Waiver of unsecured loan is a capital receipt non chargeable to tax

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High Court of Karnataka

CIT Vs. M/S Compaq Electric Ltd.,

ITA No. 172 Of 2011,

Date Of Order : 18/10/2011

Honorable High Court held that waiver of unsecured loan is a capital receipt non chargeable to tax u/s 41(1) of the Act since there is no prior deduction/allowance of the same to assessee. The condition precedent is that there should be an allowance or deduction in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee. then, subsequently, during any previous year, if the creditor remits or waives any such liability, then the assessee is liable to pay tax under section 41. The whole object is to avoid double benefit to the assessee. In the instant case, the amount claimed as capital receipt is in respect to which there was no allowance or deduction claimed by the assessee for the previous year. therefore when his creditor has waived the repayment of the said amount, it amounts to a capital recipt and not a revenue receipt as the assessee did not have the benefit of any allowance or deduction in respect of the said amount section 41 is not attracted.