Facts

Assessee had acquired certain tooling and equipments from KJC for which KJC agreed to provide loan to the assessee. Subsequently, another entity took over  KJC and agreed to waive outstanding loan amount. Assessing Officer claimed that waived amount represented income under section 28(iv) or alternatively, under section 41(1) of the Act. The same was confirmed by CIT(A). However, ITAT and  theHigh Court reversed the said findings of the lower authorities.

Issues

Whether waiver of loan can be taxed under section 28(iv) or section 41(1) of the Act?

Views

Waiver of loan take by an assessee cannot be considered as income as the same amounts to a capital receipt. As a result, the same cannot be taxed under the    Act. Section 28(iv) of the Act taxes value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession. The said section can be invoked to tax something which is convertible intomoney,  meaning thereby it  can tax any receipt which is  not in the form   of money or cash. Waiver of loan is a benefit received in the form of money, therefore, section 28(iv) does not apply.  In so far as section 41(1) is concerned,    the same brings to tax any loss, expenditure or trading liability in respect of which a deduction or allowance is claimed by the assessee and subsequently, any benefit is received by the assessee in the form of cash or remission or cessation      of liability. Loan taken by an assessee is not a trading liability and no deduction     is taken in respect of such loan liability. Therefore, on waiver, section 41(1) does  not get attracted.

Held

The Court held that, in order to invoke the provision of Section 28 (iv) of the    Act, the benefit which is received has to be in some other form rather than in       the shape of money and in case of waiver of loan, the benefit is received in the  form of cash. Therefore, section 28(iv) does not get attracted. In so far as section 41(1) is concerned, the Court held that 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. 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(1) of the Act. In respect of loan, no deduction is claimed by the assessee and in the facts of the  case, even the interest amount was not claimed as a deduction under section 36(1)(iii) of the Act. Further, the Court also held that waiver of loan amounts to cessation of liability other than trading liability. Resultantly, the Court held that section 41(1) also does not apply to such waiver of loan. (AY. 1976-77) (CA Nos. 6049-6950 of 2004 dt. 24-4-2018)

Editorial: Mahindra and Mahindra Ltd. v. CIT (2003) 261 ITR 501 (Bom.) (HC) is affirmed. Refer CIT v. Compaq Electric Ltd [2019] 261 Taxman  71  (SC) [S.41(1)], Essar Shipping Ltd v. CIT (2020) 426 ITR 220/192 DTR449/273

Taxman 49 (Bom) (HC) [S. 28(iv)], PCIT v. SICOM Ltd. [2020] 116 taxmann.com 410 (Bom) (HC) [S. 41(1)/28(iv)] and PCIT v. Colour Roof (India) Pvt Ltd (ITA 896/2017 dt. 25-9-2019) (Bom) (HC) [S. 41(1)]

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