S. 41(1) — Loan taken by the assessee from a group company — Waiver of the loan by the group company — Whether the same should be taxable u/s.41(1) — Held, No.

The assessee-company incurred huge losses and ran into
financial difficulties. It invited a new group to infuse capital into it. As per
the agreement entered into with this group, the assessee has to fulfil certain
conditions. One of these was to fulfil all existing liabilities so as to hand
over a clean balance sheet to the new management. For this, the assesee borrowed
certain amounts of money from a group company for four months. However, this
loan was later on waived off by the group company. The same was so written off
in the books of the assessee also.

The Assessing Officer held that the above loan was taxable
u/s.41(1) of the Act since the amount was received to recoup the losses. These
losses were incurred by the assessee over a period of time. The CIT(A) upheld
the assessment order. He held that even if the amount was a loan, it changes its
character at the time of forfeiture. Hence the same was taxable.

On appeal, the Tribunal held that, in the instant case, the
amount of loan received has no connection with the deduction or allowance
referred to in S. 41(1) of the Act. Although the assessee has received certain
benefits on remission or cessation of liability, the same in no way relates to
any trading liability. The said amount was given by the group company to make
the assessee company fit for the takeover. Provisions of S. 41(1) can be applied
only when a benefit is received in respect of a loss, expenditure or trading
liability, which was allowed as deduction or allowance in earlier years.

Further, it was also observed by the Hon’ble Tribunal that it
is a settled law that ‘a debt waived by the creditor cannot be the income of the
debtor’. [Relying on British Mexican Petroleum Co. Ltd. v. Jackson (1932) 16 TC
570 (HL) affirmed in the case of CIT v. P. Ganesa Chettair (1982) 133 ITR 103
(Mad.)]