2020 (12) TMI 568 - HC - Income Tax

Waiver of the loan - Deemed income either u/s.28(iv) or under Section 41(1) - HELD THAT - When a portion of the loan is waived, the total amount of loan shown on the liabilities side of the balance sheet is reduced and the amount shown as capital reserves, is increased to the extent of waiver. A careful perusal of the Assessment order and the subsequent orders of the Appellate Authority show that in the absence of particulars sought for by the Assessing Officer and substantiating records and books of accounts with regard to the previous assessment orders for the previous years, they have arrived at the decision that waiver of the loan is based on the receipt and the income is taxable under section 28(iv) and 41(i) of the Act. - It is the duty of the assessees to furnish all the particulars including the accounts of the previous years. Unless the entire books of accounts of the assessees are submitted in the previous years, it is difficult to say how the assessees had treated the amount in their books of accounts. In the absence of any particulars pertaining to the previous years books of accounts, it is difficult to arrive at a decision and therefore, in order to grant one more opportunity for production of books and accounts to substantiate their case, we are inclined to remit the matter back to the Assessing Officer. Accordingly, the order of the Income Tax Appellate Tribunal is set aside and the matter is remitted back to the Assessing Officer and the appellants/assessees are directed to submit the entire particulars including books of accounts for the year 2003-2004 and also of the previous years. ICICI bank also shall submit the entire particulars regarding the loan transaction with the assessees. The Assessing Officer, after giving reasonable opportunity to the assessees as well as the Bank, for submission of the entire particulars, is directed to consider all the particulars and pass orders.

Issues Involved:
1. Taxability of loan waiver under Section 28(iv) and Section 41(1) of the Income Tax Act.
2. Deduction of bad debts under Section 36(1)(vii) read with Section 36(2).
3. Allowance of preoperative expenses.
4. Depreciation on machinery and other assets.

Detailed Analysis:

1. Taxability of Loan Waiver:
The primary issue was whether the waiver of the loan by ICICI Bank should be taxed as income under Section 28(iv) of the Income Tax Act. The assessees argued that the loan waiver was a capital receipt and not taxable. They relied on the Supreme Court's decision in CIT Vs. Mahindra and Mahindra Limited, which held that waiver of a loan by the bank is not taxable under Section 28(iv) or Section 41(1) as it is not a trading liability.

The Tribunal, however, based its decision on earlier judgments, including Ramaniyam Homes (P) Ltd. and Iskraemeco Regent Ltd., which held that the loan waiver should be treated as a revenue receipt and thus taxable. The Tribunal noted that the assessees did not provide sufficient documentation or books of accounts to substantiate their claim. Consequently, the Tribunal confirmed the Assessing Officer's decision to treat the loan waiver as taxable income.

2. Deduction of Bad Debts:
The assessees claimed deductions for bad debts written off. The Assessing Officer disallowed these claims, stating that the assessees failed to provide sufficient evidence that the debts were actually written off and met the conditions laid down under Section 36(1)(vii) read with Section 36(2). The CIT (Appeals) and the Tribunal upheld this disallowance, noting that the assessees could not furnish account copies of the creditors or proof of steps taken for debt recovery.

3. Allowance of Preoperative Expenses:
In the case of M/s. Kothari Biotech Ltd., the assessees claimed preoperative expenses. The Assessing Officer disallowed this claim, stating that the business had not commenced its operations during the relevant assessment year. The CIT (Appeals) and the Tribunal confirmed this disallowance, noting that the business was suspended, and no manufacturing activity was undertaken. The expenses could not be allowed as they were not capitalized nor any depreciation claimed.

4. Depreciation on Machinery and Other Assets:
The assessees claimed depreciation on machinery and other assets. The Assessing Officer disallowed this claim, stating that there were no business operations during the relevant financial year, and the assets were not put to use. The CIT (Appeals) allowed the depreciation claim, following the ITAT's decision in Kothari Sugars & Chemicals Ltd., which held that depreciation should be allowed on the block of assets even if they were not used in the subsequent years. The Tribunal did not address this issue further as no appeal was filed by the Revenue.

Conclusion:
The High Court remitted the matter back to the Assessing Officer, directing the assessees to submit all relevant particulars, including books of accounts for the year 2003-2004 and previous years, and for the ICICI Bank to provide details of the loan transaction. The Assessing Officer was instructed to reconsider the issues based on the complete documentation and pass orders in accordance with the law. If the assessees fail to submit the required particulars within one month, the Tribunal's order will stand confirmed, and the appeals will be dismissed.

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