TMI Blog2008 (5) TMI 339X X X X Extracts X X X X X X X X Extracts X X X X ..... her 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot 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. - D. Manmohan J.M. And B.R. Baskaran A.M. For the Appellant : G. V. N. Hari. For the Respondent : Rajive Kumar Singh. ORDER B.R. BASKARAN, A.M. : This appeal by the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deduction in any of the preceding years and therefore it cannot be assessed to tax under s. 41(1) of the Act and thus not offered the said amount as income of the year under consideration. However, the assessee appended following note in its annual report, containing balance sheet and P L a/c, filed along with the return of income: Consequent to approval of Rehabilitation Scheme by the Government of India, the company has opted for one time settlement of term loans with interest thereon. Pursuant to the scheme, the company had paid a sum of Rs. 114.81 lakhs in full settlement of the term loans with interest. As a result of this, interest provided in earlier years to the tune of Rs. 160.77 lakhs was written back. A sum of Rs. 224.22 lakhs representing reduction of principal amount payable was transferred to capital reserve. According to the assessee, the information with regard to the settlement of loan was disclosed while completing the assessment on 29th March, 2001. The AO observed in para 9 of his order that the interest payable to the SDFC was allowed on actual payment to the extent of Rs. 4,72,962 in the year 1991-92 and therefore consequent on the waiver of interest a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lying upon the decision of the Hon'ble Bombay High Court in the case of Nectar Beverages (P) Ltd. vs. Dy. CIT (2004) 190 CTR (Bom) 319 : (2004) 267 ITR 385 (Bom) he concluded that the claim of deduction towards depreciation is in the nature of expenditure as it reduced the liability of the assessee to pay income-tax on such amount and thus upon waiver of the loan liability which was utilized for purchase of the asset, the consequent depreciation claimed thereon can be said to have been recovered by the assessee and therefore provisions of s. 41(1) of the Act are applicable. Accordingly, he brought to tax the impugned loan waiver amount of Rs. 2,24,22,400 in the assessment completed under s. 143 r/w s. 147 of the Act. 8. Aggrieved, the assessee carried the matter in appeal before the learned CIT(A). Before the first appellate authority, in addition to disputing on the taxability of waived loan amount, the assessee also raised the issue regarding the validity of reopening of the assessment by placing its reliance on the following decisions: (i) Tantia Construction Co. Ltd. vs. Dy. CIT (2002) 177 CTR (Cal) 419; (ii) Mahalaxmi Motors Ltd. vs. Dy. CIT (2004) 186 CTR (AP) 73 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction relating to waiver of loan as well as interest. (iii) The facts relating to utilization of impugned loan for acquisition of trawlers and claim of depreciation on such trawlers for different assessment years were not disclosed by the assessee. (iv) If the AO honestly comes to a conclusion that a mistake has been made, it matters nothing so far as his jurisdiction to initiate the proceedings under s. 147 of the Act is concerned [Praful Chunilal Patel]. (v) The Hon'ble Bombay High Court in the case of Dr. Amin's Pathology Laboratory vs. P.N. Prasad, Jt. CIT (2002) 172 CTR (Bom) 696 : (2001) 252 ITR 673 (Bom) has observed that mere production of account books from which material evidence could have been discovered by the AO will not necessarily amount to disclosure within the meaning of the proviso to s. 147 of the Act. (vi) In the original assessment proceedings the AO basically examined the applicability of s. 43B of the Act to the unpaid interest liability and a reference made to one time settlement was only a passing reference and that aspect was never examined by the AO. 11. Aggrieved, the assessee is in appeal before us. The learned Authorized Represe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has specifically held that so far as primary facts are concerned, it is the assessee's duty to disclose all of them including particular entries in books, particular portions of documents, and documents and other evidence which could have been discovered by the assessing authority, from the documents and other evidence disclosed. The duty, however, did not extend beyond the full and truthful disclosure of all primary facts. Once all the primary facts were before the assessing authority, it was for him to decide what inferences of facts could be reasonably drawn and what legal inferences had ultimately to be drawn. It was not for anybody else-far less the assessee-to tell the assessing authority what inferences, whether of facts or law, should be drawn . He further amplified the meaning of material primary facts as under: The 'material facts' which an assessee is required to disclose at the time of his assessment are primary facts material and necessary for the purpose of his assessment. The 'primary facts' which are required to be disclosed must be material or relevant to the decision of the question before the assessing authority so that their non-disclos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee regarding loss on account of fall in the value of shares held as current asset was originally allowed by the AO in the original assessment proceedings. Subsequently, block assessment proceedings were commenced consequent to the search on the assessee and after completion of block assessment proceedings, the assessee filed an application before the ITSC and received the orders also. In the meantime, the Department took the view that loss arising on account of fall in the share value is a speculative loss, which could not be set off against the business income of the assessee and accordingly a petition was filed before the Settlement Commission in this connection which was dismissed by the Settlement Commission. Consequent to that, the Department issued a notice under s. 148 of the Act for reopening the assessment. Against this notice, the assessee filed a writ petition before the Hon'ble Andhra Pradesh High Court questioning the validity of the notice. The Hon'ble Andhra Pradesh High Court allowed the petition of the assessee on the ground that the assessee has furnished all materials in this connection before the AO. We find that in this case, the claim of the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce it cannot be said that there is no failure on the part of the assessee to disclose fully and truly all material facts. The decision of the Hon'ble jurisdictional High Court in the case of Mahalaxmi Motors Ltd. is distinguishable as the AO in that case has originally considered the claim of the assessee whereas the AO in the present case has not considered the present issue and hence it cannot be termed as 'change of opinion'. The Hon'ble Andhra Pradesh High Court did not consider Expln. 1 to s. 147, as it was not necessary in that case to consider the Explanation. The Expln. 1 to s. 147 has been duly considered by the Bombay High Court in Dr. Amin's Pathology Laboratory while upholding the issue of notice under s. 148 of the Act. 17. In Mahalaxmi Motors Ltd. the Hon'ble Andhra Pradesh High Court extracted the observations of the Hon'ble Supreme Court in the case of Sri Krishna (P) Ltd. vs. ITO (1996) 135 CTR (SC) 75 : (1996) 221 ITR 538 (SC) and some of the abovesaid observations in this connection are given below: The enquiry at the stage of finding out whether the reassessment notice is valid is only to see whether there are reasonable ground ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of liability has to be read in relation to trading liability only. He further submitted that the waiver of principal portion of loan couldn't be taken as trading liability, as the impugned principal amount has never been claimed as expenditure or allowance under IT Act, In this connection, he relied upon the decision of Hon'ble Delhi High Court in the case of CIT vs. Phool Chand Jiwan Ram (1981) 131 ITR 37 (Del) wherein it has been held that only trading debts which are allowed as deduction in earlier years can only be treated as a trading liability. Accordingly, he submitted that the waiver of principal amount of loan cannot be brought to tax under s. 41(1) of the Act. 20. Next, he submitted that the tax authorities have proceeded under wrong interpretation of the provisions of IT Act by linking the loan amount to the depreciation claim. Depreciation is allowed on the actual cost of the assets, which have been put to use for the purpose of business. Hence, the allowance of depreciation has nothing to do with the loan taken for purchasing the assets. Hence, remission of such loan cannot be reduced from the cost of machinery. In this connection he relied upon the deci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... words remission or cessation thereof' shall apply only to trading liability and it shall not apply to any loss or expenditure. 23. The next issue that arises is whether waiver of principal amount of loan would amount to trading liability? On this issue also, the Hon'ble Delhi High Court in Phool Chand Jiwan Ram has 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. 24. The next issue to be addressed is, whether the waiver of loan will amount to a benefit relatable to depreciation expenditure claimed earlier? In this case, the assessee had obtained a loan of Rs. 3.18 crores from SCICI and acquired four trawlers by utilizing the abovesaid loan. It hart also claimed depreciation from 1988-89 to 1997-98 to the extent of Rs. 3.62 crores on the trawlers so a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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