Brief Facts:

  1. The Taxpayer, an Indian company engaged in the business of manufacturing of jeeps, entered into an agreement with a supplier based in USA (US Co) for purchase of tooling and other equipment for
  2. manufacture of jeeps (capital equipment).
  3. The US Co supplied the capital equipment through its US subsidiary. Further, for procurement of the capital equipment, US Co also provided an interest-bearing loan to the Taxpayer, repayable after 10 years in installments.
  4. The Taxpayer capitalized the equipment in its books and claimed depreciation thereon in its tax computation.
  5. Subsequently, another US entity acquired US Co and also agreed to waive off the principal amount of loan advanced by US Co to the Taxpayer.
  6. The Taxpayer claimed the principal amount of loan waived as capital receipt not taxable under the ITL. But the Tax Authority treated the waiver amount as Taxpayer’s business income.
  7. The First Appellate Authority ruled in favour of the Tax Authority with certain modifications. On further appeal, the Mumbai Tribunal and the Bombay High Court (HC) ruled in favour of the Taxpayer and held that the waiver was neither taxable as business perquisite nor taxable under the clawback provision.
  8. Being aggrieved, the Tax Authority appealed further to the Supreme Court.

Question:

  1. Whether the amount of loan waived can be taxed as business perquisite?
  2. Whether the amount of loan waived can be taxed as income as per the provisions of Section 41(1) of Income Tax 1961?

Supreme Court’s Ruling:

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