Section 41 (1) of Income Tax Act shall not apply since waiver of loan does not amount to cessation of trading liability: ITAT deletes Addition [Read Order]

The Income Tax Appellate Tribunal (ITAT)  Delhi bench held that section 41(1) of Income Tax Act, 1961 should not be applied since waiver of loan did not amount to cessation of trading liability. Therefore, the bench deleted the addition made the assessing officer.

Assessee Luxor Writing Instruments (P) Ltd filed the appeal against the order of the Commissioner of Income Tax Appeal.

During the appellate proceedings the CIT(A) confirming the addition of Rs.33485700/ Made by the assessing officer on account of waiver of liability treating the same as cessation of liability invoking the provision of Section 41 (1) of the Income Tax Act.

Assessing officer during the assessment proceedings observed that  when the amount was received it  was in the nature of capital receipt. But when the loan was  waived off, its nature changed to revenue receipt.

Counsel for the assessee submitted that “waiver of loan basically constituted capital receipts and that the waiver was by the holding company of the shareholder, hence section 41(1) of the Act is inapplicable irrespective of the manner of utilization of loan.”

During the appeal proceedings It was observed by the tribunal that  unless it is examined in the present case as to what was the purpose of taking the loan amount which was waived, the taxability of the waived amount as income could not be adjudicated upon.

Further the tribunal relied upon the decision of Supreme Court in the case of Mahindra and Mahindra and found that Section 41 (1) of the Income Tax  Act did not apply since waiver of loan does not amount to cessation of trading liability.

After analysing the material facts the two member bench of  Astha Chandra (Judicial Member) and N K Billaiya (Accountant Member) allowed the appeal filed by the assessee.

S.K. Tulsiyan appeared for the assessee and  Smita Singh appeared for the revenue.

To Read the full text of the Order CLICK HERE

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