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2016 (4) TMI 1100 - ITAT HYDERABAD

2016 (4) TMI 1100 - ITAT HYDERABAD - TMI - Reopening of assessment - waiver of loan as income u/s 41 - reasons to believe - Held that:- AO had reopened the assessment on the ground that the waiver of loan by the bank has escaped assessment. The same was pointed out in the audit objection. We have perused the audit objection and the reasons recorded by the AO for reopening the assessment. No doubt, on record the reasons recorded by the AO are based on his own reasons of view, but, the same was in .....

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applied his mind independently even though the reasons recorded on the basis of the factual error pointed out by the audit party. The reasons for reopening an assessment need to be based on tangible material which has a live-link with the formation of the belief that there was an escapement of income. Therefore, we do not find any infirmity in the order of CIT(A) in quashing the reopening of assessment made by the AO u/s 147 of the Act.

Two instalments had to be paid in AY 2007-08. Ev .....

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waiver as income u/s 41, on the contrary, the AO had not brought anything on record that the waiver of loan was relating to trading liability or any revenue expenditure was allowed against the above waiver. Hence, in our considered view, the above waiver of loan cannot be brought into tax net considering the fact that the waiver condition was not fulfilled during this AY and cannot be recognized as income u/s 41 during this assessment year - Decided in favour of assessee - ITA No. 754/Hyd/2015 - .....

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ts return of income for AY 2006-07 on 30/11/2006 admitting loss of ₹ 30,23,810/-. This company was amalgamated with the assessee company with effect from 01/04/2007. The case was selected for scrutiny and completed the assessment u/s 143(3) of the Income-tax Act, 1961 ( in short Act ) on 27/11/2008 accepting the declared loss of ₹ 30,23,810/-. Subsequently, notice u/s 148 was issued on 26/03/2013 and the reassessment was completed u/s 143(3) r.w.s. 147. Aggrieved with the above order .....

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009 which is extracted below: "Provisions of sec.41 of the Act are applicable when a liability which was claimed as deduct ion ceased or waived. As the principle portion of bank loan waived by the banks was not claimed as expenditure in earlier years, the question of treating the same as income u/s 41 of the Act does not arise. Therefore the object ion is not correct and may be dropped." (iii) Subsequently, the CIT-I I, Hyderabad vide reply dated 05-01-2011 on the above audit object io .....

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be taxed in assessment year 2006-07. The underassessment of income worked out to ₹ 5,23,36,000/- with consequential tax effect of ₹ 1,76,16,298/- " 02. The object ion raised by the audit is not acceptable as the amount is not liable to tax in the A. Y. 2006-07. This is because as per the terms of OTS vide IDBI letter dt.20.08.05, the company has to pay the balance amount of ₹ 4.25 crore as under : Rs.106.50 lakh before 30.09.2005 ₹ 106. 17 lakh before 31.03.2006 S .....

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ed by the company" Thus it could be seen that as per terms of waiver, it is only after payment of all instalments which occurs in the previous year relevant to the A. Y 2007-08 as the waiver crystallizes in the F. Y 2006-07 03. In view of the above, the audit is requested to kindly drop the object ion raised and treat the same as sett led." (iv) Fur ther, the AddI.CIT, Range-2, Hyderabad vide letter dated 13.03.2013 addressed to CIT-I I, Hyderabad which is extracted below: "Audit .....

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g due procedure of law." From the above points, CIT(A) observed that the reasons recorded on the order sheet reflect the view point of the audit. The reasons are not based on AO s application of mind as required of quasi-judicial authority. Further, he observed that the reasons for reopening an assessment need to be based on tangible material which has a livelink with the formation of the belief that there was an escapement of income. For this proposition, he relied on the decision of the H .....

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on change of opinion and audit objection. The other grounds were considered as academic considering the fact that the reopening of assessment was quashed. 4. Aggrieved with the above, revenue filed the appeal before us and has raised the following grounds of appeal: 1) The CIT(A) erred on facts and in law in granting relief to the assessee. 2) In the case laws relied upon by Ld CIT(A)-2, Hyderabad the decisions are with regard to opinion of audit party regarding application or interpretation of .....

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f CIT Vs PVS Beedies Pvt Ltd [237 ITR 13] (SC). 5. Ld. DR submitted that the audit party has pointed out a fact that the waiver of principal amount was not treated as income. The audit party has merely pointed out a fact which was overlooked by the AO. Moreover, the assessee had not brought on record the nature of the loan taken from IDBI. This was not properly assessed by the AO. Hence, reopening of the assessment is permissible on the basis of factual error pointed out by the audit party as he .....

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such reasons. The CIT(A) should not have formed opinion suo moto without giving an opportunity to AO. He also submitted that CIT(A) should have gone into the merits of the case before coming to the conclusion that the assessment was done at the behest of the Principal Commissioner of Income-tax and Revenue audit party. 6.1 It is submitted that it is the assessee's primary duty to disclose the material facts. Except for stating that the loan has been remitted by the bank, even as on date, th .....

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pal loan amount has not been claimed as a deduction in the earlier, by Producing proof of its actual utilization, it cannot be concluded that the waiver of the same is not hit by the provisions of section 41(1) 6.2 Ld. DR submitted that the hon'ble Supreme Court in Calcutta Discount Co Ltd Vs ITO 41 ITR 191 pointed out that there are three stages involved in every assessment; (i) the disclosure of all primary facts;(ii) inferences of facts to be drawn from the primary facts disclosed ; and ( .....

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so stated by Explanation I to the section, the scope of which is elucidated later. There might be an omission or failure to make a full and true disclosure if some material for the assessment lay embedded in that evidence which the assessee could uncover but did not. If there was such a fact it was the duty of the assessee to disclose that too. (Indo-Aden Salt Mfg & Trading Co Pvt Ltd(1986); 159 ITR 624(SC); Raymond Woollen Mills Ltd Vs ITO 207 ITR 929(Bom); Pala Marketing Cooperative Socie .....

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on the part of the Assessing Officer to rethink the whole issue, on the basis of material available and form an opinion that there is reason to believe that there is escapement of income as the tangible material information relating to waiver is missing, even as on today. 6.5 It is submitted that though the notice cannot be issued solely on the basis of Audit's opinion, still it can form an information which can be taken into consideration, in the process of arriving at the "Reason To .....

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it is true, if equally, it is not full. In this behalf both the elements prescribed by the statute, namely, the fullness and truthfulness of the materials should invariably be present. Then only is the officer prevented from acting under clause (a). Even when full disclosure is made, if a taxable item is omitted in the final computation of income, the officer has a duty to invoke section 147 [Praful Chandra Patel Versus ACIT 236 ITR 832 (Guj)] 6.8 It is submitted that the CIT(A) has referred to .....

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as per section 151 of I.T Act, 1961. In fact, while granting approval for reopening of the case, the hon'ble Commissioner has categorically directed to follow the procedure as per law. In fact, the honourable Apex court in the case of PVS Beedies Pvt Ltd(237 ITR 13)) has held in 1997, that reopening of case under 147(b) on basis of factual information given by internal audit party was valid in law. 6.9 It is submitted that since the Assessing Officer independently examined the material coll .....

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ITO) (11-03-2014). 6.11 It is submitted that, in fact, the decision cited by CIT (A) in the case of Usha International Ltd Vs. DClT Circle-18(1) New Delhi (56 Taxmann.com 157)(Del-Trib) is in favour of the Department. In that case, it was held that, if the AO fails to examine an issue during assessment proceedings and later developments warrant its examination, it would not be a case of "Change of Opinion" at the time of initiation of reassessment. Where the AO has given cogent reason .....

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is relatable to the amount of principal waived, is liable to be disallowed. This principle in the matter of disallowance is an unassailable one. The honorable Hyderabad Tribunal has in the case of Binjrajka Steel Tubes Ltd versus ACIT 130 lTD 46 has taken a view that the assessee has obtained benefit of tax to the extent of depreciation allowance and brought such depreciation to tax. In the event of the utilization of loan as working capital in the day to day business affairs of the assessee as .....

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ase of machinery. Therefore, in the absence of full and true disclosure of information by the assessee at any time of the proceedings, the formation of belief is after due application of mind, thoroughly, to the facts of the case. 6.13 In view of the above submissions, the ld. DR submitted that the action of the AO is not under any compulsion of audit party and therefore after due application of mind, hence, the order of CIT(A) may be set aside and that of the AO be restored. 7. Ld. AR submitted .....

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SC 2. Jagat Jayantilal Parikh Vs. DCIT, 355 ITR 400 (Guj.) 3. Vodafone West Ltd. Vs. ACIT, 37 Taxmann.com 158 (Guj.) 4. CIT Vs. T.V. Sundaram Iyengar & Sons Ltd., 222 ITR 344 SC 5. Iskraemeco Regent Ld Vs. CIT, 355 ITR 317 (Mad.) 8. Considering the submissions of both the counsels and material facts on record, we find that the AO had reopened the assessment on the ground that the waiver of loan by the bank has escaped assessment. The same was pointed out in the audit objection. We have perus .....

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ings of the notice u/s 148, which was issued on 26/03/2013 clearly shows that the reopening was done on the behest of the Addl. CIT. It clearly shows that the AO had not applied his mind independently even though the reasons recorded on the basis of the factual error pointed out by the audit party. The reasons for reopening an assessment need to be based on tangible material which has a live-link with the formation of the belief that there was an escapement of income. For this proposition, CIT r .....

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