Case Law Corporate Law IBC Income Tax

Taxation of Loan Waivers after amendment to Section 28(iv)

CA Adityavikram Banka

Tax Implications on Loan Waivers after amendment to Section 28(iv)

Under resolution plan approved by NCLT, would generally involve waiver of loans and other liabilities of corporate debtor, which is subject to IBC Proceedings

Tax implications on waive of loans can be bifurcated based on type of loan & end user as under:

1. Waiver of Loan

a) Term Loan

b) Working Capital Loan

2.  Waiver of Interest

1. Waiver of Loan

Potential tax implication under section 41(1), 28(iv) and 194R

I)Analysis of section 41

“Where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee and subsequently during any previous year

The first mentioned person has obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or some benefit in respect of such liability by way of remission or cessation thereof, the amount obtained by such person or the value of benefit accruing to him shall be deemed to be profits and gains of the business”

II) Analysis of section 28(iv)

“Erstwhile section” – [Pre-amendment to Finance Act, 2023]

The value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession. There are three ingredients:

  • Benefit or Perquisite should arise to the recipient;
  • Should arise from business or exercise of a profession;
  • Whether convertible into money or not.

A) Erstwhile Law

1. Term “benefit or perquisite” – Not defined in the act. To be referred in dictionary and judicial definitions

  • Benefit – [Black’s Law Dictionary]-defines benefit-advantage, fruit; profit; privilege
    CIT v. Smt. Kamalini Gautam Sarabhai [1994] 208 ITR 139 (Guj.) – rendered in context of2(24)(iv)

The word “benefit” implies an element of advantage, profit or gain. The word “benefit” occurring in clause (iv) of section2(24) would mean any advantage, gain or improvement in condition

  • Perquisite – Section 17(2) of the Act defines “Perquisite” inclusively –however, this applies to salary income and not “PGBP”;

[Black’s Law Dictionary] – defines “Perquisite” – A privilege or benefit given in addition to one’s salary or regular wages –often shortened to perk.

2. Arising from business and profession – The “benefit” or “perquisite” should have a connection with business or profession of the recipient and not with the business or profession of the person providing the perquisite of benefit.

  • CIT v. Bhavnagar Bone, & Fertiliser Co. Ltd. [1987] 32 Taxman 180 (Guj.) and CIT v. General Electrodes & Equipments Ltd [1985] 20 Taxman 205/155 ITR 78 (Bom.) – This amount had no connection or nexus with the business of the assessee. It did not represent value of any benefit or perquisite arising from the business of the assessee. This amount, therefore, would not partake of the character of the income.
  • ITO v. Undavalli Constructions [2021] 131 taxmann.com 204/191 ITD 749 (Visakh.-Trib.) – it is necessary to show and prove the proximate cause or nexus between the alleged benefit or perquisite and the business actually carried on by the assessee. The nexus or the proximate cause must be real, immediate and not illusionary or imaginary. The benefit or perquisite contemplated by sec. 28(iv) must necessarily have a live connection with the business carried on by the assessee and the benefit must accrue or arise in the course of carrying on of such business.
  • Gujarat HC – CIT v. Chetan Chemicals (P.) Ltd. [2004] 139 Taxman 301 (Guj.) and further in CIT v. Gujarat State Fertilizers & Chemicals Ltd. [2013] 36 taxmann.com 230/217 Taxman 229/358 ITR 323 (Guj.) – It cannot be said that the assessee-company was carrying on business of obtaining loans and that the remission of such loans by the creditors of the company was a benefit arising from such business.

3. Whether Convertible in to money or not”

  • CIT v. Mahindra and Mahindra Ltd. [2018] 93 taxmann.com 32/255 Taxman 305 (SC) – Amount received as cash receipt due to the waiver of loan -very first condition of Section 28 (iv) of the Act which says any benefit or perquisite arising from the business shall be in the form of benefit or perquisite other than in the shape of money, is not satisfied.
  • Gujarat HC – CIT v. Chetan Chemicals (P.), Ltd. [2004] 139 Taxman 301 (Guj.) and further in CIT vs. Gujarat State Fertilizers & Chemicals Ltd. (2013) 358 ITR 323 (Guj) – It cannot be said that the assessee- company was carrying on business of obtaining loans and that the remission of such loans by the creditors of the company was a benefit arising from such business.
  • CIT v. Alchemic (P.) Ltd. [1981] 5 Taxman 55 (Guj.) – The phrase “whether convertible into money or not“ would normally mean something else than money. Section 28(iv) would not apply when the amount received is cash or is considered in terms of money.

4. Purpose of Loan – Capital or Revenue

  • CIT v. T.V. Sundaram Iyengar & Sons Ltd. [1996] 88 Taxman 429 (SC) – Taxpayer received certain deposits from customers. Such deposits were not claimed by the customers and hence, taxpayer transferred it to P&L a/c. Although it was treated as deposit and was of capital nature at the point of time it was received, by influx of time the money had become the assessee’s own money. It became a definite trade surplus.
  • Logitronics (P.) Ltd v. CIT [2011] 9 taxmann.com 302/197 Taxman 394 (Delhi) – Where loan was taken for acquiring capital asset, waiver thereof would not be taxable; If loan was taken for trading purpose, waiver thereof would result in income, more so when it was transferred to P&L.
  • CIT v. Ramaniyam Homes (P.) Ltd. [2016] 68 taxmann.com 289/239 Taxman 486 (Mad.) – Amount representing principal loan waived by bank under onetime settlement scheme would constitute income falling under section 28 (iv)
    • Over ruled by SC in Mahendra & Mahendra

B) Amended Law

Amended Provision of section 28(iv) – w.e.f. 1-4-2023

The value of any benefit or perquisite arising from business or the exercise of profession, whether-

(a) Convertible in to money or not

(b) In cash or in kind or party in cash or in kind

Comments in the Memorandum for the Amendment

  • The intention of legislature while introducing this provision was also to include benefit or perquisite whether in cash or in kind. However, courts have interpreted that if the benefit or perquisite are in cash, it is not covered within the scope of this clause of section 28 of the Act.
  • In order to align the provision with the intention of legislature, it is proposed to amend clause (iv) of section 28 of the Act to clarify that provisions of the said clause also applies to cases where benefit or perquisite provided is in cash or in kind or partly in cash and partly in kind.

Waiver of Loan – Post amendment – section 28 (iv)

  • The Hon’ble Supreme Court in Mahendra & Mahendra has settled a law that waiver of loan is the benefit in cash and will not be part of section 28(iv).
  • Post amendment – all benefits whether convertible in to money or not or in cash will be part of section 28(iv)
  • Question – Waiver of loans in restructuring would be taxable u/s 28(iv) ????
  • Question – Whether waiver of such loan can be considered as “arising from” business or exercise of profession? Refer Chetan Chemicals (P.) case decided by the Hon’ble Gujarat High Court

III) Analysis of Section 194 R

Section 194R Implication – Circular no 12/2022 and Circular 18/ 2022

  • Prior to amendment in section 28(iv)- monetary benefits were not covered within the ambit of section 28(iv) – Mahendra & Mahendra (SC)
  • One time loan settlement with the borrowers or waiver of loan granted on reaching settlement with the borrowers by specified institutions [Banks and Public financial institutions] would not be subjected to deduction of tax at source under section 194R.
  • Waiver of loan apart from the specified borrower – Applicability of section 194R?
  • Write of Bad-debts – Applicability of section 194R?
  • The treatment of such settlement/waiver in the hands of the person who is benefitted from such waiver would not be impacted by this clarification. The taxability of such settlement/waiver in the hands of the beneficiary will be governed by the relevant provisions of the Act.

2.  Waiver of Interest

Implication under Income tax Act

  • Interest Expenses is allowed as deduction u/s 36(1)(iii) under Income Tax Act- subject to section 43B
  • Waiver of interest amount would constitute income and be taxable under section 41(1) of the Act.
  • If the interest was claimed and disallowed u/s 43B in earlier years, the same is not taxable under section 41(1).
  • It was also held that waiver cannot be taxable under section 28(iv)
  • Waiver of interest – Taxable u/s 41(1) if deduction claimed in earlier years.
CA Adityavikram Banka
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