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Waiver of loan is not taxable u.s. 28 (iv) or S. 41.1 as held by the honourable Supreme Court- an analysis and updates on related issues |
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Waiver of loan is not taxable u.s. 28 (iv) or S. 41.1 as held by the honourable Supreme Court- an analysis and updates on related issues |
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References and links: The Commissioner Versus Mahindra and Mahindra Ltd. thrg. M.D. 2018 (5) TMI 358 - SUPREME COURT Related judgment of lower courts: Other Citation: [2003] 261 ITR 501, 182 CTR 34, 128 TAXMANN 394 2003 (1) TMI 71 - BOMBAY High Court ITAT order –dated 16.08.1982 not found Judgments referred by the High Court: Citations: in 2003 (1) TMI 71 - BOMBAY High Court (these also includes cases on some other issues, before the High Court):
Provisions as considered by the Supreme Court (column 1) of table below and remarks of author about amendments, if any:
Conclusion from the judgment of the Supreme Court: Regarding section 28 (iv): a. Regarding section 28 (iv) ( see in above table) precondition is that there should be ‘any benefit or perquisite’ arising from the business shall be in the form of benefit or perquisite other than in the shape of money. b. In case of waiver of loan , this condition is not satisfied. Waiver of loan is not a benefit or perquisite in a form other than money. c. Section 28(iv) of the IT Act does not apply on the present case since the receipts are in the nature of cash or money. d. In view of the Supreme Court, “in no circumstances, it can be said that the amount of loan waived (₹ 57,74,064/- in this case) can be taxed under the provisions of Section 28 (iv) of the IT Act.” Regarding section 41.1: a. There is difference between ‘trading liability’ and ‘other liability’. Section 41 (1) of the IT Act particularly deals with the remission of trading liability, that too which has been allowed in past assessments and then there is waiver or cessation of such liability which was allowed. In case of un-allowed liability, waived, the provision shall not apply. b. Whereas in the instant case, waiver of loan amounts to cessation of liability other than trading liability. c. It is a matter of record that the Respondent has not claimed any deduction under Section 36 (1) (iii) of the IT Act qua the payment of interest in any previous year. { per author :what is waived is principal amount which was not claimed and allowed as expenses. Thesumwaived doesnot includeinterest amount which was allowed u/s 36 (1) (iii) or any provision therefore S. 41 cannot be applied.} Present position: As indicated in the table above there is no change in provisions. Therefore, the ruling is applicable in the present times also. Other aspect: A loan taken is a capital receipt. It is refundable, It is not income in any sense. Acknowledgement of loan by way of agreement, periodical payment of interest, re-payment etc. are evidences that the sum obtained is a loan and for its use interest is payable and it is refundable. An amount shown as a liability in books of borrower, is an evidence which is self- proved and the creditor can use it against the debtor. When such a liability , which was on account of capital when received, shall on waiver by creditor shall also be on capital account. Therefore, in opinion of author the action of crediting such waiver in P & L account was wrong. Such waiver is not an income from operation of company. Such waiver is not a part of revenue of company. Therefore, such waiver should have been credited in Capital Reserves, instead of P & L account. When such amount is credited in P & L account, it makes amount of profit or loss of current year incomparable with that of earlier years. In this regard, author is also of view that relevant accounting standards need review and amendment. Any receipt which is on capital account should be credited in P & L account after adjusting related amount in books of account. Costs: As is usual in majority of cases the Supreme Court did not allow costs in favour of assesses. This was a fit case for allowing costs, because the stand taken by the revenue was against basic principal of capital and revenue besides , as noted by the Courts, even preliminary pre-conditions to invoke S. 28(iv) and S. 41.1 were not satisfied. In this case senior counsels should not have advised to the Revenue, to file appeal. However, if they did so, they would not be able to attain levels of Senior Counsels and earn fat fees. It is unfortunate that people engaged in litigation are very highly paid and that is reason that there is brain drain in un-necessary litigation, particularly with revenue. Related issue discussed- loan or other credit or trading liability deemed as income later-on waived will not be income: A loan and even a trading liability found credited in books of account of assesse may be made taxable by fiction, if for any reason assesse fails to establish nature, source and capability of person whose account is credited. This is on invocation and addition u/s 68. In that case also , if such loan is waived, this will not be taxable u/s 28 or 41, because if the amount is already assessed as income, and it was deemed not to be loan but own money, for tax purposes, then it cannot be taxed again by treating it as income if it is credited as waiver by loan creditor or even supplier/ trading creditor. There should not be amendment on this issue: As discussed earlier, loan is a capital receipt, at the time of receipt. Therefore, even at the time of waiver, it remains a capital receipt and not a revenue or income. Therefore, it cannot be considered an item of revenue or income in any sense. Under Constitution of India and as per objects of the Income-tax Act, 1961, tax can be imposed on income and not on any capital receipts. Many capital receipts have been deemed income by insertion of fictions and specific inclusion in definitions of income. However, all such provisions are not within power of the Central Government to impose tax on income. However, these need to be challenged by way of challenging vires under appropriate Writ Petition. Because whether a provision is constitutionally valid or not cannot be considered, even by the Supreme Court while dealing an appeal.
By: CA DEV KUMAR KOTHARI - May 8, 2018
Discussions to this article
Its a nice read. But in the present scenario wouldn't the same be taxable u/s 56(2)(x)?
With reference to observations of Shri M.P.Singh, I am of view that a waiver does not amount to any money received in previous year. A waiver is also a commercial transaction bew\tween two parties. all aspects need to be consideered. Besides waiver of loan is 'capital receipt' and cannot be considered income. The deeming provisions which deem capital receitps are ultra virse and I hope in due course will be struck down, if challenged properly.
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