Opinion Of Eminent Legal Luminaries On Controversial Issues

Whether Debt Restructuring Is Remission Or Cessation Of Trading Liability And Liable To Tax U/s. 41(1)?

QUERY: Assessee had borrowed loan from bank for purchase of machinery and working capital as under:

• Term Loan Rs. 100/- crores.

• Working Capital Rs. 90 /- crores.

It also had certain unpaid interest of Rs. 30/- crores. Out of this Rs. 30/- crores Rs. 12/- crores was capitalised with machinery.

Due to certain reasons company has entered into debt restructuring with the bank and amount borrowed was partly waived as under:

Term Loan Rs. 15/- crores

Working Capital Rs. 5/- crores

Interest Rs. 20/- crores

What tax treatment to be given on waiver of loan?
ANSWER: On debt restructuring with bank, the bank has waived Rs. 15/- crores out of term loan of Rs. 100/- crores, which was taken for purchase of machinery. So, the loan was for purchase of a capital asset and the same was not debited to trading account or profit and loss account and therefore remission of that liability cannot be treated as income under section 41(1) of the Act. See Mahindra and Mahindra Ltd. v. CIT [261 ITR 501 (Bom.)] and CIT v. Xylon Holdings (P) Ltd. [26 Taxmann.com 333 (Bom.)].

Secondly, waiver of Rs. 5/- crores out of Rs. 90/- crores of working capital would be considered for business purposes. The loan was taken for trading activity and ultimately the amount was retained in the business. The amount has become assessee’s income and liable for tax under section 41(1) of the Act. See CIT v. T. V. Sundaram Iyengar and Sons Ltd. [222 ITR 344 (SC)], Solid Containers Ltd. v. DCIT [308 ITR 417 (Bom.)] and CIT v. Aries Advertising Pvt. Ltd. [255 ITR 510 (Mad.)]

Thirdly, from the facts, it is clear that out of Rs. 30/- crores, Rs. 18/- crores was debited to profit and loss account and claimed as deduction. Hence, Rs. 18/- crores shall be liable for tax under section 41(1). Balance Rs. 2/- crores may be actual cost of the asset as per section 43(1) of the Act but same is not met directly or indirectly by any other person or authority and hence same is not liable for tax under section 41(1) of the Act.
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