Facts of the Case

The assessee, a Government of India Public Sector Undertaking engaged in manufacturing pumps, compressors, and gas cylinders, filed its return of income declaring nil income for Assessment Year 2007-08. The return was originally assessed under Section 143(3), resulting in assessed loss.

Subsequently, reassessment proceedings were initiated under Section 147 and notice under Section 148 was issued. During reassessment, the Assessing Officer examined the auditors’ report, which disclosed that the Government of India had written off certain plan and non-plan loans and related interest as part of financial restructuring.

A portion of the waived loan relating to plan expenditure was credited directly to capital reserve, while the balance amount of ₹7,292.72 lakhs relating to non-plan loans was routed through the Profit & Loss Account.

Issues Involved

  1. Whether write-back of Government non-plan loan constitutes taxable income.
  2. Whether such waiver represents a capital receipt or revenue receipt.
  3. Validity of reassessment proceedings under Section 147.
  4. Applicability of provisions relating to remission or business benefit.

Petitioner’s Arguments (Assessee)

  • The loan was granted by the Government for capital purposes and not for trading operations.
  • Waiver formed part of a restructuring package for revival of a sick PSU.
  • The write-back was not a trading receipt and should not be taxed as business income.
  • No specific provision of the Income-tax Act was invoked by the Assessing Officer to justify taxation.
  • Accounting treatment should not determine taxability.

Respondent’s Arguments (Revenue)

  • The non-plan loan write-back was credited to the Profit & Loss Account and increased business income.
  • The waiver resulted in a tangible financial benefit to the assessee.
  • Such remission of liability should be treated as taxable income.
  • The reassessment proceedings were validly initiated based on information in the auditors’ report.

Court Order / Findings (ITAT Allahabad)

  • Government loans had been granted over several years for operational and financial support.
  • The portion relating to non-plan loans was credited to the Profit & Loss Account.
  • The write-back resulted in real income accruing to the assessee.
  • The waiver could not be treated purely as capital receipt in the circumstances of the case.

Important Clarification

  • Taxability of loan waiver depends on the nature and purpose of the loan and its treatment in accounts.
  • Credit to the Profit & Loss Account is a significant factor indicating revenue character.
  • Government loans are not automatically capital in nature for tax purposes.
  • Reassessment can be validly initiated based on disclosures in audited financial statements.
  • Distinction between plan and non-plan loans under Government budgeting does not determine tax treatment.

 Link to download the order –

https://itat.gov.in/public/files/upload/1633597677-ita%20no.%20142%20of%202017%20Bharat%20Pumps%20&%20Compressors%20Ltd.pdf

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