TaxTMI 
TaxTMI 
2026 (1) TMI 1569
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..../- to total income 2 erred in confirming addition by the Learned AO under Section 41(1) of Rs 11,80,72 895 on account of outstanding sundry creditors pertaining to Efkon AG. 3 erred in law and on the facts of the case by making an adjustment of Rs 11,80 72,895 under Section 41(1) of the Act without appreciating that there was no remission or cessation of Efkon AG's liability which is sine qua non for applicability of Section 41(1). 4 erred in not appreciating that Appellant's liability to Efkon AG continued during the year which is recognized by the auditors in the Appellant's books of accounts and confirmed by Efkon AG and hence Section 41(1) is not applicable in the absence of remission or cessation of liability. 5 erred in not appreciating that following the dispute with ICICI attaining finality, the Appellant has written off Rs 27.76,25.539 due to Efkon AG in the subsequent years (AY 2022-23 and AY 2024-25) and offered it to tax in its return of income and hence an addition under Section 41(1) will result in the Appellant being double taxed; Objection against disallowances of foreign exchange loss of Rs 1,79,79,775/- ....
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....res and creditor for capital of Rs. 17.57 crores are due to M/s.Efkon AG, a group concern of the appellant. 4. Regarding foreign exchange loss of Rs. 5.79 crores, it was submitted that foreign exchange loss of Rs. 2.67 crores arises from un-realised foreign exchange loss in relation to fixed assets, which has been suo moto disallowed by the assessee while filing the return of income and only an amount of Rs. 3.12 crores has been claimed, which relates to trade payables. 5. The AO further observed that the assessee has provided Inter Corporate Deposit (ICD) of Rs. 7.01 crores and advances of Rs. 4.79 crores to its holding company, M/s.Efkon India Private Limited, and observed that the assessee-company has receivable of Rs. 13,12,96,029/- from M/s.Efkon India Private Limited and has payable of Rs. 38,08,29,033/- to its ultimate holding company M/s.Efkon AG. As per the AO, the assessee has enough resources and money to clear-off the credit money/liability outstanding in its Books of Account and it is not acceptable by any reason to keep liability from a creditor in its Books of Account and at the same time give loans and advances to the related party. Thereafter, the assessee-co....
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....he proceeds awarded would be used to settle the outstanding liabilities to M/s. Efkon AG. It was submitted that M/s. Efkon AG was the largest creditor of the assessee, contributing to 99.98 percentage of its total creditors. It was accordingly submitted that the abrupt termination of the ICICI agreement severely impacted the assessee's business and working capital cash flow. Hence, a payment to M/s. Efkon AG would worsen the assessee's financial condition and hence the assessee was dependent on the arbitration reward for making good its liability to M/s. Efkon AG. It was submitted that the assessee had the intention of settling the payables due to M/s. Efkon AG and which is also evident from the Balance Sheet, where the appellant had recognized M/s. Efkon AG as a creditor. It was further submitted that the assessee continues to record its liability in its Balance Sheet and necessary confirmation from the said party has been taken on record confirming the existence of outstanding debt. It was submitted that the assessee had made payment during the year 2008 to 2013 to the said creditor, however, due to litigation with ICICI Bank, the assessee-company's adverse cash flow condition, i....
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....he creditor, however, the assessee has not paid back the amount despite having the amount, which it has given to the related party i.e., M/s. Efkon India Private Limited. There was no legal or professional requirement either to make ICD and advances to the related party i.e., M/s. Efkon India Private Limited, without squaring off the creditor i.e., M/s. Efkon AG. The assessee has not brought forward any business obligation either to do so. Under the garb of accounting, the assessee has been gaining unwanted advantages i.e., forex loss etc., which is not allowed as per the Income Tax provisions. 8. The AO accordingly held that the amount payable to M/s. Efkon AG to the extent of loans and advances given to M/s.Efkon India Private Limited i.e., 11.80 crores is considered as written-off and added to the total income of the assessee u/s. 41(1) of the Act. The AO further observed that the assessee has claimed foreign exchange loss of Rs. 3,12,30,777/- in its computation of income for valuation of creditors of Rs. 20,50,92,015/- and, therefore, proportionate foreign exchange loss needs to be disallowed, which was determined at Rs. 1,79,79,775/-. 9. Against the said findings of the ....
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.... confirmation letter from M/s. Efkon AG, acknowledging the outstanding amount due by the assessee to M/s. Efkon AG. The Ld.CIT(A), however, confirmed the findings of the AO and against the said order, the assessee is in appeal before us. 10. During the course of hearing, the ld AR submitted that the AO has invoked the provisions of section 41(1) towards the liability due towards Efkon AG and has made consequential disallowance of foreign exchange loss and thus, both the matters are inter-linked and connected. It was submitted that the assessee has continued to reflect its liability towards Efkon AG in its books of accounts and thus acknowledges its debt towards Efkon AG. It was submitted that Efkon AG has also confirmed in writing that the same is receivable from the assessee company. It was accordingly submitted that there is no remission or cessation of trading liability which is a pre-condition for invocation of provisions of section 41(1) of the Act. It was further submitted that pursuant to dispute with ICICI attaining finality, the assessee has written off Rs 27,76,25,539/- in its books of accounts and the same amount has already been offered to tax in its return of income....
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....ks of accounts, there cannot be any presumption of write off as so held by the AO in the instant case. The restatement of foreign exchange liability in the books of accounts and corresponding recording of foreign exchange loss in the books of accounts is an accepted accounting methodology duly recognized under mercantile system of accounting following the accounting standards so prescribed. The reasoning adopted by the AO which has been summarily upheld by the Ld.CIT(A) therefore cannot be accepted. Further, it is noted that the assessee has explained the reasons for non-payment of dues on account of dispute with ICICI. It has been submitted by the assessee that since the services availed from M/s. Efkon AG were related to the ICICI contract, it kept payment to M/s. Efkon AG in abeyance pending resolution of the dispute with ICICI Bank. It was further submitted that subsequent to said dispute attaining finality with the decision of the Hon'ble Supreme Court, the assessee has taken steps and has actually written off an amount of Rs 27.86 Crores in subsequent financial years in its books of accounts. Therefore, the question of application of section 41(1) arises in subsequent assessm....