WAIVER OF LOAN – CAPITAL RECEIPT OR REVENUE RECEIPT?

[Mr. M. GOVINDARAJAN]

It is inevitable in waiving of loan in the course of business transactions. Whether such waiver of loan amounts to capital receipt or revenue receipt?   This has been discussed in this article with reference to the decided case laws.

In ‘Solid containers Limited V. Deputy Commissioner of Income Tax’ –2008 (8) TMI 156 - BOMBAY HIGH COURT it was held that a waiver of the loan taken for the business purposes is in the nature of revenue receipt and therefore taxable.

In ‘Mahindra and Mahindra Limited V. Commissioner of Income Tax’ – 2003 (1) TMI 71 - BOMBAY High Court it was held that where a waiver of loan was taken for purchase of capital asset it was held to be on capital account and not on revenue account.

In ‘Commissioner of Income Tax V. Software Computers Private Limited’ – 2013 (1) TMI 89 - BOMBAY HIGH COURT the assessee was a dedicated software development center providing transaction processing facilities and airline control system services to Speedwing British Airways.   The assessee was located in the premises of Speedwing British Airways. An agreement was reached between the assessee and Speedwing British Airways that the assessee should relocate itself to an independent location.   For this purpose Speedwing British Airways provided an advance of 1 lakh pounds.

Thereafter Amadeus Global Travels stepped into the shoes of Speedwing British Airways and assumed its rights and liabilities.   After this Amadeus Global Travels and the assessee signed an agreement according to which the assessee was released from repayment of the advance of 1 lakh pounds.

The assessee by virtue of the above said agreement claimed that the waiver of the loan was in the nature of capital receipt for the assessment year 2001-02 and not included in the taxable income.   The Assessing Officer did not accept the contention of the assessee and included Rs.70.12 lakhs to the income of the assessee as revenue receipt and taxable.

The assessee filed an appeal before the Commissioner of Income Tax (Appeals).   The Commissioner (Appeals) upheld the order of the Assessing Officer and held that the waiver of loan/advance is a revenue receipt and taxable.

The Assessee filed second appeal before the Tribunal.   The Tribunal allowed the appeal and held the amount of Rs.70.12 lakhs cannot be subjected to the tax as the same was in the nature of capital receipt.

Aggrieved against this order of the Tribunal the Revenue filed appeal before High Court, Mumbai. It raised the question of law before the High Court – Whether, on the facts and circumstances of the case and in law, the Tribunal is correct in holding that the waiver of payment of Rs. 70,12,236/- is a capital receipt in the hands of the assessee and not a revenue receipt?

The High Court held that waiver was of a loan taken for trading activity will be considered as of a revenue nature.   In the present case, the amount which was advanced as a loan to the assessee was for the purposes of acquiring an office.   Therefore the loan in the present case was taken for the acquisition of capital asset and not for the purposes of trading activity.   In view of this the High Court dismissed the appeal as no substantial question of law arises for consideration by it.

Discussions to this article

[Abhay Adukia]

I,( Resident individual),  wanted to know if a company X gives me money to invest on their behalf, and i lose that money on the stock market, can i treat the loan recd as a capital receipt.

 

Thanks,

 

-Abhay