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Income Tax Appellate Tribunal, “E” BENCH, MUMBAI
Before: SHRI SHAMIM YAHYA, AM & SHRI RAM LAL NEGI, JM
O R D E R Per Shamim Yahya, A. M.: This appeal by the assessee is directed against the order of the Commissioner of Income Tax (Appeals) dated 08.07.2011 and pertains to the assessment year 2002-03.
The grounds of appeal read as under:
a) The appellant submits that the learned Commissioner of Income-tax (Appeals) [CIT(A)] erred in upholding the action of the learned Assistant Commissioner of Income-tax Company Circle - VI(1), Chennai (herein after referred to as "the Assessing Officer") in reopening the assessment under section 147 of the Act. b) The appellant submits that the learned CIT(A) ought to have held that order passed under section 143 r.w.s. 147 by the Assessing Officer is illegal, null and SPL Polymers Ltd. void and ought to have cancelled the same as on a perusal of the reasons recorded for re-opening of the assessment; the same cannot be basis to form a belief that income may have escaped assessment.
2. The learned CIT(A) erred in upholding the action of Assessing Officer in treating a sum of Rs.7,00,66,000/- being amount of loan waived by the lender as income under section 41(1) observing that taking loan is an ordinary trade transaction of the appellant as the same was obtained in the course of the regular business.
3. The learned CIT (A) erred in upholding the levy of interest under section 234B amounting to Rs.78,81,595/-.
4. The appellant submits that the Assessing Officer be directed: a. to delete the addition of Rs.7,00,66,000/- in respect of waiver of loan; b. to delete interest levied under section 234B; and to modify the assessment in accordance with the provision of the Act.
Brief facts of the case are that the assessment u/s. 143(3) was completed on 15.03.2005. Subsequently, the assessment was reopened u/s. 147 of the Act on the following reasons recorded:
The assessee took loan of US $ 3 Million from M/s. Doshin Hongknong Ltd., Hongkong for working capital requirements. As on 31.03.2001, the loan amount outstanding was Rs.10,79,70,000/-. The loan amount outstanding as on 31.03.2002 was Rs.3,31,66,000/-. The difference was Rs.7,48,04,000/- (Rs.10,79,70,000 – 3,31,66,000). Out of this amount of Rs.7,48,04,000/-, the assessee repaid Rs.47,38,000/-. The balance amount of Rs.7,00,66,000 was waived by M/s. Doshin Hongkong Ltd. The amount waived by M/s. Doshin Hongkong Ltd. is assessable to income tax income. The ratio of the supreme court judgement in the case of CIT vs. T. V. Sundaram Iyengar & Songs Ltd. (222 ITR 344) applies to the case. The assessee did not admit the amount waived of Rs.7,00,66,000/- as income for income tax purpose when it filed the return of income. hence, i have reason to believe that the income chargeable to tax has escaped assessment. The income which has escaped assessment is Rs.7,00,66,000/- Accordingly, notice u/s. 148 was issued on 20.9.2006.
In the reassessment order on this issue, the Assessing Officer has referred to the provisions of section 41(1) of the Income Tax Act, 1961. Thereafter, he has noted that SPL Polymers Ltd. the assessee obtained loan from M/s.Doshin Hongkong Ltd., Hongkong for the purpose of working capital. That loan obtained was in the course of regular business and it is an ordinary trade transaction. Therefore, Assessing Officer opined that the transaction can be categorized as trading liabilities. Hence, the Assessing Officer held that when the loan was waived by the creditor, the same become the income of the assessee as the transaction took place out of ordinary trading transaction. That although the amounts received originally were not income in nature, the amount remained with the assessee for a long period and by the waiver by the creditor, the assessee gets benefit. In this regard, the Assessing Officer referred to the decision of the Hon’ble Apex Court in the case of CIT v. T. V. Sundaram Iyengar and Sons Ltd. (1996) 222 ITR 344 (SC). He found that there were similarities in the transaction as dealt with by the Hon’ble Apex Court in the present case. Hence, invoking the provisions of section 41(1) of the Act, the Assessing Officer added the sum of Rs.70,00,66,000/- waived by the loan creditor.
The assessee has challenged the validity of reopening as well as merits of the case before the ld. Commissioner of Income Tax (Appeals). The ld. Commissioner of Income Tax (Appeals) elaborately considered the issue. However, he upheld the reopening by holding as under:
4.3 I have carefully considered the issue. The plea of the appellant is that once the assessment is completed u/s.143(3) after due consideration of facts, the assessment is not subject to re-opening. The appellant has relied on various judicial pronouncements in this regard. However, it is observed that the decisions in the cases cited by the Ld.AR of the appellant have no applicability to the facts and issue of re-opening of assessment in this case. There is a proper and valid material before A.O., who has recorded the reason properly for issue of notice
SPL Polymers Ltd. u/s.148. The decision in the case of Praful Chunilal Patel also supports the action taken by A.O. where it was held that - "On a proper interpretation of section 147, it would appear that the power to make assessment or reassessment, where the initiation has been made within four years of the end of the relevant assessment year, would be attracted even in cases where there has been a complete disclosure of all relevant facts upon which a correct assessment might have been based in the first instance, and whether it is an error of fact or law that has been discovered or found out justifying the belief required to initiate the proceedings. Thus, the words 'escaped assessment' where the return is filed, are apt to recover the case of discovery of a mistake in the assessment caused by either an erroneous construction of the transaction or due to its non consideration, or caused by a mistake of law applicable to such transfer or transaction even where there has been a complete disclosure of all relevant facts upon which a correct assessment could have been based".
4.4 In fact, the action taken by the AO for reopening the assessment-is based on sound reasons recorded by him and reproduced in the assessment order which is reproduced again hereunder for proper appreciation:
"The assesses took loan of US $ 3 million from M/s.Doshin Hongkong Ltd., Hongkong for working capital requirements. As on 31.03.2001, the loan amount outstanding was Rs.10,79,70,000/-. The loan amount outstanding as on 31.03.2002 was Rs.3,31,66,000/-. The difference was Rs.7,48,04,000/-(10,79,70,000 - 3,31,66,000). Out of this amount of Rs.7,48,04,000/-, the assessee repaid Rs.47,38,000/-. The balance amount of Rs.7,00,66,000 was waived by M/s. Dolphin Hong kong Ltd. The amount waived by M/s.Doshin Hongkong Ltd. is assessable to income tax as income. The ratio of the Supreme Court judgement in the case of CIT vs. T. V. Sundaram lyengar & Sons Ltd. (222 ITR 344) applies to the case. The assessee did not admit the amount waived of Rs.7,00,66,000/- as income for income-tax purpose when it filed the return of income. Hence, I have reason to believe that the income chargeable to tax has escaped assessment. The income which has escaped assessment is Rs.7,00,66,000/-."
4.5 The provisions of Section 147 require that the AO should have reason to believe that any income chargeable to tax has escaped assessment. The word 'reason' in the phrase could mean cause or justification. If the AO has the cause or justification to think or suppose that income has escaped assessment, he can be said to have 'reason to believe' that such income has escaped assessment. The word 'reason to believe' cannot mean that the AO should have finally ascertained the facts by legal evidence. They only mean that he forms a belief from the examination of facts that he makes and if he infers from any information that he
SPL Polymers Ltd. receives. Justification of belief of AO is not to be judged from the standards of proof required to coming to the final decision. 4.6 There is a valid existence of belief of A.O. in this case based on the existing material duly recorded. The existence of belief in this case is proved. The adequacy of grounds cannot be questioned, neither it is a matter open for investigation - S. Narayanappa Vs. CIT (1967) 63 ITR [SC]. 4.7 The case of non assessment of an item of income can warrant information of requisite belief under main section 147 - "If there is material placed on record which would show existence of income chargeable to tax and which ordinarily ought to have been included in the ascertainment of taxable income made in the assessment order but was not \ so included, that would itself provide a cause or justification for a belief to the Assessing Officer that such income had escaped assessment and the Assessing Officer in such cases would be ex facie justified in initiating the ' proceedings on such basis. The cases of non-assessment of an item of income chargeable to tax would warrant formation of requisite belief to initiate the proceedings within four years of the end of the relevant assessment year, even where full disclosures were mace and yet an income chargeable to tax had escaped from being included in the final assessment order in which taxable income was worked out. In such cases, the Assessing Officer has in fact duty to exercise his jurisdiction under the main section 147 (Praful Chuniial Patel: Vasant Chunilal Pare/ vs. ACIT 236 ITR 832,840, (Guj)."
4.8 In view of the above observations, it is held that the objection of the appellant raised in Ground no.l has no force and, accordingly, the same is dismissed.
On merits, the ld. Commissioner of Income Tax (Appeals) confirmed the action of the Assessing Officer by holding as under:
6.3 I have carefully considered the issue. The fact of the matter is that the appellant took US $ 3 million from Doshin HongKong Limited (DHL) apparently for working capital requirements. M/s.DHL has finally written off an amount equivalent of Rs.7,00,66,000/-in their books of accounts, thereby making the appellant ultimate beneficiary of this amount without any further encumbrances. The allegation of the AO that the appellant had a running account of transactions with DHL, has not been denied by the appellant. When a long standing financial relation subsists between two entities, there is a merger of capital and revenue accounts. In the given circumstances of the case, therefore, the Id.AO was correctly of the opinion that such write off by M/s.DHL and corresponding write off in the appellant's books are hit by the provisions of Section 41(1) of IT Act.
SPL Polymers Ltd. The action of the id.AO is, therefore, upheld for the detailed reasons given by him in the assessment order. This ground of appeal is, accordingly, dismissed.
Against the above order, the assessee is in appeal before us.
We have heard both the counsel and perused the records. The ld. Counsel of the assessee submitted that in this case the assessment was already completed u/s. 143(2) after thorough scrutiny. That the assessee has disclosed all the matters fully and truly.
That no fresh material came into the possession of the Assessing Officer. That the facts in respect of waiver of loans were before the earlier Assessing Officer. In support of the proposition in this regard, the ld. Counsel of the assessee placed reliance upon the several case laws.
Upon merits, the ld. Counsel of the assessee submitted that the loan in question which was written off during the year was utilized to pay old loans taken from the other financial institutions. He further submitted that the old loans taken were utilized for acquisition of fixed assets. In this regard, the ld. Counsel of the assessee referred to loan agreements with financial institutions with respect to old loans. The ld. Counsel of the assessee further submitted that the assessee has placed reliance upon the decision of the Hon'ble jurisdictional High Court in the case of Mahindra & Mahindra Ltd. vs. CIT [2003] 261 ITR 501 (Bom). He further submitted that against the said judgement, the Revenue has preferred an appeal to the Hon’ble Apex Court and the Hon’ble Apex Court has decided the issue in favour of the assessee.
SPL Polymers Ltd. 10. In this regard, it is noted that the assessee has also filed an affidavit through director making the following submissions:
1) I say that SPL Polymers Limited (Formerly known as Shin-ho Petrochemicals (India) Limited) having its office in Chennai was incorporated sometime around 1989 and it became subsidiary of Supreme Petrochem Limited in or around 2006; 2) I say that SPL Polymers Limited (SPLPL) was amalgamated with Supreme Petrochem Limited in or around 1st July, 2007; 3) I say that SPLPL has from time to time taken loan from various financial institutions in India and the total loan amount was approx. Rs.12 crores; 4) I say that the loan funds were primarily utilized for acquiring of fixed assets; 5) I say that in or around October, 1996, SPLPL arranged External Commercial Borrowings (ECB) from one Doshin Hongkong Limited (Doshin) amounting to approx. USD 3 Million; 6) I say that the amounts raised through such ECB were utilized mainly to repay the loan raised from financial institutions; 7) I say that the assessment for assessment year 2002-03 was re-opened and the reasons for re-opening stated that since loan waived off was used for working capital purpose, the same constitutes a trading liability and waiver of such liability constitutes income under provisions of section 41 of the Act; 8) I say that in submissions before the Assessing Officer as well as the Commissioner of Income-tax (Appeals), SPLPL has inadvertently stated that the loan was obtained for working capital requirement; 9) I say that the loan from financial institutions was used for the purpose of acquiring of capital assets and it was inadvertent error on the part of SPLPL to make the submission that the loan was utilized for working capital; 10) I say that the loan from financial institutions, was used for the purpose of acquisition of fixed assets only and ECB was utilized to repay the said loans from financial institutions; 11) I say that the ECB was ultimately utilized for acquisition of fixed assets and not for the purpose of working capital. 12) I say that SPLPL has before the Hon'ble Bench 'C' submitted copies of audited accounts for financial years 1991-92 to 1996-97 in support of its claim. 13) I say that the above are true and correct to the best of my knowledge.
As regards to s.234B, the ld. Counsel of the assessee submitted that the same is consequential.
SPL Polymers Ltd. 12. Per contra, the ld. Departmental Representative relied upon the orders of the ld.
Commissioner of Income Tax (Appeals).
We have carefully considered the submissions and perused the records. We may gainfully refer to the provisions of section 147 which reads as under:
Income escaping assessment.
If the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of sections 148 to 153, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings72 under this section, or recompute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned (hereafter in this section and in sections 148 to 153 referred to as the relevant assessment year) : Provided that where an assessment under sub-section (3) of section 143 or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to make a return under section 139 or in response to a notice issued under sub-section (1) of section 142 or section 148 or to disclose fully and truly all material facts necessary for his assessment, for that assessment year: Provided further that nothing contained in the first proviso shall apply in a case where any income in relation to any asset (including financial interest in any entity) located outside India, chargeable to tax, has escaped assessment for any assessment year: Provided also that the Assessing Officer may assess or reassess such income, other than the income involving matters which are the subject matters of any appeal, reference or revision, which is chargeable to tax and has escaped assessment. Explanation 1.—Production before the Assessing Officer of account books or other evidence from which material evidence could with due diligence have been discovered by the Assessing Officer will not necessarily amount to disclosure within the meaning of the foregoing proviso. Explanation 2.—For the purposes of this section, the following shall also be deemed to be cases where income chargeable to tax has escaped assessment, namely :—
(a) where no return of income has been furnished by the assessee although his total income or the total income of any other person in respect of which he is assessable under this Act during the previous year exceeded the maximum amount which is not chargeable to income-tax ; (b) where a return of income has been furnished by the assessee but no assessment has been made and it is noticed by the Assessing Officer that the assessee has understated the income or has claimed excessive loss, deduction, allowance or relief in the return ; (ba) where the assessee has failed to furnish a report in respect of any international transaction which he was so required under section 92E;] (c) where an assessment has been made, but— (i) income chargeable to tax has been underassessed ; or (ii) such income has been assessed at too low a rate ; or (iii) such income has been made the subject of excessive relief under this Act ; or (iv) excessive loss or depreciation allowance or any other allowance under this Act has been computed; (ca) where a return of income has not been furnished by the assessee or a return of income has been furnished by him and on the basis of information or document received from the prescribed income-tax authority, under sub-section (2) of section 133C, it is noticed by the Assessing Officer that the income of the assessee exceeds the maximum amount not chargeable to tax, or as the case may be, the assessee has understated the income or has claimed excessive loss, deduction, allowance or relief in the return (d) where a person is found to have any asset (including financial interest in any entity) located outside India. Explanation 3.—For the purpose of assessment or reassessment79 under this section, the Assessing Officer may assess or reassess the income in respect of any issue, which has escaped assessment, and such issue comes to his notice subsequently in the course of the proceedings under this section, notwithstanding that the reasons for such issue have not been included in the reasons recorded under sub-section (2) of section 148. Explanation 4.—For the removal of doubts, it is hereby clarified that the provisions of this section, as amended by the Finance Act, 2012, shall also be applicable for any assessment year beginning on or before the 1st day of April, 2012.
SPL Polymers Ltd. 14. The Hon’ble Apex Court in the case of CIT vs. Kelvinator of India Ltd. [2010] 320 ITR 561 (SC) had occasion to expound upon the provisions of section 147 of the Act.
The Hon’ble Apex Court has held that post 1-4-1989, power to re-open is much wider.
However, it was held that there is no power review. It was expounded that after 01.04.1989, the Assessing Officer has power to reopen, provided there is 'tangible material' to come to conclusion that there is escapement of income from assessment. It must have a live link with the formation of belief.
Now we examine the present case on the touch stone of the above said decision.
In the present case, the earlier assessment was completed u/s. 143(3). No case has been made out that this issue of waiver of loan was considered by the Assessing Officer.
There is neither any discussion nor any query in this regard has been raised to the Assessing Officer. Hence, it cannot be said that the Assessing Officer has formed any opinion which he is changing. Furthermore, we note that the assessment in this case has been made within four years of the assessment u/s. 143(3) of the Act. We also found that the issue of waiver of working capital or general is not disclosed anywhere in the accounts or in the return of income. In this regard, Explanation 1 inserted by Finance Act, 2008 w.e.f. 01.04.2008 is relevant. The said explanation provides that the pproduction before the Assessing Officer of account books or other evidence from which material evidence could with due diligence have been discovered by the Assessing Officer will not necessarily amount to disclosure within the meaning of the foregoing proviso. We find that in this case nowhere it is emanating that the fact that the assessee is SPL Polymers Ltd. not treating as income, a waiver of general working capital loan has been shown in the return of income.
The assessee has though showed the waiver amount in the profit and loss account and in first blush it can be taken that the waiver has been offered as income. However, in this regard, the assessee has displayed a well crafted accounting ingenuity. What the assessee has done is that though it has shown the amount in the profit and loss account, the same has been shown as a deduction from the past losses. The amount has nowhere been offered as income from the current year.
In the profit and loss account, after the profit for the year has been determined, in an adjustment from the brought forward losses for earlier years, there is a deduction named as ‘part waiver of ECB loan – principal amount’. We find that the above cannot at all be taken as full disclosure of the actual fact that it was waiver of a loan which was to be used by the borrower as its general funding requirement. It has been held earlier in a catena of case laws that the waiver of capital loans cannot be considered to be income of the assessee. However, general funding requirements loan cannot be taken to be falling under the span of capital funding requirement. Moreover, there is no disclosure as such.
Hence, by no stretch of imagination, it can be said that there is a due disclosure of the fact by the assessee.
Hence, by no stretch of imagination, it can be said that there was due disclosure by the assessee. Rather there was a misleading disclosure as detailed in para nos. 16 & 17 above. All the decisions referred by the ld. Counsel of the assessee have been SPL Polymers Ltd. rendered in the context that there was due disclosure by the assessee. In fact, in the case of Idea Cellular Ltd. (supra) the Hon'ble Bombay High Court had noted that the Assessing Officer has issued specific queries on the subject. Hence, the reassessment on those aspects was a change of opinion. Here we find that in the reasons recorded it has been clearly mentioned that there has been a waiver of loan amounting to Rs.7,00,66,000/- and the same is assessable as income which has not been assessed as such. The Assessing Officer has also referred to the Hon’ble Apex Court decision in the case of CIT vs. T.V. Sundaiam Iyengar & Sons Ltd. [1996] 222 ITR 344 (SC). Hence, on the touch stone of Hon’ble Apex Court decision in the case of Kelvinator of India Ltd. (supra) it can be clearly said that there is a tangible material for the Assessing Officer to come to the conclusion that there is an escapement of income from business. Hence, the reasons do have a live link with the formation of the belief. Furthermore, the case law from the Hon’ble Gujarat High Court in the case of Praful Chuniial Patel (supra) is also germane. Accordingly, in the background of the aforesaid discussion and precedent, in our considered opinion, there is no infirmity in the order of the ld. Commissioner of Income Tax (Appeals) on the issue of reopening. Accordingly, we uphold the same.
As regards the merits of the case, we find that the assessee had raised additional evidences and additional ground. In an affidavit mentioned above, it has been said that the amount raised from ECB (External Commercial Borrowing) were utilized mainly to repay the loan from financial institutions. It has further been claimed that in the submissions before the Assessing Officer as well as ld. Commissioner of Income Tax
SPL Polymers Ltd. (Appeals), it was inadvertently stated that the loan was obtained for working capital requirement. It has further been claimed that the loans from financial institutions were used for the purpose of acquiring capital asset and it was inadvertent error to make the submission that the loan was utilized for the working capital. Furthermore, the assessee has submitted the copies of balance sheet from financial years 1991-92 to 1996-97.
Furthermore, the assessee has submitted the past loan agreement with financial institutions. We find that the above submissions are quite contrary to the earlier stand of the assessee before the Assessing Officer and the ld. Commissioner of Income Tax (Appeals). Furthermore, the loan agreement itself mentions that the ECB loan was for general funding requirement. Now the assessee is making a U-turn and claiming that the said loan was utilized to pay off earlier financial institutions loans which in turn were used for acquisition of capital asset. In this regard, we note that firstly these submissions and documents were not before the authorities below. In our considered opinion, they need to be verified with reference to the original records as to whether the claim of the assessee as above is correct or not. It is only after that that it has to be considered as to whether the new claim of the assessee that the said ECB loan was used for capital purposes, can be entertained. At this juncture, needless to say the Hon’ble Apex Court’s latest exposition on the subject will be germane. Upon careful consideration, in the interest of justice, we remit the issue to the file of the Assessing Officer. The Assessing Officer shall consider the issue afresh after giving a factual finding regarding the veracity of the assessee’s new claim mentioned hereinabove.
SPL Polymers Ltd. 20. In the result, the assessee’s appeal is partly allowed for statistical purposes.
Order pronounced in the open court on 30.07.2018