This article summarizes a recent ruling of the Mumbai Income Tax Appellate Tribunal (ITAT) [2009-TIOL-707-ITAT-MUM] in the case of Cipla Investments Ltd. (Taxpayer) on taxability of waiver of loan. The ITAT held that since the loan received was on capital account, its subsequent waiver too was on capital account. Hence, the loan waived was not liable to be taxed as profits and gains from its business (business income) under the provisions of the Indian Tax Law (ITL). The ITAT also held that waiver would not be taxable as business income if a taxpayer was not allowed deduction of the loan amount earlier.
- The Taxpayer was engaged in the activity of investing in shares and securities. The Taxpayer had received share application money from its holding company which was, subsequently, treated as an unsecured loan. The funds were used for investing in shares and securities which were held as investment (i.e. on capital account). The Taxpayer suffered losses and was unable to repay the loan. The holding company had written off the loan as irrecoverable in its books of account (books). However, in the Taxpayer’s books, it continued its liability in favor of the holding company.
- The Tax Authority and the first appellate authority held that the gain arising to the Taxpayer on account of the cessation of the loan liability to the holding company is taxable as business income.
- The Taxpayer preferred an appeal before the ITAT, contesting that the waiver of loan cannot be taxed as business income under the ITL.
Contentions of the Taxpayer
- The loan amount was invested in shares which were held as investment. Also, no deduction was claimed in respect of such a loan amount.
- Neither was any trading activity undertaken nor was any income earned from the investments taxed as business income. The income earned was taxed as capital gains.
- The loan was not written off in the profit and loss account (P&L) and was shown as an outstanding liability in the books.
- Based on the judicial opinion emerging from rulings of various High Courts and Tribunals, waiver of loan by the lender cannot be taxed as business income since such amount would not generally be deductible as an expense.
- The Bombay High Court’s decision in the case of Solid Containers Ltd. was distinguishable, as in that case, loan was used for trading activity and waiver thereof was credited to the P&L.
Contentions of the Tax Authority
- The Taxpayer’s business activity comprised investment in shares and advancing of loans on interest. The loan from the holding company was obtained in the course of business.
- The gain on loan waived by the holding company was in the course of business and, hence, taxable as business income under the provisions of the ITL.
Ruling of the ITAT
- The waiver of loan would not be taxable as business income since the Taxpayer had not earlier claimed deduction in respect of such a loan.
- The loan was availed for the acquisition of a capital asset i.e. shares, which were held as investment and gain on sale thereof was offered to tax as capital gains. Hence, the waiver of loan cannot be taxable as business income.
- Since the original receipt was capital in nature, the waiver does not have the quality of changing the same into a revenue receipt.
- The loan amount was still shown as an outstanding liability in the books of the Taxpayer. The Taxpayer had not written back the loan amount in the books for its waiver to be taxable under the ITL.
- The Bombay High Court’s decision in Solid Containers Ltd. Is distinguishable and has no applicability to the facts of the Taxpayer’s case.
- The ITAT concluded by holding that the loan waived by the holding company was capital in nature and, hence, not taxable as business income.
This ruling reiterates the position, as decided by various High Courts and Tribunals that the amount received on capital account, on its waiver, cannot be taxable under the ITL as a revenue receipt. Unless a taxpayer has claimed a deduction of the loan amount in its books, waiver of such a loan cannot be taxed under the ITL.
[308 ITR 417]