ITAT, ‘C’ BENCH, MUMBAI Taxability of loan liability in hands of borrower when unilaterally written off by lender

Taxability of loan liability in hands of borrower when unilaterally written off by lender



Remission of a debt by the lender which was not claimed and allowed as a deduction to the borrower in any manner in any earlier previous year cannot be brought to tax either under section 41(1) or under section 28(iv) of Income-tax Act, 1961.



ITAT, ‘C’ BENCH, MUMBAI

Cipla Investments Ltd.

v.

ITO

ITA No. 1996/Mum/2008

August 28, 2009



RELEVANT EXTRACTS:

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9. We have considered the issue. As the facts indicate the holding company has advanced funds to the assessee company in 1998 which was received as share application money, later on transferred to unsecured loan. The amounts were utilised in investments and the incomes thereon were offered under the head 'capital gains' and not as 'business income'. As rightly held by the CIT(A), provisions of section 41(1) invoked by the A.O. does not apply. For attracting the provisions of section 41(1) the first requisite condition to be satisfied is that the assessee should have got the deduction or benefit or allowance in respect of loss, expenditure or trading liability incurred by it and consequently, during any previous year the assessee should have received any amount in respect of such loss, expenditure or trading liability by way of remission or cessation thereon. The remission would become income only when the assessee has claimed deduction earlier. In the instant case the assessee has not got any deduction on account of acquisition of capital assets as the same has been reflected in the Balance Sheet and not in the P 8s L Account and hence, applicability of provisions of section 41(1) are not there. The CIT(A)'s order to that extent is correct both on facts and on law. However, the wrongly invoked the provisions of section 28. We are not sure how the provisions of section 28 will apply. It is the contention of the assessee that the assessee has not done any trading activity nor shown any income as business income on the investments made. The findings of the CIT(A) that the amount was received in the course of its business is against his findings given while considering the addition under section 41(1). The assessee's business activity may comprise investment in shares and securities, but as far as computation of income is concerned the profit and loss in that transactions are said to be under the head 'capital gains' but not as 'business income', hence, the gain earned by the assessee in the course of business in investment and advance of loans is in the capital field but cannot be on the revenue field. As rightly held by various decisions above, remission of a debt by the holding company which was not claimed and allowed as a deduction in any manner in any earlier previous year could not be brought to tax either under section 41(1) or under section 28(iv). There is no benefit or perquisite arising to the assessee in this regard. Moreover, the assessee has to write off the amount in the books of account and the amount was still outstanding at the end of the year. As rightly pointed out by the learned counsel the decision of the Hon'ble Bombay High Court in the case of Solid Containers Ltd. (supra) does not apply to the facts of the case and moreover similar to the decision of the Hon'ble Bombay High Court in the case of Mahindra and Mahindra Ltd. vs. CIT 261 ITR 501. The loans availed for acquiring the capita asset, i.e. shares, when waived cannot be treated as assessable income for invoking the provisions of section 28. Since the original receipt was undoubtedly on account of capital nature, its waiver does not have the quality of changing the same into a revenue receipt. In view of these facts and also the various principles laid down in the case law relied upon by the learned counsel, we are of the opinion that the learned CIT(A) erred in treating the amount as taxable income in the hands of the assessee under section 28 of the Act. On the facts of the case, we are of the opinion that the provisions of section 28 does not apply and the amount is not taxable under the provisions of the Act. Accordingly the assessee’s grounds are allowed. Assessing Officer is directed to deleted the amount.

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