Remission of liability on capital account

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vittakaushik (Querist)

21 January 2013 A company has written back liabilities in the current year relating to purchase of fixed assets(Capital creditors) made in the financial year 2008.

The company has taken no due certificate from the capital creditors and treated the liability as other income by crediting p and l account.

My question is does the company need to pay tax on the remission of liability on capital account as per the income tax act.Sec 41 refers only to remission of trading liability.

In my opinion the company need not pay tax on the remission of capital liability.The amount is very material.it is 4 crores
Please advice me asap.

SANJAY TALATI

SANJAY TALATI (Expert)

30 January 2013
The taxability or otherwise of the remission of the liability on the capital account is to be decided keeping in view the provisions of sec. 2(24) ( Definition of Income), sec. 28(iv), Sec. 41(1), Sec. 56(2) (vii) and Sec. 59 of the Income Tax Act, 1961.

The waiver of the liability by the creditors on account of the capital asset is not covered under any of the clauses of Sec. 2(24) defining the Income.

Sec. 28(iv) : the value of any benefit or perquisite , whether convertible into money or not , arising from the business or exercise of a profession. Waiver of a loan taken by assessee for business activity is assessable as business Income (Logitronics P Ltd. V CIT(2011). However, your case does not fall in this category as the waiver is on account of capital expenditure and hence not taxable under sec. 28(iv).

Sec. 41(1) (a) and 41(1)(b) : Where an allowance or deduction has been made in the assessment for any yer in respect of (I) loss (ii) expenditure. Or (iii) trading liability incurred by the assessee and subsequently during any previous year, he (the same assessee or by the successor in business) has obtained whether in cash or in any other manner

(I) any amount in respect of such loss or expenditure; or
(II) some benefit in respect of trading liability by way of remission or cessation thereof, then the amount obtained or liability extinguished shall be deemed to be profit and gains of business and accordingly chargeable to tax. The section refers to the revenue expenditure or the remission of the trading liability and hence the remission of the liability on account of the capital expenditure is not attracted by sec. 41(1).

Sec. 56(2)(vii) :any sum of money, the aggregate value of which exceeds Rs. 50,000/- is received without consideration or property (whether movable or immovable) is received without consideration or movable property is received for an inadequate consideration by an individual or HUF on or after 01.10.2009, if the amount of gift or inadequate consideration exceeds Rs. 50000/-. The section is attracted as in your case the entity is not an Individual or HUF.

Sec. 59 :Where, an allowance or deduction has been made in the assessment for any year under the head “Income from other sources”, in respect of loss, expenditure or trading liability incurred by the assesee and subsequently during any previous year he has obtained, whether in cash or in any other manner , any amount or a remission of any such liability, such amount or the value of the benefit shall be deemed to be income under the head “ Income from other sources”.

Your case also does not attract Sec. 59 provisions and accordingly not taxable.

Further to add that as the amount is very big, certainly the Assessing officer will treat the remission amount as taxable and you have to fight upto the Tribunal level.

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