Waiver of Term Loan, Working Capital Loan and its Taxability under Income-tax Act, 1961

With the globalization, business in India has expended manifold. While existing units have expended their footprint, new entities have entered the booming Indian business arena by availing of various types of finances such as term loan and working capital loan from public institution, bank, private parties, etc. Due to various reasons such as stiff global competition, new invention and global recession financial position of many units have deteriorated and, as a result, their accounts with financial institutions or bank have become non-performing assets (NPA).

Such unit enters into a one-time settlement with banks or financial institutions by paying a stipulated amount against the loan amount, while the balance is waived off. A pertinent question arises is the taxability under the Income-tax Act,1961 of the sum waived off term loan and working capital loans by banks, financial institutions or depositors.

Let us refer decision of Delhi High Court in the case of Logitronics (P) Ltd. vs CIT, in the case assessee – company defaulted in payment of loan taken. Company went into the settlement of loan with bank can substantial amount of principal and interest was waived off by the bank. In the income tax return filed by the assessee, it showed the interest waived off as interest waived off to the credit of Profit & Loss account and was offered for taxation but does not offer the amount of principal  amount for taxation and  credited amount of principal to Capital Reserve.

The matter was produced before HC, from the reading of the judgment answer would depend upon the purpose for which loan was taken. If the loan was taken for acquiring the capital assets, waiver thereof would not amount to any income eligible to tax. On the other hand, if this loan was for trading purpose and was treated as such from the very beginning in the books of account, the waiver thereof may result in the income more so when it was transferred to the profit and loss account.

Source: ICAI journal, June'12

Note: For more details please reffer ICAI journal June'12.