Write - off of Unsecured Loan

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This query is : Resolved

CA Sanjay Baheti (Querist)

22 January 2011 A resident individual assessee carrying on profession and whose books of account are subject to tax audit took a friendly unsecured interest free loan of Rs.20 lacs in Fin. Yr.2005-2006 from a partnership firm for part financing purchase of a residential house. The assessee is not connected in any way with the firm. No repayment of the loan is made till date and the house is also sold in Fin. Yr. 2009-2010. Now the assessee wishes to write off the said loan in his books by crediting his capital account. Please advice on - 1)Whether the write off will be a revenue receipt or capital receipt under the Income Tax Act,1961 ? Please also provide case laws. 2) Whether the write off will be teated as money received without consideration and taxed as income us.56(2)(vii) of the Income Tax Act,1961?

Guest

Guest (Expert)

22 January 2011 Amount so written off will not be taxable income u/s 41 and 56(2)(vii)

Ratan Sharma

Ratan Sharma (Expert)

22 January 2011 It is difficult to say anything concretly . However in my opinion the same amount will be chargeable to tax as business income. Because
1. the assessee has incorporated the loan account in his regular books of accounts.
2. it means it is a business liability as per the balancesheet.
3. writing off liability from books of accounts & crediting to the capital account will amount to business income.
Therefore in my opinion it will be chargeable to tax. Experts plz advise if there is any divergent views. It certainly will not be covered u/s. 56.

Ratan Sharma

Ratan Sharma (Expert)

22 January 2011 Experts plz give your opinions.

Guest

Guest (Expert)

24 January 2011 No, it can not be treated as business income in the year of written off but in my opinion, such deposit should not be written off till 31.03.2013.

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