No reduction in WDV of fixed assets upon waiver of bank loan

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DCIT Vs. Adya Oil & Chemicals Ltd , ITAT Mum­bai

The assessee had borrowed a term loan from IDBI and a working capital loan from State Bank of Hyderabad. Since the assessee was unable to re-pay the loans, both the banks entered into a one-time settlement with the assessee for full and final settlement of the loans and part of the loan amount was waived off. During AY 2006-07, the AO contended that the loans were availed for the purpose of business and, therefore, remission of the loan liability was a benefit by way of extinguishment of liability. The AO therefore held that waiver of the loans constituted income of the assessee by virtue of Sec 28(iv) read with Sec 41(1) of the Act.

Sec 28(iv) deals with ‘the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession’ which is taxable as income from business. Sec 41(1) deals with cases where any allowance or deduction has been obtained on remission or cessation of liability, then the value of such benefit would be deemed to be profits of the business. The AO further contended that the WDV of the asset acquired by way of such loan would be reduced to the extent of the waiver of the loan amount, as the provisions of Explanation (10) to Sec 43(1).

The assessee argued that the loans were obtained from a financial institution and a bank and were repayable with interest as per the terms of the loan arrangement. The loans were not in the nature of subsidy, grant or reimbursement and hence explanation (10) to Sec 43(1) of the Act would not be applicable.

Mumbai Bench of ITAT observed that the term loan from IDBI was borrowed by the assessee for the purpose of acquiring a capital asset. Accordingly, ITAT held that the waiver of loan from IDBI was a capital receipt and not taxable u/s 28(iv) or 41(1). ITAT observed that the remission or reduction of liability, which is created on capital account, cannot to our mind result in a revenue receipt making it taxable u/s 28(iv) or 41(1) of the Act and that the waiver of such term loan does not constitute business and the waiver can not be held as income u/s.28(iv) or cessation of liability u/s 41(1).

Accordingly to ITAT, waiver of loan under one time settlement not to be reduced from WDV of capital assets; Waiver not in the nature of subsidy, grant or reimbursement, hence Explanation 10 to Sec 43(1) not applicable.