India: Supreme Court rules on the tax implications of loan waivers

International Tax Review is part of Legal Benchmarking Limited, 1-2 Paris Garden, London, SE1 8ND

Copyright © Legal Benchmarking Limited and its affiliated companies 2025

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

India: Supreme Court rules on the tax implications of loan waivers

Sponsored by

logo.png
Mutual agreement procedures are on the up

The issue of whether a waiver of loans results in taxable income for the borrower has been a controversial one in India.

The Supreme Court of India recently addressed this issue and held that a waiver of loan (i.e. the principal amount) does not amount to income in the hands of the borrower (Mahindra and Mahindra Ltd v Commissioner of Income Tax, Civil Appeal No 6949-6950 of 2004 (Supreme Court, April 24 2018).

It was contended by the tax authorities that the waiver of a loan was a benefit or a perquisite arising from the business of the borrower and thus taxable in its hands under section 28 (iv) of the Income-tax Act, 1961 (Act). This argument was rejected by the Supreme Court which held that this provision applied only to benefits and perquisites that were not in the form of cash. Since the loan waiver resulted in a cash receipt in the hands of the borrower, section 28 (iv) could not be applied to tax loan waivers.

It was additionally argued by the tax authorities that the loan waiver was the remission of a liability and therefore taxable under section 41 of the Act. This provision seeks to tax any benefit received by a taxpayer inter alia, by way of remission or cessation of a trading liability, where a deduction has been availed in respect of such liability. In this case, the Supreme Court noted that the borrowings had been used to purchase capital assets, and hence, the waiver was not in respect of a trading liability. As a result, it concluded that the waiver could not be brought to tax under section 41.

This decision will have far reaching implications in several cases, including in cases under the new Insolvency and Bankruptcy Code where loan waivers are sought.

Delhi High Court rejects government's plea to restrain Vodafone from proceeding with international arbitration under the India-UK bilateral investment treaty

The Delhi High Court dismissed the suit filed by the government of India seeking a permanent injunction against the Vodafone group from continuing with the arbitration proceedings initiated under the India-UK bilateral investment treaty (Civil Suit [original side] No. 383 of 2017 [Delhi High Court, May 7 2018]). In its suit, the government had inter alia contended that arbitration initiated under the India-UK treaty was an abuse of process, as the cause of action/reliefs claimed were the same as those in proceedings already initiated under the India-Netherlands investment treaty. The court had earlier granted an ex-parte interim injunction against Vodafone, which now stands vacated (see International Updates – October 2017 Issue – International Tax Review).

The court held that its inherent power to issue an anti-arbitration injunction could be exercised only in very compelling circumstances where it has been approached in good faith and where no alternative remedy was available. It also rejected Vodafone's argument that national courts do not have any jurisdiction in disputes under investment treaties. However, on the present facts, it dismissed the government's suit, but allowed it to approach the arbitral tribunal constituted under the India-UK bilateral investment treaty with its concerns regarding a potential abuse of process by Vodafone.

Dharawat

Gangadharan

Rakesh

Dharawat

Hariharan

Gangadharan

Rakesh Dharawat (rakesh.dharawat@dhruvaadvisors.com) and Hariharan Gangadharan (hariharan.gangadharan@dhruvaadvisors.com)

Dhruva Advisors

Tel: +91 22 6108 1000

Website: www.dhruvaadvisors.com

more across site & shared bottom lb ros

More from across our site

The US president has raised India’s tariff rate to 50% due to its importation of Russian oil; in other news, firms made key international tax partner hires
Tax auditors themselves had not been aware of the new TP ‘transaction matrix’ requirements, ITR hears as five German partners share their client experiences
Its features include a built-in AI assistant as well as expert insights and commentary from Deloitte specialists
AI is rapidly finding its way into tax advisory services. But how can AI be deployed responsibly, reliably, and in compliance with legal standards?
Specified taxpayers will have to apply a 19% VAT rate on services offered by third parties through their platforms; in other news, Donald Trump imposed 30% South African tariffs
A ‘quiet revolution’ in HMRC’s compliance strategy has caused Adam Craggs to rethink how to advise clients, he tells ITR
If the Reform leader becomes UK prime minister then he may follow the direction of the US in at least one significant way
Trump declared a new national emergency in issuing the order; in other news, Grant Thornton Germany is up for sale and the subject of interest from both its UK and US counterparts
The judgment, which saw Denmark's Supreme Court rely on OECD TP guidance, sets aside more than 15 years of consistent administrative practice, experts have told ITR
Belgium’s new coalition government has gone ahead with a new exit tax regime that could land it in the courts
Gift this article