Loan waived by lender is not taxable in the hand of borrower

SUMMARY OF CASE LAW

Remission of a debt by the lender which was not
claimed and allowed as a deduction to the borrower
in any manner in any earlier previous year cannot
be brought to tax either under section 41(1) or
under section 28(iv) of Income-tax Act, 1961.

CASE LAW DETAILS

Decided by: ITAT, `C’ BENCH, MUMBAI,
In The case of: Cipla Investments Ltd. v. ITO ,
Appeal No.: ITA No. 1996/Mum/2008,
Decided on: August 28, 2009

RELEVENT PARAGRAPH

9. We have considered the issue.
As the facts indicate the holding company
has advanced funds to the assessee company
in 1998 which was received as share application money,
later on transferred to unsecured loan.

The amounts were utilised in investments and
the incomes thereon were offered under the head
‘capital gains’ and not as ‘business income’.
As rightly held by the CIT(A), provisions of
section 41(1) invoked by the A.O. does not apply.

For attracting the provisions of section 41(1)
the first requisite condition to be satisfied
is that the assessee should have got the deduction
or benefit or allowance in respect of loss, expenditure
or trading liability incurred by it and consequently,
during any previous year the assessee should have
received any amount in respect of such loss,
expenditure or trading liability by way of
remission or cessation thereon.

The remission would become income
only when the assessee has
claimed deduction earlier. In the instant case
the assessee has not got any deduction on account
of acquisition of capital assets as the same has
been reflected in the Balance Sheet and not in
the P 8s L Account and hence, applicability of
provisions of section 41(1) are not there.

The CIT(A)’s order to that extent is correct both
on facts and on law. However, the wrongly invoked
the provisions of section 28. We are not sure how
the provisions of section 28 will apply.

It is the contention of the assessee that
the assessee has not done any trading activity
nor shown any income as business income on the
investments made. The findings of the CIT(A)
that the amount was received in the course of
its business is against his findings given while
considering the addition under section 41(1).

The assessee’s business activity may comprise
investment in shares and securities, but as
far as computation of income is concerned the
profit and loss in that transactions are said
to be under the head ‘capital gains’ but not
as ‘business income’, hence, the gain earned by
the assessee in the course of business in
investment and advance of loans is in the capital
field but cannot be on the revenue field.

As rightly held by various decisions above,
remission of a debt by the holding company
which was not claimed and allowed as a deduction
in any manner in any earlier previous year could
not be brought to tax either under section 41(1)
or under section 28(iv). There is no benefit or
perquisite arising to the assessee in this regard.

Moreover, the assessee has to write off the amount
in the books of account and the amount was still
outstanding at the end of the year.

As rightly pointed out by the learned counsel
the decision of the Hon’ble Bombay High Court
in the case of Solid Containers Ltd. (supra)
does not apply to the facts of the case and
moreover similar to the decision of
the Hon’ble Bombay High Court
in the case of Mahindra and Mahindra Ltd. vs. CIT 261 ITR 501.


The loans availed for acquiring the capital asset,
i.e. shares, when waived cannot be treated as assessable
income for invoking the provisions of section 28.
Since the original receipt was undoubtedly on account
of capital nature, its waiver does not have the quality
of changing the same into a revenue receipt.


In view of these facts and also the various
principles laid down in the case law relied
upon by the learned counsel, we are of the
opinion that the learned CIT(A) erred in treating
the amount as taxable income in the hands of the
assessee under section 28 of the Act. On the facts
of the case, we are of the opinion that the provisions
of section 28 does not apply and the amount is not taxable
under the provisions of the Act. Accordingly the assessee’s
grounds are allowed.

Assessing Officer is directed to deleted the amount.