ITO Ward 17(1) vs. Meyer Apparel Pvt. Ltd.: Deletion of Addition Under Section 28(iv) for Assessment Year 2006-07

ITO Ward 17(1) vs. Meyer Apparel Pvt. Ltd.: Deletion of Addition Under Section 28(iv) for Assessment Year 2006-07

The Income Tax Appellate Tribunal (ITAT) of Delhi Bench “E”, presided over by Shri C.M. Garg, Judicial Member, and Dr. B. R. R. Kumar, Accountant Member, adjudicated on the case between the Income Tax Officer, Ward-17(1), New Delhi and Meyer Apparel Pvt. Ltd., Haryana, for the assessment year 2006-07. The appeal, numbered ITA No. 6453/DEL/2019, was filed by the Revenue on 1st August 2019, challenging the order passed by the Commissioner of Income Tax (Appeals) [CIT(A)] on 8th May 2019. The final tribunal order was pronounced on 19th October 2023, which upheld the CIT(A)’s decision to delete the addition of Rs. 3.70 crore made by the Assessing Officer under Section 28(iv) of the Income-tax Act, 1961.

Background of the Case

Meyer Apparel Pvt. Ltd., a company involved in the apparel business, had availed a loan from Indian Overseas Bank. The loan was secured by a fixed deposit provided by a guarantor, Mr. Panchai Singh Sachthep. Due to financial difficulties, the company was unable to repay the loan, leading to the bank revoking the guarantee and adjusting the fixed deposit against the outstanding loan amount. Subsequently, Mr. Sachthep waived the amount of Rs. 3.70 crore, which was treated as a capital receipt by the company.

During the assessment proceedings, the Assessing Officer (AO) treated the waiver of loan as a cessation of liability and considered it as income under Section 28(iv) of the Income-tax Act. The AO added the amount of Rs. 3.70 crore to the taxable income of the assessee, arguing that the waiver of the loan resulted in a benefit to the assessee, which should be taxed as business income.

The assessee, dissatisfied with the addition, appealed to the CIT(A). The CIT(A) deleted the addition, relying on the judgment of the Hon’ble Supreme Court in the case of CIT vs. Mahindra & Mahindra Ltd. [2018] 93 taxmann.com 32 (SC), which held that the waiver of loan for acquiring capital assets is not taxable under Section 28(iv) as it does not constitute a trading liability.

Proceedings Before the ITAT

The Revenue, represented by Ms. Smita Singh, Senior Departmental Representative (DR), argued that the CIT(A) erred in deleting the addition of Rs. 3.70 crore. The DR contended that the waiver of the loan provided a benefit to the assessee, which should be taxable under Section 28(iv). The DR further argued that the CIT(A) had incorrectly applied the Supreme Court’s judgment in the case of Mahindra & Mahindra Ltd., as the waiver of the loan in this case was related to the company’s business operations and not the acquisition of capital assets.

In response, the assessee’s counsel, Shri V. K. Bindal, argued that the CIT(A) had correctly deleted the addition, as the waiver of the loan did not result in any monetary benefit or perquisite arising from business or profession, which is a requirement for taxation under Section 28(iv). The counsel further argued that the AO had overstepped the directions given by the ITAT in the first round of proceedings, where the issue was remanded back for the limited purpose of verifying whether the amount relating to sundry creditors had been considered in the books of accounts.

Tribunal’s Findings and Judgment

After hearing both sides and reviewing the materials on record, the ITAT upheld the order passed by the CIT(A). The Tribunal observed that the AO had made the addition under Section 28(iv) by treating the waiver of the loan as a benefit arising from business, but the facts of the case did not support this conclusion.

The Tribunal relied heavily on the judgment of the Hon’ble Supreme Court in CIT vs. Mahindra & Mahindra Ltd., where it was held that Section 28(iv) applies only to non-monetary benefits or perquisites arising from business or profession, and a waiver of loan does not constitute such a benefit. Furthermore, the Tribunal noted that the AO had failed to provide sufficient justification for treating the waiver of the loan as a revenue receipt, especially when the amount had not been claimed as an expense by the assessee in any of the previous years.

The Tribunal also considered the remand report submitted by the AO, which confirmed that the fixed deposits provided by the guarantor were not trading liabilities and were not claimed as expenses by the assessee. Given these facts, the Tribunal concluded that the addition made by the AO was not sustainable and was rightly deleted by the CIT(A).

Conclusion

In conclusion, the ITAT dismissed the Revenue’s appeal, upholding the CIT(A)’s decision to delete the addition of Rs. 3.70 crore. The Tribunal’s decision was based on the established legal principle that a waiver of loan, particularly one related to the acquisition of capital assets, does not constitute a benefit or perquisite under Section 28(iv) and is not taxable as income. This judgment reinforces the importance of adhering to judicial precedents and the proper interpretation of tax provisions.

Order Pronounced in the Open Court on 19th October 2023

Signed by:
Judicial Member: Shri C.M. Garg
Accountant Member: Dr. B. R. R. Kumar

Date of Pronouncement: 19th October 2023

ITO Ward 17(1) vs. Meyer Apparel Pvt. Ltd.: Deletion of Addition Under Section 28(iv) for Assessment Year 2006-07