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Is the principal loan amount waived by a bank taxable
Mon, 06 Dec 2010
The Hindu Business

QUESTION: A company obtained waiver of principal amount of Rs.25 lakh, besides the entire interest as waiver under one-time settlement scheme (OTS) from a bank. The borrowal of principal sum was utilised for the purchase of fixed assets like plant and machinery. The assessing officer wants to tax the sum as business perquisite under Sec. 28(iv) of the Act. Is he justified?

ANSWER: Interest waived to the extent allowed in the computation of assessable income is taxable under Sec. 41(1) of the Act. The amount remitted under a settlement even including interest would not have the character of income being a capital receipt even as decided in Mohsin Rehman Penkar v CIT (1948) 16 ITR 183 (Bom) endorsed by the Supreme Court in C. Ag. IT v Kerala Estate Mooriad Chalapuram (1986) 161 ITR 155 (SC). It is against the decision of the Bombay High Court that sub-section (2A) to Sec. 10 was inserted in the Indian Income-tax Act, 1922, now Sec. 41(1) of the Income-tax Act, 1961, so as to tax only the amount limited to what has already been allowed as a deduction.

There was need for Sec. 41(1) to tax the part allowed as a deduction only because even this amount was otherwise not taxable. Sec. 28(iv) covers any benefit or perquisite convertible into money or not, so that it covers only benefit in kind, besides not covering amounts of capital nature. Unless capital receipt is specifically made taxable as for example import licences under clause (iiia) or anti-compete fee under clause (va), capital receipt is outside the scope of business income under Sec. 28.

The Bombay High Court in Mahindra and Mahindra Ltd. v CIT (2003) 261 ITR 501 (Bom) has dealt with this issue and had decided that it is not taxable.

This was followed by the Tribunal in Accelerated Freez and Drying Co. Ltd. v Deputy CIT (2010) 1 ITR (Trib) 226 (Cochin) finding that Sec. 28(iv) is not applicable for such amount waived. Any other view should be taken as contrary to settled law.

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