India: Waiver of interest by financial institutions is treated as income

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In a recent judgement in the case of: McDowell & Company Ltd. v. CIT (Civil Appeal No. 3893 of 2006), the Supreme Court of India held that the waiver of interest by financial institutions is assessable from the hands of the Amalgamating Company regarding the benefit of section 72A of the Income Tax Act. However, the ITO proposed to treat the waiver of interest portion as revenue receipt in the hands of assessee’s company under Section 41(1) of the Act, the same is to be read with Section 72A of the Act.

Recently, the Finance Minister in his Budget speech while introducing Section 72A of the Act stated that the sickness among industrial undertaking was regarded as a matter of grave national concern inasmuch as closure of any sizable manufacturing unit industry entailed social costs in terms of production loss and unemployment as also waste of valuable capital assets and experience had shown that taking over of such sick units by Governments was not always a satisfactory or economical solution; it was felt that a more effective method would be to facilitate amalgamation of sick industrial units with sound ones by providing incentives and removing impediments in the way of such amalgamation which would not merely relieve the Government of un-economic burden of taking over and running sick units but save the Government from social costs in terms of loss of production and unemployment.

With such objection in view, in order to facilitate the merger of sick industrial units with sound ones and as and by way of offering an incentive in that behalf section 72A was introduced, where under, by a deeming fiction, the accumulated loss or unabsorbed depreciation of the amalgamating company is treated to be a loss or, as the case may be. The Revenue before the first appellate authority emphasized the application of section 72A of the Act, to the facts of the case. The first appellate authority and also the Tribunal failed to consider the scope and object of section 72A of the Act. Thus, the Tribunal committed an error in treating the waiver of interest as not income of the assessee.”

Accordingly, the Supreme Court in that McDowell case held that the waiver of interest in the hands of the amalgamating company is taxable in the hands of the amalgamated company under Section 41(1) of Act.

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