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Income Tax Officer, Ahmedabad vs. Echon Industries Ltd., Ahmedabad - (Income Tax Appellate Tribunal) (24 Aug 2021)

Waiver of loan amount cannot be brought to tax as same is on capital account and not in the nature of income


Direct Taxation

In facts of present case, the assessee is a limited company engaged in manufacturing and trading of PVC Foam sheets. The assessee has e- filed return of income by declaring total loss of Rs. 2,72,39,776 which was processed under Section 143(1) of the Income Tax Act, 1961 (IT Act). Thereafter, on the basis of information received from DIT(R), Delhi that no relief/concession was envisaged by the BIFR while considering sanctioned scheme under OTS. Therefore, after recording reasons, notice under Section 148 was issued for reopening and reframing of the assessment under Section 147 of the IT Act.

The learned Assessing Officer (AO) held that, since the character of receipt has been changed from capital to revenue as the assessee has credited the amount in the profit and Loss account, and the amount of waiver principal amount has not been spent wholly and exclusively for the purposes of earning business profit, no relief or deduction is allowable, because assessee has no liability to pay back that receipt. He accordingly made addition of Rs. 2,47,88,187 being waiver of portion of principal loan, and added to the total income of the assessee. Dissatisfied with the action of the AO, the assessee went in appeal before the first appellate authority. The learned CIT(A) allowed the claim of the assessee by relying the decision of Supreme Court in the case of CIT Vs. Mahindra & Mahindra Ltd. by holding that, waiver of loan amount could not be brought to tax, as the same was on capital account and not in the nature of income. Aggrieved Revenue is in appeal before the Tribunal.

The issue in dispute is about taxability of amount of loan waived by the financial institution, on account of one time settlement. The assessee had outstanding loan liability of Rs. 6,88,90,057 with the IDBI Bank, which was settled under OTS at Rs. 441 lakhs, and the balance amount of Rs.2,47,88,187 representing principal portion of the loan waived by the Bank has been shown as income. The assessee credited the sum as income in the profit & loss account and shown it in the return of income, at the same time, claimed the same deductible income. The learned AO did not accept treatment of waiver amount by the assessee, and held that since the assessee has shown the relief by way of waiver of part of principal amount of loan in the profit & loss account, the character of loan changed from capital to revenue, and therefore, the same liable to be taxed in the hands of the assessee.

However, when the matter carried in appeal before the learned first appellate authority, claim of the assessee was allowed by relying upon the decision of Supreme Court in the case of Mahindra & Mahindra Ltd. The Hon'ble Apex Court in that case held that, the waiver of the amount of term loan availed by the assessee under OTS will not fall under the purview of income either under Section 28(iv) or under Section 41(1) of the Act. Taking support from the judgment of Apex Court, present Tribunal is of the view that, the sum amount in dispute representing waiver of loan liability was on the capital accounts, and not in the nature of income, more so, when no deduction and allowance was made in respect of such loan in any assessment year. Therefore, the learned CIT(A) has rightly appreciated the facts of the case in terms of the judgment of Supreme Court, and allowed the claim of the assessee. Thus, order of the learned CIT(A) is confirmed. Appeal of the Revenue is dismissed.


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