DCIT, New Delhi V. M/s. AESA Air Engineering (P) Ltd, New Delhi

ITA 4313/DEL/2009

• Counselvise Citation: [2010] 119 COUNSELVISE.COM (IT) 5701 (ITAT-DELHI)
• Duration Of Justice: 4 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-03-2010
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 25-02-2010
• Assessment Year: 2006-2007
• Appeal Filed On: 10-11-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: A K MONGA SENIOR
• Assessee Lawyers: RATTAN ANMOL SINGH
• Keywords: Capital asset; Gift

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH A : NEW DELHI) SHRI R.P. TOLANI, JUDICIAL MEMBER AND SHRI A.K. GARODIA, ACCOUNTANT MEMBE ITA NO.4313/DEL./2009 (ASSESSMENT YEAR : 2006-07) DCIT, CIRCLE 4 (1), VS. M/S. AESA AIR ENGINEERING P. LTD., NEW DELHI. (FORMERLY LTG AIR ENGINEERING P. LTD.), 2 ND FLOOR, 357 FIE, INDUSTRIAL ESTATE, PATPARGANJ, NEW DELHI 110 092. (PAN : AAACL0035F) (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI RATTAN ANMOL SINGH, CA REVENUE BY : SHRI A.K. MONGA, SENIOR DR ORDER PER R.P. TOLANI, JUDICIAL MEMBER : THIS IS AN APPEAL FILED BY THE REVENUE AGAINST THE ORDER OF THE CIT (APPEALS) FOR THE ASSESSMENT YEAR 2006-07. FOLLOWI NG EFFECTIVE GROUNDS ARE RAISED :- 1. THE ORDER OF THE LEARNED CIT (APPEALS) IS ERRON EOUS & CONTRARY TO FACTS & LAW. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LEARNED CIT (APPEALS) HAS ERRED IN DELETIN G THE ADDITION OFRS.21,06,328/- MADE BY THE A.O. UNDER SE CTION 41(1)(A) OF THE INCOME TAX ACT. ITA NO.4313/DEL./2009 2 2.1 LD. CIT (A) HAS IGNORED THE FACTS THAT THE ASSE SSEE FULFILLS THE CONDITIONS MENTIONED IN SECTION 40(1)(A) OF THE INCOME TAX ACT. 2. BRIEF FACTS ARE THAT DURING THE YEAR IN QUESTION , THE ASSESSEE WAS PROVIDED TRADING GOODS FREE OF COST WORTH EURO 38,4 85.80 (EQUIVALENT TO RS.21,06,328) BY THE HOLDING COMPANY, AESA AIR ENGI NEERING SA, FRANCE WHICH WAS CREDITED BY THE ASSESSEE TO CAPITAL RESER VE ACCOUNT AND THE CORRESPONDING DEBIT WAS MADE TO PURCHASE ACCOUNT. IN THE ANNUAL ACCOUNTS OF THE ASSESSEE, FOLLOWING NOTE WAS APPENDED :- THE COMPANY, DURING THE YEAR, PROCURED TRADING GOO DS VALUING RS.21,06,328 FROM ITS HOLDING COMPANY IN CONNECTION WITH ITS CONTRACT ACTIVITIES. THE HOLDING COMPANY IN ORDER TO IMPROVE THE FINANCIAL RESOURCES OF THE COMPANY, HAVE PROVID ED THE SAID TRADING GOODS ON FREE OF COST BASIS. ACCORDINGLY, THE MANAGEMENT HAS CONSIDERED IT APPROPRIATE TO RECOGNI ZE THE SAID EXPENDITURE IN THE BOOKS OF ACCOUNTS BY A CORRESPON DING CREDIT TO CAPITAL RESERVE ACCOUNT. A.O. WAS HOWEVER OF THE VIEW THAT THE ABOVE ACCOUNT ING ENTRY OF FREE OF COST GOODS TO BE A TRADING LIABILITY TOWARDS THE HOLDING COMPANY AND FURTHER HELD THAT THE ASSESSEES LIABILITY OF THE PAYMENT OF THE SE GOODS HAS CEASED AND WAS ADDED TO ITS INCOME INVOKING PROVISIONS OF SECT ION 41 (1)(A). 3. AGGRIEVED ASSESSEE PREFERRED FIRST APPEAL. CIT ( A) HELD THAT THERE WAS NEITHER A TRADING LIABILITY FOR THE FREE OF COST GO ODS PROVIDED NOR THERE WAS ITA NO.4313/DEL./2009 3 ANY CESSATION OF LIABILITY AS CONTEMPLATED BY SECTI ON 41 (1)(A) AND DELETED THE ADDITION BY FOLLOWING OBSERVATIONS : 5.2 I HAVE CONSIDERED THE SUBMISSIONS MADE ON BEHA LF OF THE APPELLANT, THE FINDINGS OF THE ASSESSING OFFICER AN D THE FACTS ON RECORD. THERE IS NO DISPUTE THAT THE ASSESSEE HAS P ROCURED TRADING GOODS VALUING RS.21,06,328/- FROM ITS HOLDI NG COMPANY FREE OF COST AND THIS EXPENDITURE IS RECOGN IZED IN THE BOOKS BY A CORRESPONDING CREDIT ENTRY TO CAPITAL RE SERVE ACCOUNT. THE QUESTION TO BE DECIDED HERE IS AS TO W HETHER (A) THE ACCOUNTING TREATMENT GIVEN BY THE ASSESSEE IS A CCEPTABLE OR NOT AND (B) IN ACCORDANCE WITH THE ACCOUNTING PRINC IPLES OR NOT. IT IS ALSO TO BE EXAMINED AS TO WHETHER THE PROVISI ONS OF SECTION 41(1) COULD BE INVOKED IN THE PRESENT CASE OR NOT. THE BASIC COMPONENTS OF THE SITUATION WHERE THE PROVISIONS OF SECTION 41 (1) ARE ATTRACTED, ARE AS FOLLOWS:- I) THERE MUST BE A TRADING LIABILITY. II) THERE SHOULD BE REMISSION OF SUCH TRADING LIA BILITY. 5.3 IT IS OBSERVED THAT IN THE PRESENT CASE THE GOO DS WERE PROVIDED TO THE ASSESSEE FREE OF COST BY ITS HOLDIN G COMPANY. IN OTHER WORDS, IT CAN ALSO BE SAID THAT THERE WAS A G IFT BY THE HOLDING COMPANY TO THE APPELLANT BY WAY OF TRADING GOODS WHICH IS AN ADMITTED FACT. HOWEVER, THIS DOES NOT IMPLY THAT THERE WAS A TRADING LIABILITY IN EXISTENCE. WHEN TH ERE IS NO TRADING LIABILITY, THE QUESTION OF REMISSION OF LIABILITY DOES NOT ARISE. UNDER THE CIRCUMSTANCES, IT IS FAIR TO C ONCLUDE THAT PROVISIONS OF SECTION 41 (1) ARE NOT ATTRACTED IN T HE INSTANT CASE. 5.4 I HAVE ALSO GONE THROUGH THE CASE LAWS, CIT VS . GROZ- BECKERT SABOO LTD.(1979)116 ITR 125 (SC) & CIT VS. KAIRA DISTRICT CO-OPERATIVE MILK PRODUCERS' UNION LTD. (2 001) 247 ITR 314(GUJ) RELIED UPON BY THE APPELLANT DURING TH E APPELLATE PROCEEDINGS BEFORE THE UNDERSIGNED. AFTER HAVING CO NSIDERED THE FACTS OF THE CASE OF THE APPELLANT, I AM OF THE VIEW THAT RATIO DECIDENDI OF ABOVE CITED JUDGMENTS OF HON'BLE SUPRE ME COURT & GUJARAT HIGH COURT IS APPLICABLE TO IDENTICAL FAC TS OF THE CASE OF THE APPELLANT. ITA NO.4313/DEL./2009 4 5.5 UNDER THE CIRCUMSTANCES STATED ABOVE AND IN VIE W OF THE DISCUSSIONS MADE ABOVE, I AM OF THE CONSIDERED VIEW THAT THE PROVISIONS OF SECTION 41 (1) ARE NOT APPLICABLE TO THE INSTANT CASE. ACCORDINGLY, IT IS HELD THAT THE ASSESSING OF FICER WAS NOT JUSTIFIED IN MAKING THE ADDITION OF RS.21,06,328/- ON ACCOUNT OF REMISSION OF LIABILITY UNDER SECTION 41(1) OF THE A CT AND THE ADDITION MADE BY THE ASSESSING OFFICER IS NOT SUSTA INABLE IN LAW. THEREFORE, IT IS DELETED. AS A RESULT, GROUND NO: 2 IS ALLOWED. 4. AGGRIEVED, REVENUE IS IN APPEAL BEFORE THE ITAT. LEARNED DR RELIED ON THE ORDER OF A.O. LEARNED COUNSEL FOR THE ASSES SEE EXPLAINED THE FACTS AND CONTENDED THAT WHAT WAS RECEIVED BY THE ASSESSE E WAS A GIFT OF TRADING GOODS, WHICH CARRIED NO LIABILITY ON THE ASSESSEE. THEREFORE, THE QUESTION OF ASSESSEE INCURRING A TRADING LIABILITY QUA THIS GIF T DOES NOT ARISE. FOR ACCOUNTING PURPOSES ONLY, ASSESSEE AFFECTED THE ABO VE ENTRIES WHICH CANNOT CONVERT A GIFT INTO TRADING LIABILITY. SINCE THERE WAS NO LIABILITY MUCH LESS A TRADING LIABILITY THE ADDITION MADE BY A.O. INVOLVI NG SECTION 41(1)(A) HAS BEEN RIGHTLY REJECTED BY CIT (A). RELIANCE WAS PLA CED ON HON'BLE SUPREME COURT JUDGMENT IN THE CASE OF GROZ-BECKERT SABOO LT D. VS. CIT PATIALA, 86 ITR 256, FOR THE FOLLOWING PROPOSITION :- THE ASSESSEE RECEIVED CERTAIN QUANTITY OF RAW MATE RIAL AND SEMI-FINISHED GOODS FREE OF COST ALONG WITH THE MAC HINERY. THESE WERE TREATED AS STOCK, BY TAKING THEIR VALUE AS RS.74,000. ON RECEIPT THESE WERE CAPITAL ASSET. ON CONVERSION INTO STOCK THE BUSINESS PROFITS ON THEIR SALE COULD BE DETERMI NED BY DEDUCTING THE MARKET VALUE AT THE DATE OF CONVERSIO N INTO STOCK- IN-TRADE. THE ORIGINAL COST TO THE ASSESSEE WAS NO T RELEVANT. ITA NO.4313/DEL./2009 5 5. WE HAVE HEARD THE RIVAL CONTENTIONS, PERUSED THE MATERIAL ON RECORD AND GONE THROUGH THE JUDGMENT RELIEF UPON. WE FIND MERIT IN THE ARGUMENT OF LEARNED COUNSEL THAT SECTION 41(1)(A) HAS NOT BE EN INVOKED PROPERLY. IN THIS CASE, ASSESSEE DID NOT INCUR ANY TRADING LIABI LITY INASMUCH AS THE GIFT OF GOODS WAS FREE OF COST. FOR ACCOUNTING PURPOSES, A SSESSEE MADE A CREDIT ENTRY IN CAPITAL RESERVE ACCOUNT AND DEBITED IT TO PURCHASE ACCOUNT. THESE ENTRIES BY ITSELF CANNOT CONVERT THE GIFT INTO A TR ADING LIABILITY. SINCE THERE IS NEITHER A TRADING LIABILITY NOR THE CESSATION THERE OF, WE UPHOLD THE ORDER OF CIT (A) AND GROUNDS OF APPEAL ARE REJECTED. 6. IN THE RESULT, THE APPEAL OF THE REVENUE IS DISM ISSED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 12 TH DAY OF MARCH, 2010. SD/- SD/- (A.K. GARODIA) (R.P. TOLANI) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED THE 12 TH DAY OF MARCH, 2010 TS COPY FORWARDED TO: 1.APPELLANT 2.RESPONDENT 3.CIT 4.CIT (A)-VII, NEW DELHI. 5.CIT(ITAT), NEW DELHI. AR, ITAT NEW DELHI.