Waiver of principal amount of loan from private bank cannot be treated as income – ITAT
In a recent judgment, ITAT Chandigarh has held that the waiver of the principal amount of loan from private bank cannot be treated as income under Sections 2(24)(xviii), 28(iv) and 41(1) of the Income Tax Act, 1961 for assessment year prior to AY 2024-25
ABCAUS Case Law Citation:
ABCAUS 4110 (2024) (06) ITAT
In the instant case, the assessee had challenged the order passed by the CIT(A) NFAC in confirming the disallowance on account of principal amount of loan waived under the one time settlement (OTS).
the appellant assessee had borrowed funds from a Private Sector Bank. During the year, the assessee got a One Time Settlement (OTS) with the Bank, where under, the Bank waived off the principal amount of the loan.
According to the assessee, the said loan of the bank was a capital liability and it was never claimed as an expenditure. However, the AO added the principal amount of the loan waived, observing that the capital receipt on account of loan account waived off needed to be adjusted into fixed cost of assets for which the said loan was used.
The AO further observed that loan waiver was treated as capital receipt and no effect was provided on cost of tangible or intangible assets as evident from schedules on Depreciation.
The assessee relied upon the judgment of the Hon’ble Apex Court which held that waiver of principal amount of loan could not be added as cessation of liability under section 41(1) and under Section 28(iv) of the Income Tax Act, 1961 (the Act). The AO, recorded in his order that the case law relied upon by the assessee was found distinguishable and that as per section 2(24)(xviii) waiver by a body or agency is included in income.
Therefore, loan waiver was disallowed and added to total income of the assessee.
The CIT(A) held that the addition for principal amount of loan waiver was within the ambit of taxation under section 2(24)(xviii) of the Act. He observed that the said section was bought in on the Statue Book in the year waiver/concession event had occurred. The CIT(A) relied upon the judgment of ITAT Pune which according to him lucidly explained the concept.
The CIT(A) further mentioned that the logic behind Section 2(24)(xviii) was simple and clear that if the assessee had received any subsidy or grant or waiver or concession or
reimbursement etc. in respect of an asset, which was otherwise a capital receipt and further the same could not be reduced from the actual cost of the asset or the w.d.v., then it should be subjected to tax as an income of such year.
The CIT(A) further observed that bank was being run through taxpayer funded monies; that all nationalised banks were considered as ‘State’ under Article 12 of the Constitution of India for the purpose of entertaining of proceedings under Article 226 of
the Constitution and for enforcement of fundamental rights under the Constitution. Thus, the said bank was included in the definition within Section 2(24)(xviii).
The Tribunal observed that the observation made by the CIT(A) that as per Section 2(24)(xviii) if the assessee has received any subsidy or grant or waiver or concession or reimbursement, etc., in respect of any asset which is otherwise a capital receipt and further, the same cannot be reduced from the actual cost of the asset or the WDV, then it should be subject to tax as an income of such year, is not in consonance with the provisions of Section 2(24)(xviii) which provides “Assistance in the form of subsidy or grant or cash incentive or duty draw back or waiver or concession or reimbursement
(by whatever name called) by the Central Government or a State Government or any authority or Body or Agency in cash or kind to the assessee”.
The Tribunal in the light of the above provisions observed that the lender bank, undeniably, was a private Bank, not either Central Government, or a State Government, or any authority, or any Body, or any Agency. Therefore, as rightly contended by the assessee, under the provisions of Section 2(24)(xviii) of the Act, waiver of loan cannot be added.
The Tribunal opined that in view of the judgment of the Hon’ble Supreme Court, the waiver of the principal amount of a loan from a private bank cannot be taxed as income. However, post the said judgment, Section 28 had been amended to bring to tax such a waiver of loan. However, such amendment is prospective, to be effective from assessment year 2024-25. It is, therefore, not applicable retrospectively.
Accordingly, the Tribunal held that the waiver of the principal amount of loan cannot be treated as income under Sections 2(24)(xviii), 28(iv) and 41(1) of the Act.
In result, the ground raised by the assessee was allowed.
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