2015 (8) TMI 1150 - AT - Income Tax

Waiver of principal loan amount claimed as capital receipt in the revised computation of income - CIT(A) directed the AO to compute the correct figure of brought forward losses and give credit to the assessee wherever the law so demands - Held that - Assessee has filed the revised computation of income and has failed to file the revised return. The AO has also given assessee enough time by taking up the scrutiny proceedings and issued notice u/s 143(2) and 142(1) to respond to the assessment and for filing a revised return. The Hon ble Apex Court in the case of Goetz India Ltd vs. CIT 2006 (3) TMI 75 - SUPREME Court has clearly stated that the assessing authority has no power to entertain claim made otherwise than by way of revised return. Hence, the CIT (A) erred in following the decision of GVK Industries Ltd vs. ACIT (2012 (6) TMI 573 - ITAT HYDERABAD ) as the facts in this case are not similar to that as in the case of GVK Industries. The fact is that the assessee has not filed revised return and hence the ratio of the decision in the case of Goetz India Ltd vs. CIT (Supra) is applicable. In fact the proceedings are u/s 147, which are for assessing undisclosed income. Further, the Apex Court in the case of CIT vs. Sun Engineering Works (P) Ltd (S.C) (1992 (9) TMI 1 - SUPREME Court ) wherein held where the claims of the assessee durng the course of re-assessment proceedings relating to the escaped income are accepted, still the allowance of such claims has to be limited to the extent to which they reduce the income to that originally assessed. The income, for purposes of re-assessment cannot be reduced beyond the income originally assessed. Hence, we are of the opinion that the CIT (A) had erred - Decided in favour of revenue. Provision of service fee made by the company in earlier years deleted while computing book profits - Held that - In the course of assessment proceedings assessee has filed revised computation of income stating that the brought forward losses as per books of accounts has not been calculated correctly for the purpose of section 115JB. The brought forward business loss reduced from the book profit were stated to be ₹ 20,99,67,903 as against ₹ 14,86,71,093 claimed in the return of income. AO rejected this claim of carry forward loss in the books of accounts on the ground that it was not claimed in the return of income. The CIT (A) directed the AO to compute the correct figure of brought forward losses as per the law. We do not find any infirmity in the order of the CIT (A) as he has rightly directed the AO to compute the correct figure of brought forward losses. We, therefore, set aside this issue of computation of book profit u/s 115JB as well as set off of the book losses against such book profit to the file of the AO for being done denovo in accordance with the law. Reopening of assessment and reduce the cost of assets to the extent the loan which has been waived and to rework the depreciation as directed by CIT(A) - Held that - The entire cost of machinery has been paid by the assessee to the suppliers. Therefore, there is no question of reduction in the cost of acquisition of assets on which depreciation has been granted. The issue is with regard to the treatment of waiver of the principle portion of the loan. The waiver of loan does not reduce the cost of acquisition of the plant and machinery. The waiver is for reduction on the liability which has arisen on the liability incurred on purchase of plant and machinery and cannot be adjusted against the cost of acquisition of machinery. In Mahinddra and Mahindra Ltd vs. CIT (2003 (1) TMI 71 - BOMBAY High Court) it has been held that the amount of waiver is not assessable u/s 28(iv) and hence there is no remission of liability and the amount is not assessable u/s 41(1). Hence following the decision of the Hon ble Bombay High Court, the decision given by CIT (A) is not correct. - Decided in favour of assessee.

Summary

Issues Involved:
1. Waiver of principal loan amount as capital receipt.
2. Correct computation of brought forward losses and book profits.
3. Direction to reopen earlier assessment years and adjust the cost of assets.

Issue-wise Detailed Analysis:

1. Waiver of Principal Loan Amount as Capital Receipt:

The assessee, engaged in the business of storage of oil and gas, filed a return for A.Y 2008-09 declaring nil income after setting off brought forward losses and offered a book profit of Rs. 34,84,30,788 under section 115JB. During the assessment proceedings, the assessee claimed that a principal waiver of Rs. 9,26,00,305, which was mistakenly offered as income, should be considered a capital receipt and not taxable. The CIT (A) agreed with the assessee, stating that the waiver of a loan taken for acquiring capital assets should not be treated as taxable income, referencing various case laws including the decision of the Hon'ble Madras High Court in Iskraremeco Regent Ltd and the Hon'ble Bombay High Court in Mahindra & Mahindra Limited. However, the ITAT disagreed, citing the Supreme Court's decision in Goetz India Ltd vs. CIT, which mandates that claims not made in the original return cannot be entertained during reassessment proceedings. Consequently, the ITAT ruled in favor of the Revenue on this issue.

2. Correct Computation of Brought Forward Losses and Book Profits:

The AO made an addition of Rs. 5.00 crores to the book profits for A.Y 2007-08, considering it a provision for unascertained liability, which reduced the brought forward losses. The assessee argued that the correct figure of brought forward losses was not considered, and the CIT (A) directed the AO to compute the correct figure. The ITAT upheld the CIT (A)'s direction, emphasizing that the correct figure of brought forward losses should be computed as per the law. The ITAT found no fault in the CIT (A)'s order and remanded the issue back to the AO for a denovo computation in accordance with the law.

3. Direction to Reopen Earlier Assessment Years and Adjust the Cost of Assets:

The CIT (A) directed the AO to reopen earlier assessment years and consider the cost of acquisition of the capital asset connected to the waived loan amount as zero, thereby disallowing depreciation from the year the assets were acquired. The assessee filed a cross-objection against this direction, arguing that the waiver of the loan does not reduce the cost of acquisition of the plant and machinery. The ITAT agreed with the assessee, citing the Bombay High Court's decision in Mahindra & Mahindra Ltd vs. CIT, which held that the waiver of a loan does not affect the cost of acquisition of assets. Consequently, the ITAT allowed the cross-objection, ruling that the CIT (A)'s direction to reopen earlier assessment years and adjust the cost of assets was incorrect.

Conclusion:

The appeal of the Revenue was partly allowed for statistical purposes, and the cross-objection of the assessee was allowed. The ITAT emphasized the importance of adhering to the legal principles established by higher courts and directed the AO to recompute the figures as per the law. The judgment highlights the complexities involved in tax assessments and the need for precise computation and adherence to legal precedents.