ITO WARD-4(1)(3), MUMBAI vs. M/S ASHIK WOLLEN MILLS LIMITED, MUMBAI

आयकर अपील�य अ�धकरण, मुंबई पीठ�, मुंबई INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES, MUMBAI BENCH: A BEFORE SMT. BEENA PILLAI, HON’BLE JUDICIAL MEMBER AND SHRI JAGADISH, HON’BLE ACCOUNTANT MEMBER

ITA 3021/MUM/2022 िनधा�रण वष�/Assessment Year: 2011-2012) ITO WARD-4(1)(3) M/S ASHIK WOLLEN MILLS LIMITED ITO WARD-4(1)(3), ROOM NO. 637A, 6 TH FLOOR, AAYAKAR 5 TH FLOOR, SHREEJI BHAVAN, M.K.ROAD, Vs. KRUPA, KRISHNALAL CHURCHAGATE., -400020, ZAVERI MARG, CP TANK, MAHARASHTRA -400004, MAHARASHTRA अपीलाथ� Appellant ��थ� Respondent

Permanent Account Number of AAACA5048F Assessee:

अपीलाथ� �ारा/Appellant represented by: Shri Manoj Kumar (CIT-DR) ��थ� �ारा/Respondent represented Shri Niraj Sheth, Advocate & by: Shri Fenil Bhatt, ARs

सुनवाई की तारीख / Date of conclusion of hearing: 09-Jun-2026 घोषणा की तारीख / Date of pronouncement: 07/09/2026 आदेश / ORDER PER SMT. BEENA PILLAI, JUDICIAL MEMBER:

This appeal by the Revenue is directed against the order dated 03/10/2022 passed by the Ld. Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi [“Ld. CIT(A)”], for A.Y. 2011-12.

The Coordinate Bench, vide order dated 23/02/2024 passed in M.A. No.615/Mum/2023, recalled the order dated 10/05/2023 for fresh adjudication.

“1. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition of Rs.7,85,00,000/- made towards OTS and other costs of Rs.28,96,088/- discharged directly to banker by the third party and credited directly to capital reserve account in the balance sheet by holding that it does not amount to revenue receipt and therefore outside the purview of taxability u/s 41(1) of the Act. 2. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition of Rs.5,37,42,912/- by following the judicial decision in the case of Graham Firth Steel Products Vs. CIT 85 taxmann.com 110 (Bombay) and has not appreciated the fact that only a reference to the BIFR has been made by the assessee in its case and no order is passed by BIFR. 3. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition of Rs.5,37,42,912/- without appreciating the fact that the loan facility was availed towards working capital requirement of the company and paid interest thereon and claimed the same as an allowable expenditure in the earlier years. 4. The appellant craves leave to amend or alter any ground or add new ground which may be necessary.”

Assessee-company filed its original return of income for A.Y. 2011-12 on 20/09/2011, declaring total income at Rs.Nil, which was processed u/s. 143(1) of the Act. Subsequently, the Ld.AO received information that the assessee had entered into a One Time Settlement (“OTS”) in respect of loans availed from IDBI Bank, pursuant to which the Bank had granted partial waiver of the outstanding liability. Based on the said information, the Ld.AO formed a belief that income chargeable to tax had escaped assessment and reopened the assessment by issuing notice u/s. 148 dated 28/03/2018.

4.1. It is noted from the assessment record that the assessee availed financial assistance aggregating to Rs.10,00,00,000/- from IDBI Bank, comprising corporate/term loan of Rs.5,00,00,000/- and working capital loan of Rs.5,00,00,000/-. At the time of OTS, the aggregate outstanding liability stood at Rs.13,22,42,912/-, comprising principal liability of Rs.10,00,00,000/- and outstanding interest of Rs.3,22,42,912/-. It is submitted that the said two loans were availed by mortgaging agricultural land bearing plot nos.1139 and 1146 located at Chattral Gujrat, owned by Shreejit Textiled Industries.

4.2. Under the OTS arrangement, sum of Rs.7,85,00,000/- was paid to IDBI Bank by selling the agricultural lands mortgaged with the bank to a third party M/s. Logix Infosoft Pvt.Ltd. and balance Rs.28,96,088/- was to be recovered from the assessee. Rs.7,85,00,000/- was first appropriated towards outstanding interest of Rs.3,22,42,912/- and thereafter towards the principal component. The balance principal liability amounting to Rs.5,37,42,912/- was waived by the Bank.

4.3. The Ld.AO observed that the payment of Rs.7,85,00,000/- under the OTS was discharged through realisation of assets that belonged to the guarantor and the balance being the legal expenses of Rs.28,96,088/- was recovered from the asessee. According to the Ld.AO, discharge of liability through the guarantor’s assets, was not recognised as liability towards the guarantor in assessee’s books.

4.4. The observed that assessee on the contrary treated the amounts comprising waiver of principal of Rs.5,37,42,912/-, OTS payment of Rs.7,85,00,000/- and legal expenses of Rs.28,96,088/- , aggregating to Rs.13,51,39,000/-, as being in the capital field and credited the same to the Capital Reserve Account in its Balance Sheet instead of routing the same through the Profit & Loss Account.

4.5. The Ld.AO, was thus of the view that the amounts represented remission/cessation of trading liability and, accordingly, brought the aggregate amount of Rs.13,51,39,000/- to tax u/s. 41(1) of the Act while completing the reassessment.

Aggrieved by the assessment order, the assessee preferred an appeal before the Ld.CIT(A).

Aggrieved by the order of Ld.CIT(A), revenue is in appeal before this Tribunal.

5.1. The Ld.DR, reiterating the submissions advanced during the course of hearing, has filed written submissions dated 22/06/2026 challanging the relief granted by the Ld.CIT(A) on legal issue as well as on merits.

5.2. In Ground No. 4 the Ld.DR submitted that notice u/s.148 was issued on 28/03/2018 and, in response thereto, the assessee did not file a fresh return of income. It is submitted that the assessee filed a communication dated 11/04/2018 requesting that the return originally filed may be treated as the return filed in response to notice u/s.148. It is submitted that the Ld.AO recorded that no return was filed pursuant to notice u/s.148 and the reassessment was ultimately completed u/s.144 of the Act after considering the conduct and compliance of the assessee during the reassessment proceedings. The Ld.DR, thus argued that filing of return pursuant to notice u/s.148 is a statutory requirement and mere communication requesting adoption of an earlier return cannot, automatically be equated with filing of a fresh return.

5.3. He further submitted that, even if such communication were to be regarded as substantial compliance, the issue was at best a debatable legal issue and could not, by itself, justify annulment of the reassessment proceedings, particularly when the merits of the additions had not been properly appreciated by the Ld. CIT(A). The Ld.DR, therefore, supported the reasoning of the Ld.AO and 5 submitted that the reassessment proceedings were validly initiated and completed.

5.4. On merits, the Ld.DR submitted that the Ld.CIT(A) erred in treating the controversy as a simple case of waiver of loan and in proceeding substantially on the basis of the decision of Hon’ble Bombay High Court in CIT v. Graham Firth Steel Products (I) Ltd(supra). It was submitted that the controversy could not be decided merely by attaching the label of “loan waiver” to the transaction. According to the Ld.DR, the material enquiry was as to the purpose for which the borrowings were obtained, whether the borrowings were in the capital field or the business/trading field, the nature of the benefit obtained by the assessee and the commercial consequences flowing from the OTS arrangement. It was contended that the Ld. CIT(A) failed to undertake the aforesaid enquiry.

5.5. The Ld.DR placed reliance on the decision of the Hon’ble Delhi High Court in case of Logitronics (P.) Ltd. v. CIT, reported in (2011) 197 Taxman 394 to contend that the taxability of waiver of loan depends on the purpose for which the loan was obtained. It was submitted that where a loan is obtained for acquisition of capital assets, waiver thereof would ordinarily remain in the capital field; however, where the borrowing is for business or trading purposes, waiver thereof may result in a taxable receipt. It was further submitted that the decisive enquiry is whether the borrowing formed part of the capital structure of the assessee or was connected with its business and trading operations.

5.6. The Ld.DR thus submitted that in the present case the borrowings were admittedly connected with working capital requirements. The financial assistance of Rs.10,00,00,000/- comprised a term/corporate loan of Rs.5,00,00,000/- towards margin money for working capital and a working capital loan of Rs.5,00,00,000/-. It was, therefore, contended that the factual position in the present case was materially different from a case where the loan had been obtained exclusively for acquisition of capital assets.

5.7. The Ld.DR sought to distinguish the decision of the Hon’ble Supreme Court in Mahindra & Mahindra Ltd. reoirted in AIR 2018 SC 3007 with the present facts of the case. It was submitted that, in the said case the borrowing was admittedly for acquisition of tooling, dies, welding equipment, plant and machinery and other capital assets and it was in that factual backdrop that the remission of liability was held not to attract the relevant provisions. Thus according to the Ld.DR, the said decision does not lay down a proposition that every waiver of a loan is outside the ambit of taxation irrespective of the nature and purpose of the borrowing. It was submitted that the factual foundation which existed in Mahindra & Mahindra Ltd.(supra) is absent in the present case of the assessee.

5.8. The Ld.DR further relied on the decisions of Hon’ble Delhi High Court in case of Rollatainers Ltd. reported in (2011) 15 taxmann.com 111 and of Hon’ble Bombay High Court in case of Solid Containers Ltd. reported in (2009) 308 ITR 417. It was submitted that these decisions recognise the distinction between term loans utilised for acquisition of capital assets and working capital facilities utilised in the course of business operations. The Ld.DR submitted that waiver pertaining to working capital/business borrowings was held to assume revenue character in the circumstances considered therein. It was, therefore, contended that, the facts in case of the present assessee is closer to decision of Hon’ble Delhi High Court in case of Rollatainers Ltd.(supra) and decision of Hon’ble Bombay High Court in case of Solid Containers Ltd.(supra) than to decision of Hon’ble Supreme Court in case of Mahindra & Mahindra Ltd.(supra)

5.9. The Ld.DR controverted the assessee’s contention that waiver of the principal amount could not be brought to tax merely because the principal amount had never been claimed as a deduction. It was submitted that absence of a deduction may have relevance while considering the automatic applicability of section 41(1), but the enquiry could not end there. According to the Ld. DR, the real question was whether the assessee obtained a commercial benefit arising out of liabilities incurred in the course of its business and whether such benefit had acquired the character of income in its hands.

5.10. In this regard, reliance was placed on decision of Hon’ble Supreme Court in case of CIT v. T.V. Sundaram Iyengar & Sons Ltd.(supra). According to the Ld.DR, the Hon’ble Court in this case recognised that, an amount which was not taxable at the point of its original receipt may subsequently acquire the character of income when, in commercial reality, it becomes the assessee’s own money. The Ld.DR submitted that the substance of the transaction and the commercial enrichment resulting therefrom had to prevail over its original form.

5.11. It was also submitted that the assessee discharged its liabilities aggregating to more than Rs.13 crores under the OTS arrangement and appropriated the resultant benefit to its Capital Reserve. According to the Ld.DR, the taxable event relied on by the Revenue was not the receipt of the original loan but the subsequent commercial benefit obtained by the assessee on extinguishment of liabilities connected with its business operations.

5.12. With regard to the reliance placed by the Ld.CIT(A) on Graham Firth Steel Products (I) Ltd.(supra), the Ld.DR submitted that, the Revenue do not dispute the binding nature of the ratio of Hon’ble Bombay High Court. But he contended that, the said decision arose in a distinct factual background involving BIFR- related circumstances and rehabilitation arrangements. It was submitted that no comparable sanctioned rehabilitation framework or restructuring scheme existed in the present case and, therefore, the Ld.CIT(A) erred in applying the said decision without first examining whether the factual foundation on which the judgment proceeded existed in the assessee’s case.

5.13. The Ld. DR further emphasised on the fact that the OTS payment of Rs.7,85,00,000/- and legal expenses of Rs.28,96,088/- were discharged through realisation of assets belonging to the guarantor. He submitted that despite the same, the assessee did not reflect any corresponding liability towards the guarantor in its books of account. The Ld.DR submitted that where the liabilities of the assessee were discharged through realisation through the guarantor’s assets without any corresponding repayment obligation being recognised towards the guarantor, a direct economic benefit accrued to the assessee. It was contended that this material aspect had not been dealt with by the Ld. CIT(A).

5.14. The Ld.DR thus concluded by submitting that the reassessment proceedings were valid and that the borrowings in question were in the nature of working capital/business borrowings and were not exclusively for acquisition of capital assets; that the decision of Hon’ble Supreme Court in case of Mahindra & Mahindra Ltd.(supra) was distinguishable on facts, and the principles enunciated in Logitronics (P.) Ltd., decision of Hon’ble Delhi High Court in case of Rollatainers Ltd(supra)., decision of Hon’ble Bombay High Court in case of Solid Containers Ltd.(supra) and Hon’ble Supreme Court in case of T.V. Sundaram Iyengar & Sons Ltd.(supra) supported the Revenue’s case. It was accordingly prayed that the impugned order of the Ld.CIT(A) be set aside and the assessment order passed by the Ld.AO be restored.

5.15. On the contrary, the Ld.AR in respect of Ground No. 4, supported the order passed by the Ld.CIT(A). The Ld.AR submitted that the assessee had duly complied with the notice issued u/s.148 of the Act. It was contended that, vide communication dated 11/04/2018, the assessee had specifically requested the Ld.AO to treat the return originally filed as the return filed in response to the notice u/s.148. According to the Ld.AR, such adoption of the original return constitutes sufficient compliance with the requirement of furnishing a return pursuant to notice u/s.148. In support of this contention, reliance was placed on decisions of Hon'ble Bombay High Court in Tata Communications Ltd. v. DCIT, reported in (2025) 172 taxmann.com 656, and Ashok Commercial Enterprises v. ACIT, reported in (2023) 154 taxmann.com 144.

5.16. The Ld.AR submitted that, once the aforesaid communication is accepted as compliance with notice u/s.148, the present case cannot be regarded as one where the assessee had failed to furnish any return in response to the notice. Consequently, the proceedings have to be examined on the footing that the original return stood adopted as the return pursuant to section 148. It was further submitted that, on such footing, the requirement of notice u/s.143(2) has to be examined independently, notwithstanding that the assessment was ultimately completed u/s.144 of the Act.

5.17. The Ld.AR controverted the contention of the Ld.DR that the absence of any deduction of the principal loan amount was not determinative. It was submitted that section 41(1) specifically contemplates a situation where an allowance or deduction had earlier been made in respect of a loss, expenditure or trading liability and the assessee subsequently obtains a benefit by way of remission or cessation thereof. In the present case, the principal amount of the loan had never been claimed or allowed as a deduction. Consequently, the essential statutory condition for invoking section 41(1) was absent. The Ld.AR submitted that the Revenue could not enlarge the scope of section 41(1) by relying upon the general concept of commercial benefit.

5.18. The Ld.AR, on the other hand, submitted that the reliance placed by the Ld.DR on the decision of the Hon’ble Delhi High Court in Logitronics (P.) Ltd. v. CIT, reported in (2011) 197 Taxman 394, was misplaced. It was submitted that the said decision does not lay down an inflexible proposition that waiver of every loan utilised for business or working-capital purposes necessarily constitutes taxable income. According to the Ld.AR, the taxability of a waiver has to be determined having regard to the nature of the original liability, the statutory provision sought to be invoked and, in particular, whether the liability had earlier resulted in any deduction or allowance in the hands of the assessee.

5.19. The Ld.AR also distinguished the decisions relied upon by the Ld.DR in Rollatainers Ltd., reported in (2011) 15 taxmann.com 111, and Solid Containers Ltd., reported in (2009) 308 ITR 417. It was submitted that the said decisions turned upon their respective facts and the manner in which the loan amounts had been dealt with in the hands of the assessees. According to the Ld.AR, those decisions could not be read as laying down a universal proposition that remission of a working-capital loan is invariably taxable. The Ld.AR submitted that the ratio of those decisions has to be examined in the context of the statutory provision invoked and the factual finding as to whether any corresponding benefit or deduction had accrued to the assessee in respect of the liability.

We have perused the submissions advanced by both sides in light of records placed before us.

Ground No. 4:

6.1 In the facts of the present case, we are of the view that the aforesaid communication dated 11/04/2018 constitutes sufficient compliance with the notice issued u/s.148. Once the assessee had requested that its original return be treated as the return in response to notice u/s.148, the assessment proceedings had to be considered on that basis. The mere fact that a fresh return in the physical/formal sense was not furnished does not, in our view, alter the effect of the specific request made by the assessee before the Ld.AO. Having reached the aforesaid conclusion, the next question which arises for consideration is whether, after the return stood adopted as the return in response to notice u/s.148, the Ld.AO was required to issue notice u/s.143(2) before proceeding to complete the reassessment.

6.2. The requirement of notice u/s.143(2) in the context of reassessment has been considered by the Hon'ble Supreme Court in ACIT v. Hotel Blue Moon, reported in 321 ITR 362, and the principle regarding the mandatory nature of such notice has subsequently been reiterated in CIT v. Laxman Das Khandelwal, 417 ITR 325 (SC). Hon'ble Delhi High Court, in Pr.CIT v. Jai Shiv Shankar Traders (P.) Ltd., reported in 383 ITR 448, has specifically considered a case where, pursuant to notice u/s.148, the assessee requested that the original return be treated as the return filed in response to such notice, and held that failure to issue notice u/s.143(2) was fatal to the reassessment.

6.3. The Ld.DR sought to distinguish the applicability of section 143(2) on the ground that the assessment in the present case was ultimately completed u/s.144 of the Act. We are unable to accept that the mere description of the ultimate assessment order as one passed u/s.144, by itself, concludes the question. The anterior question is whether, after the assessee's return was treated as the return filed in response to notice u/s.148, the statutory procedure governing examination of such return was required to be followed. The fact that the Ld.AO subsequently proceeded to frame the assessment ex parte cannot, by itself, dispense with a statutory notice which was otherwise required to be issued before assuming jurisdiction to scrutinise the return. The Tribunal has also applied this principle to cases where the reassessment was ultimately completed u/s.144.

6.4. We also take note of the reliance Ld.DR on view of Ld.CIT(A) that cases where no return was filed pursuant to notice u/s.148 stand on a different factual footing. In the present case, as noted hereinabove, we have found that the assessee's communication dated 11/04/2018 constituted sufficient compliance with notice u/s.148 and that the original return was requested to be treated as the return in response to such notice. The question before us, therefore, is not one of complete absence of a return or response to notice u/s.148. In these circumstances, once the assessee's communication dated 11/04/2018 is treated as constituting compliance with notice u/s.148, the Ld.AO was required to follow the procedure contemplated by section 143(2) before proceeding to complete the reassessment. Admittedly, no notice u/s.143(2) was issued to the assessee thereafter.

6.5. The subsequent completion of assessment u/s.144 cannot cure the foundational defect arising from failure to issue the statutory notice u/s.143(2). The absence of such notice, where the same was mandatory, goes to the validity of the reassessment itself and is not a mere irregularity in the course of assessment. The Hon'ble Supreme Court has also held that complete absence of notice u/s.143(2) cannot be cured by invoking section 292BB.

6.6. We, therefore, hold that, on the peculiar facts and circumstances of the present case, the assessee’s communication dated 11.04.2018 requesting that its original return be treated as the return filed in response to the notice issued under section 148 constituted sufficient compliance with the requirement of section 148. Once the said return was so treated, the Assessing Officer was required to issue notice under section 143(2) before proceeding to complete the reassessment. Admittedly, no such notice was issued. The fact that the reassessment was ultimately completed under section 144 cannot obviate the statutory requirement of issuance of notice under section 143(2). The omission goes to the root of the validity of the reassessment proceedings and is not a mere procedural irregularity. We, therefore, hold that the reassessment proceedings are not sustainable in law and accordingly quash the reassessment order.

Accordingly, Ground no. 4 raised by the revenue stands dismissed.

In the result the appeal filed by the revenue stands dismissed.

Order pronounced in the open court on 07/09/2026.

Sd/- Sd/-

JAGADISH BEENA PILLAI ACCOUNTANT MEMBER JUDICIAL MEMBER

Mumbai Dated: 07/09/2026 Shamik Sr. P.S.

Copy to: ITO WARD-4(1)(3), ITO WARD-4(1)(3), ROOM NO. 637A, 6 TH FLOOR, AAYAKAR BHAVAN, 1 M.K.ROAD, CHURCHAGATE., -400020, MAHARASHTRA M/S ASHIK WOLLEN MILLS LIMITED, 5 TH FLOOR, SHREEJI KRUPA, 2 KRISHNALAL ZAVERI MARG, CP TANK,, -400004, MAHARASHTRA 3 THE PCIT / CIT, 4 THE D.R., ITAT, MUMBAI BENCH 5 GUARD FILE