2022 (9) TMI 508 - HC - Income Tax

Revenue's Appeal Dismissed; Section 41(1) Addition Deleted as Transactions Deemed Genuine by Higher Authorities

Pr. Commissioner Of Income Tax Delhi-1 Versus Arvind Kumar Arora

The HC dismissed the Revenue's appeal, affirming the decisions of the CIT(A) and ITAT. The court upheld the deletion of the addition under Section 41(1) ... Addition u/s 41(1) - evidences of liability as ceased or has been remitted provided or not? - addition made relying upon the order passed by Commissioner, Central Excise & Customs, Meerut-II wherein held that purchases made by the Assessee's firm from a sister concern were non-genuine, bogus and there was no real production or movement of goods - CIT(A) allowed the appeal and deleted the said addition of the AO after returning the finding that the books of accounts of the Assessee have not been rejected by the AO and Assessee had filed details of purchases vis-a-vis sales, which figures of sales and purchase were not doubted by the AO - HELD THAT:- The entire basis of the AO for doubting the balance was the order of the Commissioner, Central Excise & Customs, Meerut-II, and since the very said order has been set aside by the CESTAT and has become final, there can be no doubt that the finding of the AO that the purchases were bogus has no legs to stand on. The finding of the CIT(A) and ITAT that the said liability which was converted into an unsecured loan and subsequently stood repaid has not been challenged by the Revenue in the present appeal. In the facts of the present case as well as SHRI VARDHMAN OVERSEAS LTD. [2011 (12) TMI 77 - DELHI HIGH COURT] noted above the unsecured loan had not been transferred to profit & loss account by the assessee and it was infact repaid in the subsequent years. Revenue has also not challenged the findings of the CIT(A) that the two firms had been transacting for many years and had a running account which are fact findings. In light of concurrent findings of fact returned by ITAT and CIT(A), this Court, in view of the aforesaid facts, do not find that any substantial question of law arises in the present appeal and there is no infirmity in the order passed by the ITAT. No substantial question of law arises. Issues:1. Challenge to deletion of addition under Section 41(1) of the Income Tax Act, 1961.2. Interpretation of transactions between the Assessee and M/s Ruchi Infotek Systems.3. Treatment of trade liability as a loan by the Assessee.4. Transfer of business from proprietorship firm to a newly incorporated company.Analysis:Issue 1: Challenge to deletion of addition under Section 41(1) of the Income Tax Act, 1961The Revenue challenged the deletion of an addition of Rs. 6,44,29,650 made by the Assessing Officer under Section 41(1) of the Act. The AO added this amount to the Assessee's income based on the conversion of a trading liability into an unsecured loan. However, the CIT(A) allowed the appeal and deleted the addition, noting that the books of accounts were not rejected, and the transactions with M/s Ruchi Infotek Systems were genuine. The ITAT upheld this decision, emphasizing that the liability existed and was subsequently repaid, thus not warranting application of Section 41(1) of the Act.Issue 2: Interpretation of transactions between the Assessee and M/s Ruchi Infotek SystemsThe transactions between the Assessee and M/s Ruchi Infotek Systems were scrutinized, with the CIT(A) observing that the parties had a history of transactions since AY 2006-07. The trade liability was converted into a loan, and subsequent repayments were made, reducing the outstanding amount to nil. The ITAT affirmed the genuine nature of these transactions and rejected the Revenue's contention based on the overturned order of the Commissioner, Central Excise & Customs.Issue 3: Treatment of trade liability as a loan by the AssesseeThe Assessee's conversion of trade liability into a loan, as part of transferring the business to a newly incorporated company, was deemed legitimate by the CIT(A). The CIT(A) concluded that the liability shown was neither bogus nor remitted, leading to the deletion of the addition under Section 41(1) of the Act.Issue 4: Transfer of business from proprietorship firm to a newly incorporated companyThe transfer of the business from the proprietorship firm to a newly incorporated company, along with the treatment of trade liability as a loan, was a key aspect considered in the judgment. The CIT(A) and ITAT found this transfer to be in accordance with the agreement between the parties, and the subsequent repayments further supported the legitimacy of the transactions.In conclusion, the High Court dismissed the appeal, upholding the decisions of the CIT(A) and ITAT based on the genuine nature of the transactions, the repayment of the liability, and the lack of substantial legal questions raised by the Revenue. The judgment emphasized the importance of factual findings and concurrent decisions in determining the tax implications of the Assessee's transactions.