2018 (12) TMI 1592 - AT - Income Tax

Revision u/s 263 - assessee claimed deduction as loan written back under OTS scheme, considering it as capital receipt not liable to tax - Held that - We find that the A.O. has not made any enquiry regarding the nature of the loans waived off and the purposes for which they were utilized. The assessee also has at no stage given the correct and complete details and the purposes for which all the loans were utilized. Case of Mahindra & Mahindra Ltd. (2003 (1) TMI 71 - BOMBAY HIGH COURT ), provided that waiver off loans which were taken and utilized for trading purposes would fall under the realm of taxation as revenue receipt. This view is fully fortified by the decision of the Hon ble Apex Court in the case of Sundaram Iyergar and Sons Ltd. (1996 (9) TMI 1 - SUPREME COURT) rendered by the Bench comprising three of lordship. Under such facts and circumstances, what the ld. CIT is directing to the A.O. is to pass an order after doing meaningful enquiry and as per law and after giving the assessee reasonable opportunity. We find that in such circumstances, no prejudice whatsoever is caused to the assessee. In the case of Daniel Merchants Private Limited and others vs. ITO (2017 (12) TMI 409 - CALCUTTA HIGH COURT) wherein the Hon ble Apex Court has expounded that the order directing the A.O. to carry through proper enquiry cannot be said to be liable to be set aside - Decided against assessee.

Issues Involved:
1. Jurisdiction of the Commissioner of Income Tax (CIT) under Section 263.
2. Erroneous and prejudicial assessment order.
3. Nature and taxability of loans waived by banks.
4. Computation of book profit under Section 115JB.
5. Reduction of share capital and its implications.

Issue-wise Detailed Analysis:

1. Jurisdiction of the Commissioner of Income Tax (CIT) under Section 263:
The assessee challenged the CIT's jurisdiction to invoke Section 263, claiming the order was "ab initio void, illegal and bad in law." The CIT had issued a show cause notice and observed that the Assessing Officer (AO) failed to conduct relevant inquiries into the nature of loans waived by banks and their taxability. The Tribunal upheld the CIT's jurisdiction, stating that failure to carry out meaningful inquiries by the AO justified the invocation of Section 263.

2. Erroneous and Prejudicial Assessment Order:
The CIT found the AO's assessment order to be erroneous and prejudicial to the interest of the revenue. The AO did not investigate the purpose of the loans, terms of waiver, or applicability of relevant case laws. The Tribunal agreed, noting that the AO acted mechanically without proper inquiry, thus justifying the CIT's intervention.

3. Nature and Taxability of Loans Waived by Banks:
The CIT directed the AO to reexamine the taxability of ?9,86,50,379/- waived under the One Time Settlement (OTS) scheme. The CIT referenced the Bombay High Court's decision in Solid Containers Ltd., which held that waived loans for trading activities are taxable under Section 28(iv). The assessee argued that the loans were for capital purposes, invoking the Mahindra & Mahindra Ltd. case. The Tribunal found the AO did not establish the nature of the loans and agreed with the CIT's directive for a fresh assessment to determine the correct tax treatment.

4. Computation of Book Profit under Section 115JB:
The CIT identified errors in the computation of book profit under Section 115JB, specifically the incorrect set-off of ?4,81,17,410/- instead of ?4,85,58,547/-. The AO failed to consider whether Deferred Tax Asset was included in the book loss. The Tribunal upheld the CIT's finding that the AO's computation was erroneous and required correction.

5. Reduction of Share Capital and Its Implications:
The CIT noted that the AO did not inquire into the reduction of share capital from ?10/- per share to ?4/- per share and the substantial write-off from the share premium account. The CIT found this lack of inquiry indicative of the AO's mechanical approach. The Tribunal agreed, emphasizing the need for the AO to conduct a thorough examination of these aspects during reassessment.

Conclusion:
The Tribunal dismissed the assessee's appeal, upholding the CIT's order to set aside the original assessment and direct the AO to conduct a fresh assessment with proper inquiries. The Tribunal emphasized the necessity of meaningful inquiries into the nature of loans, their taxability, correct computation of book profit, and implications of share capital reduction, in line with relevant legal precedents.

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