Income Tax on Waiver of Loan

[Neeloy Kumar Bakshi]

Dear Sir / Madam,

In January 2005, I was running an Ancillary Unit performing tube cutting and semi processing operations on behalf of M/S Gabriel India Ltd. I had asked for a loan and the same was disbursed to me on 28/1/2005, at a 4% per annum monthly reducing balance, recoverable in 120 monthly installments [10 years].

The Mulund plant of Gabriel India Ltd declared a lockout and since we were an ancillary unit supplying cut tubes, we also closed the unit. Gabriel India Ltd. had recovered a principle amount of Rs. 1,91,659 out Rs. 10 lakhs [loan]. The balance loan of Rs. 8,08,341 was waived off by the Chairman in view of my Father's and my self's long services rendered to the Gabriel Group. This was in May2007.

While filing Income Tax Return for the Assessment year 2008-2009, on the advice of my chartered Accountant, the loan which was waived off was considered in my Indirect Income and a Tax of nearly Rs 1,18,000 was paid by me on the waived loan amount of Rs. 8,08,341.

A few days back, while going through the book 'Tax free Incomes and Investments' by R N Lakhotia, page 176, I came across Tax on 'Waiver of Loans'. He has mentioned that if a normal creditor waives any non trading loan, then the amount of waiver of the loan is not treated as taxable income of the debtor or borrower.

 

Q. Can you please clarify the meaning of non trading loan and also if there exists any possibility of Income Tax Refund in my case and How to go about it? Regard's.

 

[CAGOPALJI AGRAWAL]

It is too late to take corrective action. Of course, if the loan was provided for working capital, it would be taxable and if was provided for taking plant etc, it would not be taxable. You can go through the judgment by clicking the following link:

Rollatainers Ltd. Versus Commissioner of Income-tax (2011 (8) TMI 447 - DELHI HIGH COURT )

AI Summary

Waiver of loan taxability: characterization as working capital or capital loan determines whether waiver is taxable income. Whether a lender's waiver of debt is taxable hinges on the loan's purpose: waivers of loans used for working capital or revenue purposes are generally taxable as income, while waivers of loans used to acquire plant or other capital assets are generally not taxable; corrective action may be time barred and judicial precedent should be consulted.