ITO 2(1)(1), MUMBAI V. ALPINE ELECTRICALS P. LTD, MUMBAI

ITA 5432/MUM/2009

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 8753 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 3 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-01-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Assessment Year: 2006-2007
• Appeal Filed On: 30-09-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SHRAVAN KUMAR
• Assessee Lawyers: H N MOTIWALLA
• Keywords: Capital asset; Business income; Depreciation; Capital receipt
• Section: 142(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH A MUMBAI BEFORE SHRI R.S. SYAL (AM) AND SMT ASHA VIJAYARAGHA VAN (JM) ITA NO.5432/MUM/2009 (ASSESSMENT YEAR-2006-07) THE ITO 2(1)(1), AAYAKAR BHAVAN, MUMBAI-400 020 VS. M/S. ALPINE ELECTRICALS PVT. LTD., 114, SIR VITHALDAS CHAMBERS, FORT, MUMBAI-400 023 PAN-AAACA3636R (APPELLANT) (RESPONDENT) APPELLANT BY: SHRI SHRAVAN KUMAR RESPONDENT BY: SHRI H.N. MOTIWALLA O R D E R PER ASHA VIJAYARAGHAVAN (JM) THIS APPEAL FILED BY THE REVENUE IS DIRECTED AGAINS T THE ORDER OF THE LD. CIT(A)- II MUMBAI DATED 29.7.2009 FOR THE A.Y.2 006-07. 2. THE ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF MANUFACTURING OF ELECTRIC LIGHT FITTINGS AND CHOKES. THE RETURN WAS PROCESSED U/S. `143(1) OF THE I.T. ACT. SUBSEQUENTLY THE CASE WAS SELECTED FOR S CRUTINY. A DETAILED QUESTIONAIRE ALONGWITH NOTICE U/S. 142(1) WAS ISSUE D ON 10.1.2008. 3. THE ASSESSING OFFICER HELD AS FOLLOWS: ON GOING THROUGH THE DETAILS OF SUNDRY CREDITORS, T HE ASSESSEE WAS ASKED TO FURNISH THE DETAILS AND JUSTI FICATION OF OUTSTANDING CREDITORS EXCEEDING THREE YEARS VIDE ITA NO. 5432/M/09 2 QUESTIONNAIRE DATED 18-07-2008. THE ASSESSEE FURNIS HED THE DETAILS VIDE LETTER DATED 13-08-2008 WHEREIN THE AS SESSEE HAS SHOWN THE AMOUNT OF RS.11,00,000/- PAYABLE TO M /S. SANJAY CONSTRUCTION BEYOND THREE YEARS. IN THEIR JU STIFICATION, THE ASSESSEE HAS SUBMITTED THE FOLLOWING: 'CREDITORS INCLUDE AMOUNT PAYABLE TO M/S. SANJAY CONSTRUCTION BEYOND THREE YEARS. THEY HAD CONSTRUCT ED FACTORY BUILDING AT DAMAN WHICH HAD STRUCTURAL DEFE CTS SUCH AS CRACKS IN THE PILLAR, BEAMS AND LEAKAGES RESULTI NG WHICH THEIR PART PAYMENT WAS WITHHELD. THE CONTRACTOR HAD CARRIED RECTIFICATION WORK IN THE PAST AT VARIOUS OCCASIONS WHICH IS TILL DATE NOT SATISFACTORY. HENCE THEIR PAYMENT IS NOT R ELEASED.' THE ASSESSEES EXPLANATION CANNOT BE ACCEPTED FOR THE FOLLOWING REASONS: (I) THE BUILDING CONSTRUCTED MORE THAN THREE YEARS BACK IS BEING USED BY THE ASSESSEE FOR THEIR BUSINESS ACTIV ITY, THOUGH THE SO CALLED STRUCTURAL DEFECTS WERE PRESENT IS VERY DIFFICULT T O ACCEPT. (II) THE ASSESSEE HAS INCLUDED THIS PLANT AND BUILD ING IN THEIR LIST OF ASSETS AND HAS CLAIMED DEPRECIATION OVER THE YEA RS, INCLUSIVE OF THE SO CALLED STRUCTURAL DEFECTS. (III) THERE HAS NOT BEEN ANY HINDRANCES IN THEIR BU SINESS ACTIVITY DUE TO THE STRUCTURAL DEFECTS, FOR WHICH THE PAYMEN T WAS WITHHELD. BASED ON THE JUSTIFICATION, IT IS CLEAR THAT THE AS SESSEE HAS UTILIZED THE ASSET IN ALL THE POSSIBLE MANNER BUT FAILED TO MAKE PAYMENTS FOR THE SAME AND THE PAYMENT IS OUTSTANDING FOR MORE THAN THREE YEARS, THEREBY INVOKING THE PROVISIONS OF SECTION 41(1) OF THE I.T . ACT, 1961. 4. THE AO FURTHER HELD AS FOLLOWS: THOUGH THE AMOUNT OF RS.11,00,000/- IS PAYABLE FOR ACQUIRING A CAPITAL ASSET, THE PROVISIONS OF SEC.41(1) IS SQUARELY APPL ICABLE, AS PER THE SUPREME COURT'S DECISION IN THE CASE OF CIT VS. T.V . SUNDARAM IYYENGAR & SONS LTD. (222 ITR 344) (SC). 5. THE AO FURTHER OBSERVED AS FOLLOWS: ITA NO. 5432/M/09 3 HENCE, IT CAN BE CONSTRUED THAT THIS SO CALLED LIAB ILITY, WHICH AFTER SO MANY YEARS HAS BECOME A TRADING LIABILITY CEASES TO BE A LIABILITY ANY MORE BY THE DIFFERENT REASONING GIVEN IN THE ORDER. AT THE OUTSET, ONE CAN SAY THAT THIS LIABILITY IS AN UNPROVED LIABILITY OR IN OTHER WORDS, NOT AN EXISTING LIABILITY AND HENCE THE PROVISIONS OF SECT ION 41(1) IS CLEARLY ATTRACTED. NOW ONCE THIS AMOUNT HAS BEEN ESTABLISHE D AS A NON-EXISTING LIABILITY AND HOW THIS LIABILITY HAS CHANGED ITS NA TURE AND AT PRESENT IS JUST A TRADING BENEFIT RECEIVED AND UTILIZED BY THE ASSESSEE FOR A PERIOD OF TIME, THE CESSATION OF SUCH TRADING LIABILITY THIS YEAR IS QUITE JUSTIFIED. RELIANCE IS PLACED IN THE CASE OF CIT VS. A.V.M. LT D. (1984) 146 ITR 355 (MAD) WHEREIN IT WAS HELD THAT ANY BALANCE UNCLAIME D DEPOSIT AFTER ADJUSTING AGAINST AMOUNT RECEIVABLE BY THE ASSESSEE , WAS TREATED AS CHARGEABLE RECEIPTS OF THE ASSESSEE FROM TRADE. . IN THE PRESENT CASE, THE MONEY WAS PAYABLE BY THE ASSESSEE IN THE COURSE OF CARRYING ON HIS BUSINESS FOR THE PURCHASE OF A B USINESS ASSET. ALTHOUGH IT WAS TREATED AS DEPOSIT AND WAS OF CAPITAL NATURE AT THAT POINT OF TIME IT WAS PAID AND THE BALANCE WAS SHOWN AS PAYABLE, BY EFFLUX OF TIME THE MONEY PAYABLE HAS BECOME THE ASSESSEE'S OWN MONEY A ND CONSTITUTES ITS INCOME. AND SINCE THIS INCOME HAS NOT BEEN TAXED, T HE SAME IS BEING TAXED IN THIS YEAR.' BASED ON ALL THESE FACTS AND CONCLUSION, THE TOTAL AMOUNT SHOWN AS 'DEPOSITS AGAINST AGREEMENT FOR SALE' TO THE EXTENT OF RS.11,00,000/- IS ADDED TO THE TOTAL INCOME. 6. AGGRIEVED BY THE ORDER OF THE AO, ASSESSEE PREFE RRED AN APPEAL BEFORE THE LD, CIT(A). 7. BEFORE THE LD. CIT(A), THE AR SUBMITTED AS FOLLO WS: THAT THE A.O. IS NOT JUSTIFIED IN ADDING A SUM OF R S.11 LAKH U/S.41(1). THE A.R. FURTHER CLARIFIED THAT : '3. THE SAID AMOUNT OF RS.11,00,000/- IS PAYABLE FO R ACQUIRING A CAPITAL ASSET, EVEN IF THERE IS ANY CESSATION OR RE MISSION OF THE SAID AMOUNT IT WILL REDUCE THE COST OF THE ASSET AS PER GENERALLY ACCEPTED ACCOUNTING PRACTICE AND THE CORRESPONDING FUTURE DE PRECIATION WILL BE LOWER. ALSO SUCH LIABILITY IS NOT A TRADE LIABILITY HENCE PROVISIONS OF SEC.41(1) ARE NOT APPLICABLE. 4. THE FACTS OF THE CASE CITED BY THE A.O. ARE AS FOLLOWS. ITA NO. 5432/M/09 4 INCOME- BUSINESS INCOME - UNCLAIMED BALANCES - DEPO SITS RECEIVED FROM THE CUSTOMERS - NOT CLAIMED BY THEM - CLAIM BARRED BY LIMITATION - UNCLAIMED BALANCE TRANSFER TO P/L A/C. - AMOUNT ASS ESSABLE AS INCOME. THE ABOVE MENTIONED FACTS HAVE GOT NO RELEVANCE WHA TSOEVER WITH OUR CASE AND HENCE THE SAID CASE IS NOT APPLICABLE TO P RESENT CASE. 5. THE SAID LIABILITY OF RS.11,00,000/- IS NOT YET WRITTEN OFF IN THE BOOKS OF ACCOUNTS AND IT IS A LIABILITY TOWARDS A C PAITAL ASSET AND NOT A TRADING LIABILITY HENCE PROVISIONS OF SEC. 41(1) AR E NOT APPLICABLE. 6. TO SUPPORT THIS WE RELY ON FOLLOWING JUDGMENT OF BOMBAY HIGH COURT IN THE CASE MAHINDRA AND MAHINDRA LTD. V/S. C IT [2003] 261 ITR 501. 7. THE FACTS OF THE ABOVE MENTIONED CASES ARE AS F OLLOWS: BUSINESS - BUSINESS INCOME - BENEFIT ARISING FROM B USINESS - REMISSION OF LIABILITY - IMPORT OF CAPITAL ASSETS - LOAN GRANTED BY FOREIGN COMPANY - INTEREST ON THE LOAN NOT DEDUCTED U/S.36- SUBSEQUEN T WAIVER OF PRINCIPLE AMOUNT OF LOAN - AMOUNT NOT ASSESSABLE U/S.41(1). 8. IN THE ABOVE CASE IT WAS HELD THAT 'IN ORDER TO APPLY SEC. 41(1), AN ASSESSEE SHOULD HAVE OBTAINED A DEDUCTION IN THE AS SESSMENT FOR ANY YEAR IN RESPECT OF LOSS, EXPENDITURE, OR A TRADING LIABI LITY INCURRED BY THE ASSESSEE. EVEN ASSUMING THAT THE ASSESSEEE HAD GOT DEDUCTION ON ALLOWANCE SECTION 41(1 IS NOT APPLICABLE IF SUCH DE DUCTION IS NOT IN RESPECT OF ANY LOSS, EXPENDITURE OR TRADING LIABILI TY. AND THIS AMOUNT REFERABLE TO PURCHASE OF CAPITAL ASSETS WOULD NOT C ONSTITUTE A TRADING LIABILITY AND ACCORDINGLY SECTION 41(1) IS NOT ATTR ACTED.' 9. THE APPELLANT WOULD LIKE TO DRAW YOUR KIND ATTEN TION TO THE FACT THAT IN THE ABOVE RULING THE EMPHASIS SHOULD BE PUT ON THE TERM 'TRADE PARTIES'. IN THE PRESENT CASE LIABILITY OF RS.11,00 ,000/- SHOWN UNDER THE HEAD SUNDRY CREDITORS, IS A LIABILITY TOWARDS CONST RUCTION OF A CAPITAL ASSET. HENCE IT IS A 'NON - TRADE LIABILITY'. 10. THE A.O. HAS ALSO MENTIONED THAT 'THIS LIABILIT Y IS AN UNAPPROVED LIABILITY OR IN OTHER WORDS, NOT AN EXISTING LIABIL ITY AND PROVISIONS OF SEC.41(1) ARE CLEARLY ATTRACTED.' THE CONCERNED A.O. HAS CALLED THE SAID LIABILITY AS AN UNAPPROVED LIABILITY. IN THIS CASE THE A.O. HAS ERRED BY IGNOR ING THE FACT THAT THE SAID LIABILITY WAS APPEARING IN THE PAST AND WAS DULY AC CEPTED (HENCE ITA NO. 5432/M/09 5 APPROVED) IN EARLIER ASSESSMENT ORDERS. 11. THE ADDRESS AND THE PAN NO. OF THE BUILDER (AS REQUIRED BY THE A.O.) HAD BEEN MADE AVAILABLE TO THE A.O. FROM THE ABOVE FACT IT IS QUITE CLEAR THAT THE A.O. HAS ERRED IN ADDING RS.11,00,000/- TO THE TOTAL INCOME OF THE APPELLANT BY INVOKING PROVISIONS OF SEC.41(1).' 8. THE LD. CIT(A) HELD AS FOLLOWS: I HAVE DULY CONSIDERED THE SUBMISSION OF THE A.R. AND I FIND THAT THE A.O. IS NOT JUSTIFIED IN INVOKING THE PROVISIONS OF SECTION 41(1). IN THIS CASE, THE ASSESSEE HAS NOT WRITTEN OFF THE AMOUNT O F CREDITORS IN THE BOOKS OF ACCOUNT. HENCE, THE PROVISIONS OF SECTION 41(1) ARE NOT APPLICABLE. THE AMOUNT OF RS.11 LAKH IS PAYABLE TO THE CONTRACTOR N AMELY SANJAY CONSTRUCTION AS THE CONTRACTOR HAS NOT PROVIDED SAT ISFACTORY WORK. HENCE, THE PAYMENT HAS BEEN WITHHELD. HENCE, THE RA TIO OF DECISION IN THE CASE OF T.V. SUNDARAM IYENGAR & SONS LTD. 222 ITR 3 44 (SC) IS NOT APPLICABLE TO THE FACTS OF THIS CASE. IN THAT THE A SSESSEE HIMSELF HAS WRITTEN OFF AS DEBT AND INCLUDED IN THE PROFIT & LO SS A/C. ON THE CREDIT SIDE BUT ARGUED THAT THE AMOUNT IS NOT TAXABLE AS IT IS A CAPITAL RECEIPT. IN THIS CASE, THE ASSESSEE HAS NOT WRITTEN OFF THE AMOUNT O F CREDITOR BUT TREATING THE SAME AS TRADING LIABILITY. HENCE PROVISIONS OF SECTION 41(1) ARE NOT APPLICABLE. HENCE, THE A.O. IS DIRECTED TO DELETE T HIS ADDITION. THIS GROUND OF APPEAL IS ALLOWED. 9. THE LD. COUNSEL FOR THE ASSESSEE SHRI SHRI H.N. MOTIWALLA RELIED ON THE CO-ORDINATE BENCH OF THE DECISION OF MUMBAI BE NCH IN THE CASE OF DSA ENGINEERS VS ITO 30 SOT 31. 10. WE HEARD BOTH THE PARTIES. WE ARE IN CONFORMIT Y WITH THE ORDER OF THE LD. CIT(A) SINCE THE ASSESSEE HAS NOT WRITTE N OFF THE AMOUNT OF CREDITOR BUT TREATED THE SAME AS TRADING LIABILITY . HENCE PROVISIONS OF SEC. 41(1) ARE NOT APPLICABLE. GROUND NOS. 1 & 2 O F THE REVENUES APPEAL IS DISMISSED. ITA NO. 5432/M/09 6 11. GROUND NO. 3 IS DISMISSED AS INFRUCTUOUS AS IT DOES NOT ARISE FROM THE ORDER OF THE AO AND THAT OF THE LD. CIT(A ). 12. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS DISMISSED. ORDER PRONOUNCED ON THIS 28 TH DAY OF JANUARY, 2011 SD/- SD/- (R.S. SYAL) ( ASHA VIJAYARAGHAVAN) ACCOUNTANT MEMBER JUDICIAL M EMBER MUMBAI, DATED 28 TH JANUARY, 2011. RJ COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT-CONCERNED 4. THE CIT(A)-CENTRAL - I CONCERNED 5. THE DR I BENCH TRUE COPY BY ORDER ASST. REGISTRAR, I.T.A.T, MUMBAI ITA NO. 5432/M/09 7 DATE INITIALS 1 DRAFT DICTATED ON: 25. 01. 201 1 SR. PS/PS 2. DRAFT PLACED BEFORE AUTHOR: 25 .01.2011 ______ SR. PS/PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER: ______ JM/AM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER: ______ JM/AM 5. APPROVED DRAFT COMES TO THE SR. PS/PS: SR. PS/ PS 6. KEPT FOR PRONOUNCEMENT ON: ______ SR. PS/PS 7. FILE SENT TO THE BENCH CLERK: ______ SR. PS/PS 8. DATE ON WHICH FILE GOES TO THE HEAD CLERK: ______ 9 DATE ON WHICH FILE GOES TO THE AR 10 . DATE OF DISPATCH OF ORDER: _ _____