Bombay H.C : Where transaction of financial restructuring with lenders and resultant waiver of interest were disclosed in return of income, reopening of assessment was not sustainable

High Court Of Bombay

Lok Housing And Construction Ltd. Vs. DCIT

Assessment Year : 2004-05

Section : 147

Dr. D. Y. Chandrachud And A. A. Sayed, JJ.

W. P. No. 1634 Of 2011

October 20, 2011

JUDGMENT

Dr. D.Y. Chandrachud, J. – Rule, by consent returnable forthwith. With the consent of counsel and at their request, the petition is taken up for hearing and final disposal.

In these proceedings under article 226 of the Constitution, the petitioner has challenged the validity of a notice dated March 29, 2011, issued by the first respondent under section 148 of the Income-tax Act, 1961, proposing to reopen an assessment for the assessment year 2004-05 together with an order dated July 25, 2011, dealing with the objections of the petitioner.

2. During the financial year 2003-04, the petitioner entered into a financial restructuring arrangement with its lending institutions by which the lenders agreed to waive/forgo accumulated finance cost in the amount of Rs. 20.58 crores. The payments of the balance agreed amounts were rescheduled. According to the petitioner, as per the settlement terms, the waiver of interest was subject to the petitioner paying the agreed balance liability in the manner it was rescheduled, failing which the lenders had a right to withdraw the concessions given by waiver of interest. The transaction was reflected in note 3(e) to schedule P of the notes forming part of the accounts which read as follows :

“(e) During the year under review, the company has entered into financial restructuring with the lenders, according to which the lenders have agreed to waive/forgo accumulated finance cost to the tune of Rs.20,58,24,991 and have also rescheduled the payment terms of the balance agreed amounts. As per the settlement terms this waiver of interest is subject to the company paying the agreed balance liability in the manner it is rescheduled, failing which the lenders have the right to withdraw the concessions given by way of waiver of interest. However, this accumulated finance cost of Rs. 20,58,24,991 is credited by the company to work-in-progress account, to that extent the company has contingent liability the amount of which is unascertainable.”

3. Schedule M-5 to the balance-sheet which was entitled “finance cost”, inter alia, reflected interest and other finance charges. The interest waiver which was written back on debt restructuring was similarly disclosed.

4. The petitioner filed a return of income for the assessment year 2004-05 on October 28, 2004, and disclosed a business loss of Rs. 7.10 crores. The return was accompanied by a tax audit report along with an audited balance-sheet and a profit and loss account. As noted earlier, the petitioner disclosed the transaction of financial restructuring with the lenders and the resultant waiver of interest. A notice under section 143(2) was issued to the petitioner on August 24, 2004, followed by a further notice under section 142(1) along with a questionnaire on July 21, 2006. The petitioner attended hearings and furnished details which were called by the Assessing Officer from time to time. On December 27, 2006, an order of assessment was passed under section 173(3) accepting a loss of Rs. 7.10 crores disclosed by the petitioner.

5. On March 29, 2011, a notice was issued under section 148 by the Assessing Officer stating that he had reason to believe that the income which is chargeable to tax for the assessment year 2004-05 had escaped assessment within the meaning of section 147. By a letter dated April 28, 2011, the petitioner called for a disclosure of reasons. The reasons for reopening the assessment as communicated on June 16, 2011, read as follows :

“On going through the records, it was observed from the note 3(e) of schedule P notes forming part of accounts that consequent to the agreement for restructuring of loan from financial end, the assessee got interest waiver amount to Rs. 2195.46 lakhs up to the end of the previous year (Rs. 2058.25 lakhs for the assessment year 2004-05 and Rs. 137.21 lakhs for the assessment year 2005-06). The interest amount waiver of Rs. 2058.25 lakhs needs to be examined. I have reasons to believe that the above interest amount waiver has escaped the assessment to the extent of Rs. 2058.25 lakhs.”

6. The objections of the petitioner which were lodged on June 20, 2011, have been disposed of on July 25, 2011.

7. Counsel appearing on behalf of the petitioner submitted that-(i) The reopening of assessment has taken place beyond a period of four years of the end of the relevant financial year ; (ii) There was no failure on the part of the petitioner to disclose fully and truly all the material facts relating to the assessment for that year ; (iii) This is evident from schedule M-5 to the accounts as well as note 3(e) of schedule P ; (iv) As a matter of fact in his order dated July 25, 2011, the Assessing Officer has noted that the assessee had offered the interest part of the loan waived by the bank as income, but sought to change the reasons originally recorded by contending that the principal portion of the loan waived was not offered for taxation.

8. On the other hand, counsel appearing on behalf of the Revenue has reiterated the reasons which were furnished and submitted that the reopening is for valid and proper reasons.

9. Notice was issued in these proceedings on October 5, 2011, and the Assessing Officer was placed on notice that the petition would be heard finally at the stage of admission. No reply has been filed despite an opportunity which has been given to the Assessing Officer.

10. The reopening of the assessment in the present case is beyond the period of four years of the end of the relevant assessment year. In such a case, the power of the Assessing Officer is structured by the requirement, a jurisdictional condition precedent, that there must be a failure on the part of the assessee to fully and truly disclose all the material facts necessary for the assessment for that assessment year. Ex facie, the reasons which have been disclosed by the Assessing Officer do not refer to any failure on the part of the assessee to disclose material facts, nor is there any allegation of suppression on the part of the assessee. On the contrary, the Assessing Officer has relied upon note 3(e) of schedule P to the notes forming part of the accounts. The assessee had clearly disclosed therein that as a result of the restructuring by the lenders, finance cost to the tune of Rs. 20.58 crores was waived/forgone and that the payment of the balance was to be made in accordance with the settlement terms. The power of the Assessing Officer to reopen beyond a period of four years is even more restricted than when the reopening takes place within a period of four years of the end of the relevant assessment year. In the present case, the condition precedent to the invocation of the jurisdiction is clearly absent since there is not even an averment to the effect that there was a failure on the part of the assessee to disclose fully and truly all the material facts necessary for the assessment.

11. In the circumstances, for the reasons indicated the Assessing Officer has clearly acted in excess of jurisdiction in purporting to reopen the assessment, beyond a period of four years for the assessment year 2004-05 by his notice dated March 29, 2011. Rule is accordingly made absolute by setting aside the notice dated March 29, 2011.

12. There shall be no order as to costs.

[Citation : 348 ITR 335]

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