THE COMMISSIONER OF INCOME TAX vs. M/S.DUROFLEX PRIVATE LTD.

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ITA/98/2010HC KeralaKLHC01026790201019 October 2010Author: HONOURABLE MR.JUSTICE K.SURENDRA MOHAN,HONOURABLE MR.JUSTICE C.N.RAMACHANDRAN NAIR7 pages
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What did the High Court hold?

The High Court held that the Commissioner's proceedings under Section 263 were not time-barred. The Court distinguished the Supreme Court's decision in Commissioner of Income Tax v. Alagendran Finance Ltd. by noting that in this case, the AO himself had proposed to assess the amount by re-opening the assessment under Section 148. Even though the AO later dropped these proceedings, the Commissioner was free to initiate revision proceedings under Section 263 after the dropping of the AO's reassessment proceedings. The Court found the Section 263 order to be within time when limitation was reckoned from October 25, 2006, the date the AO dropped the reassessment proceedings. On the merits, the Court followed its earlier judgment in Commissioner of Income Tax v. Messrs. Accelerated Freeze Drying Co. Ltd. (ITA 1774/2009 dated 22/3/2010), holding that waiver of funds does not constitute income. However, if any interest, for which deduction was claimed and allowed in earlier years under Section 36(1)(iii), formed part of the waived amount, then such interest would be assessable as income under Section 41(1) of the Act. The appeal was disposed of by modifying the Tribunal's order, directing the AO to verify the break-up of the waived amount and assess only the interest component if it was previously allowed as a deduction under Section 36(1)(iii).

What were the facts?

The Commissioner of Income Tax (Revenue) initiated suo motu revision proceedings under Section 263 of the Income Tax Act, 1961, against an order passed by the Assessing Officer (AO) concerning M/s. Duroflex Private Ltd. (Assessee) for assessment year(s) not specified. The AO had initially accepted the assessee's claim that a loan waiver of Rs. 62.50 lakhs by a bank was not assessable as income. The Commissioner, however, directed its inclusion. The Income Tax Appellate Tribunal (Tribunal) cancelled the Commissioner's order, holding it to be time-barred. The Revenue appealed this decision to the High Court. The AO had previously initiated proceedings under Section 147/148 for reassessment concerning the same amount, which were dropped on October 25, 2006.

What were the issues?

1. Whether the Commissioner's proceedings under Section 263 of the Income Tax Act, 1961, were time-barred, considering the prior dropping of reassessment proceedings under Section 147/148 by the Assessing Officer. (Question of law) Assessee's Contention: The Tribunal correctly held that the Section 263 proceedings were time-barred, relying on the Supreme Court decision in Commissioner of Income Tax v. Alagendran Finance Ltd. (293 ITR 1), which states that extended limitation is not available from the date of dropping income escaping assessment proceedings if the re-opening was on issues other than those considered by the Commissioner in Section 263 proceedings. Revenue's Contention: The Commissioner can initiate Section 263 proceedings after the dropping of Section 147 proceedings by the AO, and the limitation should be reckoned from the date the AO dropped the reassessment proceedings (October 25, 2006), making the Section 263 order within time. The Tribunal's reliance on Alagendran Finance Ltd. was distinguished. 2. Whether the waiver of a loan of Rs. 62.50 lakhs by the bank in favour of the respondent is assessable as income. (Question of mixed law and fact) Assessee's Contention: Not explicitly recorded, but implicitly argued that the waiver is not income, as accepted by the AO initially. Revenue's Contention: Not explicitly recorded, but implicitly argued for inclusion as income, leading to the Section 263 notice.

Which sections of the Income-tax Act were involved?

Section 263,Section 147,Section 148,Section 41(1),Section 36(1)(iii)

AI-generated summary — verify with the full judgment below

Cause title — parties, addresses and appearances
IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE C.N.RAMACHANDRAN NAIR & THE HONOURABLE MR. JUSTICE K.SURENDRA MOHAN TUESDAY, THE 19TH OCTOBER 2010 / 27TH ASWINA 1932 ITA.No. 98 of 2010() ------------------------ ITA.306/2009 of I.T.A.TRIBUNAL,COCHIN BENCH .................... APPELLANT/RESPONDENT ---------------------------- COMMISSIONER OF INCOME TAX, KOTTAYAM. BY ADV. SRI.JOSE JOSEPH, SC, FOR INCOME TAX RESPONDENT(S)/APPELLANT ------------------------------------ M/S.DUROFLEX PRIVATE LTD., ALAPPUZHA. ADVS. SRI.JOSEPH MARKOSE, SENIOR ADVOCATE SRI.V.ABRAHAM MARKOS SRI.B.J.JOHN PRAKASH SRI.TOM THOMAS (KAKKUZHIYIL) SRI.TERRY V.JAMES THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 19/10/2010, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: SVS/ C.N.RAMACHANDRAN NAIR & K. SURENDRA MOHAN, JJ. ------------------------------------------------------------ I.T.A.NO:98 OF 2010 ----------------------------------------------------------- Dated this the 19th October, 2010.

JUDGMENT Ramachandran Nair, J. The question raised is whether the waiver of loan of Rs.62.50 lakhs by the bank in favour of the respondent is assessable as income. Even though in the assessment the Assessing Officer accepted the assessee's claim that amount of loan waived by the bank is not assessable under the Act, the Commissioner in suo motu revision directed inclusion of the amount as income in assessment. In the appeal filed by the assessee the Tribunal cancelled the order of the Commissioner against which this appeal is filed.

2.

We have heard senior counsel Shri. P.K.R.Menon appearing for the revenue and senior counsel Shri. Joseph Markose appearing for the respondent.

3.

On the question of limitation the Tribunal held that there was already a proceedings under Section 143(1) with reference to which proceedings under Section 263 is time barred. The Tribunal has relied on the decision of the Supreme Court in Commissioner of Income Tax v. Alagendran Finance Ltd. (293 ITR 1). However, this is a case where Assessing Officer himself issued notice under Section 147 for revising the assessment to bring to tax the very same amount in respect of which Section 263 order is issued by the Officer. Proceedings initiated by the Assessing Officer to make income escaping assessment by issuing notice under Section 148 was dropped only on 25/10/2006. In the case of Alagendran Finance Ltd the Supreme Court held that extended limitation is not available from the date of dropping of income escaping assessment proceedings initiated under Section 147 if the re-opening was on issues other than the one considered by the Commissioner in proceedings under Section 263. In this case what we notice is that the Officer himself proposed to assess the amount by re-opening the assessment under Section 148. Though he later dropped the same we feel the Commissioner can always wait for correction of the assessment by the Officer himself and he is free to initiate proceedings for revision of assessment under Section 263 after dropping of the proceedings initiated by the Officer under Section 147. Admittedly the order issued under Section 263 is not time barred if the limitation is reckoned from 25/10/2006, the date on which the officer dropped the re-assessment proceedings. We

therefore reverse the order of the Tribunal on this issue and hold that proceedings initiated by the Commissioner under Section 263 was well within time.

4.

On the merits of the case we have already decided the issue in our judgment in the case of Commissioner of Income Tax v. Messrs. Accelerated Freeze Drying Co. Ltd. (judgment in ITA 1774/2009 dated 22/3/2010) wherein we have held that waiver of funds do not constitute income. However, if any interest on which deduction was claimed and allowed for any earlier year under Section 36(1)(iii) happened to form part of this amount waived then such amount is assessable as income under Section 41 (1) of the Act.

5.

We dispose of the appeal by modifying the order of the Tribunal with direction to the Assessing Officer to verify the break- up details of the amount waived by the bank and assess only interest if any waived that was allowed as deduction in any of the earlier years under Section 36(1)(iii) of the Act. C.N.RAMACHANDRAN NAIR Judge K. SURENDRA MOHAN Judge jj

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