CA Deepak Goel
Waiver of loan – Madras HC has reignited this issue. Held that Waiver of loan is taxable under section (‘u/s’) 28(iv)
Under one time settlement the bank waived loan amount (used by the assessee for acquiring capital assets) which includes both principal amount of loan and interest on loan. Held that Waiver of loan is taxable under section (‘u/s’) 28(iv) of the Income-tax Act, 1961 (‘the Act’). The waiver of a portion of the loan would certainly tantamount to the value of a benefit. This benefit may not arise from “the business” of the assessee. But, it certainly arises from “business”.
Decision of Supreme Court in the case of CIT v. T.V.Sundaram Iyengar & Sons Ltd. [222 ITR 344] and various decisions of different High courts referred to. Madras HC overruled its own ruling in Iskraemeco Regent Limited and Delhi High Court rulings in Logitronics and in Rollatainers.
Madras HC in CIT v. M/s. Ramaniyam Homes P Ltd. (Order dated April 22, 2016) – Tax Case (Appeal) No.278 of 2014
Question before Madras HC
1. Whether principal loan amount waived by the bank under the one time settlement scheme which the assessee received during the course of its business is chargeable to tax?
2. Whether the waiver of principal amount would constitute income falling u/s 28(iv) of the Act being the benefit arising for the business?
Under one time settlement the bank waived loan amount (used by the assessee for acquiring capital assets) which includes both principal amount of loan and interest on loan.
First Appellate Authority [‘CIT(A)’]
CIT(A) followed Madras HC in Iskraemeco Regent Limited v. CIT [(2011) 196 TAXMAN 103] held that Section 28(iv) has no application to cases involving waiver of principal amounts -of loans.
Term loan had admittedly been used by the assessee for acquiring capital assets. Therefore, ITAT following the decision of Madras HC in Iskraemeco Regent Limited confirmed the order of CIT(A).
Decision of Supreme Court in the case of CIT v. T.V.Sundaram Iyengar & Sons Ltd. [222 ITR 344] & various decisions of High courts referred to. Overruled its own ruling in Iskraemeco Regent Limited and Delhi High Court rulings in Logitronics and in Rollatainers. Held as under:-
“But, the Delhi High Court, both in Logitronics as well as in Rollatainers, did not take note of one fallacy in the reasoning given in paragraph 27.1 of the decision of this Court in Iskraemeco Regent Limited. In paragraph 27.1 of the decision in Iskraemeco Regent Limited, this Court held that Section 28(iv) speaks only about a benefit or perquisite received in kind and that therefore, it would have no application to any transaction involving money. This observation was actually based upon the decision of the Bombay High Court in Mahindra & Mahindra, which, in turn, had relied upon the decision of the Delhi High Court in Ravinder Singh Vs. C.I.T.[205 I.T.R. 353].
38. With great respect, the above reasoning does not appear to be correct in the light of the express language of Section 28(iv). What is treated as income chargeable to income tax under the head ‘profits and gains of business or profession’ u/s 28(iv), is “the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession.“
39. Therefore, it is not the actual receipt of money, but the receipt of a benefit or perquisite, which has a monetary value, whether such benefit or perquisite is convertible into money or not, which is what is covered by Section 28(iv). Say for instance, a gift voucher is issued, enabling the holder of the voucher to have dinner in a restaurant, it is a benefit of perquisite, which has a monetary value. If the holder of the voucher is entitled to transfer it to someone else for a monetary consideration, it becomes a perquisite convertible into money. But, irrespective of whether it is convertible into money or not, it should have a monetary value so as to attract Section 28(iv). A monetary transaction, in the true sense of the term, can also have a value. Any number of instances where a monetary transaction confers a benefit or perquisite that would have a value, can be conceived of. There may be cases where an incentive is granted by the supplier, waiving a portion of the sale price or granting a rebate or discount of a portion of the price to be paid, when the payments scheduled over a period of time, are made promptly. It is needless to point out that in such cases, the prompt payment of money itself brings forth a benefit in the form of an incentive or a rebate or a discount in the price of the product. We do not know why it should not happen in the case of waiver of a part of the loan. Therefore, the finding recorded in paragraph 27.1 of the decision in Iskraemeco Regent Limited that Section 28(iv) has no application to any transaction, which involves money, is a sweeping statement and may not stand in the light of the express language of Section 28(iv). In our considered view, the waiver of a portion of the loan would certainly tantamount to the value of a benefit. This benefit may not arise from “the business” of the assessee. But, it certainly arises from “business”. The absence of the prefix “the” to the word “business” makes a world of difference.
40. We shall now turn our attention to the distinction sought to be made between the waiver of a portion of the loan taken for the purpose of acquiring capital assets on the one hand and the waiver of a portion of the loan taken for the purpose of trading activities on the other hand.
41. It appears that in so far as accounting practices are concerned, no such distinction exists. Irrespective of the purpose for which, a loan is availed by an assessee, the amount of loan is always treated as a liability and it gets reflected in the balance sheet as such. When a repayment is made in monthly, quarterly, half yearly or yearly instalments, the instalment is divided into two components, one relating to interest and another relating to a portion of the principal. To the extent of the principal repaid, the liability as reflected in the balance sheet gets reduced. The interest paid on the principal amount of loan, will be allowed as deduction, in computing the income under the head “profits and gains of business or profession”, as per the provisions of the Act.
42. But, Section 36(1)(iii) makes a distinction. The amount of interest paid in respect of capital borrowed for the purpose of business or profession is allowed as deduction under Section 36(1)(iii), in computing the income referred to in Section 28. But, the proviso thereunder states that any amount of interest paid in respect of capital borrowed for acquisition of an asset for extension of existing business or profession, whether capitalised in the books of account or not for any period beginning from the date on which the capital was borrowed for the acquisition of the asset, till the date on which such asset was put to use, shall not be allowed as deduction.
43. Therefore, it is clear that the moment the asset is put to use, then the interest paid in respect of the capital borrowed for acquiring the asset, could be allowed as deduction. When the loan amount borrowed for acquiring an asset gets wiped off by repayment, two entries are made in the books of account, one in the profit and loss account where payments are entered and another in the balance sheet where the amount of unrepaid loan is reflected on the side of the liability. But, when a portion of the loan is reduced, not by repayment, but by the lender writing it off (either under a one time settlement scheme or otherwise), only one entry gets into the books, as a natural entry. A double entry system of accounting will not permit of one entry. Therefore, when a portion of the loan is waived, the total amount of loan shown on the liabilities side of the balance sheet is reduced and the amount shown as Capital Reserves, is increased to the extent of waiver. Alternatively, the amount representing the waived portion of the loan is shown as a capital receipt in the profit and loss account itself. These aspects have not been taken note of in Iskraemeco Regent Ltd.
44. In view of the above, the questions of law are liable to be answered in favour of the Revenue/appellant.”
In view of above ruling of Madras HC, now even the waiver of loans taken for capital purposes have been brought within the ambit of income tax under the Act. However, considering the fact that there are contrary judicial rulings, it seems that this issue will attain finality only after a ruling of Apex Court in the matter.
(CA Deepak Goel, can be reached at: Mob: +91 9911839405, Mail: email@example.com)