One-Time Settlement of Debt by Bank not Perquisite from Business If Loan granted to Assessee was a Separate Transaction: ITAT [Read Order]

The Ludhiana bench of the ITAT has held that the one-time settlement of debt by the bank cannot be treated as perquisite from the business under section 28(iv) of the Income Tax Act, 1961 if such loan granted to the assessee was a separate transaction.

Assessee is a Proprietor of M/s Mack Hosiery, which concern was earlier a Partnership firm constituted in the year 1988 and dissolved on 30.09.2002, which was taken over by the assessee as his proprietorship concern along with assets and liabilities whatsoever. The loan to the firm taken from M/s Punjab National Bank (PNB) was also owed up / taken over by the assessee in his proprietorship concern. During the year under consideration, the assessee claimed the expenditure on interest on loan that was waived by Bank.

Before the Tribunal, the assessee claimed that neither the provisions of section 28 (iv) and 41(1) nor of section 56(2)(vi) of the Income Tax Act were applicable to the facts of the present case. It was also submitted that the assessee was not in a business of taking / lending of the loan and, hence, the amount of loan received by the assessee for the business of hosiery was not part of the trading activity of the assessee.

The Tribunal observed that the very language of the section speaks about the value of any benefit or perquisite arising from business or exercise of a profession. “Now considering the facts and circumstances of the case, though, the loan was taken for the purpose of the business but the same was never taken in the course of business or to say that the loan sourced was not linked to the trading receipts or the like. Similarly, the waiver of the loan amount was not in the course of business or in the exercise of a profession. A part of the amount was waived by the bank in a one-time settlement because there were little chances of recovery of the entire amount. This one-time settlement was not done as part of the business activity of the assessee, rather, the transaction of the loan and waiver was a separate transaction. Under the circumstances, the waiver of a part of the loan amount cannot be said to be a benefit or perquisite arising from business or profession to the assessee.”

“Though the grant of loan on interest may be the part of the banking business of the Lender Bank, to take a loan is not the business activity of the assessee. So far as the assessee is concerned, the loan in question was not the trading liability of the assessee and, hence, the bank has not waived any loss/expenditure of trading liability of the assessee. What has been waived is a part of the loan amount in the one-time settlement as the loan asset has been declared as NPA and there were little chances of the recovery of the loan. Moreover, the assessee did not take any benefit in the shape of allowance or deduction in earlier years of such principal loan amount which has been waived. Under the circumstances, the provisions of Section 41(1)of the Act are not applicable to the facts and circumstances of the case,” the Tribunal said.