The lender wrote off the principal of a loan I used to buy machinery. Is that taxable?
No. Section 28(iv) reaches only a benefit in a form other than money, and a waiver puts cash in the debtor's hands. Section 41(1) needs an earlier allowance or deduction in respect of a trading liability; here only depreciation on the assets had been claimed, never a deduction for the loan.
Decided by the Supreme Court (Supreme Court (R.K. Agrawal and Abhay Manohar Sapre JJ)) on 2018-04-24, reported as (2018) 404 ITR 1 (SC); [2018] 93 taxmann.com 32 (SC); [2018] 255 Taxman 305 (SC); [2018] 302 CTR 213 (SC); Civil Appeal Nos. 6949-6950 of 2004 and connected appeals. It bears on section 41(1), section 28(iv), section 36(1)(iii) of the Income Tax Act 1961, in Deductions & Disallowances matters.
It answers the addition made when a write-back of a loan appears in the accounts and the AO taxes it under one section or the other without asking which. The two limbs have to be checked separately, and both failed here. The accounting entry showing a cessation of liability did not decide taxability, which is useful where the client has already credited the sum in the books.
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Mahindra & Mahindra decided to extend its jeep range to the FC-150 and FC-170 models and, on 18 June 1964, agreed with Kaiser Jeep Corporation of America for the supply of dies, welding equipment and die models at a CIF price of US$ 650,000. The equipment was supplied through a subsidiary, Kaiser Jeep International Corporation, and Kaiser Jeep separately agreed to lend the purchase price at 6 per cent interest repayable after ten years in instalments; the Reserve Bank and the concerned Ministry approved the loan. American Motor Corporation later took over Kaiser Jeep and agreed to waive the principal and cancel the promissory notes as they matured, which was communicated to the company on 17 February 1976. In its return filed on 30 June 1976 for assessment year 1976-77 the company showed Rs 57,74,064 as cessation of liability. By order dated 3 September 1979 the Income-tax Officer held the credit to be income taxable under section 28. The Commissioner (Appeals) upheld that with modifications on 23 March 1981, the Tribunal decided for the company on 16 August 1982, and the Bombay High Court confirmed the Tribunal's findings on a reference by judgment dated 29 January 2003. The Revenue appealed, arguing that the waiver was taxable under section 28(iv) or, alternatively, under section 41(1). The company's case was that the loan was on capital account: the supply of tooling and the loan were independent transactions, the balance was shown in its balance sheet under 'Loans-unsecured', and interest had been paid on it throughout.
The Court dismissed the Revenue's appeals and declined to interfere with the Bombay High Court's judgment. Section 28(iv) did not apply because the benefit it taxes must take some form other than money, and the receipt here was cash arising from the waiver of a loan (paras 13 and 17). Section 41(1) did not apply because it is a sine qua non of that provision that an allowance or deduction has been made in an earlier assessment in respect of a loss, expenditure or trading liability; the company had never claimed a deduction for the interest under section 36(1)(iii), the deduction it had taken in earlier years was depreciation on the machinery, and the purchase price of plant, machinery and tooling was never debited to the trading or profit and loss account. The waiver was therefore the cessation of a liability other than a trading liability, which section 41(1) does not reach (paras 15 to 17).
The Court began from what a loan is and what waiver does: a creditor or his successor may unilaterally waive repayment, and the effect is that the debtor has extra cash in hand, so there is a receipt (paras 10 and 11). The question was whether that receipt is taxable as a perquisite under section 28(iv) or as a remission under section 41(1). On section 28(iv), the provision taxes the value of a benefit or perquisite arising from business, and on its plain reading the benefit must be in a form other than money; a cash receipt therefore fails the first condition (paras 12 and 13). On section 41(1), the Court identified the purpose of the provision as preventing a double benefit — a deduction in one year and an untaxed remission later — and held that its precondition was absent. The company had paid interest at 6 per cent throughout but had never claimed it under section 36(1)(iii). The Commissioner (Appeals) had reasoned that the company obtained an amortisation benefit, but amortisation is the allocation of the cost of an asset over time and so is depreciation; what had been allowed in earlier years was depreciation on the machine, not any deduction referable to the loan or its interest (para 15). Since the purchase was of plant, machinery and tooling — capital assets — and the price was never taken to the trading or profit and loss account, the liability waived was not a trading liability, and section 41(1) deals specifically with the remission of trading liabilities (para 16).
in order to invoke the provision of Section 28 (iv) of the IT Act, the benefit which is received has to be in some other form rather than in the shape of money.
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Handle my notice → Ask a CA on WhatsAppNo. Section 28(iv) reaches only a benefit in a form other than money, and a waiver puts cash in the debtor's hands. Section 41(1) needs an earlier allowance or deduction in respect of a trading liability; here only depreciation on the assets had been claimed, never a deduction for the loan. This was decided by the Supreme Court (Supreme Court (R.K. Agrawal and Abhay Manohar Sapre JJ)) and bears on section 41(1), section 28(iv), section 36(1)(iii) of the Income Tax Act 1961. It is reported as (2018) 404 ITR 1 (SC); [2018] 93 taxmann.com 32 (SC); [2018] 255 Taxman 305 (SC); [2018] 302 CTR 213 (SC); Civil Appeal Nos. 6949-6950 of 2004 and connected appeals. It answers the addition made when a write-back of a loan appears in the accounts and the AO taxes it under one section or the other without asking which. The two limbs have to be checked separately, and both failed here. The accounting entry showing a cessation of liability did not decide taxability, which is useful where the client has already credited the sum in the books. If it applies to you, the first step is this: Show what the borrowing was used for and produce the fixed asset schedule, because the capital-account character of the loan is what carries the argument.
Mahindra & Mahindra decided to extend its jeep range to the FC-150 and FC-170 models and, on 18 June 1964, agreed with Kaiser Jeep Corporation of America for the supply of dies, welding equipment and die models at a CIF price of US$ 650,000. The equipment was supplied through a subsidiary, Kaiser Jeep International Corporation, and Kaiser Jeep separately agreed to lend the purchase price at 6 per cent interest repayable after ten years in instalments; the Reserve Bank and the concerned Ministry approved the loan. American Motor Corporation later took over Kaiser Jeep and agreed to waive the principal and cancel the promissory notes as they matured, which was communicated to the company on 17 February 1976. In its return filed on 30 June 1976 for assessment year 1976-77 the company showed Rs 57,74,064 as cessation of liability. By order dated 3 September 1979 the Income-tax Officer held the credit to be income taxable under section 28. The Commissioner (Appeals) upheld that with modifications on 23 March 1981, the Tribunal decided for the company on 16 August 1982, and the Bombay High Court confirmed the Tribunal's findings on a reference by judgment dated 29 January 2003. The Revenue appealed, arguing that the waiver was taxable under section 28(iv) or, alternatively, under section 41(1). The company's case was that the loan was on capital account: the supply of tooling and the loan were independent transactions, the balance was shown in its balance sheet under 'Loans-unsecured', and interest had been paid on it throughout. The matter was decided on 2018-04-24 by the Supreme Court (Supreme Court (R.K. Agrawal and Abhay Manohar Sapre JJ)). On those facts the Supreme Court held as follows. The Court dismissed the Revenue's appeals and declined to interfere with the Bombay High Court's judgment. Section 28(iv) did not apply because the benefit it taxes must take some form other than money, and the receipt here was cash arising from the waiver of a loan (paras 13 and 17). Section 41(1) did not apply because it is a sine qua non of that provision that an allowance or deduction has been made in an earlier assessment in respect of a loss, expenditure or trading liability; the company had never claimed a deduction for the interest under section 36(1)(iii), the deduction it had taken in earlier years was depreciation on the machinery, and the purchase price of plant, machinery and tooling was never debited to the trading or profit and loss account. The waiver was therefore the cessation of a liability other than a trading liability, which section 41(1) does not reach (paras 15 to 17).
The Court began from what a loan is and what waiver does: a creditor or his successor may unilaterally waive repayment, and the effect is that the debtor has extra cash in hand, so there is a receipt (paras 10 and 11). The question was whether that receipt is taxable as a perquisite under section 28(iv) or as a remission under section 41(1). On section 28(iv), the provision taxes the value of a benefit or perquisite arising from business, and on its plain reading the benefit must be in a form other than money; a cash receipt therefore fails the first condition (paras 12 and 13). On section 41(1), the Court identified the purpose of the provision as preventing a double benefit — a deduction in one year and an untaxed remission later — and held that its precondition was absent. The company had paid interest at 6 per cent throughout but had never claimed it under section 36(1)(iii). The Commissioner (Appeals) had reasoned that the company obtained an amortisation benefit, but amortisation is the allocation of the cost of an asset over time and so is depreciation; what had been allowed in earlier years was depreciation on the machine, not any deduction referable to the loan or its interest (para 15). Since the purchase was of plant, machinery and tooling — capital assets — and the price was never taken to the trading or profit and loss account, the liability waived was not a trading liability, and section 41(1) deals specifically with the remission of trading liabilities (para 16). In the words reproduced by the source cited on this page: "in order to invoke the provision of Section 28 (iv) of the IT Act, the benefit which is received has to be in some other form rather than in the shape of money." The decision followed or applied Mahindra & Mahindra Ltd. v. CIT [2003] 128 Taxman 394/261 ITR 501 (Bom.) — affirmed; CIT v. Dholgiri Industrial (P.) Ltd. [2014] 48 taxmann.com 279 (MP) — affirmed; CIT v. Gujarat State Fertilizers & Chemicals Ltd. [2013] 36 taxmann.com 557 (Guj.) — affirmed; CIT v. Ramaniyam Homes (P.) Ltd. [2016] 68 taxmann.com 289 (Madras) — reversed.
It was decided by the Supreme Court on 2018-04-24 and is reported as (2018) 404 ITR 1 (SC); [2018] 93 taxmann.com 32 (SC); [2018] 255 Taxman 305 (SC); [2018] 302 CTR 213 (SC); Civil Appeal Nos. 6949-6950 of 2004 and connected appeals. Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 41(1), section 28(iv), section 36(1)(iii), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The Court dismissed the Revenue's appeals and declined to interfere with the Bombay High Court's judgment. Section 28(iv) did not apply because the benefit it taxes must take some form other than money, and the receipt here was cash arising from the waiver of a loan (paras 13 and 17). Section 41(1) did not apply because it is a sine qua non of that provision that an allowance or deduction has been made in an earlier assessment in respect of a loss, expenditure or trading liability; the company had never claimed a deduction for the interest under section 36(1)(iii), the deduction it had taken in earlier years was depreciation on the machinery, and the purchase price of plant, machinery and tooling was never debited to the trading or profit and loss account. The waiver was therefore the cessation of a liability other than a trading liability, which section 41(1) does not reach (paras 15 to 17). It arises in Deductions & Disallowances matters, on section 41(1), section 28(iv), section 36(1)(iii) of the Income Tax Act 1961, and was decided by Supreme Court (R.K. Agrawal and Abhay Manohar Sapre JJ). Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. State on record that no deduction was ever claimed in respect of the loan itself, and check whether interest was claimed under s.36(1)(iii) before saying so. Deal with s.28(iv) and s.41(1) as separate objections in the reply; an answer to one does not answer the other. Do not rest the defence on the way the write-back was journalised.
Still good law. Separate search for later treatment found no overruling and no amendment to s.28(iv)/41(1) on loan waiver; the BCAJ analysis records that the Bombay High Court in Solid Containers Ltd distinguished Mahindra as a fixed-capital loan case and held that waiver of a working capital loan remains taxable, and notes continuing debate over whether the Supreme Court's reasoning extends to trading loans. That finding was checked against a published source, which is linked on this page, on 2026-08-25. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The date of pronouncement is 24 April 2018 and the judgment is reported at (2018) 404 ITR 1 (SC), which settles the conflict the earlier note recorded. Note what the judgment does to the High Court authorities: it affirms the Bombay High Court's 2003 decision in the same matter and the Gujarat and Madhya Pradesh decisions, and it reverses the Madras High Court in Ramaniyam Homes, which had held the waiver of a loan taken for a capital asset taxable. The decision turns on two facts — the borrowing was on capital account and no deduction had ever been claimed for it or for the interest on it. Where either is absent the reasoning does not carry over. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The Court dismissed the Revenue's appeals and declined to interfere with the Bombay High Court's judgment. Section 28(iv) did not apply because the benefit it taxes must take some form other than money, and the receipt here was cash arising from the waiver of a loan (paras 13 and 17). Section 41(1) did not apply because it is a sine qua non of that provision that an allowance or deduction has been made in an earlier assessment in respect of a loss, expenditure or trading liability; the company had never claimed a deduction for the interest under section 36(1)(iii), the deduction it had taken in earlier years was depreciation on the machinery, and the purchase price of plant, machinery and tooling was never debited to the trading or profit and loss account. The waiver was therefore the cessation of a liability other than a trading liability, which section 41(1) does not reach (paras 15 to 17).
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