Introduction
In this article, we seek to examine tax liability owing to the waiver of a loan. For various other articles on offering a given receipt for taxation or otherwise, you may refer to our other articles covering different situations at https://rdlawchambers.com/research-articles/ .
Waiver of loan can arise for an individual owing to a one-time settlement scheme or for a corporate entity going through different situations e.g. a one-time settlement under any One Time Settlement Scheme, approval of a resolution plan under Insolvency and Bankruptcy Code, 2016 by the NCLT providing for reduction/waiver of any loans in favour of the corporate debtor, scheme of arrangement under Companies Act, 2013 etc.
Effect of waiver in terms of Section 28(iv) prior to amendment through Finance Act, 2023
In terms of Section 28(iv) of the Income Tax Act, 1961 pertaining to profits and gains of business of profession, “the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession”, will be chargeable to income tax under the head “Profits and gains of business or profession”.
Considering the same the Supreme Court of India in the case of Commissioner of Income Tax, Bombay and Ors. Vs. Mahindra and Mahindra Ltd. & Ors held that the amount received owing to the waiver of the loan will be a cash receipt and therefore one of the conditions of section 28(iv) providing that the benefit of perquisite arising from the business shall be in the form other than in the shape of money, remain not satisfied and consequently, such waiver was not taxable in terms of section 28(iv).
Effect of waiver in terms of Section 28(iv) after amendment through Finance Act, 2023
To take care of such a situation and ensure that no income is left out from taxability owing to such phraseology of section 28(iv), the same as amended through the Finance Act, 2023 w.e.f 01.04.2024, and this section now reads as:-
“(iv) the value of any benefit or perquisite arising from business or the exercise of a profession, whether—
(a) convertible into money or not; or
(b) in cash or kind or partly in cash and partly in kind;”
Although it might provide that cash benefit, could be taxable under section 28(iv), it is important to note here that the condition that existed in this section prior to the amendment requiring that benefit must be arising from the business or the exercise of a profession is kept intact in amended section 28(iv) as well, and therefore it will be normally difficult to bring this amount of waiver within the purview of Tax Net under section 28(iv).
In the case of Commissioner of Income Tax vs Chetan Chemicals Pvt. Ltd.[1], the Gujarat High Court held that as the assessee could not be said to be carrying on the business of obtaining loans and waiver of such loan by the creditor/of the company was not a benefit arising from business or excise of a profession.
Therefore, a waiver of loan still cannot be taxable in terms of section 28(iv) until the same can be said to be arising from the business or from carrying out a business or a profession
Taxation of Waiver of Loan under s.41(1) of the Income Tax Act, 1961
While waiver of the loan in the majority of the situations could not be said to be arising in the course of business or profession for it to be taxable under section 28(iv), The same may be taxable under section 41(1) if the loan was taken for the purpose of business or trading activity and was claimed as an expense in assessment, in terms of the decision Bombay High Court in the case of Mahindra & Mahindra v. CITreported at [2003] 26 ITR 501of and thedecision of Income Tax Appellate Tribunal, Delhi in the case of Logitronics Pvt. Ltd., New Delhi vs Department of Income Tax[2].
Applicability of s.28(iv) and s.41(1) of the Income Tax Act, 1961, in cases of loan waiver, arising out of approval of resolution plan under the Insolvency and Bankruptcy Code, 2016
While we deal in this article with loan waiver in general, there may be a little confusion regarding tax liability extinguishment in case of an approved resolution plan and whether that will include a liability arising from loan waiver as well. We therefore seek to address the issue of extinguishment of tax liability under IBC as under.
Past liabilities under the Income Tax Act, 1961 and other statutes for direct/ indirect taxes get extinguished under a resolution plan
In the case of an approval of a resolution plan, the approved plan will likely also provide for extinguishment of the liabilities and different tax statutes including the Income Tax Act and GST as well as the reduction or waiver of the loan facilities granted by any bank or any financial institutions.
The position of law as regards the claims up to the initiation of the corporate insolvency resolution process, including the income tax liability is clear by the decision of the Supreme Court of India in the case of Ghanashyam Mishra and Sons Private Ltd. Vs. Edelweiss Asset Reconstruction Company Ltd.[3]holding that if the plan is approved by the NCLT, claims covered in the resolution plan and treatment of such claims will be governed by the provisions of the approved resolution plan and the same will bind all the parties i.e. corporate debtor, its members, creditors, etc., as well as central government, state government or any other local authorities and no person will be entitled to initiate or continue any proceedings regarding the claim which did not form part of the approved resolution plan.
That having said, aspects that we have addressed in the instant article will not be taken care of by above stated legal position as what we have sought to examine is whether, by virtue of waiver of the loan per se, any tax liability arises under s.28(iv) or s.41(1).
If such tax liability arises on the count of the waiver itself, the same will not be included within the ambit of claims up to initiation of CIRP as coming into subsistence afterwards and upon approval of a resolution plan.
In such cases, the benefits under the Insolvency and Bankruptcy Code, 2016 will not be available as tax liability, if any, will arise on account of the waiver of the loan after the approval of the resolution plan and could not be covered in the resolution plan; no reliefs could be asked regarding such future and potential tax liabilities under a resolution plan.
Conclusion
In case of a waiver of the loan under a one-time settlement scheme or any other mechanism including approval of the resolution plan by NCLT, the same will be governed in light of the analysis of sections 28(iv), and section 41(1).
If there is a haircut in the hands of the corporate debtor on count of loan waiver/loan reduction in terms of the approved loan resolution plan, there may be a tax liability under s.28(iv) or section 41(1) of Income Tax Act, 1961 in line with analysis above in this article and the fact of approved resolution plan will not help the corporate debtor in such case for such tax liability, although it is unlikely that waiver of loan will be considered as arising from carrying out of business and profession in terms of the earlier mentioned provisions.
*The content of this article is intended to provide general information. No reader or user should act or refrain from acting on the basis of the information written above without first seeking legal advice from a qualified law practitioner.