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TMI Blog2008 (5) TMI 339X X X X Extracts X X X X X X X X Extracts X X X X ..... red total income of Rs. 1,49,67,491 on 30th Nov., 1998 before setting off of various losses and depreciation. The assessment was completed under s. 143(3) of the Act by determining the income as per the provisions of s. 115JA of the Act. 4. The assessee company had acquired four trawlers in the year 1985 by availing loan of Rs. 3.18 crores from Shipping Development Fund Committee (SDFC) which was abolished subsequently and in its place Shipping Credit & Investment Co. of India (SCICI) was appointed as a designated person to hold the assets. The total amount due towards principal amount of loan was Rs. 3,30,99,944 including capitalized interest of Rs. 12,59,187. As most of the industries engaged in export of shrimp suffered heavy losses, SCICI offered a package of one time settlement of loan and upon availing the package. the assessee company paid Rs. 1,04,37,405 as against its total liability of Rs. 3,28,59,805. In effect, the assessee's liability to the extent of Rs. 2.24,22,400 was waived by SCICI. The assessee credited the same to the capital reserve account. One time settlement procedure was concluded during the previous year relevant to the asst. yr. 1998-99 and therefore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aimed in the earlier years was more than the benefit derived now by way of remission of the loan and thus the impugned amount has escaped assessment. Accordingly, a notice was issued under s. 148 of the Act on 24th March. 2005 with the prior approval of the CIT-I, Visakhapatnam. with a view to bring to tax the impugned amount under s. 41(1) of the Act. 6. In response to the notice, the assessee submitted that it has already filed its return of income on 30th Nov., 1998. Subsequently, the case was taken up for scrutiny. During the course of assessment proceedings the assessee argued that waiver of principal amount cannot be considered as income as it is capital in nature and relied upon the following decisions to contend that allowance of depreciation cannot be equated with deduction in respect of "loss expenditure or trading liability" and therefore depreciation allowed cannot be brought back to tax on the ground that its depreciation claimed till date exceeds the amount of loan waived: (i) Mahindra & Mahindra Ltd. vs. C1T (2003) 182 CTR (Bom) 34 : (2003) 128 Taxman 394 (Bom); (ii) CIT vs. Chetan Chemicals (P) Ltd. (2004) 188 CTR (Guj) 572 : (2004) 139 Taxman 301 (Guj); (iii ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from SCICI has been utilized to acquire four trawlers on which depreciation has been claimed from asst. yrs. 1988-89 to 1997-98. These facts, i.e., utilization of amounts for buying the trawlers, depreciation claimed on them and the transaction of waiver of loan was not capital receipt, but a reduction in the expenditure on the capital items were not fully and truly disclosed by the appellant. (c) In the original assessment, the issue relating to waiver of term loan was not considered. (d) The AO relied upon the decision of Gujarat High Court in the case of Praful Chunilal Patel vs. M.J. Makwana, Asstt. CIT (1998) 148 CTR (Guj) 62 : (1999) 236 ITR 832 (Guj) wherein the words "escaped assessment" have been explained to cover the case of discovery of a mistake in assessment caused by either an erroneous construction of transaction or due to its non-consideration. 10. After considering the remand report, the various case laws, learned CIT(A) upheld the validity of the issue of notice under s. 148 on the following grounds: (i) The justification for belief is not to be judged from the standard of proof required for coming to a final decision. If the AO has a cause or justificati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e further submitted that the AO has considered the matter of waiver in the original assessment order when he was dealing with the taxability of interest and hence his action of issuing the notice under s. 148 of the Act after a period of four years is due to the change in the opinion of the AO, which cannot be a basis for issuing notice under s. 148 of the Act. He placed his reliance on the decision of the Hon'ble jurisdictional High Court in the case of Mahalaxmi Motors Ltd. wherein the Hon'ble High Court considered the effect of disclosure in the annual report and held that the issue of notice under s. 148 is invalid. He further submitted that though the learned CIT(A) referred to the decision of Hon'ble Bombay High Court in the case of Dr. Amin's Pathology Laboratory, in view of the decision of the jurisdictional High Court, learned CIT(A) is precluded from following the decision of the Bombay High Court. He further submitted that the decision of Hon'ble Gujarat High Court in the case of Praful Chunilal Patel does not apply to the present case as that was case of reopening within four years. He also submitted that the decision of the Hon'ble Bombay High C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... discovered by the AO, will not necessarily amount to disclosure within the meaning of the impugned proviso. Further, he submitted that the learned CIT(A) has considered all the legal aspects of the decisions relied upon by the assessee before upholding the validity of reopening. Accordingly, he supported the order of the learned CIT(A). 13. We heard the rival contentions and perused the record. 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. So, before adjudicating the issue before us regarding the validity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aim is in excess by about Rs. 4 lakhs 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. 16. Now the question before us is that whether such disclosure in the annual report would amount to full and true disclosure of all material facts. In this connection, it is pertinent to note the decision of the Hon'ble Supreme Court in the case of Kantamani Venkata Narayana & Sons vs. Addl. ITO (1967) 63 ITR 638 (SC) wherein it was observed as under: "It is the assessee's duty to bring to the notice of the AO particular items in the books of account or portions of documents which are relevant. The assessee's omission to bring to the attention of the AO the particular items in the accounts books or the particular positions of the documents which are relevant will amount to non-disclosure of material facts within the meaning of s. 147(a)." In the present case a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... make enquiries regarding taxability of principal portion waived. The assessee has also failed to bring the above 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 referred supra 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. 19. The next issue to be addressed is whether the waiver of principal part of the loan would give rise to income taxable under s. 41(1) of the IT Act. The learned Authorised Representative in this connection invited our attention to Hon'ble Supreme Court decision in the case of Polyflex (India) (P) Ltd. vs. CIT (2002) 177 CTR (SC) 93 : (2002) 257 ITR 343 (SC) wherein the Hon'ble Supreme Court has held that the words "some benefit in respect of such trading liability by way of remission or cessatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the tax authorities. 22. We heard the rival contentions and perused the records. Sec. 41(1) of the Act reads as under: "41(1). Where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee (hereinafter referred to as the first mentioned person) and subsequently during any previous year,- (a) the first mentioned person has obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtained by such person or the value of benefit accruing to him shall be deemed to be profits and gains of business or profession and accordingly chargeable to income-tax as the income of that previous year, whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not;" Sec. 41(1) consists of two main ingredients viz., (a) "loss or expenditure" and (b) "trading liability". As per the decision of the Hon'ble Supreme Court in the case of Polyflex (India) (P) Ltd., the two component ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or authority for the purpose of meeting the cost of the asset. When a person avails a term loan, it has to be repaid along with the interest, if any, in accordance with the terms and conditions prescribed for that purpose. If the term loan is utilized for acquiring any asset, it cannot be termed as 'meeting of a portion of cost of the asset'. 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. 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. 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. Accor ..... X X X X Extracts X X X X X X X X Extracts X X X X
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