Delhi High Court: Waiver of loan, used for acquiring capital asset not to be treated as income

CIT v. Jubilant Securities Pvt. Ltd., decided on 18^th February, 2011

ITA No.503 of 2010

Assessment Year: 2004-05

Question/s before the Hon’ble Tribunal:

Whether learned ITAT erred in deleting the addition of Rs. 25 lacs made by the Assessing Officer on account of Unsecured Loan Written Back is applicable to waiver of loan?"

Relevant facts: The AO found that the assessee had credited a sum of `25,00,000/- in Profit and Loss Account on account of remission of liability with respect of certain unsecured loans appearing in its financial results. This amount represented loan taken from one M/s. Sail Holdings Pvt. Ltd. more than ten years ago. Since there was no communication from the party and no claim was made for so many years the loan was written back. It was treated as capital receipt and was reduced from taxable income in the computation of assessable income for the assessment year in question. The AO was of the view that the assessee had treated such write off (Loan Written Back) as receipt of a capital nature without explaining as to how and in what manner such cash credited were transferred to the Profit and Loss Account.

Dismissing the appeal of the department, the Hon’ble Court held that:

Para 23: “In the context of waiver of loan amount, what follows from the reading of the aforesaid judgment is that the answer would depend upon the purpose for which the said loan was taken. If the loan was taken for acquiring the capital asset, waiver thereof would not amount to any income exigible to tax. On the other hand, if this loan was for trading purpose and was treated as such from the very beginning in the books of account, as per Sundaram Iyengar (T.V.) and Songs Ltd. (supra), the waiver thereof may result in the income, more so when it was transferred to Profit and Loss account.”

The decision is available here.