In a recent Judgment, a division bench of Madras High Court held that, benefit received while an amount of loan waived by the bank under the one time settlement shall come under the purview ‘income’ from business under section 28(iv) of the Income Tax Act.
The Court was hearing an appeal filed by Commissioner of Income Tax, Chennai.
“The waiver of a portion of the loan would certainly tantamount to the value of a benefit. This benefit may not arise from “the business” of the assessee. But, it certainly arises from “business”. The absence of the prefix “the” to the word “business” makes a world of difference”, the Court observed.
A bench comprising of Justice V.Ramasubramanian and Justice T.Mathivanan also observed that, “the moment the asset is put to use, then the interest paid in respect of the capital borrowed for acquiring the asset, could be allowed as deduction. When the loan amount borrowed for acquiring an asset gets wiped off by repayment, two entries are made in the books of account, one in the profit and loss account where payments are entered and another in the balance sheet where the amount of unrepaid loan is reflected on the side of the liability. But, when a portion of the loan is reduced, not by repayment, but by the lender writing it off (either under a one time settlement scheme or otherwise), only one entry gets into the books, as a natural entry. A double entry system of accounting will not permit of one entry. Therefore, when a portion of the loan is waived, the total amount of loan shown on the liabilities side of the balance sheet is reduced and the amount shown as Capital Reserves, is increased to the extent of waiver. Alternatively, the amount representing the waived portion of the loan is shown as a capital receipt in the profit and loss account itself”.
Read the full text of the judgment here.
[googleapps domain=”drive” dir=”file/d/0B3j3oXdY53gVRHEzenhJSFJBblk/preview” query=”” width=”640″ height=”480″ /]
