By TIOL News Service

NEW DELHI, MAY 02, 2018: THE issue is - Whether loan waiver granted by overseas supplier of capital assets is waiver of trading liability and it falls within the purview of Sec 41(1). NO is the verdict.

Facts of the case

The Assessee-company is a leading automobile company. The assessee decided to expand its jeep product line by including FC-150 and FC-170 models and for that purpose, it entered into an agreement with Kaiser Jeep Corporation (KJC) based in America. As per the agreement, the KJC agreed to sell the die, welding equipments and die moulds to the assessee. The final price of the tooling and other equipments was agreed at ,50,000/- including cost, insurance and freight (CIF). Accordingly, the assessee took all the requisite approvals and the equipments were supplied by the KJC. For the procurement of the said toolings and other equipments, the KJC also agreed to provide loan to the assessee at the rate of 6% interest repayable after 10 years in installments and for that purpose, the assessee got the requisite approval from the RBI.

In the meantime, one American Motor Corporation (AMC) had taken over the KJC and also agreed to waive the principal amount of loan advanced by the KJC to the assessee and to cancel the promissory notes as and when they got matured. Thereafter, the assessee filed its return and disclosed around Rs. 57 lakhs as cessation of its liability towards the AMC. However, after perusal of the return, the AO concluded that with the waiver of the loan amount, the credit represented income and not a liability. Accordingly, the AO held that such sum was taxable u/s 28. Being dissatisfied, the assessee preferred an appeal before the CIT(A), which dismissed the appeal and upheld the decision of the AO. On further appeal by the assessee, the Tribunal decided the matter in favour of the assessee. Thereafter, on Revenue's appeal, the High Court also confirmed the decision of the Tribunal.

On hearing the matter, the Apex Court held that,

++ it is a well-settled principle that creditor or his successor may exercise their "Right of Waiver" unilaterally to absolve the debtor from his liability to repay. After such exercise, the debtor is deemed to be absolved from the liability of repayment of loan subject to the conditions of waiver. The waiver may be a part waiver i.e., waiver of part of the principal or interest repayable, or a complete waiver of both the loan as well as interest amounts. Hence, waiver of loan by the creditor results in the debtor having extra cash in his hand. It is receipt in the hands of the debtor/assessee. The short but cogent issue in the instant case arises whether waiver of loan by the creditor is taxable as a perquisite under Section 28 (iv) of the IT Act or taxable as a remission of liability under Section 41 (1) of the IT Act;

++ for the applicability of the provision of section 28 (iv), the income which can be taxed shall arise from the business or profession. Also, in order to invoke the provision of Section 28 (iv) of the IT Act, the benefit which is received has to be in some other form rather than in the shape of money. In the present case, it is a matter of record that the amount of Rs. 57,74,064/- is having received as cash receipt due to the waiver of loan. Therefore, the very first condition of Section 28 (iv) of the IT Act which says any benefit or perquisite arising from the business shall be in the form of benefit or perquisite other than in the shape of money, is not satisfied in the present case. Hence, in no circumstances, it can be said that the amount of Rs 57,74,064/- can be taxed under the provisions of Section 28 (iv) of the IT Act;

++ it is a sine qua non that there should be an allowance or deduction claimed by the assessee in any assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee. Then, subsequently, during any previous year, if the creditor remits or waives any such liability, then the assessee is liable to pay tax under Section 41 of the IT Act. The objective behind this Section is simple. It is made to ensure that the assessee does not get away with a double benefit once by way of deduction and another by not being taxed on the benefit received by him in the later year with reference to deduction allowed earlier in case of remission of such liability. It is undisputed fact that the assessee had been paying interest at 6 % per annum to the KJC as per the contract but the assessee never claimed deduction for payment of interest under Section 36 (1) (iii) of the IT Act. In the case at hand, CIT (A) relied upon Section 41 (1) of the IT Act and held that the assessee had received amortization benefit. Amortization is an accounting term that refers to the process of allocating the cost of an asset over a period of time, hence, it is nothing else than depreciation. Depreciation is a reduction in the value of an asset over time, in particular, to wear and tear. Therefore, the deduction claimed by the assessee in previous assessment years was due to the deprecation of the machine and not on the interest paid by it;

++ the purchase effected from the Kaiser Jeep Corporation is in respect of plant, machinery and tooling equipments which are capital assets of the assessee. It is important to note that the said purchase amount had not been debited to the trading account or to the profit or loss account in any of the assessment years. There is difference between 'trading liability' and 'other liability'. Section 41 (1) of the IT Act particularly deals with the remission of trading liability. Whereas in the instant case, waiver of loan amounts to cessation of liability other than trading liability. Hence, there is no force in the argument of the Revenue that the case of the assessee would fall under Section 41 (1) of the IT Act.

(See 2018-TIOL-173-SC-IT)