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.

 

AI Summary

Tax Implications of Loan Waiver: Working Capital Loans Taxable, Asset Loans Not. Refund Too Late. An individual sought clarification on the tax implications of a loan waiver. In 2005, they received a loan for their ancillary unit operations, which was partially waived by the lender due to long service. Their accountant advised treating the waived amount as indirect income, resulting in a tax payment. The individual later read that non-trading loan waivers might not be taxable and questioned if a refund was possible. A chartered accountant responded that it was too late for corrective action and clarified that loans for working capital are taxable, while those for acquiring assets are not.