Conversion of loan to capital

Before the party transact the above I would like them to consider S.41 of the income tax act

S.41.  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 (hereinafter referred to as the first-mentioned person) and subse-quently during any previous year,—

(a) the first-mentioned person has obtained, whether in cash or in any other manner whatsoever, any amount in 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 such person 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 or profession in respect of which the allowance or deduction has been made is in existence in that year or not

Also Note that if there is waiver of TERM LOAN , like for the purpose of procuring Fixed assets then provisions of S. 41(1) shall not apply but this would be covered u/s 28 [But there are contrary High Court judgements in this regards]

The loan conversion can be done using a simple journal entry. As the gift is to a relative, the same will not be chargeable to tax. And as the loan amount is transferred/gifted to the son, and not waived off, who in turn converts the same as capital, I believe that the provisions of section 41 does not have any implication in this case.