Section 41(1) of the Income Tax Act is triggered only when an assessee derives a real benefit due to remission or cessation of a trading liability. In recent years, the transfer of stressed loans by banks to Asset Reconstruction Companies (ARCs) has become a common commercial practice, often involving assignment at a discounted value. This raises an important tax question — does such discount automatically result in taxable income for the borrower?
In this ruling, the Delhi ITAT clarified that mere acquisition of an assessee’s loan by an ARC at a lower price does not amount to remission or cessation of liability, particularly when there is no one-time settlement (OTS), waiver, or actual benefit accruing to the assessee. The Tribunal held that Section 41(1) cannot be invoked unless the borrower’s liability is genuinely reduced or extinguished.
Citation
05 Feb 2026 | [2026] 182 taxmann.com 801 (Delhi – Trib.)
Decision dated: 24-12-2025
Forum
Income Tax Appellate Tribunal (ITAT), Delhi Bench
Background Facts
- The assessee was engaged in the business of real estate development.
- It had outstanding loan liabilities payable to a financial institution/bank.
- The lender assigned the loan to an Asset Reconstruction Company (ARC).
- The ARC acquired the loan at a discounted value (as is common in stressed asset transactions).
Key Issue Before ITAT
Whether the assignment of loan to an ARC at a discounted value amounts to:
- remission or cessation of liability, and
- taxable income under Section 41(1) of the Income Tax Act?
Assessing Officer’s View
- The AO treated the difference between the original loan amount and the discounted purchase value as a benefit to the assessee.
- Accordingly, the AO invoked Section 41(1) and added the amount as income, alleging cessation of liability.
Assessee’s Argument
- The assessee contended that:
- There was no waiver of loan.
- There was no One-Time Settlement (OTS).
- The liability was still outstanding, only the creditor changed (bank → ARC).
- No benefit or income actually accrued to the assessee.
ITAT Decision & Ruling
The ITAT held that:
- Assignment of loan to an ARC at a discounted value does not automatically result in remission or cessation of liability.
- Section 41(1) applies only when the assessee has obtained a real benefit, such as:
- waiver of loan,
- settlement at a lower amount, or
- writing off of liability.
- In the present case:
- There was no OTS,
- no waiver,
- no reduction in liability for the assessee.
Thus, no taxable benefit accrued.
Final Held
✅ No cessation of liability u/s 41(1) arises merely because the lender assigns the loan to an ARC at a discounted value.
Addition made by the AO was deleted.
Practical Significance
This ruling is important because:
- Loan transfers to ARCs are common in stressed real estate and infrastructure sectors.
-
Mere discount between bank and ARC cannot be taxed unless the borrower gets an actual waiver or settlement benefit.