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Waiver Of Interest To Be Treated As Income In Hands Of Assessee

Supreme Court of India in M/s McDowell v. CIT Karnataka held that to ascertain the actual accumulated loses to be set off in the hands of the assesssee first adjust the income that is accruing to it on account of waiver of interest by financial institutions.

The Bench of Justices AK Sikri and Ashok Bhushan was considering an appeal against the Judgment of Karnataka High Court whereby the appeal of Commissioner of Income Tax (Revenue) was allowed setting aside the order to the Income Tax Appellate Tribunal(ITAT) which had granted the benefit of provisions of Section 72A of the Income Tax Act, 1961 to the appellant-assessee.

In the instant matter, M/s Hindustan Polymers Ltd. (HPL) had become a sick industrial company and was amalgamated with appellant-assesssee company i.e. M/s McDowell and Company Ltd. Since HPL was a sick industrial undertaking it owed a lot of money to banks and financial institutions. The interest was claimed as expenditure by HPL in its return and by the virtue of section 72A of the Income Tax Act, assessee was allowed to carry forward and set off accumulated loses and unabsorbed depreciation allowances of HPL in the event of amalgamation.

After the scheme of amalgamation, banks and financial institutions which have advanced loans to HPL agreed to waive off interest which had accrued prior to 01.04.1977.

Since this interest was waived off it became income in the hands of HPL as per section 41(1) of the Income Tax Act, 1961. The assessee has claimed a set off of the accumulated loses which it had taken over from HPL.  After the amalgamation it was observed that the income which has accrued under section 41 (1) of the Act has not been set off against the accumulated loses. The assessing officer adjusted this income against the losses. On an appeal to ITAT by the assessee it was that the aforesaid income under section 41(1) is not in the hands of the assessee rather it is the income of HPL and since HPL is a separate entity, assessee is not liable to pay any tax on this income.

However, the Supreme Court held that since the assessee has taken over HPL and HPL has ceased to exist as a legal entity, the income tax will be payable in the hands of the assessee. When the assessee is allowed the benefit of the accumulated loses, while computing those loses, the income which accrued to it had to be adjusted and only thereafter net loses could have been allowed to be set off by the assessee company. Assessee cannot take the advantage of the accumulated loses and refuse to account for income accrued under section 41(1) of the Act.

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