Issue:– Whether waiver of principal amount would constitute income falling under section 28(iv) of the Income Tax Act being the benefit arising for the business?
Held by ITAT: Tribunal held in para 12 of its order that the term loan had admittedly been used by the assessee for acquiring capital assets. Therefore, the Tribunal followed the decision of this Court in Iskraemeco Regent Limited v. CIT (2011) 196 Taxman 103 and confirmed the order of the first Appellate Authority. Hence, this appeal by the revenue.
Held by Madras High Court-
Taxability of Loan Waiver
What is treated as income chargeable to income tax under the head ‘profits and gains of business or profession’ under section 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.”
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.
Non agreement with Delhi High Court Judgment on the issue
On the basis its analysis of the decision of this Court in Iskraemeco Regent Limited v. CIT (2011) 196 Taxman 103, the Delhi High Court came to the conclusion in paragraph 23 of the report that ‘in the context of waiver of loan amount, what follows from the reading of the aforesaid judgment would be that the answer would depend upon the purpose for which the loan was taken.’ If the loan had been taken for acquiring the capital asset, waiver thereof would not amount to any income exigible to tax. But, if the loan was for trading purpose and was treated as such from the beginning in the books of account, the waiver thereof may result in the income more so when it was transferred to the profit and loss account.
In Rollatainers Ltd. v. CIT (2011) 339 ITR 54 (Del), the Delhi High Court was again concerned with a case where in terms of a corporate debt restructuring package worked out between the assessee and the bank, a portion of the principal and interest were waived. The Income Tax Appellate Tribunal held that the waiver of the working capital loan utilised towards the day-to-day business operations resulted in manifest in the revenue field and hence, was taxable in the year of waiver.
Finding on facts that the term loans in question were taken for the purchase of capital assets from time to time and these amounts did not come into the possession of the assessee on account of any trading transactions, the Delhi High Court reiterated the opinion rendered in Logitronics P Ltd. v. CIT (2011) 333 ITR 386 (Del).
Therefore, the law as expounded by the Delhi High Court appears to be that if a loan had been taken for acquiring a capital asset, waiver thereof would not amount to any income exigible to tax. If the loan is taken for trading purposes and was also treated as such from the beginning in the books of account, the waiver thereof may result in the income, more so when it is transferred to the profit and loss account.
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 v. CIT (1994) 205 ITR 353 (Del).
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’ under section 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.”
Distinction between the waiver of a portion of the loan taken for the purpose of acquiring capital assets
On the issue of 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 the waiver of a portion of the loan taken for the purpose of trading activities on the other hand. 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.
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.
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.