TaxTMI 
TaxTMI 
2015 (2) TMI 169
X X X X Extracts X X X X
X X X X Extracts X X X X
....I, New Delhi ['CIT(A)'J has: 1. erred in passing an order which is bad in law by confirming the disallowance made by the Ld. AO amounting to Rs. 10,94,714 under Section 41 (1) of the Act, which is payable to M/s Kirloskar Brothers on the alleged basis that the said amount is not more payable and represents cessation of trading liability and the appellant has agreed to offer the same to taxation during the course of assessment proceedings. 2. erred in passing an order which is bad in law by: (i) Confirming the disallowance made by Ld. AO amounting to Rs. 4,835,897 on account of failure and non-compliance of notices issued under section 133(6) of the Income Tax Act, 1961 by the appellant's creditors without appreciating that the appellant's responsibility is limited to providing the desired information by way of names and addresses of the creditors which was duly complied with and the appellant cannot be held responsible and penalized for the noncompliance of notices by the creditors. (ii) Confirming the additions made by the Ld. AO in the absence of the assessee's book being rejected which is impermissible in law. (iii) Not appreciating that withou....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... water and waste water treatment plants, machinery and equipments. The return of income for the year under consideration was filed on 25.09.2009 declaring total income of Rs. 9,38,55,545/- before setting off of brought forward losses. The case of the assessee was selected for scrutiny. During assessment proceedings the A.O. observed that assessee had incurred an expenditure of Rs. 23,50,967/- under the head 'Vehicle repair & petrol expenses'. The A.O. held that since log book was not maintained and therefore, element of personal use cannot be ruled out and in view of the above, disallowed an amount of Rs. 2,62,767/- representing 10% of the expenses. It is further observed that during assessment proceedings the A.O. had issued notice u/s. 133(6) to various sundry creditors and in response to the notices, some of the parties responded and submitted their confirmations and some of the notices were returned back as unserved. Thereafter, a show cause notice was issued to the assessee company and it was directed to explain balances appearing in the books of accounts. The A.O. observed that reply to notices issued to 7 parties as listed in his assessment order, at para 4.4 had not been re....
X X X X Extracts X X X X
X X X X Extracts X X X X
....lf of and under the instructions of the assessee, submit as under: Further, to our submissions dated 12.12.2011 and 19.12.2011, it is reiterated that the amount of Rs. 130316737/- (75338715+54978022) represents unsecured loan from UEM lnc which is evident from 'Schedule 4 - Unsecured Loans' of the financial statements for the financial year (FY) 2008-09. It is submitted that during the financial years 2001-02 to 2006-07, the assessee secured a number of domestic and overseas projects for installation of waste water plants, sewage water plants & reverse osmosis plants at various locations. In order to meet the specifications and requirements of the projects, the assessee made several purchases of machinery and equipments amounting to USD 2935539.84 from UEM tnc, USA and other overseas suppliers. It is further submitted that due to insufficient funds, the assessee could not make payments either to UEM Inc or the overseas suppliers. On the request of the assessee, UEM Inc settled the' accounts of the overseas suppliers on behalf of the assessee and deferred the payments from time. The assessee filed an application dated 07.02.2003 with Department of Industrial ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of ACIT Vs. Pheonix Mills Ltd (2001) (80M) 83 ITO 65 it was held that the onus is on assessee to prove that the liability is not ceased. When assessee did not bring cogent evidence to establish that the liability had not factually ceased by producing the parties or otherwise the amounts were inadmissible under section 41 {l} On reading of Explanation 1 of Section 41, it is very clear that in the case of assessee there is remission of trading liability, now needs to be added back as income. Accordingly liability of Rs. 7,53,38,715/-and Rs. 5,49,78,022/- totaling to Rs. 13,03,16,737/- in respect of to UEM lnc., USA needs to be added back as income under section 41 (1). Thus, disallowance on this account comes to Rs. 13,03,16,737/-. (Disallowance Rs. 13,03,16,737/-)" 6. Aggrieved with the assessment order, the assessee filed appeal before Ld. CIT(A). Ld. CIT(A) after going through the submissions of the assessee and after obtaining remand report from the A.O., dealt with the various additions made by A.O. as under: " (i) Addition on account of disallowance of vehicle expenses: " In this regard it is found that similar issue was involved in ay 2008- 09 also, wherein, I have....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tal of Rs.l,14,38,593/-, an amount of Rs. 48,35,897/- pertaining to three persons, as under, has not been confirmed. S. No. Name of Party Address PAN/TIN Amount(Rs.) 1 Purshottam Engineers P. Ltd. Contru Link Road, Cuttack - 753012 AAAC02100L 1,949,624 2 M/s Windsor Sathyam Engineering 61/2, UR Nagar, Park Road, Annanagar West Extn. Chennai-600101 3304/364617 2,486,900 3. M/s Hindustan Chemicals and Indl. Engg. E-82A, Ganesli Nagar, Works Pandav Nagar, Delhi-110092 ACGPB3759H 3,99,373 Total 4,835,897 6.2 So, after taking in to account the details filed vide additional evidence and after admitting the additional evidence and giving credit of the same, an amount of Rs. 48,35,897/- will remain unexplained because appellant has failed to furnish full confirmation even till the date of the last hearing. So, in my considered opinion, out of addition of Rs.l,14,38,593/-, an addition of Rs. 48,35,597/- is sustained. The appellant gets a relief of Rs. 66,02,696/-. This ground is partly allowed." (iv) Addition u/s 41(1) on account of unsecured loan: "7.1 I have gone through t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....itions u/s 41(1), the liability must have ceased to exist and in the present case, the liability had not ceased to exist as the assessee was reflecting the same in its balance sheets continuously. It was submitted that A.O. had made the additions only on the basis that confirmations could not be filed and regarding other additions u/s 41 for unsecured loans relating to UEM Inc., the Ld.A.R. submitted that assessee had imported various machines from its holding company and further holding company had made certain payments on behalf of assessee company and assessee was to pay for these liabilities and since the assessee was not having sufficient funds, these liabilities were frozen & it was agreed that preference shares be issued to holding company against liabilities but the proposal did not go through and, therefore, the liability was classified under the head unsecured loans and Reserve bank of India was approached for repayment of above loans but due to late approval by Reserve Bank of India, only partial amount could b remitted and whole amount could not be remitted and Ld. CIT(A) without considering these facts upheld the addition. Our attention was drawn to paper book pages 32....
X X X X Extracts X X X X
X X X X Extracts X X X X
....plained to Ld. CIT(A) and Ld. CIT(A) had obtained remand report also. It was submitted that assessee had by mistake recorded a purchase of Rs. 9,88,887/- from the above said party and when mistake came to its notice, it had reversed it in the succeeding year and therefore, tax effect in claiming extra purchases in this year was nullified in the succeeding year when purchases were reduced by an equivalent amount. It was submitted that both the A.O. and Ld. CIT(A) without commenting upon the merits of facts, had dismissed it as afterthought which is not justified as there is no tax effect as tax rates in both the years are the same. Ld. A.R. relied upon the case law of CIT Vs Vishnu Industrial Gases (P) Ltd. ITR 229/1988 with the proposition that if expenditure is allowable in principle, the year of its allowability should not be disputed if the tax rates in the years under consideration were same. 13. Ld. D.R. on the other hand submitted that addition agitated by Ld. A.R. in ground No.I was an agreed addition and there are number of judgements which say that appeal cannot be filed against agreed additions. Pointing out to paper book page I, Ld. D.R. submitted that in the account ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... under: " In this regard I is found that similar issue was involved in assessment year 2008-09 also, wherein, I have decided the issue vide order dated 21.03.2012 and I have found that there is no case of making ad hoc disallowance when accounts are audited and details have been made available. As facts and circumstances of the case remain the same, I am inclined to agree with the view of the appellant that there is no case of making disallowance in case of the corporate assessee. Ground No.2 of the appeal is allowed." 18. However, we find that in assessment year 2008-09, the issue of disallowance of vehicle expenses was not in dispute and Ld. CIT(A) in its order dated 21.03.2012 has not adjudicated on this issue. Therefore, reliance made by Ld. CIT(A) in his order for Assessment Year 2008-09 is misplaced. However, we find that during assessment proceedings, the assessee had furnished complete information regarding vehicle expenses as noted by A.O. in para 3 and A.O. did not find any discrepancy in the same. He just disallowed 10% of expenses on ad-hoc basis which is not as per law as A.O. had not made any adverse comments on the details of expenses. In view of the above, gro....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... as can be seen from the copy of account where this entry has been reversed on 31.03.2010. The Ld. CIT(A) had made the confirmation of addition on the basis of remand report of A.O. wherein he had alleged that the explanation of assessee was after thought. A.O. did not furnish any adverse comments on the explanation of assessee. Ld. A.R. had argued that reporting of lower profits in Assessment Year 2009-10 by an amount of Rs. 9,88,887/- has been compensated in Assessment Year 2010-2011 by an equal amount and since the tax rates in both yeas were same, there is no tax loss to the Revenue. W find that assessee has though filed copy of accounts of said party showing reversal of such entry but has not filed any evidence to demonstrate that the contra entry has been reduced from purchases in succeeding year. In view of the above, the ground No.1 of assessee's appeal needs to be readjudicated by A.O. who will verify from the accounts of succeeding year about the fact of reduction form purchases. In view of the above, ground NO.1 is allowed for statistical purposes. 23. Ground No.2 & 3 relates to addition u/s 41(1) of the Act. Ground No.2 relates to addition sustained y Ld. CIT(A) on a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r manner whatsoever, any amount in respect of which loss or expenditure was incurred by the first-mentioned person or some benefit in respect of the trading liability referred to in clause (a) by way of Remission of cessation thereof, the amount obtained by the successor in business or the value of benefit accruing to the successor in business shall be deemed to be profits and gains of the business or profession, And accordingly chargeable to income tax as the income of that previous year. Explanation 1. - For the purposes of this sub-section, the expression 'Loss or expenditure or some benefit in respect of any such trading liability by way of remission or cessation thereof shall include the remission or cessation of any liability by a unilateral act by the first mentioned person under clause (a) or the successor in business under clause (b) of that sub-section by way of writing off such liability in his accounts." 15. Indisputably, Explanation 1 to section 41(1) of the Act, which was inserted, w.e.f 01.04.1997 is not applicable, as the assessee has not written off the liability to pay M/s Elephanta Oil & Vanaspati Ltd. in its books of account. 16. The Supreme Court i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....following passage from the Judgement of the Bombay High Court in the said case of J.K. Chemicals Ltd. (supra). "The question to be considered is whether the transfer of these entries brings about a remission or cessation of its liability. The transfer of an entry is a unilateral act of the assessee, who is a debtor to its employees. We fail to see how a debtor, by his own unilateral act, can bring about the cessation or remission of his liability. Remission has to be granted by the creditor. It is not in dispute, and it indeed cannot be disputed, that it is not a case of remission of liability. Similarly, a unilateral act on the part of the debtor cannot bring about a cessation of his liability. The cessation of the liability may occur either by reason of the operation of law, i.e., on the liability becoming unenforceable at law by the creditor and the debtor declaring unequivocally his intention not to honour his liability when payment is demanded by the creditor, or a contract between the parties, or by discharge of the debt-the debtor making payment thereof to his creditor. Transfer of an entry is neither an agreement between the parties nor payment of the liability. We have ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... it by the assessee. Admittedly, winding up proceedings against M/s Elephanta Oil & Vanaspati Ltd. are pending and there is no certainty that any claim that may be made by the assessee with regard to the amounts receivable from M/s Elephanta Oil & Vanaspati Ltd. would be paid without the liquidator claiming the credit for the amounts receivable from the assessee company. It is well settled that in order to attract the provisions of Section 41(1) of the Act, there should have been an irrevocable cession of liability without any possibility of the same being revived. The assessee-company having acknowledged its liability successively over the years would not be in a position to defend any claim that may be made on behalf of the liquidator for credit of the said amount reflected by the assessee as payable to M/s Elephanta Oil & Vanaspati Ltd. 22. We may also add that, admittedly, no credit entry has been made in the books of the _assessee in the previous year relevant to the assessment year 2008-2009. The outstanding balances reflected as payable to M/s Elephanta Oil & Vanaspati Ltd. are the opening balances which are being carried forward for several years. The issue as to the gen....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f limitation for the discharge of the liability as debt." In several judgments of this Court, this legal position has been accepted. In Daya Chand Uttam Prakash Jain vs. Santosh Devi Sharma 67 (1997) DLT 13, S.N.Kapoor 1. applied the principle in a case where the primary question was whether a suit under Order 37 CPC could be filed on the basis of an acknowledgement. In Larsen & Tubro Ltd. v. Commercial Electric Works and Ors. 67 (1997) DLT 387 a Single Judge of this Court observed that it is well settled that a balance sheet of a company, where the defendants had shown a particular amount as due to the plaintiff, would constitute an acknowledgement within the meaning of Section 18 of the Limitation Act. In Rishi Pal Gupta v. S.J. Knitting & Finishing Mills Pvt. Ltd. 73 (1998) DLT 593, the same view was taken. The last two decisions were cited by Geeta Mittal, J. in S.C. Gupta v. Allied Beverages Company Pvt. Ltd. (decided on 30/4/2007) and it was held that the acknowledgement made by a company in its balance sheet has the effect of extending the period of limitation for the purposes of Section 18 of the Limitation Act. In Ambika Mills Ltd. Ahmedabad v. CIT Gujarat (1964) 54ITR ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ause there were certain issues which had a bearing on the liability to pay purchase tax which still remained disputed between the assessee and the sales tax department. 19. Since strong reliance was placed by the learned standing counsel for the income-tax department on the judgment of the Supreme Court in CIT vs T. V. Sundaram Iyengar & Sons (supra), it is necessary to refer to the same in some detail. In that case, the ITO found that for the assessment years 1982-83 and 1983-84 the assessee had transferred amounts of Rs. 17,381 and Rs. 38,975 respectively to its profit and loss accounts for the respective accounting years. However these amounts were not included in the total income in the returns filed by the assessee. It was explained that the amounts were payable by the assessee-company to its customers but since they were not claimed by them, they were transferred to the profit and loss account. The ITO rejected the explanation. He held that because the surplus in the accounts of the creditors arose on account of trading transactions, it had the character of income and had to be added to the total income for tax purposes. The CIT(A) and the Tribunal deleted the additions ho....
X X X X Extracts X X X X
X X X X Extracts X X X X
....deposits has not been claimed by the customers. The claims of the customers have become barred by limitation. The assessee itself has treated the money as its own money and taken the amount to its profit 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 else's money. In fact, as Atkinson 1. pointed out that what the assessee did was the commonsense way of dealing with the amounts." 20. It may at once be noticed that the decision cannot be understood as explaining the conditions of applicability of section 41 (I) of the Act, for the simple reason that the section was not invoked by the revenue authorities in that case and there was a finding of the appellate authorities to the effect that neither section 41 (1) nor section 28 was attracted to that case. That was a case of certain deposits being received by the assessee. At the time of the receipt they were admittedly treated as capital in nature, and the assessee credited them to separate accounts. In due course of time, they were depleted by adjustments made from time to time. The balance in the accounts remained unclaimed for a ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....saria Tea Co. Ltd. (supra) the revenue sought to raise the argument based on the judgment of the Supreme Court in CIT Vs. T. V.Sundaram Iyengar (supra), but it was rejected by the Supreme Court holding that the decision was of no relevance to the question involved in the case before them, which was about the applicability of Section 41 (1), and because the factual matrix and the provision of law considered therein were entirely different. For these reasons we are unable to give effect to the argument of the ld. standing counsel based on the judgment of the Supreme Court in CIT Vs. T. V.Sundaram Iyengar (supra). 22. The other judgment which the Id. standing counsel for the income tax department relied upon before us is of this Court in Jay Engineering Works Ltd. v. CIT (supra). A perusal of the judgment shows that though Section 41 (1) was invoked to tax amounts that were unilaterally written back to the profit and loss account of the assessee, this Court had applied the judgment of the Supreme Court in CIT Vs. T. V.Sundaram Iyengar (supra) to hold that the unclaimed liabilities written back were taxable under Section 41 (1). A perusal of question No.3 referred to this Court unde....
X X X X Extracts X X X X
X X X X Extracts X X X X
....48) J 6 ITR J 83 holding that remission of a liability in a subsequent assessment year in respect of which the assessee had obtained a deduction in an earlier assessment year, can never become income for the purpose of taxation, where the assessee maintains accounts in the mercantile system of accounting. Thus, it may be seen that Section 10(2A) of the Indian Income Tax Act, 1922 and Section 41 (1) of the present Act of 1961 were intended only to govern a particular factual situation. Section 28(iv), on the other hand, is a general provision which brings to assessment the value of any benefit or perquisite arising to the assessee from the business carried on by him. If, as contended before us by the learned standing counsel for the revenue, the alleged benefit enjoyed by the assessee by utilizing the amounts payable to the sundry creditors in its own business for a period of four years or more is to be brought to tax under Section 28(iv), notwithstanding that the conditions of Section 41 (l), which govern the factual situation, are not satisfied, then it would render the latter section otiose or a dead letter. If we accept the argument of the learned standing counsel for the revenu....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e we are not concerned with Explanation-l to Section 41(1)(a). Our judgment is only on the applicability of Clause (a) of sub-section (1) of Section 41 and as to what creditors remained unpaid by the assessee for more than 20 years and there was practically a cessation of the debt which resulted in a benefit to the assessee which should be brought to tax under Section 41(1). This argument was not given effect to by the Supreme Court, nor did it consider fit to apply Section 28(iv). It is a well settled rule of interpretation of statutes that a construction that reduces one of the two provisions in a statute to a useless lumber or a dead letter would not amount to a harmonious construction and that a familiar approach in -such cases is to find out which one of the two provisions is a special provision made to govern a certain situation and to exclude that situation from the applicability of the general provision. If we apply this rule of interpretation to the case before us, we must necessarily hold that while Section 28(iv) would apply generally to all benefits or perquisites which arise to the assessee from the business carried on by him, the benefit which he obtains by way of rem....