rs.14,89,99,689/- as gain in One Time Settlement (OTS) of the term loan borrowings and reduced the same from computation. From the details furnished by the assessee, he noted that the assessee company has availed rupee term loan of Rs.25.92 crores from Citi Bank against which guarantee was provided by Blue Orchard Micro Finance, Luxembourg (BOMF). Subsequently, the assessee company was referred to the Corporate Debt Restructuring (CDR) to restructure its outstanding debts. Being a non-CDR lender, Citibank invoked the stand-by letter of Credit issued by Citibank International on behalf of BOMF and appropriated the outstanding rupee term loan and closed the account. Thus, BOMF became a creditor to....
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....the nature of the loan availed by the assessee. 7.10 As seen from the details and the documentary evidence placed on record, the assessee, being a Non-Banking Financial Company ('NBFC' for short), had availed rupee term loan from the Citi Bank, India to the extent of Rs.25,92,00,000/- during the FY 2009-10 relevant to the AY 2010-11, vide Facility Agreement dated 09.10.2009. Further, the said loan was guaranteed by a non-resident investor i.e., M/s. B8OME, and the Citi Bank, London, in turn, gave standby Letter of Credit to the Citi Bank, India, to disburse the rupee term loan to the assessee. Accordingly, the assessee entered into a guarantee fee agreement with M/s. BOMF on 07.10.2009. 7.11 However, due to operational constraints imposed by the enactment of the AP Micro Finance institutions (Regulation of the money lending) Act, 2010, the assessee was referred to the Corporate Debt Restructuring ('CDR' for short) Cell, so as to restructure its outstanding debt. At this juncture, it may be noted that, though most of the lenders of the Assessee had restructured their debt ds per the CDR, the Citi Bank, India did not join the CDR scheme. Instead, it ....
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....argeable to tax either u/s.28(iv) of the Act, or u/s. 41(1) of the Act. However, the Hon'ble Supreme Court in the case of Mahindra and Mahindra Limited (supra) has settled a party of the issue, wherein it has been held that in a case of a term loan barrowed for acquisition of capital assets, any interest waiver relating to the principal amount cannot be brought to tax either u/s. 28{iv) of the Act, or u/s. 41(1) of the Act. 7.16 While doing so, the Hon'ble Supreme Court has held that, for applying the provisions of sec.28(iv) of the Act, the benefit must have been received by the assessee in some other form / kind rather than in the shape of money. However, in a case of the waiver of the loan, the amount was received in the form of cash, and, therefore, the same cannot be considered as the income within the meaning of sec.28 (iv) of the Act, observed by the court. In regard to bringing the same to tax u/s.41(1) of the Act, the court has held that there must have been an allowance or deduction which was claimed by the assessee earlier, and, subsequently, the creditor remits or waives off the liability. The head note of the judgment (93 taxmann.com 32 (SC)) is reprod....
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....of the loan is subject to tax by virtue of newly inserted clause (xviii) of sub-sec. (24) of sec.2 of the Act. To be precise, the definition of income as provided u/s. 2(24) of the Act, was amended by the Finance Act, 2015 with effect from 01.04.2016 i.e.. the AY 2016-17 onwards. Accordingly, the income includes any assistance in the form of the subsidy, or the grant given by the Central or State Government or any authority or body or any agency, shall be considered as the income of the assessee, except where the subsidy or the grant or the reimbursement is considered for the determination of actual cost of the asset. The relevant portion of the statute is reproduced below for ready reference. 2(24)(xvii) of the Act: "assistance in the form of a subsidy or grant or cash incentive or duty drawback or waiver or concession or reimbursement (by whatever name called) by the Central Government or a State Government or any authority or body or agency in cash or kind or grant other than the subsidy to the assessee reimbursement which is taken into account of determination of the actual cost of the asset in accordance with the provisions of Explanation 10 to clause (1) of ....
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....e Ld. CIT(A) has erred on facts in confirming the order of the AO making an addition of a sum of Rs. 14,89,99,689 to the returned income and reduced the loss on the ground that waiver of loan (principal) under an one-time settlement agreement, assumes the character of revenue receipts and hence should be treated as taxable income. 6. The one-time settlement offered to the assessee of the term loan based on the scheme against erosion of capital. The waiver of such term loan has reduced the erosion of capital under the scheme, it will remain as capital transaction, and it can never be treated as revenue. 7. Reliance is placed on the following judicial pronouncements: a) CIT Vs Sundaram lyengar (T.V.) and Sons Ltd (1 996) 222 IT R 344 (SC) b) JSW Steels vs. ACIT, ITA No.9 c) ITO vs. TiniPharma Ltd., Hyderabad ((TA No. 669/HYD2016) d) ITO Vs Gold Chick Hatcheries & Food Ltd., Hyderabad ([TA No. 668/HYD/2016)" 7. The learned Counsel for the assessee strongly opposed the order passed by the CIT (A) in confirming the disallowance made by the Assessing Officer. He submitted that as per the One Time Settlement (OTS) claim dated 25.11.....
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....deduction in any of the earlier years. It is not the case of the Assessing Officer or the CIT (A) that any benefit of such liability was claimed by the assessee in any assessment year. Therefore, the waiver of the term loan, which is upon settlement by a third party, cannot by any stretch of imagination be connected to any loss or expenditure or trading liability contemplated under the provisions of section 41(1). Therefore, the loan waiver cannot be taxed as business profits. 9. Referring to the decision of the Vizag Bench of the Tribunal in the case of ITO vs. Sri Vasavi Polymers (2020) 117 Taxmann.com 236, he submitted that the Tribunal, relying on the decision of the Hon'ble Supreme Court in the case of Mahindra & Mahindra (Supra) held that gain on OTS is not taxable even though, in this case borrowings were utilized for working capital. 9.1 Referring to the decision of the Coordinate Bench of the Tribunal in the case of TINI PHARMA Ltd vide ITA No.669/Hyd/16, he submitted that in this case also the loan was taken for working capital and packing credit and the Tribunal had held that waiver of loan is in the nature of capital receipt and the appeal filed by the assessee wa....
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....y treating the same as capital in nature. 12. We find the CIT (A) upheld the action of the Assessing Officer, the reasons of which have already been reproduced in the preceding paragraph. It is the submission of the learned Counsel for the assessee that provisions of sec 28(iv) and 41(1)(a) are not applicable to the facts of the present case in view of the decision of the Hon'ble Supreme Court in the case of Mahindra & Mahindra (Supra), the decision of the Vizag Bench of the Tribunal in the case of ITO vs. Sri Vasavi Polymers (Supra)and the decision of the Coordinate Bench of the Tribunal in the case of TINY PHARMA Ltd (Supra) and various other decisions. 13. We do not find any force in the above argument of the learned Counsel for the assessee. The assessee in the instant case is a non-banking finance company and was advancing loans to various entities. It has availed loan from Citi Bank which is for the business of the assessee company and not for acquiring any capital asset like Plant & Machinery, land & building etc., A perusal of the Master Facility Agreement (MAF), copy of which is placed at page 21 to 56 of the Paper Book, shows that the assessee is a Micro-Finance Ins....
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....ng transactions. Although the amounts received originally was not of income nature, the amounts remained with the assessee for a long period unclaimed by the trade parties. By lapse of long time, the claim of the deposit became time barred and the amount attained a totally different quality. It became a definite trade surplus. Atkinson, J. pointed out that in Tattersall's case no trading asset was created. Mere change of method of book-keeping had taken place. But, where a new asset came into being automatically by operation of law, common sense demanded that the amount should be entered in the profit and loss account for the year and be treated income. In other words, the principle appears to be that of an amount is received in course of trading transaction, even though it is not taxable in the year of receipt as being of revenue character, the amount changes its character when the amount becomes the assessee's won money because of limitation or by any other statutory or contractual right. When such a thing happens, common sense demands that the amount should be treated as income of the assessee. In the present case, the money was received by the assessee in cours....
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....Section 28(iv). A monetary transaction, in the true sense of the term, can also have a value. Any number of instances where a monetary transaction confers a benefit or perquisite that would have a value, can be conceived of. There may be cases where an incentive is granted by the supplier, waiving a portion of the sale price or granting a rebate or discount of a portion of the price to be paid, when the payments scheduled over a period of time, are made promptly. It is needless to point out that in such cases, the prompt payment of money itself brings forth a benefit in the form of an incentive or a rebate or a discount in the price of the product. We do not know why it should not happen in the case of waiver of a part of the loan. Therefore, the finding recorded in paragraph 27.1 of the decision in Iskraemeco Regent Limited that Section 28(iv) has no application to any transaction, which involves money, is a sweeping statement and may not stand in the light of the express language of Section 28(iv). In our considered view, the waiver of a portion of the loan would certainly tantamount to the value of a benefit. This benefit may not arise from "the business" of the assessee. But it....
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....the loan is reduced, not by repayment, but by the lender writing it off (either under a one time settlement scheme or otherwise), only one entry gets into the books, as a natural entry. A double entry system of accounting will not permit of one entry. Therefore, when a portion of the loan is waived, the total amount of loan shown on the liabilities side of the balance sheet is reduced and the amount shown as Capital Reserves, is increased to the extent of waiver. Alternatively, the amount representing the waived portion of the loan is shown as a capital receipt in the profit and loss account itself. These aspects have not been taken note of in Iskraemeco Regent Ltd. 44. In view of the above, the questions of law are liable to be answered in favour of the Revenue/appellant. Accordingly, they are answered in favour of the appellant/Revenue and the appeal filed by the Revenue is allowed. No costs." 18. So far as the decision of the Hon'ble Supreme Court in the case of Mahindra & Mahindra is concerned, we find the said decision is distinguishable and not applicable to the facts of the present case since in that case the loan was obtained for capital assets. The Hon'ble Supr....