Taxability of waiver of working capital loan
This query is : Resolved
27 June 2012
Sir,
1. whether waiver of working capital loan by bank is taxable under income tax act?
if yes then please provide me some material so i cab prove it?
2. what will be the answer if unsecured loan taken by a pvt ltd company from relative of director of company is waived by co.?
1. whether waiver of working capital loan by bank is taxable under income tax act?
if yes then please provide me some material so i cab prove it?
2. what will be the answer if unsecured loan taken by a pvt ltd company from relative of director of company is waived by co.?
08 July 2012
There are 2 parts
1) Capital
2) Revenue
If you have debited Interest in past and if that is waived then it is to be treated as income
If the original loan amount is waived then it is capital receipt and not taxable
1) Capital
2) Revenue
If you have debited Interest in past and if that is waived then it is to be treated as income
If the original loan amount is waived then it is capital receipt and not taxable
09 July 2012
What will be the taxability if it is unsecured loan?
What will be the taxability if it is unsecured loan?
26 July 2025
Here's a detailed explanation on the **taxability of waiver of working capital loan** and waiver of unsecured loan:
---
### 1. **Waiver of Working Capital Loan by Bank**
* **Principal Loan Amount Waiver:**
* Waiver of the **principal loan amount** is generally considered a **capital receipt**.
* Capital receipts are **not taxable as income** under the Income Tax Act.
* Hence, **waiver of principal loan amount by the bank is not taxable**.
* **Waiver of Interest on Loan:**
* If the company has **debited interest expense in earlier years**, and now the bank waives that interest liability,
* This **waiver of interest** is considered as **income** (specifically, **other income** or **income from other sources**) for the company.
* This is because interest expense was allowed as deduction earlier, and now the liability is extinguished, resulting in income.
* **Supporting Case/Legal Principle:**
* The principle is aligned with the concept of **"income arising from remission of liability"**.
* **Interest waiver = income**;
* **Principal waiver = capital receipt, non-taxable.**
---
### 2. **Waiver of Unsecured Loan by Private Ltd Company from Relative of Director**
* When the company takes an unsecured loan from a relative of the director, and **the loan is waived off by the lender**, it is treated as **income in the hands of the company** because:
* The loan was a **liability** on the company books.
* Waiver of this liability leads to a **reduction in liability without repayment**, resulting in **income**.
* **If the company waives off the loan given to it by the relative** (i.e., the relative is forgiving the loan), then:
* The company will have to **recognize the waiver as income** under the head **"Income from Other Sources"** or **"Other Income"**.
* **If the company itself waives loan given to it (which is not common),** it may affect related party transactions and tax implications for the lender (relative), but normally the waiver happens by the lender forgiving the loan.
* **If the company waives off loan given to another party, then** it may be treated as **loss or expense** for the company, but that's a different scenario.
---
### Summary Table
| Scenario | Taxability |
| ---------------------------------------- | --------------------------------------- |
| Waiver of principal working capital loan | Capital receipt — **Not taxable** |
| Waiver of interest on loan | Income from other sources — **Taxable** |
| Waiver of unsecured loan by relative | Income for company — **Taxable** |
---
If you want, I can help you draft a legal note or find relevant case laws and sections to support this position. Would you like me to do that?
---
### 1. **Waiver of Working Capital Loan by Bank**
* **Principal Loan Amount Waiver:**
* Waiver of the **principal loan amount** is generally considered a **capital receipt**.
* Capital receipts are **not taxable as income** under the Income Tax Act.
* Hence, **waiver of principal loan amount by the bank is not taxable**.
* **Waiver of Interest on Loan:**
* If the company has **debited interest expense in earlier years**, and now the bank waives that interest liability,
* This **waiver of interest** is considered as **income** (specifically, **other income** or **income from other sources**) for the company.
* This is because interest expense was allowed as deduction earlier, and now the liability is extinguished, resulting in income.
* **Supporting Case/Legal Principle:**
* The principle is aligned with the concept of **"income arising from remission of liability"**.
* **Interest waiver = income**;
* **Principal waiver = capital receipt, non-taxable.**
---
### 2. **Waiver of Unsecured Loan by Private Ltd Company from Relative of Director**
* When the company takes an unsecured loan from a relative of the director, and **the loan is waived off by the lender**, it is treated as **income in the hands of the company** because:
* The loan was a **liability** on the company books.
* Waiver of this liability leads to a **reduction in liability without repayment**, resulting in **income**.
* **If the company waives off the loan given to it by the relative** (i.e., the relative is forgiving the loan), then:
* The company will have to **recognize the waiver as income** under the head **"Income from Other Sources"** or **"Other Income"**.
* **If the company itself waives loan given to it (which is not common),** it may affect related party transactions and tax implications for the lender (relative), but normally the waiver happens by the lender forgiving the loan.
* **If the company waives off loan given to another party, then** it may be treated as **loss or expense** for the company, but that's a different scenario.
---
### Summary Table
| Scenario | Taxability |
| ---------------------------------------- | --------------------------------------- |
| Waiver of principal working capital loan | Capital receipt — **Not taxable** |
| Waiver of interest on loan | Income from other sources — **Taxable** |
| Waiver of unsecured loan by relative | Income for company — **Taxable** |
---
If you want, I can help you draft a legal note or find relevant case laws and sections to support this position. Would you like me to do that?
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