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July 30, 2022

Waiver of loan amount leads to cessation of liability other than trade liability

by CA Shivam Jaiswal in Income Tax

Waiver of loan amount leads to cessation of liability other than trade liability

Facts and Issues of the case

The assessee company Technichem Organics Pvt. Ltd. is engaged in the business of manufacturing of organic  chemicals. The assessee filed its return of income declaring total income at Rs. Nil.  The case was selected for scrutiny under CASS for the reasons that large amount not credited in Profit & Loss account as per Scheduled-A OI and mismatch in amount paid to related person under Section 40A(2)(b) of the Income Tax Act, 1961 reported in Audit Report and ITR. Notice under Section 143(2) of the Act. In response to the notice, the assessee filed copy of return of income along with statement of income, Balance Sheet, Profit & Loss account, tax audit report . The Assessing Officer made addition at capital receipts amounting to Rs.1,29,78,902/- thereby observing that waiver of principal loan amounting to Rs.1,29,78,902/- which forms income of the assessee.

Observations by the court

The court has heard both the parties and perused all the relevant material available on record. It is pertinent to note that the assessee has used the loan amount for capital assets and this fact was never disputed by the Revenue. The waiver of principal amount of loan which was made by the Bank has been deducted by the assessee from the outstanding loan and credited to reserves & surplus.  

In the present assessee’s case the loan was utilized only for the purpose of obtaining capital assets. Section 28(iv) of the Income Tax Act, 1961 will not be applicable in the present assessee’s case as the receipts are in the nature of cash or money. The waiver of loan amounts to cessation of liability other than trading liability, thus, the said amount cannot  fall under Section 28(iv) will not be applicable.

Therefore, the Assessing Officer as well as the CIT(A) was not right in making the said  addition and confirming the same. Hence, appeal of the assessee is allowed.

Conclusion

The waiver of principal amount of loan by the bank has been deducted by the assessee from the outstanding loan and credited to reserves and surplus. This leads to cessation of liability and is not applicable as addition.

Technichem-Organics-Pvt.-Ltd-Vs-ITO-ITAT-Ahmedabad

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