Core Emballage Ltd., Ahmedabad V. The CIT,Ahmedabad-I, Ahmedabad

ITA 974/AHD/2010

• Counselvise Citation: [2010] 135 COUNSELVISE.COM (IT) 9817 (ITAT-AHMEDABAD)
• Duration Of Justice: 5 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-09-2010
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 26-08-2010
• Assessment Year: 2005-2006
• Appeal Filed On: 01-04-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SHELLEY JINDAL
• Assessee Lawyers: M K PATEL
• Keywords: Capital asset; Business expenditure; Opportunity of being heard; Principle of natural justice; Difference of opinion; Capital receipt; Change of opinion
• Section: 43B; 143(3); 142(1); 115JB; 68; 263; 28

Judgement Text

- 1 - IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH C AHMEDABAD BEFORE S/SHRI BHAVNESH SAINI, JM AND D.C.AGRAWAL, A M CORE EMBALLAGE LTD., CORE HOUSE, OFF C.G. ROAD, NEAR PARIMAL GARDEN, ELLISBRIDGE, AHMEDABAD. VS. THE COMMISSIONER OF INCOME-TAX, AHMEDABAD-1, AHMEDABAD. (APPELLANT) .. (RESPONDENT) APPELLANT BY :- SHRI M. K. PATEL, AR RESPONDENT BY:- SHRI SHELLEY JINDAL, CIT, DR O R D E R PER D. C. AGRAWAL, ACCOUNTANT MEMBER . THIS IS AN APPEAL FILED BY THE ASSESSEE AGAINST TH E ORDER OF LD. CIT EXERCISING HIS POWERS UNDER SECTION 263 AND IN SETT ING ASIDE THE ORDER OF THE AO DATED 20.12.2007. THE ASSESSEE HAS RAISED TH E FOLLOWING GROUNDS:- (1) THAT THE LD. CIT, AHMEDABAD-1, AHMEDABAD HAS ERRED IN ASSUMING JURISDICTION U/S 263 WITHOUT ESTABLISHING TWIN CONDITIONS TO REVISE THE SCRUTINY ASSESSMENT MADE U NDER SECTION 143(3) OF THE ACT. (2) THAT IN ABSENCE OF ANY DEFINITE FINDING THAT THE AM OUNT IN QUESTION WAS TAXABLE LD. CIT HAS ERRED IN RESTORING THE MATTER TO THE AO AFRESH CAUSING GREAT HARDSHIP, AND LONG DRAW N LITIGATION. ITA NO.974/AHD/2010 ASST. YEAR :2005-06 ITA NO.974/AHD/2010 ASST. YEAR 2005-06 2 (3) THAT ON THE ADMITTED FACTS AND SETTLED LEGAL POSITI ON, IT BE HELD THAT THE ASSESSEE WAS JUSTIFIED IN CREDITING THE SU M OF RS.59,21,72,000/- IN GENERAL RESERVE THE SAME BEI NG REMISSION OF PRINCIPAL AMOUNT OF LOAN OF THE CONCERNED BANKS. (4) THE LD. CIT HAS ERRED IN IGNORING THE BINDING CASE LAW AND RELYING UPON THE INAPPLICABLE CASE LAW AND HAS FURT HER ERRED IN STATING THAT THE AO HAD NOT MADE ANY ENQUIRY ON THE POINT. 2. THE FACTS OF THE CASE ARE THAT THE ASSESSEE IS E NGAGED IN THE BUSINESS OF MANUFACTURING AND SUPPLY OF CORRUGATED BOXES. RETURN OF INCOME WAS FILED FOR ASST. YEAR 2005-06 ON 31.10.20 05. IT WAS ACCEPTED UNDER SECTION 143(1) ON DECLARED INCOME AT NIL. SUB SEQUENTLY THE CASE WAS SELECTED FOR SCRUTINY AND ASSESSMENT WAS COMPLE TED ON 20.12.2007 ON A TOTAL LOSS OF RS.3,82,79,348/- AS AGAINST BUSI NESS LOSS AS PER RETURN OF RS.5,59,45,644/-. THE AO HAD WORKED OUT THE BOOK PR OFIT UNDER SECTION 115JB AT NIL. 3. THE LD. CIT EXAMINED THE RECORD OF THE ASSESSEE AND FOUND THAT ASSESSEE HAS CREDITED A SUM OF RS.59,21,72,000/- BE ING AMOUNT OF REMISSION OF LIABILITY, TO THE GENERAL RESERVE. THI S AMOUNT WAS NOT FOUND CREDITED IN THE PROFIT AND LOSS ACCOUNT. THE LD. CI T FURTHER FOUND THAT ASSESSEE HAS NOT FOLLOWED ACCOUNTING STANDARD AS-5 WHILE PREPARING THE PROFIT AND LOSS ACCOUNT IN ACCOUNTING THE REMISSION OF LIABILITY. ACCORDINGLY LD. CIT ISSUED FOLLOWING SHOW CAUSE NOT ICE TO THE ASSESSEE: ITA NO.974/AHD/2010 ASST. YEAR 2005-06 3 NO.CIT/ABD.1/201(25)/2008-09 DATE 04/02/2010 TO THE PRINCIPAL OFFICER, M/S CORE EMBALLAGE LTD., CORE HOUSE, OFF C.G. ROAD, NR. PARIMAL GARDEN, ELLISBRIDGE, AHMEDABAD. SIR, SUB: PROCEEDINGS U/S 263 OF THE INCOME-TAX ACT FO R ASST. YEAR 2005-06-REGARDING. PLEASE REFER TO THE ABOVE. 2. ON PERUSAL OF YOUR CASE RECORDS, IT IS NOTICED T HAT IN YOUR CASE ASSESSMENT ORDER U/S 143(3) HAS BEEN PASSED ON 20/12/2007 DETE RMINING TOTAL INCOME (-) RS.3,82,79,348/- AS AGAINST RETURNED INCOME OF RS.N IL FILED ON 31/10/2005. 3. ON VERIFICATION OF RECORD, IT IS NOTICED THAT DU RING THE YEAR UNDER CONSIDERATION A TOTAL AMOUNT OF RS.59,21,72,000/- H AS BEEN CARRIED BY YOUR COMPANY TO GENERAL RESERVE ACCOUNT. HOWEVER, AS PER PROVISI ONS OF SECTION 115JB OF THE ACT, BOOK PROFIT IS TO BE INCREASED BY AMOUNT CARRIED TO ANY RESERVES BY WHATEVER NAME CALLED, PROVIDED IT IS DEBITED TO P & L ACCOUNT. IN YOUR CASE, THE ACCOUNTING ENTRY IS THAT THE LOAN ACCOUNT (UNDER THE HEAD LIABILITY IN BALANCE SHEET) HAS BEEN DEBITED AND THE GENERAL RESERVE ACCOUNT HAS BEEN CREDITED. THUS , THE ABOVE MENTIONED ENTRY HAS NOT BEEN PASSED THROUGH P & L ACCOUNT AND THUS PROV ISIONS OF SECTION 115JB OF THE ACT WILL NOT APPLY. 4. HOWEVER, YOUR AUDITOR IN HIS REPORT DTD.29.04.20 05 AT ITEM NO.6(C) HAVE CLEARLY POINTED OUT THAT YOUR COMPANY HAS NOT FOLLO WED AS-5 IN THE P & L ACCOUNT WHILE ACCOUNTING REMISSION OF LIABILITY. TOTAL REMI SSION OF LIABILITY FIGURES IN ONE TIME SETTLEMENT AGREEMENT SHOULD HAVE BEEN SHOWN IN THE P & L ACCOUNT IN PART-2 OF SCHEDULE-VI OF THE COMPANIES ACT AND THE AMOUNT OF RS.59,21,72,000/- SHOULD HAVE BEEN CREDITED TO THE P & L ACCOUNT. 5. ALSO IT HAS BEEN HELD BY THE HON. HIGH COURT OF BOMBAY IN THE CASE OF M/S SOLID CONTAINERS LTD., MUMBAI VS. DCIT, SPL. RANGE- 1, MUMBAI, CIT-1, MUMBAI 308 ITR 417 THAT IF AN AMOUNT IS RECEIVED IN COURSE OF A TRADING TRANSACTION EVEN THOUGH IT IS NOT TAXABLE IN THE YEAR OF RECEIPT AS BEING O F CAPITAL CHARACTER, THE AMOUNT CHANGES IT CHARACTER, THE AMOUNT CHANGES WHEN THE A MOUNT BECOMES THE ASSESSEES OWN MONEY BECAUSE OF LIMITATION OR BY ANY OTHER STA TUTORY OR CONTRACTUAL RIGHT. 6. THUS, THE AMOUNT OF RS.59,21,72,000/- SHOULD HAV E BEEN CREDITED TO P & L ACCOUNT AND OFFERED TO TAX. CONSEQUENTLY, PROVISION S OF SECTION 115JB WILL NOT APPLY AS THE TAX PAYABLE ON THE TOTAL INCOME WILL BE MORE THAN MAT PAYABLE ON BOOK PROFIT. THEREFORE, THE ORDER OF THE AO IS ERRONEOUS IN NOT INCLUDING THE AMOUNT OF RS.59,21,72,000/- IN THE PROFIT AND LOSS ACCOUNT (B Y WHICH TAX PAYABLE WOULD BE MORE ITA NO.974/AHD/2010 ASST. YEAR 2005-06 4 THAN THE TAX PAYABLE U/S 115JB OF THE ACT) TO THE E XTENT OF TAX PAYABLE ON THE RESULTANT INCOME. 7. IN VIEW OF FOREGOING, THE ORDER PASSED U/S 143(3 ) OF THE IT ACT, 1961 DATED 20/12/2007 APPEARS TO BE NOT ONLY ERRONEOUS BUT ALS O PREJUDICIAL TO THE INTEREST OF REVENUE. IT IS PROPOSED TO PASS APPROPRIATE ORDER U /S 263(1) IN YOUR CASE FOR ASST. YEAR 2005-06. 8. YOU ARE, THEREFORE, REQUESTED TO SHOW CAUSE AS T O WHY APPROPRIATE ORDER U/S 263(1) BE NOT PASSED IN YOUR CASE. HEARING IN YOUR CASE IS FIXED ON 12/02/2010 AT 11.45 A.M. IN CASE NOTHING IS HEARD FROM YOU BY THE SAID DATE, IT SHALL BE PRESUMED THAT YOU HAVE NO OBJECTION TO THE PROPOSED ACTION A ND MATTER SHALL BE DECIDED ON MERITS. YOURS FAITHFULLY, SD/- B.N. PANDA COMMISSIONER OF INCOME-TAX, AHMEDABAD-1, AHMEDABAD. IN RESPONSE TO THIS ASSESSEE FURNISHED THE DETAILED REPLY AS UNDER :- (A) NATURE OF AMOUNT WAIVED BY BANKS: (I) THE COMPANY HAS SETTLED ITS DUES WITH ICICI BAN K LTD., UNDER ONE TIME SETTLEMENT SCHEME AGREEMENT ON 2 ND MARCH, 2005. THE TOTAL DUES PAYABLE TO BANK AS PER BOOKS OF THE COMPANY WAS RS. 9794.45 LACS WHICH IS SETTLED BY PAYING OFF RS.1570 LACS. THE INTEREST BENEFIT OF RS.2772.45 LACS ARISING OUT OF THIS SETTLEMENT IS SHOWN UNDER THE HEAD INTEREST BENEFIT ON FINANCIAL RESTRUCTURING. THE AMOUNT OF DIFFERENCE OF RS.5352.00 LACS ON PRINCIPAL LOAN AMOUNT IS TAKEN T O RECONSTRUCTION RESERVE A/C UNDER THE HEAD GENERAL RESERVE AND S HOWN IN SCHEDULE 2 OF BALANCE SHEET. (II) SIMILARLY THE COMPANY HAS SETTLED ITS DUES WIT H THE SOUTH INDIAN BANK LTD UNDER OTS AGREEMENT ON 31ST DECEMBER, 2004 . THE TOTAL DUES PAYABLE TO HANK AS PER BOOK OF THE COMPANY WAS RS 1 812.92 LACS WHICH IS SETTLED BY PAYING OF RS. 450 LACS. THE INTEREST BENEFIT OF RS. 793.20 LACS ARISING OUT OF THIS SETTLEMENT IS SHOWN UNDER THE H EAD 'INTEREST BENEFIT OF FINANCIAL RESTRUCTURING', THE AMOUNT OF DIFFERENCE OF RS. 569.72 LACS ON PRINCIPAL LOAN AMOUNT IS TAKEN TO RECONSTRUCTION R ESERVE A/C' UNDER THE HEAD GENERAL RESERVE AND SHOWN IN SCHEDULE 2 OF BAL ANCE SHEET. (III) THUS THE TOTAL AMOUNT TAKEN TO RECONSTRUCTION RESERVE IN RESPECT OF PRINCIPAL AMOUNT OF LOAN WAIVED BY BANKS IS AS F OLLOWS : ITA NO.974/AHD/2010 ASST. YEAR 2005-06 5 NO. ----- 1. NAME OF BANK --------------------------- ICICI BANK AMT. RS.(CRORES) -------------------- 53.52 NATURE OF AMT ---------------------- PRINCIPAL AMI, OL LOAN 2, THE SOUTH INDIAN BANK LTD. 5.697 PRINCIPAL AMT. OF LOAN TOTAL 59.217 PRINCIPAL AMT OF LOAN (B) THE TERMS OF ONE LIME SETTLEMENT ARE AS FOLLOWS : (I) ICICI BANK (PRINCIPAL OUTSTANDING RS. 70.22 CRO RES) THE ONE TIME SETTLEMENT WAS AGREED UPON BY THE BANK AND ASSESSEE IN JANUARY, 2003 AS FOLLOWS: 1. (A) THE COMPANY SHALL PAY ICICI BANK RS. 40 MILL ION BEFORE 31ST MARCH, 2003 AND RS. 6.25 MILLION ON THE 15TH OF EAC H MONTH FOR A PERIOD OF 24 MONTHS BEGINNING FROM 15TH APRIL, 2003 . (B) THE COMPANY SHALL ARRANGE TO GIVE POST DATED CH EQUES FOR 4 CONSECUTIVE MONTHS AT A TIME AND ON CLEARANCE OF 1 CHEQUE WILL PROVIDE FOR FOLLOWING MONTH AND THE SAME PRACTICE W ILL CONTINUE TILL ALL 24 CHEQUES HAVE BEEN ISSUED. (C) IN THE EVENT, THE COMPANY IS UNABLE TO MAKE THE PAYMENT AS PER SCHEDULE ON 15TH OF EVERY MONTH, IC1CI BANK HAVE A RIGHT TO CHARGE A DEFAULT INTEREST RATE EQUIVALENT TO THE PT ,R PREVAILING AT THE TIME OF DEFAULT FOR ANY DEFAULT IN THE SETTLEME NT PACKAGE. HOWEVER, THERE SHALL NOT BE ANY INTEREST CHARGED ON THE OUTSTANDING SETTLEMENT AMOUNT (D) CORE EMABALLAGE LIMITED AND CHRYSALIS FINANCE L IMITED AGREE TO DEPOSIT THE PROCEEDS OF SALE OF JMC HOUSE PROPER TY IN A NO LIEN ACCOUNT WHICH CAN BE USTILISED EITHER TO REPAY IC1C 1 BANK AND/OR FOR ANY OTHER PURPOSE WITH THE APPROVAL OF ICICI BA NK, (2) (A) ICICI BANK SHALL ISSUE FORTHWITH ON ITS L ETTERHEAD DULY SIGNED BY THE AUTHORISED REPRESENTATIVE A RECEIPT O N REALIZATION OF THE CHEQUES. ITA NO.974/AHD/2010 ASST. YEAR 2005-06 6 (B) ICIC1 BANK AGREES AND CONFIRMS THAT THE RECEIP T AND REALIZATION OF THE ABOVE REFERRED PAYMENT AS MENTIO NED AT 1 (A) HEREINABOVE SHALL BE CONSTRUED AS FULL AND FINAL SE TTLEMENT OF ALL THE LIABILITIES IN RESPECT OF THE JOAN ARREARS, PRI NCIPAL OUTSTANDING, CHARGES, INTEREST, PENAL INTEREST, EXPENSES, LIQUID ATED DAMAGES, LEGAL FEES, ETC; ON ACCOUNT OF THE SUBJECT LOANS AN D PREFERENCE SHARES. (C) THE SANK SHALL IMMEDIATELY ON RECEIPT AND CLEAR ANCE OF THE LAST INSTALMENT OF THE AMOUNT AS PER CLAUSE 1 (A) (I) SHALL ISSUE A NO DUE CERTIFICATE IN FAVOUR OF M/S R CORE EMBALLAGE LIMITED AND ITS GUARANTORS, (II) SHALL FURTHER TO TAKE ALL NECESSARY STEPS FORT HWITH IN COMPLYING WITH THE PROCEDURE TO BE COMPLIED WITH BE FORE THE REGISTRAR OF COMPANIES GUJARAT, AHMEDABAD FOR RECOR DING OF SATISFACTION OF THE CHARGE CREATED IN FAVOUR OF ICI CI BANK IN RESPECT OF THE SUBJECT LOAN. (III) SHALL TRANSFER PREFERENCE SHARES IN FAVOUR O F THE PROMOTER OR ANY OTHER PERSON OR COMPANY DESIRED BY THE PROMOTER . (3) ICICI BANK RESERVES THE RIGHT TO WITHDRAW THE A FORESAID SETTLEMENT IF THE COMPANY FAILS TO COMPLY WITH ALL OR ANY OF T HE TERMS OF PAYMENT, THE AMOUNTS REMITTED TO ICICI BANK SHALL BE ADJUSTE D AGAINST DOCS AND OUTSTANDINGS OF THE COMPANY AND OTHER CHARGES AND P ENALTIES SHALL BE CALCULATED AN PER THE TERMS AND CONDITION OF THE CO RRESPONDING FACILITY AGREEMENTS AS IF THE SETTLEMENT PACKAGE HAVE NEVER BEEN ENTERED INTO, (II) THE SOUTH INDIAN BANK LTD. (PRINCIPAL OUTSTAN DING RS 1019.72 LAKHS.) PAYMENT OF RS. 450.00 LAKHS (RUPEES FOUR HUNDRED AN D FIFTY LAKHS ONLY) SHALL BE MADE AS PER THE FOLLOWING CONDITIONS : A. RS. 50.00 LAKHS TO BE PAID WITHIN 00 DAYS FROM T HE DATE OF OFFER LETTER. B. BALANCE RS. 400.00 LAKHS SHOULD BE PAID IN 24 EQ UAL MONTHLY INSTALLMENTS OF RS. 18,44 LAKHS INCLUDING INTEREST. THE FIRST OF SUCH ITA NO.974/AHD/2010 ASST. YEAR 2005-06 7 MONTHLY INSTALLMENTS WILL BEGIN ON 25-03-2004 AND S UBSEQUENT INSTALLMENTS WILL BECOME DUE ON THE SAME DATE OF EA CH MONTH. C. RATE OF INTEREST PAYABLE IS AT 10% ON REDUCED BA LANCE OUTSTANDING. D. IN CASE OF DEFAULT IN PAYING TWO CONSECUTIVE INS TALLMENTS, BANK WILL HAVE THE RIGHT TO OPT OUT OF THE COMPROMISE SETTLEM ENT AND IN SUCH AN EVENT, THE BANK WILL HAVE THE RIGHT TO RECOVER THE ENTIRE AMOUNT OUTSTANDING IN ACCOUNT WITH INTEREST, COST ETC IN T ERMS OF THE ORIGINAL LOAN DOCUMENTS EXECUTED IN FAVOUR OF THE BANK, E. TO MAKE PAYMENT OF THE AMOUNT OF ADVOCATE B'EC, IF ANY, PAYABLE BY THE BANK IN ACCOUNT IN ADDITION TO RS, 450.00 LA KHS. (C) SIR, THE ABOVE ARE THE FACTS OF THE CASE. THE C OPY OF AUDITED ACCOUNTS, STATEMENT OF INCOME AND TAX AUDIT REPORT FOR I.T.AY.Y 2005-06 ARE ENCLOSED. PLEASE NOTE THAT DEDUCTION AS BUSINES S EXPENDITURE HAS NEITHER BEEN CLAIMED IN ANY EARLIER YEARS AND CURRE NT YEAR OF THE ABOVE AMOUNT OF RS.59.217 CRORES, NOR DEDUCTION AS BUSINE SS EXPENDITURE OR OTHERWISE HAS BEEN ALLOWED IN ANY ASSESSMENT YEAR. AT THE COST OF REPETITION IT IS STATED THAT NO DED UCTION HAS BEEN CLAIMED OR ALLOWED FOR THE PRINCIPAL AMOUNT OF LOAN OF RS.59,217 CRORES. 4. THE LD. CIT WAS, HOWEVER, NOT SATISFIED. HE INFE RRED THAT - (1) AUDITORS HAVE CLEARLY POINTED OUT IN THEIR REPO RT DATED 24.9.2005 THAT ASSESSEE COMPANY HAS NOT FOLLOWED AS-5 IN THE PROFI T AND LOSS ACCOUNT WHILE ACCOUNTING REMISSION OF LIABILITY. (2) AS PER DECISION OF HON. BOMBAY HIGH COURT IN SO LID CONTAINERS LTD. (SUPRA) IT IS HELD THAT IF AN AMOUNT IS RECEIVED IN COURSE OF A TRADING TRANSACTION EVEN THOUGH IT IS NOT TAXABLE IN THE YE AR OF RECEIPT AS BEING OF CAPITAL CHARACTER, THE AMOUNT CHANGES IT CHARACTER, THE AMOUNT CHANGES WHEN THE AMOUNT BECOMES THE ASSESSEES OWN MONEY BE CAUSE OF LIMITATION OR BY ANY OTHER STATUTORY OR CONTRACTUAL RIGHT. (3) THE DECISION OF JURISDICTIONAL HIGH COURT IN TH E CASE OF CIT VS. CHETAN CHEMICALS (P) LTD. 267 ITR 770 (GUJ) WILL NO T BE APPLICABLE AS THIS DECISION HAS NOT CONSIDERED THE DECISION OF HO N. SUPREME COURT IN ITA NO.974/AHD/2010 ASST. YEAR 2005-06 8 THE CASE OF CIT VS. SUNDARAM IYENGAR & SONS LTD. 22 2 ITR 344 (SC) WHEREIN THE HON. SUPREME COURT HAS HELD AS UNDER :- 'THE PRINCIPLE LAID DOWN BY ATKINSON J., APPLIES IN FULL FORCE TO THE FACTS OF THIS CASE, IT A COMMONSENSE VIEW OF THE MATTER IS TOKEN, THE ASSESSES, BECAUSE OF THE TRADING OPERATION, HAD BECOME RICHER BY THE AMOUNT WHICH IT TRANSFERRED TO ITS P&L A/C. THE MONEYS HAD ARISEN OUT OF ORDINARY TRADING TRANSACTIONS. ALTHOUGH THE AMOUNTS RECEIVED ORIGINALLY WERE NOT OF INCOME NATURE, THE AMOUNTS REMAINED WITH THE ASS ESSEE FOR A LONG PERIOD UNCLAIMED BY THE TRADE PARTIES. BY LAPSE OF TIME, THE CLAIM OF THE DEPOSIT BECAME TIME-BARRED AND THE AMOUNT ATTAINED A TOTALLY DIFFERENT QUALITY, IT BECAME A DEFINITE TRADE SURPLUS. ATKINS ON J. POINTED OUT THAT IN TATTERSALL'S CASE (SUPRA) NO TRADING ASSET WAS CREA TED. MERE CHANGE OF METHOD OF BOOK -KEEPING HAD TAKEN PLACE. BUT WHERE A NEW ASSET CAME INTO BEING AUTOMATICALLY BY OPERATION OF LAW, COMMONSENSE DEMANDED THAT THE AMOUNT SHOULD BE ENTERED IN THE & P&L A/C FOR THE YEAR AND BE TREATED AS TAXABLE INCOME, IN OTHER WORDS, THE PRIN CIPLE APPEARS TO BE THAT IF AN AMOUNT IS RECEIVED IN THE COURSE OF TRAD ING TRANSACTION, EVEN THOUGH IT IS NOT TAXABLE IN THE YEAR OF RECEIPT AS BEING OF REVENUE CHARACTER, THE AMOUNT CHANGES ITS CHARACTER WHEN TH E AMOUNT BECOMES THE ASSESSEE'S OWN MONEY BECAUSE OF LIMITATION OR BY ANY OTHER STATUTORY OR CONTRACTUAL RIGHT. WHEN SUCH A THING HAPPENS, COMMO NSENSE DEMANDS THAT THE AMOUNT SHOULD BE TREATED AS INCOME OF THE ASSESSEE. IN THE PRESENT CASE, THE MONEY WAS RECEIVED BY THE ASSESSEE IN THE COURSE OF CARRYING AN HIS BUSINESS. 'ALTHOUGH IT WAS TREAT ED AS DEPOSIT AND WAS OF CAPITAL NATURE AT THE POINT OF TIME IT WAS RECEI VED, BY EFFLUX OF TIME THE MONEY HAS BECOME THE ASSESSEE'S OWN MONEY. WHAT REMAINS AFTER ADJUSTMENT OF THE DEPOSITS HAS NOT BEEN CLAIMED BY THE CUSTOMERS. THE CLAIMS OF THE CUSTOMERS HAVE BECOME BARRED BY LIMIT ATION. THE ASSESSEE ITSELF HAS TREATED THE MONEY AS ITS OWN MONEY AND T AKEN THE AMOUNT TO ITS P&L A/C. THERE IS NO EXPLANATION FROM THE ASSESSEE WHY THE SURPLUS MONEY WAS TAKEN TO ITS P&L A/C EVEN IF IT WAS SOMEB ODY ELSE'S MONEY. IN FACT, AS ATKINSON J. POINTED OUT THAT WHAT THE ASSE SSEE DID WAS THE COMMONSENSE WAY OF DEALING WITH THE AMOUNTS'. 4. THE AO HAS NOT MADE ANY ENQUIRY AND HAS NOT ANAL YZED THE ISSUE OF TAXABILITY OF ABOVE REFERRED LIABILITY OF RS.59, 21,72,000/-. ONCE THE AO DOES NOT CARRY OUT PROPER ENQUIRY OR VERIFICATION T HEN HIS ORDER WOULD BE ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF REVENU E. IN SUPPORT OF THIS PROPOSITION THE LD. CIT HAS REFERRED FOLLOWING JUDG MENTS :- ITA NO.974/AHD/2010 ASST. YEAR 2005-06 9 (1) TARAJAN TEA CO. P. LTD. VS. CIT 205 ITR 45 (GAU) (2) CIT VS. SESHASAYEE PAPER & BOARDS LTD. 242 ITR 490 (MAD) (3) CIT VS. SOUTH INDIA SHIPPING CORPORATION LTD. 233 I TR 546 (MAD) (4) CIT VS. EMERY STONE MFG. CO. 213 ITR 843 (RAJ) (5) MANNULAL MATADEEN VS. CIT 277 ITR 346 (ALL) THUS FINALLY HOLDING THAT AO DID NOT VERIFY THE ISS UE OF TAXABILITY OF REMISSION OF ABOVE REFERRED LIABILITY OF RS.59,21,7 2,000/- HE HELD THAT THE ORDER OF THE AO IS ERRONEOUS IN SO FAR AS IT IS PRE JUDICIAL TO THE INTEREST OF REVENUE. HE ACCORDINGLY SET ASIDE THE ORDER ON THIS ISSUE AND DIRECTED TO MAKE IT AFRESH AND DECIDE THE ISSUE AS PER LAW. 5. AGAINST THIS, LD. AR FOR THE ASSESSEE SUBMITTED THAT IT IS ONLY A CASE OF CHANGE OF OPINION BECAUSE AO HAS ALREADY APPLIED HIS MIND AND CAME TO THE CONCLUSION THAT ABOVE SOME IS NOT TAXABLE UN DER SECTION 41(1). HE REFERRED TO QUESTION NO.16 AS PER LETTER DATED 9 TH OCTOBER, 2006 ISSUED BY THE AO WHEREIN AO HAD RAISED FOLLOWING QUERIES :- 16. SIMILARLY, AS PER 3CD REPORT, PROFIT CHARGEABL E TO TAX U/S 41(I) OF THE IT ACT IS SHOWN AT RS.1,27,46,563/- WHICH IS NO T OFFERED FOR TAXATION. PLEASE EXPLAIN THE REASON FOR THE SAME. THEREAFTER LD. AR REFERRED TO QUERY LETTER ISSUED U NDER SECTION 142(1) DATED 6.9.2007 WHEREIN AS PER POINT NO.17 THE AO HA D CALLED FOR COMMENTS ON SCHEDULE-3 OF THE ANNUAL REPORT AS UNDE R :- 17. PENALTY. FURNISH YOUR COMMENTS ON SCHEDULE-3 O F ANNUAL REPORT. AND ALSO QUERY NO.23 IN THE SAME CONTEXT. 23. PENALTY. FURNISH YOUR COMMENTS ON POINT NO.20 OF AUDIT REPORT. PL. EXPLAIN WHETHER THE AMOUNT OF RS.12746563 HAS BEEN SHOWN AS INCOME. ITA NO.974/AHD/2010 ASST. YEAR 2005-06 10 THE LD. AR THEN REFERRED TO FOLLOWING REPLIES IN RE SPONSE TO THE QUERIES RAISED BY THE AO:- (1) REPLY DATED 21.9.2007 POINT NO.7 AS UNDER :- 7. EXPLANATION FOR PARA 20 OF FORM 3CD : (PARA 23 OF NOTICE DATED 06.09.2007) THE ASSESSEE IS FOLLOWING MERCANTILE METHOD OF ACC OUNTING. HENCE IT HAD MADE A PROVISION TOWARDS INTEREST PAYABLE ON BANK LOANS OF ICICI BOND AND SOUTH INDIAN BANK IN EARLIER ASSE SSMENT YEARS. AS PER SECTION 43B THESE LIABILITIES AMOUNTING TO R S.34,38,17,086/- WERE NOT ALLOWED AS DEDUCTION BECAUSE OF NON-PAYMEN TS. DUE TO THE OTS WITH THESE TWO BANKS, DURING THE YEAR THE A SSESSEE IS NOT LIABLE TO PAY THESE AMOUNTS. SINCE THE TOTAL BENEFI T UNDER OTS IS RS.35,65,64,589/- THE DIFFERENCE IS RS.1,27,46,563/ -. IT MAY BE NOTED THAT THE PROFIT FOR THE CURRENT YE AR AS SHOWN IN P & L A/C OF RS.27.96 CRORES IS AFTER TAKING THE CREDIT ON INCOME SIDE OF ABOVE STATED RS.35.65 CRORES. SINCE IN EARLIER YEAR S RS.34,38,17,086/- IS NOT ALLOWED U/S 43B, THE SAID AMOUNT IS NOT INCOME CHARGEABLE U/S 41(1) OF THE CURRENT YEAR. HE NCE THE SAME IS REDUCED AS SHOWN IN STATEMENT OF INCOME. THE NET EF FECT IS THAT RS.1,27,46,563/- REMAINS INCLUDED IN TOTAL INCOME. 7. JUSTIFICATION OF INTEREST WRITTEN BACK RS.34.38 CRORES (PARA 12 OF THE NOTICE) PLEASE NOTE THAT WE HAD BEEN ENJOYING CREDIT FACIL ITIES FROM THE FOLLOWING BANKS: (A) ICICI BANK (B) SOUTH INDIAN BANK WE HAD ENTERED INTO AN ARRANGEMENT WITH THE SAID BA NKS UNDER THE ONE TIME SETTLEMENT SCHEME (OTS). WE ENCLOSE HEREWI TH THE PHOTO COPIES OF THE LETTERS OF THE SAID BANKS. SINCE THE LAST INSTALMENT OF THE LOANS WERE PAID IN THE CURRENT YEAR, THE SAID S ETTLEMENT WITH THE TWO BANKS BECAME EFFECTIVE IN THE CURRENT YEAR ONLY . IT WILL BE FOUND THAT BOTH THE BANKS HAVE WAIVED THE PRINCIPAL AMOUNT AS WELL AS INTEREST TO THE EXTENT MENTIONED IN THE LETTERS OF THE SAID BANKS. THIS ISSUE HAS BEEN ADDRESSED BY THE COMPANY IN NOT ES NO.4 AND 5 ITA NO.974/AHD/2010 ASST. YEAR 2005-06 11 OF SCHEDULE-15 OF THE AUDITED ACCOUNTS SUBMITTED AL ONG WITH THE RETURN OF INCOME. THESE NOTES ARE SELF EXPLANATORY. IN RESPECT OF THE INTEREST WRITTEN BACK, PLEASE NO TE THAT THE SAID INTEREST IS NOT LIABLE TO INCOME TAX U/S 41(1) OR O THERWISE SINCE THE AMOUNT OF INTEREST WRITTEN BACK HAS NOT BEEN CLAIME D AND/OR ALLOWED AS A DEDUCTIBLE EXPENSE FROM THE TOTAL INCO ME IN THE CURRENT YEAR OR EARLIER ASSESSMENT YEARS. IN THIS R ESPECT YOUR HONOUR IS REQUESTED TO REFER THE RETURNS OF INCOME OF EARLIER ASSESSMENT YEARS. 10. COMMENTS ON SCHEDULE-3 OF AUDITED ACCOUNTS (PAR A 17 OF THE NOTICE) PLEASE REFER TO OUR REPLY AT PARA 7 HEREINABOVE. A S PER THE OTS WITH THE BANKS THERE IS A WAIVER OF PRINCIPAL AMOUN T OF THE LOANS WHICH HAS BEEN DEDUCTED FROM THE TOTAL LOANS OUTSTA NDING VIS--VIS THE SAID TWO BANKS. AS A RESULT THEIR OUTSTANDING B ALANCES HAVE BECOME NIL DURING THE YEAR WHICH IS DULY REFLECTED IN THE SCHEDULE-3 ALONG WITH THE DETAILED EXPLANATION IN T HE NOTES APPEARING IN SCHEDULE-3. 13. EXPLANATION FOR AMOUNT OF RS.1,27,46,563/-(PARA 23 OF THE NOTICE) PLEASE REFER TO THE STATEMENT OF INCOME SUBMITTED ALONG WITH THE RETURN OF INCOME. IT WILL BE FOUND THAT THE AMOUNT OF RS.34,38,17,026/- HAS BEEN DEDUCTED FROM THE TOTAL INCOME BECAUSE THE SAME HAVE NOT BEEN ALLOWED IN EARLIER YEARS IN VIEW OF SECTION 43B OF THE INCOME-TAX ACT. PLEASE REFER TO THE PROF IT AND LOSS ACCOUNT WHEREIN INTEREST BENEFIT (AMOUNT WRITTEN BA CK) IS SHOWN AT RS.35,65,64,589/-. THIS AMOUNT STANDS INCLUDED IN T HE TOTAL INCOME THROUGH THE NET PROFIT FIGURE SHOWN IN THE STATEMEN T OF INCOME. THE DIFFERENCE BETWEEN THESE TWO FIGURES IS RS.1,27,46, 563/-, WHICH STANDS INCLUDED IN THE TOTAL INCOME. 1. DURING THE CURRENT YEAR, THE COMPANY HAS BEEN AB LE TO REDUCE ITS LIABILITY OF SECURED LOANS OF ICICI BANK AND SOUTH INDIAN BANK DUE TO ONE TIME SETTLEMENT WITH THESE B ANKS. THE PRINCIPAL AMOUNT OF LOANS REDUCED DUE TO THESE SETT LEMENTS IS RS.59,21,72,000/-, WHICH IS SHOWN IN SCHEDULE-2 AN D 3 OF AUDITED BALANCE SHEET. ITA NO.974/AHD/2010 ASST. YEAR 2005-06 12 THE WAIVER OF INTEREST LIABILITY VIS--VIS THESE L OANS IS RS.35,65,64,589/- AS STATED IN P & L A/C. THE ABOVE AMOUNTS ARE NOT LIABLE TO INCOME TAX BEC AUSE: (I) THE PRINCIPAL AMOUNT WAIVED IS NEITHER INCOME, AS IT IS A WAIVER ON CAPITAL AMOUNT, NOR IS TAXABLE U/S 41(1) SINCE IT HAS NEVER BEEN EARLIER ALLOWED AS A DEDUCTIBLE EXPE NSE. (II) THE WAIVER OF INTEREST IS NOT LIABLE TO INCOME TAX U/S 41(1) BECAUSE THE SAME HAS NOT BEEN ALLOWED AS DEDUCTION ON ACCOUNT OF RESTRICTIVE PROVISIONS OF SECTION 43B. THE DETAILS OF THE DISALLOWANCES U/S 43B IS PAST YE ARS IS AS FOLLOWS: (2) COMING BACK TO RECAPITULATE THE FACTS, PLEASE NOTE THAT THE COMPANY HAS SETTLED ITS DUES WITH THE SOUTH INDIAN BANK LTD. UNDER OTS AGREEMENT ON 31 ST DECEMBER, 2004. THE TOTAL DUES PAYABLE TO BANK AS PER BOOKS OF THE COMPANY WAS RS.1812.92 LAC S WHICH IS SETTLED BY PAYING OFF RS.450 LACS. THE INTEREST BEN EFIT OF RS.293.20 LACS ARISING OUT OF THIS SETTLEMENT IS SHOWN UNDER THE HEAD INTEREST BENEFIT OF FINANCIAL RESTRUCTURING. THE AMOUNT OF DIFFERENCE OF RS.569.72 LACS ON PRINCIPAL LOAN AMOUNT IS TAKEN TO RECONSTRUCTION RESERVE A/C UNDER THE HEAD GENERAL RESERVE AND SHOWN IN SCHEDULE 2 OF BALANCE SHEET. SIMILARLY THE COMPANY HAS ALSO SETTLED ITS DUES WI TH ICICI BANK LTD. UNDER ONE TIME SETTLEMENT SCHEME AGREEMENT ON 2 ND MARCH, 2005. THE TOTAL DUES PAYABLE TO BANK AS PER BOOK OF THE COMPANY WAS RS.9794.45 LACS WHICH IS SETTLED BY PAYING OFF RS.1670 LACS. THE INTEREST BENEFIT OF RS.2772.45 LACS ARISING OUT OF THIS SETTLEMENT IS SHOWN UNDER THE HEAD INTEREST BENEFIT ON FINANC IAL RESTRUCTURING. THE AMOUNT OF DIFFERENCE OF RS.5352 .00 LACS ON PRINCIPAL LOAN AMOUNT IS TAKEN TO RECONSTRUCTION R ESERVE A/C UNDER THE HEAD GENERAL RESERVE AND SHOWN IN SCHED ULE 2 OF BALANCE SHEET. THE LD. AR THEN REFERRED TO POINT NO.20 FROM THE AU DIT REPORT DATED 26.10.2005: ITA NO.974/AHD/2010 ASST. YEAR 2005-06 13 20. ANY AMOUNT OF PROFIT CHARGEABLE TO TAX UNDER SECTION 41 AND COMPUTATION THEREOF. RS.35,65,64,589/- AMOUNT DUE TO ICICI AND SIB WRITTEN BACK UNDER OTS OUT OF WHICH RS.34,38,17,026/- WAS DISALLOWED U/S 43(B) IN EARLIER YEARS, HENCE IN OUR OPINION EFFECTIVELY AMOUNT OF RS..1,27,46,563/- WILL BE INCLUDED U/S 41((I). ON THE BASIS OF ABOVE QUERIES AND INFORMATION PROVI DED BY THE ASSESSEE LD. AR ARGUED THAT THE ISSUE REGARDING SETTLEMENT O F LOAN AND WAIVER BY THE BANK OF PART OF SUCH LOAN WAS FULLY AND DULY DI SCUSSED BY THE AO AND, THEREAFTER HE HAD COME TO THE CONCLUSION THAT SUCH AMOUNT IS NOT TAXABLE AND, THEREFORE, HE HAD NOT MADE ANY ADDITION. NOW W HAT THE LD. CIT IS DOING IS ONLY SUBSTITUTING HIS OPINION WHICH IS ON LY A CHANGE OF OPINION BY HOLDING THAT SUCH ISSUE WAS NOT DISCUSSED BY THE AO AND THEREFORE, IT REQUIRES TO BE ENQUIRED AGAIN BY HIM. HE REFERRED T O THE JUDGMENT OF HON. DELHI HIGH COURT IN CIT VS. HONDA SIEL POWER PRODUC TS LTD. (2010) 41 DTR (DEL) 353 FOR THE PROPOSITION THAT WHERE AO HAS TAKEN A DECISION AFTER CARRYING OUT ENQUIRIES AND FORMING AN OPINION THEN LD. CIT CANNOT REVISE HIS ORDER BY EXERCISING HIS POWER UNDER SECT ION 263. FURTHER HE REFERRED TO THE FOLLOWING TWO DECISIONS OF THE TRIB UNAL IN SUPPORT OF HIS ARGUMENT THAT ORDER OF THE AO CANNOT BE REVISED MER ELY ON CHANGE OF OPINION. THEY ARE AS UNDER :- (1) ITA NO.1395/AHD/2004 ASST. YEAR 1995-96 IN THE CASE OF BARODA DIST. CO-OP. MILK PRODUCERS UNION LTD. VS. CIT-I, B ARODA & IN ITA NO.1135/AHD/2005 ASST. YEAR 1995-96 IN THE CASE OF BARODA DIST. CO-OP. MILK PRODUCERS UNION LTD. VS. CIT, CIR-2, BARODA. (2) ITA NO.3871/AHD/2003 ASST. YEAR 1997-98 IN THE CASE OF P.I.C. (GUJARAT) LTD. VS. DY.CIT, CIRCLE 7(5), AHMEDABAD & IN ITA NO.425/AHD/2006 ASST. YEAR 1997-98 IN THE CASE OF I TO, AHMEDABAD VS. P.I.C. (GUJARAT) LTD. IN ADDITION TO THIS, LD. AR FURTHER REFERRED TO FOL LOWING JUDGMENTS IN SUPPORT OF SAME PROPOSITION- ITA NO.974/AHD/2010 ASST. YEAR 2005-06 14 (1) MALABAR INDUSTRIAL CO. LTD. VS. CIT 243 ITR 83 (SC) (2) CIT VS. MAX INDIA LTD. 295 ITR 282 (SC) (3) CIT VS. ARVIND JEWELLERS (SLP OF DEPTT. REJECTE D 266 ITR (ST) 101 (4) CIT VS. GABRIEL INDIA LTD. 203 ITR 108 (BOM) 6. THE LD. AR THEN SUBMITTED THAT EVEN ON MERITS NO ADDITION UNDER SECTION 41(1) IS CALLED FOR BECAUSE AMOUNT OF LOAN WAIVED BY THE BANKS IN FAVOUR OF THE ASSESSEE WERE NEVER TAKEN INTO ACCOUN T WHILE COMPUTING PROFIT OF THE ASSESSEE. THEY NEVER FORMED PART OF M ANUFACTURING, TRADING OR PROFIT AND LOSS ACCOUNT. THEREFORE, QUESTION OF TAXING IT UNDER SECTION 41(1) WOULD NOT ARISE. THE PRIMARY CONDITION FOR IN VOKING SECTION 41(1) IS THAT IMPUGNED AMOUNT SHOULD HAVE BEEN CONSIDERED AS DEDUCTION IN THE PROFIT AND LOSS ACCOUNT IN THE CURRENT YEAR OR IN A N EARLIER YEAR. SINCE LOAN WAS ON CAPITAL ACCOUNT WHICH NEVER PASSED THROUGH A NY PROFIT AND LOSS ACCOUNT, THEREFORE, ON ITS WAIVER BY THE BANKS, IT WILL NOT GET THE CHARACTER OF PROFIT. HE SUBMITTED THAT THE DECISION OF HON. B OMBAY HIGH COURT IN SOLID CONTAINER (SUPRA) RELIED BY LD. CIT IN HIS OR DER, WOULD NOT BE APPLICABLE IN VIEW OF THE BINDING JUDGMENT OF HON. GUJARAT HIGH COURT IN CHETAN CHEMICALSS CASE (SUPRA). 7. AGAINST THIS, LD. DR SUBMITTED THAT MERELY BECAU SE ASSESSEE HAS SUBMITTED CERTAIN INFORMATION IN THE RETURN OF INCO ME OR IN THE AUDIT REPORT IT WOULD NOT MEAN THAT AO HAD APPLIED HIS MI ND AND CAME TO ANY DEFINITE CONCLUSION AS TO THE TAXABILITY OR OTHERWI SE OF THE IMPUGNED AMOUNT OF WAIVER MADE BY THE BANKS. NO ENQUIRY HAS BEEN DONE BY THE AO AND NO MATERIAL HAS BEEN SUBMITTED BY THE ASSESS EE AS TO WHETHER THIS PARTICULAR AMOUNT WAS AT ANY TIME CONSIDERED IN THE PROFIT AND LOSS ACCOUNT OR NOT. NO SUCH FACTS HAVE BEEN PUT ON THE RECORD. THE LD. DR FURTHER SUBMITTED THAT IN ANY CASE AO HAS NOT PUT A NY SPECIFIC QUERY ON ITA NO.974/AHD/2010 ASST. YEAR 2005-06 15 THE TAXABILITY OF SUM OF RS.59.21 CRORES. THEREFORE , IT CANNOT BE SAID THAT HE HAS APPLIED HIS MIND AND FORMED AN OPINION AS TO THE TAXABILITY OF THIS SUM. THE AO HAD ONLY RAISED QUERIES ABOUT TAXABILIT Y OF INTEREST AMOUNT AND HE HAD ACCORDINGLY TAKEN A DECISION. BUT THE SA ME CANNOT BE SAID ABOUT RS.59.21 CRORES. LD. DR REFERRED TO SEVERAL J UDGMENTS ON THE PROPOSITION THAT IF ASSESSEE SUBMITS PAPERS BEFORE THE AO THEN IT DOES NOT MEAN THAT AO HAS NECESSARILY APPLIED HIS MIND AND F ORMED AN OPINION. HE REFERRED TO THE FOLLOWING JUDGMENTS IN SUPPORT O F THIS PROPOSITION:- (1) MALABAR INDUSTRIAL CO. LTD. VS. CIT (2000) 243 ITR 83 (SC) (2) RAJIT AGNIHOTRI VS. CIT (2009)23 DTR 476 (DEL) (TRI B) (3) RAJALAKSHMI MILLS LTD. VS. ITO (2009) ITD 343 (CHEN NAI) (SB) (4) CIT VS. DEEPAK KUMAR GARG (2008) 299 ITR 435 (M.P.) (5) DUGGAL AND CO. VS. CIT (1996) 220 ITR 456 (DEL) (6) ADDL. CIT VS. MUKUR CORPORATION (1978) 111 ITR 312 (GUJ) 8. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PER USED THE MATERIAL ON RECORD TO WHICH THE PARTIES HAVE DRAWN OUR ATTEN TION. THE UNDISPUTED FACTS ON THE ISSUE ARE THAT AUDITORS HAVE MADE A NO TE ON THE AUDIT REPORT THAT SUM OF RS.35.65 CRORES DUE FROM ICICI AND SIB BANKS WERE WRITTEN BACK. A SUM OF RS.34.38 CRORES WAS DISALLOWED UNDER SECTION 43B IN EARLIER YEARS AND, THEREFORE, ONLY A SUM OF RS.1,27 ,46,563/- WOULD BE TAXABLE IN THE CURRENT YEAR UNDER SECTION 41(1). WH ILE MAKING SCRUTINY ASSESSMENT AO HAD IN GENERAL ASKED FOR COMMENTS ON SCHEDULE-3 OF THE AUDIT REPORT. THE SCHEDULE-3 PROVIDED THAT AMOUNT O F RS.59,21,72,000/- WAS TRANSFERRED TO SCHEDULE-2 AND SCHEDULE-2 IS GEN ERAL RESERVE ACCOUNT. FROM THIS IT DOES NOT APPEAR THAT AO IN ANY WAY APP LIED HIS MIND TO THE SUM OF RS.59.21 CRORES AND ITS TAXABILITY. IT IS AP PARENTLY A GENERAL QUERY RAISED BY THE AO WHICH WAS ALSO REPLIED IN GENERAL MANNER BY THE ASSESSEE AS REFERRED TO ABOVE. PARA 7 FROM THE ASSE SSEES REPLY DATED 21.9.2007 REFERRED TO ABOVE DOES NOT SPEAK OF SUM O F RS.59.21 CRORES BUT ITA NO.974/AHD/2010 ASST. YEAR 2005-06 16 ONLY REFERS TO DIFFERENCE OF INTEREST AMOUNT TAXABL E THIS YEAR AT RS.1,27,46,563/-. SIMILARLY, REPLY DATED 6.11.2007 DOES NOT REFER TO TRANSFER OF RS.59.21 CRORES TO GENERAL RESERVE AND ITS NON-TAXABILITY BUT ONLY FOCUSES ON TAXABILITY OF INTEREST UNDER SECTIO N 41(1). THE COMMENTS ON SCHEDULE-3 AS CALLED FOR BY THE AO AND AS MADE B Y THE AO VIDE PARA 10 OF LETTER DATED 6.11.2007 AS REFERRED TO ABOVE D OES NOT SPEAK OF SUM OF RS.59.21 AND ITS TAXABILITY AND FOCUS OF REPLY OF T HE ASSESSEE IN HIS LETTER IS ON THE TAXABILITY OF SUM OF RS.1,27,46,563/-. EV EN REPLY DATED 7.12.2007 DOES NOT MAKE IT CLEAR THAT SUM OF RS.59. 21 CRORES IS NOT TAXABLE FOR CERTAIN REASONS. IT ONLY REFERS THAT LO AN OF THE ASSESSEE WAS REDUCED BY RS.59.21 CRORES. PARA 2 OF THE LETTER DA TED 7.12.2007 REFERS TO SETTLEMENT OF LOAN ACCOUNT OF ICICI BANK AND SOUTH INDIAN BANK LTD.(SIB, IN SHORT) BUT AGAIN FOCUS IS ON DIFFERENC E IN THE AMOUNT OF INTEREST TAXABLE U/S 41(1). IT INFORMS ABOUT WAIVER OF PRINCIPAL AMOUNT OF RS.59,21,72,000/- AND WAIVER OF INTEREST AMOUNT OF RS.35.65 LACS. THUS IN NONE OF THESE REPLIES ASSESSEE HAS EXPLAINED THAT S UM OF RS.59.21 CRORES IS NOT TAXABLE UNDER SECTION 41(1) AND EQUALLY THER E IS NO QUERY FROM THE AO AS TO WHY THIS SUM BE NOT TAXED UNDER SECTION 41 (1). THUS WE ARE OF THE CLEAR VIEW THAT THE ISSUE OF TAXABILITY OF SUM OF RS.59,21,72,000/- WAS NOT AT ALL IN THE FOCUS OF THE AO AND, THEREFORE, H E DID NOT RAISE ANY QUERY ABOUT THE TAXABILITY AND, THEREFORE, ASSESSEE ALSO AVOIDED TO GIVE ANY DIRECT REPLY AS TO ITS NON-TAXABILITY. MERELY BECAU SE AO COULD HAVE INFERRED FROM THE MATERIAL AVAILABLE BEFORE HIM THA T SUM OF RS.59,21,72,000/- COULD ALSO BE TAXABLE OR NOT TAXA BLE UNDER SECTION 41(1) IN THE SAME MANNER AS SUM OF RS.1.27 CRORES ON ACCO UNT OF INTEREST IS TAXABLE IT CANNOT BE SAID THAT HE HAD CONSCIOUSLY A PPLIED HIS MIND OR ISSUE WAS AT ALL IN HIS FOCUS AND, THEREFORE, HE WA S IN A POSITION TO FORM AN OPINION ON THIS ISSUE. IN OUR CONSIDERED VIEW ONCE THE ENTIRE FACTS ARE NOT AVAILABLE ON RECORD OF THE AO AS TO WHETHER THE SUM OF RS.59,21,72,000/- ITA NO.974/AHD/2010 ASST. YEAR 2005-06 17 HAD PASSED THROUGH THE PROFIT AND LOSS ACCOUNT OR N OT HE COULD NOT BE IN A POSITION TO FORM A VIEW AS TO WHETHER THIS SUM WOUL D BE TAXABLE OR NOT TAXABLE. ALL THE JUDGMENTS RELIED ON BY THE LD. AR ARE ON THE POINT THAT WHERE AO HAS CONSCIOUSLY CONSIDERED AN ISSUE AND DI D NOT DECIDE AGAINST THE ASSESSEE THEN CIT COULD NOT ADOPT A DIFFERENT V IEW THAT THE IMPUGNED AMOUNT NOT TAXED BY AO COULD HAVE BEEN TAXED. FOR I NVOKING THE PROPOSITION THAT OUT OF THE TWO ONE VIEW FAVOURABLE TO THE ASSESSEE CAN BE ADOPTED THERE SHOULD BE TWO OPINIONS, ONE IN FAVOUR OF ASSESSEE AND THE OTHER IN FAVOUR OF THE REVENUE, INASMUCH AS THAT BO TH THE VIEWS SHOULD BE LEGALLY POSSIBLE, AND ARE SUPPORTED EITHER BY STATU TORY PROVISIONS OR THEIR INTERPRETATION AS MADE BY THE COURTS. IN OTHER WORD S FORMATION OF AN OPINION CAN BE POSSIBLE ONLY WHEN ALL THE RELEVANT FACTS ARE PLACED ON RECORD AS REQUIRED UNDER THE PROVISIONS OF LAW AND AO TAKES ONE OF POSSIBLE LEGALLY SUPPORTED VIEW IN FAVOUR OF THE AS SESSEE. ONCE AO ADOPTS SUCH A POSSIBLE LEGAL VIEW IN FAVOUR OF THE ASSESSEE THEN LD. CIT CANNOT SUBSTITUTE HIS OWN VIEW IN FAVOUR OF THE REV ENUE EVEN THOUGH SUCH VIEW IS LEGALLY POSSIBLE. IN THE PRESENT CASE THERE IS NO MATERIAL ON RECORD NEITHER CALLED FOR BY THE AO NOR SUBMITTED B Y THE ASSESSEE AT HIS OWN SO AS TO SUGGEST THAT SUM OF RS.59,21,72,000/- BEING WAIVER OF LOAN AMOUNTS BY THE BANKS HAD NOT BEEN PASSED THROUGH TH E MANUFACTURING- CUM-TRADING-CUM PROFIT AND LOSS ACCOUNT. EVEN THOUG H PRIMA FACIE IT WOULD APPEAR THAT LOAN AMOUNT WOULD NOT HAVE PASSED THROUGH THE MANUFACTURING-CUM-TRADING-CUM PROFIT AND LOSS ACCOU NT AS IT IS APPARENTLY IT IS IN CAPITAL FIELD BUT A FINDING TO THIS EFFECT IS NECESSARY BEFORE ANY CONCLUSION CAN BE ARRIVED AT. NO SUCH MA TERIAL WAS AVAILABLE IN THE RECORD OF THE AO NOR POINTED OUT BY THE AR T HAT AO WAS IN THE KNOWLEDGE THAT SUCH AMOUNT HAS PASSED THROUGH THE M ANUFACTURING-CUM- TRADING-CUM-PROFIT AND LOSS ACCOUNT. THEREFORE, NO SUCH VIEW COULD HAVE BEEN MADE BY THE AO THAT THIS AMOUNT IS NOT TAXABLE UNDER SECTION 41(1) ITA NO.974/AHD/2010 ASST. YEAR 2005-06 18 WHEN WAIVED BY THE BANKS. WE ACCORDINGLY REJECT THE ARGUMENTS OF LD. AR THAT AO HAD FORMED AN OPINION, THEREFORE, LD. CI T COULD NOT HAVE SUBSTITUTED HIS OPINION AND REVISED THE ORDER UNDER SECTION 263. 9. IT IS NOW SETTLED LAW THAT IF AO DOES NOT CARRY OUT ANY ENQUIRY AND FORMS A DEFINITE VIEW IN THE MATTER THEN LD. CIT IS JUSTIFIED IN EXERCISING HIS POWER UNDER SECTION 263. SOME OF THE JUDGMENTS ARE REFERRED TO BY THE LD. DR. WE ALSO FOR THE SAKE OF COMPLETENESS OF THE DISCUSSION REFER THEM AS UNDER:- 1. MALABAR INDUSTRIAL CO. LTD. VS. CIT (2000) 243 ITR 83 (SC) WHERE AO DID NOT MAKE PROPER ENQUIRIES CALLED FOR I N THE CIRCUMSTANCES OF THE CASE AND ASSESSMENT ORDER DID NOT SHOW THAT AO HAS CONSIDERED ALL ASPECTS OF THE CASE INCLUDING THE AGREEMENT DAMAGES , AND COMPENSATION REALIZED FOR LOSS OF AGRICULTURE INCOME, THE APEX C OURT HELD: THE COMMISSIONER NOTED THAT THE INCOME-TAX OFFICER PASSED THE ORDER OF NIL ASSESSMENT WITHOUT APPLICATION OF MIND. INDEE D, THE HIGH COURT RECORDED THE FINDING THAT THE INCOME-TAX OFFICER FA ILED TO APPLY HIS MIND TO THE CASE IN ALL PERSPECTIVE AND THE ORDER PASSED BY HIM WAS ERRONEOUS. THE RESOLUTION PASSED BY THE BOARD OF THE APPELLANT -COMPANY WAS NOT PLACED BEFORE THE AO. THUS, THERE WAS NO MATERIAL T O SUPPORT THE CLAIM OF THE APPELLANT THAT THE SAID AMOUNT REPRESENTED COMP ENSATION FOR LOSS OF AGRICULTURAL INCOME. HE ACCEPTED THE ENTRY IN THE S TATEMENT OF THE ACCOUNT FILED BY THE APPELLANT IN THE ABSENCE OF AN Y SUPPORTING MATERIAL AND WITHOUT MAKING ANY INQUIRY. ON THESE FACTS, THE CONCLUSION THAT THE ORDER OF THE ITO WAS ERRONEOUS WAS IRRESISTIBLE. TH E HIGH COURT HAD RIGHTLY HELD THAT THE EXERCISE OF JURISDICTION BY T HE COMMISSIONER UNDER SECTION 263(1) WAS JUSTIFIED. 2. RAJIV AGNIHOTRI VS. CIT (2009) 23 DTR 476 (DEL)(TRI B) ASSESSING OFFICER HAVING ACCEPTED THE ACCOUNTS OF T HE ASSESSEE AFTER THE LATTER HAD SUBMITTED THE DETAILS AS CALLED FOR BY T HE AO, IT COULD NOT BE SAID THAT HE HAS NOT APPLIED HIS MIND TO THE RELEVA NT ISSUES AND THEREFORE, ORDER PASSED BY CIT UNDER SECTION 263 IS NOT SUSTAI NABLE, MORE SO WHEN HE DID NOT RECORD A FINDING AS TO HOW THE ORDER OF THE AO IS ERRONEOUS. ITA NO.974/AHD/2010 ASST. YEAR 2005-06 19 3. RAJALAKSHMI MILLS LTD. VS. ITO 121 ITD 343 (CHENNAI )(SB) REVISION FURTHER ENQUIRY -263 COMMISSIONER CAN REGARD ORDER AS ERRONEOUS ON THE G ROUND THAT IN CIRCUMSTANCES OF CASE AO SHOULD HAVE MADE FURTHER E NQUIRIES BEFORE ACCEPTING STATEMENT MADE BY THE ASSESSEE. 4. CIT VS. DEEPAK KUMAR GARG (2008) 299 ITR 435 (M.P.) REVISION--CONDITIONS PRECEDENT--ASSESSMENT ORDER PASSED WITHOUT PROPER ENQUIRY--ORDER ERRONEOUS AND PREJUDICIAL TO REVENUE--ORDER OF REVISION REMANDING MATTER--VALID--INCOME-TAX ACT, 1961, S. 263. NO RULE OF UNIVERSAL APPLICATION CAN BE LAID DOWN F OR THE EXERCISE OF REVISIONAL POWER UNDER SECTION 263 OF THE INCOME-TA X ACT, 1961. IT WILL DEPEND ON THE FACTS OF EACH CASE BUT THE COMMISSION ER MUST BE SATISFIED OF THE EXISTENCE OF THE TWIN CONDITIONS VIZ., THAT THE ORDER OF THE AO IS ERRONEOUS AND THAT IT IS PREJUDICIAL TO THE INTERES TS OF THE REVENUE. HELD- THAT FROM THE ORDER OF THE AO, IT WAS CLEAR T HAT FOR WANT OF TIME, THE AO HAD DONE ONLY A SEMBLANCE OF ENQUIRY AND THAT TO O, IN A VERY SLIP- SHOD MANNER. THE AO ACCEPTED THE VERSION OF THE ASS ESSEE WITHOUT PROPER ENQUIRY AND AS A RESULT A SUBSTANTIAL AMOUNT OF TAX ABLE INCOME WAS NOT BROUGHT TO TAX. THE COMMISSIONER OF INCOME-TAX HAD RECORDED A CATEGORICAL FINDING THAT THE ORDER OF THE AO FOR WA NT OF ADEQUATE ENQUIRY, WAS ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF TH E REVENUE AND AFTER SETTING ASIDE THE ASSESSMENT ORDER, REMANDED THE MA TTER TO THE AO FOR FRESH ASSESSMENT ON THE MERITS. THE CIT ALSO DIRECT ED THE AO TO OBSERVE THE RULES OF NATURAL JUSTICE AND TO PROVIDE OPPORTU NITY OF HEARING TO THE ASSESSEE BEFORE MAKING A FRESH ASSESSMENT ORDER ON THE MERITS. THIS WOULD ADEQUATELY SAFEGUARD THE INTEREST OF THE ASSE SSEE AND WOULD CAUSE NO PREJUDICE. THE ORDER OF REVISION WAS VALID. 5. DUGGAL AND CO. V. CIT [1996] 220 ITR 0456- [DEL] REVISION-CONDITION PRECEDENT FOR REVISION-ORDER OF ITO WHICH IS ERRONEOUS AND PREJUDICIALTO REVENUE- MEANING OF 'ERRONEOUS'-RETURN CALLING FOR FURTHER ENQUIRY-FAILURE OF ITO TO INVESTIGATE FACTS-ORDER O F ITO IS ERRONEOUS AND CAN BE REVISED-INCOME-TAX ACT, 1961, S. 263. ITA NO.974/AHD/2010 ASST. YEAR 2005-06 20 THE INCOME-TAX OFFICER IS NOT ONLY AN ADJUDICATOR B UT ALSO AN INVESTIGATOR. HE CANNOT REMAIN PASSIVE IN THE FACE OF A RETURN WHICH IS APPARENTLY IN ORDER BUT CALLS FOR FURTHER INQUIRY, FT IS INCUMBENT ON THE INCOME-TAX OFFICER TO FURTHER INVESTIGATE THE FACTS STATED IN THE RETURN, WHEN CIRCUMSTANCES WOULD MAKE SUCH AN INQUIRY PRUDE NT AND THE WORD 'ERRONEOUS' IN SECTION 263 OF THE INCOME-TAX ACT, 1 961, INCLUDES THE FAILURE TO MAKE SUCH AN ENQUIRY. THE ORDER BECOMES ERRONEOUS BECAUSE SUCH AN INQUIRY HAS NOT BEEN MADE AND NOT BECAUSE T HERE IS ANYTHING WRONG WITH THE ORDER IF ALL THE FACTS STATED THEREI N ARE ASSUMED TO BE CORRECT. 6. ADDL. CIT V. MUKUR CORPORATION [1978] 111 ITR 0312- [GUJ] REVISION BY COMMISSIONER-SCOPE OF NATURE OF ENQUIRY TO BE MADE BY THE COMMISSIONER-COMMISJIONER NEED NO T COME TO FIRM CONCLUSION-CONDITIONS NECESSARY FOR COMMISSIONER TO EXERCISE POWER OF REVISION-ORDER SETTING ASIDE ASSESSMENT AND DIRECTING FRESH ASSESSMENT-WHETHER PROPER-INCOME-TAX ACT, 1961, S, 263. AS A RESULT TO THIS EXTENT LD. CIT WAS JUSTIFIED IN EXERCISING HIS POWER UNDER SECTION 263 AND ISSUING THE SHOW CAUSE NOTICE TO THE ASSESSEE. 10. HOWEVER, WE ARE NOT CONVINCED WITH THE ULTIMATE FINDING OF LD. CIT. IN OUR CONSIDERED VIEW LD. CIT HAS RATHER PREM ATURELY DECIDED TO SET ASIDE THE ISSUE FOR BEING CONSIDERED BY THE AO. AN ISSUE FOR ENQUIRY CAN BE SET ASIDE TO THE FILE OF AO BY LD. CIT UNDER SEC TION 263 ONLY WHEN A PRIMA FACIE CASE IS MADE OUT THAT PARTICULAR AMOUNT COULD BE TAXABLE IF ENQUIRIES TO THE LOGICAL END ARE CARRIED OUT. THOUG H IT IS NOT NECESSARY THAT LD. CIT GIVE A DEFINITE FINDING ABOUT TAXABILITY OF AN ITEM BUT IT IS IMPERATIVE THAT A PRIMA FACIE CASE SHOULD BE MADE O UT THAT PARTICULAR AMOUNT COULD BE TAXABLE THOUGH FINALLY AO MAY NOT T AX THE SAME AFTER CARRYING OUT COMPLETE ENQUIRIES AND EXPLANATION OF THE ASSESSEE ON THAT ISSUE. ITA NO.974/AHD/2010 ASST. YEAR 2005-06 21 11. IN THE PRESENT CASE IN THE REPLY SUBMITTED BY T HE ASSESSEE IT HAS BEEN EMPHASIZED BY THE ASSESSEE THAT SUM OF RS.59,2 1,72,000/- IS WAIVER OF LOAN BY THE TWO BANKS I.E. ICICI AND SOUTH INDIA N BANK. ITS LOAN AMOUNT THEN PRIMA FACIE COULD NOT HAVE PASSED THROU GH PROFIT AND LOSS ACCOUNT AND, THEREFORE, ON ITS WAIVER IT CANNOT BE HELD TAXABLE UNDER SECTION 41(1). THE RELEVANT AUTHORITIES ON THE SUBJ ECT ARE AS UNDER :- (I) CHIEF CIT VS. KESARIA TEA CO. LTD. 254 ITR 434 (SC) THE QUESTION IS WHETHER THE CIRCUMSTANCES CONTEMPLA TED BY SECTION 41(1) EXIST SO AS TO ENABLE THE REVENUE TO TAKE BACK WHAT HAS BEEN ALLOWED EARLIER AS BUSINESS EXPENDITURE AND TO INCLUDE SUCH AMOUNT IN THE INCOME OF THE RELEVANT ASSESSMENT YEAR, I.E. 198586. FN OR DER TO APPLY SECTION 41(1) IN THE CONTEXT OF THE FACTS OBTAINING IN THE PRESENT CASE, THE FOLLOWING POINTS ARE TO BE KEPT IN VIEW : (1] IN TH E COURSE OF ASSESSMENT FOR AN EARLIER YEAR, ALLOWANCE OR DEDUCTION HAS BEE N MADE IN RESPECT OF TRADING LIABILITY INCURRED BY THE ASSESSEE ; (2) SU BSEQUENTLY, A BENEFIT IS OBTAINED IN RESPECT OF SUCH TRADING LIABILITY BY WA Y OF REMISSION OR CESSATION THEREOF DURING THE YEAR IN WHICH SUCH EVE NT OCCURRED ; (3] IN THAT SITUATION THE VALUE OF THE BENEFIT ACCRUING TO THE ASSESSEE IS DEEMED TO BE THE PROFIT AND GAINS OF BUSINESS WHICH OTHERW ISE WOULD NOT BE HIS INCOME ; AND (4J SUCH VALUE OF THE BENEFIT IS MADE CHARGEABLE TO INCOME- TAX AS THE INCOME OF THE PREVIOUS YEAR WHEREIN SUCH BENEFIT WAS OBTAINED. THE LEARNED SENIOR COUNSEL APPEARING FOR THE INCOME -TAX DEPARTMENT HAS CONTENDED THAT THE ASSESSEE ITSELF TOOK STEPS TO WR ITE OFF THE LIABILITY ON ACCOUNT OF PURCHASE TAX BY MAKING NECESSARY ADJUSTM ENTS IN THE BOOKS, WHICH ITSELF IS INDICATIVE OF THE FACT THAT THE LIA BILITY CEASED FOR ALL PRACTICAL PURPOSES AND THEREFORE, THE ADDITION OF T HE AMOUNT OF RS. 3,20,758 DEEMING THE SAME AS INCOME OF THE YEAR 198 5-86 UNDER SECTION 41(1) IS WELL JUSTIFIED OF THE ACT. BUT, WHAT THE A SSESSEE HAS DONE IS NOT CONCLUSIVE. AS OBSERVED BY THE TRIBUNAL, A UNILATER AL ACTION ON THE PART OF THE ASSESSEE BYWAY OF WRITING-OFF THE LIABILITY IN ITS ACCOUNTS DOES NOT NECESSARILY MEAN THAT THE LIABILITY CEASED IN THE E YE OF LAW. IN FACT, THIS IS THE VIEW TAKEN BY THIS COURT IN CIT V. SUGAULI SUGA R WORKS (P.) LTD. (1999) 236 ITR 518, WE, THEREFORE, FIND NO SUBSTANCE IN THE CONTENTION ADVANCED ON BEHALF OF THE APPELLANT. INCIDENTALLY, WE MAY MENTION THAT TH E CONTROVERSY RELATES TO THE PERIOD ANTERIOR TO THE INTRODUCTION OF EXPLANAT ION 1 TO SECTION 41(1). ITA NO.974/AHD/2010 ASST. YEAR 2005-06 22 THE DECISION OF THIS COURT IN CIT V. T. V. SUNDARAM IYENGAR AND SONS LTD. (1996) 222 ITR 344 HAS BEEN CITED BY LD. COUNS EL FOR THE APPELLANT. WE FIND NO RELEVANCE OF THIS DECISION TO THE DETERM INATION OF THE QUESTION INVOLVED IN THE PRESENT CASE. THE FACTUAL MATRIX AN D THE PROVISION OF LAW CONSIDERED THEREIN IS ENTIRELY DIFFERENT. (II) CIT V. CHETAN CHEMICALS PVT. LTD. [2004] 267 I TR 0770-[GUJ] ON A READING OF SECTION 41(1) OF THE INCOME-TAX ACT , 1961, IT IS APPARENT THAT BEFORE THE SECTION CAN BE INVOKED AN ALLOWANCE OR A DEDUCTION MUST HAVE BEEN GRANTED DURING THE COURSE OF ASSESSMENT F OR ANY YEAR IN RESPECT OF LOSS, EXPENDITURE OR TRADING LIABILITY WHICH IS INCURRED BY THE ASSESSEE, AND SUBSEQUENTLY DURING ANY PREVIOUS YEAR THE ASSES SEE OBTAINS, WHETHER IN CASH OR IN ANY OTHER MANNER, ANY AMOUNT IN RESPE CT OF SUCH TRADING LIABILITY BY WAY OF REMISSION OR CESSATION OF SUCH LIABILITY. IN THAT CASE, EITHER THE AMOUNT OBTAINED BY THE ASSESSEE OR THE V ALUE OF THE BENEFIT ACCRUING TO THE ASSESSEE CAN BE DEEMED TO BE THE PR OFITS AND GAINS OF BUSINESS OR PROFESSION AND CAN BE BROUGHT TO TAX AS INCOME OF THE PREVIOUS YEAR IN WHICH SUCH AMOUNT OR BENEFIT IS OB TAINED. THE ASSESSEE, A PRIVATE LIMITED COMPANY, WAS INCORP ORATED IN THE YEAR 1974-75. SINCE 1976, THE COMPANY CARRIED ON COMMERC IAL PRODUCTION OF VARIOUS INORGANIC CHEMICALS. THE COMPANY MAINTAINED ITS ACCOUNTS AS PER THE MERCANTILE SYSTEM OF ACCOUNTING. IN THE COURSE OF CARRYING ON ITS BUSINESS, THE COMPANY HAD OBTAINED UNSECURED LOANS FROM VARIOUS CREDITORS, AND IN THE LIGHT OF THE FINANCIAL DIFFIC ULTIES FACED BY THE COMPANY, THE CREDITORS APPROACHED THE HIGH COURT BY FILING VARIOUS COMPANY PETITIONS. DURING THE COURSE OF THOSE PROCE EDINGS, A COMPROMISE WAS REACHED BETWEEN THE ASSESSEE-COMPANY AND ITS CREDITORS WHEREIN AS PER THE TERMS OF THE COMPROMISE CERTAIN CREDITORS REMITTED UNSECURED LOANS AMOUNTING TO RS. 1,77,052. AT THE S AME TIME, INTEREST WHICH HAD ACCRUED IN FAVOUR OF THE CREDITORS AMOUNT ING TO RS. 2,96,171 WAS ALSO REMITTED. SUCH REMITTED INTEREST WAS DECLA RED BY THE ASSESSEE FOR THE ASSESSMENT YEAR 1982-83 AS INCOME LIABLE TO TAX UNDER SECTION 41(1) OF THE INCOME-TAX ACT WHILE FILING ITS RETURN OF IN COME, BUT THE REMISSION OF LOANS AMOUNTING TO RS. 1,77,052 WAS NOT RETURNED AS INCOME LIABLE TO TAX. THE INCOME-TAX OFFICER TREATED THE AFORESAID R EMISSION OF LOANS AS A BENEFIT ACCRUING TO THE COMPANY DURING THE COURSE O F ITS BUSINESS ACTIVITY AND BROUGHT IT TO TAX BY INVOKING THE PROVISIONS OF SECTION 28(IV) OF THE ACT. THE COMMISSIONER (APPEALS) CONFIRMED THE ASSES SMENT ORDER AND THE ASSESSEE APPROACHED THE TRIBUNAL. THE TRIBUNAL HELD THAT THE REMISSION OF UNSECURED LOANS COULD NOT BE SUBJECTED TO TAX BY INVOKING THE PROVISIONS OF SECTION 28(IV) READ WITH SECTION 41(1). ON A REFERENCE : ITA NO.974/AHD/2010 ASST. YEAR 2005-06 23 HELD,_ THAT IT WAS AN ADMITTED POSITION THAT THERE HAD BEEN NO ALLOWANCE OR DEDUCTION IN ANY OF THE PRECEDING YEARS AND, HEN CE, THERE WAS NO QUESTION OF APPLYING THE PROVISION AS SUCH. SECTION 28 OF THE ACT DEALS WITH PROFITS AND GAINS OF BUSINESS OR PROFESSION AN D CLAUSE (IV) THEREOF SAYS THAT THE VALUE OF ANY BENEFIT OR PERQUISITE, W HETHER CONVERTIBLE INTO MONEY OR NOT, ARISING FROM BUSINESS OR THE EXERCISE OF A PROFESSION SHALL BE CHARGEABLE AS INCOME UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION. IN THE FACTS OF THE PRESENT CASE, IT C OULD NOT BE SAID THAT THE ASSESSEE-COMPANY WAS CARRYING ON BUSINESS OF OBTAIN ING LOANS AND THAT THE REMISSION OF SUCH LOANS BY THE CREDITORS OF THE COMPANY WAS A BENEFIT ARISING FROM SUCH BUSINESS. THE TRIBUNAL WAS RIGHT IN HOLDING THAT THE AMOUNT OF RS. 1,77,052 ARISING AS A RESULT OF REMIS SION OF UNSECURED LOANS WAS NOT TAXABLE IN THE HANDS OF THE ASSESSEE. (III) GOVINDBHAI C. PATEL VS. DCIT, ITA NO.1675/AHD /2009 OCTOBER 30, 2009. SECTION 41(1) OF IT ACT, 1961 CONCERNS A TRADING LI ABILITY AND NOT OTHER TYPES OF LIABILITY. WHERE THE ASSESSEE RECEIVED SOME AMOUNT AS A LIABIL ITY, WHICH WAS NOT CLAIMED AS DEDUCTION OR EXPENSES IN ANY OF THE YEAR S, AND THE SAME WAS WRITTEN OFF AS COMPENSATION/DAMAGES FOR RELINQUISHM ENT OF RIGHT TO SUE IN COURT OF LAW, THE PROVISIONS OF SECTION 41(1) OR SE CTION 68 WOULD NOT APPLY TO THE WRITING OFF THAT LIABILITY. (IV) CIT VS. GOYAL M.G. GASES LTD. (2010) 321 ITR 4 37 (DEL) HELD,_ DISMISSING THE APPEAL, THAT THE ASSESSEE DID NOT CLAIM NOR WAS ALLOWED ANY DEDUCTION OR BENEFIT OF ALLOWANCE BY WAY OF ALLOWAB LE EXPENDITURE AND TRADING LIABILITY, AND THE SUM, HAVING BEEN CREDITED TO THE PROFIT AND LOSS ACCOUNT HAD BEEN SUBJECTED TO TAX AS PART OF BOOK PROFIT UNDER SECTI ON 115JB OF THE ACT. THE CONCLUSIONS OF THE TRIBUNAL WERE BASED ON A CORRECT APPRECIATIO N OF LAW AND, THEREFORE, NOT TO BE INTERFERED WITH. (V) PRISM CEMENT LTD. VS. JOINT CIT (2006) 285 ITR (A.T.) 43 (ITAT, MUM) FOR INVOKING THE PROVISIONS OF SECTION 41(1) OF THE INCOME-TAX ACT, 1961, AN ALLOWANCE OR DEDUCTION MUST HAVE BEEN GRANTED DURIN G THE COURSE OF ASSESSMENT FOR ANY YEAR IN RESPECT OF LOSS, EXPENDITURE OR TRADING LIABILITY INCURRED BY THE ASSESSEE AND SUBSEQUENTLY DURING ANY PREVIOUS YEAR, THE ASSE SSEE MUST OBTAIN, WHETHER IN CASH OR IN ANY OTHER MANNER WHATSOEVER ANY AMOUNT IN RES PECT OF SUCH TRADING LIABILITY BY ITA NO.974/AHD/2010 ASST. YEAR 2005-06 24 WAY OF REMISSION OR CESSATION OF SUCH LIABILITY. UN LESS AND UNTIL THE LIABILITY WHICH HAS CEASED OR BEEN REMITTED DURING THE ASSESSMENT YEAR, HAS BEEN DEBITED AND CLAIMED TO THE PROFIT AND LOSS ACCOUNT AND ALLOWED IN EARLIER YEARS, IT CANNOT BE TREATED TO BE AN INCOME UNDER SECTION 41(1). IF THAT LIABILITY WAS N OT ALLOWED OR ITS DEDUCTION WAS NOT GRANTED IN EARLIER YEARS, IT WOULD NOT ASSUME THE C HARACTER OF INCOME CHARGEABLE TO TAX IN A LATER YEAR BY VIRTUE OF SECTION 41(1). (VI) MINDTEK (INDIA) LTD. VS. ITO (2010) 122 ITD 48 6 (BOM) (VII) NARAYANAN CHETTIARY INDUSTRIES VS. ITO 277 IT R426 (MAD) ALL THE INCOME TAX AUTHORITIES TREATED THE AMOUNT O F RS.23,66,695 (THE AMOUNT WHICH WAS WRITTEN OFF BY THE SISTER CONCERN OF THE ASSESSEE) AS INCOME IN THE HANDS OF THE ASSESSEE AND TAXED IT UN DER SECTION 41(1) OF THE INCOME-TAX ACT, 1961. ON APPEAL THE ASSESSEE CONTEN DED THAT THERE WAS NO FINDING THAT THERE WAS DEDUCTION OF ALLOWANCE MA DE IN THE ASSESSMENT OF THE ASSESSEE FOR ANY YEAR AND HENCE THE PROVISIO NS OF SECTION 41(1) HAD NO APPLICATION. HELD THAT SECTION 41(1) CREATES A LEGAL FICTION AN D HENCE HAS TO BE STRICTLY COMPLIED WITH IF ANY ADDITION TO THE INCOME IS SOUG HT TO BE MADE BY THE REVENUE. UNLESS AN ALLOWANCE OR DEDUCTION HAD BEEN MADE IN AN EARLIER YEAR IN RESPECT OF LOSS, EXPENDITURE OR TRADING LIA BILITY THERE CAN BE NO ADDITION UNDER SECTION 41(1). THERE WAS NO FINDING OF THE TRIBUNAL THAT ANY DEDUCTION OR ALLOWANCE WAS MADE IN THE ASSESSME NT OF THE ASSESSEE IN AN EARLIER YEAR. THEREFORE, THE ORDER OF THE TRIBUN AL WAS SET ASIDE AND THE MATTER WAS REMITTED TO THE TRIBUNAL FOR FRESH CONSI DERATION IN ACCORDANCE WITH LAW. (VIII) SMARTALK (P) LTD. VS. ITO ACIT VS. SMARTALK (P) LTD. (2009) 313 ITR (A.T.) 96 (ITAT-MUM) HELD,_ THAT THE AMOUNT CREDITED TO THE CAPITAL RESE RVE ACCOUNT COULD NOT BE TAXED EITHER UNDER SECTION 28(IV) OR SECTION 41(1) OF THE ACT AS WAIVER OF LOA N WAS NEITHER COVERED UNDER SECTION 28(IV) OR SECT ION 41(1) OF THE ACT. THE PROVISIONS OF SECTION 10(3) C OULD NOT BE INVOKED FOR CHARGING ANY INCOME TO TAX AS SECTION 10 DEALS WITH ONLY SUCH INCOMES, WHICH ARE NOT TO BE INCLUDED IN THE TOTAL INCOME OF THE ASSESSEE. THE ASSESSING OFFICER WOULD NOT INCLUDE T HE SUM OF RS. 2.45 CRORES AS INCOME OF THE ASSESSEE SINCE IT WAS UTILISED TO REPAY THE AMOUNT DUE TO THE BANK OF AMERICA ON ACCOUNT OF LOAN TAKEN FOR THE PURPOSE OF BUSINESS AND THE AMOUNT WAS CRED ITED TO THE CAPITAL RESERVE ACCOUNT BEING THE CONTRIBUTION MADE BY THE SHAREHOLDER FOR REPAYING I TS LIABILITIES IN ORDER TO FULFIL ITS GUARANTEE OBL IGATIONS. THEREFORE THE AMOUNT CREDITED IN THE CAPITAL RESERV E ACCOUNT WAS NOT TAXABLE UNDER SECTION 10 OF THE ACT. (IX) MAHINDRA AND MAHINDRA LTD. VS. CIT CIT VS. MAHINDRA AND MAHINDRA LTD. (2003) 261 ITR 5 01 (BOM) (II) THAT IN ORDER TO APPLY SECTION 41(1), AN ASSES SEE SHOULD HAVE OBTAINED A DEDUCTION IN THE ASSESSMENT FOR ANY YEAR IN RESPECT OF LOSS, EXPENDI TURE OR TRADING LIABILITY INCURRED BY THE ASSESSEE. THE ITA NO.974/AHD/2010 ASST. YEAR 2005-06 25 ASSESSEE HAD NOT OBTAINED SUCH ALLOWANCE OR DEDUCTI ON IN RESPECT OF EXPENDITURE OR TRADING LIABILITY. THE ASSESSEE HAD PAID INTEREST AT 6 PER CENT. OVER A PE RIOD OF TEN YEARS ON RS. 57,74,064. IN RESPECT OF T HAT INTEREST, THE ASSESSEE NEVER GOT DEDUCTION UNDER SE CTION 36(1)(III) OR SECTION 37. IN THE CIRCUMSTANCE S, SECTION 41(1) OF THE ACT WAS NOT APPLICABLE. SECOND LY, EVEN ASSUMING THAT THE ASSESSEE HAD GOT DEDUCTION ON ALLOWANCE SECTION 41(1) WAS NOT APPLIC ABLE BECAUSE SUCH DEDUCTION WAS NOT IN RESPECT OF LOSS, EXPENDITURE OR TRADING LIABILITY. LASTLY THE TOOLINGS CONSTITUTED CAPITAL ASSETS AND NOT STOCK-I N-TRADE. THEREFORE, TAKING INTO ACCOUNT ALL THE ABOVE FACTS, SECTION 41(1) OF THE ACT WAS NOT APPLICABLE. THEREFORE, FOR INVOKING SECTION 41(1) A FINDING IS NECESSARY THAT AMOUNT IN QUESTION HAS BEEN CLAIMED AS DEDUCTION AND ALLOW ED ACCORDINGLY IN THE CURRENT YEAR OR IN ANY EARLIER YEARS. WITHOUT THIS FINDING IT CANNOT BE SAID THAT ORDER OF AO CAN BE ERRONEOUS AND ACCORDINGLY P REJUDICIAL TO THE INTEREST OF REVENUE. THEREFORE, IT WAS IMPERATIVE O N THE PART OF LD. CIT TO GIVE A PRIMA FACIE FINDING ON THIS ISSUE BEFORE REM ITTING THE MATTER BACK TO THE AO. THE LAW ALSO EMPOWERS THE LD. CIT TO CAR RY OUT ENQUIRIES WHEN THE SECTION MENTIONS HE MAY AFTER GIVING THE ASSESSEE AN OPPORTUNITY OF BEING HEARD AND AFTER MAKING OR CAUS ING TO BE MADE SUCH ENQUIRIES AS HE DEEMS THE MENTIONING OF CARRYING OUT ENQUIRY DIRECTLY BY THE LD. CIT OR THROUGH HIS OFFICERS IS NOT A MERE EMPTY FORMALITY BUT A NECESSARY INGREDIENT IN THE PROCESS OF COMING TO THE CONCLUSION THAT ORDER OF THE AO IS ERRONEOUS IN SO FAR AS IT IS PREJUDICIAL TO THE INTEREST OF REVENUE. IF MERELY ON THE BASIS OF FINDING BY THE LD. CIT THAT AO HAS NOT CARRIED OUT ENQUIRIES THE ORDER BEC OMES ERRONEOUS THEN EMPOWERING THE COMMISSIONER TO CARRY OUT ENQUIRIES OR CAUSING THEM TO BE MADE WOULD BE A WASTE AND WE CANNOT INFER THAT L EGISLATURE HAS VESTED WORDS EMPOWERING THE COMMISSIONER TO CARRY OUT ENQU IRIES. WHERE THE LEGISLATURE THOUGHT THAT ENQUIRIES AS DEEMED FIT MA Y BE CARRIED OUT BY CIT IT DID NOT NECESSARILY MEAN THAT ENQUIRY SHOULD NOT BE CARRIED OUT BY THE LD. CIT. THE WORDS DEEMS FIT USED IN SECTION 263 MEAN AND REFER TO THE NATURE AND EXTENT OF ENQUIRIES WHICH THE COMMIS SIONER UNDER THE CIRCUMSTANCES OF THE CASE CAN CONSIDERS TO CARRY OU T. IT IS A POSITIVE MANDATE AND THE EXTENT, SCOPE AND NATURE OF ENQUIRI ES IS LEFT TO THE DISCRETION AND WISDOM OF THE CIT AND IT COULD NOT M EAN THAT CIT SHOULD ITA NO.974/AHD/2010 ASST. YEAR 2005-06 26 NOT CARRY OUT ANY ENQUIRY, EVEN IF IT BECOMES IMPER ATIVE UNDER THE FACTS AND CIRCUMSTANCES OF THE CASE PARTICULARLY WHEN ASS ESSEE EXPLICITLY EMPHASIZED THAT PARTICULAR AMOUNT IS NOT TAXABLE UN DER SECTION 41(1) BECAUSE THIS WAS NOT CLAIMED AS DEDUCTION IN THE EA RLIER YEARS IN THE MANUFACTURING-CUM-TRADING-CUM PROFIT AND LOSS ACCOU NT. THE LD. CIT IS DUTY BOUND TO GIVE A CLEAR FINDING ON THE ASSERTION MADE BY THE ASSESSEE THAT PARTICULAR AMOUNT IS NOT TAXABLE BECAUSE OF NO N FULFILLMENT OF A NECESSARY INGREDIENT OF SECTION 41(1) AS LAID DOWN BY HON. SUPREME COURT IN KESARIA TEA CO. (SUPRA). PROBABLY IN THOSE CASES WHERE IN RESPONSE TO SHOW CAUSE NOTICE ISSUED BY THE CIT UND ER SECTION 263 ASSESSEE CHOOSE TO KEEP SILENT ABOUT TAXABILITY OF IMPUGNED AMOUNT THEN CIT MAY LEAVE THE ISSUE TO BE ENQUIRED FULLY BY THE AO BUT WHERE CLEAR ASSERTION IS MADE AS TO THE NON-TAXABILITY OF AN AM OUNT CIT, IS NOT EXPECTED TO IGNORE THE SUBMISSIONS AND NOT RECORDIN G ANY FINDING THEREON. WE ACCORDINGLY ARE OF THE VIEW THAT DECISION OF THE CIT TO COME TO THE CONCLUSION THAT ORDER OF THE AO IS ERRONEOUS AND PR EJUDICIAL TO THE INTEREST OF REVENUE IS RATHER PREMATURE INASMUCH AS A FINDING ON THE MAIN PLANK OF THE SUBMISSION MADE BY THE ASSESSEE IS NOT GIVEN. 12. NOW BEFORE PARTING AWAY WE MAY LIKE TO REFER TO THE JUDGMENT OF HON. BOMBAY HIGH COURT IN SOLID CONTAINERS CASE (S UPRA). IN THIS CASE THE HON. BOMBAY HIGH COURT HAD OBSERVED AS UNDER :- SOLID CONTAINERS LTD. V DCIT [2009] 308 ITR 0417-[B OM] THE ASSESSEE HAD TAKEN A LOAN OF RS. 6,86,071 FOR B USINESS PURPOSES WHICH WAS WRITTEN BACK AND DIRECTLY CREDITED TO THE RESERVES ACCOUNT, AS A RESULT OF CONSENT TERMS ARRIVED AT IN A SUIT. THE A SSESSEE CLAIMED THIS AMOUNT AS CAPITAL RECEIPT, EVEN THOUGH IT HAD OFFER ED THE INTEREST ON THE SAID LOAN AS ITS INCOME BY CREDITING THE SAME TO IT S PROFIT AND LOSS ACCOUNT. THE ASSESSING OFFICER ADDED THE AMOUNT TO THE TOTAL INCOME OF ITA NO.974/AHD/2010 ASST. YEAR 2005-06 27 THE ASSESSEE AS ITS INCOME AND THIS WAS UPHELD BY T HE TRIBUNAL. ON APPEAL TO THE HIGH COURT: HELD, DISMISSING THE APPEAL, THAT IT WAS A LOAN T AKEN FOR TRADING ACTIVITY AND ULTIMATELY, UPON WAIVER THE AMOUNT WAS RETAINED IN THE BUSINESS BY THE ASSESSEE. THE AMOUNT HAD BECOME THE ASSESSEE'S INCOME AND WAS ASSESSABLE. CIT V. T.V. SUNDARAM LYENGAR AND SONS LTD. [1996] 2 22 ITR 344 (SC) APPLIED. IN THIS JUDGMENT HON. BOMBAY HIGH COURT HAD APPLIED THE JUDGEMENT OF HON. SUPREME COURT IN CIT V. T.V. SUNDARAM LYENGAR AND SONS LTD. [1996] 222 ITR 344 (SC) AND CAME TO THE CONCLUSION THAT ONCE A LOAN IS TAKEN FOR TRADING ACTIVITIES AND THE SAME IS WAIVED THEN THIS AMOUNT BECOMES ASSESSEES INCOME. FIRSTLY, THIS JUDGEMENT IS PER INCURIAM OF THE JUDGMENT OF HON. SUPREME COURT IN KESARIA TEA CO.S CASE WHEREIN IT IS HELD THAT CLAIM IN THE PROFIT AND LOSS ACCOUNT IS N ECESSARY BEFORE A SUM IS TAXED UNDER SECTION 41(1) ON ITS REMISSION OR CESSA TION OF LIABILITY. SECONDLY, IN THIS JUDGMENT, BASIC REASONING LAID DO WN BY HON. SUPREME COURT IN CIT VS. SUNDARAM IYENGAR AND SONS LTD. (SU PRA) THAT THE SUMS STATED TO BE CREDIT BALANCE STANDING IN FAVOUR OF T HE CUSTOMER OF THE COMPANY WERE WRITTEN BACK IN THE PROFIT AND LOSS AC COUNT AND ACCORDINGLY WERE TAXABLE WAS NOT CONSIDERED. THERE WAS A CLEAR FINDING IN CIT VS. SUNDARAM IYENGAR AND SONS LTD. (SUPRA) THAT THE AMO UNTS IN QUESTION WERE CONSIDERED AND PASSED THROUGH RELEVANT PROFIT AND LOSS ACCOUNT/TRADING ACCOUNT AS CREDIT BALANCE OF THE CU STOMERS. THEY WERE NOT THE LOAN SIMPLICITOR NOT PASSED THROUGH TRADING ACC OUNT-CUM-PROFIT AND LOSS ACCOUNT. THIRDLY THE JUDGMENT OF HON. JURISDICTIONAL HIGH CO URT IN CIT V. CHETAN CHEMICALS PVT. LTD. [2004] 267 ITR 0770-[GUJ] IS CLEARLY APPLICABLE AS IT ALSO HOLDS THAT BEFORE TAXING A SUM UNDER SECTION 4 1(1) IT SHOULD BE FOUND ITA NO.974/AHD/2010 ASST. YEAR 2005-06 28 THAT IT HAS PASSED THROUGH OR CLAIMED AS DEDUCTION IN THE TRADING-CUM- PROFIT AND LOSS ACCOUNT. EVEN SECTION 41(1) MAKES I T MANDATORY FOR A FINDING TO BE GIVEN THAT THE SUM HAS PASSED THROUGH OR CLAIMED AS DEDUCTION IN THE PROFIT AND LOSS ACCOUNT/TRADING AC COUNT IN THE CURRENT YEAR OR IN EARLIER YEARS BEFORE IT IS TAXED IN THE YEAR OF REMISSION OR CESSATION OF LIABILITY. FOR THE SAKE OF CONVENIENCE WE REFER TO THE MAIN PORTION OF SECTION 41(1) AS UNDER :- SEC.41 PROFITS CHARGEABLE TO TAX (1) WHERE AN ALL OWANCE OR DEDUCTION HAS BEEN MADE IN THE ASSESSMENT FOR ANY YEAR IN RES PECT OF LOSS, EXPENDITURE OR TRADING LIABILITY INCURRED BY THE AS SESSEE (HEREINAFTER REFERRED TO AS THE FIRST MENTIONED PERSON) AND SUBS EQUENTLY DURING ANY PREVIOUS YEAR,- THUS RESPECTFULLY, WE ARE UNABLE TO FOLLOW THE JUDG EMENT OF HON. BOMBAY HIGH COURT IN SOLID CONTAINER (SUPRA) FOR TH E REASONS MENTIONED ABOVE. 13. ACCORDINGLY WE HOLD THAT CIT WAS REQUIRED TO GI VE A FINDING WHETHER SUM OF RS.59,21,72,000/- HAD PASSED THROUGH TRADING-CUM-PROFIT AND LOSS ACCOUNT IN THE CURRENT YEAR OR IN ANY EARL IER YEARS BEFORE SETTING ASIDE THE ORDER OF THE AO. THEREFORE, WE RESTORE TH E MATTER BACK TO THE FILE OF LD. CIT. 14. IN THE RESULT, APPEAL OF THE ASSESSEE IS ACCORD INGLY ALLOWED BUT FOR STATISTICAL PURPOSES. ORDER WAS PRONOUNCED IN OPEN COURT ON 24/9/2010. SD/- SD/- (BHAVNESH SAINI) (D.C.AGRAWAL) JUDICIAL MEMBER ACCOUNTANT ME MBER AHMEDABAD, DATED : 24/9/2010. MAHATA/- ITA NO.974/AHD/2010 ASST. YEAR 2005-06 29 COPY OF THE ORDER FORWARDED TO :- 1. THE ASSESSEE. 2. THE REVENUE. 3. THE CIT(APPEALS)- 4. THE CIT CONCERNS. 5. THE DR, ITAT, AHMEDABAD 6. GUARD FILE. BY ORDER, DEPUTY / ASSTT.REGISTRAR ITAT, AHMEDABAD 1.DATE OF DICTATION 3/9/2010. 2.DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE TH E DICTATING 21/9/2010 MEMBER.OTHER MEMBER. 3.DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR. P.S./P.S. 4.DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE DICTATING MEMBER FOR PRONOUNCEMENT.. 5.DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR .P.S./P.S 6.DATE ON WHICH THE FILE GOES TO THE BENCH CLERK .. 7.DATE ON WHICH THE FILE GOES TO THE HEAD CLERK . 8.THE DATE ON WHICH THE FILE GOES TO THE ASSTT. REG ISTRAR FOR SIGNATURE ON THE ORDER 9.DATE OF DESPATCH OF THE ORDER..