M/s. Kaps Advertising, New Delhi V. ITO, New Delhi

ITA 518/DEL/2010

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 3808 (ITAT-DELHI)
• Duration Of Justice: 4 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-06-2010
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: D
• Next Hearing Date: 01-06-2010
• Assessment Year: 2004-2005
• Appeal Filed On: 04-02-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: BK GUPTA
• Keywords: Capital asset; Period of limitation; Time period of passing order

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH D DELHI BEFORE SHRI A.D. JAIN AND SHRI K.G. BANSAL ITA NO. 518(DEL)/2010 ASSESSMENT YEAR: 2004-05 M/S KAPS ADVERTISING, INCOME-TAX OFFICER, 30, COMMUNITY CENTRE, VS. WARD 32(1), NEW DELHI. EAST OF KAILASH, NEW DELHI-65. (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI GAUTAM JAIN, C.A RESPONDENT BY: SH RI B.K. GUPTA, SR. DR ORDER PER K.G. BANSAL : AM THIS APPEAL OF THE ASSESSEE EMANATES FROM THE ORDER OF THE CIT(APPEALS)-XXVI, NEW DELHI, PASSED ON 07.06.2 008 IN APPEAL NO. 359/06-07, AND IT PERTAINS TO ASSESSMENT YEAR 2004-05. THE ASSESSEE HAD TAKEN UP 7 GROUNDS IN THE APPEAL. GROUND NOS. 3 TO 7 WERE NOT PRESSED BEFORE US BY THE LD. COUNSEL FOR THE ASSESSEE. THEREFORE, THESE GROUNDS ARE DISMISSED AS NOT PRESSED. THE LD . COUNSEL ALSO EXPLAINED THE IMPORT OF GROUND NOS. 1 AND 2 THAT THE AUTH ORITIES BELOW HAD BROUGHT TO TAX AN AMOUNT OF RS. 33,89,860/-, IN RESPE CT OF TWO CREDITORS, WHICH REMAINED OUTSTANDING AT THE END OF THIS YEAR AL SO. THESE AMOUNTS PERTAINED TO M/S LASER GRAPHICS (P) LTD. AND M/S LASER GRAPHICS FROM ITA NO. 518(DEL)/2010 2 ASSESSMENT YEAR 2000-01 IN RESPECT OF DESIGNING AND PRINTING. THESE AMOUNTS WERE NOT WRITTEN OFF IN THIS YEAR AS WELL. THEREFORE, HIS CONTENTION IS THAT THE LD. CIT(APPEALS) ERRED IN BRINGING THIS AMOUNT TO TAX IN THIS YEAR. 2. THE FACTS, AS MENTIONED IN THE ASSESSMENT ORDER, ARE THAT THE ASSESSEE HAD SHOWN LIABILITIES OF RS. 33,89,860 /- AND RS. 1,16,378/- IN THE NAMES OF M/S LASER GRAPHICS (P) LTD. AND M/S LA SER GRAPHICS RESPECTIVELY. THE ASSESSEE WAS REQUIRED TO FU RNISH THE ADDRESSES OF THESE PARTIES AND TO FILE COPIES OF CONFIRMED ACCOUNTS. THE ASSESSEE SUBMITTED THE POSTAL ADDRESS OF THE PARTIES, BUT DID NOT FILE ANY CONFIRMATION LETTER. THE AO GOT ENQUIRIES MAD E AT THE GIVEN ADDRESSES, WHO REPORTED THAT THESE PARTIES LEFT THE PR EMISES IN THE YEAR 2001, AND THE PRESENT WHEREABOUTS OF THE CREDITORS COULD NOT BE GATHERED. ON THE BASIS OF THESE FACTS, THE AO CAME TO THE CONCLUS ION THAT THESE PARTIES NO LONGER EXISTED AND THERE HAS BEEN NO CORRESPOND ENCE BETWEEN THE ASSESSEE AND THEM SINCE THE YEAR 2001. SINC E MORE THAN THREE YEARS ELAPSED SINCE THE LIABILITY AROSE, HE FURTHE R CAME TO THE CONCLUSION THAT THE LIABILITY CEASED TO EXIST. RELYING ON THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF CIT VS. T.V.SUND ARAM IYENGAR & SONS ITA NO. 518(DEL)/2010 3 LTD., (1996) 222 ITR 344, IT WAS HELD THAT THE CHARACTER OF THE RECEIPT CHANGES AND ON COMMON SENSE VIEW, IT BECOMES T HE INCOME OF THE ASSESSEE. THEREFORE, THESE AMOUNTS WERE TAKEN AS THE INCOME U/S 41(1). HOWEVER, FROM THE COMPUTATION OF INCOME, IT IS SEEN THAT ONLY A SUM OF RS. 33,89,860/- WAS ADDED TO THE TOTAL INCOM E OF THE ASSESSEE. 2.1 AGGRIEVED BY THIS ORDER, THE ASSESSEE FILE D APPEAL BEFORE THE CIT(APPEALS). HE CONCURRED WITH THE VIEW OF TH E AO THAT SINCE MORE THAN THREE YEARS HAVE ELAPSED AND PRESENT WHE REABOUTS OF THE CREDITORS ARE NOT KNOWN, THE AMOUNT WAS INCLUDIBLE IN THE TOTAL INCOME OF THE ASSESSEE. HE ALSO RECTIFIED THE ERROR COMMIT TED BY THE A.O IN NOT ADDING THE SUM OF RS. 1,16,378/-, IN RESPECT OF M/S LASER GRAPHICS, TO THE TOTAL INCOME OF THE ASSESSEE. 3. BEFORE US, THE LD. COUNSEL EXPLAINED THE FACTS OF THE CASE. THERE IS NO DISPUTE THAT THE CREDITS AROSE IN ASSE SSMENT YEAR 2000-01, THE PRESENT WHEREABOUTS OF THE CREDITORS ARE NOT KN OWN, AND NO CORRESPONDENCE HAS TAKEN PLACE BETWEEN THE ASSESSEE AND THE CREDITORS SINCE THE LIABILITY AROSE. HOWEVER, IT WAS STRESSED THAT THE AMOUNTS HAVE NOT BEEN CREDITED TO PROFIT AND L OSS ACCOUNT. IN ABSENCE ITA NO. 518(DEL)/2010 4 THEREOF, THE LIABILITY CONTINUED TO EXIST A ND, THEREFORE, THE AMOUNTS COULD NOT HAVE BEEN BROUGHT TO TAX EITHER U/S 41(1) OR SECTION 28(IV). IN THIS CONNECTION, RELIANCE WAS PLACED ON T HE DECISION OF HONBLE SUPREME COURT IN THE CASE OF CIT VS. SUGAULI SU GAR WORKS (P) LTD. (1999) 236 ITR 518. 3.1 IN REPLY, THE LD. DR SUBMITTED THAT THE LIABILITIES HAVE BECOME TIME BARRED AND THE PRESENT WHEREABOUTS OF THE CREDITORS ARE NOT KNOWN EVEN TO THE ASSESSEE. IN SUCH A CIRCUMSTANCE IT WILL BE FAIR TO CONCLUDE THAT THE LIABILITIES NO LONGER EXIST. IN SUCH A CIRCUMSTANCE, IT WILL BE FUTILE TO CONTINUE TO CARRY ON THE LIABILITIES IN THE BOOKS OF ACCOUNT. IN ORDER TO SUPPORT HIS CASE, RELIANCE WAS PL ACED ON THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF JAY ENG INEERING WORKS VS. CIT (2009) 311 ITR 299. 4. WE HAVE CONSIDERED THE FACTS OF THE CASE AND THE SUBMISSIONS MADE BEFORE US. WE HAVE ALSO CONSIDERED THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF SOLID CONTAINER S LTD. VS. DEPUTY CIT & ANOTHER (2009) 308 ITR 417. ITA NO. 518(DEL)/2010 5 4.1 BRIEFLY SPEAKING, THE FACTS ARE THAT L IABILITIES AROSE IN ASSESSMENT YEAR 2000-01 IN RESPECT OF PRINTIN G JOB WORKS. THESE LIABILITIES HAVE BEEN CARRIED FORWARD FROM YEAR TO YEAR AND FIND PLACE IN THE BALANCE-SHEET OF THIS YEAR ALSO. LOCAL ENQU IRIES MADE BY THE AO REVEALED THAT THESE PERSONS SHIFTED FROM T HEIR KNOWN ADDRESSES IN THE YEAR 2001 AND THE PRESENT WHEREABOUTS ARE NOT KNOWN EVEN TO THE ASSESSEE. THERE IS NO CORRESPONDENCE BETWEEN TH E ASSESSEE AND THEM SINCE THE YEAR 2001. 4.2 COMING TO THE CASE OF TVS IYENGAR & SONS L TD. (SUPRA), THE FACTS ARE THAT ASSESSEE HAD RECEIVED CERTAIN ADVANCES IN THE COURSE OF BUSINESS, WHICH WERE INITIALLY TREATED AS CAPITAL IN N ATURE. HOWEVER, BY EFFLUX OF TIME, THESE AMOUNTS WERE WRITTEN OFF TO THE CRE DIT OF PROFIT AND LOSS ACCOUNT AS NO BODY CAME TO CLAIM THE AMOUNT. TH US, THE ASSESSEE TREATED THE AMOUNTS AS HIS OWN MONEY. THE HON BLE COURT CAME TO THE CONCLUSION THAT THE COMMON SENSE APPROACH WIL L SHOW THAT THE CHARACTER OF THE AMOUNTS CHANGE AND THE ASSE SSEE HAS BECOME RICHER ACCORDINGLY. THEREFORE, THE MONEY SHOULD BE T AKEN AS INCOME OF THE ITA NO. 518(DEL)/2010 6 ASSESSEE AS IT HAS BEEN CREDITED TO PROFIT AND LOSS ACCOUNT. THE RELEVANT OBSERVATIONS FROM PAGE 353 ARE REPRODUCED BELOW :- IN THE PRESENT CASE, THE MONEY WAS RECEIVED BY THE ASSESSEE IN THE COURSE OF CARRYING ON HIS BUS INESS. ALTHOUGH IT WAS TREATED AS DEPOSIT AND WAS OF CAPITAL NATURE AT THE POINT OF TIME IT WAS RECEIVED, BY EFFLUX OF T IME THE MONEY HAS BECOME THE ASSESSEES OWN MONEY. WHAT RE MAINS AFTER ADJUSTMENT OF THE DEPOSITS HAS NOT BEEN CLAIMED BY THE CUSTOMERS. THE CLAIMS OF THE CUSTOMERS HAVE BECOM E BARRED BY LIMITATION. THE ASSESSEE ITSELF HAS TREAT ED THE MONEY AS ITS OWN MONEY AND TAKEN THE AMOUNT TO ITS PROFITS AND LOSS ACCOUNT. THERE IS NO EXPLANATION FROM THE ASSESSEE WHY THE SURPLUS MONEY WAS TAKEN TO ITS PROFIT AND LOSS ACCOUNT EVEN IF IT WAS SOMEBODY ELSES MONEY . IN FACT, AS ATKINSON J. POINTED OUT THAT WHAT THE A SSESSEE DID WAS THE COMMONSENSE WAY OF DEALING WITH THE AMOUNTS . 4.3 THE FACTS OF THIS CASE ARE DISTINGUISHAB LE FROM THE FACTS OF THAT CASE, IN AS MUCH AS THE ASSESSEE HAS NOT T REATED THE AMOUNT TO BE HIS OWN MONEY AS THE LIABILITIES HAVE BEEN SHOWN IN THE BALANCE-SHEET. NO DOUBT, THE AMOUNTS HAVE BECOME BARRED BY LIMITAT ION AND THE CREDITORS HAVE NO LEGAL REMEDY TO RECOVER THESE AMOUNTS, BUT THE FACT IS THAT THE ASSESSEE CONTINUES TO SHOW THESE AMOUNTS AS LIA BILITY IN HIS BOOKS OF ACCOUNT. 4.4 IN THE CASE OF SOLID CONTAINERS LTD., THE FACTS WERE SIMILAR TO THE FACTS IN THE CASE OF TVS IYENGAR & SONS LTD. THE HONBLE COURT ITA NO. 518(DEL)/2010 7 BROUGHT THE AMOUNTS TO TAX BY FOLLOWING THE AFORESAID DECISION OF HONBLE SUPREME COURT. THE FACTS OF THAT CAS E ARE ALSO DISTINGUISHABLE. THAT ASSESSEE HAD TAKEN A LOAN OF RS. 6,86,071/ - FOR THE BUSINESS PURPOSE. AS PER CONSENT TERMS, ARRIVED IN A SUIT, THE ASSESSEE CREDITED THIS AMOUNT TO PROFIT AND LOSS ACCOUN T. THE DECISION OF HONBLE COURT IS THAT SINCE THE LOAN WAS TAKEN FOR TRADING ACTIVITIES, ITS CHARACTER CHANGED WHEN THE AMOUNT WAS CREDITED TO PROFIT AND LOSS ACCOUNT. IN THIS CONTEXT THE FOLLOWING OBSERVAT IONS WERE MADE BY THE HONBLE COURT:- THE PRESENT APPELLANT CAN HARDLY DERIVE ANY ADVANTAGE FROM THE CASE OF MAHINDRA AND MAHINDRA LTD. VS. CIT [2003] 261 ITR 501 (BOM). AS IN THAT CASE, A CLEAR FINDING WAS RECORDED THAT THE ASSESSEE CONTINUED TO P AY INTEREST AT THE RATE OF 6% FOR A PERIOD OF 10 YEARS AND THE AGREEMENT FOR PURCHASE OF TOOLINGS WAS ENTERED INTO MUC H PRIOR TO THE APPROVAL OF LOAN ARRANGEMENT GIVEN BY THE RESE RVE BANK OF INDIA. THEREFORE, THE LOAN AGREEMENT, IN ITS ENTIRETY, WAS NOT OBLITERATED BY SUCH WAIVER. SECONDLY, THE PURCH ASE CONSIDERATION RELATED TO CAPITAL ASSETS. THE TO OLINGS WERE IN THE NATURE OF DIES AND THE ASSESSEE WAS A MA NUFACTURER OF HEAVY VEHICLES. THE IMPORT WAS THAT OF PLANT AND MACHINERY AND THE WAIVER COULD NOT CONSTITUTE BUSINESS. THE FACTS OF THE PRESENT CASE ARE ENTIRELY DIFFERENT INASMU CH AS IT WAS A LOAN TAKEN FOR TRADING ACTIVITY AND ULTIMATEL Y, UPON WAIVER THE AMOUNT WAS RETAINED IN BUSINESS BY THE ASSESSEE. THUS, THE PRINCIPLE STATED BY THE SUPREME COURT IN THE CASE OF T.S. SUNDARAM IYENGAR AND SONS LTD.[1996] 222 ITR 344 WOULD BE SQUARELY APPLICABLE TO THE FACTS OF THE PRESENT CASE. THE AMOUNT WHICH INITIALLY DID NOT FALL WITHIN THE ITA NO. 518(DEL)/2010 8 SCOPE OF THE PROVISIONS RENDERING IT LIABLE TO TAX SUBSEQUENTLY HAD BECOME THE ASSESSEES INCOME B EING PART OF THE TRADING OF THE ASSESSEE. SIMILAR VIEW WAS ALSO TAKEN BY A BENCH OF THE MADRAS HIGH COURT IN THE CAS E OF CIT VS. ARIES ADVERTISING P. LTD. [2002] 255 ITR 510. T HE COURT TOOK THE VIEW THAT THE ASSESSEE BECAUSE OF TRAD ING OPERATION BECAME RICHER BY THE AMOUNT WHICH HAD BEEN TRANS FERRED AND/OR RETAINED IN THE PROFIT AND LOSS ACCOUNT O F THE ASSESSEE. 4.5 IN THE CASE OF JAY ENGINEERING WORKS LTD., T HE FACTS ARE THAT THE ASSESSEE WROTE OFF A SUM OF RS. 1,16,240/- IN R ESPECT OF UNCLAIMED WAGES AND SUNDRY CREDIT BALANCE. BY RELYING ON THE DECISION IN THE CASE OF SUGAULI SUGAR WORKS (P) LTD., IT WAS CONTENDED THAT THE LIABILITY DID NOT CEASE TO EXIST BY MERELY PASSING ENTRIES IN THE BOOKS OF ACCOUNT. IN THIS CONNECTION, THE ATTENTION OF THE HONBLE COU RT WAS DRAWN TOWARDS THE AMENDMENT MADE IN SECTION 41, BY WHICH AN EXPL ANATION WAS INSERTED WITH EFFECT FROM 1.4.1997, TO THE EFFECT THAT UNILATERAL ACT OF WRITING OFF THE AMOUNT TO THE CREDIT OF PROFIT AND LOSS ACC OUNT WOULD BE DEEMED TO BE THE INCOME. HIS CASE WAS THAT PRIOR TO 1 .4.1997, A UNILATERAL ACT OF WRITING OFF OF A LIABILITY COULD NOT BE TREATED AS INCOME. HOWEVER, THE HONBLE COURT DID NOT AGREE WITH THE CONTENTION OF THE ASSESSEE AND MENTIONED THAT THE POSITION OF LAW STANDS SETTL ED BY THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF TVS IYENGAR & SONS LTD. THE FACTS OF THAT CASE ARE ALSO DISTINGUISHABLE IN AS MUCH AS THE ASSESSEE ITA NO. 518(DEL)/2010 9 HAD WRITTEN OFF THE AMOUNT TO THE CREDIT OF PRO FIT AND LOSS ACCOUNT AND THUS STARTED TREATING THE AMOUNT AS HIS OWN MO NEY, AS IN THE CASE OF TVS IYENGAR & SONS LTD. HOWEVER, IN THE CASE A T HAND, THE AMOUNT HAS NOT BEEN WRITTEN OFF TO THE CREDIT OF PROFIT AND LOSS ACCOUNT. 4.6 IN THE CASE OF SUGAULI SUGAR WORKS (P) LTD., THE HONBLE SUPREME COURT CAME TO THE CONCLUSION THAT AFTER EXPIRY O F LIMITATION PERIOD, A DEBT DOES NOT STAND EXTINGUISHED, BUT IT ONLY BARS THE CREDITOR FROM TAKING RECOURSE TO A LEGAL REMEDY FOR ENFORCEME NT OF THE DEBT. THEREFORE, EVEN WHERE AN ENTRY IS MADE IN THE ACCOUNTS O F THE DEBTORS UNILATERALLY WITHOUT ANY ACT ON THE PART OF THE CREDITOR, IT WILL NOT LEAD TO A CONCLUSION THAT THE LIABILITY HAS CEASED TO E XIST. SUCH AN ACT WILL ALSO NOT CONFER ANY BENEFITS ON THE DEBTOR AS CONTEM PLATED IN SECTION 41(1). FOR THE SAKE OF READY REFERENCE, THE RELEVANT PORTION OF THE JUDGMENT IS REPRODUCED BELOW:- THE PRINCIPLE THAT EXPIRY OF THE PERIOD OF LIM ITATION PRESCRIBED UNDER THE LIMITATION ACT COULD NOT EXTINGUISH THE DEBT BUT IT WOULD ONLY PREVENT THE CREDITO R FROM ENFORCING THE DEBT, HAS BEEN WELL SETTLED. IT IS ENOUGH TO REFER TO THE DECISION OF THIS COURT IN BOMBAY DYE ING AND MANUFACTURING CO. LTD. VS. STATE OF BOMBAY, AIR 1958 SC 328; [1958] SCR 1122. IF THAT PRINCIPLE IS APP LIED, IT IS CLEAR THAT MERE ENTRY IN THE BOOKS OF ACCOUNT OF THE DEBTOR MADE UNILATERALLY WITHOUT ANY ACT ON THE PART OF THE CREDITOR WILL NOT ENABLE THE DEBTOR TO SAY THAT THE LIABILIT Y HAS COME TO AN ITA NO. 518(DEL)/2010 10 END. APART FROM THAT THAT WILL NOT BY ITSELF CONFER ANY BENEFIT ON THE DEBTOR AS CONTEMPLATED BY THE S ECTION. 4.7 HAVING CONSIDERED ALL THESE CASES, WE ARE OF THE VIEW THAT THE DECISION IN THE CASE OF SUGAULI SUGAR WORKS (SUPR A) IS APPLICABLE TO THE FACTS OF THE CASE MORE SO WHEN THE LIABILIT Y HAS NOT BEEN WRITTEN OFF IN THE ACCOUNTS OF THE ASSESSEE. IN SUCH A CIR CUMSTANCE, NON-AVAILABILITY OF THE CREDITOR AND LACK OF ANY CORRESPONDEN CE WITH THEM DOES NOT OBLITERATE THE DEBT, AS THE ASSESSEE CONTIN UES TO SHOW THE SAME IN ITS BOOKS OF ACCOUNT. THUS, THE PROVISION CONTAINED IN SECTION 41(1) IS NOT APPLICABLE. COMING TO THE RATIO OF OTHER THRE E DECISIONS, IT IS AN UNDISPUTED FACT THAT THE ASSESSEE HAS NOT WRIT TEN OFF THE AMOUNT TO THE CREDIT OF PROFIT AND LOSS ACCOUNT. THUS, HE HAS NOT TREATED THE MONEY AS HIS OWN MONEY. ACCORDINGLY, HE HAS NOT BECOME RI CHER BY THE IMPUGNED AMOUNT AS HE CONTINUES TO HOLD OUT THAT HE I S INDEBTED TO THE AFORESAID TWO CREDITORS. THEREFORE, THE PROVISION CONTAINED IN SECTION 28(IV) IS ALSO NOT APPLICABLE. THE ONLY GRUDGE OF THE LD. DR IS REGARDING THE LENGTH OF PERIOD FOR WHICH THE ASSESSEE WILL CONTINUE TO CARRY ON THE DEBTS IN THE BOOKS OF ACCOUNT IN ABSENCE OF ANY DEMAND FROM THE CREDITORS AND ALSO THEIR NON-AVAILABILITY. WE ARE OF THE VIEW TH AT THIS QUESTION NEED NOT BE ANSWERED BY US AS THE STATUTORY PROVISION AN D THE CASE LAW THEREUNDER ITA NO. 518(DEL)/2010 11 DO NOT REFER ANY LIMIT AFTER WHICH IT CAN B E DEEMED THAT THE ASSESSEE HAS BECOME RICHER BY THE AMOUNT OF LIABILITY SHOWN IN THE BOOKS. 5. IN THE RESULT, THE APPEAL IS PARTLY ALLOWED. THIS ORDER WAS PRONOUNCED IN THE OPEN COURT ON 1 1 TH OF JUNE, 2010. SD/- SD/- (A.D. JAIN) (K.G.BANSAL) JUDICIAL MEMBER ACCOUNTANT MEMBER DATE OF ORDER: 11TH JUNE, 2010. SP SATIA COPY OF THE ORDER FORWARDED TO:- 1. M/S KAPS ADVERTISING, NEW DELHI. 2. ITO, WARD 32(1), NEW DELHI. 3. CIT(A) 4. CIT 5. THE DR, ITAT, NEW DELHI. ASSISTANT REGISTRAR.