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Waiver of loan is not taxable as business income

In The Commissioner vs Mahindra and Mahindra Ltd., the Respondent had entered into a contract with an American Company for equipment and for this the Seller had extended loan. Subsequently, the Seller was taken over by another company which waived the loan.

The bone of contention was that according to the Income Tax Officer (ITO) concluded that with the waiver of the loan amount, the credit represented income and not a liability which was disputed by the Respondent.

The Supreme Court decided the issue is to be decided under Section 28(iv) & 41(1) of the Income Tax Act. For Section 28(iv) to be attracted, the benefit should come in form other than cash whereas in this case the Respondent has received money in form of waiver of loan. For Section 41(1) to be attracted, there should be an allowance or deduction claimed by the assessee in any assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee. Then, subsequently, during any previous year, if the creditor remits or waives any such liability, then the assessee is liable to pay tax under Section 41 of the IT Act. But in this case, the Respondent had been paying interest at 6 % per annum to the American company as per the contract but the assessee never claimed deduction for payment of interest under Section 36 (1) (iii) of the IT Act. In the case at hand, learned CIT (A) relied upon Section 41 (1) of the IT Act and held that the Respondent had received amortization benefit. Amortization is an accounting term that refers to the process of allocating the cost of an asset over a period of time, hence, it is nothing else than depreciation. Depreciation is a reduction in the value of an asset over time, in particular, to wear and tear. Therefore, the deduction claimed by the Respondent in previous assessment years was due to the deprecation of the machine and not on the interest paid by it.

Thus the Supreme Court rejected the appeal due to the following reasons :-

(a) Section 28(iv) of the IT Act does not apply on the present case since the receipts of Rs 57,74,064/- are in the nature of cash or money.
(b) Section 41(1) of the IT Act does not apply since waiver of loan does not amount to cessation of trading liability. It is a matter of record that the Respondent has not claimed any deduction under Section 36 (1) (iii) of the IT Act qua the payment of interest in any previous year.

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