Facts of the case:

  1. Assessee company, engaged in the business of manufacture and sale of Bulk drugs and pharmaceutical formulations, filed its return of income for the AY 2007-08 on 28/10/2007 declaring loss of Rs. 1,54,71,478/-.
  2. The AO observed that as per assessee’s books the outstanding payable to Catholic Syrian Bank is Rs. 8,88,30,167/- and on account of one-time settlement for Rs. 4,10,00,000/- the assessee company closed the balance amount of Rs. 4,78,30,167/- by transferring the same to capital reserve
  3. The AO completed the assessment u/s 143(3) read with section 147 of the Income-tax Act, 1961 (in short ‘the Act’) by treating the waiver of the loan amount of Rs. 4,78,30,167/- as business income and added the same to the loss returned.
  4. The assessee argued that the loans obtained and outstanding were on capital account and do not represent any trading receipt.
  5. The assessee preferred an appeal before the CIT(A). The CIT(A) directed the AO to delete the loan waiver benefit by holding that the loan waiver is only on capital account and hence cannot be brought to tax as trading receipt and the AO is not correct in treating the said amount as income u/s 41(1) as the assessee had not claimed the expenditure of the amount for any of the earlier years, therefore, the provisions of section 41(1) are not applicable.
  6. Aggrieved by the order of CIT(A), the revenue filed an appeal before ITO.

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