[2019] 106 taxmann.com 194 (Mumbai – Trib.)

AO can’t invoke sec. 41(1) to tax surplus arising from assignment of loan to third party

Where assessee assigned its loan obligation to a third party by making a payment in terms of present value of future liability, surplus resulting from assignment of loan was not cessation or extinguishment of liability as loan was to be repaid by third party and, therefore, same could not be brought to tax in hands of assessee

Section 41(1), read with section 28(iv), of the Income-tax Act, 1961 – Remission or cessation of trading liability (Assignment of loan obligation) – Assessment year 2000-01

– Assessee borrowed loan of Rs. 12 crores from a company

– Assessee assigned liability of repayment of loan to third party CPPL by making payment of Rs. 0.36 crores in terms of present value of future liability

– Surplus of Rs. 11.64 crores resulting from assignment of loan liability in terms of present value of future liability was credited to profit & loss account under head income from other sources but while computing total income, said income was reduced from income on ground that such surplus represented capital receipt and, therefore, not taxable

– Assessing Officer was of view that liability of assessee to repay loan was ceased/extinguished, thus, amount of surplus resulting from assignment of loan represented income under section 41(1) or under section 28(iv)

 – Whether since loan amount was utilized by assessee for purchase of shares and same was not used in relation to trading activity of assessee in its line of business, said surplus could not be treated as revenue receipt

 – Whether, further, surplus resulting from assignment of loan was not cessation or extinguishment of liability as loan was to be repaid by third party and, therefore, could not be brought to tax in hands of assessee under section 41(1) – Held, yes

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