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In a significant impact on companies undergoing insolvency proceedings, the Supreme Court has said the waiver of a loan taken to purchase a capital asset cannot be considered as business income for taxation purpose.
The ruling comes in the case of Mahindra and Mahindra (M&M) versus the Income Tax Department involving a loan of ₹57.7 lakh.
To expand its product line, the auto manufacturer has entered into an agreement with the US-based Kaiser Jeep Corporation. KJC was supposed to sell equipment to M&M through its subsidiary Kaiser Jeep International Corporation. It also provided a loan to M&M at 6 per cent interest, which was repayable after 10 years.
However, American Motor Corporation (AMC) took over KJC and waived the principal amount of loan given to M&M. Though in its tax return, the Indian auto manufacturer showed the loan as cessation of liability towards AMC, the Income Tax Department had said that it was income and taxable under Section 28 of the Income Tax Act.
While the Commissioner of Income Tax Appeals had upheld the Tax Department’s order, the tribunal and the High Court later ruled in the favour of M&M.
Court view
A Supreme Court Bench, comprising Justice RK Agarwal and Justice Ajay Manohar Sapre, has now held that Section 28(iv) of the Income Tax Act does not apply to the case and neither does Section 41(1) of the IT Act because waiver of loan does not amount to cessation of trading liability.
“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,” it had noted, while dismissing 22 other appeals of a similar nature. Experts have termed the ruling as significant and have said that it settles a matter of law. “In cases under insolvency, this could mean that lenders may have to take a haircut while borrowers will stand to gain,” said an analyst.
Abhishek A Rastogi, Partner, Khaitan and Co, said income tax on loan waivers has been under dispute by the Tax Department for long either under Section 28(iv) or under Section 41(1). “The Supreme Court ruling on this issue has settled the matter once and for all. Once a loan amount is waived, the debtor is absolved of the liability to repay. Hence, waiver of loan by the creditor results in the debtor having extra cash. It is receipt in the hands of the debtor or assessee,” he said, adding that the Supreme Court has however, held that such waiver of loan cannot be treated as a perquisite.
“This case will provide respite to those assessees who have not taken double benefit of income tax deduction and waiver,” he further said.
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