Supreme Court of India
THE COMMISSIONERversusMAHINDRA AND MAHINDRA LTD. THRG. M.D.
- Citation
- 2018 INSC 409
- Decided
- 24 April 2018
- Disposal
- Dismissed
- Bench
- R K AGRAWAL
Holding
The waiver of a loan resulting in a cash receipt is not taxable under Section 28(iv) or Section 41(1) of the Income Tax Act, 1961, and therefore the appeal is dismissed.
Summary
Mahindra & Mahindra Ltd. obtained a loan of $650,000 from Kaiser Jeep Corporation to purchase tooling equipment. The loan, bearing 6% interest, was later waived by American Motor Corporation, the successor lender, resulting in a cash receipt of Rs 57,74,064 for Mahindra. The Income Tax Officer treated the waiver as taxable income under Section 28 of the Income Tax Act, and the Commissioner upheld this view. Mahindra appealed, arguing that the receipt was a non‑taxable capital receipt and not a perquisite or remission of a trading liability. The Supreme Court held that the amount was a cash receipt, failing the condition of Section 28(iv) that the benefit be in a form other than money, and that Section 41(1) did not apply because the waived loan was not a trading liability. Consequently, the appeals were dismissed.
Issues considered
- The receipt of Rs 57,74,064 arising from the waiver of a loan is taxable as a perquisite under Section 28(iv) of the Income Tax Act, 1961.
- The receipt is taxable as a remission of liability under Section 41(1) of the Income Tax Act, 1961.
- Whether the waived loan amount constitutes a capital receipt exempt from tax.
Legislation cited
- Companies Act, 1956
- Income Tax Act, 1961s. 28(iv), s. 36(1)(iii), s. 41(1)
Subjects
Income TaxSection 28(iv)Section 41(1)Loan waiverTaxabilityPerquisiteRemission of liabilityCapital receiptMahindra & Mahindra
Judgment
[2018] 3 S.C.R. 951 951
THE COMMISSIONER A
v.
MAHINDRA AND MAHINDRA LTD. THRG. M.D.
(Civil Appeal Nos. 6949-6950 of 2004)
APRIL 24, 2018 B
[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
C
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 D
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 E
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 F
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]
G
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, H
951
952 SUPREME COURT REPORTS [2018] 3 S.C.R.
A 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
B
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
C 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
D 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
E 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
F 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]
G 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
H
THE COMMISSIONER v. MAHINDRA AND MAHINDRA LTD. 953
THRG. M.D.
the IT Act particularly deals with the remission of trading liability. A
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 B
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 C
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 D
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 E
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 F
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, G
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,
H
954 SUPREME COURT REPORTS [2018] 3 S.C.R.
A 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,
B
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
C parties.
The Judgment of the Court was delivered by
R. K. AGRAWAL, J.
Civil Appeal Nos. 6949-6950 OF 2004
D 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
E 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
F 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
G 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
H 18.06.1964, it entered into an agreement with Kaiser Jeep Corporation
THE COMMISSIONER v. MAHINDRA AND MAHINDRA LTD. 955
THRG. M.D. [R. K. AGRAWAL, J.]
(for short ‘the KJC’) based in America wherein KJC agreed to sell the A
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
B
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 C
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 D
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 E
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
(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
(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.
H
956 SUPREME COURT REPORTS [2018] 3 S.C.R.
A (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.
B (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:-
C 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?
D 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
E
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
F 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
G 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
H
THE COMMISSIONER v. MAHINDRA AND MAHINDRA LTD. 957
THRG. M.D. [R. K. AGRAWAL, J.]
the toolings and the loan was given by the Kaiser Jeep Corporation A
(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
B
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 C
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:- D
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. E
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 F
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 G
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:-
H
958 SUPREME COURT REPORTS [2018] 3 S.C.R.
A “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”,—
xxx
(iv) the value of any benefit or perquisite, whether convertible
B 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
C 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
D 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
E 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
F 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
G 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,
H
THE COMMISSIONER v. MAHINDRA AND MAHINDRA LTD. 959
THRG. M.D. [R. K. AGRAWAL, J.]
whether the business or profession in respect of which the A
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 B
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 C
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) D
(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 E
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 F
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 G
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.
H
960 SUPREME COURT REPORTS [2018] 3 S.C.R.
A 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 (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.
C 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.
D
Nidhi Jain Appeals dismissed.
E
F
G
H
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