In a recent ruling the Mumbai bench of the Income Tax Appellate Tribunal ( ITAT ) observed that the waiver of loan for acquiring capital assets cannot be taxed as a perquisite under Section 28 (iv) of Income Tax Act, 1961.
The brief facts are that the assessee company had excluded the foreign exchange gain written back on cancellation of the vessel contract, which was earlier capitalized to the vessels, when computing the Total Income for the year ended 31/03/2011, relevant to the Assessment Year 2011-12, as the same constituted a capital receipt.
The AO has, vide the draft Assessment Order, treated the capital receipt in respect of the foreign exchange gain written back on cancellation of the vessel construction contracts amounting to Rs. 1,80,76,104/-, which was earlier capitalized to the vessels, as the income of the assessee by resorting to the provisions of Section 28(iv) of the Income Tax Act. It was stated that the gain is not related to the vessel as the vessel has not been acquired by the assessee and hence, the gain cannot be related to a capital asset. The AO has, therefore, proceeded to tax the said amount as a revenue receipt.
DRP has held that the assessee has not clarified the treatment given to Capital Work-in-Progress on cancellation of the contract and has, therefore, directed the ld. AO to provide an opportunity to the assessee to explain the relevant facts
However, AO in his final assessment order held that the assessee has not given any clarification regarding the treatment given to the ‘capital works in progress. Accordingly, he held that any absence of any proper explanation, the exchange difference written back on cancellation of the vessel construction contract is a benefit which has arisen to the assessee and such benefit is covered within the provisions of Section 28(iv) of the Income Tax Act.
The bench observed that the Supreme Court in the case of Mahindra & Mahindra Ltd wherein the Supreme Court held that waiver of loan for acquiring capital assets cannot be taxed as a perquisite under Section 28(iv) of the Income Tax Act as receipt in the hands of the assessee are in the form of cash / money and further, the same cannot be taxed as a remission of liability under Section 41(1) of the Income Tax Act as waiver of loan does not amount to cessation of trading liability.
Thus the two member bench of the tribunal comprising S.Rifafur Rahman and Amit Shukla ( Judicial member ) observed that foreign exchange gain was written back on cancellation of vessel construction contracts which were earlier capitalised in the vessels as capital receipt and outside the purview of chargeability under Section 28(iv) of the Income Tax Act.
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