Mahindra and Mahindra Ltd. (SC) Capital asset loan waiver neither perquisite u/s 28(iv) nor cessation of trading liability

ISSUE

Whether the sum due by the assessee-company to K, which has been waived off later on by AMC (which took over K), constitutes taxable income in the hands of the company u/s 28(iv) or u/s 41(1).

FACTS:

1.The assessee, Mahindra and Mahindra, decided to expand its jeep  product line and entered into an agreement with K, an American company, wherein K agreed to sell the dies, welding equipments and die models to the assessee. For the procurement of the said toolings and other equipments, K agreed to provide a loan to the assessee at the rate of 6% interest repayable after 10 years in instalments.

2.Later on, AMC took over K and agreed to waive the principal amount of loan advanced by K to the assessee-company and to cancel the promissory notes as and when they matured.

3.The assessee claimed the waiver to be capital receipt. While, the AO concluded that the waiver of the loan amount represented income and was taxable u/s 28(iv) as a perquisite. The alternate argument of the revenue authorities was that the sum would be taxable u/s 41(1) as a waiver of a trading liability.

PROVISION APPLICABLE

1.Sec.28(iv) provides that the value of ANY BENEFIT OR PERQUISITE, WHETHER

CONVERTIBLE INTO MONEY OR NOT, arising from business or the exercise of a

profession shall be chargeable under the head PGBP.

2.Sec.41(1) provides that 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 and subsequently during any previous year,

assessee has obtained, some benefit by way of remission or cessation thereof, the

amount obtained by assessee or the value of benefit accruing to him shall be

deemed to be PGBP

ANALYSIS:

1) Sec.28(iv) applies only when benefit is non-cash in nature

Supreme Court observed that for applicability of section 28(iv), income must arise

from business or profession and the benefit received has to be in in some other

form rather than in the shape of money. SC held that waived amount represented

a cash receipt due to waiver and therefore, provisions of Sec 28(iv) would not

apply.

2) In order to attract provisions of Sec.41(1) it is the sine qua non that there

should be an allowance or deduction claimed by the assessee in any assessment year

in respect of loss, expenditure or trading liability incurred by the assessee, however,

here loan was for procurement of capital asset.

For being covered under section 41(1), the assessee-company should have claimed

an allowance or deduction in any assessment for any year in respect of a trading

liability incurred by the assessee. Subsequently, during any previous year, if the

creditor waives such liability, the assessee-company would be liable to pay tax under

section 41. In this case, the loan was taken for procurement of capital assets,

namely, plant, machinery and tooling equipment. The purchase amount had not been

debited to the trading account or to the profit and loss account in any of the

assessment years. SC further noted that the assessee had been paying interest at

6 % per annum to K as per the contract but had never claimed a deduction for

payment of interest u/s 36(1)(iii). Further, SC noted that the deduction claimed

by assessee in earlier years was on account of depreciation of machine and not on

account of interest payment. Hence, waiver of such loan would not tantamount to

cessation of a trading liability.

CONCLUSION:

Supreme Court, accordingly, held that the amount of loan waived would not be 

taxable either under section 41(1) or under section 28(iv)

NOTE: As per section 2(24)(xviii), assistance in the form of waiver by the Central

Government or State Government or any authority or body or agency in cash or

kind to the assessee would be included in the definition of “income”. In this case,

the waiver is by a foreign company, and hence, is not included within the scope of

definition of “income” under section 2(24).

Further, it may be noted that as per Explanation 10 to section 43(1), deduction

on account of, subsidy or grant or reimbursement, by whatever name called, received

from any person has to be made while computing actual cost. Since waiver has not

been expressly included in the said Explanation, it is possible to take a view that

the same is not deductible while computing the actual cost. However, if a view is

taken that “waiver” is included within the scope of the phrase “by whatever name

called” in the said Explanation, then, the same has to be deducted while computing

actual cost.