Tax Forum: Is the principal amount of the loan canceled by a bank taxable?
QUESTION: A company obtained a waiver of the principal amount of Rs.25 lakh, in addition to the full interest as a waiver under a bank’s Single Settlement Scheme (OTS). The capital loan was used for the purchase of fixed assets such as plant and machinery. The valuation officer wants to tax the sum as a business advantage under Sec. 28 (iv) of the Act. Is it justified?
REPLY: Interest forfeited to the extent permitted in computing taxable income is taxable under Sec. 41 (1) of the Act. The amount remitted as part of a settlement, including interest, would not have the character of income as capital receipt, even as decided in Mohsin Rehman Penkar v CIT (1948) 16 ITR 183 (Bom) approved by the Supreme Court in C. Ag. IT v Kerala Estate Mooriad Chalapuram (1986) 161 ITR 155 (SC). It was against the decision of the Bombay High Court that subsection (2A) of 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 a need for Sec. 41 (1) to tax the permitted portion as a deduction only because even that amount was not otherwise taxable. Second. 28 (iv) covers any benefit or benefit convertible into cash or not, so that it only covers benefits in kind, in addition to not covering amounts of a kind in capital. Unless capital receipts are specifically taxable, such as import licenses under clause (iiia) or anti-competition charges under clause (va), capital receipts are not included. of the scope of business income under Sec. 28.
The High Court of Bombay in Mahindra and Mahindra Ltd. v CIT (2003) 261 ITR 501 (Bom) looked into this matter and 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) noting that Sec. 28 (iv) does not apply to such a waived amount. Any other point of view must be regarded as contrary to established law.