Waiver of Loan for Acquiring Capital Assets is not taxable as Business Income under Income Tax Act – Supreme Court
Facts of the Case:
- Mahindra And Mahindra Ltd (Assessee) in order to expand its product line entered into an agreement with Kaiser Jeep Corporation (KJC). KJC agreed to sell the dies, welding equipment through its subsidiary, Kaiser Jeep International Corporation (KJIC). KJC granted loans to the assessee @ 6% interest repayable after 10 years in instalments.
- Later, American Motor Corporation (AMC) took over KJC and waived the principal amount of loan and filed its return of income by showing the relevant sum waived by AMC as a “cessation of liability” and therefore, did not offer the same to tax.
- The Income Tax Officer concluded that waiver of the loan represented an income and not a liability therefore, the same should be taxable u/s 28(iv) of the Income tax Act.
Contention of Revenue:
The Revenue Authority contended that waiver of loan by AMC was done as a measure of compensation for certain losses and the loan amount waived off amounts to an income in the hands of the assessee. Therefore, the same should be taxable under provisions of section 28(iv) or alternatively taxable as a remission of liability u/s 41(1).
Contention of Assessee:
The Counsel for the assessee contended that the KJIC supplied the toolings and the loan was given by the KJC, both being independent transactions. It was further submitted that the relevant sum could not be brought to tax as it represents the waiver of loan liability which was on the capital amount and not in the nature of income.
Decision of Supreme Court:
- Supreme Court was of the view that for section 28(iv) to be applicable income must arise from business or profession and the benefit received has to be in some other form rather than in the shape of money. This very condition was not satisfied in the present case.
- Further, section 41(1) of the Income tax Act specifically talks about cessation of trading liability, whereas in the present case, waiver of loan amounted to cessation of liability other than trading liability. It is also a matter of record that the assessee had not claimed any deduction u/s 36(1)(iii) against payment of interest. The Supreme Court held the decisions of the High Court right and decided the appeal in favor of the Assessee.
Conclusion:
Based on the above facts and clarifications it is evident that cessation of loan liability for acquiring of capital assets is neither taxable u/s 28 (iv) nor u/s 41(1) of the Income tax Act since, such a receipt does not have any characteristics of an income, a loan being a capital in nature.
The above judgement of the Supreme Court would help in clarifying the issue pertaining to taxability of such loan waivers and help in settling the prevalent controversy.
Source: [2018] 93 taxmann.coam 32 (SC)
