1991 (1) TMI 52 - HC - Income Tax

Opening debit balance keeps prior year character; revenue cannot reopen past assessments, enquiry limited to current year increase

HC upheld the Appellate Tribunal, holding that the opening debit balance in the accounting year retains the character as of the previous year's closing ... Borrowed funds diversion - Treatment of an opening debit balance in the current accounting year - Assessment - Whether, the Income-tax Appellate Tribunal is right in law in holding that since no additions have been made in earlier years, the opening debit balance cannot be considered during the current year and that the enquiry has to be limited to the increase in the current year only ? - HELD THAT:- We are in agreement with the view expressed by the Appellate Tribunal. The status of the amount outstanding from Nalanda on the first day of the accounting year is the amount that stood outstanding on the last day of the previous accounting year and, therefore, its nature and status cannot be different on the first day of the current accounting year from its nature and status as on the last day of the previous accounting year. Regarding the past years, the assessee's claims for deduction were allowed in respect of the sums advanced during those years ; this could be only on the assumption that those advances were not out of borrowed funds of the assessee. This finding during the previous years is the very basis of the deductions permitted during the past years, whether a specific finding was recorded or not. A departure from that finding in respect of the said amounts advanced during the previous year would result in a contradictory finding ; it will not be equitable to permit the Revenue to take a different stand now in respect of the amounts which were the subject-matter of previous years' assessments ; consistency and definiteness of approach by the Revenue is necessary in the matter of recognising the nature of an account maintained by the assessee so that the basis of a concluded assessment would not be ignored without actually reopening the assessment. The principle is similar to the cases where it has been held that debt which had been treated by the Revenue as a good debt in a particular year cannot subsequently be held by it to have become bad prior to that year. Accordingly, we answer the question referred to us in the affirmative and against the Revenue. Issues involved: Interpretation of Income-tax Act, 1961 regarding treatment of opening debit balance in current year.Summary:The case involved a dispute regarding the treatment of an opening debit balance in the current accounting year under the Income-tax Act, 1961. The assessee had advanced sums to another entity without charging interest, leading to a disallowance of deduction claimed by the assessee. The Commissioner of Income-tax (Appeals) upheld the disallowance, stating that the advance was not necessitated by business considerations. The Appellate Tribunal affirmed this decision, emphasizing that the enquiry should be limited to the increase in the current year only, as no additions had been made in earlier years.The Tribunal remitted the case back to the Commissioner of Income-tax (Appeals) to determine whether the advances made in the current year were from borrowed funds. The Revenue contested this limited remand, arguing that the question should also include the opening balance advanced to the other entity. However, the Court agreed with the Tribunal, stating that the nature and status of the opening balance cannot be different from the previous year. The Court emphasized the importance of consistency in assessing the nature of accounts to avoid contradictory findings.The Court referred to a previous decision to support the principle that borrowed money diverted for non-business purposes requires justification. Ultimately, the Court answered the question in favor of the assessee, highlighting the need for material to support conclusions regarding borrowed funds diverted for non-business purposes.In conclusion, the Court ruled in favor of the assessee, emphasizing the importance of consistency in assessing the nature of accounts and the need for justification when claiming borrowed funds were diverted for non-business purposes.