Assignment of loan is common practice and is adopted with an intension of reducing communication cycle for recovering the amount from debtor. Under the Income Tax Act, 1961 (‘the ITA’), there is no specific provision for tax treatment of assignment of loan. In one such case, where Cable Corporation of India Ltd (‘the Assessee’) [1] has entered into an arrangement where the loan has been borrowed for long period (100 years) and loan amount has been assigned at present value to third party. Detailed discussion on tax treatment of such an arrangement has been discussed as same was questioned by tax authorities. Details of the case is as under:
Facts of the case:
- The Assessee had borrowed an interest free loan of INR 12 Cr from a Memoric Pictures Pvt Ltd (‘MPPL’) which was to be repaid over a period of 100 years. The assessee utilized the said loan for the purchase of shares and not for its business purposes.
- Thereafter, assessee entered into a tripartite agreement with MPPL and Champions Pictures Pvt. Ltd (“CPPL”) under which the obligation of repaying the above-mentioned loan of INR 12 Cr was assigned to CPPL at a discounted present value of INR 0.36 Cr.
- The resultant difference of INR 11.64 Cr was credited by the assessee to the profit and loss account; however, while computing the taxable income, the assessee reduced the said amount from the taxable receipt on the ground that same constitutes a capital receipt and was not taxable.
Assessment Proceedings:
- Assessing officer (‘AO’) held the surplus Rs. 11.64 Cr resulting from the assignment of loan to M/S CPPL under tripartite agreement between Assessee , M/S MPPL and M/S CPPL as a revenue receipt liable to tax u/s 41(1) of the ITA as a liability of the Assessee was ceased / extinguished.
- Upon making an appeal to CIT (A), order of AO was upheld.
- Aggrieved by the order of CIT(A), the Assessee preferred further appeal to Income Tax Appellate Tribunal, Mumbai bench (‘Mumbai ITAT’).
Order of Mumbai ITAT:
Mumbai ITAT set aside the order of CIT(A) and directed AO to delete the addition of INR 11.64 Cr. Observations made by Mumbai ITAT are as under:
- The Mumbai Tribunal observed that the loan was utilized for the purpose of purchasing the shares which is not the business of the Assessee. Accordingly, the surplus resulting from the assignment of loan is not resulting from trading operation and therefore, not to be treated as revenue receipt.
- Further, the surplus resulting from assignment of loan at present value of future liability is not cessation or extinguishment of liability as the loan is to be repaid by the third party and, therefore, cannot be brought to tax in the hands of the Assessee.
- The provisions of section 41(1) of the Act are not applicable to the said surplus as the basic conditions as envisaged in section 41(1) are not fulfilled. In other words, the Assessee has not claimed it as deduction in the profit & loss account in the earlier or current year. In order to bring an allowance or deduction within the ambit of section 41(1) of the ITA, it is necessary that a deduction/allowance is granted to the Assessee. In the present case before us, it abundantly clears that the loan was utilized for the purpose of purchasing the shares which is not the business of the Assessee and therefore the surplus arising from the assignment of loan can not be said to have arisen from the trading operation of the Assessee.
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[1] Cable Corporation of India Ltd v DCIT [2019] 106 taxmann.com 194 (Mumbai – Trib.)
