A loan denotes borrowing money which is to be paid back along with interest. In a loan, the borrower at receives an amount of money that is termed as the ‘principal’ from the lender and he is under an obligation to pay back the same along with the interest to the lender after a certain time. In a case the borrower is unable to repay the loan and the lenders are unable to get their money back, what is legal position? What are Tax Implications on Loans waived off in the hands or borrowers?
What are Tax Implications on Loans Waived off- Judicial Stand Point
The money borrowed is generally repaid in installments. However loan is not same as debt and/or deposit. Debt is the amount of money owed by one to another.
In the case of Central Bank of India vs. JCIT, it was held that though each loan creates a debt in favour of lender, but each debt is not necessarily a loan.
In Oriental Insurance Co. Ltd. vs. Dy. CIT a difference was marked between loan or deposit by observing that the terms ‘loans’ and ‘deposits’ are not mutually exclusive. There were many common features between them.
A deposit is also a loan with a difference that it a loan is charged with the liability to be repaid the time it is incurred. But it is not so in the case of a deposit. The repayment will depend either upon the maturity date or upon the terms of the agreement. In other words, there is no immediate obligation to repay in case of a deposit.
Tax Implications of Waiver of Loan- Receipt in hand of borrower
Waiver of a loan is an act of waiving the liability of the borrower by the lender. By waiving, the borrower is free from repaying the amount he has borrowed. The waiver may be of a part of the principal amount or that of the interest or a complete waiver of both the amounts.
Waiver of loan gives the borrower extra money in hand. Thus it amounts to a receipt in the hands of the borrower.
Whether waiver of loan is taxable?
The issue whether waiver of loan is taxable under Section 28(iv) or taxable under Section 41(1) is discussed below.
Is Loan Waiver ‘Business income’ under Section 28(iv):
Section 2(24)(vd) read along with section 28(iv) of the Income Tax Act, 1961 states that the value of any benefit, whether that can be converted into money or not, arising from a business activity or a profession, is taxable in the hands of the recipient as his business income.
Section 2 (24) provides the definition of business income. Therefore, the value of any benefit taxable under section 28(iv) should be treated as ‘income’.
In Section 17(2) of the Act, it has been stated that at times when non-cash benefits are provided by an employer to an employee in addition to salary or wages, under section 28 of the Act such income will be treated as ‘Profits and Gains of Business or Profession’ if they belong to any of the clauses.
Clause (iv) of the section states that the value of any benefit, whether convertible into money or not, coming out of a business or a profession, shall be considered as income from business or profession and will be taxed accordingly.
In Ravinder Singh vs. CIT, the High Court of Delhi held that Section 28(iv) would not apply in case of payments made in cash. Section 28(iv) can be applied only where the benefit is other than cash.
Is waiver of loan treated is as a perquisite?
In the case of CIT vs. Alchemic (P) Ltd., 130 ITR 168 (Guj.) the question which arose was whether waiver of loan taken is a benefit under section 28(iv).
In the case of ITO vs. Ahuja Graphic Machinery (P) Ltd., it was held that the value of any benefit arising from business or a profession is chargeable to income tax as part of the income from business or a profession under section28(iv) and it is considered as income under section 2(24).
Section 36 of eth act states that interest paid on the loan or any other expense incurred fully for the purposes of the business can be allowed as a deduction if the loan is taken for business purposes, that is it is a revenue receipt.
The benefit which arises through remission of trading liability will be taxable under the head ‘Profits and Gains of business or profession’ only when an allowance has been made in connection with such trading liability.
Nature of loan to be considered:
To accept that waiver of loan is taxable one should look at the purpose of borrowing of the money, accounting treatment of the waived amount and the purpose of the borrowing.
A loan can be taken to buy a capital asset, for expanding the business, for accumulating capital, for making investments in shares, etc. The accounting treatment of the loan depends upon the purpose for which it is taken.
The taxability of waiver of loan also depends upon the nature of the loan. If the loan is taken for the purchasing a capital asset, waiver of the loan is not taxable.
Related Read- Is there provision to waive off Penalty in case of deceased assessees
However, when a loan is taken for carrying on regular business activity, it forms part of the trading liability of the borrower. When the lender waives the amount, such amount is chargeable to income tax as income. This has been held in Solid Containers Ltd vs. Deputy Commissioner of Income Tax.
The Madras High Court in the case of the Commissioner of Income Tax vs. M/s. Fidelity Textiles (P) Ltd., 2016 (4) TMI 131, has held that the protection provided to the British National by the agreement dated 26.06.2000, cannot be treated as a consideration. It does not constitute the income of the assessee as per section 28 (iv) of the Act.
In view of above, loans waived off are taxable in hands of borrower
