The Commissioner vs Mahindra And Mahindra Ltd. Through M.D.

The Commissioner …..Appellant(s)

Versus

Mahindra and Mahindra Ltd. thrg. M.D. …..Respondent(s)

WITH

CIVIL APPEAL No. 5320 OF 2012 CIVIL APPEAL No. 5319 OF 2012 CIVIL APPEAL No. 4435 OF 2018 (Arising out of Special Leave Petition (C) No. 20625 OF 2012) CIVIL APPEAL No. 890 OF 2012 CIVIL APPEAL No. 10169 OF 2010 CIVIL APPEAL No. 10168 OF 2010 CIVIL APPEAL No. 3624 OF 2012 CIVIL APPEAL No. 5751 OF 2011 CIVIL APPEAL No. 1214 OF 2012 CIVIL APPEAL No. 780 OF 2012 CIVIL APPEAL No. 2164 OF 2012

CIVIL APPEAL No. 4434 OF 2018 (Arising out of Special Leave Petition (C) No. 20144 OF 2012) Signature Not Verified

Digitally signed by ASHA SUNDRIYAL Date: 2018.05.01 17:52:47 IST CIVIL APPEAL No. 7951 OF 2012 Reason:

1 CIVIL APPEAL No. 4442 OF 2018 (Arising out of Special Leave Petition (C) No. 4008 OF 2014)

CIVIL APPEAL No. 4441 OF 2018 (Arising out of Special Leave Petition (C) No. 5782 OF 2014) CIVIL APPEAL No. 4345 OF 2014

CIVIL APPEAL No. 4609 OF 2018 (Arising out of Special Leave Petition (C) No. 18964 OF 2014)

CIVIL APPEAL No. 4436 OF 2018 (Arising out of Special Leave Petition (C) No. 24752 OF 2014)

CIVIL APPEAL No. 4545 OF 2018 (Arising out of Special Leave Petition (C) No. 4977 OF 2015)

CIVIL APPEAL No. 6942 OF 2015

CIVIL APPEAL No. 4539 OF 2018 (Arising out of Special Leave Petition (C) No. 6648 OF 2016)

CIVIL APPEAL No. 4546 OF 2018 (Arising out of Special Leave Petition (C) No. 29776 OF 2016)

2 JUDGMENT

R.K. Agrawal, J.

Civil Appeal Nos. 6949-6950 OF 2004

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 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 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

3 appellant herein is the Department of Income Tax (for brevity

‘the Revenue), on the 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 18.06.1964, it entered into an agreement with

Kaiser Jeep Corporation (for short ‘the KJC’) based in America

wherein KJC agreed to sell the 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 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

4 in installments. For this purpose, the Respondent addressed a

letter dated 07.06.1965 to the 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 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 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’).

5

(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) 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) 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.

6

(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:-

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?

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 was

done by the American Motor Corporation, who took over the

Kaiser Jeep Corporation, as a measure of compensation for

7 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

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 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 the toolings and the loan was given by the

Kaiser Jeep Corporation (KJC), hence, these transactions were

independent transactions. The only relationship, which

survived after the supply of toolings, was that of a lender and

8 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 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 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:-

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

9 debtor is under a liability to pay back the principal amount

along with the agreed rate of interest within a stipulated time.

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 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 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:-

10

“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 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

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 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 provisions of Section 28 (iv) of the IT Act.

11

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 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 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, whether the business or profession in respect of which the 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 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

12 that 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.

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) (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 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

Corporation is in respect of plant, machinery and tooling

13 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 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.

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) Section 41(1) of the IT Act does not apply since waiver of

loan does not amount to cessation of trading liability. It

14 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.

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.

…….....…………………………………J. (R.K. AGRAWAL)

…….…………….………………………J. (ABHAY MANOHAR SAPRE) NEW DELHI;

APRIL 24, 2018.

15