2016 (4) TMI 1100 - AT - Income Tax

Reopening of assessment - waiver of loan as income u/s 41 - reasons to believe - Held that - AO had reopened the assessment on the ground that the waiver of loan by the bank has escaped assessment. The same was pointed out in the audit objection. We have perused the audit objection and the reasons recorded by the AO for reopening the assessment. No doubt, on record the reasons recorded by the AO are based on his own reasons of view, but, the same was indulged on findings of the audit objection raised by the audit party as it can be considered as it will fall in the similar situation as held in the case of CIT Vs. PVS Beedies (1997 (10) TMI 5 - SUPREME Court ). But as the findings recorded by CIT, the timings of the correspondence of Addl. CIT, which is dated 13/03/2013 and timings of the notice u/s 148, which was issued on 26/03/2013 clearly shows that the reopening was done on the behest of the Addl. CIT. It clearly shows that the AO had not applied his mind independently even though the reasons recorded on the basis of the factual error pointed out by the audit party. The reasons for reopening an assessment need to be based on tangible material which has a live-link with the formation of the belief that there was an escapement of income. Therefore, we do not find any infirmity in the order of CIT(A) in quashing the reopening of assessment made by the AO u/s 147 of the Act. Two instalments had to be paid in AY 2007-08. Even though, the assessee was following mercantile system, it cannot recognize the waiver of loan as income u/s 41 of the Act, since, as per the pre-condition for OTS, all the balance amount had to be settled, then only, the assessee can enjoy the benefit of loan waiver. In this case, it was clear that the assessee can only recognize the waiver of loan as income only when it pays the final instalment of waiver as per OTS conditions. Hence, the assessee was not in a position to recognize the above waiver as income u/s 41, on the contrary, the AO had not brought anything on record that the waiver of loan was relating to trading liability or any revenue expenditure was allowed against the above waiver. Hence, in our considered view, the above waiver of loan cannot be brought into tax net considering the fact that the waiver condition was not fulfilled during this AY and cannot be recognized as income u/s 41 during this assessment year - Decided in favour of assessee

Summary

Issues Involved:
1. Validity of reassessment under section 147 of the Income-tax Act, 1961.
2. Taxability of the waiver of the principal loan amount under section 41(1) of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Validity of Reassessment under Section 147 of the Income-tax Act, 1961:

The reassessment was initiated by the Assessing Officer (AO) based on an audit objection that the waiver of the principal loan amount was not treated as income. The audit party pointed out that the waiver of Rs. 5,23,36,000/- by IDBI was not brought to tax under section 41(1) of the Act. However, the CIT(A) observed that the reasons recorded for reopening the assessment reflected the viewpoint of the audit rather than the AO's independent application of mind. The CIT(A) relied on the Supreme Court decision in CIT Vs. Kelvinator of India Ltd., 320 ITR 561, which mandates that reasons for reopening an assessment must be based on tangible material with a live link to the formation of the belief of income escapement.

The CIT(A) allowed the appeal of the assessee, quashing the reopening of the assessment, on the grounds that it was based on a change of opinion and audit objection without independent application of mind by the AO. The Tribunal upheld this decision, noting that the AO had not independently applied his mind and the reopening was influenced by the audit objection and the directions from the Addl. CIT. Consequently, the Tribunal dismissed the revenue's ground on the validity of reassessment.

2. Taxability of the Waiver of Principal Loan Amount under Section 41(1) of the Income-tax Act, 1961:

The CIT(A) and the Tribunal examined the terms of the One-Time Settlement (OTS) with IDBI, which required the assessee to pay the balance amount in installments. The waiver of the loan was contingent upon the payment of all installments. Since two installments were to be paid in AY 2007-08, the waiver could not be recognized as income in AY 2006-07. The Tribunal agreed with the CIT(A) that the waiver of the loan could only be recognized as income once the final installment was paid, fulfilling the OTS conditions.

Additionally, the AO did not provide evidence that the waiver of the loan was related to a trading liability or any revenue expenditure that had been allowed in earlier years. Thus, the Tribunal concluded that the waiver of the loan could not be brought to tax under section 41(1) for AY 2006-07, as the conditions for recognizing the waiver as income were not met during that assessment year. The Tribunal dismissed the revenue's ground on the taxability of the loan waiver.

Conclusion:

The Tribunal dismissed the revenue's appeal, upholding the CIT(A)'s decision to quash the reassessment and concluding that the waiver of the principal loan amount could not be taxed under section 41(1) for AY 2006-07. The judgment emphasized the necessity for independent application of mind by the AO in reassessment proceedings and the fulfillment of specific conditions for recognizing loan waivers as income.