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principal amount waived in OTS by bank

Started by JB, January 07, 2011, 06:38:03 PM

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Learned friends

The Bombay HC in case of Mahindra & Mahindra (261 ITR ) held that principal amount waived by bank in respect of term loan for asset purpose is neither taxable u/s 28(iv) nor 41(1). However, in later judgment the Bombay HC in case of Solid Containers (308 ITR ) held that waiver of loan obtaind for trding liability is taxable u/s 28(iv). The HC distinguished earlier judgment of Mahindra & Mahindra and relied on T.V. sundaram Iyengar (222 ITR ). It means waiver in respect of working capital finance from bank which are generally obtained for trading purpose acn be taxed u/s 28(iv). The situation appears to be undesirable. Kindly give your view in the matter.


The facts were different in solid containers. In case of Toshobia , the Apex court has dismissed the SLP of department against the Delhi High judgement on the same issue.Even some ITAT,s have also distinguished the judgement of solid containers. But still litgation can be there till Apex court comes with the direct answer.


Thank you for your prompt response. The main ground for holding the waiver of loan as taxable u/s 28(iv) in the solid container's case was that the loan was obtained for trading purpose. Normally, the working capital finance are obtained for trading purpose on the security of stock and book debts. The Tribunals have distinguished Solid Container case mainly on the ground that in the cases before tribunal, the loan waived was for capital purpose. However, i also feel that this controversy will remain till the judgment of other High Court comes or Apex Court decides the issue. Till that time, litigation will be there.


It is alos relevant ot  consider the decision of delhi high court in the case of  Goyal M G gases private Limited 312 ITR  437 and then we have to see whether the  provisions of section 4191)  for waivr of loan  is governed by the utiliation of such loan/ purposes of obtaining such loan?


as per my littile knowledge, section 41(1) can not apply to such a situation as no deduction of the amount of loan waived is claimed or allowed in the computation of toal income. The Delhi HC in case of Goyal  M G Gases Lrd. has also considered the same. There are other judgments also in this regard. One which is often being referred to is Gujarat HC in case of Chetan Chemicals (267 ITR 770). In fact, in that judgment Gujarat HC has held that such waiver cannot be taxed even u/s 28(iv).


Read the latest judgement of Madras High court on the issue .ISKRAEMECO REGENT LTD v/s CIT.49 DTR 185(mad)(2011). Further in Direct tax code waiver of principal amount has been specifically brought under definition of income. This can be argued that as there was no such provision in the income tax act , for this reason only such provisions has been brought in the code.