[Opinion] When Does the Interest Under MSMED Act, 2006 Not Taxable in the Hands of Person Entitled to It?

CA V K Subramani – [2024] 161 taxmann.com 34 (Article)

Provisions contained in Income-tax law are meant not only to administer taxation but also for gathering resources to the exchequer. The term ‘income’ is defined in section 2(24) inclusively and presently it contains 18 sub-clauses. One of the prominent incomes liable to tax in the hands of taxpayers is interest income which could be either interest from banks or corporate deposits or against any advance given. If a person eligible to receive interest from another person forgoes such interest whether the amount so foregone is liable to tax is a controversial issue. It could be argued that it is liable to tax when the lender (assessee) has the enforceable right to realize such interest voluntarily foregoes the same and hence liable to tax. This refresher attempts to analyse when the waiver of interest by the lender due from the borrower is not chargeable to tax and also in the context of section 16 of The Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act, 2006) whether the person supplying goods or services is liable to admit such interest income for delayed payment of bills even though it was not received by him.

1.1 Meaning of ‘interest’

Section 2(28A) defines the term ‘interest’ which means “interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation) and includes any service fee or other charge in respect of moneys borrowed or debt incurred or in respect of any credit facility which has not been utilized”.

The term ‘interest’ therefore does not mean only the interest on moneys borrowed/advanced but also the debt incurred which may be due to purchase of goods or availing of services. Therefore, when there is sale of goods or supply of service and the person is obliged to make payment to the goods or services within the prescribed time but omits to make the payment or delays in making payment, the person who supplied the goods or services by virtue of contract between the parties may become eligible to receive interest being compensatory in nature for the delay in settlement of the dues.

There are many settled issues such as waiver of term loan interest by banks and financial institutions which were not allowed as deduction in view of section 43B previously and on subsequent waiver such amounts being not chargeable to income-tax. [CIT v. Mahindra & MahindraLtd [2018] 93 taxmann.com 32/255 Taxman 305/404 ITR 1 (SC)]. Similarly, when a loan is taken for trading activity and upon waiver of such loan it was held that the amount gained by the assessee because of waiver is liable to tax. [Solid Containers Ltd. v. Dy.CIT [2009] 178 Taxman 192/308 ITR 417 (Bom)]. Remission or cessation of trading liability by waiver of loan taken for purchase of capital asset when written off was held as liable to tax in Rollatainers Ltd v. CIT [2011] 15 taxmann.com 111/203 Taxman 31 (Mag.)/339 ITR 54 (Del).

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