EPC INDUSTRIES LTD,NASHIK vs. ACIT OSD 10(1), MUMBAI

The Ld. Counsel for the assessee at the outset submits that the reopening of assessment u/s 147 is bad in law. The Ld. Counsel for the assessee submits that in the course of original assessment proceedings, the assessing officer called for the details in respect of waiver of loan on account of one time

The Ld. Counsel for the assessee further submitted that the Company has raised the fund by issue of debenture in the year 1994-95. The amount so borrowed had been utilized for acquisition of fixed assets. The investment in acquisition of fixed assets was made in the year 1994-95 and 1995-96. He submits that the Certificate received from the Chartered Accountants to establish this fact has been placed in paper book at Pg.243A to 243D. The Ld. Counsel for the assessee submitted that the loans from bank were taken against the hypothecation of stocks and book debts and the same has also been utilized for the purpose of fixed assets from time to time. The Ld. Counsel for the assessee submitted that court have time and again held that when the amount borrowed have been utilized for the purpose of fixed assets, it does not result in a revenue receipts. For this proposition he placed reliance on following cases.

We have heard the rival submissions, perused the orders of the authorities below, the papers referred to in the paper book and the case laws relied on. In this case, assessee filed return of income declaring Nil income on 31.10.2007 and the assessment was completed u/s 143(3) on 30.11.2009. In the course of assessment proceedings, the assessing officer called for the details in respect of waiver of principal amount of loan on one time settlement from the bank claimed as deduction in the computation of income. The assessee vide letter dated 16.10.2009 submitted a detailed explanation and clarification as to why only the interest which was waived by the bank was offered to tax and why the principal amount of loan which was waived by the bank on one time settlement was claimed as not taxable and deduction was claimed in the return of income. In its detailed submission, the assessee also placed reliance on the decisions in support of its contention that the principal amount waived by the banks on one time settlement is not taxable. The detailed note submitted by the assessee is as under : “1. During the previous years ending 31st March 2007 the company has made One Time Settlement (OTS) with Debenture holders and Banks. The lenders have agreed to waive the interest 7 M/s EPC Industries Ltd. Annexure I.

Copies of OTS letters from banks and financial institutions are attached herewith.

The Company has issued Rs 1800 lacs 16.5% Secured Non Convertible debenture to various financial institutions in the year 1995 Debentures were issued for its expansion cum diversification of the project. It was secured against first charge on mortgage of company's immoveable properties and plant and machineries present and future.

The company made cash losses and failed to repay its principal and interest to banks and debenture holders. On 02/07/2001 BIFR declared the company as sick in terms of Section 3 (1) (o) of SICA. State Bank of India was appointed as the operating agency to carry out techno economic viability study, valuation of assets and to prepare Draft Rehabilitation Scheme (DRS).

The banks and debenture holders have agreed to settle the principal amount at Rs 1000 lacs and Rs 934 lacs respectively. The interest have been waived by the bank of Rs 2469.93 lacs and debenture holders Rs 824.82 lacs, aggregating to Re 3294.65 lacs . The waiver of interest have been offered for tax as under provision of section 41(1) of the Income tax Act 1961. The waiver of principal amount of Banks and Debenture holders of Rs 2141.61 lacs and Rs 866.00 lacs respectively have been credited to Profit & Loss 8 M/s EPC Industries Ltd. Accounts not considered taxable under the provision of section 41(1) of the Act, in as much as there was no allowances or deduction of this liability claimed in earlier years. The provisions of section 41(1) of the Act is attracted only that liability which can only be ceased if it has been debited to the profit and loss account in the earlier years as a loss or expenditure or trading liabilities. Unless and until that liability debited to the profit and loss account in the earlier years it cannot become an income of the company on its cessation in view of the provisions of section 41(l) of the Act. The provisions of section 28 of the Act which deal with various types of receipts which can form part of "profits and gains of business or profession" with the 'submission that this type of receipt does not fall in any category of the receipts given under section 28 of the Act. Since there is no specific head with regard to chargeability of wavier of loan it cannot assume the character of taxable income. In support of this contention, the reliance has been placed on following cases. (I) Comfund Financial Services (I) Ltd. Vs Dy. CIT [67 ITD 304 (Bang)] (ii) CIT Vs. Chetan Chemicals (P.) Ltd [267 ITR 770 (Guj)] (iii) Mahindra and Mahindra Ltd. v. CIT [261 ITR 501 (Bom)] (iv) CIT Vs. Hukumchand Mohanlal [82 ITR 624 (SC)] (v) Mehboob Productions (P.) Ltd. v. CIT [106 ITR 758 (Bom)]”

Further, the assessee requested the assessing officer to give reasons for reopening assessment by letter dated 14.12.2012. The assessing officer intimated the reasons for reopening of the assessment as under “The assessee had claimed deduction of Rs.30,07,71,569/- for waiver of loan on account of One Time Settlement (OTS) with banks and NCD holders. The amount was credited to the P&L a/c as income but claimed as deduction in the statement of computation of income. The assessee had claimed deduction for depreciation on the assets acquired with the said loan, banks claimed the write-off of the loan on OTS as bad debts and the write back by assessee was to be treated as income. Therefore, I have reasons to believe that income to the extent of Rs.30.07 crores has escaped assessment within the meaning of Section 147 of the Act.” 11. On receiving the reasons for reopening, assessee by letter dated 01.01.2013 submitted its objections stating that there is no escapement of income by the assessee and it had furnished all the information in the course of assessment proceedings in respect of waiver of loan by the banks on one time settlement as required by the assessing officer and therefore reopening of assessment was merely a change of opinion and there were no tangible materials which came on record subsequent to completion of assessment to justify the conclusion that the income had escaped assessment, hence reassessment is bad in law. However, the assessing officer rejected the objections of the assessee by order dated 08.01.13 and completed reassessment u/s 143(3) on 22.03.2013 bringing to tax the waiver of principal amount of loan of Rs.30,07,71,569/- as income of the assessee u/s 41(1) / 28 (iv) of the IT Act.

On perusal of the reassessment order, we find that the assessment was reopened only based on the information which was already available on the records and no new tangible materials have come on record suggesting escaped of income in respect of waiver of loan on OTS by Banks which was claimed as deduction by the assessee. It is very apparent from the reassessment order that the assessing officer came to the conclusion that income had escaped assessment for the reason that assessee claimed deduction of Rs.30.07 crores as waiver of loan on account of one time settlement with bank and NCD holders and this amount was credited to P&L account as income, but was claimed as deduction in the computation of income and therefore income had escaped assessment. It is not the case of the revenue that the assessee has not submitted any details in respect of the loan waived by the banks, but, it was the contention of the assessing officer that there is no change of opinion which in our considered view is not correct. The assessee has furnished all the information and a detailed submission along with case law in its support for its claim for deduction of waiver of loan by Banks on OTS. We also find that there is nothing on record to suggest that the revenue has got tangible material in its possession after completion of assessment suggesting escapement of income. What we see is only mere change of opinion of the incumbent assessing officer to bring to tax the amount of principal waiver of loan claimed as deduction by the assessee in its computation of income on same set of facts which were already on record.

The Hon’ble Bombay High Court in the case of Asian Paints Ltd. Vs. DCIT [308 ITR 195] held that when a regular order of assessment is passed u/s 143(3) a presumption can be raised that such order has been passed on 11 M/s EPC Industries Ltd. application of mind. It was held that if non application of mind by the assessing officer in passing an order would itself confer jurisdiction upon the assessing officer to reopen the proceedings without knowing further, it would amount to giving a premium to an authority to the assessing officer exercising quasi judicial function to take benefit of his own wrong. The Hon’ble High Court held that the legislature has not conferred the power on the assessing officer to review his own order. The Hon’ble High Court held that initiation of reassessment proceedings would amount to change of opinion of the assessing officer as it was merely a fresh application of mind by the assessing officer to the same set of facts. It was held by the High Court that since the assessing officer has failed to apply his mind to the relevant material while framing the assessment order, he would not take advantage of his own wrong. The legislature has not conferred power on the assessing officer to review his own order. While holding so, the Hon’ble High Court also considered the Full Bench decision of the Delhi High Court in the case of CIT Vs Kelvinator of India Ltd [256 ITR 1] which was later affirmed by the Supreme Court, reported in [320 ITR 561] as CIT Vs Kelvinator of India Ltd. The Hon’ble High Court while holding so held as under “7. We have heard the learned counsel appearing for both sides. We have also gone through the judgments on which reliance was placed by the learned counsel appearing for both sides.

It is clear from the observations made above that the Full Bench of the Delhi High Court has taken a view that in a situation where according to the Assessing Officer he failed to apply his mind to the relevant material in making the assessment order, he cannot take advantage of his own wrong and reopen the assessment by taking recourse to the provisions of section 147. We find, ourself, in respectful agreement with the view taken by the Full Bench of the Delhi High Court.

It is further to be seen that the Legislature has not conferred power on the Assessing Officer to review its own order. Therefore, the power under section 147 cannot be used to review the order. In the present case, though the Assessing Officer has used the 13 M/s EPC Industries Ltd. "reason to believe", admittedly between the date of the order of assessment sought to be reopened and the date of formation of opinion by the Assessing Officer, nothing new has happened, therefore, no new material has come on record, no new information has been received, it is merely a fresh application of mind by the same Assessing Officer to the same set of facts and the reason that has been given is that the some material which was available on record while assessment order was made was inadvertently excluded from consideration. This will, in our opinion, amount to opening of the assessment merely because there is change of opinion. The Full Bench of the Delhi High Court in its judgment in the case of Kelvinator [2002] 256 ITR1 referred to above, has taken a clear view that reopening of assessment under section 147 merely because there is a change of opinion cannot be allowed. In our opinion, therefore, in the present case also, it was not permissible for respondent No. 1 to issue notice under section 148.”

In the case of Siemens Information Systems Ltd. Vs. ACIT [295 ITR 333], the Hon’ble Bombay High Court held that the assessing officer on the same set of facts had taken a view which was different from the views taken by the previous assessing officer on the interpretation of the same provision of law and therefore it is mere change of opinion which is not permissible.

In view of what is explained above, we are of the considered view that in the case on hand, reopening of assessment u/s 147 is only on mere change of opinion by the assessing officer on some set of facts which were already available on record before him while completing the original assessment u/s 143(3) of the Act. Thus, following the decision of Hon’ble Supreme Court in the case of Kelvinator India Ltd. and the above decisions of the jurisdictional High

As we have held that reopening of assessment itself is bad in law we are not going into merits of the case since it would become only academic at this stage. Therefore, grounds on merit are kept open.