TaxTMI 
TaxTMI 
2026 (7) TMI 867
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....off of carried forward losses pertaining to A.Ys. 2004-05 and 2005-06. The case was selected for scrutiny and the original assessment was completed under section 143(3) on 17.03.2015 determining income at Rs. Nil. 3. Subsequently, on perusal of records, it was noticed by the Assessing Officer that the assessee had credited an amount of Rs. 11,03,62,194/- to its Profit and Loss Account, being principal amount of loan waived by banks. In the computation of income, however, the assessee had deducted the said amount from its business profits and had not offered the same to tax. The Assessing Officer observed that the said loan was reflected as "Short Term Borrowings" and was availed as working capital against mortgage of stock-in-trade, thereby implying that the same was taken for trading purposes. According to the Assessing Officer, the said amount was liable to be taxed and the failure to offer the same resulted in escapement of income. 4. Accordingly, reassessment proceedings were initiated under section 147 by issuance of notice under section 148 dated 27.03.2019 after obtaining approval under section 151. In response, the assessee filed return and sought reasons recorded, wh....
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....e for taxation purposes being higher than normal income. 8. Aggrieved by the assessment order, the assessee carried the matter in appeal before the CIT(A). The CIT(A), as recorded in the appellate order, noted that the reassessment was completed on 12.12.2019 making addition of Rs. 11,03,62,194/- on account of waiver of principal amount of loans pursuant to BIFR scheme dated 19.02.2015. 9. Before the CIT(A), the assessee contended that the reopening was invalid and that the addition under section 41(1) was not sustainable as the principal amount of loan waived was a capital receipt. It was further submitted that the assessee had credited the waived amount to Profit and Loss Account but the same represented capital receipt and could not be taxed. Reliance was placed on judicial precedents including the decision of the Hon'ble Supreme Court in the case of CIT v. Mahindra and Mahindra Ltd.(404 ITR 1).It was also submitted that the assessee could not properly present facts before the Assessing Officer as the reasons recorded were not received in time. 10. The CIT(A), after considering the facts of the case, recorded that similar issue had arisen in the assessee's own case in e....
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....he formation of belief was based on material already available on record, namely the balance sheet and accompanying details furnished by the assessee. It was thus contended that the very foundation of reopening proceeds on "perusal of records" and not on any new tangible material, and therefore there was no failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment. It was further submitted that since the reopening has been carried out beyond a period of four years from the end of the relevant assessment year, the jurisdictional condition prescribed under the proviso to section 147 is not satisfied and consequently the reassessment is liable to be quashed. In support of the aforesaid contention, reliance was placed on the judgment of the Hon'ble Bombay High Court in the case of Great Eastern Shipping Company Ltd. vs. ACIT reported in 440 ITR 58. The learned AR specifically drew our attention to the last sub-para of para 9, wherein the Hon'ble High Court has categorically held as under: "The reasons disclosed by the Assessing Officer, on the face of it, does not indicate any failure on the part of the assessee to disclose ful....
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....er of loan does not amount to cessation of trading liability. 15. Relying on the aforesaid ratio, it was submitted that in the present case also the amount written off represents the principal amount of loan and not any trading liability. Therefore, the same being on capital account, cannot be brought to tax in the hands of the assessee. It was thus contended that the addition made by the Assessing Officer and sustained by the CIT(A) is contrary to the law laid down by the Hon'ble Supreme Court and deserves to be deleted. 16. The learned AR further placed reliance on the judgment of the Hon'ble Bombay High Court in the case of PCIT vs. SICOM Ltd. reported in 274 Taxman 58 and submitted that the issue involved in the present appeal is squarely covered by the said decision. It was contended that the Hon'ble High Court, following the judgment of the Hon'ble Supreme Court in the case of Mahindra and Mahindra Ltd., has categorically held that waiver of loan, particularly the principal component, cannot be brought to tax either under section 41(1) or under section 28(iv) of the Act. Accordingly, it was submitted that both on facts as well as in law, the addition sustained by the CI....
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.... production of books of account or other records does not amount to full and true disclosure of material facts. Placing reliance on the statutory language, it was contended that: "Explanation 1. - Production before the Assessing Officer of account books or other evidence from which material evidence could with due diligence have been discovered by the Assessing Officer will not necessarily amount to disclosure within the meaning of the foregoing proviso." 20. Relying on the above provision, the learned DR submitted that even if the balance sheet or other financial statements containing details of loan and its waiver were available on record, the same would not ipso facto establish that the assessee had made full and true disclosure of all material facts. 21. The learned DR also invited our attention to para 4 of the order of the CIT(A) and submitted that the CIT(A) has relied upon judicial precedents including decisions of the Co-ordinate Bench and Hon'ble High Court to hold that where loan is utilised for business purposes, waiver thereof may assume the character of income. 22. On the strength of the above observations in the assessment order, the learned DR cont....
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....217), submitted that where reopening is based on figures and disclosures already available in the Profit and Loss Account and Balance Sheet, it cannot be alleged that there was any failure on the part of the assessee to disclose fully and truly all material facts. The learned AR further submitted that once the Assessing Officer has completed assessment under section 143(3), it necessarily implies that the primary financial statements, including the Profit and Loss Account, have been examined. Therefore, to contend subsequently that the same disclosures constitute "failure to disclose" under Explanation 1 to section 147 would render the scrutiny assessment itself otiose. Accordingly, it was argued that the present reopening is nothing but a review of the earlier assessment on the same material, which is not permissible under law. 25. We have heard the rival submissions and perused the material available on record including the assessment order, the appellate order, the reasons recorded for reopening, and the judicial precedents relied upon by both sides. Ground no.1 challenges the validity of reopening under section 147 of the Act, while ground no.2 assails the addition of Rs. 11....
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....the nature of borrowing was stated to be emerging from the balance sheet itself. These are not facts discovered from any outside source. They are facts drawn by the Assessing Officer from the assessee's own records. 29. The decision of the Hon'ble Bombay High Court in Great Eastern Shipping Company Ltd. vs. ACIT (supra)is directly relevant on this aspect. In that case also, reopening beyond four years was set aside because the recorded reasons did not indicate any failure on the part of the assessee to disclose fully and truly all material facts and, in fact, showed that the conclusion was drawn from the assessee's own case records. The Hon'ble High Court specifically noted that the reasons proceeded on the basis of "perusal of details" and "perusal of records". The ratio of the said judgment is that where the recorded reasons themselves reveal that the Assessing Officer has drawn the conclusion from material already on record, the condition prescribed in the proviso to section 147 is not satisfied. The facts before us stand on the same footing. 30. The later judgment of the Hon'ble Bombay High Court in Imperial Consultants and Securities Ltd. vs. DCIT(supra) fortifies the sa....
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.... Assessing Officer in the reasons recorded. The waiver was reflected in the Profit and Loss Account and the nature of the borrowing was gathered by the Assessing Officer from the note below Schedule 6. If such direct disclosures in the financial statements and computation are to be treated as non-disclosure, the distinction between scrutiny assessment and review would stand obliterated. The ratio of Imperial Consultants answers this contention against the Revenue, because the Hon'ble High Court rejected reopening even though the Revenue there also sought to rely on figures available in the balance sheet and Profit and Loss Account. 33. We may also note that the learned DR has sought to justify reopening by observing that the issue was not examined in the original assessment and that there was failure by the assessee to disclose fully and truly all material facts. In our view, mere non-discussion in the original assessment order does not by itself establish failure of disclosure by the assessee. An assessment order cannot be expected to discuss every item in the return and financial statements. The decisive test is whether the primary material was before the Assessing Officer. He....
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....d that waiver of loan falls in the latter category. This ratio is the governing law. 37. The Revenue has sought to distinguish Mahindra and Mahindra on the ground that in that case the loan was utilised for acquiring capital assets, whereas in the present case the borrowing was used as working capital. We are unable to accept this distinction insofar as section 28(iv) is concerned. The Hon'ble Karnataka High Court in I.G. Petrochemicals Ltd. vs. ITAT(supra), after considering Mahindra and Mahindra, has held in categorical terms that the clinching factor for section 28(iv) is not the purpose of the loan but whether the benefit is in the shape of money or not. The High Court observed that the purpose of loan was neither dealt with by the Supreme Court as a determinative factor nor is it legally relevant for section 28(iv); the only test is whether the benefit or perquisite is "other than in the shape of money". It was further held that the nature of loan, whether term loan or working capital loan, is of no relevance for attracting section 28(iv). This reasoning directly answers the Revenue's contention before us. 38. Even independently of I.G. Petrochemicals, the Bombay High Co....
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....determining taxability under section 28(iv), the said reasoning cannot prevail once the Supreme Court has authoritatively held that the decisive test is whether the benefit is in money or not. 41. The Revenue has also relied on T.V. Sundaram Iyengar & Sons Ltd. and the line of reasoning flowing into Solid Containers Ltd.(308 ITR 417). The CIT(A), in para 4, has quoted observations from another case to the effect that where a loan taken for business purposes is retained in business, it may acquire the character of income. In our view, these authorities operate in a different factual setting and do not advance the Revenue's case on the present record. T.V. Sundaram Iyengar dealt with deposits or amounts received in the course of trading transactions which, by efflux of time and the surrounding circumstances, assumed the character of trade surplus. A principal borrowing from a bank is conceptually different from a trade receipt or customer deposit. The Supreme Court in Mahindra and Mahindra was aware of the earlier jurisprudence and nevertheless held that waiver of loan does not amount to cessation of trading liability under section 41(1), and that money receipt on waiver falls out....