Loan Waiver
This query is : Resolved
17 September 2007
A Financial Institution has waived of the Loan amount of Rs. 60 Lacs along with the Interest of Rs. 20 Lacs of One Loss making Company.
The Interest Amount Waived is Credited to P&L A/c and taxable as Income U/s 41 of IT Act and Also liable to be taxed under MAT.
I would like to know about the Accounting and Tax Treatment of Principal Amount Waived Off.
The Interest Amount Waived is Credited to P&L A/c and taxable as Income U/s 41 of IT Act and Also liable to be taxed under MAT.
I would like to know about the Accounting and Tax Treatment of Principal Amount Waived Off.
Late CA Sampat Jain
(Expert)
17 September 2007
In my opinion the amount of loan is to be written off to P/L account as extra-ordinary item .
Further , the definiton of business income u/s 28 includes"the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession;]" .
The loan was for the purpose of business and in course of carrying on business . Any waiver thereof also arises out of business .Since the benefit of waiver of loan was received in current year , it will be a Business Income of the current year.
Further , the definiton of business income u/s 28 includes"the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession;]" .
The loan was for the purpose of business and in course of carrying on business . Any waiver thereof also arises out of business .Since the benefit of waiver of loan was received in current year , it will be a Business Income of the current year.
18 September 2007
Waiver of principal amount by lenders/creditors can only be credited to Capital Reserve A/c under financial reconstruction.
21 September 2007
In My opinion,
As per section 41(1), if a bank waives loan and interest amount, then waiver of loan does not attract section 41(1) because it is not a trading liability.
Section 41(1) is attracted when there is remission or cessation of trading liability.
Also waiver of interest is not taxable since interest was disallowed u/s 43B.
The waived loan amount shall be credited to the P & L a/c and shall form part of total income but while calculating the taxable income this amount shall not be considered.
In this case, the loan is not a trading liability and therefore section 41(1) is not attracted.
Eg: the P&L account after waiver shall stood as follows :
Dr. side : Expenses : Rs.400000
Cr. Side : Loan W/o : Rs.600000
: Other Incomes : Rs.1100000
N.P. as per P&L account : Rs. 13,00,000
Less : Loan written off : Rs. 6,00,000
Taxable income : Rs. 7,00,000
As per section 41(1), if a bank waives loan and interest amount, then waiver of loan does not attract section 41(1) because it is not a trading liability.
Section 41(1) is attracted when there is remission or cessation of trading liability.
Also waiver of interest is not taxable since interest was disallowed u/s 43B.
The waived loan amount shall be credited to the P & L a/c and shall form part of total income but while calculating the taxable income this amount shall not be considered.
In this case, the loan is not a trading liability and therefore section 41(1) is not attracted.
Eg: the P&L account after waiver shall stood as follows :
Dr. side : Expenses : Rs.400000
Cr. Side : Loan W/o : Rs.600000
: Other Incomes : Rs.1100000
N.P. as per P&L account : Rs. 13,00,000
Less : Loan written off : Rs. 6,00,000
Taxable income : Rs. 7,00,000
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