M/s. Shabina Steels, Bangalore V. ACIT, Circle 2(3)(1), Bangalore

ITA 1702/BANG/2016

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 9247 (ITAT-BANGALORE)
• Duration Of Justice: 2 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-12-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2012-2013
• Appeal Filed On: 27-09-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: S GANESH RAO
• Keywords: Business expenditure
• Section: 28

Judgement Text

ITA.1702/BANG/2016 PAGE - 1 IN THE INCOME TAX APPELLATE TRIBUNAL SMC, BENGALURU BENCH 'B', BENGALURU BEFORE SHRI GEORGE GEORGE K, JUDICIAL MEMBER I.T.A NO.1702/BANG/2016 (ASSESSMENT YEAR : 2012-13) M/S. SHABINA STEELS, NO.12, DRESSER RAJAPPA LANE, SJP ROAD, BENGALURU 560 002 .. APPELLANT PAN : AAFFS9512G V. ASST. COMMISSIONER OF INCOME-TAX, CIRCLE -2(3)(1), BENGALURU .. RESPONDENT ASSESSEE BY : SHRI. S. GANESH RAO REVENUE BY : SMT. S. PRAVEENA, ADDL. CIT HEARD ON : 01.12.2016 PRONOUNCED ON : 07.12.2016 O R D E R PER GEORGE GEORGE K, JUDICIAL MEMBER : THIS APPEAL, AT THE INSTANC E OF THE ASSESSEE, IS DIRECTED AGAINST THE ORDER OF THE CIT (A)-5, BANGALORE, DATED: 4.7.2016. THE RELEVANT ASSESSMENT YEAR IS 2012-13. 2. THE ASSESSEE HAS, IN ITS GROUNDS OF APPEAL, RAI SED A SOLITARY GROUND, NAMELY, THAT THE AO WAS NOT JUSTIFIED IN ADDING THE LIABILITY OF RS.12,31,049/- TO THE TOTAL INCOME U/S 41(1) R W S.28(IV) OF THE ACT. ITA.1702/BANG/2016 PAGE - 2 3. BRIEFLY STATED, THE FACTS OF THE ISSUE ARE AS F OLLOWS: THE ASSESSEE, AN INDIVIDUAL, IS A DEALER IN IRON AN D STEEL. FOR THE PERIOD UNDER DISPUTE, THE ASSESSEE HAD FILED A RETURN OF INCOME ON 9.9.2012, ADMITTING A TOTAL INCOME OF RS.27,72,420/-. THE CASE WAS TAKEN UP FOR SCRUT INY. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, IT WAS OBSERVED BY THE ASSE SSING OFFICER THAT THE ASSESSEE HAD SHOWN RS.1,84,54,601/ AS SUNDRY CREDITORS. ON EXAMINATION OF THE LEDGER ACCOUNT, IT WAS NOTICED BY THE AO THAT THOSE LIABILITIES WER E IN EXISTENCE FOR MORE THAN THREE YEARS AND THAT THE ADVANCES RECEIVED BY THE ASSESSE E RELATED TO BUSINESS WHICH WERE NEITHER PAID BACK EITHER IN CASH OR IN KIND IN SUBS EQUENT YEARS NOR THE CLIENTS ENFORCED THE COLLECTION OF THE SAME. IN RESPONSE TO THE AO S QUERY AS TO WHY THE LIABILITY SHOULD NOT BE ADDED BACK U/S 41(1) R W S. 28(IV) OF THE AC T, THE ASSESSEE, ACCORDING TO THE AO, CAME UP WITH A REPLY THAT THERE WERE TWO SUNDRY CRE DITORS VIZ., SHOBHA VIJAYA STEEL CORPORATION OUT-STANDING FROM FY 2008-09 OF RS.4,31 ,049 /- AND SUBBA RAO, OUTSTANDING OF RS.8 LAKHS FROM FY 2006-07 AND THAT THE OUTSTANDING AMOUNTS REPRESENT ADVANCES RECEIVED LONG BACK FOR SUPPLY OF GOODS WHI CH DID NOT MATERIALIZE AND THAT THE PARTIES DID NOT COLLECTED THE AMOUNTS AND, HENCE, T HE SAME WAS OUTSTANDING. AFTER RECORDING THE ELABORATE REASONING AND ALSO RELYING ON THE RULINGS OF THE (I) HONBLE JURISDICTIONAL HIGH COURT REPORTED IN 111 TAXMAN 44 6; (II) THE HONBLE DELHI HIGH COURT REPORTED IN 210 TAXMAN 173; (III) THE HONBLE APEX COURT REPORTED IN 124 TAXMAN 373; AND (IV) THE FINDINGS OF HONBLE MUMBAI TRIBUNAL IN ITO V. SHAILESH D SHAH [ITA 7012/M/10], THE AO HAD ADDED A SUM OF RS.12,31,049 /- U/S 41(1) R W S.28(IV) OF THE ACT. ITA.1702/BANG/2016 PAGE - 3 4. AGGRIEVED, THE ASSESSEE TOOK UP THE ISSUE WITH FIRST APPELLATE AUTHORITY FOR CONSIDERATION. AFTER DUE CONSIDERATION OF THE ASS ESSEES CONTENTIONS AND ALSO THE CASE LAWS AS CITED BY THE AO (SUPRA), THE CIT (A) UPHELD THE AOS ACTION IN TREATING THOSE CREDITS AS INCOME BY INVOKING THE PROVISIONS OF S. 41(1) R W S. 28(IV) OF THE ACT FOR THE FOLLOWING REASONS, NAMELY: 6.1. DEDUCTION IN RESPECT OF LOSS, EXPENDITURE OR TRADING LIABILITY INCURRED BY THE ASSESSEE MUST HAVE BEEN ALLOWED IN EARLIER Y EARS. IN A LATER YEAR, THERE HAS TO BE RECOUPMENT OF THE LOSS, EXPENDITURE OR TRADING LIABILITY. THE RECOUPMENT/BENEFIT COULD BE BY WAY OF: (I) REMI SSION; OR (II) CESSION. THE LIABILITY MUST CEASE BY WAY OF WRITING OFF, REM ISSION, CESSATION, OPERATION OR LAW OR IN ANY OTHER MANNER. SECTION 4 1(1) TAXES INCOME ON LEGAL FICTION AND HAS TO BE STRICTLY CONSTRUED. IT IS AN ESTABLISHED PRINCIPLE THAT IN CONSTRUING A PROVISION CREATING A STATUTORY FICTION, TWO RULES OPERATE. THE STATUTORY FICTION SHOULD BE CARRIED TO ITS LOGI CAL CONCLUSION, BUT, THE FICTION CANNOT BE EXTENDED BEYOND THE LANGUAGE OF T HE SECTION BY WHICH IT IS CREATED OR BY IMPORTING ANOTHER FICTION. HENCE, TILL AN AMOUNT IS WRITTEN OFF/BACK, IT CANNOT BE CONSIDERED AS INCOME IN TERM S OF SEC. 41(1) EVEN IF IT BECOMES BARRED BY LIMITATION. REMISSION CONNOTES A POSITIVE ACT ON THE PART OF THE CREDITOR. A LIABILITY MAY CEASE ON ACC OUNT OF JUDICIAL PRONOUNCEMENT PROVIDED IT HAS BECOME FINAL AND HAS NOT BEEN SUBJECTED TO AN APPEAL BECAUSE CESSATION U/S 41(1) IS AN IRRE VOCABLE. THE LIABILITY MUST BE TRADING ONE AND SHOULD HAVE BEEN ALLOWED AS A DEDUCTION EARLIER. WHEN THE ASSESSEE HAD NOT WRITTEN OF ANY LIABILITY IN ITS BOOKS OF ACCOUNT, THE SAID AMOUNT COULD NOT BE TREATED AS INCOME UNLE SS THE ASSESSING OFFICER BROUGHT SOMETHING FROM RECORDS TO PROVE THA T THOSE LIABILITIES CEASED TO EXIST IN THE APPELLANTS CASE, THE ASSESS ING OFFICER HAS PROVED THAT THE TRADE LIABILITY CEASED TO EXIST IN FY 2011 -12 AND, THEREFORE, IT IS CONSIDERED AS PROFIT FOR THE YEAR UNDER CONSIDERATI ON. THE VIEW THAT I AM, THUS, TAKING, FIND SUPPORT FROM THE FOLLOWING DECIS IONS. THE HONBLE MUMBAI TRIBUNAL IN THE CASE OF ITO V. SHAILESH D SH AH (ITA NO. 7012/M/10) WHEREIN IT WAS HELD THAT THE ASSESSEE HA S JUST CONTINUED THE ENTRY IN HIS BOOKS OF ACCOUNT WITHOUT ANY INTENTION TO PAY BACK THE SAME. HENCE, UPHELD THE ADDITION U/S 41(1). THE HONBLE APEX COURT IN THE CASE OF POLYFLEX INDIA (P) LTD V. CIT (124 TAXMAN 373), ALSO CONFIRMED THE ADDITION U/S 41(1) ON CESSION OF LIABILITY.. ITA.1702/BANG/2016 PAGE - 4 5. AGGRIEVED, THE ASSESSEE HAS COME UP BEFORE US W ITH THE PRESENT APPEAL. DURING THE COURSE OF HEARING, THE LEARNED COUNSEL F OR THE ASSESSEE REITERATED WHAT HAS BEEN CONTENDED BEFORE THE FIRST APPELLATE AUTHORITY . IN FURTHERANCE, IT WAS SUBMITTED THAT THE AO HAD ERRONEOUSLY COME TO THE CONCLUSION THAT THOSE TWO CREDITS OUT-STANDING CONSTITUTED REMISSION OR CESSATION OF LIABILITY A ND, ACCORDINGLY, ADDED A SUM OF RS.12,31,049/- U/S 41(1) R W S. 28(IV) OF THE ACT. IT WAS, FURTHER, SUBMITTED THAT THE AO RELIED ON THE FINDINGS OF THE HONBLE MUMBAI TRIBUN AL CITED SUPRA AND ALSO THE RULING OF THE HONLE SUPREME COURT IN THE CASE OF POLYFLEX IN DIA (P) LTD (SUPRA) IN COMING TO AN ERRONEOUS CONCLUSION. THE AO HAD FAILED TO NOTICE THE FACT THAT THERE WAS NEITHER ANY CESSION NOR REMISSION OF LIABILITY NOR WAS THERE ANY BENEFIT OF ACCRUAL OF INCOME TO THE ASSESSEE BY HIS UNILATERAL ACT OF SUCH EXTINGUISHME NT. IT WAS THE CONTENTION OF THE LEARNED COUNSEL THAT THE AO SHOULD HAVE NOTICED THA T THE OUTSTANDING AMOUNTS REPRESENTED ADVANCES RECEIVED BY THE ASSESSEE FOR S UPPLY OF GOODS AND FOR SOME OBVIOUS REASON THE TRANSACTIONS DID NOT TAKE PLACE AND THOSE AMOUNTS WERE LYING UNPAID AS THE CONCERNED PARTIES DID NOT TURN UP TO COLLECT THE ADVANCE AMOUNTS. OUR REFERENCE WAS ALSO INVITED BY THE LEARNED COUNSEL T O THE EFFECT THAT THE RULING OF THE APEX COURT IN THE CASE OF POLYFLEX INDIA (P) LTD (S UPRA) CITED BY THE AO WAS TOTALLY DIFFERENT FROM THE FACTS OF THE PRESENT CASE, I.E., THAT THE ISSUE BEFORE THE HONBLE COURT WAS THAT THE BUSINESS EXPENDITURE WHICH HAD BEEN AL LOWED IN THE PRECEDING ASSESSMENT YEARS GOT REIMBURSED TO THE ASSESSEE AN D, HENCE, S.41(1) WAS APPLICABLE, BUT, IN THE INSTANT CASE, THERE WAS NO ALLOWANCE OF SUCH EXPENDITURE IN THE PRECEDING YEARS OR WAS THERE ANY BENEFIT ACCRUED TO THE ASSES SEE BY WAY OF UNILATERAL REMITTANCE. LIKEWISE, IT WAS ARGUED, IN THE CASE OF CIT V. COMFUND FINANCIAL SERVICES ITA.1702/BANG/2016 PAGE - 5 (111 TAXMAN 446) CITED BY THE AO IN HER ASSESSMENT ORDER, THE ISSUE BEFORE THE HONBLE COURT WAS WAIVER OF INTEREST BY THE ASSES SEES BANKERS AND, AS SUCH, THERE WAS BENEFIT ACCRUED TO THE ASSESSEE WHICH ATTRACTED THE PROVISIONS OF S. 41(1) OF THE ACT WHEREAS IN THE PRESENT CASE, THERE WAS NO SUCH WAIV ER. IT WAS, THEREFORE, PLEADED THAT THE ADDITION OF RS.12,31,049/- MADE BY THE AO WHICH WAS SUSTAINED BY THE CIT(A) REQUIRES TO BE DELETED. 6. ON THE OTHER HAND, THE LEARNED DR PRESENT SUPPO RTED THE STAND OF THE AUTHORITIES BELOW AND, ACCORDINGLY, PRAYED THAT THE ASSESSEES APPEAL DESERVES TO BE DISMISSED. 7. I HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIO NS, DULY PERUSED THE RELEVANT MATERIALS ON RECORD, THE REASONING OF THE AO IN MAKING THE ADDITION AND ALSO THE FINDINGS OF THE CIT (A) IN SUSTAINING THE AOS ACTION. AS CONCEDED BY THE AO (ON PARA 3.2.3. OF THE ASST. ORDER), ACCORDING TO S. 41 (1) OF THE ACT , THERE HAS TO BE A REMISSION OR CESSATION OF A LIABILITY OR THE LIABIL ITY MUST BE AS TRADING LIABILITY AND NOT ON CAPITAL ACCOUNT. IT WAS THE CASE OF THE AO THAT IN THE ASSESSEES CASE, IT WAS A TRADING LIABILITY AND CEASED TO EXIST FOR THE PERIOD F.Y 20 11.12. HOWEVER, IT WAS CONTESTED BY THE ASSESSEE THAT THERE WAS NEITHER CESSATION OR REMISSION OF LIABILITY NOR THERE WAS ANY BENEFIT OF ACCRUAL OF INCOME TO THE ASSESSEE BY ITS UNILATERAL ACT OF SUCH EXTINGUISHMENT. FURTHER, IT WAS CONTENDED THAT THE OUTSTANDING AMOUNTS REPRESENTED ONLY ADVANCES RECEIVED BY THE ASSESSEE FOR SUPPLY O F GOODS AND, FOR THE REASON BEYOND ITS CONTROL, THE TRANSACTION DID NOT MATERIALIZE. THUS, THE SAID AMOUNTS WERE LYING UNPAID AS THE SAID PARTIES MADE NO ATTEMPT TO COLLE CT THE ADVANCES SO MADE FOR THE SUPPLY OF MATERIALS. TO SUPPORT ITS CLAIM, THE ASS ESSEE HAS FURNISHED AN AFFIDAVIT DURING ITA.1702/BANG/2016 PAGE - 6 THE COURSE OF HEARING, ACCORDING TO WHICH, THERE WA S NEITHER CESSION NOR REMISSION OF LIABILITY NOR WAS THERE ANY BENEFIT OF ACCRUAL OF I NCOME TO THE ASSESSEE. AS THE AMOUNTS SHOWN IN ITS BOOKS OF ACCOUNT AS OUTSTANDING AND TO THIS EFFECT, THE ASSESSEE HAS FURNISHED AN AFFIDAVIT TO VOUCH ITS BONA FIDE CLAIM , I AM OF THE VIEW THAT THERE WAS NO REMISSION OR CESSATION OF A LIABILITY, WITHOUT ASSE SSEE WRITING OFF IT IN ITS BOOKS OF ACCOUNT. THUS, THE PROVISIONS OF S. 41(1) R W S. 28(IV) OF THE ACT HAVE NO APPLICATION. 7.1. I HAVE, WITH DUE RESPECTS, PERUSED THE RULING OF THE HONBLE APEX COURT AS RELIED ON BY THE AO TO SUPPORT HER STAND. HOWEVER, THE FACT BEFORE THE HONBLE COURT WAS THAT THE BUSINESS EXPENDITURE WHICH HAD BEEN AL LOWED IN THE PRECEDING ASSESSMENT YEAR GOT REIMBURSED TO THE ASSESSEE AND, THUS, THE HONBLE COURT WAS OF THE VIEW THAT THE PROVISIONS OF S. 41(1) OF THE ACT WERE APPLICABLE. HOWEVER, IN THE CASE ON HAND, NEITHER THERE WAS ANY ALLOWANCE OF SUCH EX PENDITURE IN THE PRECEDING YEARS NOR WAS THERE ANY BENEFIT ACCRUED TO THE ASSESSEE B Y WAY OF UNILATERAL REMITTANCE AND, AS SUCH, WE ARE OF THE VIEW THAT THE RULING OF THE HONBLE COURT (SUPRA) CITED BY THE AO, CANNOT COME TO HER RESCUE. FURTHER, IN THE CASE RE PORTED IN 111 TAXMAN 446, THE HONBLE JURISDICTIONAL HIGH COURT HAD HELD THAT TH E WAIVER OF INTEREST BY BANK WAS CESSATION OF LIABILITY AND, THEREFORE, UPHELD THE A DDITION U/S 41(1) R W S. 28 (IV) OF THE ACT. HOWEVER, IN THE PRESENT CASE, THERE WAS NO SUCH WAI VER AND, AS SUCH, THE RULING OF THE JURISDICTIONAL HIGH COURT CITED, IN OUR VIEW, HAS N O APPLICATION TO THE INSTANT CASE. 8. TAKING INTO ACCOUNT THE FACTS AND CIRCUMSTANCES OF THE ISSUE AS DISCUSSED ELABORATELY IN THE FORE-GOING PARAGRAPHS, I AM OF T HE VIEW THAT THE PROVISIONS OF S. 41(1) R W S. 28(IV) HAVE NO APPLICATION TO THE ISSUE UNDE R DISPUTE, SINCE AO CANNOT TAKE ITA.1702/BANG/2016 PAGE - 7 UNILATERAL VIEW THAT THE LIABILITY HAD CEASED TO EX IST. IT IS ORDERED ACCORDINGLY. IN SUBSTANCE, THE ASSESSEES APPEAL IS ALLOWED. 9. IN THE RESULT , THE ASSESSEES APPEAL IS ALLOWED . ORDER PRONOUNCED IN THE OPEN COURT ON 7 TH DAY OF DECEMBER, 2016. SD/- (GEORGE GEORGE K) JUDICIAL MEMBER MCN* COPY TO: 1. THE ASSESSEE 2. THE ASSESSING OFFICER 3. THE COMMISSIONER OF INCOME TAX 4. THE COMMISSIONER OF INCOME TAX (A) 5. DR 6. GF, ITAT, BANGALORE BY ORDER ASSISTANT REGISTRAR