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

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.


Rakesh Dharawat ( and Hariharan Gangadharan (
Dhruva Advisors
Tel: +91 22 6108 1000

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