The Supreme Court in the case of CIT v. Mahindra and Mahindra Ltd. (2018) 404 ITR 1/165 DTR 337/302 CTR 213/255 Taxman 305 (SC) held that as per S. 28(iv) of Income Tax Act: Business income – Waiver of loan – Remission or cessation of trading liability – S. 28(iv) does not apply if the receipts are in the nature of cash or money; but will apply if the benefits are received in some other form – Loan waiver amounts to benefit/receipt in the form of cash – waiver of loan cannot be assessed u/s 28(iv) of the Act. Section 41(1) apply to a trading liability; in respect of which either an allowance or deduction is claimed by the assessee –Loan is not a trading liability and no deduction is claimed in respect of the interest expense – no addition can be made u/s 41(1) of the Act in respect of waiver of loan.
The assessee had purchased certain machinery and equipment from KJC, and in exchange for those purchases, KJC had agreed to provide the assessee a loan. After then, another organisation took over KJC and agreed to waive the amount of the debt that was still owing. The Assessing Officer asserted that the sum that was waived constituted income in accordance with the provisions of section 28(iv) or, alternatively, section 41(1) of the Act. CIT has also verified the same thing (A). Notwithstanding this, both the ITAT and the High Court overturned the conclusions reached by the lower tribunals.
If a debt is forgiven, does it qualify as a taxable event under the Act’s section 28(iv) or section 41(1)?
It is impossible to include the cancellation of a loan that an assessee has taken out as income since this action is equivalent to receiving capital. As a direct consequence of this, the Act does not permit the taxation of the same.
The value of any benefit or perquisite that arises from the operation of a company or the practise of a profession, regardless of whether or not it may be converted into monetary form, is subject to taxation under the terms of Section 28(iv) of the Act. It is possible to invoke the aforementioned clause in order to levy a tax on anything that is convertible into money, which means that it is possible for it to levy a tax on any receipt that is not in the form of money or cash.
As the cancellation of a loan is a benefit in the monetary form, subsection 28(iv) is inapplicable un this scenario. Insofar as subsection (1) of section 41 is concerned, the same brings to tax any loss, expenditure, or trading liability in respect of which the assessee claims a deduction or allowance and, subsequently, the assessee receives any benefit in the form of cash or remission or cessation of liability. This applies to any loss, expenditure, or trading liability in respect of which a deduction or allowance is claimed by the assessee. A deduction cannot be made in regard to a loan debt since it is not considered a trade liability and hence cannot be taken out of an assessee’s income. As a result, the provisions of subsection 41(1) are not applicable in the event of a waiver.
The Court decided that in order to be able to make use of the provision of Section 28 (iv) of the Act, the benefit that is received must be in some other form besides the shape of money, whereas in the case of the waiver of a loan, the benefit is received in the shape of cash.
This is because Section 28 (iv) of the Act states that the benefit cannot be in the shape of money. As a result, the provisions of section 28(iv) are not applicable. As far as subsection (1) of section 41 is concerned, the Court ruled that it is an absolute necessity for there to 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.
This was the decision made in light of the fact that the Court deemed subsection (1) to be an absolute necessity. Thereafter, during any prior year, if the creditor remits or waives any such debt, then the assessee is responsible to pay tax under section 41(1) of the Act. This is because section 41(1) of the Act states that the assessee is obligated to pay tax. No deduction is being claimed by the assessee in regard to the loan, and given the circumstances of the case, even the interest amount is not being claimed as a deduction in accordance with the provisions of section 36(1)(iii) of the Act.
In addition, the court decided that the waiver of a loan constitutes the termination of a responsibility that is not associated with trade. As a direct consequence of this, the Court came to the conclusion that subsection 41(1) does not apply to the aforementioned loan cancellation.
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Judgement Reviewed by Jay Kumar Gupta, School of Law, Narsee Monjee Institute of Management Studies, Bengaluru