Section 41(1) states that any allowance or deduction made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee and subsequently it is waived off or remission is granted by the lender, it shall be deemed to be the income chargeable to tax under the head ‘Profits and gains of business or profession’.

The key expression is “trading liability” which alone can become taxable upon waiver.

The term ‘trading liability’ became subject matter of discussion in Rollatainers Ltd. v. CIT [2011] 15 taxmann.com   111/203 Taxman 31 (Mag.)/339 ITR 54 (Del- hi).

The assessee took cash credit facility from a bank and it was meant for carrying on business.

The waiver of such cash credit amount subsequently was held as cessation of trading liability and, thus, falling in the revenue field. It was held that the money was borrowed by way of cash credit for day-to-day affairs of the business and was not meant for purchase of machinery. When the loan forming part of circulating capital of the assessee is waived, off it is chargeable to tax under section 41(1).

The Court held that such waiver, even though would not fall in section 28(iv), it is covered by section 41(1) and, hence, liable to be taxed as an income.