Non-repayment of unsecured loan in case of company assessees
This query is : Resolved
12 August 2010
Case: A Pvt. Ltd.company has taken an unsecured loan from a party, but even after considrable period of time neither the party is demanding repayment nor the company is willing to repay it.Now the company wants to close the unsecured loan account of the party, in such a case what are the taxation provisions with regard to such loan, whether it will be treated as an income in the hands of company, if so under what section will it be taxable???????? Kindly reply as soon as possible...
Thank you..
Thank you..
13 August 2010
POINT TO BE NOTED:
1)The waiver of loan would not be taxable as business income since the Taxpayer had not earlier claimed deduction in respect of such a loan.
2)Since the original receipt was capital in nature, the waiver does not have the quality of changing the same into a revenue receipt.
Remission of Unsecured Loan
Case for Taxability u/s 41(1) vis-à-vis 28(iv)
Brief facts for issue in discussion are as under-
ABC Pvt. Ltd had taken unsecured loan from various parties. For the first 2 years the company paid interest regularly and thereafter it did not pay any interest on the said unsecured loans. After 4 years the said lenders entered into an agreement with the company and they agreed for receiving 10% of the total loan amount against the full discharge of loan. The company credited the balance amount into capital reserves.
The question now arises about the taxability of the amount credited to the reserves and surplus?
The AO has treated the aforesaid remission of loans as a benefit accruing to the company during the course of its business activity and brought to tax the same by invoking provisions of s. 28(iv) of the Act.
To fully appreciate the issue, following two section are reproduced, which are applicable in the instant case Section 28(iv) and 41(1)
Section 28 (iv) reads as under
"28- Profits and gains of business or profession.
The following income shall be chargeable to income-tax under the head "Profits and gains of business or profession:
i……
ii……..
iii……
iv the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession....”
Section 41(1) reads as under-
"Where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee, and subsequently during any previous year the assessee has obtained, whether in cash or in any other manner whatsoever, any amount is respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtained by him or the value of benefit accruing to him, shall be deemed to be profits and gains of business or profession and accordingly chargeable to income-tax as the income of that previous year, whether the business of profession in respect of which the allowance or deduction has been made is in existence in that year or not."
The discussion for the issue under consideration therefore revolves, around two provisions mentioned above.
As far as interest is concerned, which in case, if debited to profit & loss account, the remission thereof is fully taxable u/s 41(1) as because it has been claimed as deduction in the profit & loss account for arriving at the profit for the year.
But in case of the principal amount, this is not the case. The assessee has never claimed any benefit of the said amount in so far as it never claimed any debit in profit & loss a/c of the said loan amount.
As far as section 28(iv) is concerned, what is taxable is value of any benefit, whether convertible into money or not, arising from business & profession.
Cash benefit/ perquisite is not covered under this section. Only non monetary benefit are covered by this section [CIT v Alchemic Pvt. Ltd. (1981)130 1TR 168 (Guj)]
The decision in the case of CIT vs. Chetan Chemicals (P) Ltd. [(2004) 267 ITR 770 (Guj)], is relevant. Facts in brief are as under-
The assessee is a private limited company. The company maintained its accounts as per mercantile system of accounting. In the course of carrying on its business, the company had obtained unsecured loans from various creditors, and in the light of the financial difficulties faced by the company, the creditors approached the High Court by filing various company petitions. During the course of those proceedings, it transpires that a compromise was reached between the assessee-company and its creditors wherein, as per the terms of the compromise, certain creditors remitted unsecured loans amounting to1,77,052/-. At the same time, interest which had accrued in favour of the creditors amounting to2,96,171/- was also remitted. Such remitted interest was declared by the assessee as income liable to tax under s. 41(1) of the IT Act, while filing its return of income, but the remission of loans amounting to1,77,052/- was not returned as income liable to tax.
While deciding the issue the Hon'ble High Court held as under-
Sec. 28 of the Act deals with profits and gains of business or profession and cl. (iv) thereof says that the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession shall be chargeable as income under the head profits and gains of business or profession. In the facts of the present case, it cannot be said that the assessee-company was carrying on business of obtaining loans and that the remission of such loans by the creditors of the company was a benefit arising from such business.
Further on applicability of section 41 (1) the Hon'ble Gujrat HC have observed as under-
On a reading of the provisions, it is apparent that before the section can be invoked, it is necessary that an allowance or a deduction has been granted during the course of assessment for any year in respect of loss, expenditure or trading liability which is incurred by the assessee, and subsequently during any previous year the assessee obtains, whether in cash or in any other manner, any amount in respect of such trading liability by way of remission or cessation of such liability. In that case, either the amount obtained by the assessee or the value of the benefit accruing to the assessee can be deemed to be the profits and gains of a business or profession and can be brought to tax as income of the previous year in which such amount or benefit is obtained. In the facts of the case on hand, without entering into the aspect as to whether the liability to repay the loans would be a trading liability or not, it is an admitted position that there had been no allowance or deduction in any of the preceding years and hence, there is no question of applying the provision as such.
1)The waiver of loan would not be taxable as business income since the Taxpayer had not earlier claimed deduction in respect of such a loan.
2)Since the original receipt was capital in nature, the waiver does not have the quality of changing the same into a revenue receipt.
Remission of Unsecured Loan
Case for Taxability u/s 41(1) vis-à-vis 28(iv)
Brief facts for issue in discussion are as under-
ABC Pvt. Ltd had taken unsecured loan from various parties. For the first 2 years the company paid interest regularly and thereafter it did not pay any interest on the said unsecured loans. After 4 years the said lenders entered into an agreement with the company and they agreed for receiving 10% of the total loan amount against the full discharge of loan. The company credited the balance amount into capital reserves.
The question now arises about the taxability of the amount credited to the reserves and surplus?
The AO has treated the aforesaid remission of loans as a benefit accruing to the company during the course of its business activity and brought to tax the same by invoking provisions of s. 28(iv) of the Act.
To fully appreciate the issue, following two section are reproduced, which are applicable in the instant case Section 28(iv) and 41(1)
Section 28 (iv) reads as under
"28- Profits and gains of business or profession.
The following income shall be chargeable to income-tax under the head "Profits and gains of business or profession:
i……
ii……..
iii……
iv the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession....”
Section 41(1) reads as under-
"Where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee, and subsequently during any previous year the assessee has obtained, whether in cash or in any other manner whatsoever, any amount is respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtained by him or the value of benefit accruing to him, shall be deemed to be profits and gains of business or profession and accordingly chargeable to income-tax as the income of that previous year, whether the business of profession in respect of which the allowance or deduction has been made is in existence in that year or not."
The discussion for the issue under consideration therefore revolves, around two provisions mentioned above.
As far as interest is concerned, which in case, if debited to profit & loss account, the remission thereof is fully taxable u/s 41(1) as because it has been claimed as deduction in the profit & loss account for arriving at the profit for the year.
But in case of the principal amount, this is not the case. The assessee has never claimed any benefit of the said amount in so far as it never claimed any debit in profit & loss a/c of the said loan amount.
As far as section 28(iv) is concerned, what is taxable is value of any benefit, whether convertible into money or not, arising from business & profession.
Cash benefit/ perquisite is not covered under this section. Only non monetary benefit are covered by this section [CIT v Alchemic Pvt. Ltd. (1981)130 1TR 168 (Guj)]
The decision in the case of CIT vs. Chetan Chemicals (P) Ltd. [(2004) 267 ITR 770 (Guj)], is relevant. Facts in brief are as under-
The assessee is a private limited company. The company maintained its accounts as per mercantile system of accounting. In the course of carrying on its business, the company had obtained unsecured loans from various creditors, and in the light of the financial difficulties faced by the company, the creditors approached the High Court by filing various company petitions. During the course of those proceedings, it transpires that a compromise was reached between the assessee-company and its creditors wherein, as per the terms of the compromise, certain creditors remitted unsecured loans amounting to1,77,052/-. At the same time, interest which had accrued in favour of the creditors amounting to2,96,171/- was also remitted. Such remitted interest was declared by the assessee as income liable to tax under s. 41(1) of the IT Act, while filing its return of income, but the remission of loans amounting to1,77,052/- was not returned as income liable to tax.
While deciding the issue the Hon'ble High Court held as under-
Sec. 28 of the Act deals with profits and gains of business or profession and cl. (iv) thereof says that the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession shall be chargeable as income under the head profits and gains of business or profession. In the facts of the present case, it cannot be said that the assessee-company was carrying on business of obtaining loans and that the remission of such loans by the creditors of the company was a benefit arising from such business.
Further on applicability of section 41 (1) the Hon'ble Gujrat HC have observed as under-
On a reading of the provisions, it is apparent that before the section can be invoked, it is necessary that an allowance or a deduction has been granted during the course of assessment for any year in respect of loss, expenditure or trading liability which is incurred by the assessee, and subsequently during any previous year the assessee obtains, whether in cash or in any other manner, any amount in respect of such trading liability by way of remission or cessation of such liability. In that case, either the amount obtained by the assessee or the value of the benefit accruing to the assessee can be deemed to be the profits and gains of a business or profession and can be brought to tax as income of the previous year in which such amount or benefit is obtained. In the facts of the case on hand, without entering into the aspect as to whether the liability to repay the loans would be a trading liability or not, it is an admitted position that there had been no allowance or deduction in any of the preceding years and hence, there is no question of applying the provision as such.
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