THE COMMISSIONER versus MAHINDRA AND MAHINDRA LTD. THRG. M.D. on 24 April 2018

[2018] 3 S.C.R. 951

THE COMMISSIONER

v.

MAHINDRA AND MAHINDRA LTD. THRG. M.D.

(Civil Appeal Nos. 6949-6950 of 2004)

APRIL 24, 2018

[R. K. AGRAWAL AND ABHAY MANOHAR SAPRE, JJ.]

Income Tax Act, 1961 – ss. 28(iv) and 41(1) – Waived of loanamount, taxability – Sum of Rs. 57,74,064/- due by assessee to aCompany – Later on waiver of loan by creditor-lender – Whethertaxable as a perquisite u/s. 28(iv) or taxable as a remission of liabilityu/s. 41(1) – Held: Amount of Rs. 57,74,064/- is received as cashreceipt due to the waiver of loan – The very first condition of s. 28(iv) that any benefit or perquisite arising from the business shall bein 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 betaxed under the provisions of s. 28 (iv) – Section 41(1) deals withthe remission of trading liability, waiver of loan amounts to cessationof liability other than trading liability – Thus, s. 41(1) does notapply.

Dismissing the appeals, the Court

HELD: 1.1 Creditor or his successor may exercise their“Right of Waiver” unilaterally to absolve the debtor from hisliability to repay. After such exercise, the debtor is deemed to beabsolved from the liability of repayment of loan subject to theconditions of waiver. The waiver may be a partly waiver i.e., waiverof part of the principal or interest repayable, or a complete waiverof both the loan as well as interest amounts. Hence, waiver ofloan by the creditor results in the debtor having extra cash in hishand. It is receipt in the hands of the debtor/assessee. [Para11][957-F]

1.2 On a plain reading of Section 28 (iv) of the Income TaxAct, 1961, prima facie, it appears that for the applicability of thesaid provision, the income which can be taxed shall arise fromthe business or profession. Also, in order to invoke the provisionof Section 28 (iv), the benefit which is received has to be in someother form rather than in the shape of money. In the instant case,

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Ait is a matter of record that the amount of Rs. 57,74,064/- is havingreceived as cash receipt due to the waiver of loan. Therefore,the very first condition of Section 28 (iv) which says any benefitor perquisite arising from the business shall be in the form ofbenefit or perquisite other than in the shape of money, is notsatisfied in the instant case. Hence, in no circumstances, it canBbe said that the amount of Rs 57,74,064/- can be taxed under theprovisions 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 evidentthat it is a sine qua non that there should be an allowance ordeduction claimed by the assessee in any assessment for anyCyear in respect of loss, expenditure or trading liability incurredby the assessee. Then, subsequently, during any previous year,if the creditor remits or waives any such liability, then theassessee is liable to pay tax under Section 41 of the IT Act. Theobjective behind this Section is simple. It is made to ensure thatDthe assessee does not get away with a double benefit once byway of deduction and another by not being taxed on the benefitreceived by him in the later year with reference to deductionallowed earlier in case of remission of such liability. Therespondent had been paying interest at 6 % per annum to theKJC as per the contract but the assessee never claimed deductionEfor payment of interest under Section 36 (1) (iii) of the IT Act. Inthe instant case, CIT (A) relied upon Section 41 (1) of the IT Actand held that the respondent had received amortization benefit.Amortization is an accounting term that refers to the process ofallocating the cost of an asset over a period of time, hence, it is Fnothing else than depreciation. Depreciation is a reduction inthe value of an asset over time, in particular, to wear and tear.Therefore, the deduction claimed by the respondent in previousassessment years was due to the deprecation of the machine andnot on the interest paid by it. [Para 15][959-B-E]

G1.4 Moreover, the purchase effected from the KJC is inrespect of plant, machinery and tooling equipments which arecapital assets of the Respondent. The said purchase amount hadnot been debited to the trading account or to the profit or lossaccount in any of the assessment years. There is differencebetween ‘trading liability’ and ‘other liability’. Section 41 (1) ofH

the IT Act particularly deals with the remission of trading liability.Whereas in the instant case, waiver of loan amounts to cessationof liability other than trading liability. Hence, the case of therespondent 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 isnot interfered with in view of the following reasons: Section 28(iv)of the IT Act does not apply on the instant case since the receiptsof Rs 57,74,064/- are in the nature of cash or money; and Section41(1) does not apply since waiver of loan does not amount tocessation of trading liability. The respondent has not claimed anydeduction under Section 36(1)(iii) of the IT Act qua the payment 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 Courtof 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 and7951 of 2012

Civil Appeal Nos. 4435, 4434, 4442, 4441, 4609, 4436, 4545, 4539and 4546 of 2018

Civil Appeal Nos. 10169 and 10168 of 2010

Civil Appeal No. 5751 of 2011

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,Ms. Rekha Pandey, Mrs. Anil Katiyar, Amar Dave, P.S. Sudheer, RishiMaheshwari, Ms. Shruti Jose, Ms. Subhoshree Sil, C. N. Sreekumar,Amit Sharma, T. G. Narayanan Nair, Ms. Kavita Jha, Udit Naresh, PratapVenugopal, Ms. Surekha Raman, Anuj Sarma, Ms. Niharika,M/s. K J John And Co., Rajat Jariwal, Sahil Narang, Ms. Snehal Kakrania, A

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AMs. Bharat Gupta, M/s Khaitan & Co., Satyen Sethi, Ms. Arta TranaPanda, Ms. Gargi Sethee, Rameshwar Prasad Goyal, B. V. BalaramDas, Ms. Vanita Bhargava, Ajay Bhargava, Rony O. Joh, Ms. ShwetaKabra, Abhishek Bairagi, Bhargava V. Desai, Akshat Malpani,Rashmikumar Manilal Vithlani, Manish K. Bishnoi, Devensh Srivastava,Anurag Bhatt, Rabin Majumder, Sindhu Sinha, Shantanu Sagar,BM/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. BhartiTyagi, Nishant, Rakesh K. Sharma, A. Venayagam Balan, Mrs. AnilKatiyar, Ms. Kavita Jha, M/S. Parekh & Co., Advs. for the appearingCparties.

The Judgment of the Court was delivered by

R. K. AGRAWAL, J.

Civil Appeal Nos. 6949-6950 OF 2004

D1. Leave granted.

2. These appeals have been filed against the impugned judgmentand order dated 29.01.2003 passed by the High Court of Judicature atBombay in R.A.No.1561 (Bom)/1982 and R.A.No.5161/B/80 wherebythe Division Bench of the High Court while giving answers to theEReference 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. Sincethe question of law is same in all these appeals, all the appeals wouldstand disposed off with this common judgment.F

3. Brief facts:-

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 hereinis the Department of Income Tax (for brevity ‘the Revenue), on theGother 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 productline by including FC-150 and FC-170 models. For this purpose, onH18.06.1964, it entered into an agreement with Kaiser Jeep Corporation (for short ‘the KJC’) based in America wherein KJC agreed to sell thedies, welding equipments and die models to the assessee. The final priceof the tooling and other equipments was agreed at $6,50,000/- includingcost, insurance and freight (CIF). Meanwhile, the Respondent took allthe requisite approvals from the concerned Government Departments.The said toolings and other equipments were supplied by the KaiserJeep Corporation through its subsidiary Kaiser Jeep InternationalCorporation (KJIC).

(c) However, for the procurement of the said toolings and otherequipments, the KJC agreed to provide loan to the Respondent at therate of 6% interest repayable after 10 years in installments. For thispurpose, the Respondent addressed a letter dated 07.06.1965 to theReserve 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 AmericanMotor Corporation (AMC) had taken over the KJC and also agreed towaive the principal amount of loan advanced by the KJC to theRespondent and to cancel the promissory notes as and when they gotmatured. The same was communicated to the Respondent vide letterdated 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 MotorCorporation. After perusal of the return, the Income Tax Officer (ITO)concluded that with the waiver of the loan amount, the credit representedincome and not a liability. Accordingly, the ITO, vide order dated03.09.1979, held that the sum of Rs 57,74,064/- was taxable under Section28 of the Income Tax Act, 1961 (for brevity ‘the IT Act’).

(f) Being dissatisfied, the Respondent preferred an appeal beforethe Commissioner of Income Tax (Appeals) being No. CIT(A) V/CCIV/IT/261/79-80. After perusal of the matter, learned CIT (Appeals), videorder dated 23.03.1981, dismissed the appeal and upheld the order ofthe ITO with certain modifications.

(g) Being aggrieved, the Respondent as well as the Revenuepreferred appeals being Nos. 2007 (Bomb.) of 1981 and 2132 of 1981respectively before the Tribunal. The Tribunal, vide order dated16.08.1982, set aside the order passed by learned CIT (Appeals) anddecided the case in favour of the Respondent.

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A(h) Being aggrieved, the Revenue filed a Reference before theHigh Court at Bombay. In that Reference, three applications were filed,one by the assessee and rest two by the Revenue. Vide impugned commonjudgment and order dated 29.01.2003, the High Court confirmed certainfindings of the Tribunal in favour of the Respondent.B(i) Hence, these instant appeals have been filed by the Revenue.

(i) Hence, these instant appeals have been filed by the Revenue.4. Heard learned senior counsel for parties and perused the factualmatrix of the case.

Point(s) for consideration:-

5. The short point for consideration before this Court is whetherin the present facts and circumstances of the case the sum of Rs.57,74,064/- due by the Respondent to Kaiser Jeep Corporation whichlater on waived off by the lender constitute taxable income of theRespondent or not?

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6. At the onset, learned senior counsel for the Revenue submittedthat the Respondent had received the amount of Rs. 57,47,064/- fromthe American Motor Corporation as loan waiver, which it had initiallyborrowed from the Kaiser Jeep Corporation as loan in order to enable itto purchase dies, tools etc. for manufacture of jeeps. The waiver of loanEwas done by the American Motor Corporation, who took over the KaiserJeep Corporation, as a measure of compensation for certain lossesincluding goodwill, the benefit of association, and also for sudden changeto the American Motor Corporation as a share holder which was creditedby the Respondent to its account but was claimed as exemption fromFtaxation being capital receipt.

7. Before concluding, it was contended that since an amount iswaived off, for which the Respondent is claiming exemption, it actuallyamounts to income at the hands of the Respondent in the sense that anamount which ought to be paid by it is now not required to be paid. As aGresult, 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 ofthe High Court is liable to be set aside.

8. Conversely, learned senior counsel for the Respondentsubmitted that the Kaiser Jeep International Corporation (KJIC) supplied H

the toolings and the loan was given by the Kaiser Jeep Corporation(KJC), hence, these transactions were independent transactions. Theonly relationship, which survived after the supply of toolings, was that ofa lender and borrower. The purchase of toolings was not a transactionfor the purchase of goods on credit in the ordinary course of businessnor could it be equated to unpaid purchase consideration to be liquidatedover a period of time.

9. Further, it was also submitted that it is very clear that the amountof $650,000 provided by KJC was in fact a loan on which interest wasbeing paid regularly from time to time. It is also pointed out that in thebooks of account of the Respondent, this loan has been shown in theBalance Sheet under the heading “Loans-unsecured”. Hence, it issubmitted that the said sum could not be brought to tax as it representsthe waiver of a loan liability which was on the capital amount and is notin the nature of income. Accordingly, the High Court rightly upheld theorder of the Tribunal and, hence, these appeals deserve to be dismissed.

Discussion:-

10. The term “loan” generally refers to borrowing something,especially a sum of cash that is to be paid back along with the interestdecided mutually by the parties. In other terms, the debtor is under aliability to pay back the principal amount along with the agreed rate ofinterest within a stipulated time.

11. It is a well-settled principle that creditor or his successor mayexercise their “Right of Waiver” unilaterally to absolve the debtor fromhis liability to repay. After such exercise, the debtor is deemed to beabsolved from the liability of repayment of loan subject to the conditionsof waiver. The waiver may be a partly waiver i.e., waiver of part of theprincipal or interest repayable, or a complete waiver of both the loan aswell as interest amounts. Hence, waiver of loan by the creditor results inthe debtor having extra cash in his hand. It is receipt in the hands of thedebtor/assessee. The short but cogent issue in the instant case ariseswhether waiver of loan by the creditor is taxable as a perquisite underSection 28 (iv) of the IT Act or taxable as a remission of liability underSection 41 (1) of the IT Act.

12. The first issue is the applicability of Section 28 (iv) of the ITAct in the present case. Before moving further, we deem it apposite toreproduce the relevant provision herein below:- AB

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A“28. Profits and gains of business or profession.—Thefollowing income shall be chargeable to income-tax under the head“Profits and gains of business profession”,—

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(iv) the value of any benefit or perquisite, whether convertibleBinto money or not, arising from business or the exercise of aprofession; x x x”

13. On a plain reading of Section 28 (iv) of the IT Act, primaCfacie, it appears that for the applicability of the said provision, the incomewhich can be taxed shall arise from the business or profession. Also, inorder to invoke the provision of Section 28 (iv) of the IT Act, the benefitwhich is received has to be in some other form rather than in the shapeof money. In the present case, it is a matter of record that the amount ofRs. 57,74,064/- is having received as cash receipt due to the waiver ofDloan. Therefore, the very first condition of Section 28 (iv) of the IT Actwhich says any benefit or perquisite arising from the business shall be inthe form of benefit or perquisite other than in the shape of money, is notsatisfied in the present case. Hence, in our view, in no circumstances, itcan be said that the amount of Rs 57,74,064/- can be taxed under theEprovisions of Section 28 (iv) of the IT Act.

14. Another important issue which arises is the applicability of theSection 41 (1) of the IT Act. The said provision is re-produced as under:

“41. Profits chargeable to tax.- (1) Where an allowance ordeduction has been made in the assessment for any year in respectFof loss, expenditure or trading liability incurred by the assessee(hereinafter referred to as the first-mentioned person) andsubsequently during any previous year,- (a) the first-mentioned person has obtained, whether in cash or inany other manner whatsoever, any amount in respect of such lossGor expenditure or some benefit in respect of such trading liabilityby way of remission or cessation thereof, the amount obtained bysuch person or the value of benefit accruing to him shall be deemedto be profits and gains of business or profession and accordinglychargeable to income-tax as the income of that previous year, H

whether the business or profession in respect of which theallowance or deduction has been made is in existence in that yearor not; or x x x”

15. On a perusal of the said provision, it is evident that it is a sinequa non that there should be an allowance or deduction claimed by theassessee in any assessment for any year in respect of loss, expenditureor trading liability incurred by the assessee. Then, subsequently, duringany previous year, if the creditor remits or waives any such liability, thenthe assessee is liable to pay tax under Section 41 of the IT Act. Theobjective behind this Section is simple. It is made to ensure that theassessee does not get away with a double benefit once by way of deductionand another by not being taxed on the benefit received by him in thelater year with reference to deduction allowed earlier in case of remissionof such liability. It is undisputed fact that the Respondent had been payinginterest at 6 % per annum to the KJC as per the contract but the assesseenever claimed deduction for payment of interest under Section 36 (1)(iii) of the IT Act. In the case at hand, learned CIT (A) relied uponSection 41 (1) of the IT Act and held that the Respondent had receivedamortization benefit. Amortization is an accounting term that refers tothe process of allocating the cost of an asset over a period of time,hence, it is nothing else than depreciation. Depreciation is a reduction inthe value of an asset over time, in particular, to wear and tear. Therefore,the deduction claimed by the Respondent in previous assessment yearswas due to the deprecation of the machine and not on the interest paidby it.

16. Moreover, the purchase effected from the Kaiser JeepCorporation is in respect of plant, machinery and tooling equipmentswhich are capital assets of the Respondent. It is important to note thatthe said purchase amount had not been debited to the trading account orto the profit or loss account in any of the assessment years. Here, wedeem it proper to mention that there is difference between ‘tradingliability’ and ‘other liability’. Section 41 (1) of the IT Act particularlydeals 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 caseof the Respondent would fall under Section 41 (1) of the IT Act.

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A17. To sum up, we are not inclined to interfere with the judgmentand 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 presentcase since the receipts of Rs 57,74,064/- are in the nature ofcash or money.

B(b) Section 41(1) of the IT Act does not apply since waiver ofloan does not amount to cessation of trading liability. It is amatter of record that the Respondent has not claimed anydeduction under Section 36 (1) (iii) of the IT Act qua thepayment of interest in any previous year.

C18. In view of above discussion, we are of the considered viewthat these appeals are devoid of merits and deserve to be dismissed.Accordingly, the appeals are dismissed. All the other connected appealsare disposed off accordingly, leaving parties to bear their own cost.

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Nidhi Jain

Appeals dismissed.

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