Waived working capital loan is a non-taxable capital receipt and its reopening constitutes a review.

By | May 26, 2026
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Waived working capital loan is a non-taxable capital receipt and its reopening constitutes a review.

Issue

  • Whether reassessment proceedings initiated beyond four years are legally valid when the Assessing Officer’s belief of income escaping assessment is based entirely on the balance sheet and tax computation records originally submitted by the assessee.

  • Whether the waiver of a principal loan amount utilized for business working capital is taxable as business income under section 28(iv) or as a remission of trading liability under section 41(1).

Facts

  • For the assessment year 2012-13, the assessee-company filed its return of income, which was processed and accepted under a regular original assessment order.

  • The assessee had credited an amount of approximately Rs. 11.03 crores to its profit and loss account under “Extraordinary items” representing the principal amount of a waived loan. It simultaneously reduced this amount in its taxable income computation, claiming it as a non-taxable capital receipt.

  • The loan was categorized under short-term borrowings and had been secured as working capital against the mortgage of the company’s stock-in-trade.

  • Beyond a period of four years from the end of the relevant assessment year, the Assessing Officer (AO) initiated reassessment proceedings under section 148, asserting that the loan waiver constituted a taxable remission of trading liability.

  • The AO made a final addition of the waived amount under the head “profits and gains of business or profession.”

Decision

  • Reassessment Held Invalid: The High Court ruled that the reopening of the assessment was invalid in law. Since the primary financial facts were fully disclosed in the original balance sheet, profit and loss account, and tax computation, there was no concealment by the assessee. The reassessment was a mere change of opinion and an impermissible review of the existing records.

  • Loan Liability is Not Trading Liability: The court held that a loan liability retains its character as a capital debt even if the borrowed funds are deployed as working capital in business operations; it does not automatically transmute into a trading liability.

  • Inapplicability of Section 41(1): For section 41(1) to apply, the revenue must prove that an allowance or deduction was explicitly claimed and granted for that specific liability in a preceding tax year. Because the principal loan amount was never claimed as a tax deduction, its subsequent waiver cannot be added back as income.

  • Inapplicability of Section 28(iv): The court observed that the benefit derived from the waiver of a loan is a cash/money benefit. Under the prevailing law, benefits received purely in the form of money fall outside the scope of business perquisites under section 28(iv). Therefore, the principal loan waiver is not chargeable to tax.

Key Takeaways

  • Disclosure Shields Against Reopening: If an assessee fully and truly discloses a transaction in its audited accounts and tax computations, the revenue cannot invoke reassessment provisions after four years simply to re-interpret those same facts.

  • The Deduction Test for Remissions: A debt waiver can only be taxed as a remission of liability under section 41(1) if the taxpayer previously used that exact liability to reduce their taxable profits. Principal loan amounts fail this test.

  • Manner of Utilization is Irrelevant: The specific business purpose of a loan—such as securing it against stock-in-trade for day-to-day working capital—does not alter the legal reality that the principal debt is a capital asset transaction rather than a trading expense.

IN THE ITAT MUMBAI BENCH ‘D’
Mukat Pipes Ltd.
v.
ACIT*
Pawan Singh, Judicial Member
and MAKARAND VASANT MAHADEOKAR, Accountant Member
IT Appeal No. 4957 (Mum) of 2025
[Assessment year 2012-13]
APRIL  24, 2026
Dharan Gandhi, Ld. AR Umashankar Prasad, Ld. DR
ORDER
Makarand Vasant Mahadeokar, Accountant Member.- This appeal filed by the assessee is directed against the order passed by the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi[hereinafter referred to as “CIT(A)”], dated 23.07.2025 under section 250 of the Income Tax Act, 1961[hereinafter referred to as “the Act”], arising out of the assessment order passed by the Assessing Officer under section 143(3) read with section 147 of the Act dated 12.12.2019 for the assessment year 2012-13.
Facts of the Case
2. The facts of the case, as emanating from the assessment order, are that the assessee e-filed its return of income for A.Y. 2012-13 on 28.09.2012 declaring total income at Rs. Nil after claiming set-off of carried forward losses pertaining to A.Ys. 2004-05 and 2005-06. The case was selected for scrutiny and the original assessment was completed under section 143(3) on 17.03.2015 determining income at Rs. Nil.
3. Subsequently, on perusal of records, it was noticed by the Assessing Officer that the assessee had credited an amount of Rs. 11,03,62,194/- to its Profit and Loss Account, being principal amount of loan waived by banks. In the computation of income, however, the assessee had deducted the said amount from its business profits and had not offered the same to tax. The Assessing Officer observed that the said loan was reflected as “Short Term Borrowings” and was availed as working capital against mortgage of stock-in-trade, thereby implying that the same was taken for trading purposes. According to the Assessing Officer, the said amount was liable to be taxed and the failure to offer the same resulted in escapement of income.
4. Accordingly, reassessment proceedings were initiated under section 147 by issuance of notice under section 148 dated 27.03.2019 after obtaining approval under section 151. In response, the assessee filed return and sought reasons recorded, which were furnished. The Assessing Officer recorded that the loan waiver arose out of settlement of total loan liability of Rs. 19,08,65,864/- at Rs. 8,05,03,670/-, resulting in benefit of Rs. 11,03,62,194/- to the assessee, and since the loan was taken for working capital purposes, its waiver constituted taxable income. It was also recorded that the issue was not examined in original assessment and that there was failure on the part of the assessee to disclose fully and truly all material facts.
5. During the course of reassessment proceedings, notices under sections 143(2) and 142(1) were issued calling for submissions and evidences. However, as recorded by the Assessing Officer, the assessee did not file any submissions. A show-cause notice was also issued proposing addition of Rs. 11,03,62,194/-, but no response was received. Consequently, the assessment was completed on the basis of material available on record.
6. On merits, the Assessing Officer recorded that the assessee’s case was before BIFR and the waiver of Rs. 11,03,62,194/- was pursuant to the sanctioned scheme dated 19.02.2015, though benefit was received during the relevant previous year. The said amount formed part of Rs. 27,79,98,805/- credited to Profit and Loss Account under the head “Extraordinary item”. The assessee reduced the said amount from business income claiming exemption. The Assessing Officer held that such claim was not allowable and invoked the provisions of section 41(1) treating the same as remission or cessation of trading liability. Relying upon judicial precedents, the Assessing Officer concluded that the principal amount of loan waived was chargeable to tax and accordingly made addition of Rs. 11,03,62,194/- under the head “Profits and gains of business or profession”.
7. Penalty proceedings under section 271(1)(c) were also initiated. The total income under normal provisions was computed at Rs. 11,03,62,194/- after set-off of brought forward losses. Further, the Assessing Officer observed that the assessee had declared book profit under section 115JB at Rs. 24,72,12,504/- but reduced the entire amount claiming deduction on account of “profit of sick industrial company” and declared Nil book profit. The Assessing Officer held that such deduction was not permissible under section 115JB and accordingly computed book profit at Rs. 24,72,12,504/- and adopted the same for taxation purposes being higher than normal income.
8. Aggrieved by the assessment order, the assessee carried the matter in appeal before the CIT(A). The CIT(A), as recorded in the appellate order, noted that the reassessment was completed on 12.12.2019 making addition of Rs. 11,03,62,194/- on account of waiver of principal amount of loans pursuant to BIFR scheme dated 19.02.2015.
9. Before the CIT(A), the assessee contended that the reopening was invalid and that the addition under section 41(1) was not sustainable as the principal amount of loan waived was a capital receipt. It was further submitted that the assessee had credited the waived amount to Profit and Loss Account but the same represented capital receipt and could not be taxed. Reliance was placed on judicial precedents including the decision of the Hon’ble Supreme Court in the case of Commissioner v. Mahindra and Mahindra Ltd.404 ITR 1 (SC) .It was also submitted that the assessee could not properly present facts before the Assessing Officer as the reasons recorded were not received in time.
10. The CIT(A), after considering the facts of the case, recorded that similar issue had arisen in the assessee’s own case in earlier years where waiver of loan and interest had been treated as income by the Assessing Officer. The CIT(A) noted that though in earlier proceedings the addition was deleted by the CIT(A), the same was reversed by the Tribunal (page 7 of 14 of ITA No. 541/Bang/2019)holding that where loan is utilised for business purposes, waiver thereof assumes the character of income. The CIT(A) further noted that the said decision of the Tribunal was affirmed by the Hon’ble Delhi High Court vide order dated 18.02.2011.Respectfully following the decision of the Tribunal and the Hon’ble High Court in the assessee’s own case, the CIT(A) upheld the addition made by the Assessing Officer and dismissed the appeal of the assessee.
11. Being aggrieved, the assessee is in appeal before us and has raised the following grounds of appeal:
1. On the facts and circumstances of the case as well as in law the Ld CIT (A) erred in confirming the action of Learned A.O. of reopening reassessment order U/s.147 of the IT Act. Reasons assigned by him for doing the same are wrong and insufficient. Appellant contends that the issuance of notice u/s.148 of the IT Act for reopening of the assessment was itself illegal and unjustified and consequently the reassessment order so passed liable to be quashed.
2. On the facts and circumstances of the case as well as in law the Ld CIT (A) erred in confirming the action of Ld. A.O of making addition of a sum of Rs. 11,03,62,194/- under section 41(1) of the Act without appreciating the fact that principal amount of loan waiver during the year is in the nature of capital receipt, hence not chargeable to tax. The reasons assigned by him for doing the same are wrong and insufficient.
3. The order passed by the Learned CIT(A) is devoid of any merit, arbitrary, uncalled for and bad in law, the appellant be given such relief or reliefs as prayed for.
4. Appellant craves leave to add, alter and/or modify the grounds of appeal on or before the date of hearing of the appeal.
12. In the course of hearing before us, the learned Authorised Representative (AR) of the assessee invited our attention to para 2.2 of the assessment order and submitted that the Assessing Officer has himself recorded that “Further, it is seen from balance sheet, note below schedule -6- Short Term Borrowings.”, thereby clearly demonstrating that the formation of belief was based on material already available on record, namely the balance sheet and accompanying details furnished by the assessee. It was thus contended that the very foundation of reopening proceeds on “perusal of records” and not on any new tangible material, and therefore there was no failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment. It was further submitted that since the reopening has been carried out beyond a period of four years from the end of the relevant assessment year, the jurisdictional condition prescribed under the proviso to section 147 is not satisfied and consequently the reassessment is liable to be quashed. In support of the aforesaid contention, reliance was placed on the judgment of the Hon’ble Bombay High Court in the case of Great Eastern Shipping Company Ltd. v. ACITCIT 440 ITR 58 (Bombay) . The learned AR specifically drew our attention to the last sub-para of para 9, wherein the Hon’ble High Court has categorically held as under:
“The reasons disclosed by the Assessing Officer, on the face of it, does not indicate any failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment. The reasons, in fact shows that the conclusion have been drawn from the case record of assessee itself. The entire reasons proceed on the basis of „perusal of details’ and on ‘penisal of records’.”
13. The learned AR further stated that the Hon’ble High Court, after considering the entire factual and legal position, has quashed and set aside the impugned notice. Placing reliance on the aforesaid ratio, it was submitted that where the Assessing Officer derives his satisfaction solely from the material already on record and does not allege any specific failure on the part of the assessee to disclose material facts, reopening beyond four years is impermissible in law. It was thus contended that the present reassessment proceedings, being founded on such recorded reasons, are without jurisdiction and liable to be annulled.
14. On merits, the learned AR placed reliance on the judgment of the Hon’ble Supreme Court in the case of Mahindra and Mahindra Ltd.(supra) and invited our attention to paras 13 to 17 of the said decision. It was submitted that the Hon’ble Apex Court has categorically held that waiver of loan, particularly the principal component, does not partake the character of income and is not taxable either under section 28(iv) or under section 41(1) of the Act. The learned AR drew our specific attention to para 13 of the judgment wherein the Hon’ble Supreme Court has held that for invoking section 28(iv), the benefit must be in a form other than money and since waiver of loan results in a cash receipt, the said provision has no application. Further reliance was placed on paras 15 and 16 of the judgment to submit that for applicability of section 41(1), it is a sine qua non that an allowance or deduction should have been claimed in respect of a trading liability in earlier years. It was contended that where the loan was taken for acquisition of capital assets and no deduction was claimed in respect of such liability, waiver thereof cannot be treated as remission of trading liability. The learned AR emphasised para 17 of the judgment wherein the Hon’ble Supreme Court, after analysing both provisions, concluded that section 28(iv) is not applicable since the receipt is in the nature of money, and section 41(1) is also not applicable since waiver of loan does not amount to cessation of trading liability.
15. Relying on the aforesaid ratio, it was submitted that in the present case also the amount written off represents the principal amount of loan and not any trading liability. Therefore, the same being on capital account, cannot be brought to tax in the hands of the assessee. It was thus contended that the addition made by the Assessing Officer and sustained by the CIT(A) is contrary to the law laid down by the Hon’ble Supreme Court and deserves to be deleted.
16. The learned AR further placed reliance on the judgment of the Hon’ble Bombay High Court in the case of Pr. CIT v. SICOM Ltd. (Bombay) and submitted that the issue involved in the present appeal is squarely covered by the said decision. It was contended that the Hon’ble High Court, following the judgment of the Hon’ble Supreme Court in the case of Mahindra and Mahindra Ltd., has categorically held that waiver of loan, particularly the principal component, cannot be brought to tax either under section 41(1) or under section 28(iv) of the Act. Accordingly, it was submitted that both on facts as well as in law, the addition sustained by the CIT(A) deserves to be deleted.
17. Per contra, the learned Departmental Representative (DR) strongly relied upon the orders of the Assessing Officer as well as the CIT(A) and submitted that the reopening has been validly initiated in the facts of the present case. It was contended that, as specifically noted by the Assessing Officer, the assessee company’s case was before the Board of Industrial and Financial Reconstruction (BIFR) and the waiver of loan amounting to Rs. 11,03,62,194/- was pursuant to the sanctioned scheme of the Hon’ble BIFR dated 19.02.2015. It was emphasized that the said date falls immediately prior to the completion of the original assessment under section 143(3) on 17.03.2015.The learned DR submitted that the benefit of such waiver was received by the assessee during the previous year relevant to the assessment year under consideration and the same constituted a material fact having a direct bearing on the computation of income. It was further contended that the Assessing Officer, while completing the original assessment, had not examined the taxability of such waiver of loan and therefore the issue remained unverified at that stage.
18. The learned DR further invited our attention to the reasoning recorded by the Assessing Officer in para 2.1 of the assessment order and submitted that the Assessing Officer had, in fact, formed a prima facie view on the basis of settled legal principles governing taxability of loan waiver. It was pointed out that the Assessing Officer has relied upon the decision of the Hon’ble Delhi High Court in the case of Logitronics (P.) Ltd. v. CIT   333 ITR 386 (Delhi) to observe that the taxability of waiver of loan depends upon the purpose for which the loan was originally taken. It was submitted that the Assessing Officer has categorically recorded that where the loan is taken for acquiring a capital asset, waiver thereof would not be taxable, whereas where the loan is taken for trading purposes and treated as such in the books, the waiver would result in taxable income, particularly when credited to the Profit and Loss Account, following the ratio of the Hon’ble Supreme Court in the case of T.V. Sundaram Iyengar & Sons Ltd. CIT v. T.V. Sundaram Iyengar & Sons Ltd. (SC) .
19. The learned DR further invited our attention to Explanation 1 to section 147, as applicable to the year under consideration, and submitted that mere production of books of account or other records does not amount to full and true disclosure of material facts. Placing reliance on the statutory language, it was contended that:
“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.”
20. Relying on the above provision, the learned DR submitted that even if the balance sheet or other financial statements containing details of loan and its waiver were available on record, the same would not ipso facto establish that the assessee had made full and true disclosure of all material facts.
21. The learned DR also invited our attention to para 4 of the order of the CIT(A) and submitted that the CIT(A) has relied upon judicial precedents including decisions of the Co-ordinate Bench and Hon’ble High Court to hold that where loan is utilised for business purposes, waiver thereof may assume the character of income.
22. On the strength of the above observations in the assessment order, the learned DR contended that the issue of taxability of loan waiver, in the light of its nature and purpose, had not been examined during the original assessment proceedings. It was thus argued that the Assessing Officer, upon subsequently noticing the nature of loan as working capital borrowing, was justified in forming a belief that the waiver constituted taxable income and that such aspect had escaped assessment.
23. In rebuttal, the learned AR submitted that the distinction sought to be drawn by learned DR between waiver of term loan and working capital loan does not affect the taxability of the amount. It was contended that once the nature of receipt is that of waiver of loan resulting in a monetary benefit, the same falls outside the ambit of section 28(iv), irrespective of the purpose for which the loan was originally taken. In support of the aforesaid contention, reliance was placed on the judgment of the Hon’ble Karnataka High Court in the case of I.G. Petrochemicals Ltd. v. Income-tax Appellate Tribunal (Karnataka) . The learned AR invited our attention to paras 30 and 31 of the said decision wherein the Hon’ble High Court has categorically held that the decisive test for applicability of section 28(iv) is whether the benefit is in a form other than money, and that the purpose or nature of loan, whether term loan or working capital loan, is not a relevant determinative factor. The learned AR further emphasised that the Hon’ble High Court, following the judgment of the Hon’ble Supreme Court in Mahindra and Mahindra Ltd. (supra), has held that waiver of loan results in a cash receipt and therefore does not satisfy the condition of “benefit or perquisite” contemplated under section 28(iv). It was thus submitted that even in cases where loans are utilized for business purposes, including working capital, the waiver thereof would not be taxable under section 28(iv).
24. The learned AR also submitted that the very basis adopted by learned DR relating to Explanation 1 to section 147 is misconceived. It was contended that the Profit and Loss Account and Balance Sheet constitute primary and fundamental documents forming part of the return of income and are mandatorily examined in scrutiny assessment under section 143(3).The learned Authorised Representative, placing reliance on the judgment of the Hon’ble Bombay High Court in Imperial Consultants and Securities Ltd. v. Dy. CIT  473 ITR 217 (Bombay) ), submitted that where reopening is based on figures and disclosures already available in the Profit and Loss Account and Balance Sheet, it cannot be alleged that there was any failure on the part of the assessee to disclose fully and truly all material facts. The learned AR further submitted that once the Assessing Officer has completed assessment under section 143(3), it necessarily implies that the primary financial statements, including the Profit and Loss Account, have been examined. Therefore, to contend subsequently that the same disclosures constitute “failure to disclose” under Explanation 1 to section 147 would render the scrutiny assessment itself otiose. Accordingly, it was argued that the present reopening is nothing but a review of the earlier assessment on the same material, which is not permissible under law.
25. We have heard the rival submissions and perused the material available on record including the assessment order, the appellate order, the reasons recorded for reopening, and the judicial precedents relied upon by both sides. Ground no.1 challenges the validity of reopening under section 147 of the Act, while ground no.2 assails the addition of Rs. 11,03,62,194/-made on account of waiver of principal amount of loan. Since the issue of jurisdiction goes to the root of the matter, we first deal with the validity of reopening.
26. The undisputed factual position is that the original assessment was completed under section 143(3) on 17.03.2015 and the notice under section 148 came to be issued on 27.03.2019. The reopening is thus admittedly beyond four years from the end of the relevant assessment year. In such a case, the first proviso to section 147, as then applicable, squarely governs the field and reopening can be sustained only if income has escaped assessment by reason of failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment. The requirement is jurisdictional and not merely procedural.
27. When we examine the reasons recorded by the Assessing Officer, it becomes immediately evident that the entire basis of reopening is drawn from the existing record itself. The Assessing Officer has specifically stated that on perusal of the balance sheet for financial year 2011-12, the loan was found classified under Schedule 6 as “Short Term Borrowings” and that the same was taken as working capital against mortgage of stock in trade. The reasons furnished to the assessee also proceed on the same footing, namely, “on perusal of case records”, “it is seen from balance sheet”, and “note below schedule-6”. Thus, the very language employed by the Assessing Officer establishes that the foundation for reopening was not any fresh tangible material coming subsequently into his possession, but the very financial statements and case records which were already part of the assessment record at the time of original scrutiny.
28. In our considered view, once the Assessing Officer himself predicates the belief of escapement on the balance sheet and computation already filed by the assessee, the Revenue cannot simultaneously contend that there was failure to disclose fully and truly all material facts. The law requires the assessee to disclose primary facts. It does not require the assessee to instruct the Assessing Officer as to what legal inference should be drawn from those disclosed facts. Here, the primary facts were not concealed. On the contrary, the waiver amount stood credited in the Profit and Loss Account; the assessee had reduced the same in computation; and the nature of borrowing was stated to be emerging from the balance sheet itself. These are not facts discovered from any outside source. They are facts drawn by the Assessing Officer from the assessee’s own records.
29. The decision of the Hon’ble Bombay High Court in Great Eastern Shipping Company Ltd. (supra)is directly relevant on this aspect. In that case also, reopening beyond four years was set aside because the recorded reasons did not indicate any failure on the part of the assessee to disclose fully and truly all material facts and, in fact, showed that the conclusion was drawn from the assessee’s own case records. The Hon’ble High Court specifically noted that the reasons proceeded on the basis of “perusal of details” and “perusal of records”. The ratio of the said judgment is that where the recorded reasons themselves reveal that the Assessing Officer has drawn the conclusion from material already on record, the condition prescribed in the proviso to section 147 is not satisfied. The facts before us stand on the same footing.
30. The later judgment of the Hon’ble Bombay High Court in Imperial Consultants and Securities Ltd. (supra) fortifies the same principle. In that case, reopening beyond four years was held invalid where the reasons were based on the balance sheet, Profit and Loss Account and other details already available during the scrutiny assessment. The Hon’ble High Court held that such reopening breaches the mandate of the first proviso to section 147 and also amounts to a clear change of opinion, since the Assessing Officer was seeking to review the completed assessment on the basis of the same material. Particularly instructive is the reasoning that once the details were part of the original assessment record, reopening on that very material is not permissible. This principle squarely applies here because the Assessing Officer has expressly relied on the balance sheet, the note to Schedule 6, and the computation filed along with the return.
31. The Revenue has argued that the BIFR sanctioned scheme dated 19.02.2015 constituted additional information before the Assessing Officer and therefore the issue was not examined during the original assessment completed on 17.03.2015. We are unable to accept this contention for two reasons. First, the assessment order itself records that the benefit of waiver was received by the assessee during the previous year relevant to the year under appeal and that the corresponding amount was included in the extraordinary item in the Profit and Loss Account. Thus, the factual event of waiver was already reflected in the accounts and computation of the assessee. Secondly, the reopening reasons do not state that the BIFR order was some fresh or external information coming later into possession of the Assessing Officer. The reasons, on the contrary, repeatedly refer to the balance sheet and case records. Therefore, the Revenue cannot improve upon the recorded reasons by introducing a new jurisdictional basis at the appellate stage.
32. The learned DR also relied upon Explanation 1 to section 147 to contend that mere production of books of account or other evidence from which material could have been discovered by due diligence would not necessarily amount to disclosure. There can be no quarrel with the statutory proposition. However, Explanation 1 does not rescue the Revenue where the material fact is not hidden in some obscure or latent form but is directly evident from the primary documents filed by the assessee and is in fact expressly referred to by the Assessing Officer in the reasons recorded. The waiver was reflected in the Profit and Loss Account and the nature of the borrowing was gathered by the Assessing Officer from the note below Schedule 6. If such direct disclosures in the financial statements and computation are to be treated as non-disclosure, the distinction between scrutiny assessment and review would stand obliterated. The ratio of Imperial Consultants answers this contention against the Revenue, because the Hon’ble High Court rejected reopening even though the Revenue there also sought to rely on figures available in the balance sheet and Profit and Loss Account.
33. We may also note that the learned DR has sought to justify reopening by observing that the issue was not examined in the original assessment and that there was failure by the assessee to disclose fully and truly all material facts. In our view, mere nondiscussion in the original assessment order does not by itself establish failure of disclosure by the assessee. An assessment order cannot be expected to discuss every item in the return and financial statements. The decisive test is whether the primary material was before the Assessing Officer. Here, by the Assessing Officer’s own showing, it was. Once that is so, the failure, if any, was not of disclosure by the assessee but of drawing a particular legal inference by the Assessing Officer. Such an omission cannot confer jurisdiction to reopen beyond four years.
34. For all the aforesaid reasons, we hold that the jurisdictional condition of the first proviso to section 147 is not fulfilled in the present case. The recorded reasons reveal that the formation of belief is based on the assessee’s balance sheet, Profit and Loss Account, computation and case records already available at the time of original assessment. The reopening is therefore nothing but a review on the same material and is invalid in law. Consequently, the notice issued under section 148 and the reassessment framed under section 143(3) read with section 147 are liable to be quashed. Ground no.1 of the assessee is accordingly allowed.
35. Since elaborate arguments have also been addressed on merits and the lower authorities have dealt with the addition in detail, we consider it appropriate to record our findings on the substantive issue as well. The addition has been made under section 41(1) in respect of waiver of principal amount of loan aggregating to Rs. 11,03,62,194/-. The Assessing Officer’s reasoning is that since the borrowing was working capital borrowing used for trading purposes, waiver of its principal amount partakes the character of income chargeable under section 41(1), placing reliance on Logitronics and T.V. Sundaram Iyengar. The CIT(A) has affirmed the addition by referring to certain judicial observations quoted in para 4 of the appellate order.
36. In our considered opinion, the issue on merits now stands substantially concluded by the judgment of the Hon’ble Supreme Court in Mahindra and Mahindra Ltd. (supra). The Hon’ble Apex Court held, first, that for invoking section 28(iv), the benefit or perquisite must be in a form other than money, and loan waiver, resulting in cash/money benefit, does not satisfy that test. Secondly, the Hon’ble Supreme Court held that section 41(1) applies only where an allowance or deduction has been granted in respect of a loss, expenditure or trading liability, and waiver of loan does not amount to cessation of trading liability. The Supreme Court drew a clear distinction between “trading liability” and “other liability” and held that waiver of loan falls in the latter category. This ratio is the governing law.
37. The Revenue has sought to distinguish Mahindra and Mahindra on the ground that in that case the loan was utilised for acquiring capital assets, whereas in the present case the borrowing was used as working capital. We are unable to accept this distinction insofar as section 28(iv) is concerned. The Hon’ble Karnataka High Court in I.G. Petrochemicals Ltd. (supra), after considering Mahindra and Mahindra, has held in categorical terms that the clinching factor for section 28(iv) is not the purpose of the loan but whether the benefit is in the shape of money or not. The High Court observed that the purpose of loan was neither dealt with by the Supreme Court as a determinative factor nor is it legally relevant for section 28(iv); the only test is whether the benefit or perquisite is “other than in the shape of money”. It was further held that the nature of loan, whether term loan or working capital loan, is of no relevance for attracting section 28(iv). This reasoning directly answers the Revenue’s contention before us.
38. Even independently of I.G. Petrochemicals, the Bombay High Court in SICOM Ltd. (supra) has followed Mahindra and Mahindra and has held that where the waiver relates to principal amount and no part thereof represents waiver of interest liability, such amount is not chargeable to tax either under section 41(1) or under section 28(iv). The importance of SICOM lies in the fact that the Revenue there too attempted to contend that the matter stood on a different footing; yet the Court held that the entire principal waiver remained outside sections 41(1) and 28(iv). In the present case also, the addition is in respect of the principal waiver alone. There is no finding by the Assessing Officer that the impugned sum represents remission of interest earlier allowed as deduction. Thus, SICOM directly supports the assessee.
39. As regards section 41(1), the decisive requirement is that an allowance or deduction must have been made in an earlier assessment year in respect of loss, expenditure or trading liability, and the later remission must relate to that very item. The Assessing Officer has straightaway assumed that because the borrowing was working capital borrowing, its waiver is remission of trading liability. In our view, that assumption overlooks the ratio of Mahindra and Mahindra and SICOM. A loan liability, even if employed in business, remains a loan liability. It does not become a trading liability merely because the borrowed funds are used in business operations. A trading liability ordinarily arises on revenue account, such as purchase liability, expense liability, or similar obligations in respect whereof deduction has been obtained. The principal amount of borrowing is not such a liability. Unless the statute is specifically attracted, the waiver of principal cannot be recast as taxable income under section 41(1).
40. The reliance of the Assessing Officer on Logitronics (P.) Ltd. and the similar line of reasoning adopted in the appellate order cannot override the later and binding pronouncement of the Hon’ble Supreme Court in Mahindra and Mahindra. Indeed, the materials placed before us show that I.G. Petrochemicals specifically notes that judgments such as Logitronics (supra) and CIT v. Ramaniyam Homes (P.) Ltd.  384 ITR 530 (Madras) ) relied upon by the Revenue stand eclipsed by the ratio of Mahindra and Mahindra on the interpretation of section 28(iv). To the extent Logitronics draws a distinction based on the purpose of the borrowing for determining taxability under section 28(iv), the said reasoning cannot prevail once the Supreme Court has authoritatively held that the decisive test is whether the benefit is in money or not.
41. The Revenue has also relied on T.V. Sundaram Iyengar & Sons Ltd. and the line of reasoning flowing into Solid Containers Ltd. v. Dy. CIT 308 ITR 417 (Bombay) ). The CIT(A), in para 4, has quoted observations from another case to the effect that where a loan taken for business purposes is retained in business, it may acquire the character of income. In our view, these authorities operate in a different factual setting and do not advance the Revenue’s case on the present record. T.V. Sundaram Iyengar dealt with deposits or amounts received in the course of trading transactions which, by efflux of time and the surrounding circumstances, assumed the character of trade surplus. A principal borrowing from a bank is conceptually different from a trade receipt or customer deposit. The Supreme Court in Mahindra and Mahindra was aware of the earlier jurisprudence and nevertheless held that waiver of loan does not amount to cessation of trading liability under section 41(1), and that money receipt on waiver falls outside section 28(iv). Once the Apex Court has pronounced directly on loan waiver, the broader revenue principle in T.V. Sundaram Iyengar cannot be extended to nullify the specific ratio of Mahindra and Mahindra.
42. We also find the CIT(A)’s reasoning to be unsustainable for an additional reason. The appellate order states that the issue had arisen in the assessee’s own case and then refers to “page 7 of 14 ITA No. 541/Bang/2019” and to affirmation by the Hon’ble Delhi High Court dated 18.02.2011. On the face of the record, this reference appears incongruous with the present assessee and the present proceedings. No copy of such alleged own-case decision has been brought on record before us. The CIT(A) has thus confirmed the addition essentially by reproducing extracts from some other decision without first establishing its identity, factual similarity, or direct applicability to the present assessee. Such a course cannot sustain the addition, particularly when binding judgments of the Hon’ble Supreme Court and Hon’ble jurisdictional High Court directly cover the controversy.
43. There is yet another aspect. The Assessing Officer himself has noted that the impugned amount was credited to the Profit and Loss Account as part of extraordinary item and thereafter reduced in the computation while claiming exemption. Mere credit in the accounts is not conclusive of taxability. Book treatment cannot override the true legal character of the receipt. If the receipt is not chargeable under the Act, the manner in which it is presented in the accounts would not render it taxable. This principle is embedded in the reasoning of Mahindra and Mahindra and also reflected in SICOM, where principal waiver was held non-taxable despite the Revenue’s attempt to treat it as business benefit.
44. Having regard to the entire conspectus, we hold on merits that the principal amount of loan waived amounting to Rs. 11,03,62,194/- is not chargeable to tax either under section 28(iv) or under section 41(1) of the Act. The reason is twofold. First, the benefit on waiver is in the nature of money and therefore falls outside section 28(iv). Second, principal loan liability does not amount to trading liability and there is no finding of prior allowance or deduction in respect of the principal amount so as to attract section 41(1). The distinction attempted by the Revenue between capital loan and working capital loan does not alter this legal position, at least for the purposes of section 28(iv), in view of I.G. Petrochemicals, and does not convert the principal borrowing into a trading liability for section 41(1), in view of Mahindra and Mahindra and SICOM.
45. Accordingly, even on merits, the addition of Rs. 11,03,62,194/- is liable to be deleted. Ground no.2 of the assessee is therefore allowed.
46. In the result, the reassessment is quashed on jurisdictional ground. Even otherwise, on merits also, the addition of Rs. 11,03,62,194/- on account of waiver of principal amount of loan is deleted. The appeal of the assessee is allowed.