The Finance Act 2023 has introduced significant changes to Section 28(iv) of the Income Tax Act, 1961. This amendment aims to redefine the tax treatment of loans waived by banks and financial institutions. In this article, we’ll explore the implications of this amendment, its background, and its potential impact on various scenarios.
Amendment in section 28(iv) by Finance Act 2023.
The Finance Act 2023 has amended section 28(iv) of the Income Tax Act, 1961. The existing clause of section 28(iv) prior to amendment was as under :
28(iv):
“the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession;”
This has been substituted by the following clause with effect from 1-4-2024 ( AY 2024-25 onwards ):
“the value of any benefit or perquisite, arising from business or the exercise of a profession whether –
i) whether convertible into money or not; or
ii) in cash or in kind or partly in cash and partly in kind;”
It is manifestly clear from the above that the amendment seeks to clarify that section 28(iv) with effect from 1-4-2024 would be applicable to benefits and perquisite arising from business both in kind and/or cash. This gets further clarified by the Memorandum explaining the provisions of the Finance Bill, relevant portion of which is extracted below:
Providing clarity on benefits and perquisites in cash:
1. Section 28 of the Act provides for income that shall be chargeable to income-tax under the head “Profits and gains of business or profession”. Clause (iv) of this section brings to chargeability the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession. This provision was inserted through the Finance Act 1964 and the Circular no 20D dated 7th July 1964 issued to explain the provisions of this Act stated clearly that the benefit could be in cash or in kind. Therefore, the intention of the legislation while introducing this provision was also to include benefit or perquisite whether in cash or in kind. However, Courts have interpreted that if the benefit or perquisite are in cash, it is not covered within the scope of this clause of section 28 of the Act.
2. In order to align the provision with the intention of legislature, it is proposed to amend clause (iv) of section 28 of the Act to clarify that provisions of said clause also applies to cases where benefit or perquisite provided is in cash or in kind or partly in cash and partly in kind.
3. This amendment will take effect from 1st April, 2024 and will accordingly apply to the assessment year 2024-2025 and subsequent assessment years. [Clause 11]
It is clear from the Memorandum extracted above that this amendment has been brought to overcome some court decision wherein it has been held that section 28(iv) would be applicable only to benefits and perquisites in kind and not in cash. Obviously, the reference is to the 2018 decision of the Supreme Court in the case of CIT v. Mahindra & Mahindra – (2018) 404 ITR 1 (SC) wherein the Supreme Court had held that section 28(iv) of the Income Tax Act, 1961 was not attracted on cash benefits arising from business and profession. However, after this amendment with effect from AY 2024-25, even benefits and perquisites in cash arising from business and profession shall come within the ambit of section 28(iv) of the Act.
What are the implications? Will write-off of all kinds of loans, working capital as well as term loan by banks, become taxable? Will buyers of companies through NCLT have to pay tax on the amount of loan of the corporate debtors waived by banks/creditors? Will crediting the write back directly to the capital reserve not routing it through P&L account, make a difference?
To answer these questions, one needs to examine the decision of the Supreme Court in the case of Mahindra & Mahindra (Supra) which is sought to be undone by this amendment.
The facts before the hon’ble Supreme Court in Mahindra & Mahindra (Supra) were as under:
Briefly stated, Mahindra & Mahindra for the purpose of expansion of its business had entered into an agreement with Kaiser Jeep Corporation whereby the later agreed to sell certain equipments to Mahindra & Mahindra. Mahindra & Mahindra entered into an agreement with Kaiser Jeep Corporation ( for short ‘the KJC ) based in America wherein KJC agreed to sell the dies, welding equipments and die moulds to the assessee. The price of the equipments was US $ 6,50,000. The KJC also agreed to provide loan to Mahindra & Mahindra for procurement of these equipments at the rate of 6% interest. Subsequently, Kaiser Jeep Corporation was taken over by the American Motor Corporation which agreed to waive the principal loan amount advanced by KJC to Mahindra & Mahindra. The assessee (Mahindra & Mahindra) therefore, wrote-back Rs. 57,74,064/- being the amount of said loan in its books in the profit & loss account however, did not offer it for taxation on the ground that it was a capital receipt. The AO however, taxed the amount as income treating it as benefit and perquisite under section 28(iv) of the Income Tax Act.
It is in the above factual matrix that first the Bombay High Court and thereafter, the Supreme Court considered the question as to whether the loan waived by the lender constituted taxable income of Mahindra & Mahindra under section 28(iv) of the Act. The Supreme Court held as under:-
“The term “loan” generally refers to borrowing something, especially a sum of cash that is to be paid back along with the interest decided mutually by the parties. In other terms, the debtor is under a liability to pay back the principal amount along with the agreed rate of interest within a stipulated time. It is a well-settled principle that the creditor or his successor may exercise their “right of waiver” unilaterally to absolve the debtor from his liability to repay. After such exercise, the debtor is deemed to be absolved from the liability of repayment of loan subject to the conditions of waiver. The waiver may be a partly waiver, i.e. waiver of part of the principal or interest repayable or a complete waiver of both the loan as well as interest amounts. Hence, waiver of loan by the creditor results in the debtor having extra cash in his hand. It is cash receipt in the hands of the debtor/assessee. The short but cogent issue in the instant case arises whether waiver of loan by the creditor is taxable as a perquisite under Section 28 (iv) of the IT Act or taxable as a remission of liability under Section 41 (1) of the IT Act.”
The Supreme Court further held :-
“On a plain reading of section 28(iv) of the Income-tax Act, prima facie, it appears that for the applicability of the said provision, the income which can be taxed shall arise from the business or profession. Also, in order to invoke the provisions of section 28(iv) of the Income-Tax Act, the benefit which is received has to be in some other form rather than in the shape of money. In the present case, it is a matter of record that the amount of Rs.57,74,064.00 is having received as cash receipt due to the waiver of loan. Therefore, the very first condition of section 28(iv) of the Income-Tax Act which says any benefit or perquisite arising from the business shall be in the form of benefit or perquisite other than in the shape of money, is not satisfied in the present case. Hence, in our view, in no circumstances, it can be said that the amount of Rs.57,74,064.00 can be taxed under provisions of section 28(iv) of the Income-tax Act.”
The points to be noted here is that in this case (Mahindra & Mahindra) the loan was for purchasing capital assets and even interest on loan was not debited in the P&L account but amortised. Still the Supreme Court held that the write-off resulted in a cash benefit to the assessee arising from business. That section 28(iv) of the Act was not attracted was held on the ground that, according to the Supreme Court, section 28(iv) as it stood then, was not applicable to cash benefits. As loan waiver was cash benefit, the Hon’ble Supreme Court held that section 28(iv) did not apply.
Now after this amendment, the amended section itself specifically provides for applicability of 28(iv) to cash benefits and therefore, all write back of waived loan whether term or working capital would fall in the category of benefit arising from business and consequently income from business & profession under section 28(iv) of the Act.
This however, will come into effect from AY 2023-24. Thus, any write back in the books after 1-4-2023 would attract taxability under section 28(iv)
Some views are still being expressed in different fora that only working capital loan waiver would be hit by this amendment. The term loan waiver would continue to be treated as a capital receipt and hence exempt from taxation. These views are on the basis of some High Court decisions in the past which are not good law any more.
The taxability of loan waiver was put to rest after the decision of Mahindra & Mahindra (SC). After this amendment, the status quo ante would be restored and the department would seek to tax all loan waiver as income under section 28(iv) of the Act. Any write back of waived loan in the books after 1-4-2023 whether as result of NCLT order or due to onetime settlement by banks would be hit by 28(iv). This view has been upheld recently by The Karnataka High Court vide order dated 23rd September 2023 in the case of I.G. Petrochemicals Ltd. v. Income-tax Appellate Tribunal, “C” Bench [2023] 155 taxmann.com 45 (Karnataka HC). The observation of the court is as under:
“The recent amendment to Section 28 of I.T. Act vide Finance Act 2023 wherein the legislature has included ‘benefit’ even in form of ‘cash’ arising from business or profession as being chargeable to income tax. Such amendment substantiates the interpretation of the Apex Court in Mahindra and Mahindra (supra), wherein it was concluded that the ‘benefit’ not being “other than in the shape of money” i.e., ‘benefit’ in form of ‘cash’ would fall outside the ambit of Section 28(iv) of the I.T. Act by proposing the present amendment.”
Therefore, the law as it stands today, from AY 2024-25, loan waived would be taxable under section 28(iv) of the Income Tax Act, 1961.
*****
Author: Bishwanath Jha IRS, Pr. Chief Commissioner of Income Tax (Retd.), Kolkata
Author Bio
