The Hyderabad Bench of Income Tax Appellate Tribunal (ITAT) has held that the debt forgiveness cannot be taxed as business income under Section 28(iv) of the Income Tax Act.
The bench of K. Narasimha Chary ( Judicial Member) and Manjunatha G. (Accountant Member) has observed that the assessee has treated ‘debt forgiveness’ as income and as against this income claimed various expenditures and reported net loss in the return of income filed on 07.08.2015. Since, income pertaining to ‘debt forgiveness’ has been assessed for A.Y. 2010- 11 on substantive basis, the assessment of same income for the assessment year 2011-12 on protective basis cannot be sustained.
The appellant/assessee is a partnership firm and engaged in the business of real estate and construction of apartments. A search and seizure operation was carried out in the case of the assessee and its partners.
During the course of search, a draft copy of the Settlement Agreement between Smith Group of Companies and M/s. Amsri Principals was founded. As per the Settlement Agreement, M/s. Amsri Principals had agreed to arrange 600 acres of land for Smith Group of Companies for real estate development in Hyderabad. It was agreed that, for the purpose of acquisition of land, Smith Group will provide adequate finance by way of advance. M/s. Amsri Principals and M/s. Amsri Builders failed to fulfill their commitment to arrange the land.
The arrangements which passed through rough weather were finally culminated in Settlement Agreement between the parties and as per the said agreement, Smith Group forgives an amount of Rs.26,84,75,235/- being unutilized advance due to Smith Group from various related companies of M/s. Amsri Principals.
During the course of assessment proceedings, the Assessing Officer called upon the assessee to explain as to why benefit derived from ‘debt forgiveness’ on account of Settlement Agreement dt.13.01.2010 with Smith Group of Companies should not be brought to tax under Section 28(iv) of the Income Tax Act?
Section 28 (iv) of the Income Tax Act provides that the value of any benefit or perquisite arising from business, whether convertible into money or not, should be taxed as business income.
The Assessing Officer observed that going by terms and conditions of Settlement Agreement and the subsequent events, it is undisputedly clear that, the benefit arising out of Settlement Agreement, and consequent ‘debt forgiveness’ is taxable, as ‘business profits’ under section 28(iv) of the Income Tax Act, for A.Y. 2010-11 and therefore, by taking into account the amount outstanding in the name of assessee firm amounting to Rs.26,84,71,235, has been treated as income under Section 28(iv) of the Income Tax Act.
The tribunal directed the Assessing Officer to exclude the income declared by the assessee and assessed by the Assessing Officer towards ‘debt forgiveness’ as income for the assessment year 2011- 12. Further, once the income has been excluded for the assessment year 2011-12, then loss declared by the assessee would increase to that extent.
The tribunal while allowing the appeal directed the Assessing Officer to delete the addition made towards disallowance of expenditure of Rs. 27,55,09,803.
Case Details
Case Title: DCIT Versus M/s. Amsri Builders
Case No.: ITA Nos.1897 and 1898/Hyd/2018
Date: 13.03.2025
Counsel For Appellant: K.C. Devdas, C.A.
Counsel For Respondent: M. Narmada
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