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Waiver of Loan by Government - Whether Chargeable to Tax Under Section 28 (iv) as Benefit or Perquisite Arising from Business or Profession

13 Oct,2021

1. Section 28 (iv) of Income Tax Act :

Section 28(iv) of the Income Tax Act 1961 provides as follows which is taxable as income under the head business or profession:
(iv)the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession.

2. Only non-monetary benefits or perquisite is covered under section 28(iv)

If what is received either by way of benefit or perquisite is money, there is no question of considering the value of such monetary benefit or perquisite under clause (iv) and including the value of such benefit or perquisite  under the head “profits and gains of business or profession”. It is only if the benefit or the prerequisite is not in cash or money but is a nonmonetary benefit or non-monetary prerequisite that the question of including the value of such benefit or perquisite would ever arise.- Vide CIT  v. Alchemic (P) Ltd. (1981) 130 ITR 168 (Guj): 1981 TaxPub (DT) 0719(Guj-HC).

Since waiver of interest is a benefit received in cash, section 28(iv) would not be applicable.-Vide  Asst. CIT v. Spel Semiconductor Ltd.(2013) 59 SOT 114 (Cheenn-Trib); 2013 Taxpub(DT) 2278(Chen-Trib). Also see, Dy CIT v. Parasar -Navnitlal  Patel & Ors. (2015)65(II) ITCL 55 (Ahd ‘A’-Trib); 2015 Taxpub(DT)3451 (Ahd-Trib).

3. Supreme court verdict in Mahindra v. CIT 2003 TaxPub (DT) 0995 (Bom-HC): (2003)261 ITR 501(Bom)

In CIT v. Mahindra and Mahindra Ltd. 2018 TaxPub(DT)2139 (SC): (2018)      404 ITR 1(SC): (2018) 302 CTR (SC) 213, assessee company, way back, deci-ded to expand its jeep product line by including FC-150 and FC-170 Models. In 1964 It entered into agreement with  KJC, based in America, wherein KJC Agreed to sell dies, equipment and die model at a certain final price inclu-ding CIF. Further, For procurement of equipment KJC agreed to provide a loan to  Assessee at a rate of 6% interest repayable after 10  years in instalments. The assessee took all requisite approvals from the concerned Government Depart- ments and RBI approved the loan agreement. Accordingly, Assessee obtained the loan. Later on, the assessee was informed that  AMC had taken over KJC  and also agreed to waive the principal amount of loan advanced by KJC to Assessee and to cancel promissory notes as and when they got matured. The Assessee filed its return showing a certain amount as cessation of its liability towards AMC. The assessing officer concluded that with the waiver of the loan amount, the credit represented income and not a liability. The assessing officer held that the loan waived off was taxable under section 28. It was held that in the instant case, the amount of  ? 57,74,064 has been received in cash due to the waiver of the loan. Therefore, the very first condition of section  28(iv)  which says any benefit or perquisite arising from the business shall be in the form of benefit or prerequisite other than in the shape of money, is not satisfied in the present case. Hence in no circumstances, it can be said that the amount of ? 57,74,064 can be taxed under section 28(iv), waiver of loan for acquiring capital assets could not be taxed as perquisites under section  28(iv)  since receipts were in the nature of cash or money. Section 41(1) does not apply since waiver of loan does not amount to the cessation of trading liability.

4. Recent decision of Bombay High court

Recently in Essar shipping Ltd .v. CIT 2020 TaxPub(DT) 1725  (Bom-HC) assessee claimed deduction of loan amount waived by  Government. Assessing Officer disallowed the claim made by the assessee by observing that waiver of loan benefited assessee in carrying on its business and hence in terms of section 28, said benefit enjoyed by the assessee should constitute in income in the hands of the assessee.

On appeal before Commissioner (Appeals), it was held that waiver of loan could not be treated as benefit or prerequisite because it was a cash item. The amount would be includible under section 28(iv) only if it is a non-cash item and cash item cannot be treated as a prerequisite. The  ITAT held that written off of loan was inseparably concerned with the business of the assessee and therefore benefit had arisen out of such business. The amount is written was nothing but an incentive for the assessee’s business. The benefit was received by the assessee in the form of writing of liability. Therefore, it could not be said that the assessee received cash benefits. Thus, 
ITAT upheld the order by assessing the officer.

On further appeal, the Bombay High court held that the Supreme Court in the case of Mahindra and Mahindra v. CIT (2003) 261 ITR 501  (Bom):2003 Tax Pub(DT)0995(Bom-HC)  has held that for applicability of Section 28(iv), income which can be taxed has to arise from the business and Profession. That apart, the benefit which is received has to be in some other form rather than in the shape of money. Therefore, The amount of loan waived was to be construed as cash receipt in hands of the assessee and could not be taxed under section 28(iv).

Conclusion

Where a waiver of loan cannot be treated as cash receipts on facts of the case the same cannot be treated as perquisite chargeable under section 28(iv).

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