This appeal by assessee company is directed against order dt. 10th Aug., 2006 passed by CIT(A)-I, Visakhapatnam, and it pertains to asst. yr. 1998-99. Though assessee has raised number of grounds and sub-grounds, they in effect give rise to only two issues; i.e., (a) Whether AO is justified in reopening assessment under s. 147 beyond four years from end of assessment year? (b) Whether amount representing waiver of part of loan taken from SCICI (successor of SDFC), would give rise to income taxable under s. 41(1) of IT Act? facts necessary for disposal of this appeal are stated in brief. assessee is engaged in business of deep sea fishing and export of same. In respect of previous year relevant to asst. yr. 1998-99, it declared total income of Rs. 1,49,67,491 on 30th Nov., 1998 before setting off of various losses and depreciation. assessment was completed under s. 143(3) of Act by determining income as per provisions of s. 115JA of Act. assessee company had acquired four trawlers in year 1985 by availing loan of Rs. 3.18 crores from Shipping Development Fund Committee (SDFC) which was abolished subsequently and in its place Shipping Credit & Investment Co. of India (SCICI) was appointed as designated person to hold assets. total amount due towards principal amount of loan was Rs. 3,30,99,944 including capitalized interest of Rs. 12,59,187. As most of industries engaged in export of shrimp suffered heavy losses, SCICI offered package of one time settlement of loan and upon availing package, assessee company paid Rs. 1,04,37,405 as against its total liability of Rs. 3,28,59,805. In effect, assessee s liability to extent of Rs. 2,24,22,400 was waived by SCICI. assessee credited same to capital reserve account. One time settlement procedure was concluded during previous year relevant to asst. yr. 1998-99 and therefore, question arose as to whether benefit obtained therein was assessable to tax under s. 41(1) of Act during that year. assessee had claimed depreciation on trawlers, which were purchased with aid of loan taken from SCICI. However, upon waiver of loan as one time settlement package, assessee was of view that it is not directly related to any expenditure claimed as deduction in any of preceding years and therefore it cannot be assessed to tax under s. 41(1) of Act and thus not offered said amount as income of year under consideration. However, assessee appended following note in its annual report, containing balance sheet and P&L a/c, filed along with return of income: "Consequent to approval of Rehabilitation Scheme by Government of India, company has opted for one time settlement of term loans with interest thereon. Pursuant to scheme, company had paid sum of Rs. 114.81 lakhs in full settlement of term loans with interest. As result of this, interest provided in earlier years to tune of Rs. 160.77 lakhs was written back. sum of Rs. 224.22 lakhs representing reduction of principal amount payable was transferred to capital reserve." According to assessee, information with regard to settlement of loan was disclosed while completing assessment on 29th March, 2001. A O observed in para 9 of his order that interest payable to SDFC was allowed on actual payment to extent of Rs. 4,72,962 in year 1991-92 and therefore consequent on waiver of interest allowed by SCICI as measure of one time settlement of loan due to assessee company, sum of Rs. 4,72,962 has to be considered as income of this year. Though para 9 indicates that AO is in knowledge of fact that there was one time settlement of loan, issue regarding whether waiver of loan amount (other than interest) would amount to cessation of trading liability under s. 41(1) of Act was not specifically considered by AO. Subsequently, it was noticed that assessee claimed deduction by way of depreciation on trawlers which in turn were acquired by availing loan of Rs. 3,30,99,944 and upon waiver of part of said loan, assessee s liability ceased to exist during current previous year and benefit of depreciation claimed in earlier years was more than benefit derived now by way of remission of loan and thus impugned amount has escaped assessment. Accordingly, notice was issued under s. 148 of Act on 24th March, 2005 with prior approval of CIT-I, Visakhapatnam, with view to bring to tax impugned amount under s. 41(1) of Act. In response to notice, assessee submitted that it has already filed its return of income on 30th Nov., 1998. Subsequently, case was taken up for scrutiny. During course of assessment proceedings assessee argued that waiver of principal amount cannot be considered as income as it is capital in nature and relied upon following decisions to contend that allowance of depreciation cannot be equated with deduction in respect of "loss, expenditure or trading liability" and therefore depreciation allowed cannot be brought back to tax on ground that its depreciation claimed till date exceeds amount of loan waived: (i) Mahindra & Mahindra Ltd. vs. CIT (2003) 182 CTR (Bom) 34: (2003) 128 TAXMAN 394 (Bom); (ii) CIT vs. Chetan Chemicals (P) Ltd. (2004) 188 CTR (Guj) 572: (2004) 139 TAXMAN 301 (Guj); (iii) APR Ltd. vs. Dy. CIT (2003) 87 ITD 618 (Hyd); (iv) Impsat (P) Ltd. vs. ITO (2005) 92 TTJ (Del) 552: (2004) 91 ITD 354 (Del). Before AO, appellant did not raise any objection regarding validity of reopening of assessment proceeding. AO was of view that aforecited case laws and decisions are not applicable to facts of present case and kly relying upon decision of Hon ble Bombay High Court in case of Nectar Beverages (P) Ltd. vs. Dy. CIT (2004) 190 CTR (Bom) 319: (2004) 267 ITR 385 (Bom) he concluded that claim of deduction towards depreciation is in nature of expenditure as it reduced liability of assessee to pay income-tax on such amount and thus upon waiver of loan liability which was utilized for purchase of asset, consequent depreciation claimed thereon can be said to have been recovered by consequent depreciation claimed thereon can be said to have been recovered by assessee and therefore provisions of s. 41(1) of Act are applicable. Accordingly, he brought to tax impugned loan waiver amount of Rs. 2,24,22,400 in assessment completed under s. 143 r/w s. 147 of Act. Aggrieved, assessee carried matter in appeal before learned CIT(A). Before first appellate authority, in addition to disputing on taxability of waived loan amount, assessee also raised issue regarding validity of reopening of assessment by placing its reliance on following decisions: (i) Tantia Construction Co. Ltd. vs. Dy. CIT (2002) 177 CTR (Cal) 419; (ii) Mahalaxmi Motors Ltd. vs. Dy. CIT (2004) 186 CTR (AP) 739: (2004) 265 ITR 53 (AP); (iii) Amiya Sales & Industries vs. Asstt. CIT (2005) 195 CTR (Cal) 598: (2005) 274 ITR 25 (Cal); (iv) CIT vs. Foramer France (2003) 185 CTR (SC) 512: (2003) 264 ITR 566 (SC); (v) Parikh Petrol Chemical Agencies (P) Ltd. vs. Asstt. CIT (2003) 183 CTR (Bom) 243: (2003) 129 TAXMAN 574 (Bom); (vi) CIT vs. A.R. Enterprises (P) Ltd. (2003) 126 TAXMAN 49 (Raj); (vii) G.N. Shaw (Wine) (P) Ltd. vs. ITO (2003) 183 CTR (Cal) 528: (2003) 260 ITR 513 (Cal). As matter relating to validity of reopening was not raised before AO, learned CIT(A) called for remand report from AO. substance of remand report furnished by AO is given below: (a) Mere submission of accounts or other information does not amount to full and true disclosure. (b) term loan from SCICI has been utilized to acquire four trawlers on which depreciation has been claimed from asst. yrs. 1988-89 to 1997-98. These facts, i.e., utilization of amounts for buying trawlers, depreciation claimed on them and transaction of waiver of loan was not capital receipt, but reduction in expenditure on capital items were not fully and truly disclosed by appellant. (c) In original assessment, issue relating to waiver of term loan was not considered. (d) AO relied upon decision of Gujarat High Court in case of Praful Chunilal Patel vs. M.J. Makwana, Asstt. CIT (1998) 148 CTR (Guj) 62: (1999) 236 ITR 832 (Guj) wherein words "escaped assessment" have been explained to cover case of discovery of mistake in assessment caused by either erroneous construction of transaction or due to its non-consideration. After considering remand report, various case laws, learned CIT(A) upheld validity of issue of notice under s. 148 on following grounds: (i) justification for belief is not to be judged from standard of proof required for coming to final decision. If AO has cause or justification to think or suppose that income has escaped assessment, he can be said to have reason to believe that such income had escaped assessment. His formation of belief is not judicial decision but administrative decision. (ii) While completing assessment under s. 143(3) of Act on 29th March, 2001, no question was raised regarding impugned transaction relating to waiver of loan as well as interest. (iii) facts relating to utilization of impugned loan for acquisition of trawlers and claim of depreciation on such trawlers for different assessment years were not disclosed by assessee. (iv) If AO honestly comes to conclusion that mistake has been made, it matters nothing so far as his jurisdiction to initiate proceedings under s. 147 of Act is concerned [Praful Chunilal Patel (supra)]. (v) Hon ble Bombay High Court in case of Dr. Amin s Pathology Laboratory vs. P.N. Prasad, Jt. CIT (2002) 172 CTR (Bom) 696: (2001) 252 ITR 6 7 3 (Bom) has observed that mere production of account books from which material evidence could have been discovered by AO will not necessarily amount to disclosure within meaning of proviso to s. 147 of Act. (vi) In original assessment proceedings AO basically examined applicability of s. 43B of Act to unpaid interest liability and reference made to one time settlement was only passing reference and that aspect was never examined by AO. Aggrieved, assessee is in appeal before us. learned Authorized Representative adverted our attention to proviso to s. 147 of Act according to which in case where assessment has been completed under s . 143(3) of Act, no action shall be taken under s. 147 of Act after expiry of four years from end of relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of failure on part of assessee to disclose fully and truly all material facts necessary for his assessment. In this connection, he submitted that fact of waiver of loan amount has been duly disclosed in its annual report filed along with return of income and as assessee has disclosed all material facts, by virtue of proviso referred above, AO is precluded from reopening assessment after expiry of four years. He further submitted that AO has considered matter of waiver in original assessment order when he was dealing with taxability of interest and hence his action of issuing notice under s. 148 of Act after period of four years is due to change in opinion of AO, which cannot be basis for issuing notice under s. 148 of Act. He placed his reliance on decision of Hon ble jurisdictional High Court in case of Mahalaxmi Motors Ltd. (supra) wherein Hon ble High Court considered effect of disclosure in annual report and held that issue of notice under s. 148 is invalid. He further submitted that though learned CIT(A) referred to decision of Hon ble Bombay High Court in case of Dr. Amin s Pathology Laboratory (supra), in view of decision of jurisdictional High Court, learned CIT(A) is precluded from following decision of Bombay High Court. He further submitted that decision of Hon ble Gujarat High Court in case of Praful Chunilal Patel (supra) does not apply to present case as that was case of reopening within (supra) does not apply to present case as that was case of reopening within four years. He also submitted that decision of Hon ble Bombay High Court in case of Citibank N.A. vs. S.K. Ojha & Ors. (2003) 179 CTR (Bom) 124: (2002) 257 ITR 663 (Bom) also does not apply as that case revolves around on different set of facts. He further invited our attention to decision of jurisdictional High Court in case of CIT vs. Jeskaran Bhuvalka (1970) 76 ITR 128 (AP) wherein Hon ble High Court has specifically held that "so far as primary facts are concerned, it is assessee s duty to disclose all of them including particular entries in books, particular portions of documents, and documents and other evidence which could have been discovered by assessing authority, from documents and other evidence disclosed. duty, however, did not extend beyond full and truthful disclosure of all primary facts. Once all primary facts were before assessing authority, it was for him to decide what inferences of facts could be reasonably drawn and what legal inferences had ultimately to be drawn. It was not for anybody else far less assessee to tell assessing authority what inferences, whether of facts or law, should be drawn". He further amplified meaning of material primary facts as under: "The material facts which assessee is required to disclose at time of his assessment are primary facts material and necessary for purpose of his assessment. primary facts which are required to be disclosed must be material or relevant to decision of question before assessing authority so that their non-disclosure could have material bearing on question of escapement of income from assessment. Only when this requirement is satisfied, primary facts can be said to be material facts within meaning of s. 34(1)(a)." Accordingly, he submitted that assessee has fully disclosed all material facts during course of original assessment proceedings itself and after lapse of four years, AO is not entitled to issue notice under s. 148 of Act as there is no failure on part of assessee to disclose fully and truly all material facts. On contrary, learned Departmental Representative invited our attention to Expln. 1 to s. 147 of Act, according to which production before AO of account books or other evidence from which material evidence could, with due diligence, have been discovered by AO, will not necessarily amount to disclosure within meaning of impugned proviso. Further, he submitted that learned CIT(A) has considered all legal aspects of decisions relied upon by assessee before upholding validity of reopening. Accordingly, he supported order of learned CIT(A). We heard rival contentions and perused record. proviso to s. 147 of Act specifically states that where assessment has been made under s. 143(3) or under s. 147 of Act for any assessment year, reopening of s u c h assessment after expiry of four years from end of relevant assessment year shall be made only if there is failure on part of assessee, amongst other things, to disclose fully and truly all material facts necessary for his assessment for that year. Explanation 1 to s. 147 of Act specifically states that production before AO of account books or other evidence from which material evidence could, with due diligence, have been discovered by AO, will not necessarily amount to disclosure within meaning of proviso. So, before adjudicating issue before us regarding validity of notice issued under s. 148 of Act, we will have to decide whether assessee has disclosed fully and truly all material facts before AO in original assessment proceedings. assessee kly relies upon decision of jurisdictional High Court in case of Mahalaxmi Motors Ltd. (supra). In that case, claim of assessee regarding loss on account of fall in value of shares held as current asset was originally allowed by AO in original assessment proceedings. Subsequently, block assessment proceedings were commenced consequent to search on assessee and after completion of block assessment proceedings, assessee filed application before ITSC and received orders also. In meantime, Department took view that loss arising on account of fall in share value is speculative loss, which could not be set off against business income of assessee and accordingly petition was filed before Settlement Commission in this connection which was dismissed by Settlement Commission. Consequent to that, Department issued notice under s. 148 of Act for reopening assessment. Against this notice, under s. 148 of Act for reopening assessment. Against this notice, assessee filed writ petition before Hon ble Andhra Pradesh High Court questioning validity of notice. Hon ble Andhra Pradesh High Court allowed petition of assessee on ground that assessee has furnished all materials in this connection before AO. We find that in this case, claim of assessee regarding loss on account of fall in value of shares has been originally considered and allowed by AO and assessee has also furnished all details in that connection in documents filed along with return of income. However, in present case under consideration, facts are different. waiver of loan by SCICI consisted of two parts, i.e., (i) waiver of principal portion and (ii) waiver of interest portion. assessee duly offered waiver of interest portion in its return of income. In earlier years assessee s claim of interest on abovesaid loan had been disallowed under s. 43B of Act. Hence assessee claimed deduction of interest amount that was disallowed under s. 43B of Act in earlier years. To that extent AO verified claim of assessee and found that above claim is in excess by about Rs. 4 lakhs and accordingly reduced claim by that amount. However, AO did not go into details in connection with waiver of principal portion or its taxability. assessee had disclosed facts regarding waiver of principal portion and credit of that amount in capital reserve account in annual report in schedule containing notes forming part of accounts. Now question before us is that whether such disclosure in annual report would amount to full and true disclosure of all material facts. In this connection, it is pertinent to note decision of Hon ble Supreme Court in case of Kantamani Venkata Narayana & Sons vs. Addl. ITO (1967) 63 ITR 638 (SC) wherein it was observed as under: "It is assessee s duty to bring to notice of AO particular items in books of account or portions of documents which are relevant. assessee s omission to bring to attention of AO particular items in accounts books or particular positions of documents which are relevant will amount to non-disclosure of material facts within meaning of s. 147(a)." In present case also, though assessee has given note regarding waiver of principal portion of loan, it was not brought to notice of AO by assessee. AO has also not dealt with matter of waiver of principal portion and its taxability in original assessment proceeding. Hence Expln. 1 to s. 147 will apply to present case and hence it cannot be said that there is no failure on part of assessee to disclose fully and truly all material facts. decision of Hon ble jurisdictional High Court in case of Mahalaxmi Motors Ltd. (supra) is distinguishable as AO in that case has originally considered claim of assessee whereas AO in present case has not considered present issue and hence it cannot be termed as change of opinion . Hon ble Andhra Pradesh High Court did not consider Expln. 1 to s. 147, as it was not necessary in that case to consider Explanation. Expln. 1 to s. 147 has been duly considered by Bombay High Court in Dr. Amin s Pathology Laboratory (supra) while upholding issue of notice under s. 148 of Act. In Mahalaxmi Motors Ltd. (supra) Hon ble Andhra Pradesh High Court extracted observations of Hon ble Supreme Court in case of Sri Krishna (P) Ltd. vs. ITO (1996) 135 CTR (SC) 75: (1996) 221 ITR 538 (SC) and some of abovesaid observations in this connection are given below: "The enquiry at stage of finding out whether reassessment notice is valid is only to see whether there are reasonable grounds for ITO to believe and not whether omission/failure and escapement of income is established. It is necessary to keep this distinction in mind. Since belief is that of ITO, sufficiency of reasons for forming belief is not for Court to Judge but it is open to assessee to establish that, in fact there existed no belief or that belief was not at all bona fide one or was based on vague, irrelevant and non-specific information. To that extent, Court may look into conclusion arrived at by ITO and examine whether there was any material available on record from which requisite belief could be formed by ITO and further whether that material had any rational connection or live link for formation of requisite belief." In present case under consideration, AO did not make enquiries regarding taxability of principal portion waived. assessee has also failed to bring above facts to notice of AO though same have been mentioned in annual report. In view of Hon ble Supreme Court decision referred supra and further in view of Expln. 1 to s. 147, note given in annual report cannot be taken as full and true disclosure. Hence belief of AO regarding escapement of income can be taken as reasonable one. assessee has also not established that there existed no belief or belief was not at all bona fide one. Hence, on conspectus of matter, we hold that issue of notice under s. 148 is valid. next issue to be addressed is whether waiver of principal part of loan would give rise to income taxable under s. 41(1) of IT Act. learned Authorised Representative in this connection invited our attention to Hon ble Supreme Court decision in case of Polyflex (India) (P) Ltd. vs. CIT (2002) 177 CTR (SC) 93: (2002) 257 ITR 343 (SC) wherein Hon ble Supreme Court has held that words "some benefit in respect of such trading liability by way of remission or cessation thereof" appearing in s. 41(1) of Act should be read as distinct and self-contained provision, and words "has obtained, whether in cash or in any other manner whatsoever, any amount in respect of loss or expenditure" appearing in same section have to be read separately. Accordingly, he contended that remission or cessation of liability has to be read in relation to trading liability only. He further submitted that waiver of principal portion of loan couldn t be taken as trading liability, as impugned principal amount has never been claimed as expenditure or allowance under IT Act, In this connection, he relied upon decision of Hon ble Delhi High Court in case of CIT vs. Phool Chand Jiwan Ram (1981) 131 ITR 37 (Del) wherein it has been held that only trading debts which are allowed as deduction in earlier years can only be treated as trading liability. Accordingly, he submitted that waiver of principal amount of loan cannot be brought to tax under s. 41(1) of Act. Next, he submitted that tax authorities have proceeded under wrong interpretation of provisions of IT Act by linking loan amount to depreciation claim. Depreciation is allowed on "actual cost" of assets, depreciation claim. Depreciation is allowed on "actual cost" of assets, which have been put to use for purpose of business. Hence, allowance of depreciation has nothing to do with loan taken for purchasing assets. Hence, remission of such loan cannot be reduced from cost of machinery. In this connection he relied upon decision of Kerala High Court in case of CIT vs. Cochin Co. (P) Ltd. (1990) 81 CTR (Ker) 115: (1990) 184 ITR 230 (Ker). He further submitted that learned CIT(A) has wrongly interpreted decision of Hon ble Bombay High Court in case of Mahindra & Mahindra Ltd. (supra). Accordingly, he pleaded that appeal of assessee be allowed. On contrary, learned Departmental Representative submitted that assessee has purchased assets by availing term loan and also has claimed depreciation on such assets. amount of loan now waived is less than depreciation amount claimed to date. As there is nexus between purchase of fixed assets and availing of loan, waiver of loan will amount to benefit relatable to depreciation claim and hence it is taxable under s. 41(1) of Act. Accordingly, he supported order of tax authorities. We heard rival contentions and perused records. Sec. 41(1) of Act reads as under: "41(1). Where allowance or deduction has been made in assessment for any year in respect of loss, expenditure or trading liability incurred by assessee (hereinafter referred to as first mentioned person) and subsequently during any previous year, (a) first mentioned person has obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, amount obtained by such person or value of benefit accruing to him shall be deemed to be profits and gains of business or profession and accordingly chargeable to income-tax as income of that previous year, whether business or profession in respect of which allowance or deduction has been made is in existence in that year or not;" Sec. 41(1) consists of two main ingredients viz., (a) "loss or expenditure" and (b) "trading liability". As per decision of Hon ble Supreme Court in case of Polyflex (India) (P) Ltd. (supra), two components of s. 41(1) of Act have to be read separately, namely (i) has obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure; (ii) some benefit in respect of such trading liability by way of remission or cessation thereof. Accordingly Hon ble apex Court held that words "remission or cessation thereof" shall apply only to trading liability and it shall not apply to any loss or expenditure. next issue that arises is whether waiver of principal amount of loan would amount to trading liability? On this issue also, Hon ble Delhi High Court in Phool Chand Jiwan Ram (supra) has held that only trading debts, which are allowed as deduction in earlier years, can be treated as trading liability. It is not in dispute principal portion of loan amount, which has been waived, has not been claimed as deduction in any of years. Hence, waiver of principal portion of loan cannot be termed as waiver of trading liability and hence second clause of s. 41(1), relating to trading liability, shall not apply to present case under consideration. next issue to be addressed is, whether waiver of loan will amount t o benefit relatable to depreciation expenditure claimed earlier? In this case, assessee had obtained loan of Rs. 3.18 crores from SCICI and acquired four trawlers by utilizing abovesaid loan. It had also claimed depreciation from 1988-89 to 1997-98 to extent of Rs. 3.62 crores on trawlers so acquired by availing loan. waiver of principal amount is Rs. 2.24 crores. Hence Department contends that such waiver would give rise to refund of benefit of depreciation claim allowed earlier. It is to be noted here that depreciation under s. 32 of Act is allowed on "actual cost" of assets. term actual cost has been defined in s. 43(1) of Act, according to which, actual cost means actual cost of assets to assessee reduced by that portion of cost thereof, if any, as has been met directly or indirectly by any other person or authority . So, only deduction permissible from actual cost is amount, which has been met by any other person or authority. words "which has been met by another person or authority" would mean non- refundable amount given by any other person or authority for purpose of meeting cost of asset. When person avails term loan, it has to be repaid along with interest, if any, in accordance with terms and conditions prescribed for that purpose. If term loan is utilized for acquiring any asset, it cannot be termed as meeting of portion of cost of asset . Loan is availed as source of finance while depreciation is allowed on actual user of asset. So availing of loan and claim of depreciation are two distinct things, which cannot be clubbed together. Hon ble Kerala High Court in case of Cochin Co. (P) Ltd. (supra) has specifically held that remission of loan taken to purchase machinery cannot be reduced from cost of machinery. Hence, we find no force in contention of Revenue that in view of nexus between term loan and acquisition of assets, remission of loan will amount to remission of depreciation. decision of Bombay High Court in case of Mahindra & Mahindra Ltd. (supra) relied upon by tax authorities will not support their contention as Hon ble Bombay High Court has not gone into question of depreciation at all. Accordingly, we hold that remission of principal portion of loan cannot fall in purview of provisions of s. 41(1) of Act. Accordingly, we reverse decision of learned CIT(A) in this regard. In result, appeal filed by assessee is allowed. *** COASTAL CORPORATION LTD. v. JOINT COMMISSIONER OF INCOME TAX