2008 (5) TMI 339 - AT - Income Tax

Validity of reopening the assessment u/s. 147 - beyond four years - Addition u/s 41(1) - cessation of liability - waiver of loan as a one time settlement package - business of deep sea fishing and export - HELD THAT - The proviso to s. 147 of the Act specifically states that where an assessment has been made under s. 143(3) or under s. 147 of the Act for any assessment year reopening of such assessment after expiry of four years from the end of the relevant assessment year shall be made only if there is a failure on the part of the assessee amongst other things to disclose fully and truly all material facts necessary for his assessment for that year. Explanation 1 to s. 147 of the Act specifically states that the production before the AO of account books or other evidence from which material evidence could with due diligence have been discovered by the AO will not necessarily amount to disclosure within the meaning of the proviso. Whether the assessee has disclosed fully and truly all the material facts before the AO in the original assessment proceedings - The waiver of loan by SCICI consisted of two parts i.e. (i) waiver of principal portion and (ii) waiver of interest portion. The assessee duly offered the waiver of interest portion in its return of income. In earlier years the assessee s claim of interest on the abovesaid loan had been disallowed under s. 43B of the Act. Hence the assessee claimed deduction of interest amount that was disallowed under s. 43B of the Act in earlier years. To that extent the AO verified the claim of the assessee and found that the above claim is in excess and accordingly reduced the claim by that amount. However the AO did not go into the details in connection with the waiver of principal portion or its taxability. The assessee had disclosed the facts regarding waiver of principal portion and credit of that amount in capital reserve account in the annual report in the schedule containing the notes forming part of accounts. Whether such disclosure in the annual report would amount to full and true disclosure of all material facts - In the present case though the assessee has given a note regarding the waiver of principal portion of loan it was not brought to the notice of the AO by the assessee. The AO has also not dealt with the matter of waiver of principal portion and its taxability in the original assessment proceeding. Hence Expln. 1 to s. 147 will apply to the present case and hence it cannot be said that there is no failure on the part of the assessee to disclose fully and truly all material facts. AO did not make enquiries regarding taxability of principal portion waived. The assessee has also failed to bring the facts to the notice of the AO though the same have been mentioned in the annual report. In view of the Hon ble Supreme Court decision in the case of Sri Krishna (P) Ltd. vs. ITO 1996 (7) TMI 2 - SUPREME COURT and further in view of the Expln. 1 to s. 147 the note given in the annual report cannot be taken as full and true disclosure. Hence the belief of the AO regarding escapement of income can be taken as reasonable one. The assessee has also not established that there existed no belief or the belief was not at all bona fide one. Hence on a conspectus of the matter we hold that the issue of notice under s. 148 is valid. Whether waiver of principal amount of loan would amount to trading liability? - The Hon ble Delhi High Court in Phool Chand Jiwan Ram 1980 (4) TMI 29 - DELHI HIGH COURT held that only trading debts which are allowed as deduction in earlier years can be treated as trading liability. It is not in dispute the principal portion of loan amount which has been waived has not been claimed as deduction in any of the years. Hence waiver of principal portion of loan cannot be termed as waiver of trading liability and hence the second clause of s. 41 (1) relating to trading liability shall not apply to the present case under consideration. Whether the waiver of loan will amount to a benefit relatable to depreciation expenditure claimed earlier? - Assessee obtained a loan from SCICI and acquired four trawlers by utilizing the loan - claimed depreciation from 1988-89 to 1997-98 on the trawlers so acquired by availing the loan - waiver of principal - Loan is availed as a source of finance while the depreciation is allowed on the actual user of the asset. So availing of loan and claim of depreciation are two distinct things which cannot be clubbed together. The Hon ble Kerala High Court in the case of Cochin Co. (P) Ltd. 1989 (10) TMI 20 - KERALA HIGH COURT has specifically held that remission of loan taken to purchase machinery cannot be reduced from the cost of machinery. Hence we find no force in the contention of the Revenue that in view of nexus between the term loan and acquisition of assets remission of loan will amount to remission of depreciation. The decision of Bombay High Court in the case of Mahindra Mahindra Ltd. 2003 (1) TMI 71 - BOMBAY HIGH COURT relied upon by the tax authorities will not support their contention as the Hon ble Bombay High Court has not gone into the question of depreciation at all. Accordingly we hold that the remission of principal portion of the loan cannot fall in the purview of the provisions of s. 41(1) of the Act. Accordingly we reverse the decision of the learned CIT(A) in this regard. In the result the appeal filed by the assessee is allowed.

Summary

Issues Involved:
1. Validity of reopening the assessment under Section 147 beyond four years from the end of the assessment year.
2. Taxability of the amount representing waiver of part of the loan under Section 41(1) of the IT Act.

Detailed Analysis:

1. Validity of Reopening the Assessment under Section 147 Beyond Four Years:

The primary contention was whether the Assessing Officer (AO) was justified in reopening the assessment beyond four years from the end of the assessment year. The assessee argued that all material facts, including the waiver of the loan, were disclosed in its annual report filed with the return of income. The AO, however, did not consider the taxability of the principal portion of the loan waiver during the original assessment. The CIT(A) upheld the validity of the reopening, citing that mere submission of accounts does not amount to full and true disclosure. The AO's belief regarding the escapement of income was considered reasonable, given that the waiver of the principal portion of the loan was not specifically brought to his attention.

The Tribunal concluded that the assessee failed to disclose fully and truly all material facts necessary for the assessment, as required by the proviso to Section 147. The Tribunal emphasized that the AO did not make inquiries regarding the taxability of the principal portion waived, and the assessee did not bring these facts to the AO's notice. Consequently, the reopening of the assessment was deemed valid.

2. Taxability of the Waiver of Part of the Loan under Section 41(1):

The second issue was whether the waiver of the principal part of the loan would give rise to income taxable under Section 41(1) of the IT Act. The assessee contended that the waiver of the principal amount of the loan could not be considered as income since it was capital in nature and not a trading liability. The assessee relied on various judicial precedents to support this contention.

The AO, however, argued that the depreciation claimed on the assets purchased with the loan should be considered as expenditure, and thus, the waiver of the loan should be taxable under Section 41(1). The CIT(A) upheld the AO's view, relying on the decision of the Bombay High Court in the case of Nectar Beverages (P) Ltd.

The Tribunal, after considering the arguments and judicial precedents, concluded that the waiver of the principal portion of the loan could not be treated as trading liability. The Tribunal emphasized that depreciation is allowed on the actual cost of the assets, and the remission of the loan cannot be equated with remission of depreciation. The Tribunal relied on the decision of the Kerala High Court in the case of CIT vs. Cochin Co. (P) Ltd., which held that remission of the loan taken to purchase machinery cannot be reduced from the cost of machinery. Consequently, the waiver of the principal portion of the loan was not taxable under Section 41(1) of the Act.

Conclusion:

The Tribunal allowed the appeal filed by the assessee, holding that the reopening of the assessment under Section 147 was valid, but the waiver of the principal portion of the loan could not be taxed under Section 41(1) of the IT Act.