Waiver of Loan Interest Loss Tax and Accounting Effect
Many times we heard about waiver of loan by banks and other
financial institution due to various reason like business slow down, cash flow
issue or loan NPA. At this situation many times bank provide OTS facility
popularly known as one time settlement scheme or any other acceptable
restructuring model. In both the cases either OTS or Restructuring of Loan
there is waiver of certain portion of loan as well as certain portion of
interest. This loan may be taken for working capital or fixed asset purpose and
over the year a certain amount may have been paid on account of interest
expense. This waiver results in waiver of interest liability and loan liability
and as well as waiver of interest already charged into profit and loss account.
This waiver brings lot of technicalities in tax & accounting matter.
To discuss this by notional figure I am dissecting the Difference
as a waiver of Loan and OTS amount as per below. Suppose out of 200 Crore Loan
outstanding including unpaid interest ( 100 Crore WC Loan and Interest thereon
and 100 Crore Loan and Interest thereon ) there is waiver of 100 Crore amount
in following manner.
Total Waiver-
1- On
account of Principal Amount of TL- 50 CR
2- On
Account of Principal Amount of WC Loan-20 CR
3- On
Account of TL Interest Capitalized- 5 CR
4- On
Account of TL Interest Expense out- 15 CR
5- On
Account of WC Loan Interest Expense out- 10 CR
6- B/F
Loss Adjustment and C/F issue
1- Waiver
of Loan of Principal Amount of TL- 50 CR
When the loan was taken it was
capital receipt and utilized for buying of assets means out of total assets , 50
CR Assets representations made by the Loan receipt and since it was not debited
in to PL Account and added in to Asset Side of balance sheet, any waiver of
this amount shall be treated as a capital waiver hence capital receipt. Now
here two question shall be arrived
1- Whether
this capital receipt shall be treated as a capital gain. As per me for capital
gain there is two important condition, 1st it should be capital
asset and 2nd it should be transferred in some hand. In this case
this loan waiver was not a capital assets and not creating any right earlier or
at the time of OTS in balance sheet as a
receivable. It was reduction in liability and reduction in liability is not any
type of right but it is giving relief from lender. There is distinction between
relief and right and I think this relief does not come under the definition of
Right as a Capital Assets similarly there is no transfer of any assets/rights
hence no capital gain.
2-
2nd question will be if this receipt is capital
receipt then it will go to capital reserve hence amount will not be taxable in
plain reading. But I have little concern here because The loan at the time of
given is being represented by Assets. And based on the loan obligation, Asset
Value was debited on which we have claimed depreciation as business
expenditure. Since Asset was debited by the vendor bill and vendor bill
replaced by loan means depreciation part is based on vendor bill and vendor
bill paid by loan. So whether amount of deprecation to the tune of claimed on
50 CR assets may be treated as a Income or not is a legitimate question. And as
per me and also as per AS 10 any rebate shall not form a part of Assets, so department
may take a view that since this 50 Cr is now waived off representing a set of
assets and you are directly crediting the capital reserve and not reducing the
assets, you have taken double benefit in past years on depreciation on value of
this 50 Crore and in further year also you are claiming deprecation on asset
without reduction of this relief which is actually rebate.
Also we have
to refer any IT Order of disallowance or self disallowance made on account of
Asset Decapitalization or capital advance written off and keep into
consideration because any item can not be disallowed twice. If this disallowance
can be allocated and traced then fine otherwise a logical computation is
required.
2- Waiver
of Loan On Account of Principal Amount of
WC Loan -20 CR
When the loan was taken it was for
paying operating creditor and that operating creditor was credited by debiting
operating expenditure or purchases. Means by this loan ultimately either
purchase or expense has been debited. Since it was taken for paying operating
expenditure so any relief on account this shall be treated as operating
receipt.
Also section 41(1)a of IT Act says
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 subsequently 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.
And as per
reading of this section we find that cessation of this loan shall earlier
representing the credit entry of vendor, which was credited by way of debiting
the expenditure and as per me ultimately this loan liability will be treated as
a trading liability and any waiver of this shall be taxable income and shall be
credited in to PL account.
3- Waiver
On Account of TL Interest Capitalized- 5 CR
1- As
stated above u/s section 41(1) it may not be treated as a Income as it was not
debited as a expenditure in PL Account. But here two issues arrived
a. 1st If
it is not taxable u/s section 41(1) can it be treated as a business income u/s
28 (iv) which says the value of any benefit or
perquisite, whether convertible into money or not, arising from business or the
exercise of a profession. Here arising from the business means arising from
business activity or arising from the exercise of profession and as per me this
5 Cr relief is not on account of business activity as taking loan and getting
relief is not a business activity and it is a exceptional income hence as per
me it should not be treated under activity of business or profession and should
not treat as a part of taxable income.
b- 2nd depreciation, on 5 CR instead of one year
we are allowing expenditure over a lifetime of asset period. So whether amount
of deprecation to the tune of claimed on 5 CR assets may be treated as a Income
or not is a legitimate question. And as per me and also as per AS 10 any rebate
shall not form a part of Assets, so department may take a view that since this
5 Cr is now waived off representing a set of assets capitalized through
interest you have taken double benefit in past years on depreciation on value
of this 5 Crore and in further year also you are claiming deprecation on asset
without reduction of this relief which is actually rebate. Also we have to refer any IT Order of disallowance or self
disallowance made on account of Asset Decapitalization and keep into
consideration because any item can not be disallowed twice. If this disallowance
can be allocated and traced then fine otherwise a logical computation is
required.
2- In Accounting there is some concern about this capitalized
interest, because earlier it was not received as a capital receipt but it was
charged by bank as a business income to them, though it was representing in
Capital Assets from our side, whether it should be added in capital reserve or
credited in PL Account and further in IT return treated as a Capital Receipts.
I am more in to crediting in Capital Reserve account.
4- Waiver
On Account of TL Interest Expense out- 15 CR
When the interest was debited it
was allowed in same year as a expenditure.
Also section 41(1)a of IT Act says
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 subsequently 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.
And as per
reading of this section we find that cessation of this interest liabality will
be treated as a waiver of trading liability and any waiver of this shall be
taxable income and it should be credited in to PL account. However we have to
refer any IT Order of disallowance made on account of Interest and keep into
consideration because any interest can not be disallowed twice. If this disallowance
can be allocated and traced then fine otherwise a logical computation is
required.
5- On
Account of WC Loan Interest Expense out- 10 CR
When the interest was debited it
was allowed in same year as a expenditure.
Also section 41(1)a of IT Act says
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 subsequently 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.
And as per
reading of this section we find that cessation of this interest liability will
be treated as a waiver of trading liability and any waiver of this shall be
taxable income and it should be credited in to PL account. However we have to
refer any IT Order of disallowance or self disallowance made on account of
Interest and keep into consideration because any interest can not be disallowed
twice. If this disallowance can be allocated and traced then fine otherwise a
logical computation is required.
6- B/F
Loss Set Off Adjustment and Balance Loss C/F issue
As per IT Act in current year
Inter Head Loss Can get set off subject to Long term Capital loss and in future
years it can be set off only in same head of income.
Here I don’t think any income
treated on account of this waiver as referred above shall not be treated as a
business income and B/F Loss set off issue can be raised by IT Department.
Because more of the addition was due to u/s 41(1) and on account of relief in
form of waiver received on business expenditure done through the loan taken
hence any reversal of this loss shall also be treated in same head and not in
“Other Sources” Income.
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