Tax on time barred loan taken

1. What would be the tax treatment?

As you have already stated, the benefit he(the debtor) has received, is taxable income in his hands, if the loan had been  taken by him for his business purposes. 

[The creditor may inform theCommissioner of  Income Tax, in writing, with a copy of his letter refusing torepay the loan on the ground that it has become time barred.]  

Waiver of loan taken by assessee for business activity assessable as business income : Logitronics P. Ltd. v. CIT (Delhi) 333 ITR 386

Where outstanding liability due to trading transaction becoming subsequently non-payable, s. 41 applicable : Sashak Noble Metals Ltd. v. ITO (Mumbai) 11 ITR(Trib) 335

2. If now he says to the tax department that it is a loan, then would that mean it is no longer time barred and is now recoverable?

If it is a loan time barred and not intended to be repaid, it is taxable income in his hands, if he had taken the loan for his business purposes.

Thanks,

1. Actually it was taken to buy some property and was not for business purpose.

So when it becomes taxable from. Since the time it was taken? Would the person be liable to be penalised (charged interest ) by the I/Tax

deptt. for not paying tax on time?

2. 2. If now he says to the tax department that it is a loan, then would that mean it is no longer time barred and is now recoverable?

Rajagopal sir,

I have one more query.

If father had given his daughter Rs 20 lac and also gave  in writing that this amount is a gift. Now this daughter is litigating with him.

Chances are daughter never got the gift registered ( It is only on paper and above Rs 50,000/=). Can she get the gift registered after 10 years.If not is she liable to pay tax?

1 . Actually it was taken to buy some property and was not for business purpose.

So when it becomes taxable from. Since the time it was taken? Would the person be liable to be penalised (charged interest ) by the I/Tax deptt. for not paying tax on time?

If the loan had been taken/utilised not for business, but for investments, it is not taxable.

A loan taken for capital transaction such as acquisition of assets like land, building, machinery or plant when waived by the lender or written off by the borrower (i.e. the assessee) such waiver or write-off could not be subjected to tax, since the loan does not fall in the revenue field. The courts have consistently held that a loan taken for acquiring capital asset when waived by the lender, either in whole or in part, the amount of waiver cannot be taxed as income since it does not have any semblance of revenue nature. [Refer Mahindra &Mahindra Ltd vs. CIT 261 ITR 501 (Bom); CIT vs. Chetan Chemicals P Ltd267 ITR 770 (Bom).]

Thanks sir for your kind advise.