Mortgage Waiver, OTS Scheme – Tax implications underneath the provisions of the Earnings Tax Act

By CA Nishant Sejpal

Loan waiver - OTS program - Tax implications - Income tax law - TaxscanShare symbol

In the current Covid-19 pandemic era, many companies are unable to repay the loan due to financial crises, so that in certain cases, due to negotiations between the parties, loans from the financial creditor / business creditor are waived or they opt for a one-off loan settlement ( OTS) with the banks / FIs. Loans are typically taken out for the purpose of purchasing fixed assets or to meet a company’s working capital needs. Here in this article, we are going to discuss the tax implications of loan waiver, one-time payments from banks.

Tax implications according to the provisions of the Income Tax Act

The taxation of the loan waiver was discussed and the relevant provisions of the Income Tax Act of 1961 (“Act” for short) within the scope of normal income tax calculation provide as follows:

• Section 28 (iv) of the Act provides, among other things, that the value of any benefit or fringe benefit arising from doing business, whether or not convertible into cash, should be taxed as business income.

The main components that can be derived from the above clause are:

(i) The referee should derived any benefit or claim.

(ii) Which arises from business or professional practice.

(iii) Then this benefit or requirement becomes income under the head business or profession.

(iv) Regardless of whether such benefit or requirement is per convertible into money or not.

• Section 41 (1) of the Act provides, among other things, that if an appraiser has applied for compensation or a deduction in relation to loss, spending or trade liability and subsequently receives an advantage in relation to such trade liability, by decree or their elimination in cash or in any other way, this amount is deemed to be the operating income of the borrower.

The main ingredients that can be derived from the section above are:

(i) Pursuant to Section 41 (1) (a) loss or expense and (b) commercial liability must be considered independently. “Remission or termination thereof” applies to a commercial liability only and does not apply to any loss or expense.

(ii) Section 41 (1) cannot be asserted against the waiver of liability if this was not permitted as a deduction in previous years.

(iii) Also note that paragraph (1) of Section 41 has been replaced by the Finance Act of 1992 to tax the amount or benefit, if any, even in cases where the recipient is a successor in title and is different Person as the person to whom the deduction was previously granted. “

Since waiving a loan gives the borrower a certain benefit, the income tax implications of this are examined below:

Section 28 (iv)

In relation to this section, the question arises whether the words “Value of benefits or fringe benefits“Also cover benefits in cash or in cash, or whether the above words are limited to any benefits or benefits in kind that could be valued. The said matter was brought up by the Hon’ble Supreme Court (SC) in CIT vs. Mahindra and Mahindra Ltd. attached. [2018] 404 ITR 1 (SC), the court categorically ruling that the benefit received must be in non-monetary form in order to invoke the provisions of Section 28 (iv). Since the waiver of a loan is a cash receipt, it does not fall within the scope of Section 28 (iv).

Section 41 (1)

The main controversy regarding the taxation of loan waivers revolves around the provisions of Section 41 (1). As mentioned above, Section 41 (1) is used if a benefit arises from the waiver or termination of commercial liability. The question arises as to whether the loan is a trade liability and whether the waiver is taxable under Section 41 (1)? In this context, it should be noted that, according to general accounting principles, loans are per se a financial and not a commercial liability. However, different courts have taken different views in determining the taxation of loan waivers.

The previous view has been that if the loan has been drawn on to acquire capital assets and is waived, such waiver cannot be treated as the value of any benefit or benefit arising out of doing business or practicing a profession, and therefore § 28 (iv) could not be called. However, if a commercial loan was taken out and this amount was waived, the Assesse could keep this amount in the company and thus become his income. According to the judgment of the Hon’ble Apex Court in Mahindra & Mahindra (supra), however, the distinction between the credit on capital account and the credit on the bank’s trading account is no longer applicable because one was that of the Hon’ble Apex Court in Mahindra & Mahindra (supra) that Section 28 (iv) does not apply in the case of cash benefits. A similar view was taken by Hon’ble Madras High Court of Iskraemeco Regent Ltd., where it was ruled that the loan-type transaction does not apply in relation to Section 28 (iv), which cannot be described as income for the purposes of this of Section 2 (24). Therefore, the question of whether the loan is taken out to purchase fixed assets or to cover working capital requirements no longer arises, since a loan for working capital at a bank is not equated with a liability from a commercial transaction with a seller can be.


Therefore, it can be concluded that Section 28 (iv) only applies in cases of benefits in kind / perks arising for business / professional reasons. The service / requirement should have a value that cannot, however, be converted into money. The waiver of the loan is a cash payment and is therefore excluded from Section 28 (iv). It is irrelevant whether the loan was taken out to purchase fixed assets or to cover operating capital requirements (above). For the application of Section 41, Paragraph 1, the AO must prove that a loss / expense or commercial liability was deductible in an earlier year from which the expert has benefited in cash or in some other way. If the interest amount waived by the bank / FIs has not been claimed as a deduction by the Assesse or has not been approved by the AO, this waiver cannot be taxed according to 41 (1). In addition, the initial expression u / s 41 (1) is “If a deduction or a deduction was made in the assessment for any year …”. “Was made in the assessment” means that it must have been approved by the AO in the assessment. If the expense claim (loan interest) is rejected by the AO for whatever reason, an expense deduction cannot be spoken of in the assessment. Therefore, the same cannot be added to u / s 41 (1).

In addition, the waiver of the amount of the fixed-term loan used by the Assesse under OTS does not fall within the income range under U / s 28 (iv) or U / s 41 (1). Section 28 (iv) is understood to be speaking about the benefit or indulgence received. Such a benefit in kind or ancillary benefit that is not granted in cash would be income within the meaning of Section 2 (24). In other words, any transaction involving cash does not apply to Section 28 (iv). The waiver of the loan is a cash benefit and not a benefit in kind, so Section 28 (iv) does not apply. Since a loan in a previous year is neither a loss nor an expense nor a trade liability that was taken into account in the profit and loss account, Section 41 (1) does not apply.

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