No Income Tax on settlement or waiver of Working Capital Loan

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No Income Tax on settlement or waiver of Working Capital Loan

Taxation of benefit arising from settlement or waiver of working capital loan is an issue  full of divergent views and opinions.

 As far as the waiver of term loan is concerned, issue is almost settled by virtue of SC ruling in the case of Mahindra Fimance. However, the controversy as to the waiver in respect of working capital limit is still continuing.

After Chandigarh ITAT Judgment , this time Vishakhapattanam ITAT has now ruled in favour of Assessee.

The gist of the judgment by Visakhapatnam ITAT is as under:

ITAT VISAKHAPATNAM

INCOME TAX OFFICER WARD-3 SRIKAKULAM VERSUS M/S SRI VASAVI POLYMERS P. LTD

I.T.A.No.606/Viz/2018

Issue : Addition u/s 41(1) or u/s 28 on waiver of working capital loan

– In respect of principal amount, though the assessee has gained the benefit by way of one time settlement the same cannot be brought to tax u/s 41(1) because the OCC loan represents the principal which was never claimed as expenditure.

AO also did not make out a case that the principal amount was debited to the Profit & Loss account in the earlier years.

Therefore there is no case for making addition u/s 41(1) in respect of the principal amount.

– assessee had received the benefit as a result of one time settlement of loan by the Indian Overseas bank.

– Loan was due to Indian Overseas Bank, Visakhapatnam in respect of term loan & OCC which included the interest subsidy as well as the working capital loan

– Addition deleted by the Ld.CIT(A)

HELD THAT:- In the instant case, the trading liability or the expenditure or deduction was claimed by the assessee in respect of interest paid on the OCC loan.

In respect of principal amount, though the assessee has gained the benefit by way of one time settlement the same cannot be brought to tax u/s 41(1) because the OCC loan represents the principal which was never claimed as expenditure.

 AO also did not make out a case that the principal amount was debited to the Profit & Loss account in the earlier years.

Therefore there is no case for making addition u/s 41(1) in respect of the principal amount.

In MAHINDRA AND MAHINDRA LTD. THRG. M.D. [2018 (5) TMI 358 – SUPREME COURT] considered the issue with regard to taxing the remission of liability u/s 28(iv) and decided the issue against the revenue and in favour of the assessee, since, the receipt was in the nature of cash or money.

The Hon’ble Supreme Court held that section 28(iv) has no application since the receipt was in the nature of cash or money.

 In the instant case what the assessee has received was remission of liability which was in the form of cash or money and the difference amount of principal which was settled by onetime payment was never debited to Profit & Loss account.

Therefore, the decision of Hon’ble Supreme Court is squarely applicable in the instant case.

The appeal of the revenue is dismissed.

Readers may refer my earlier article on the same issue at following link –

Settlement (OTS) of Bank Loan: Income Tax Implications

 https://thetaxtalk.com/2020/05/25/one-time-settlement-ots-by-bank-or-loan-waiver-income-tax-implications/

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