29 May, 2018
The taxability of a loan or advance waived/written off has been a subject of discussions before various courts and there have been contradictory judgments.[1] This issue has recently obtained more importance for the companies who are undergoing the resolution process under the Insolvency and Bankruptcy Code, 2016 (“IBC”). The resolution plans passed under the IBC would generally result in partial waiver of loans by the lenders. The question therefore has been whether such loan waiver results in taxable income under the Income Tax Act, 1961 (“IT Act”) in the hands of the company under the IBC. For a successful implementation of the IBC resolution, it is indeed critical to have clarity on this issue.
The Hon’ble Supreme Court (“SC”), in the recent decision of CIT v. Mahindra and Mahindra Limited[2] has brought some clarity in this regard. In the instant case, the taxpayer had obtained a loan from a company to purchase certain dies and equipment’s for the purposes of manufacturing cars. Subsequently, the borrower waived off the principal amount of the loan and the taxpayer did not offer the waived off amount to tax in its returns. The tax authorities sought to tax the loans waived off, as income from business and profession under section 28(iv) of the IT Act. This section seeks to tax as business income, value of perquisite or benefit (whether convertible into monies or not), arising from the business. Alternatively, the tax authorities sought to bring this loan waiver as taxable income under section 41(1) of the IT Act.
This section seeks to tax a benefit that the tax payer receives by way of the waiver of a liability in respect of which the taxpayer has claimed any deduction in any previous year. The deduction could be in the form of a loss, expenditure or a trading liability. Such benefit would be taxed as business income.
The SC observed that on the bare perusal of section 28(iv) of the IT Act it was evident that such provision was only applicable in case any benefit was received in a form other than cash.[3] However, since in the instant case the tax payer had actually received the loan in cash, which was waived, this section could not be invoked. Similarly, the SC held that the sine qua non for invoking section 41 of the IT Act is that there should have been an allowance or deduction claimed by the taxpayer in respect of the loan which was waived. However, the taxpayer in the instant case had not claimed any deduction on account of interest paid on such loans, therefore the receipts accruing to the taxpayer on account of waiver of loan could not be taxed, being a benefit realised for a deduction claimed earlier, under section 41 of the IT Act. Further, the SC also pointed out that section 41 of the IT Act could only apply where there is a cessation of a trading liability not otherwise.
However, in the case at hand the loan was taken to acquire capital assets, therefore the impugned transaction could not have been said to have resulted in a trading liability. Thus, the SC held that the benefit on account of waiver of the principal amount of the loan could not be subjected to tax under the IT Act. It may be noted that the High Courts (“HC”) dealing with similar facts in the case of Iskraemeco Regent Limited v. CIT (2011)196, 103 (Madras HC) and Logitronics Private Limited v. CIT 333 ITR 54 had rendered judgement on similar lines.
Based on the above referred judicial precedents, it appears that if the loan was obtained and utilised for acquiring a capital asset, and no deduction was claimed in respect of such a loan in prior years then, the waiver of such a loan should be regarded as a capital receipt and not be subject to tax in the hands of the taxpayer under the current provisions of the IT Act.
This discussion also needs to take note of a different view taken by the Madras HC in case of CIT v. Ramaniyam Homes (P) Ltd, (2016) 384 ITR 530 (Madras HC). In that case, the HC had held that irrespective of the purpose of the loan, all loan waivers would be regarded as a benefit under section 28(iv) of the IT Act and hence taxable in the hands of the company.
The HC explained that section 28(iv) of the IT Act would be applicable in case of waiver of loan as the same would qualify as a ‘value of any benefit’ and had disagreed with the decision of its coordinate bench in the case of Iskraemeco Regent Limited (supra), where the court had held that section 28(iv) of the IT Act would only be applicable to non-monetary perquisites.
Further, the HC elucidated that the accounting practice does not create any distinction between loans taken for different purpose and irrespective of whether the loan is taken for acquiring a capital asset or business purpose, the interest expenditure is allowed as deduction. Based on this logic, the HC concluded that section 28(iv) of the IT Act would be applicable to all waivers of loans, irrespective of the purpose of the loan. It may be noted that similar decision was also rendered in the case of Solid Containers Ltd. v. DCIT (2009)308 ITR 417(Bombay HC). However, since the honourable SC in the recent decision of Mahindra(supra) has specifically dealt with both aspects and ruled on them individually, this decision of the SC would now provide the settled position of law on this issue.
As the decision of the SC may only be relevant in cases of remission of loans taken for acquiring capital goods, if the waiver under the IBC includes waiver of outstanding interest which has been claimed as a deduction in earlier assessment years or waiver of loan obtained for the purpose of business, then such waiver may continue to be subjected to tax in the hands of the borrower as ruled by the Madras HC, discussed above.
The other issue that is relevant in case of the companies under the IBC resolution process is whether the loan waiver, would attract Minimum Alternate Tax (“MAT”) under Section 115JB of the IT Act. This section provides that in the event a company’s tax liability on the taxable income computed as per the provisions of the IT Act is less than 18.5% of its book profits, then such company is liable to pay MAT on the book profits at the rate of 18.5% (plus applicable surcharge and cess). The IT Act further provides that book profits for the purpose of section 115JB means profits as reflected in the statement of profit and loss prepared in accordance with the Companies Act, 2013 (“2013 Act”) having due regard to accounting policies and applicable accounting standards. Thus, in order to determine whether the loan waiver would result in MAT, one would need to determine whether such waiver would form part of the profit and loss statement.
Indian Accounting Standard (“Ind AS”) 109 stipulates that upon waiver of a loan, the difference between the carrying amount of the loan and the consideration actually paid towards such waiver would be routed through profit and loss account.
Therefore, if a financial liability (being a loan) is extinguished without paying any consideration, the entire extinguished liability would be treated as part of income in the profit and loss statement of the debtor, thus attracting MAT provisions.Despite the fact that as per the aforementioned Mahindra (supra) ruling of the SC, waiver of loan is regarded as capital receipt, by virtue of the prescribed accounting treatment under Ind AS 109 and the 2013 Act, the said waiver would form part of book profit and would seem to attract MAT under section 115JB of the IT Act.
In this regard, it may be noted that the legislative intent behind introducing MAT was to address the revenue loss to the Government on account of zero tax companies which did not pay any income tax even though they made profits and declared significant dividends. This was possible by availing benefit of the various deductions and exemptions for computation of taxable income under the IT Act.
Thus, it is arguable that it was never the intention of the legislature to subject a benefit received by a company to MAT when such benefit did not qualify as income under the IT Act. This argument is supported by the judgement of the SC in the case of Indo Rama Synthetics Limited v. CIT (2011) 330 ITR 363. Further, in case of JSW Steel Ltd. v. Asst. CIT (2017) 82, 210 (Mumbai ITAT), the Mumbai Tribunal has held that waiver of loan taken for acquiring capital asset would not be taxed in the hands of the company, both, under the normal provisions of the IT Act as well as while computing the book profit under section 115JB of the IT Act.
It is also relevant to note that the IT Act provided certain reliefs to stressed companies covered under the erstwhile Sick Industrial Companies (Special Provisions) Act, 1985 (“SICA”) (dealing with reorganization and insolvencies of companies).
Companies under SICA were specifically excluded from the purview of MAT levy. It appears that the intention of the legislature has been, not to burden a stressed company with tax levy while it is undergoing reorganisation for survival. No such omnibus specific relief has been provided to the companies undergoing resolution process under the IBC. The Finance Act, 2018 has provided a limited respite from levy of MAT in respect of companies under the IBC resolution process in certain circumstances. This respite is available to the extent of unabsorbed depreciation and losses brought forward. Thus, if the amount of loan waived is greater than these two amounts put together, then such company would still be liable to MAT. It should be possible for companies undergoing resolution process under the IBC to take a position that the waiver or remission of loan pertaining to capital assets, is not chargeable to tax under the IT Act as ruled by the SC and therefore regardless of the accounting treatment, the same should not attract MAT.
A clear position of law in this regard would go a long way in making the IBC process simpler as regards taxation.
This article was first published on Taxsutra.com
[1] CIT v. Ramaniyam Homes (P) Ltd, (2016) 384 ITR 530 (Madras HC); Mahindra and Mahindra Limited v CIT (2003) 128, 394 (Bombay HC); Solid Containers Ltd. v. DCIT 308 ITR 417; Iskraemeco Regent Limited v. CIT (2011)196, 103(Madras HC) and Logitronics Private Limited v. CIT 333 ITR 54
[2] (2018) 3, 32 (SC)
[3] Reliance in this regard was placed on the case of CIT v Alchemic P.
For further information, please contact:
Daksha Baxi, Executive Director – Tax, Cyril Amarchand Mangaldas
daksha.baxi@cyrilshroff.com
Kunal Savani, Director – Tax & Private Client Practice, Cyril Amarchand Mangaldas
kunal.savani@cyrilshroff.com
