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Is waiver of loan for

acquiring capital assets
assessable as business
income
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Introduction
1.The provisions of Income-tax law are subject to
interpretations, which include multiple and diametrically
opposite interpretations at different points of time. One court
may interpret a provision in a particular manner and another
court might interpret the very same provision differently, thus,
leading to chaos for the stakeholders. Sometimes even the very
same court which interpreted a provision in a particular manner
will deviate from its binding precedent after a passage of time.
Therefore, the subject of income-tax in India continues to remain
dynamic and ever evolving which keeps the tax practitioners on
the toes to be abreast of the recent developments.
Whether loan waiver is chargeable to income-tax is decided by
various juridical authorities from time-to-time. However, in a
thumb-rule it is generally understood that waiver of loan for
acquisition of capital asset is not covered by section 41(1), since
such loan would not have been allowed as a deduction
previously. Recently, the Madras High Court inCITv.Ramaniyam
Homes
(P.)
Ltd.
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Ramaniyam Homes case
2. The assessee filed its return of income for the assessment year 2006-07 admitting a total loss
of Rs. 242.21 lakhs. The case was selected for scrutiny. During the course of scrutiny it was
found that the assessee was indebted to a bank with whom a proposal for one time settlement
(OTS) was made. As against the amount payable of Rs.10.50 crores under OTS the assessee
paid only Rs.93.89 lakhs during financial year 2005-06. The decision of the High Court did not
exhibit the factual aspects of the case in details, and, hence, for facts reference was made to
the tribunal's, decision vide ITA No.1245/Mds/2011, dated 09.03.2012 as presented below.
The assessee claimed Rs.120.26 lakhs as interest on term loan as deduction under section
43B. However, according to the Assessing Officer a sum of Rs.93.89 lakh was transferred to an
OTS scheme account in the books of account. There was no actual payment made by the
assessee. Since the assessee did not produce the evidence for payment of interest, the entire
claim was disallowed by the Assessing Officer.
The CIT (Appeals) perused the ledger folio and confirmation obtained from the bank and,
accordingly, came to the conclusion that the assessee had actually effected the payments. The
journal entry was only for transfer of balance in OTS account to the bank account. Accordingly,
he deleted the disallowance of Rs.120.26 lakhs.
Yet another ground before the tribunal was the addition of Rs.358.78 lakhs representing term
Customer
Care
No. 91-11loan waiver
which
was taxed as income by applying section 28(iv) of the Act.www.taxmann.com
The tribunal relied

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Issue before the High Court
2.1 Two issues which were referred to the High Court under section 260A were : (i) whether the
tribunal was right in holding that the amount representing the principal loan amount waived of
under OTS scheme was not exigible to tax? and (ii) whether the tribunal ought to have seen
that the waiver of principal amount would constitute income under section 28(iv), being a
benefit arising in the business?
The Court took note of the binding precedent in Iskraemeco Regent Ltd's. case (supra). In this
case, the assessee took a loan from bank for purchase of capital assets and, subsequently,
became sick. It approached the BIFR for rehabilitation and the assessee was given some
benefit under a one-time settlement. The assessee credited the loan waiver amount to the
capital reserve account in the balance sheet treating it as capital in nature. The Assessing
Officer treated the amount as income under section 28(iv), read with section 2(24). The Court
held that the loan transaction has no application with respect to section 28(iv), of the Act and
that the same cannot be termed as an income within the purview of section 2(24).

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Precedents
2.2.1InRavinder Singhv.CIT[1994] 205 ITR 353/[1993] 71 Taxman 336 (Delhi)while
interpreting section 28(iv) the court held that this provision will apply only where the benefit or
perquisite is other than cash. It will not apply where the benefit is by way of money. Factually,
the partnership firm allowed the partners to utilize its funds without paying interest. The issue
before the court was about disallowance of interest in firm's assessment and its inclusion in the
hands of the partner as benefit obtained by him. While deciding the case on the value of such
notional interest enjoyed by the partner, the court held that section 28(iv) could not be applied
for taxing such benefit or perquisite since it was by way of cash.It was held that section 28(iv)
can be invoked only where the benefit or perquisite is other than cash.
2.2.2InSolid Containers Ltd.v.Dy. CIT[2009] 308 ITR 417/178 Taxman 192 (Bom.)the
assessee took a loan of Rs.6.86 lakhs for business purposes which was waived of subsequently.
The assessee credited the amount to reserve account as a result of consent terms arrived at in a
suit. The taxability of such waiver of loan was the dispute before the court. The Court held that
the amount was chargeable to tax by relying on the decision in the case ofCITv.T.V. Sundaram
Iyengar & Sons Ltd.[1996] 222 ITR 344/88 Taxman 429 (SC).As the loan was taken for trading
activity, its waiver was held as chargeable to tax as income.
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