The Commissioner of Income Tax-8, Mumbai vs Perfect Thread Mills Pvt. Ltd., Mumbai

This appeal by the Revenue under Section 260A of the Income Tax Act, 1961 (''Act'') challenges the order dated 27 November 2012 passed by the Income Tax Appellate Tribunal (''Tribunal''). The impugned order relates to the Assessment year 2009-2010.

Mr. Pinto learned counsel for the Revenue urges the following question for our consideration, as question of law.

"Whether, in the facts and circumstances of the case and in law, the Tribunal was justified in upholding the view of the CIT(A) that the principal amount of loans waived off by the financial institutions / banks do not represent the assessee''s taxable income in terms of Section 41(1) r.w.s.28(iv) of the Act as the loans were taken for the purpose of acquisition of capital assets without appreciating that even if the loans were taken by the assessee for the purpose of acquisition of capital assets for the purposes of its business, the amount of waiver of such loans is liable to be taxed in the hands of the assessee in terms of Section 43(1) read with Explanation (10) thereto, which was inserted in the Income Tax Act,1961 by the Finance Act ( No. 2),1998 with effect from 01.04.1999."

The Respondent - Assessee had entered into one time settlement with it''s creditors viz. financial institution / Scheduled bank. As per the scheme of settlement, the financial institutions wrote off the principal amount of Rs. 1.05 crores loan advanced to Respondent Assessee. During the assessment proceedings the assessee contended that out of the total amount of Rs. 1.05 crores written off by the financial institutions an amount of Rs. 25.88 lakhs of loan not being in the capital field were offered for tax. So far as the balance of Rs. 79.81 lakhs was concerned it was contended that it was not taxable as it was in the capital field i.e. for purchase of fixed assets. However, the Assessing officer by order dated 3 August 2015 held that the entire sum of Rs. 1.05 crores was hit by the provisions of section 41(1) r.w. sec.28(iv) of the Act, and would be added as income of the Respondent - Assessee for the subject Assessment year.

In Appeal, the Commissioner of Income Tax (Appeals) allowed the Respondent Assessee''s appeal. It held that the loan amount of Rs. 79.81 lakhs had been taken for the purchase of machinery / fixed assets being on capital account and not on trading account would not be hit by Section 41(1) r.w. section 28(iv) of the Act. In coming to the above conclusion reliance was also placed upon the decision of this Court in Mahindra and Mahindra Ltd. Vs. Commissioner of Income Tax, .

On further appeal by the Revenue before the Tribunal it was contended that the decision of this Court in Mahindra and Mahindra would be inapplicable in view of the subsequent introduction of Explanation 10 to Section 43(1) of the Act. Further it was submitted that the loan being waived by the financial institution would amount to a subsidy, grant or reimbursement and to the extent of the waiver of the loan the costs of the asset would stand reduced. The Tribunal by the impugned order held that admittedly the loan of Rs. 79.81 lakhs was taken for purchase of fixed assets and the same was waived. Further the Tribunal held that the waiver of a loan by a creditor would not amount to grant of subsidy, grant or reimbursement. Accordingly, the Revenue''s appeal was dismissed.

The grievance of the Revenue is that in view of Explanation 10 to Section 43(1) of the Act the waiver of a loan would amount to a subsidy grant or reimbursement and thus, the costs of the fixed assets relating to which there is grant of subsidy, grant or reimbursement would stand reduced. In the above view according to the Revenue by virtue of Explanation 10 to Section 43(1) of the Act such waiver of loan is liable to be taxed as income in the hands of assessee for the subject assessment year.

We find that it is undisputed that the loan of Rs. 79.81 lakhs was utilised to purchase a fixed asset. Thus it was not a trading asset but appropriately would fall in the capital field. The waiver of a loan taken for acquisition of a capital asset cannot convert the said loan into an income of the Respondent - Assessee. In any even the Explanation 10 to Section 43 of the Act would apply only in cases of grant of subsidy or reimbursement or grant by whatever name called. A waiver of a loan is not in the nature of subsidy, grant or reimbursement. It may also be pointed out that in the present facts there was an arrangement arrived at between the creditors i.e. financial institutions / schedule banks on one hand that the Respondent-assessee to reach a one time settlement. In this case it was not a waiver of a loan under a scheme issued by Central government, State government or any other authority established under any law or for the purpose of extending a benefit to a particular individual or a class of individual that any scheme has been issued. The words subsidy, grant or reimbursement would normally be construed as amounts being paid by the authority concerned to a party. In case, of waiver of loan, there is no payment being made by the Bank to the party but only its rights to recover the amounts due from a party is being given up. The words ''by whatever name called'' after the words subsidy, grant or reimbursement have to be read ''Noscitur a Sociis'' i.e. the meaning of the words is to be decided / ascertained by the company it keeps. In any case, Section 43 of the Act only reduces the value of an asset but doesn''t convert a transaction in the Capital field into one in the Revenue / Trading field.

Be that as it may, the loan being taken was undisputedly in the Capital field then its waiver should also be in the Capital field. The sine quo - non for - application of Section 41(1) of the Act is that a deduction must have been claimed by assessee in the Revenue field respect of the loan taken while arriving at it''s profit in the earlier years so that a subsequent benefit of the same has to be taxed as income in the assessment year in which it is received. This admittedly is not the situation here. Moreover as held by this Court in Mahindra and Mahindra that Section 28(iv) of the Act is applicable only on the receipt of any benefit or perquisite and would not apply to benefits obtained in cash or money. In this case also the waiver of loan is not a benefit or perquisite in kind but the right to recovery money of Rs. 79.81 lakhs is given up. Thus the issue stands concluded by the decision of this Court in Mahindra & Mahindra and the addition of Explanation 10 to Section 43 of the Act, does not in any manner impact the binding nature of this Court''s order in Mahindra and Mahindra.

In view of the above, no substantial question of law arises for consideration. Accordingly, the appeal is dismissed. No order as to costs.