Loan Waiver Benefit consequent to One-Time Settlement is Capital in Nature: ITAT [Read Order]

In Income Tax Officer vs. Tini Pharma Ltd., the Hyderabad bench of Income Tax Appellate Tribunal ( ITAT ) held that loan waiver benefit consequent to one-time settlement is capital in nature.

The assessee is engaged in the business of manufacture and sale of Bulk drugs and pharmaceutical formulations. It filed it income returns declaring a loss of Rs. 1.54 Crores. The Assessing Officer (A.O.) completed the assessment by treating the waiver of the loan amount of Rs. 4,78,30,167/- as business income and added the same to the loss returned. On reassessment the AO noticed that the loan of Rs. 1.21 Crores and Rs. 7.67 Crores was outstanding towards packing credit and working capital respectively. The assessee during the FY relevant to AY under consideration, negotiated one-time settlement with Catholic Syrian Bank as per which assessee agreed to pay Rs. 4.1 Crores in full settlement of loans.

The AO observed that as per assessee’s books the outstanding payable to Catholic Syrian Bank is Rs. 8,88,30,167/- and on account of one-time settlement for Rs. 4.1 Crores the assessee company closed the balance amount of Rs. 4.78 Crores by transferring the same to capital reserve. The assessee argued that the loans obtained and outstanding were on capital account and do not represent any trading receipt. The A.O rejected the submission of the assessee on the ground that one-time settlement with the bank brought about cessation of liability and hence it is a trading income. Accordingly, the loan waiver benefit of Rs. 4,78,30,167/- including interest was brought tax u/s 41(1) by the AO. The Commissioner of Income Tax (Appeals) allowed the appeal of the assessee and directed the AO to delete the loan waiver benefit by holding that the loan waiver is only on capital account and hence cannot be brought to tax as trading receipt. Aggrieved, Revenue appealed to ITAT.

The bench comprising of Judicial Member P. Madhavi Devi and Accountant Member S. Rifaur Rahman relied on the decisions of the Bombay High Court in the cases CIT Vs Santogen Silk Mills Ltd., CIT Vs. Xylon Holdings (P) Ltd. “Following the ratios laid down in the aforesaid cases, we uphold the order of the CIT(A) in directing the AO to delete the addition of Rs. 4,78,30,167/- made by the AO on account of waiver of the loan amount treating it as capital in nature and dismiss the grounds raised by the revenue.” observed the Members.