INDUS CITYSCAPES, CHENNAI V. DCIT CORPORATE CIRCLE 2 (2), CHENNAI

ITA 1226/CHNY/2018

• Counselvise Citation: [2022] 106 COUNSELVISE.COM (IT) 6416 (ITAT-CHENNAI)
• Duration Of Justice: 4 year(s) 5 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-09-2022
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Assessment Year: 2008-2009
• Appeal Filed On: 09-04-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Depreciation; Bad and doubtful debts; Scheme of amalgamation
• Section: 148; 143(3); 143(1)

Judgement Text

आयकर अपीलीय अिधकरण, ‘डी’ Ɋायपीठ, चेɄई IN THE INCOME-TAX APPELLATE TRIBUNAL ‘D’ BENCH, CHENNAI ŵी वी दुगाŊ राव Ɋाियक सद˟ एवं ŵी जी. मंजुनाथा, लेखा सद˟ के समƗ Before Shri V. Durga Rao, Judicial Member & Shri G. Manjunatha, Accountant Member आयकर अपील सं./I.T.A. No.1226/Chny/2018 िनधाŊरण वषŊ/Assessment Year: 2008-09 M/s. Indus Cityscapes Constructions Pvt. Ltd., No. 5-C, EGA Trade Centre, 809, Poonamalle High Road, Kilpauk, Chennai 600 010. [PAN:AABCI2175A] Vs. The Deputy Commissioner of Income Tax, Corporate Circle 2(2), Chennai. (अपीलाथŎ/Appellant) (ŮȑथŎ/Respondent) अपीलाथŎ की ओर से / Appellant by : Shri T. Banusekar, CA ŮȑथŎ की ओर से/Respondent by : Shri D. Hema Bhupal, JCIT सुनवाई की तारीख/ Date of hearing : 06.09.2022 घोषणा की तारीख /Date of Pronouncement : 16.09.2022 आदेश /O R D E R PER V. DURGA RAO, JUDICIAL MEMBER: The appeal filed by the assessee is directed against the order of the ld. Commissioner of Income Tax (Appeals)-13, Chennai dated 06.12.2017 relevant to the assessment year 2008-09. 2. Facts are, in brief, that the assessee company is carrying real estate, construction and related activities, filed return of income for the assessment year 2008-09 on 30.09.2008 declaring a total income of ₹.84,76,260/- and the same was processed under section 143(1) of the I.T.A. No.1226/Chny/18 2 Income Tax Act, 1961 [“Act” in short]. The case was selected for scrutiny and the assessment under section 143(3) of the Act was completed on 23.12.2010 on an income of ₹.6,79,89,064/-. Subsequently a notice under section 148 of the Act dated 27.03.2013 was issued to the assessee on the ground that there is an escapement of income. The assessee vide its letter dated 29.04.2013 requested to treat the original return filed as a return filed in lieu of the notice issued under section 148 of the Act. Thereafter, the Assessing Officer has completed the assessment under section 143(3) r.w.s. 147 of the Act dated 24.02.2014. 3. On verification of details of M/s. V.S. Net Ltd., the Assessing Officer has noted that as per agreement entered between the assessee company and M/s. V.S. Net Ltd., in clause 5 Return, sub clause 5.2, the interest amount to be paid on the principal amount was clearly defined and based on that ₹.1.31 crore interest payable by Indus Cityscapes Construction Pvt. Ltd. to V.S. Net Ltd. was written off as bad and doubtful debts by M/s. V.S. Net Ltd., for the year ending 31.03.2008.The said interest amount was payable by the assessee company towards advances received from V.S. Net Limited for land purchase, etc. The transactions pertaining to this has been confirmed by M/s. V.S. Net Limited (Now known as Siva Industries and Holdings Limited) and they have confirmed vide their letter I.T.A. No.1226/Chny/18 3 dated 27.01.2014 that they have written off an amount of ₹.1.31 Crores as interest receivable from M/s. Indus Cityscapes Construction Pvt. Ltd. for the year ending 31.03.2008. The Assessing Officer has issued with a show-cause notice dated 31.01.2014 that why the said amount written off by M/s. V.S. Net Limited at ₹.1.31 crores should not be treated as income in the hands of the assessee company within the meaning of section 41(1) of the Act. The Assessing Officer has noted that the assessee has not been able to explain the said transaction from their accounts and on verification of details filed, it become very clear that assessee has not complied with the provisions of section 41(1) of the Act and not offered the said income amount to tax. Accordingly, the said amount of ₹.1.31 crores was added back to the income of the assessee. 4. On appeal, the ld. CIT(A) confirmed the order of the Assessing Officer by observing as under: “I have carefully considered the appellant's above contentions and also gone through the case laws relied by the assessee supra. The same are found clearly distinguishable on facts than that of the facts of the assessee's case. The AO has verified the books of accounts of the M/s.VS Net Limited and also relied on the agreement entered between the assessee company and M/s. VS Net Ltd., in clause 5 Return, sub clause 5.2 wherein, it is clearly mentioned about the interest payment of Rs. 1.31 crore interest payable by Indus Cityscapes Constructions Pvt. Ltd. to VS Net Ltd., moreover, it is a finding fact of the AO that M/s. V S Net Ltd has written off Rs.1.31 crore interest payable by Indus Cityscapes Constructions Pvt. Ltd. in their books of accounts. The confirmation factor is also brought on record by the AO for which the AO has obtained confirmation from M/s. V S Net Ltd(now known as Siva Industries and Holdings Limited) by way of confirmation letter dated 27.01.2014. Thus, it is clear cut factual position where interest amount of Rs. 1.31 I.T.A. No.1226/Chny/18 4 crore interest payable by Indus Cityscapes Constructions Pvt. Ltd. to VS Net Ltd and M/s. V S Net Ltd has written off the said amount receivable by them from Indus Cityscapes Constructions Pvt. Ltd. Thus in assessee's case section 41(1) of the Act are clearly attracted. For ready reference the statute provisions are reproduced below. 41. (1) Where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee (hereinafter referred to as the first-mentioned person) and subsequently during any previous year, - (a) the 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, the amount obtained by such person or the 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 the income of that previous year, whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not; or (b) the successor in business has obtained, whether in cash or in any other manner whatsoever, any amount in respect of which Joss or expenditure was incurred by the first-mentioned person or some benefit in respect of the trading liability referred to in clause (a) by way of remission or cessation thereof, the amount obtained by the successor in business or the value of benefit accruing to the successor in business shall be deemed to be profits and gains of the business or profession, and accordingly chargeable to income-tax as the income of that previous year. [Explanation l.- For the purposes of this sub-section, the expression "loss or expenditure or some benefit in respect of any such trading liability by way of remission or cessation thereof" shall include the remission or cessation of any liability by a unilateral act by the first mentioned person under clause (a) or the successor in business under clause (b) of that subsection by way of writing off such liability in his accounts.] [Explanation 2].-For the purposes of this sub-section, "successor in business" means, - (i) where there has been an amalgamation of a company with another company, the amalgamated company; (ii) where the first-mentioned person is succeeded by any other person in that business or profession, the other person; I.T.A. No.1226/Chny/18 5 (iii) where a firm carrying on a business or profession is succeeded by another firm, the other firm;] (iv) where there has been a demerger, the resulting company.] [(2) Where any building, machinery, plant or furniture,- (a) which is owned by the assessee; (b) in respect of which depreciation is claimed under clause (i) of sub- section (1) of section 32; and (c) which was or has been used for the purposes of business, is sold, discarded, demolished or destroyed and the moneys payable in respect of such building, machinery, plant or furniture, as the case may be, together with the amount of scrap value, if any, exceeds the written down value, so much of the excess as does not exceed the difference between the actual cost and the written down value shall be chargeable to income-tax as income of the business of the previous year in which the moneys payable for the building, machinery, plant or furniture became due. Explanation.-Where the moneys payable in respect of the building, machinery, plant or furniture referred to in this sub-section become due in a previous year in which the business for the purpose of which the building, machinery, plant or furniture was being used is no longer in existence, the provision of this sub-section shall apply as if the business is in existence in that previous year.] (2A)[***] (3) Where an asset representing expenditure of a capital nature on scientific research within the meaning of clause (iv) of sub-section (1), [or clause (c) of sub-section (2B),] of section 35, read with clause (4) of section 43, is sold, without having been used for other purposes, and the proceeds of the sale together with the total amount of the deductions made under clause (i) [or, as the case may be, the amount of the deduction under clause (ia)] of subsection (2), [or clause (c) of sub-section (2B),] of section 35 exceed the amount of the capital expenditure, the excess or the amount of the deductions so made, whichever is the less, shall be chargeable to income-tax as income of the business or profession of the previous year in which the sale took place. Explanation.--Where the moneys payable in respect of any asset referred to in this subsection become due in a previous year in which the business is no longer in existence, the provisions of this sub-section shall apply as if the business is in existence in that previous year. I.T.A. No.1226/Chny/18 6 (4) Where a deduction has been allowed in respect of a bad debt or part of debt under the provisions of clause (vii) of sub-section (1) of section 36, then, if the amount subsequently recovered on any such debt or part is greater than the difference between the debt or part of debt and the amount so allowed, the excess shall be deemed to be profits and gains of business or profession, and accordingly chargeable to income-tax as the income of the previous year in which it is recovered, whether the business or profession in respect of which the deduction has been allowed is in existence in that year or not. [Explanation.--For the purposes of sub-section (3), - (1) "moneys payable" in respect of any building, machinery, plant or furniture includes- (a) any insurance, salvage or compensation moneys payable in respect thereof; (b) where the building, machinery, plant or furniture is sold, the price for which it is sold, so, however, that where the actual cost of a motor car is, in accordance with the proviso to clause (1) of section 43, taken to be twenty-five thousand rupees, the moneys payable in respect of such motor car shall be taken to be a sum which bears to the amount for which the motor car is sold or, as the case may be, the amount of any insurance, salvage or compensation moneys payable in respect thereof (including the amount of scrap value, if any) the same proportion as the amount of twenty-five thousand rupees bears to the actual cost of the motor car to the assessee as it would have been computed before applying the said proviso; (2) "sold" includes a transfer by way of exchange or a compulsory acquisition under any law for the time being in force but does not include a transfer, in a scheme of amalgamation, of any asset by the amalgamating company to the amalgamated company where the amalgamated company is an Indian company.] (4A) Where a deduction has been allowed in respect of any special reserve created and maintained under clause (viii) of sub-section (1) of section 36, any amount subsequently withdrawn from such special reserve shall be deemed to be the profits and gains of business or profession and accordingly be chargeable to income-tax as the income of the previous year in which such amount is withdrawn. Explanation- Where any amount is withdrawn from the special reserve in a previous year in which the business is no longer in existence, the provisions of this sub-section shall apply as if the business is in existence in that previous year.] (5) Where the business or profession referred to in this section is no longer in existence and there is income chargeable to tax under sub-section (1), I.T.A. No.1226/Chny/18 7 sub-section (3), subsection (4) or sub-section (4A)] in respect of that business or profession, any loss, not being a loss sustained in speculation business, which arose in that business or profession during the previous year in which it ceased to exist and which could not be set off against any other income of that previous year shall, so far as may be, be set off against the income chargeable to tax under the sub-sections aforesaid. [(6) References in sub-section (3) to any other provision of this Act which has been amended or omitted by the Direct Tax Laws (Amendment) Act, 1987 shall, notwithstanding such amendment or omission, be construed, for the purposes of that sub-section, as if such amendment or omission had not been made.] Thus the apparent written conditions above is not sustainable in the above discussed facts. Accordingly I confirm the action of the AO to bring to tax Rs.1.31 crores u/s 41(1) of the Act. The ground of appeal on the issue of facts is hereby dismissed.” 5. On being aggrieved, the assessee carried the matter in appeal before the Tribunal. By referring to paper book page 46 to 51, the ld. Counsel for the assessee has pointed out that the assessee has not at all charged the amount to profit and loss account and not at all debited to profit and loss account. Therefore, the provision of section 41(1) of the Act has no application. On the other hand, the ld. DR relied on the orders of the authorities below. 6. We have heard both the sides, perused the materials available on record and gone through the orders of authorities below including paper book filed by the assessee. The issue involved in this appeal relates to application of provisions of section 41(1) of the Act in the given facts and circumstances of the case. The assessee has to pay interest to M/s. V.S. Net Ltd. of ₹.1.31 crores. M/s. V.S. Net Ltd. have confirmed that they I.T.A. No.1226/Chny/18 8 have written off the said amount of R..1.31 crores interest receivable from the assessee for the year ending 31.03.2008 as bad debt. On the basis of that, the Assessing Officer came to a conclusion that the provision of section 41(1) of the Act has to be applied to the assessee. It is not the case of Department that the assessee has debited the said interest amount in the profit and loss account or charged to profit and loss account. The only case of the Assessing Officer is that because M/s. V.S. Net Ltd., to whom the assessee has to pay the interest amount has written off the amount as bad debt, thereby the provision of section 41(1) of the Act as to be applied automatically. 6.1 In this case, the Assessing Officer has invoked section 41(1) of the Act on the ground that the other party M/s. V.S. Net Ltd. has written off the interest amount as bad debt and therefore, section 41(1) of the Act has to be applied in assessee’s case. As per section 41(1) of the Act, in earlier year, the assessee was not allowed deduction in respect of the loss or expenditure revenue or capital for trading liability incurred by the assessee. In the present case, the assessee has not claimed any deduction in earlier years in respect of loss or expenditure or trading liability. Therefore, the Assessing Officer invoked the section 41(1) of the Act presuming that the assessee has got benefit is not correct. We find I.T.A. No.1226/Chny/18 9 that section 41(1) of the Act as no application to the facts of the assessee’s case. Without considering the provision of section 41(1) of the Act, in sprit, the ld. CIT(A) has simply confirmed the order of the Assessing Officer. Accordingly, we reverse the order passed by the ld. CIT(A) on this issue and allow the ground raised by the assessee. 7. In the result, the appeal filed by the assessee is allowed. Order pronounced on 16 th September, 2022 at Chennai. Sd/- Sd/- (G. MANJUNATHA) ACCOUNTANT MEMBER (V. DURGA RAO) JUDICIAL MEMBER Chennai, Dated, 16.09.2022 Vm/- आदेश की Ůितिलिप अŤेिषत/Copy to: 1. अपीलाथŎ/Appellant, 2.ŮȑथŎ/ Respondent, 3. आयकर आयुƅ (अपील)/CIT(A), 4. आयकर आयुƅ/CIT, 5. िवभागीय Ůितिनिध/DR & 6. गाडŊ फाईल/GF.