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Querist : Anonymous

Querist : Anonymous (Querist)

15 October 2013 Please advise whether at the time of One time settlement with the lender, the difference between the actual liability and the amount actually paid should be transfer to Profit & Loss account or it should be transferred to capital reserve. In case it is routed through P/L, the tax liability will be huge.

Nikhil Kaushik

Nikhil Kaushik (Expert)

16 October 2013 The difference between actual liability and the settlement amount needs to be tri-furcated into:

1. Interest in respect of which any deduction as been claimed as expense in earlier assessment years

2. Interest in respect of which deduction was not claimed in earlier assessment years

3. The principal amount

tax treatment

Part 1 should be transferred to Profit and Loss

part 2 and 3 should be transferred to capital reserve.

Logic Part 1 is taxable under 41(1).

Part 2 and 3 don't amount to any income or benefit to the assessee. Refer CIT vs. Chetan Chemicals (P) Ltd. [(2004) 267 ITR 770 (Guj)]

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