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ISSUE FOR CONSIDERATION
On account of the inability to repay a borrower, may write-back a part of the
amount due or the full amount so due, in pursuance of the negotiations with the
lender or otherwise. It is usual to come across cases of write back of
liability towards repayment of loans taken by an assesssee in the course of his
business. The amount so written back is credited to the profit & loss
account of the year of write back or is credited to the reserves.
Important issues arise, under the income-tax law, concerning the treatment and
taxability of the amount written back. Will such a write back attract the
provisions of section 41 (1) of the Act and be taxed in the hands of the
assesssee in the year of write back? Alternatively, will the write back attract
the provisions of section 28 (i) or (iv) of the Act and be taxed in the hands
of the assesssee? Whether the fact that the borrowings were made for the
purposes of acquiring a capital asset, make any difference to liability for
taxation? Whether it can be said that the write back does not represent any
benefit or a perquisite for the assessment and is hence not taxable?
Conflicting decisions are rendered by the courts over a period of years
requiring us to take a fresh view of the issues on hand. Recently, the Madras
High Court has taken a view that the amount of loan written back by the
borrower is taxable in his hands in contrast to its own decision delivered a
few years ago.
Iskraemeco Regent Ltd ‘s case.
The issue arose in the case of Iskraemeco Regent Ltd. vs. CIT, 331 ITR 317
(Mad.). In that case the assessee, engaged in the business of manufacturing
energy meters, obtained a term loan from State Bank Of India for the purchase
of capital assets, both by way of import as well as in the local market. The
company also procured credit facility, through cash credit account, for import
of capital assets as well as for meeting the working capital requirements.
The assessee was declared a sick industrial company by the BIFR, which had
sanctioned a scheme for its revival, and in pursuance thereto, the State Bank
of India waived the outstanding dues of principal amount of about Rs.5 crores
and the interest outstanding for a sum of about Rs. 2 crores under the one time
settlement scheme. The assessee credited the waiver of principal amount to the
“Capital Reserve Account” in the balance sheet treating it as capital
in nature and the waiver of interest was credited to its “Profit and Loss
Account” for the financial year ending 31.03.2001 corresponding to the
assessment year 2001-02.
The assessee filed its return declaring its total income assessable at Rs.
45,160 after setting off the carried forward business losses and unabsorbed
depreciation. The AO in assessing the total income added the amounts of loan
and interest waived under the head business income by applying the provisions
of section 41(1) and section 28(iv) of the Act.
The appeals filed by the
assessee, before the Commissioner of Income Tax (Appeals) and the Tribunal,
were dismissed on the ground that the issue in appeal was no longer res integra
in as much as the same had already been concluded by the judgment in CIT vs.
T.V. Sundaram Iyengar & Sons Ltd., 222 ITR 344(SC). Aggrieved by the order
of the tribunal, the assessee preferred an appeal to the high court by raising
the following substantial questions of law;
- “Whether the learned
Tribunal misdirected itself in law, and it adopted a wholly erroneous
approach, in interpreting the provisions of Section 28(iv) of the
Income-tax Act, 1961, to hold that the sum of Rs.5,07,78,410/-
representing the principal loan amount, waived by the bank under the One
Time Settlement Scheme (OTS), and credited by the appellant assessee to
its Capital Reserve Account, in its Balance Sheet drawn as at 31st March,
2001, is assessable to tax as a revenue receipt in the assessment for the
assessment year 2001-02; and whether the findings of the learned Tribunal
to this effect were wholly unreasonable, based on irrelevant
considerations, contrary to the facts and evidence on record and/or
otherwise perverse?
- Whether the decision of the
Hon’ble Supreme Court in CIT vs. T.V.Sundaram Iyengar & Sons Ltd.
[1996] 222 ITR 344, applied by the learned Tribunal in passing its said
impugned order dated 26th March, 2010, has any application whatsoever, in
the facts and circumstances of the instant case, and particularly in
relation to section 28(iv) of the said Act?
- Whether on a correct
interpretation of section 28(iv) of the Income Tax Act, 1961, the Tribunal
ought to have held that the principal amount of loan waived by the Bank
under the OTS, not being a trading liability and also not being a
“benefit or perquisite, whether convertible into money or not”,
the expression used in the said section, did not constitute revenue
receipt and/or business income of the appellant assessee assessable to tax
in its assessment for the assessment year 2001-02?
- Whether ………….
- Whether
……………..
On behalf
of the assessee it was submitted that:—
- it was not in dispute that
the assessee had obtained loan from the State Bank of India for the purchase
of fixed assets, both within the country and outside the country, which
were admittedly capital assets. It was a pure loan transaction and the
same could never be termed as a trading transaction.
- the loan was obtained for
the purchase of capital assets and the waiver amounted to a capital
receipt and not a revenue receipt.
- it was not involved in any
business involving the transaction of money lending .
- the AO had not gone behind
the loan arrangement and the loan arrangement in its entirety was not
obliterated by the waiver, considering the fact that the assessee had paid
a sum of Rs. 5 crores from the date of receipt of the loan.
- a grave error was committed
in mechanically applying the judgment rendered by the apex court in T.V.
Sundaram Iyengar & Sons Ltd.’s case (supra ) without appreciating the
factual scenario that the loan had been obtained towards the purchase of
capital assets and not for a business transaction. The facts involved in
the judgment referred above disclosed that the transaction therein was a
trading transaction as against the facts involved in the assessee’s case.
- reliance was placed on the
decisions in the cases of Mahindra & Mahindra Ltd. vs. CIT, 261 ITR
501(Bom.), CIT v. Alchemic (P.) Ltd., 130 ITR 168 and CIT vs. Mafatlal
Gangabhai & Co. (P.) Ltd.219 ITR 644 (SC).
- relying on the decision in
the case of Solid Containers Ltd. vs. Dy. CIT, 308 ITR 417 it was
submitted that, in a case where a transaction involved a purchase related
to capital assets, a waiver made of the loan taken for the said purchase
would not constitute a business receipt.
- the reasoning of the
authorities that, section 28(iv) of the Act was applicable to a money
transaction was totally misconceived and contrary to the provision itself.
Section 28(iv) provided for chargeability of profits and gains of business
or profession with relation to the value of any benefit or perquisite
arising out of business or the exercise of profession and therefore the
same would not include a money transaction. Since in the present case on
hand, the transaction involved a loan transaction, being a transaction of
money, section 28(iv) had no application.
- Section 41(1) also did not
apply as it mandated that there had to be an actual allowance or deduction
made for the purpose of computing under the said section. In as much as
there was no allowance or deduction in the present case on hand, the
question of application of section 41(1) also did not arise for
consideration.
- in support of the
contentions, the company placed reliance on the following judgments, CIT
vs. P. Ganesa Chettiar, 133 ITR 103 (Mad.), CIT vs. A.V.M. Ltd., 146 ITR
355 , Alchemic Pvt. Ltd.’s case (supra), Mafatlal Gangabhai & Co. (P.)
Ltd.’s case (supra ) and Dy. CIT v. Garden Silk Mills Ltd., 320 ITR 720
(Guj.) to submit that section 28(iv) had no application to a money
transaction. In so far as the scope of section 41(1) was concerned, the
judgments in Polyflex (India) (P.) Ltd. vs. CIT, 257 ITR 343 (SC) and
Tirunelveli Motor Bus Service Co. (P.) Ltd. vs. CIT, 78 ITR 55 (SC) were
relied upon by the company. the combOn behalf of the Revenue it was
submitted that:—ined reading of section 41(1) and section 28(iv) showed
that the words “whether in cash or any other manner” as found in
s. 41(1) had not been incorporated in section 28(iv) which was indicative
of the fact that section 28(iv) did not cover a cash transaction.
On behalf
of the Revenue it was submitted that:
- the appellate authorities
had not rejected the company’s appeal on application of section 28(iv) but
was on application of section 28(i)of the Act and therefore, the findings
rendered by the authorities below had to be seen in the context of the
provisions contained in section 28(i) of the Act.
- the ratio laid down by the
apex court in T.V. Sundaram Iyengar & Sons Ltd.’s case (supra), held
good and had been followed in CIT vs. Rajasthan Golden Transport Co. (P.)
Ltd., 249 ITR 723, CIT v. Sundaram Industries Ltd., 253 ITR 396, CIT vs.
Aries Advertising (P.) Ltd., 255 ITR 510 and the authorities below had
rightly applied the same in rejecting the case of the assessee.
- it was not in dispute that
the amount had been borrowed by the assessee for the purpose of his
business and once the said amount was used for business, the question as
to whether it had been used for the purchase of capital assets or revenue
receipts was immaterial. The assessee having become richer by the
settlement, the said transaction would partake the character of the income
assessable to tax. Even assuming an amount was utilised towards the
capital assets, it would take the character of a revenue receipt,
subsequently. The borrowal and waiver were in the course of business
during carrying on of which the benefit accrued to the assessee and hence
was taxable. If the amount was received in pursuance to a business or a
contractual liability, then it was taxable as income.
- relying on Jay Engg. Works
Ltd. v. CIT, 311 ITR 299 it was submitted that the facts involved in the
cases relied upon by the assessee company were different and that some of
the judgments had been rendered prior to the decision in the case of T.V.
Sundaram Iyengar & Sons Ltd.’s (supra). The Madras high court after
considering the submissions of the parties to the dispute observed and
held that;-
- the assessee was not
trading in money transactions. A grant of loan by a bank could not be
termed as a trading transaction and it could not also be construed to be
in the course of business. Indisputably, the assessee obtained the loan
for the purpose of investing in its capital assets. The facts involved in
the present case were totally different than the facts involved in T.V.
Sundaram Iyengar & Sons Ltd.’s case (supra). What had been done in the
present case was a mere waiver of loan. There was no change of character
with regard to the original receipt which was capital in nature into that
of a trading transaction. There was a marked difference between a loan and
a security deposit.
- every deposit of money would
not constitute a trading receipt. Even though a receipt might be in
connection with the business, it could not be said that every such receipt
was a trading receipt. Therefore, the amount referable to the loans
obtained by the assessee towards the purchase of its capital asset would
not constitute a trading receipt. The finding of the court had been
fortified by the judgment of this Court in A.V.M. Ltd.’s case (supra).
- the same contention had been
raised on behalf of the revenue before the Bombay High Court in Solid
Containers Ltd.’s case (supra), by relying upon the judgment rendered in
T.V. Sundaram Iyengar & Sons Ltd.’s case (supra), however, in the said
case, a finding was given that the money was received by the assessee in
the course of carrying on his business and the agreement was completely
obliterated and the loan in its entirety was completely waived and the
loan itself was taken for a trading activity and on waiving it was
retained in business by the assessee. In the said judgment, the court had
distinguished its earlier judgment rendered in Mahindra & Mahindra
Ltd.’s case (supra) by highlighting that in the facts of the Solid
Container’s case, there was a trading transaction and the money received
was used towards a business transaction and accordingly the ratio laid
down in. T.V. Sundaram Iyengar & Sons Ltd.’s case (supra) was
applicable.
- therefore, the above said
facts indicated that the ratio laid down in T.V. Sundaram Iyengar &
Sons Ltd.’s case (supra) had no application at all to the facts and
circumstances of the present case on hand. Hence, the authorities below
had wrongly applied the ratio laid down in T.V. Sundaram Iyengar &
Sons Ltd.’s case (supra) and the orders passed by them could not be
sustained. In the matter of applicability or otherwise of section 28(iv)
and 41(1), the court deemed it fit to give its views even though the
Revenue had conceded that the said provisions did not apply to the present
case. It observed that;-
- Section 28(iv) of the Act
dealt with the benefit or perquisite received in kind. Such a benefit or
perquisite received in kind other than in cash would be an income as
defined u/s. 2(24) of the Act. In other words, to any transaction which
involved money, section 28(iv) had no application.
- the transaction in the
present case being a loan transaction having no application with respect
to section 28(iv), the same could not be termed as an income within the
purview of section 2(24) of the said Act. In other words, in as much as
section 28(iv) was not applicable to the transactions on hand, it could
not be termed as income which could be made taxable as receipt. A receipt
which did not have any character of an income being that of a loan could
not be made eligible to tax.
Section 41(1) could apply only to
a trading liability. A loan received for the purpose of capital asset would not
constitute a trading liability.
Ramaniyam Homes P Ltd .’s case,
The issue once again arose recently before the Madras High Court, in the Tax
Case (Appeal) No.278 of 2014, in the case of CIT v. Ramaniyam Homes P Ltd., in
an appeal filed u/s 260-A of the Act. In that case, the assessee filed a return
of income for the assessment year 2006-07 admitting a total loss of
Rs.2,42,20,780. It was found by the AO that the assessee was indebted to the
Indian Bank which bank, vide a letter dated 15.2.2006, had mooted a proposal
for a one time settlement requiring the company to pay Rs.10.50 crore on or
before 30.4.2006 against which the company paid only a sum of Rs.93,89,000 by
that date.
The AO appears to have held that the One Time Settlement Scheme was accepted by
the assessee during the year and the interest waived was taxable u/s 41(1) of
the Act and the balance was taxable u/s 28(iv) of the Act. The CIT(Appeals)
held that the mere acceptance of the conditional offer of the bank under the
One Time Settlement Scheme, without complying with the substantive part of the
terms and conditions, would not give a vested right of waiver and therefore,
interest waived to the extent of Rs.1.68 Crores was not exigible to tax u/
s.41(1) and consequently, he deleted the addition of Rs.1,67,74,868. On the
issue of addition u/s 28(iv), he followed the decision in the case of Iskraemeco
Regent Limited vs. CIT, (supra) and held that Section 28(iv) had no application
to cases involving waiver of principal amounts of loans. In the appeal of the
Revenue, on the issue of the deletion of the principal portion of the term loan
waived by the bank, the Tribunal held in para 12 of its order that the term
loan had admittedly been used by the assessee for acquiring capital assets and
following the decision of the jurisdictional Madras high court in the case of
Iskraemeco Regent Limited(supra) it confirmed the order of the first appellate
authority.
In the appeal by the revenue to the high court, the following substantial
questions of law were raised therein:-
• ” Whether on the facts and in the circumstances of the case, the Income
Tax Appellate Tribunal was right in holding that the amount representing the
principal loan amount waived by the bank under the one time settlement scheme
which the assessee received during the course of its business is not exigible
to tax?
• Whether on the facts and in the circumstances of the case, the Income Tax
Appellate Tribunal ought to have seen that the waiver of principal amount would
constitute income falling under Section 28(iv) of the Income Tax Act being the
benefit arising for the business?”
The Revenue invited attention to the definition of the expressions
“income” and “total income” u/s. (24) and (45) of section 2
and the provisions of the charging section 4 as well as the relevant provisions
of sections 28(iv), 41(1) and 59. It was contended that the principal amount of
loan waived by the bank under the one time settlement was a taxable receipt
coming within the definition of the expression “income” by relying
upon the decisions in cases of CIT vs. T.V.Sundaram Iyengar & Sons Ltd. 222
ITR 344(SC), Solid Containers Ltd. vs. DCIT, 308 ITR 417 (Bom.), Logitronics P
Ltd. v. CIT,333 ITR 386 and Rollatainers Ltd. vs. CIT, 339 ITR 54.
In so far as the decision in Iskraemeco Regent Limited was concerned, it was
submitted that the Supreme Court had already granted leave to the Department
and the decision was the subject matter of Civil Appeal No.5751 of 2011, on the
file of the Supreme Court, and the Court was entitled to consider the issue
independently. At the outset, the Madras high court examined the decision in
Iskraemeco Regent Limited, since the appellate authorities had merely followed
the said decision. The court found that in the said decision it was held that a
loan transaction had no application with respect to s.28(iv) of the Act and
that the same could not be termed as an income within the purview of section
2(24).The Madras high court thereafter examined the statutory provisions and
also the decisions relied upon by the contesting parties in support of their
respective submissions. The Madras high court in particular examined the
decisions in the cases of T.V. Sundram Iyengar & Sons Ltd. (SC), Solid
Containers Ltd.(Bom), Mahindra & Mahindra (Bom.) and Logitronics P.
Ltd.(Del.) and Rollatainers Ltd. (Del).
The court noted that the law as expounded by the Delhi High Court appeared to
be that if a loan had been taken for acquiring a capital asset, waiver thereof
would not amount to any income exigible to tax and if the loan was taken for
trading purposes and was also treated as such from the beginning in the books
of account, the waiver thereof might result in the income, more so when it was
transferred to the profit and loss account. Having noted so, the court observed
that;
- the Delhi High Court, both in
Logitronics as well as in Rollatainers cases, did not take note of one fallacy
in the reasoning given in paragraph 27.1 of the decision of the Madras high
court rendered in Iskraemeco Regent Limited’s case.
- in paragraph 27.1 of the
decision in Iskraemeco Regent Limited’s case, it was held that s.28(iv)
spoke only about a benefit or perquisite received in kind and that
therefore, it had no application to any transaction involving money which
was actually based upon the decision of the Bombay High Court in Mahindra
& Mahindra Ltd.(supra), which, in turn, had relied upon the decision
of the Delhi High Court in the case of Ravinder Singh vs. C.I.T.205 I.T.R.
353.
- with great respect, the
above reasoning did not appear to be correct in the light of the express
language of section 28(iv). What was treated as income chargeable to
income tax under the head ‘profits and gains of business or profession’
u/s 28(iv), was “the value of any benefit or perquisite, whether
convertible into money or not, arising from business or the exercise of a
profession.”
- therefore, it was not the
actual receipt of money, but the receipt of a benefit or perquisite, which
had a monetary value, whether such benefit or perquisite was convertible
into money or not, which was what was covered by section 28(iv). For
instance, if a gift voucher was issued, enabling the holder of the voucher
to have a dinner in a restaurant, it was a benefit or perquisite, which
had a monetary value. If the holder of the voucher was entitled to
transfer it to someone else for a monetary consideration, it became a
perquisite, convertible in to money. Irrespective of whether it was
convertible into money or not, to attract section 28(iv) it was sufficient
that it had a monetary value.
- a monetary transaction, in
the true sense of the term, can also have a value.
- we do not know why it should
not happen in the case of waiver of a part of the loan. Therefore, the
finding recorded in paragraph 27.1 of the decision in Iskraemeco Regent
Limited that Section 28(iv) had no application to any transaction, which
involved money, was a sweeping statement and might not stand in the light
of the express language of section 28(iv).
- in our considered view, the
waiver of a portion of the loan would certainly tantamount to the value of
a benefit. The benefit might not arise from “the business” of
the assessee. But, it certainly arose from “business”.
- the absence of the prefix
“the” to the word “business” made a world of
difference. The Madras high court thereafter dealt with the issue of the
distinction, sought to be made, between the waiver of a portion of the
loan taken for the purpose of acquiring capital assets on the one hand and
the waiver of a portion of the loan taken for the purpose of trading
activities on the other hand. In the context, it held that;-
- in so far as accounting
practices were concerned, no such distinction existed. Irrespective of the
purpose for which, a loan was availed by an assessee, the amount of loan
was always treated as a liability and it got reflected in the balance
sheet as such. When a repayment was made in monthly, quarterly, half
yearly or yearly installments, the payment was divided into two
components, one relating to interest and another relating to a portion of
the principal. To the extent of the principal repaid, the liability as
reflected in the balance sheet got reduced. The interest paid on the
principal amount of loan, would be allowed as deduction, in computing the
income under the head “profits and gains of business or
profession”, as per the provisions of the Act.
- Section 36(1)(iii) made a
distinction where under the amount of interest paid in respect of capital
borrowed for the purpose of business or profession was allowed as
deduction, in computing the income referred to in section 28. But, the
proviso there under stated that any amount of interest paid in respect of
capital borrowed for acquisition of an asset for extension of existing
business or profession, whether capitalised in the books of account or not
for any period beginning from the date on which the capital was borrowed
for the acquisition of the asset, till the date on which such asset was
put to use, should not be allowed as deduction.
- therefore, it was clear that
the moment the asset was put to use, then the interest paid in respect of
the capital borrowed for acquiring the asset, could be allowed as
deduction. When the loan amount borrowed for acquiring an asset got wiped
off by repayment, two entries were made in the books of account, one in
the profit and loss account where payments were entered and another in the
balance sheet where the amount of un repaid loan was reflected on the side
of the liability.
- when a portion of the loan
was reduced, not by repayment, but by the lender writing it off (either
under a one time settlement scheme or otherwise), only one entry got into
the books, as a natural entry. A double entry system of accounting would
not permit of one entry. Therefore, when a portion of the loan was waived,
the total amount of loan shown on the liabilities side of the balance
sheet was reduced and the amount shown as capital reserves, was increased
to the extent of waiver. Alternatively, the amount representing the waived
portion of the loan was shown as a capital receipt in the profit and loss
account itself.
- these aspects had not been
taken note of in Iskraemeco Regent Ltd.
-
- In view of the above, the
Madras High court decided the issue in favour of the Revenue and the
appeal filed by the Revenue was allowed without any costs.
Observations
The issue
under consideration, of the write back of loans, has over the years turned
rotten and worse, has produced many off shoots. The sheer size of the quantum
involving this issue is another reason for addressing it at the earliest.
Settlement between the lenders and the borrowers is an everyday phenomenon and
the issues arising there from require to be handled with care importantly, due
to the fact that the borrower involved is admittedly in a precarious financial
health that can be worsened by the additional tax borrowings that may not have
been intended by the legislature.
It is time proper that a clear guideline is provided by the CBDT as regards the
Revenue’s understanding of the subject and its desired tax treatment. This
clarification is necessary in view of the fact that varied stands have been
taken by the Revenue before the courts in different cases. It is also most
desired that the apex court addresses the issue, at the earliest, in view of
the conflicting stands of the high courts, sometimes of the same high court, as
is seen by the conflicting decision of the Madras High Court and to an extent
of the Bombay High Court.
A classic case is the case of a company which has
been declared sick, under a statue, by the Board of Industrial & Financial
Reconstruction. The Board on one side mandates the lenders to compromise their
dues, in the interest of the financial health of the company, but, on the other
side, rests on the fringe when it comes to saving a sick company from
consequences of tax, directly arising out of the reliefs granted by it. We are
of the firm view that the relief from taxation should be granted in respect of
a sick company as has been done by some courts even where the CBDT has resisted
the tax relief before the BIFR.
Section 41(1) of the Act brings to tax the value of a benefit in respect of a
trading liability accruing to an assesssee by way of remission or cessation
thereof. The said section also seeks to tax the amount obtained by an
assesssee, in cash or otherwise in respect of a loss or an expenditure. In both
the cases, the charge of tax is attracted provided an allowance or deduction
has been granted to the assesssee. A charge once attracted, is placed in the
year of relief. By and large, the issues about the applicability of section
41(1) are settled. An understanding seems to have been reached that no
liability to tax arises unless an allowance or deduction has been granted to an
assesssee and subsequent thereto a relief has been obtained by him or a benefit
has accrued to him. Obviously in a case of a loan taken, the provisions of
s.41(1) should not be attracted unless the issue involves the settlement of an
interest, on the loan taken, for which a deduction was allowed.
Section 28(i) provides that the profits or gains of any business or profession
which was carried on during the year shall be chargeable to income tax under
the head “profits and gains of business or profession”. Section
28(iv) brings to tax the value of any benefit or perquisite, whether
convertible into money or not arising from business or the exercise of a
profession. The issue of taxation of a write back of a loan mainly revolves
around application of section 28. The questions that arise, in addressing the
issue are;
- Whether a relief from
repayment of loan taken can be held to be profits or gains of business
carried on during the year? In other words, can a loan be said to have
been taken by the person in the ordinary course of his business where he
is not engaged in the business of granting of loans and advances? Will
such a transaction be treated as a trading transaction?
- Will it make any difference
whether the loan was taken for the purpose of acquiring a capital asset or
was taken for meeting the working capital requirements of the business?
- Will the relief, if any,
resulting on settlement be construed as a benefit or a perquisite arising
from the business?
- Has the apex court in the
case of T.V.Sundaram Iyengar & Sons Ltd (supra) held that a write back
of loan shall be liable to be taxed as business income and that too only
where it was taken for the purposes of meeting a trading liability?
For the sake of brevity, we place our views on each of the above issues,
so identified, instead of referring and analyzing the entire case law on the
subject including the facts of the said T.V.Sundaram Iyengar & Sons Ltd
(supra)’s case . A reader however is advised to do so.
Section 28(i) brings to tax profits or gains from business carried on during
the year. Unless the profits arise from the business that was carried on during
the year, a charge under section 28(i) fails. An ordinary businessman, not
engaged in the business of money lending, etc, cannot be said to be engaged in
the business of receiving or granting loans and therefore no profits can be
said to have arisen from such a business. The Act makes a clear distinction
between an ordinary business and the business of granting any loans or advances
for the purposes of section 36(2) and section 73, for example. Accordingly, a
waiver of loan and it’s consequential write back cannot be said to be
representing any profits and gains arising from the business carried on during
the year. This finding should hold true in respect of all businessmen other
than the one engaged in the business of receiving and granting loans. The
transactions of loans are on capital account only and holding it otherwise will
lead to a situation where under a write off of an irrecoverable loan, advanced
in the past, will have to be allowed as a deduction in all cases. A loan taken
is a thing with which a person does his business; he carries on his business
with the funds borrowed. He does not deal in them; his business is that of
dealing in things other than the funds borrowed. He is a user of funds and not
a dealer of funds. He does not derive any profits from such funds nor is he
expected to derive any and rather derives profits from optimum use of such
funds in his business.
Once it is accepted that an ordinary businessman obtains a loan for the purpose
of carrying on his business, it is natural to accept that the purpose of loan
would not make any difference. Unless a loan is inextricably linked to the
regular business and its customers, it is not possible to hold that a purpose
for which a loan was taken will have any material bearing on its eventual
transaction. With great respect, we beg to differ with the view which seeks to
make a distinction, for the purposes of taxation, on the basis of the purpose
for which a loan is taken. In our opinion, the purpose for which a loan is
taken is immaterial unless the assesssee is in the business of dealing in loans
or the loan taken is inextricably linked to his business deal. The Madras high
court is spot on in the case of Ramaniyam Homes P.Ltd. (supra) when it
concludes on this aspect of the issue by holding that there is no difference
between a loan taken for the purpose of a capital asset or for meeting working
capital requirements.
Section 28(iv) reads as: “the value of any benefit or perquisite, whether
convertible into money or not, arising from business or the exercise of a
profession.” From a reading, it is noticed that a benefit or a perquisite
should arise from business and if so it would be taxable whether its value can
be converted into money or not. The twin conditions are cumulative in nature
and both of them require satisfaction before a charge of taxation is attracted.
The use of the expression “whether convertible into money or not”
clearly indicate that the benefit or perquisite is the one which is capable of
being converted into cash but is certainly not the cash itself. Had it been so
then the expression would have been “whether received in cash or in
kind”. Section 41(1) explicitly uses the expression ‘whether in cash or in
any other manner”. The intention of the legislature is adequately
communicated by the use of appropriate expression; the intention being to bring
to tax such benefit or perquisite i.e. received in kind irrespective of its
possibility to convert in money or not. Again, the use of the term ‘value’,
supports such an interpretation in as much as cash carries the same value and
therefore does not require any prefix. Even otherwise can a remission in a loan
liability ever be construed as a benefit or perquisite and be considered to
have arisen from a business are the questions that remain open for being
addressed before a charge u/s 28(iv) is completed.
An interesting aspect of section 28(iv) is brought out by the Madras High Court
in paragraph 39 of the decision in the case of Ramaniyam Homes P Ltd.’s
(supra). The Madras High Court, in the context of applicability of section
28(iv), held that a benefit might not arise from “the business” of
the assesssee but it certainly arose from “business” and the absence
of the prefix “the” to the word “business” made a world of
difference. It seems that the court would have taken a different view had the
prefix “the” before the word “business” been placed in
section 28(iv). Had that been so the court would have concluded that the waiver
of loan did not attract the provisions of section 28(iv)!! In our very
respectful opinion, the logic supplied requires a reconsideration. The court
has failed to appreciate that the benefit or perquisite, for application of
section 28(iv), has to be from a business even though not from the specific business.
In the absence of any other business, the question of attracting section 28(iv)
does not arise at all. Even otherwise the legislative intent does not seem to
support such an interpretation which is evident from a bare reading of section
28(i) and section 28(va) which has consciously used the prefix “any’
before the term expression “business” to convey the wider scope of
the provisions.
The apex court in the case of T.V.Sundaram Iyengar & Sons Ltd (supra)
has neither, explicitly nor implicitly, stated that a loan on being written
back would attain the character of income. It was a case wherein the assessee
had received deposits from it’s customers for the purposes of the trading
transactions carried on with the customers . The said deposits or a part of it
got adjusted against regular trading transactions and the excess balance
remaining with the assessee was carried in the balance sheet as the liability
to creditors. On a later day it was found that the said excess balance so
obtained from the customers was not repayable and the company wrote back the
said liability by crediting the same to the profit & loss account. It is in
such facts that the Supreme Court held that a write back of such non-repayable
deposits were to be treated as business income.
It is a settled position of law that every receipt need not be an income even
though the amount may be received as a part of the business activity of the
assesssee. It is also a settled position in law that a receipt, originally of a
capital nature, will not change its character merely by a lapse of time subject
to an exception in respect of an amount received in the course of a trading
activity, for example, advances received from a customer or a deposit received
from a contractor or a customer or a supplier or margin money received for
security of performance by the customer. An act of borrowing a loan is not a
trading transaction in that manner.
In exceptional cases a receipt originally of a capital nature would, with lapse
of time, attain the character of an income. It is this principle of law which
was propounded in the case of Jay’s- The Jewellers Ltd, 1947 (29 TC 274) (KB)
that was followed by the Supreme Court in the case of Karamchand Thapar Sons
222 ITR 112 (SC) and was reconfirmed in the case of T.V.Sundaram Iyengar &
Sons Ltd (supra). The Supreme Court in the said case of T.V.Sundaram Iyengar
& Sons Ltd (supra) had clearly restricted the application of the exception
to the case of an amount received as a part of the trading operations where a trading
liability was incurred out of an ordinary trading transaction. In our opinion,
a transaction of a loan borrowed for the purposes of funding a trading activity
can never be considered as a transaction that could be covered by the above
mentioned tests laid down by the Supreme Court. An ordinary loan, at its
inception, is of a capital character and retains its character even with the
flux of time it does not change even where it was later on waived.
Another important part of the facts in the case of T.V.Sundaram Iyengar &
Sons Ltd (supra) was that in the said case the unclaimed deposit representing
excess balance was credited to the profit & loss account of the company and
it is this fact which had influenced the Supreme Court when it observed that
“when the assessee itself had treated the money as its own money and taken
the amount to its profit & loss account then the amounts were assessable in
the hands of the assessee”. It appears that all those decisions of the
courts require a reconsideration wherein the courts relying on the ratio of the
decision in the case of T.V.Sundaram Iyengar & Sons Ltd (supra) held that a
waiver of an ordinary loan was to be treated as income. The high courts had
failed to notice that in all such cases before them the amount received did not
have any trading character which was so in the case of T.V.Sundaram Iyengar
& Sons Ltd (supra).
Attention of the reader is invited to the following pertinent
observations of the author on page 1095 of the 10th edition of Kanga &
Palkhivala’s The Law and Practice of Income Tax in the context of the ratio of
the decision in the case of T.V. Sundaram Iyengar & Sons Ltd (supra).
“The Supreme Court erroneously held that crediting deposits that had been
given by the parties to a profit and loss account after they had reminded
unclaimed for a long period of time, would definitely be trade surplus and part
of assessee’s taxable income. Surprisingly, the court did not even refer to the
statutory provisions of section 41(1). It failed to note that unless the
assesssee had claimed an allowance or deduction in respect of a loss of
expenditure or trading liability, the subsequent cessation of liability would
not attract section 41(1)”. Also see the later decision of the Supreme
Court in the case of Kesaria Tea, 254 ITR 434.
The Supreme Court in a later decision in the case of Travancore Rubber, 243 ITR
158 has reconciled the legal position and reemphasised that unless a different
quality is imprinted on the receipt by a subsequent event, a receipt which is
not in the first instance a trading receipt cannot become a trading receipt by
any subsequent process. Under the circumstances it is very respectfully
observed that the decisions delivered by different high courts simply relying
on the ratio of the decision in the case of T.V.Sundaram Iyengar & Sons Ltd
(supra) require a fresh application of mind.
