THE COMMISSIONER

MAHINDRA AND MAHINDRA LTD. THRG. M.D.

(Civil Appeal Nos. 6949-6950 of 2004)

APRIL 24, 2018

[R. K. AGRAWAL AND ABHAY MANOHAR SAPRE, JJ.]

Income Tax Act, 1961 - ss. 28(iv) and 41(1) - Waived of loan amount, taxability - Sum of Rs. 57,74,064/- due by assessee to a Company - Later on waiver of loan by creditor-lender - Whether taxable as a perquisite u/s. 28(iv) or taxable as a remission of liability u/s. 41(1) - Held: Amount of Rs. 57,74,064/- is received as cash receipt due to the waiver of loan - The very first condition of s. 28

(iv) that any benefit or perquisite arising from the business shall be in the form of benefit or perquisite other than in the shape of money, is not satisfied - Hence, the amount of Rs 57,74,064/- cannot be taxed under the provisions of s. 28 (iv) - Section 41(1) deals with the remission of trading liability, waiver of loan amounts to cessation of liability other than trading liability - Thus, s. 41(1) does not apply.

Dismissing the appeals, the Court

HELD: 1.1 Creditor or his successor may exercise their "Right of Waiver" unilaterally to absolve the debtor from his liability to repay. After such exercise, the debtor is deemed to be absolved from the liability of repayment of loan subject to the conditions of waiver. The waiver may be a partly waiver i.e., waiver of part of the principal or interest repayable, or a complete waiver of both the loan as well as interest amounts. Hence, waiver of loan by the creditor results in the debtor having extra cash in his hand. It is receipt in the hands of the debtor/assessee. [Para

11][957-F]

1.2 On a plain reading of Section 28 (iv) of the Income Tax Act, 1961, prima facie, it appears that for the applicability of the said provision, the income which can be taxed shall arise from the business or profession. Also, in order to invoke the provision of Section 28 (iv), the benefit which is received has to be in some other form rather than in the shape of money. In the instant case,

[2018] 3 S.C.R. 951

SUPREME COURT REPORTS


it is a matter of record that the amount of Rs. 57,74,064/- is having received as cash receipt due to the waiver of 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 perquisite other than in the shape of money, is not satisfied in the instant case. Hence, in no circumstances, it can be said that the amount of Rs 57,74,064/- can be taxed under the provisions of Section 28 (iv) of the IT Act. [Para 13][958-C-E]

1.3 On a perusal of the s.41(1) of the IT Act, it is evident that it is a sine qua non that there should 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. Then, subsequently, during any previous year, if the creditor remits or waives any such liability, then the assessee is liable to pay tax under Section 41 of the IT Act. The objective behind this Section is simple. It is made to ensure that the assessee does not get away with a double benefit once by way of deduction and another by not being taxed on the benefit received by him in the later year with reference to deduction allowed earlier in case of remission of such liability. The respondent had been paying interest at 6 % per annum to the KJC as per the contract but the assessee never claimed deduction for payment of interest under Section 36 (1) (iii) of the IT Act. In the instant case, CIT (A) relied upon Section 41 (1) of the IT Act and held that the respondent had received amortization benefit.

Amortization is an accounting term that refers to the process of allocating the cost of an asset over a period of time, hence, it is nothing else than depreciation. Depreciation is a reduction in the value of an asset over time, in particular, to wear and tear.

Therefore, the deduction claimed by the respondent in previous assessment years was due to the deprecation of the machine and not on the interest paid by it. [Para 15][959-B-E]

1.4 Moreover, the purchase effected from the KJC is in respect of plant, machinery and tooling equipments which are capital assets of the Respondent. The said purchase amount had not been debited to the trading account or to the profit or loss account in any of the assessment years. There is difference between 'trading liability' and 'other liability'. Section 41 (1) of

the IT Act particularly deals with the remission of trading liability.

Whereas in the instant case, waiver of loan amounts to cessation of liability other than trading liability. Hence, the case of the respondent would not fall under Section 41 (1) of the IT Act. [Para 16][959-F-H]

1.5 The judgment and order passed by the High Court is not interfered with in view of the following reasons: Section 28(iv) of the IT Act does not apply on the instant case since the receipts of Rs 57,74,064/- are in the nature of cash or money; and Section 41(1) does not apply since waiver of loan does not amount to cessation of trading liability. The respondent has not claimed any deduction under Section 36(1)(iii) of the IT Act qua the payment of interest in any previous year. [Para 17][960-A-B]

CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 6949- 6950 of 2004.

From the Judgment and Order dated 29.01.2003 of the High Court of Judicature at Bombay in R. A. No. 1561(Bom) of 1982 and R. A. No.

5161/B/80.

WITH

Civil Appeal Nos. 5320, 5319, 890, 3624, 1214, 780, 2164 and 7951 of 2012

Civil Appeal Nos. 4435, 4434, 4442, 4441, 4609, 4436, 4545, 4539 and 4546 of 2018

Civil Appeal Nos. 10169 and 10168 of 2010

Civil Appeal No. 5751 of 2011

Civil Appeal No. 4345 of 2014

Civil Appeal No. 6942 of 2015

S. Ganesh, Ajay Vohra, Arvind P. Datar, Gurukrishna Kumar, Ramesh P. Bhatt, J. D. Mistri, Sr. Advs., Arijit Prasad, Ritesh Kumar, Ms. Rekha Pandey, Mrs. Anil Katiyar, Amar Dave, P.S. Sudheer, Rishi Maheshwari, Ms. Shruti Jose, Ms. Subhoshree Sil, C. N. Sreekumar, Amit Sharma, T. G. Narayanan Nair, Ms. Kavita Jha, Udit Naresh, Pratap Venugopal, Ms. Surekha Raman, Anuj Sarma, Ms. Niharika, M/s. K J John And Co., Rajat Jariwal, Sahil Narang, Ms. Snehal Kakrania,

THE COMMISSIONER v. MAHINDRA AND MAHINDRA LTD.

THRG. M.D.


Ms. Bharat Gupta, M/s Khaitan & Co., Satyen Sethi, Ms. Arta Trana Panda, Ms. Gargi Sethee, Rameshwar Prasad Goyal, B. V. Balaram Das, Ms. Vanita Bhargava, Ajay Bhargava, Rony O. Joh, Ms. Shweta Kabra, Abhishek Bairagi, Bhargava V. Desai, Akshat Malpani, Rashmikumar Manilal Vithlani, Manish K. Bishnoi, Devensh Srivastava, Anurag Bhatt, Rabin Majumder, Sindhu Sinha, Shantanu Sagar, M/s. Khaitan & Co., Gunnam Venkateswara Rao, Amar Dave, P. S. Sudheer, Rishi Maheshwari, Ms. Shruti Jose, Ms. Subhoshree Sil, Pankaj Bhatia, Nipun Goel, Dhruv Surana, Ashish Choudhary, Ms. Bharti Tyagi, Nishant, Rakesh K. Sharma, A. Venayagam Balan, Mrs. Anil Katiyar, Ms. Kavita Jha, M/S. Parekh & Co., Advs. for the appearing parties.

The Judgment of the Court was delivered by

R. K. AGRAWAL, J.

Civil Appeal Nos. 6949-6950 OF 2004

1. Leave granted.

2. These appeals have been filed against the impugned judgment and order dated 29.01.2003 passed by the High Court of Judicature at Bombay in R.A.No.1561 (Bom)/1982 and R.A.No.5161/B/80 whereby the Division Bench of the High Court while giving answers to the Reference Applications filed by the Respondent as well as the Revenue, confirmed certain findings passed by the Income Tax Appellate Tribunal (in short 'the Tribunal') dated 16.08.1982 in favour of the Respondent.

Along with this, there are certain other connected appeals also. Since the question of law is same in all these appeals, all the appeals would stand disposed off with this common judgment.

3. Brief facts:-

(a) For the proper appreciation of the issue in the case at hand, we deem it apposite to mention the gist of the facts. The appellant herein is the Department of Income Tax (for brevity 'the Revenue), on the other hand, respondent herein is Mahindra & Mahindra Ltd. (for brevity 'the Respondent') - a company registered under the Companies Act, 1956.

(b) The Respondent, way back, decided to expand its jeep product line by including FC-150 and FC-170 models. For this purpose, on 18.06.1964, it entered into an agreement with Kaiser Jeep Corporation

(for short 'the KJC') based in America wherein KJC agreed to sell the dies, welding equipments and die models to the assessee. The final price of the tooling and other equipments was agreed at $6,50,000/- including cost, insurance and freight (CIF). Meanwhile, the Respondent took all the requisite approvals from the concerned Government Departments.

The said toolings and other equipments were supplied by the Kaiser Jeep Corporation through its subsidiary Kaiser Jeep International Corporation (KJIC).

(c) However, for the procurement of the said toolings and other equipments, the KJC agreed to provide loan to the Respondent at the rate of 6% interest repayable after 10 years in installments. For this purpose, the Respondent addressed a letter dated 07.06.1965 to the Reserve Bank of India (RBI) for the approval of the said loan agreement.

The RBI and the concerned Ministry approved the said loan agreement.

(d) Later on, it was informed to the Respondent that the American Motor Corporation (AMC) had taken over the KJC and also agreed to waive the principal amount of loan advanced by the KJC to the Respondent and to cancel the promissory notes as and when they got matured. The same was communicated to the Respondent vide letter dated 17.02.1976.

(e) On 30.06.1976 the Respondent filed its return and shown Rs. 57,74,064/- as cessation of its liability towards the American Motor Corporation. After perusal of the return, the Income Tax Officer (ITO) concluded that with the waiver of the loan amount, the credit represented income and not a liability. Accordingly, the ITO, vide order dated 03.09.1979, held that the sum of Rs 57,74,064/- was taxable under Section 28 of the Income Tax Act, 1961 (for brevity 'the IT Act').

(f) Being dissatisfied, the Respondent preferred an appeal before the Commissioner of Income Tax (Appeals) being No. CIT(A) V/CCIV/ IT/261/79-80. After perusal of the matter, learned CIT (Appeals), vide order dated 23.03.1981, dismissed the appeal and upheld the order of the ITO with certain modifications.

(g) Being aggrieved, the Respondent as well as the Revenue preferred appeals being Nos. 2007 (Bomb.) of 1981 and 2132 of 1981 respectively before the Tribunal. The Tribunal, vide order dated 16.08.1982, set aside the order passed by learned CIT (Appeals) and decided the case in favour of the Respondent.

THE COMMISSIONER v. MAHINDRA AND MAHINDRA LTD.

THRG. M.D. [R. K. AGRAWAL, J.]


(h) Being aggrieved, the Revenue filed a Reference before the High Court at Bombay. In that Reference, three applications were filed, one by the assessee and rest two by the Revenue. Vide impugned common judgment and order dated 29.01.2003, the High Court confirmed certain findings of the Tribunal in favour of the Respondent.

(i) Hence, these instant appeals have been filed by the Revenue.

4. Heard learned senior counsel for parties and perused the factual matrix of the case.

Point(s) for consideration:-

5. The short point for consideration before this Court is whether in the present facts and circumstances of the case the sum of Rs. 57,74,064/- due by the Respondent to Kaiser Jeep Corporation which later on waived off by the lender constitute taxable income of the Respondent or not?

Rival contentions:-

6. At the onset, learned senior counsel for the Revenue submitted that the Respondent had received the amount of Rs. 57,47,064/- from the American Motor Corporation as loan waiver, which it had initially borrowed from the Kaiser Jeep Corporation as loan in order to enable it to purchase dies, tools etc. for manufacture of jeeps. The waiver of loan was done by the American Motor Corporation, who took over the Kaiser Jeep Corporation, as a measure of compensation for certain losses including goodwill, the benefit of association, and also for sudden change to the American Motor Corporation as a share holder which was credited by the Respondent to its account but was claimed as exemption from taxation being capital receipt.

7. Before concluding, it was contended that since an amount is waived off, for which the Respondent is claiming exemption, it actually amounts to income at the hands of the Respondent in the sense that an amount which ought to be paid by it is now not required to be paid. As a result, the case of the Revenue falls within the ambit of Section 28(iv) and, alternatively within Section 41 of the IT Act. Hence, the decision of the High Court is liable to be set aside.

8. Conversely, learned senior counsel for the Respondent submitted that the Kaiser Jeep International Corporation (KJIC) supplied

the toolings and the loan was given by the Kaiser Jeep Corporation (KJC), hence, these transactions were independent transactions. The only relationship, which survived after the supply of toolings, was that of a lender and borrower. The purchase of toolings was not a transaction for the purchase of goods on credit in the ordinary course of business nor could it be equated to unpaid purchase consideration to be liquidated over a period of time.

9. Further, it was also submitted that it is very clear that the amount of $650,000 provided by KJC was in fact a loan on which interest was being paid regularly from time to time. It is also pointed out that in the books of account of the Respondent, this loan has been shown in the Balance Sheet under the heading "Loans-unsecured". Hence, it is submitted that the said sum could not be brought to tax as it represents the waiver of a loan liability which was on the capital amount and is not in the nature of income. Accordingly, the High Court rightly upheld the order of the Tribunal and, hence, these appeals deserve to be dismissed.

Discussion:-

10. The term "loan" generally refers to borrowing something, especially a sum of cash that is to be paid back along with the interest decided mutually by the parties. In other terms, the debtor is under a liability to pay back the principal amount along with the agreed rate of interest within a stipulated time.

11. It is a well-settled principle that creditor or his successor may exercise their "Right of Waiver" unilaterally to absolve the debtor from his liability to repay. After such exercise, the debtor is deemed to be absolved from the liability of repayment of loan subject to the conditions of waiver. The waiver may be a partly waiver i.e., waiver of part of the principal or interest repayable, or a complete waiver of both the loan as well as interest amounts. Hence, waiver of loan by the creditor results in the debtor having extra cash in his hand. It is receipt in the hands of the debtor/assessee. The short but cogent issue in the instant case arises whether waiver of loan by the creditor is taxable as a perquisite under Section 28 (iv) of the IT Act or taxable as a remission of liability under Section 41 (1) of the IT Act.

12. The first issue is the applicability of Section 28 (iv) of the IT Act in the present case. Before moving further, we deem it apposite to reproduce the relevant provision herein below:-

THE COMMISSIONER v. MAHINDRA AND MAHINDRA LTD.

THRG. M.D. [R. K. AGRAWAL, J.]


"28. Profits and gains of business or profession.-The following income shall be chargeable to income-tax under the head "Profits and gains of business profession",-

x x x

(iv) the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession;

x x x"

13. On a plain reading of Section 28 (iv) of the IT Act, prima facie, it appears that for the applicability of the said provision, the income which can be taxed shall arise from the business or profession. Also, in order to invoke the provision of Section 28 (iv) of the IT Act, the benefit which is received has to be in some other form rather than in the shape of money. In the present case, it is a matter of record that the amount of Rs. 57,74,064/- is having received as cash receipt due to the waiver of loan. Therefore, the very first condition of Section 28 (iv) of the IT Act which says any benefit or perquisite arising from the business shall be in the form of benefit or perquisite other than in the shape of money, is not satisfied in the present case. Hence, in our view, in no circumstances, it can be said that the amount of Rs 57,74,064/- can be taxed under the provisions of Section 28 (iv) of the IT Act.

14. Another important issue which arises is the applicability of the Section 41 (1) of the IT Act. The said provision is re-produced as under:

"41. Profits chargeable to tax.- (1) Where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee (hereinafter referred to as the first-mentioned person) and subsequently during any previous year,-

(a) the first-mentioned person has obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtained by such person or the value of benefit accruing to him shall be deemed to be profits and gains of business or profession and accordingly chargeable to income-tax as the income of that previous year,

whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not; or

x x x"

15. On a perusal of the said provision, it is evident that it is a sine qua non that there should 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. Then, subsequently, during any previous year, if the creditor remits or waives any such liability, then the assessee is liable to pay tax under Section 41 of the IT Act. The objective behind this Section is simple. It is made to ensure that the assessee does not get away with a double benefit once by way of deduction and another by not being taxed on the benefit received by him in the later year with reference to deduction allowed earlier in case of remission of such liability. It is undisputed fact that the Respondent had been paying interest at 6 % per annum to the KJC as per the contract but the assessee never claimed deduction for payment of interest under Section 36 (1)

(iii) of the IT Act. In the case at hand, learned CIT (A) relied upon Section 41 (1) of the IT Act and held that the Respondent had received amortization benefit. Amortization is an accounting term that refers to the process of allocating the cost of an asset over a period of time, hence, it is nothing else than depreciation. Depreciation is a reduction in the value of an asset over time, in particular, to wear and tear. Therefore, the deduction claimed by the Respondent in previous assessment years was due to the deprecation of the machine and not on the interest paid by it.

16. Moreover, the purchase effected from the Kaiser Jeep Corporation is in respect of plant, machinery and tooling equipments which are capital assets of the Respondent. It is important to note that the said purchase amount had not been debited to the trading account or to the profit or loss account in any of the assessment years. Here, we deem it proper to mention that there is difference between 'trading liability' and 'other liability'. Section 41 (1) of the IT Act particularly deals with the remission of trading liability. Whereas in the instant case, waiver of loan amounts to cessation of liability other than trading liability.

Hence, we find no force in the argument of the Revenue that the case of the Respondent would fall under Section 41 (1) of the IT Act.

THE COMMISSIONER v. MAHINDRA AND MAHINDRA LTD.

THRG. M.D. [R. K. AGRAWAL, J.]


17. To sum up, we are not inclined to interfere with the judgment and order passed by the High court in view of the following reasons:

(a) Section 28(iv) of the IT Act does not apply on the present case since the receipts of Rs 57,74,064/- are in the nature of cash or money.

(b) Section 41(1) of the IT Act does not apply since waiver of loan does not amount to cessation of trading liability. It is a matter of record that the Respondent has not claimed any deduction under Section 36 (1) (iii) of the IT Act qua the payment of interest in any previous year.

18. In view of above discussion, we are of the considered view that these appeals are devoid of merits and deserve to be dismissed.

Accordingly, the appeals are dismissed. All the other connected appeals are disposed off accordingly, leaving parties to bear their own cost.

Nidhi Jain Appeals dismissed.