February 2019

TAXABILITY OF LOAN WAIVER POST SC DECISION IN CASE OF MAHINDRA & MAHINDRA

Pinakin Desai | Ravikant Kamath | Sambhav Mama
Chartered Accountants

Introduction 

The decision of the Supreme Court (SC) in the case of Commissioner vs. Mahindra & Mahindra Ltd.1  (Mahindra’s case) is a landmark ruling in the context of tax treatment of loan waiver benefit obtained by a tax payer. The SC held that such waiver is neither taxable as business perquisite u/s. 28(iv)2  of the Income-tax Act 1961 (ITA), nor taxable as remission of trading liability u/s. 41(1)3 of the ITA.

 

The SC delivered the judgement after hearing a batch of connected appeals with the lead case being that of Mahindra. In most cases before the SC, the loan was utilised by the assessee for acquiring capital assets (including in Mahindra’s case). But, there were also cases where the loan was utilised by the assessee for working capital purposes. The SC has delivered the judgment by analysing the fact pattern of Mahindra’s case as the lead case.

 

To understand the controversy in greater detail, it is worthwhile to revisit the history of judicial development on this aspect.

 

OLD ENGLISH RULING ON NON - TAXABILITY OF REMISSION OF LIABILITY


As far back as 1932, the House of Lords in the British Mexican Petroleum Company Limited vs. The Commissioners of Inland Revenue4 (British case) dealt with a case where the tax payer used to purchase raw material from a supplier who was also the promoter of the company. At a later date, there was remission or waiver of indebtedness (including indebtedness which arose due to supplies effected during the year of remission). The release from liability was not regarded as a ‘trading receipt’. The Court held “how on earth the forgiveness in that year of a past indebtedness can add to those profits, I cannot understand”.

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