Impact of waiver of loan or liability on depreciation claim

ISSUE FOR CONSIDERATION

When a loan taken for acquiring a depreciable capital asset or a part of the purchase price of such capital asset is waived in a year subsequent to the year of acquisition, an issue that arises with respect to waiver of loan or part of the purchase price is whether the depreciation claimed in the past on that portion of the cost of the asset which represents the waiver of the purchase price, or which had been met from the loan waived, can be added / disallowed u/s 41(1) / 43(6) in the year in which that amount of the loan / purchase price has been waived, and whether the written down value (WDV) of the block of the assets concerned needs to be reworked so as to reduce it by the amount of loan / purchase price waived.

The Hyderabad Bench of the Tribunal has held that while section 41(1) would not apply, the depreciation claimed in the past needs to be added as income and the WDV is also required to be reworked in such a case. As against this, the Bengaluru Bench of the Tribunal has held that waiver of loan taken to acquire a depreciable asset does not have any consequences in the year in which the loan has been waived off, insofar as claim of depreciation is concerned.

BINJRAJKA STEEL TUBES LTD.'s CASE

The issue had earlier come up for consideration of the Hyderabad Bench of the Tribunal in the case of Binjrajka Steel Tubes Ltd. vs. ACIT 130 ITD 46.

1. In this case, the assessee had purchased certain machinery from M/s Tata SSL Ltd. for a total consideration of Rs. 6 crores.
2. Since the machinery supplied was found to be defective, the matter was taken up with the supplier for replacement and after protracted correspondence and a legal battle, the supplier agreed to an out-of-court settlement.
3. As per this settlement, the liability of the assessee which was payable to the supplier to the extent of Rs. 2 crores were waived.
4. During the previous year relevant to assessment year 2005-06, the assessee gave effect to this settlement in its books of accounts by reducing the cost of machinery by Rs. 2 crores. Consequently, the depreciation for the year had also been adjusted, including withdrawal of excess charged depreciation of earlier years amounting to Rs. 1,19,01,058.
5. While making the assessment, the A.O. added back the amount of Rs. 2 crores as income of the assessee u/s 41(1), and this was confirmed by the CIT(A).
6. Before the Tribunal, the assessee submitted that the remission of liability of Rs. 2 crores which was written back was not taxable u/s 41(1) because cessation of liability was towards a capital cost of asset and, hence, it was a capital receipt.
7. On the other hand, the Department argued that the assessee had claimed the depreciation on Rs. 6 crores from the year of acquisition of the asset.
8. From the date of inception of the asset, depreciation was allowed by the Department on the block of assets, and when the assessee received any amount as benefit by way of reduction of cost of acquisition, the amount of benefit had to be offered for taxation as per the provisions of section 41(1).
9. The Tribunal referred to the provisions of section 41(1) and held that it could be invoked only where any allowance or deduction had been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee, and subsequently, during any previous year, the assessee had obtained any amount or some benefit with respect to such loss, expenditure, or trading liability.
10. The benefit of depreciation obtained by the assessee in the earlier years could not be termed as an allowance or expenditure claimed by the assessee in the earlier years.
11. Hence, any recoupment received by the assessee on this count could not be taxed u/s 41(1).
12. Accordingly, the Tribunal rejected the Revenue's contention that the assessee had obtained the benefit of depreciation in the earlier years as allowance in respect of expenditure incurred by it when it bought the plant and machinery and the Rs. 2 crores liability waived by the supplier of the machinery in the year under consideration was liable to be taxed as deemed income within the purview of section 41(1).
13. Though the issue raised before the Tribunal was only with regard to the taxability of the amount waived u/s 41(1), it further dealt with the issue of adding back of depreciation which was already claimed on the said amount. For the purpose of dealing with the said issue of disallowance of depreciation, which was not raised before it, the Tribunal placed reliance on the decision of the Calcutta High Court in the case of Steel Containers Ltd. vs. CIT [1978] 112 ITR 995, wherein it was held that when the Tribunal finds that disallowance of a particular expenditure by the authorities below is not proper, it is competent to sustain the whole or part of the disputed disallowance under a different section under which it is properly so disallowable.
14. On the merits of the issue of disallowance of depreciation, the Tribunal held that depreciation already allowed in past years on the amount which was waived by the supplier under the settlement with the assessee had to be withdrawn and added back in the year under consideration, as otherwise, the assessee would get double benefit which was not justified.
15. Accordingly, the A.O. was directed to add the amount of depreciation claimed in past years on the amount of Rs. 2 crores as income u/s 28(iv) as the value of benefit arising from the business.
16. After reducing the said amount of depreciation granted earlier from the amount of Rs. 2 crores, the Tribunal further directed that the balance amount was to be reduced from the closing WDV of the block of assets, without giving any reasoning or relying on any relevant provision of the Act.

CONCLUSION

It to be noted that provisions of Section 41(1) provides that there should have been allowance or deduction claimed by the Assessee in any Assessment Year as a loss, expenditure or trading liability incurred by the Assessee. Subsequently, if any remission or waiver is granted in respect of which such an allowance/deduction has been claimed, then the Assessee is liable to pay tax on the amount waived/ remitted under Section 41(1) of the Income Tax Act,1961. The waiver of loan taken or liability of the assessee will not be considered as deduction /allowance taken by the assessee in previous AYs and hence amount of loan or liability waived is not considered as income of the assessee. In case of depreciable assets , the depreciation which has been claimed on the amount of liability must be added back and considered as income u/s. 28 of the Income Tax Act,1961 and the balance amount of Rs. 2.00 Crores will be reduced from the WDV of the assets or block of asset.

DISCLAIMER: The above case law is only for information and knowledge of readers. The views expressed here are the personal views of the author and same should not be taken as professional advice. in case of necessity do consult with tax professionals.