Govt. Loan Interest Converted into Equity Not Taxable u/s 41(1) | HC

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conversion of loan interest into equity taxability

Case Details: Commissioner of Income-tax - II Tiruchirapalli vs. Tamil Nadu State Transport Corporation (Kum Div.I) Ltd. - [2026] 182 taxmann.com 556 (Madras)

Judiciary and Counsel Details

  • Dr Anita Sumanth and Mrs K. Govindarajan Thilakavadi, JJ.
  • V. Mahalingam & Dr S. Sathiya Narayanan, Sr. Standing Counsels for the Appellant.
  • A.S.Sriraman, S.Sridhar, J. Balachander & Ms K. Kavitha for the Respondent.

Facts of the Case

The assessee, a State transport corporation, had, pursuant to a Government Order, allotted shares aggregating to about Rs. 74.14 lakhs (at Rs. 10 per share), converting outstanding interest payable to the Government on loans into equity share capital.

The Assessing Officer, on examining the notes to accounts, held that such conversion was not acceptable and treated the amount of about Rs. 74.14 lakhs as deemed profits taxable under section 41(1)(a). On appeals, the Commissioner (Appeals) and Tribunal deleted the addition.

The matter reached the Madras High Court

High Court Held

The Court held that converting liability received from the Government and the interest payable on such loan into equity share capital by allocating shares is an acceptable method of treating the principal and outstanding interest. Therefore, the amount of equity gain in such circumstances is not liable to be taxed as deemed profits.

Accordingly, the addition made by the Assessing Officer was not sustainable and the issue was decided in favour of the assessee.

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Author: Taxmann

Taxmann Publications has a dedicated in-house Research & Editorial Team. This team consists of a team of Chartered Accountants, Company Secretaries, and Lawyers. This team works under the guidance and supervision of editor-in-chief Mr Rakesh Bhargava.

The Research and Editorial Team is responsible for developing reliable and accurate content for the readers. The team follows the six-sigma approach to achieve the benchmark of zero error in its publications and research platforms. The team ensures that the following publication guidelines are thoroughly followed while developing the content:

  • The statutory material is obtained only from the authorized and reliable sources
  • All the latest developments in the judicial and legislative fields are covered
  • Prepare the analytical write-ups on current, controversial, and important issues to help the readers to understand the concept and its implications
  • Every content published by Taxmann is complete, accurate and lucid
  • All evidence-based statements are supported with proper reference to Section, Circular No., Notification No. or citations
  • The golden rules of grammar, style and consistency are thoroughly followed
  • Font and size that's easy to read and remain consistent across all imprint and digital publications are applied