Waiver Of Liability To Redeem Debentures Not Taxable If Interest Deduction Was Not Claimed Earlier: ITAT Pune

The Pune Bench of the Income Tax Appellate Tribunal (ITAT) has held that the waiver of a company's liability to redeem debentures cannot be taxed as income when no deduction of interest on those debentures was claimed in earlier years.

A coram comprising Judicial Member Astha Chandra and Accountant Member Dr. Dipak P. Ripote examined the applicability of Sections 28(iv) and 41(1) of the Income Tax Act on the action.

Relying on apex court rulings, the tribunal held that Section 28(iv) applies only to non-cash business benefits. Since the loan waiver resulted in a monetary benefit, the provision was held to be inapplicable. It further held that Section 41(1) applies only when a taxpayer has claimed a deduction in earlier years. As no related expense was ever claimed in this case, the provision could not be invoked.

"Neither the Assessing Officer nor the ld.CIT(A) has brought on record any evidence to prove that any of the interest pertaining to Rs.75 lakhs was debited to profit and loss account. Therefore, respectfully following Hon'ble Supreme Court(supra), we hold that no addition can be made u/s.41(1) of Rs.75 lakhs," the tribunal held.

The case concerned Mithi Software Technologies Pvt. Ltd., which had borrowed Rs 75 lakh from SIDBI Venture Capital Limited in FY 2004-05 by issuing non-convertible debentures. The lender later agreed not to recover the amount, effectively cancelling the company's repayment obligation.

The company treated the loan forgiveness as a capital receipt and did not offer it to tax.

During assessment proceedings, the tax department treated the forgiven amount as taxable income and added Rs 75 lakh to the company's income. The addition was upheld by the Commissioner of Income Tax (Appeals).

Relying on the Supreme Court's ruling in Mahindra & Mahindra Ltd., the tribunal held that Section 28(iv) applies only to non-monetary benefits and cannot be invoked where the benefit is received in money.

On Section 41(1), the tribunal held that the provision applies only when an assessee/taxpayer has claimed a deduction for a trading liability in earlier years. Since no interest on the debentures was ever claimed, the provision was held to be inapplicable.

The tribunal accordingly deleted the Rs 75 lakh addition.

On a separate issue, the tribunal found that the tax authorities had wrongly denied the set-off of carried-forward losses and unabsorbed depreciation, despite these being reflected in the return schedules. It directed the Assessing Officer to allow the set-off as claimed.

The appeal was allowed in full.

Case Title: Mithi Software Technologies Private Limited v. The Income Tax Officer

Citation: 2026 LLBiz ITAT(PUN) 8

Case Number: ITA No.2371/PUN/2025

For Appellant: Advocate Nikhil Pathak

For Respondent: Advocate Ambarnath Khule