[Opinion] Finance Bill 2023 | Mahindra & Mahindra SC Ruling: Changes & Impact

Authored by Punit Agarwal | Chartered Accountant

Table of Contents
1. Introduction
2. Issue Involved
3. Ratio laid down by Hon’ble Supreme Court of India
4. Amendment through Finance Budget, 2023
5. Conclusion

1. Introduction

In an attempt to reduce tax litigation in India and rationalise extant tax provisions, the Hon’ble FM announced major tax amendments which also included plugging of existing loopholes in the direct tax legislation.

Over time, the Government has frequently resorted to make amendments in the Income-tax Act to deal with or even overturn the decisions pronounced by Judicial forums including the Apex Court, which the Government, for any reason, finds unpalatable or unacceptable. The merits of such a practice in general and the effects of specific amendments are highly, in fact fiercely debatable and striking as they target at the roots of the functioning of the judiciary and its overreaching responsibilities.

In this article we will be discussing the recent amendment in section 28 (iv) by finance bill 2023, overturning the landmark decision of Hon’ble Apex Court in the case of Mahindra & Mahindra.

2. Issue Involved

The Insolvency and Bankruptcy Code, 2016 (IBC) has revolutionized insolvency resolution process, replacing DRTs and other courts that had left previous restructuring and winding up process stagnated. Waiver of liabilities by creditors is one of most important element of resolution plan, which may lead to significant tax implications in the hands of the Company.

The question which comes to mind is that whether the loan amount waived off by the lender constitutes taxable income u/s. 28(iv) of the Act?

As per section 28(iv) of the Income Tax Act,1961, the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise shall be taxable as business income. It clearly says that benefit or perquisite can be in any form, which can also be converted into money. It means it should not necessarily be money.

3. Ratio laid down by Hon’ble Supreme Court of India

The issue was settled by Hon’ble Supreme Court (SC) in the case of Commissioner v. Mahindra & Mahindra Ltd. [2018] 93 taxmann.com 32/255 Taxman 305 wherein it was categorically held that in order to invoke the provision of section 28(iv), the benefit which is received has to be in some other form rather than in the shape of money. As waiver of loan is a cash receipt, Section 28(iv) does not come into picture.

Prior to this judgement of Hon’ble Apex Court, various courts had taken divergent views. However, after the decision of Hon’ble Apex Court, courts and tribunals have unanimously followed the decision of Mahindra and Mahindra and held that the provisions of section 28(iv) shall not apply in case of waiver of loan as the same is a cash receipt.

4. Amendment through Finance Budget, 2023

The above proposition laid down by the Hon’ble Apex court was rescinded by the Hon’ble Finance Minister in the Budget 2023 wherein the government clarified the intention of the legislature behind the provisions of section 28(iv) of the Income Tax Act, 1961.

In the Memorandum explaining the Finance Bill, 2023 it has been proposed to amend the clause (iv) of section 28 of the Act to clarify that the said clause also applies to cases where benefit or perquisites is in cash or in kind or partly in cash or partly in kind.

The government through this amendment has asserted the intention of the legislature behind the provisions of section 28(iv) of the Act which always deemed to include the benefit or perquisite whether in cash or in kind. An explanation has also been proposed to be inserted in section 194R, wherein it has been clarified that provisions of section 194R (1) shall apply to benefit or perquisites whether in cash or in kind or partly in cash or partly in kind.

The above amendment has been made effective from 01^st April, 2024 and will be applicable from AY 2024-25 onwards.

5. Conclusion

The above amendment will change the prevalent notion in the system where the waiving off of loan was not taxed in the hands of the taxpayer. Going forward, the loan amount waived off in the hands of the any person will be taxed under section 28(iv) of the Act as a benefit or perquisite though the same is received in monetary form.

Having said the above, a major sigh of relief to the taxpayers is that the amendment has been brought prospectively by the Government i.e. w.e.f 01.04.2024. Thus, the decision of Hon’ble Supreme Court in case Mahindra & Mahindra still holds good in cases prior to 01.04.2024.

Dive Deeper:
Highlights of the Finance Bill 2023
Income Tax Slab Rates for A.Y. 2024-25 | F.Y. 2023-24
Union Budget 2023-24 | 45+ Recommendations and Expectations