Chargeability of waiver of loan depends upon the purpose of the loan taken if for trading purpose than chargeable and if for acquiring capital asset than not chargeable

Court :
INCOME TAX APPELLATE TRIBUNAL

Brief :
Briefly stated facts of the case are that the assessee company is engaged in the business of manufacturing of PVC sheets, Leathercloth, Flooring Materials and Trading in commodity, filed return declaring loss of Rs.4,79,89,263/-. During the course of assessment proceeding, the AO observed that the assessee has credited to profit and loss account an amount of Rs.2,87,35,673/- under the head ‘other income’ which includes excess liability/ provisions written back of Rs.5,35,34,287/-. However, in the computation the assessee reduced an amount of Rs.2,28,36,132/- being interest provisions, disallowed in the assessment years 2002-03 and 2003-04. However, the assessee reduced its income by an amount of Rs.2,87,35,673/- being ‘term loan’ and ‘working capital term loan’. The assessee was asked to show as to why both the amounts should not be added to the total income of the assessee. In response, the assessee submitted that the assessee has taken ‘term loan’ and ‘working capital term loan’ from IDBI. During the year the assessee entered into a onetime settlement with the IDBI. As a result of one time Settlement, IDBI waived the interest of Rs.2,28,36,132/- on the above loan for the F.Ys. 2001-02 & 2002-03. The said interest was disallowed u/s.43B of the Act in the A.Ys.2002-03 & 2003-04. An amount of Rs.2,87,35,673/- represents waiver out of principal amount of loan. The assesses further stated that waiver of principal amount is not a liability within the meaning of section 41(1) of the Act. The assessee further submitted that “since the amount was originally received by the assesses as a loan and not in the normal course of trading, and since no deduction was claimed or allowed in the past in respect of the liability that is now proposed to be waived, the loan so waived cannot be treated as income chargeable to tax. However, the AO while admitting that waiver of term loan is not trading liability, expenditure or loss as envisaged in sec. 41(1) of the Act observed that every income that has accrued, received or receivable is chargeable to tax. According to the AO in the present case the assessee as a result of ‘One time Settlement’ has benefited by way of waiver of principle amount of term loan which otherwise the assessee would have to pay to the bank. The AO while relying on the decision of the Hon’ble Supreme Court in the case of S. G. Mercantile Corporation P Ltd V/s CIT (1972) 83 ITR 700 (SC) wherein according to him it has been held that waiver of principal amount of term loan is chargeable to tax under the head ‘Income from other sources’ added the amount of Rs.2,87,35,673/- to the income of the assessee.

Citation :
Dy. Commissioner of Income Tax, 1(1),Room No.579, Aayakar Bhavan,M K Road,Mumbai -400020.APPELLANT V/s M/s Bhor Industries Ltd.,Tanna House Annex,11-A, Nathalal Parekh Marg,Colaba,Mumbai-400039.PAN: AAACB3535C RESPONDENT