Priya Soparkar 1 210 itxa 201-02-o IN HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION INCOME TAX APPEAL (IT) NO.201 OF 2002 M/s Essar Shipping Limited Appellant V/s. Commissioner of Income-tax, City III, Mumbai. Respondent Mr. Subhash S. Shetty with Mr. P. C. Tripathi, Advocate for Appellant. Mr. P. C. Chhotaray, Advocate for Respondent. CORAM : UJJAL BHUYAN & MILIND N. JADHAV, JJ. DATE : MARCH 5, 2020 P.C.:- 1. Heard Mr. Subhash S. Shetty, learned counsel for appellant; and Mr. P. C. Chhotaray, learned standing counsel revenue for respondent. 2. This appeal under Section 260A of Income Tax Act, 1961 (briefly Act hereinafter) has been preferred by assessee assailing order dated 16th August, 2001 passed by Income Tax Appellate Tribunal, Bench, Mumbai (briefly Tribunal hereinafter) in Income Tax Appeal No.144/Ban/91 for assessment year 1984-85. Uploaded on - 17/03/2020 Downloaded on - 18/03/2020 10:46:56 Priya Soparkar 2 210 itxa 201-02-o 3. appeal was admitted on following substantial question of law:- Whether on facts and in circumstances of case and in law, provisions of Section 28(iv) of Act are attracted where alleged benefit or perquisite is other than cash? 4. above question has arisen in backdrop of following factual matrix. 5. Appellant is resident company assessed under Act. Earlier it was known as M/s Karnataka Shipping Corporation Limited and carrying on business of shipping. During relevant previous year because of certain developments company was amalgamated with M/s Essar Bulk Carriers Limited, Madras whereafter it came to be known as M/s Essar Shipping Limited. 6. In assessment proceeding for assessment year 1984-85 following amalgamation it filed revised return of income wherein amount of Rs.2,52,00,000/- was claimed as deduction being amount of loan given by Government of Karnataka which was subsequently waived. Assessing Officer by assessment order dated 27 th March, 1987 passed under section 143(3) of Act disallowed above claim of appellant. It was claimed on behalf of appellant that Government of Karnataka had written off said loan advanced to appellant as said amount had become irrecoverable. Assessing Officer did not accept claim of appellant. Assessing Officer observed that Uploaded on - 17/03/2020 Downloaded on - 18/03/2020 10:46:56 Priya Soparkar 3 210 itxa 201-02-o waiver of loan benefited appellant in carrying on its business and in terms of provisions contained in Section 28, said benefit enjoyed by appellant should constitute income in its hand. Accordingly, aforesaid amount was added to total income of assessee. 7. Aggrieved by above, assessee preferred appeal before Commissioner of Income Tax (Appeals)-III, Bangalore (referred to hereinafter as first appellate authority). By appellate order dated 26 th September, 1990, first appellate authority considered requirement of Section 28(iv) of Act and returned finding that waiver of loan could not be treated as benefit or perquisite because it was clearly cash item. Amount would be includible under Section 28(iv) only if it is non- cash item and that cash item cannot be treated as perquisite. It was further held that what can be assessed under Section 28 are only items of revenue nature and not items of capital nature. Therefore, waiver of loan cannot partake character of income to be includible for assessment. Accordingly, addition made by Assessing Officer was deleted. 8. matter was carried forward in further appeal before Tribunal by revenue. Tribunal took view that written off of loan was inseparably connected with business of assessee and therefore this benefit had arisen out of business of assessee. Amount written off was nothing but incentive for business of assessee. It Uploaded on - 17/03/2020 Downloaded on - 18/03/2020 10:46:56 Priya Soparkar 4 210 itxa 201-02-o was held that benefit was received by assessee in form of writing off of liability to extent of loan. Therefore, it could not be said that assessee received cash benefit. By order dated 16 th August, 2001 Tribunal opined that Assessing Officer had correctly made addition considering waiver of loan as revenue receipt of assessee and therefore, set aside finding of first appellate authority thereby restoring order of Assessing Officer. 9. Hence, present appeal by assessee under Section 260A of Act. 10. Mr. Shetty, learned counsel for appellant at outset has referred to provisions contained in Section 28(iv) of Act and contends that to be income chargeable to income tax under head profits and gains of business and profession, value of any benefit or perquisite has to arise from business or exercise of profession and it should not be in cash. He submits that this court in Mahindra and Mahindra Vs. CIT, 261 ITR 501 has held that income which can be taxed under Section 28(iv) must not only be referable to benefit or perquisite but it must be arising from business. Secondly, Section 28(iv) would not apply to benefits in cash or money. This was following judgment of Gujarat High court in CIT Vs. Alchemic (P) Ltd, 130 ITR 168. He submits that revenue had questioned finding of Bombay High Court before Supreme Court in CIT Vs. Mahindra & Mahindra Uploaded on - 17/03/2020 Downloaded on - 18/03/2020 10:46:56 Priya Soparkar 5 210 itxa 201-02-o Limited, 404 ITR 1 wherein Supreme Court had affirmed finding of Bombay High Court and has declared that for applicability of Section 28(iv) of Act, income should arise from business or profession and that benefit which is received has to be in some other form rather than in shape of money. He further submits that reliance placed by revenue before Tribunal in Sahney Steel & Press Works Limited Vs. CIT, 228 ITR 253 is wholly misplaced in as much as in that case Supreme Court was considering question as to whether subsidy received by assessee from Andhra Pradesh Government was taxable as revenue receipt or not. He therefore submits that issue raised in this appeal is squarely covered by Supreme Court decision in case of Mahindra & Mahindra Limited (supra) and therefore, question framed may be answered in favour of assessee and against revenue. 11. On other hand, Mr.Chhotaray, learned standing counsel submits that after loan is waived or written off it partakes character of subsidy, more particularly operational subsidy. He has laid emphasis on expression operational subsidy to contend that action of Government of Karnataka in writing off of loan provided was act of providing operational subsidy to assessee thus extending helping hand to assessee to salvage its losses thereby benefiting assessee to extent of loan waived and it is in this context that he placed reliance on decision of Sahney Steel & Press Works Limited Uploaded on - 17/03/2020 Downloaded on - 18/03/2020 10:46:56 Priya Soparkar 6 210 itxa 201-02-o (supra). In course of his arguments he also placed reliance on earlier decision of this court in Protos Engineering Company Private Limited Vs. CIT, 211 ITR 919 also referred to by Tribunal. Adverting to decision of Supreme Court in Mahindra & Mahindra Limited (supra) he submits that facts of present case are distinguishable from facts of that case. Therefore, he prays for dismissal of appeal. 12. Submissions made by learned counsel for parties have been considered. 13. At outset, we may refer to provisions contained in Section 28(iv) of Act. For ready reference, Section 28(iv) is extracted hereunder:- Profits and gains of business or profession. 28. following income shall be chargeable to income-tax under head Profits and gains of business or profession:- (iv) value of any benefit or perquisite, whether convertible into money or not, arising from business or exercise of profession. 14. As would be evident from above, Section 28 deals with profits and gains of business or profession. It says that incomes mentioned therein shall be chargeable to income tax under head profits and gains of business or profession . Clause (iv) refers to value of any benefit or perquisite whether convertible into money or not arising from business or exercise of profession. Uploaded on - 17/03/2020 Downloaded on - 18/03/2020 10:46:56 Priya Soparkar 7 210 itxa 201-02-o 15. In Mahindra & Mahindra Limited (supra) Supreme Court was examining whether amount due by Mahindra & Mahindra to Kaiser Jeep Corporation which was later on waived off by lender constituted taxable income of Mahindra & Mahindra or not. Briefly it may be stated that Mahindra & Mahindra for purpose of expansion of its business had entered into agreement with Kaiser Jeep Corporation whereby later agreed to sell certain equipments to Mahindra & Mahindra. price of equipments was finally estimated at 6,50,000. Kaiser Jeep Corporation agreed to provide loan to Mahindra & Mahindra for procurement of equipments at rate of 6% interest repayable after 10 years in installments. Subsequently, Kaiser Jeep Corporation was taken over by American Motor Corporation which agreed to waive off principal loan amount advanced by Kaiser Jeep Corporation to Mahindra & Mahindra. It is in this factual background that aforesaid provision first cropped up before Bombay High Court and thereafter, travelled to Supreme Court in consideration of question as to whether loan amount which was waived off by lender constituted taxable income of Mahindra & Mahindra. Supreme Court discussed meaning of term loan and also right of creditor to exercise its right of waiver. It was held as under :- term loan generally refers to borrowing something, especially sum of cash that is to be paid back alongwith interest decided mutually by parties. In other terms, debtor is under liability to pay back principal amount alongwith agreed rate of interest within stipulated time. Uploaded on - 17/03/2020 Downloaded on - 18/03/2020 10:46:56 Priya Soparkar 8 210 itxa 201-02-o It is well-settled principle that creditor or his successor may exercise their right of waiver unilaterally to absolve debtor from his liability to repay. After such exercise, debtor is deemed to be absolved from liability of repayment of loan subject to conditions of waiver. waiver may be partly waiver, i.e. waiver of part of principal or interest repayable or complete waiver of both loan as well as interest amounts. Hence, waiver of loan by creditor results in debtor having extra cash in his hand. It is receipt in hands of debtor/assessee. 16. Having discussed above, Supreme Court posed question as to whether waiver of loan by creditor is taxable as perquisite under Section 28(iv) of Act and in this connection referred to provisions of Section 28(iv) of Act. Thereafter Supreme Court held as under:- On plain reading of section 28(iv) of Income-tax Act, prima facie, it appears that for applicability of said provision, income which can be taxed shall arise from business or profession. Also, in order to invoke provisions of section 28(iv) of Income- Tax Act, benefit which is received has to be in some other form rather than in shape of money. In present case, it is matter of record that amount of Rs.57,74,064.00 is having received as cash receipt due to waiver of loan. Therefore, very first condition of section 28(iv) of Income-Tax Act which says any benefit or perquisite arising from business shall be in form of benefit or perquisite other than in shape of money, is not satisfied in present case. Hence, in our view, in no circumstances, it can be said that amount of Rs.57,74,064.00 can be taxed under provisions of section 28(iv) of Income-tax Act. Uploaded on - 17/03/2020 Downloaded on - 18/03/2020 10:46:56 Priya Soparkar 9 210 itxa 201-02-o 17. From above it is quite evident that according to Supreme Court for applicability of Section 28(iv) of Act, income which can be taxed has to arise from business or profession. That apart, benefit which is received has to be in some other form rather than in shape of money. In facts of that case it was found that amount of Rs.57,74,064.00 was received as cash receipt due to waiver of loan. Therefore, it was held that Section 28(iv) of Act was not satisfied in as much as prime condition of Section 28(iv) that any benefit or perquisite arising from business or profession shall be in form of benefit or perquisite other than in shape of money was absent. Therefore, it was held that said amount could not be taxed under Section 28(iv) of Act in no circumstances. 18. Facts and issue in present case are identical to that in Mahindra & Mahindra (supra). Here also loan of Rs.2.52 cores was given by Karnataka Government to assessee which was subsequently waived off. Therefore, this amount would be construed to be cash receipt in hands of assessee and cannot be taxed under Section 28(iv). In view of Supreme Court decision in Mahindra & Mahindra (supra), earlier decision of this court in Protos Engineer Company Private Limited (supra) would no longer hold good. 19. In so far decision in Sahney Steel & Press Works Limited (supra) is concerned, we find that issue Uploaded on - 17/03/2020 Downloaded on - 18/03/2020 10:46:56 Priya Soparkar 10 210 itxa 201-02-o involved in said case pertained to subsidy received by assessee from Andhra Pradesh Government. Question was whether such subsidy received was taxable as revenue receipt or not. In facts of that case it was held that such subsidies were of revenue nature and not of capital nature. 20. In so far argument of Mr.Chhotaray that upon waiver of loan amount covered by such loan would partake character of operational subsidy, we are unable to accept such contention. Conceptually, loan and subsidy are two different concepts. As per Concise Oxford English Dictionary, Indian Edition, term loan has been explained as thing that is borrowed, especially sum of money that is expected to be paid back with interest; action of lending. Black s Law Dictionary, Eight Edition, describes loan as act of lending; grant of something for temporary use; thing lent for borrower s temporary use, especially sum of money lent at interest; to lend, especially money. In Supreme Court on Words and Phrases, it is stated that loan necessarily supposes return of money loaned; in order to be loan, advance must be recoverable; loan is advance in cash which includes any transaction which in substance amounts to such advance. Having noted above, we may revert back to what Supreme Court has said regarding loan in Mahindra & Mahindra (supra). It is stated that loan generally refers to borrowing something, especially sum of cash which is to be paid back alongwith interest decided by parties. Therefore, loanee or Uploaded on - 17/03/2020 Downloaded on - 18/03/2020 10:46:56 Priya Soparkar 11 210 itxa 201-02-o debtor is under liability or obligation to pay back loan amount i.e. principal amount alongwith interest agreed upon within stipulated time frame. It is in this context that Supreme Court acknowledged well settled principle that creditor has right to waive off loan or debt either partly or fully, thus absolving debtor from liability of repayment of loan. 21. In contra-distinction, subsidy has been explained in Concise Oxford English Dictionary, Indian Edition, as sum of money granted from public funds to help industry or business keep price of commodity or service low; sum of money granted to support undertaking held to be in public interest i.e., grant or contribution of money. As per Black s Law Dictionary, Eight Edition, subsidy has been defined as grant usually made by Government to any enterprise whose promotion is considered to be in public interest; although Governments sometimes make direct payments (such as cash grants), subsidies are usually indirect. subsidy granted for production or bringing into existence any new asset of assessee would be construed to be capital receipt whereas subsidy granted for purpose of assisting assessee to carry on its already existing business would be in nature of revenue receipt and thus taxable. Therefore, when subsidy is given, character thereof in hands of recipient - whether revenue or capital would have to be determined having regard to purpose for which it is given. In Sahney Steel and Press Works Ltd. (supra), Supreme Court held that subsidy provided by Uploaded on - 17/03/2020 Downloaded on - 18/03/2020 10:46:56 Priya Soparkar 12 210 itxa 201-02-o Andhra Pradesh Government was basically endeavour of state to extend helping hand to newly set up industries to enable them to be viable and competitive. 22. Thus, from careful analysis, it is evident that there is fundamental difference between loan and subsidy and two concepts cannot be equated. While loan is borrowing of money required to repaid back with interest; subsidy is not required to be repaid back being grant. Such grant is given as part of public policy by state in furtherance of public interest. Therefore, even if loan is written off or waived, which can be for various reasons, it cannot partake character of subsidy. 23. From discussions and reasons aforementioned, we find sufficient force in contention of appellant. substantial question of law therefore is answered in favour of assessee by holding that waiver of loan cannot be brought to tax under Section 28(iv) of Act. 24. Appeal is accordingly allowed but there shall be no order as to cost. (MILIND N. JADHAV, J.) (UJJAL BHUYAN, J.). Uploaded on - 17/03/2020 Downloaded on - 18/03/2020 10:46:56 Essar Shipping Limited v. Commissioner of Income-tax, City-III, Mumbai