Sections 28(iv) and 41(1) — Remission of loan liability — Loan utilised for the purpose of acquisition of capital assets — Whether loan liability remitted taxable — Held, No.

On appeal, the CIT(A) confirmed the order of the AO. Before the Tribunal the assessee challenged the reopening of the case and contended that the facts were known to the AO while passing the original order and it was merely a change of opinion. It was further contended that even if all the procedures are considered to be correctly followed by the AO, the reopening made on the basis of a reason was not sustainable in law. According to it, in all cases of remission of liability, it was section 41(1) which would be applicable and not section 28(iv). The Revenue supported the orders of the lower authorities and relied on the order of the Supreme Court in the case of T. V. Sundaram Iyengar & Sons v. CIT, (222 ITR 344) and the decision of the Bombay High Court in the case of Solid Containers v. DCIT, (308 ITR 417).

According to it, the loans availed by the assessee were utilised for the purpose of carrying on of the business and therefore the AO was right in holding that it was the benefit which arose to the assessee during the course of its business and taxable u/s.28(iv).

Held:

The Tribunal agreed with the assessee and relying on the decision of the Supreme Court in the case of Commissioner of Agricultural Income Tax v. Kerala Estate Mooriad Chalapuram, (161 ITR 155) held that since the loan received was utilised for acquiring capital assets, the amount remitted was not taxable u/s.41(1).

According to the Tribunal the decision of the Chennai High Court in the case of Iskraemeco Regent Ltd. v. CIT, (196 Taxman 103) was also directly applicable to the case of the assessee. According to it, the said decision had considered the decisions of the Bombay High Court not only in the case of Solid Containers Ltd. v. DCIT, (308 ITR 417), but also that of Mahindra & Mahindra Ltd. v. CIT, (261 ITR 501). Further it was noted that the said decision had also distinguished the decision of the Supreme Court in the case of T. V. Sundaram Iyengar & Sons, which was relied on by the Revenue. Accordingly, the appeal of the assessee was allowed.

Errata: Note below a Tribunal decision (Sr. No. 21 on page 24 of August issue of BCAJ) may be read as under: In Hemendra Chandulal Shah v. ACIT, (ITA No. 1129/ Ahd./2010), where on a direction of the bank a father had taken cash loan from his son to clear the debit balance in his bank account, according to the Ahmedabad Tribunal there was reasonable cause and penalty u/s.271D cannot be imposed. The full text of the decision is available in the office of the Society.