Whether the loan given to the subsidiary company is a “capital asset” within the meaning of section 2(14) of the Income Tax Act and any loss incurred on “assignment” of such debt to the third party can be claimed as a short term capital loss?
The loan given to the subsidiary company is a capital asset within the meaning of section 2(14) of the Income Tax Act and assessee can claim the loss incurred on assignment of such debt to the third party as a short term capital loss.
The term “capital asset” is defined in section 2(14) of the Act which states that
“capital asset means –
Property of any kind held by an assessee whether or not connected with his business or profession;
… but does not include
Thus capital asset includes the definition of the term “capital asset” is exhaustive when it states that capital asset means it includes property of any kind held by the assessee whether or not connected with his business or profession.
The term “property” has not been defined in the Income Tax Act. Section 5 of Transfer of Property Act defines “transfer of property” i.e. the Act of Transfer of property but does not define the term “property” as such. Section 6 of TPA also states that property of any kind may be transferred except as otherwise provided by TPA or by any other law for the time being in force. However section 6 enumerates as to what cannot be transferred, the exclusionary provision does not include the loan given by a party.
Loan is an actionable claim. The term “actionable claim” is defined in section 3 of TPA as under:-
“actionable claim means a claim to any debt, other than a debt secured by mortgage of immovable property or by hypothecation or pledge of movable property, or to any beneficial interest in movable property not in the possession, either actual or constructive, of the claimant, which the Civil Courts recognize as affording grounds for relief, whether such debt or beneficial interest be existent, accruing, conditional or contingent.
Thus actionable claim means a claim to any debt or beneficial interest in movable property not in possession of the claimant and whether such debt is existent or non-existent, conditional or contingent. Moreover, this definition includes unsecured loan and not the loan secured by way of any security.
Section 130 of TPA provides for transfer of actionable claim. Sub-section (1) states that
“the transfer of an actionable claim, whether with or without consideration shall be effected only by the execution of an instrument in writing signed by the transferor or his duly authorized agent, shall be complete and effectual upon the execution of such instruments, and thereupon all the rights and remedies of the transferor, whether by way of damages or otherwise, shall vest in the transferee, whether such notice of transfer as is hereinafter provided be given or not
Thus as per TPA, actionable claim includes a debt other than a debt secured by any kind of property and it can be transferred by an instrument in writing.
Section 2(47) of the Income Tax Act defines the term “transfer” in relation to a capital asset and prescribes the mode of transfer. It includes extinguishment of any right in the capital asset. To assign a debt to a third person for consideration entails extinguishment of right of the transferor and such right vest in the transferee.
Thus assignment of loan to a 3rd person is allowable within the meaning of section 2(47) r/w section 2(14) of the Act.
Now the question arises as to whether any loss incurred on assignment of such loan can be claimed as a short term or long term capital gain/loss.
Section 45 of the Act states that any profit or gain arising from the transfer of a capital asset effected in the previous year shall be chargeable to income tax under the head “capital gains” and shall be deemed to be the income of the previous year in which the transfer took place.
Section 47 of the Act enumerates the transaction, which are not regarded as transfer. Assignment of debt to a 3rd party is not included in this section. Hence, the difference between the amount of loan and the consideration received on account of assignment would be a gain or loss as the case may be and the same may be claimed as such in the return of income.
Similar issue had arisen before the Hon’ble Supreme Court in the case of CIT (International Taxation) v. Siemens Nixdorf Information Systemse GMBH (2023) 453 ITR 741 (SC). In this case, assessee had lent an amount of 90 lakh Euros to its subsidiary SNISL (an Indian company) under an agreement. The Subsidiary company ran into financial troubles and was likely to be wound-up. In this situation assessee sold this debt (90 lakh Euros) to one Siemens AG on the basis of valuation carried out by M/s Infrastructure & Leasing Finance Ltd. Assessee claimed the difference between the amount lent to subsidiary and the consideration received from Siemens AG as a short term capital loss. Assessing Officer disallowed the same on the ground that the loan was not a capital asset within the meaning of section 2(14) and there was no transfer in terms of section 2(47) of the Act. CIT(A) confirmed the order of Assessing Officer, however, Tribunal allowed the appeal of assessee holding that the loan given by the assessee was a capital asset within the meaning of section 2(14) of the Act. ITAT relied upon the judgement of Bombay High Court in the case of CWT v. Vidur V Patel (1995) 215 ITR 30 (Bom) rendered in the context of Wealth Tax Act, in which it was held that the term “property” includes interest of every kind. Tribunal also relied upon the judgement of Bombay High Court in the case of Bafna Charitable Trust v. CIT (1998) 230 ITR 864 (Bom) wherein it is held that property is word of widest import and signifies every possible interest which a person can hold or enjoy except those specifically excluded.
Accordingly, Tribunal allowed the appeal of the assessee, Bombay High Court confirmed the order of Tribunal, Department filed SLP before Supreme Court which is dismissed by Supreme Court stating that Tribunal had passed an order giving strong reasons.
In view of above discussion, it is opined that the loan given to a subsidiary is a capital asset which can be assigned to the 3rd party and the difference can be claimed as short term / long term capital gain/loss, as the case may be.