What happens when a businessman gets a loan waiver or opts for One time settlement, does that become taxable income? Depreciation claimed on capital asset purchased from loan becomes taxable income? Decoding case study of Mahindra & Mahindra v/s CIT(2018) and answer all such questions as framed above

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Treatment of One time
settlement (OTS) by Bank
or Loan waiver under
Income Tax by Shalini
Somani
Highlight: Case study of CIT Vs.
Mahindra & Mahindra (2018)
404 ITR 0001 (SC)
Waiver of Term Loan waiver wherein loan is
taken for:
 Capital Asset
 Non Business Purpose
 Trading or regular business purpose

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FC 150 FC 170 Agreement with
KJF Kaiser
Jeep
Corporation
The Expansion Deal - 18.06.1964

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$6,50,000
10 yrs Inst
CIF(Cost,
Insurance
& freight)
6% Interest
American Motor Corporation (AMC)
Takeover
Principal Waiver
Subsidiary KJIC Kaiser Jeep
International Corporation - dies,
welding equipments and die
models
Facts of the case
RBI Approval

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taxpayer
filed its
return of
income and
showed
cessation
of
liability
01
ITO &
CIT(Appeal
s) in
favor of
revenue
03
57,74,064
/-
taxable
under
Section
28
02
Tribunal,
High Court
and Supreme
Court in
favor of
Assessee
04
The purchase of tooling was not a
transaction for purchase of goods on
credit in the ordinary course of
business and it could neither be
equated with unpaid purchase
consideration to be liquidated over a
period of time.
Taxpayer view
Case law

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Whether waiver of loan would
be taxable under section
28(iv) or 41(1) of the Act?
Issue
under
Considerat
ion

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Ruling of the
Supreme Court section 28(iv) is N/A in the present case, as the
amount waived is receipt in the nature of cash/
money
Section 41(1) is also N/A n this case as waiver of loan
does not amount to cessation of trading liability
Conclusion
Benefit to be in
form rather than
in the shape of
money
no deduction was
claimed under
section 36(1)(iii)
of the Act.
Capital Asset
purchase amount
had not been
debited to P&L
A/c
Section 41(1)
specifically talks
of cessation of
trading liability

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Whether any
other
provision
applicable?Section 56(2)(x) was recently introduced in the Act, which is
applicable if the amount is received “without consideration”. In
case of bank loan, the amount is taken by the borrower against a
consideration of “Interest” & “Promise to repay”. Further, the
settlement is also against a “consideration” of paying certain fixed
amount to the bank & compliance with the terms and condition
of OTS.

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w w w . y o u r c o mp a ny . co
m
Solid
Containers
Ltd Vs.
DCIT (2009
) 308 ITR
0417
(Bombay
HC)
Waiver of
working
Capital
Limit: Not
Taxable
Chandigarh bench of ITAT in the case
of Jai Pal Gaba (Prop: M/s Mack
Hosiery) Vs.ITO [ITA No.
244/CHD/2018, (2019) 178 ITD 0357)
CIT vs. T.V.
Sundaram
Iyengar & Sons
Ltd: (1996)
222 ITR 344
(SC)
section 28 (iv) of the Act is
applicable as the same is in
the nature of Revenue receipt
Receipt as being of capital
character, the amount
changes its character when
the amount becomes the
assessee’s own money
because of limitation or by
any other statutory or
contractual right
Waive
r of
worki
ng
Capit
al
Limit
:
Taxab
le

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NPA Bifurcation of Rs.
5,74,05,687/-
Rs.
1,93,64,
729Accumulated interest for the
period of NPA i.e. from
1.4.2003 to 31.12.2006
Rs.
1,47,857legal expenditure and
valuation charges
Rs.
1,40,00,
000One time settlement
programme
Rs.
4,34,05,
687
total waiver including interest along
with legal valuation & principal
Loan of Rs. 3,78,93,001/-, split into term loan of Rs. 84,83,001/- and cash credit limit of Rs.
2,94,10,000/- as on 31.12.2006

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A
B
C
D
Except in money lending
business, such waiver of loan
cannot be treated as income
arising from business U/s 28(iv).
The one-time settlement was
not done as part of the business
activity of the assessee, rather,
the transaction of the loan and
waiver was a separate
transaction. So 41(1) N/A
Above observations are made
in the peculiar facts and
circumstances of this case and
cannot be simply applied in
each and every type of waiver
of the loan amount.
The loan was advanced by the
banker for a consideration of
interest. Hence the amount
waived cannot betaxable u/s 56.
ITAT, Chandigarh categorical observation

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Interview with
Cogencies
Shaktikanta Das
Present Governor
of RBI
RBI on May 22, 2020
announced an
extension of the
previously announced
three-month term
loan EMI moratorium
by another 3 months
to August 31, 2020
making it total 6
month of relief.
Additional provisions
of 5% each for
quarter ending March
and June has been
mandated.
We not only announced
the standstill on NPA
recognition, we also
mandated the banks to
maintain 10 per cent
additional provisions

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w w w . y o u r c o mp a ny . co
m
Thank You
For attention