Logitronics Pvt Ltd vs. CIT (Delhi High Court)

DATE: (Date of pronouncement)
DATE: March 9, 2011 (Date of publication)

Click here to download the judgement (logitronics_loan_waiver_income.pdf)

Q whether waiver of loan is income or not depends on whether loan was used for capital or revenue purposes

The assessee, engaged in manufacture of electronic products, took a loan from SBI of which Rs. 4.76 crores was due towards principal and Rs. 1.90 crores was due towards interest. Owing to its inability to repay the amounts, the assessee entered into a settlement under which an amount of Rs. 1.85 crores was agreed to be paid towards the principal and the balance was waived. The whole of the interest was also waived. The assessee offered the amount of interest waived to tax though it claimed that the principal sum waived was a capital receipt. On appeal, the Tribunal held that the question whether the principal sum waived was income or not would depend on whether the loan was utilized for capital or revenue purposes and directed the AO to go into the matter. On appeal by the assessee, HELD:

The answer to the question whether the waiver of a loan is taxable as income or not depends on the purpose for which the loan was taken. If the loan was taken for acquiring a capital asset, the waiver thereof would not amount to any income exigible to tax u/s 28(iv) or 41(1). On the other hand, if the loan was taken for a trading purpose and was treated as such from the very beginning in the books of account, its waiver would result in income more so when it was transferred to the P&L A/c in view of Sundaram Iyengar 222 ITR 344 (SC).

See also King Prawns Ltd vs. ITO (ITAT Mumbai) where it was held, distinguishing Solid Containers Ltd 308 ITR 417 (Bom), that the reduction of the liability on account of term loan and other loans payable to the bank under a one time settlement scheme was not taxable as income u/s 28(i), 28(iv) and 41(1)

Leave a Reply

Your email address will not be published. Required fields are marked *