In order to apply sec 41 (1) assessee should have obtained deduction in the assessment in any year in respect trading liability incurred by the assessee

IN THE INCOME TAX APPELLATE TRIBUNAL

HYDERABAD BENCH ‘A’, HYDERABAD

BEFORE SHRI H.S. SIDHU, JUDICIAL MEMBER AND

CHANDRAPOOJARI, ACCOUNTANT MEMBER

ITA No.1225/Hyd/2010

Assessment Year: 2007-08

M/s. NJP Surya Cold Storage Pvt

Ltd., R.R .District, Hyd.

(PAN:AABCN 3603 Q)

(Appellant)

VS

Income-tax Officer,

Ward-7(2), Hyderabad.

 (Respondent)

Appellant by: Shri A.Srinivas

Respondent by : Smt. T.H.Vijayalakshmi

Date of hearing: 29-11-2011.

Date of Pronouncement: 08-12-2011.

O R D E R

Per Bench:

This appeal preferred by the assessee is directed against the order of the CIT (A)-V, Hyderabad dated 18-6-2010 and it pertains to the assessment year 2007-08.

2. The first ground of appeal is with regard to addition of an amount of Rs.52,75,000/- under section 41 of the Act.

3. Brief facts of this issue are that during the year, the company has written off unsecured loans to the tune of Rs.52.75 lakhs and it is mentioned in the schedule-L i.e., notes forming part of accounts that there was no claim from the loan creditors and hence they were written off. During the proceedings, it was explained that he company has raised loans in the personal capacity of the Directors by giving personal guarantees to the tune of Rs.52.75 lakhs and the company had not executed any documents and there were no claims from the above said unsecured loans and hence the Board has transferred them to Sundry Balances written off a/c. The assessee is not a position to furnish the names of the creditors and reasons for which the liability has been incurred in the absence of such details and the inference is that the liability is during the course of business and that the assessee has derived the benefit of expenditure on the basis of which the liability has been created. Since the unilateral act of writing back the loans amounts to cessation of liability for the company, it is to be treated as ‘income’ under section 41 of the income-tax Act.

4. Aggrieved against the order of the assessing officer, the assessee went in appeal before the CIT (A).

5. On appeal, the CIT (A) observed that the assessee has not even provided the names of the creditors who have advanced the amounts to the assessee and there is absolutely no evidence to show that the amounts were raised other than through the normal course of business. Accordingly, he placed reliance on the decision of Hon’ble Supreme Court in the case of CIT vs. T.V. Sundaram Iyengar & Sons Limited (222 ITR 344) and held that the amounts were received by the assessed during the normal course of business and in its trading activity and the cessation of this liability has been rightly treated as income by the assessing officer and accordingly the CIT (A) upheld the finding of the assessing officer. Against the order of the first appellate authority, the assessee is in appeal before us.

6. We have heard the rival submissions of the parties and perused the material available on record. The learned authorized representative of the assesseee submitted that the provisions of section 41 of the Act cannot be invoked in this case of the assessee. In support of his contentions, the learned counsel for the assessee has relied on the judgment of Bombay High Court in the case of Mahindra and Mahindra Limited vs. CIT (2003) 261 ITR 501 wherein it was held at page 503 of the judgment as follows:-

“That in order to apply section 41(1), an assessee should have obtained a deduction in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee. The assessee had not obtained such allowance or deduction in respect of expenditure or trading liability. The assessee had paid interest at 6 per cent over a period of ten years on Rs.57,74,064. In respect of that interest, the assessee never got deduction under section 36(1)(iii) or section 37. In the circumstances, section 41(1) of the Act was not applicable. Secondly, even assuming that the assessee had got deduction on allowance section 41(1) was not applicable because such deduction was not in respect of loss, expenditure or trading liability. Lastly the toolings constituted capital assets and not stock-in-trade. Therefore, taking into account all the above facts, section 41(1) of the Act was not applicable.”

Further, he Gujarat High Court in the case of CIT vs. Chetan Chemicals Pvt. Limited (2004) 267 ITR 770 as per head notes, it held as follows:

“Held, that it was an admitted position that there had been no allowance or deduction in any of the preceding years and, hence, there was no question of applying the provision as such. Section 28 of the Act deals with profits and gains of business or profession and clause (iv) thereof says that the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession shall be chargeable as income under the head “profits and gains or business or profession”.

In the facts of the present case, it could not be said that the assessee company was carrying on business of obtaining loans and that the remission of such loans by the creditors of the company was a benefit arising from such business. The Tribunal was right in holding that the amount of Rs.1,77,052/- arising as a result of remission of unsecured loans was not taxable in the hands of the assessee.”

On the other hand, the learned departmental representative relied on the orders of the CIT (A).

7. We have considered the rival submissions of the parties and perused the material available on record. In this case, the assessee has not furnished the names and addresses of the creditors or any other details and whether the funds are borrowed for the purpose of acquiring trading assets or fixed assets. If the money has been received in the course of carrying on its business and treated as loan advances or in that event, it was written off and it is to be considered as trading receipts by invoking the provisions of section 41(1) of the Act. On the other hand, it is on account of purchase consideration relating to capital goods and it cannot be considered as trading receipts and the amount received as loan by the assessee for the purpose of trading activity and it is ultimately retained in the business by writing off “is taxable” in view of section 41(1) or section 28(iv) of the Act. In the instant case, the assessee had not brought any material or evidences on record to show that the loan was taken by it from the parties on what account. The fact whether the loan amount had been utilized either for the purpose of acquiring of capital asset or for the purpose of business activity or trading activity, had neither been looked into nor examined by the authorities below nor had the assessee established that the loan amount was utilized for the purpose of acquiring capital asset. In the aforesaid circumstances, the issue was to be restored to the file of the assessing officer for fresh adjudication with a direction to the assessee to furnish all the details and particulars of loan and the purpose for which the loan was taken from the parties was utilized. All these informations were within the control and specific knowledge of the assessee and, therefore, it would be the duty of the assessee to prove and establish that the amount of loan taken from various parties was utilized for the purpose of earning capital asset. If on enquiry and on verification, it transpired that the assessee had utilized the loan for the purpose of business activity or trading activity, the amount of loan to the extent it had been waived by the parties would be deemed to be the assessees’ income chargeable to tax. The assessing officer would provide a reasonable opportunity of being heard to the assessee, but it mentioned herein that, in case, the assessee failed to produce or furnish details about the purpose for which the loan amount was utilized, the assessing officer would draw adverse inference against the assessee and hence decide the issue in the light of the fact that the loan amount was obtained for the purpose of trading activity.

8. The next ground is with regard to the addition of Rs.25,86,776/- under section 40(1)(ia) of the Act.

9. Briefly stated facts of this issue are that during the proceedings before the assessing officer, it was explained that the assessee has availed one time settlement from APSFC and an analysis of the accounts copy was furnished before the assessing officer. According to the analysis, there is an interest waiver of Rs.25,86,776/- which consists of three entries of Rs.7,51,090/- on 28-12-2006 and Rs.4,30,575/- on 28- 12-2006 and Rs.14,05,111/- on 28-12-2006. Though the assessee has claimed that the interest has not been claimed as expenditure in income has been filed belatedly for the assessing years 2003-04, 2004- 05 and 2005-06 and are not valid returns as per law and therefore the same was brought to the tax under section 40(1)(ia) of the Act the AO.

10. Aggrieved against the order of the assessing officer, the assessee went in appeal before the CIT (A). On appeal, the CIT (A) held that no evidence has been shown to substantiate the claim of the assessee that  the amounts in question had not been claimed as expenditure and accordingly he confirmed the action of the assessing officer on this issue.

11. The learned authorized representative of the assessee submitted that the provisions of section 40(1)(ia) are not applicable if the returns of the assessee of earlier years were considered as non est, then it cannot be considered that the assessee has claimed interest liability in earlier years and if the interest liability is not claimed in the earlier years, the waiver of such interest cannot be considered as income of the assessee. For this purpose, he relied on the order of the Tribunal in the case of Rayala Corporation (P) Ltd. Vs. ACIT, ITAT, Chennai –B Bench (127 TTJ (Chennai) 369 wherein held that:-

“Business income- profits chargeable to tax under s. 41(1)- waiver of interest by bank- returns for assessment years 1994- 95 to 1998-99 wherein the assessee had claimed deduction of interest were found defective by the AO and were declared to be non est as the assessee had failed to rectify the defect in spite of notices under s. 139(8) having been issued- authorities below concluded that the returns having become invalid, it would mean that the claim of interest has been allowed- not justified- none of the prescribed modes of assessment contemplates any type of inference to be attached to an invalid return. Thus, the inference drawn by the authorities below is devoid of cogency- a return treated as non est and ‘invalid’ can by no stretch of imagination be treated as allowance or deduction as per IT Act and records- Therefore, interest waived by the bank cannot be charged to tax under s. 41(1).”

12. On the other hand, the learned departmental representative relied on the orders of the authorities below.

13. We have considered the rival submissions of the parties and perused the material available on record. In this case, it is on record that in earlier years, returns were non est. returns and the interest claimed cannot be considered as allowed to the assessee in the earlier years. This being so, interest waived in the present assessment year cannot be considered as income of the assessee. Reliance placed by the assessee in the case of Rayala Corporation (P) Limited vs. ACIT cited supra supports our view on this issue. In view of the above, we allow the ground raised by the assessee.

14. In the result, the appeal filed by the assessee is allowed in part.

Order pronounced in the Open Court on 8.12.2011

                           Sd/-                                                                       Sd/-

                 (Chandra Poojari)                                                  (H.S. Sidhu)

                Accountant Member.                                            Judicial Member.

Dt/- 8.12.2011.

Copy forwarded to:

1. M/s NJP Surya Cold Storage Pvt. Ltd., Ragannagar (GP), Hayathnagar Mandal, R.R. District, Hyderabad.

2. DCIT,Cir-16(1), Hyderabad.

3. CIT(A)-V, Hyderabad.

4.. CIT, AP, Hyderabad.

5. The D.R., ITAT, Hyderabad.

Jmr*