Is waiver of loan for acquiring capital assets assessable as business income?

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Is waiver of loan for acquiring capital assets
assessable as business income
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• Introduction
• 1. The provisions of Income-tax law are subject
  to interpretations, which include multiple and
  diametrically opposite interpretations at
  different points of time. One court may interpret
  a provision in a particular manner and another
  court might interpret the very same provision
  differently, thus, leading to chaos for the
  stakeholders. Sometimes even the very same court
  which interpreted a provision in a particular
  manner will deviate from its binding precedent
  after a passage of time. Therefore, the subject
  of income-tax in India continues to remain
  dynamic and ever evolving which keeps the tax
  practitioners on the toes to be abreast of the
  recent developments.
• Whether loan waiver is chargeable to income-tax
  is decided by various juridical authorities from
  time-to-time. However, in a thumb-rule it is
  generally understood that waiver of loan for
  acquisition of capital asset is not covered by
  section 41(1), since such loan would not have
  been allowed as a deduction previously. Recently,
  the Madras High Court in CIT v. Ramaniyam Homes
  (P.) Ltd. 2016 384 ITR 530/239 Taxman 486/68
  taxmann.com 289 has given a decision in favour of
  the Revenue by holding that waiver of loan for
  acquisition of capital asset is covered by
  section 28(iv) of the Act. This article discusses
  on the above said decision and the precedents
  which are both favourable and adverse for the
  taxpayers.

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• Ramaniyam Homes case
• 2. The assessee filed its return of income for
  the assessment year 2006-07 admitting a total
  loss of Rs. 242.21 lakhs. The case was selected
  for scrutiny. During the course of scrutiny it
  was found that the assessee was indebted to a
  bank with whom a proposal for one time settlement
  (OTS) was made. As against the amount payable of
  Rs.10.50 crores under OTS the assessee paid only
  Rs.93.89 lakhs during financial year 2005-06. The
  decision of the High Court did not exhibit the
  factual aspects of the case in details, and,
  hence, for facts reference was made to the
  tribunal's, decision vide ITA No.1245/Mds/2011,
  dated 09.03.2012 as presented below.
• ? The assessee claimed Rs.120.26 lakhs as
  interest on term loan as deduction under section
  43B. However, according to the Assessing Officer
  a sum of Rs.93.89 lakh was transferred to an OTS
  scheme account in the books of account. There was
  no actual payment made by the assessee. Since the
  assessee did not produce the evidence for payment
  of interest, the entire claim was disallowed by
  the Assessing Officer.
• ? The CIT (Appeals) perused the ledger folio and
  confirmation obtained from the bank and,
  accordingly, came to the conclusion that the
  assessee had actually effected the payments. The
  journal entry was only for transfer of balance in
  OTS account to the bank account. Accordingly, he
  deleted the disallowance of Rs.120.26 lakhs.
• ?Yet another ground before the tribunal was the
  addition of Rs.358.78 lakhs representing term
  loan waiver which was taxed as income by applying
  section 28(iv) of the Act. The tribunal relied on
  the jurisdictional High Court's decision in the
  case ofIskraemeco Regent Ltd. v. CIT 2011 331
  ITR 317/196 Taxman 103/2010 8 taxmann.com 119
  (Mad.) and held that the section 28(iv) has no
  application on the waiver of principal amount of
  term loan. Thus, the decision was rendered in
  favour of the assessee.

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• Issue before the High Court
• 2.1 Two issues which were referred to the High
  Court under section 260A were (i) whether the
  tribunal was right in holding that the amount
  representing the principal loan amount waived of
  under OTS scheme was not exigible to tax? and
  (ii) whether the tribunal ought to have seen that
  the waiver of principal amount would constitute
  income under section 28(iv), being a benefit
  arising in the business?
• The Court took note of the binding precedent in
  Iskraemeco Regent Ltd's. case (supra). In this
  case, the assessee took a loan from bank for
  purchase of capital assets and, subsequently,
  became sick. It approached the BIFR for
  rehabilitation and the assessee was given some
  benefit under a one-time settlement. The assessee
  credited the loan waiver amount to the capital
  reserve account in the balance sheet treating it
  as capital in nature. The Assessing Officer
  treated the amount as income under section
  28(iv), read with section 2(24). The Court held
  that the loan transaction has no application with
  respect to section 28(iv), of the Act and that
  the same cannot be termed as an income within the
  purview of section 2(24).

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• Precedents
• 2.2.1 In Ravinder Singh v. CIT 1994 205 ITR
  353/1993 71 Taxman 336 (Delhi) while
  interpreting section 28(iv) the court held that
  this provision will apply only where the benefit
  or perquisite is other than cash. It will not
  apply where the benefit is by way of money.
  Factually, the partnership firm allowed the
  partners to utilize its funds without paying
  interest. The issue before the court was about
  disallowance of interest in firm's assessment and
  its inclusion in the hands of the partner as
  benefit obtained by him. While deciding the case
  on the value of such notional interest enjoyed by
  the partner, the court held that section 28(iv)
  could not be applied for taxing such benefit or
  perquisite since it was by way of cash. It was
  held that section 28(iv) can be invoked only
  where the benefit or perquisite is other than
  cash.
• 2.2.2 In Solid Containers Ltd. v. Dy. CIT 2009
  308 ITR 417/178 Taxman 192 (Bom.) the assessee
  took a loan of Rs.6.86 lakhs for business
  purposes which was waived of subsequently. The
  assessee credited the amount to reserve account
  as a result of consent terms arrived at in a
  suit. The taxability of such waiver of loan was
  the dispute before the court. The Court held that
  the amount was chargeable to tax by relying on
  the decision in the case of CIT v. T.V. Sundaram
  Iyengar Sons Ltd. 1996 222 ITR 344/88 Taxman
  429 (SC). As the loan was taken for trading
  activity, its waiver was held as chargeable to
  tax as income.

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