Income Tax Appellate Tribunal - Mumbai
Basil Exports P. Ltd , Mumbai vs Department Of Income Tax on 16 January, 2006
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCHES "H" : MUMBAI
BEFORE SHRI D. MANMOHAN, VICE PRESIDENT
AND
SHRI RAJENDRA SINGH, ACCOUNTANT MEMBER
ITA. No. 4830/Mum/2009
Assessment year 2003-1004
ACIT 2 (1) M/s. Basil Exports (P) Ltd.
Mumbai vs. Mumbai - 39
PAN AAACB3294Q
(Appellant) (Respondent)
For appellant : Shri Dhivendra Khare
For respondent : Shri Niraj D. Sheth
ORDER
PER D. MANMOHAN, V.P.
1. In this appeal, filed by the Revenue, it was contended that the CIT(A) erred in deleting the addition of Rs. 4.49 crores made by the Assessing Officer by invoking the provisions of section 41 (1) of the Income Tax Act, 1961.
2. Facts necessary for the disposal of the appeal are stated in brief. The assessee is a domestic company. In respect of previous year relevant to the assessment year 2003-2004 it declared an income of Rs.11,79,734/-. Though the case was processed under section 143 (1) of the I.T. Act, 1961, subsequently it was taken-up for scrutiny and during the course of assessment proceedings, assessee was called upon to furnish the details of business carried on by him during the last 3 years. In response thereto, it was submitted that for the last 3 financial years ending on 31-3-2003 no business activity was carried out by the assessee, in view of heavy loss suffered by it from 31/3/1996 onwards.
3. On a detailed probe, the Assessing Officer noticed that the assessee has shown, in the balance sheet, outstanding liability under 2 the head "current liabilities and provision" amounting to Rs.4,55,05,753/-. Out of its liabilities, a sum of Rs.4,49,71,451/- was stated to be amount payable to sundry creditors i.e., M/s. Gold Crest Finance (India) Limited which is an associate concern of the assessee. Since the assessee was not carrying on any business but still declared outstanding liabilities, the assessee was asked to furnish details of this liability. In response thereto, the assessee submitted that during the financial years 1994-95 and 1995-96 it had taken over "lease rental liability" of various parties who had obtained assets on lease basis from M/s. Gold Crest Finance (India) Limited (in short "GFIL"). These liabilities were takenover from the respective lessees at a discounted value and were stated to be paid to M/s. GFIL on their face value. The difference between the discounted value and face value amounted to cost of obtaining face value to interest charged but are called discounting charges by the assessee. It was further stated that the assessee had entered into this transaction in order to obtain ready money so as to utilise the same for its business purposes; However, since the transactions resulted into loss, no income whatsoever could be generated from the transactions. In the assessment year 1996-97 details of these transactions were given to the Assessing Officer and the Assessing Officer finally found that the part of the funds obtained by the assessee out of such arrangement has been utilised for non- business purposes and accordingly a part of the discounting charges being Rs. 25 lakhs was disallowed in that assessment year.
4. The Assessing Officer further noticed that M/s. GFIL classified these liabilities as 'non-performing assets (NPS)'. Under these circumstances, the assessee was called upon to furnish complete details of the transactions including the assessee's purpose in entering into such transactions with its associate concern and also the total income and expenditure of the assessee out of these transactions as well as bifurcation of principle and discounting charges, out of its liabilities which is outstanding as on 31-3-2003.
3Though the assessee sought to furnish certain details it could not bifurcate the expenditure referable to revenue account and capital account. On a conspectus of the matter, the Assessing Officer arrived at a conclusion that the liability shown as outstanding cannot be treated as payable as on 31-3-2003 particularly when M/s. GFIL has already written-off the same as non-performing assets, apart from the fact that the transaction was entered into with its associate concern. Therefore, the same is only an arrangement by the assessee with its own associate concern under the garb of obtaining ready funds for utilisation of the same in assessee's business whereas the assessee has not utilised the funds for the business since it has not carried on business for the past 3 years, and even in the assessment years 1996- 97 and 1997-98 there is no evidence on record to show that the transaction in any way helped the assessee infurtherance of its business. He accordingly, brought to tax, the impugned sum, under section 41 (1) of the I.T. Act, 1961.
5. On an appeal filed by the assessee, the learned CIT(A) set aside the addition. The case of the assessee before the learned CIT(A) was that the assessee was engaged in the business of trading in shares and commodities and financing activities. Assessee had credited income of commodity trading in the P & L account. It is a fact that the sister concern of the assessee-company had leased certain assets to various companies whereby GFIL was to receive lease rentals of Rs.29,68,72,262/- from various lessees over a period of 5 years. The assessee, by virtue of entering into agreements with each of the lessees of the GFIL, obtained ready finance by discounting the lease rentals payable by the lessees to GFIL on internal rate of return basis and in return the assessee received funds of Rs.19,27,35,576/-. Instead of lessees being liable to pay GFIL, the appellant was liable to pay GFIL Rs.29,68,72,262/-. The assessee incurred expenditure by way of "discounting charges" of Rs.10,41,36,686/-. The assessee has also made certain pre-payments of the lease rentals to GFIL on 4 account of which the sister concern gave a rebate of Rs.5,61,97,504/-. Thus the balance amount of finance charges payable was reduced to Rs.4.79 crores which was claimed and allowed as deduction in the assessment orders for assessment years 1997-1998 to 2000-2001. Thus out of the total amount of Rs. 29.68 crores payable by the assessee to GFIL, the assessee had received rebate of Rs. 5.61 crores and balance due payable was only Rs.4.49 crores. Since it was payable by the assessee, it cannot be treated as remission or cessation of liability. It was submitted before the learned CIT(A) that assessee had partially discharged the amount due in assessment years 2004- 2005 and 2005-06. Since liability was acknowledged by assessee and partly discharged in subsequent years, it cannot be considered under section 41 (1) of the Act.
6. Having regard to the circumstances of the case, the learned CIT(A) set aside the addition by observing in para 8 as under :
8. "The aforesaid issues are considered hereinafter.
The appellant vide their letter dated 16-1-2006 had explained that there was no remission or cessation of liability as the liability was subsisting and due by the appellant. It was also explained that the appellant had partially discharged the amount due in A.Y. 2004-05 (Rs.2,38,40,000) and 2005-06 (Rs.40,50,386). The appellant had also submitted the account confirmation of GFIL as on 31-3-2003. From the confirmation letter it is seen that the appellant had paid Rs.23,36,473/- during the previous year relevant to the impugned year in appeal. Thus it is established that the appellant was discharging its liability to GFIL during the previous year as also in the subsequent years. In the afore stated facts it is held that there was no cessation or remission of liability due to GFIL and 5 hence the provisions of s. 41 (1) was not applicable in A.Y. 2003-04. During the appellate proceedings, the A.R. was called upon to explain the treatment given by the A.O. in the assessment orders for A.Y. 2004-05 and subsequent years for the payments made to GFIL. The A.R. produced before me the copy of the assessment order for A.Y. 2004-05, wherefrom it is seen that the A.O. has allowed deduction for the amount of Rs.2,38,40,000/-, paid to GFIL during the previous year relevant to A.Y. 2004-05 as the said amount was assessed u/s. 41 (1) in A.Y. 2003-04. Such action of A.O. in making addition u/s. 41 (1) in A.Y. 2003-04 and granting of deduction for the actual payments made in the subsequent years is not correct and proper. The provisions of s. 41 (1) would be attracted only in cases where there was an absolute cessation or remission of a liability. In case the liability is existing and is in the process of being discharged, provisions of s. 41 (1) cannot be attracted. In view of the aforesaid discussion, the addition of Rs.4,49,71,451/- u/s. 41 (1) is deleted. It might also be discussed that the A.O. has laid much emphasis on the fact that GFIL had written off the amount due from the appellant in their books of account. This issue would not be material in so far as the appellant's liability to GFIL stands duly confirmed in the account confirmation letter filed as also on account of the subsequent repayments made by the appellant to GFIL. The accounting treatment given by GFIL would not lead to any interference that the liability of the appellant 6 ceased or stood remitted, especially having the facts of appellants case."
7. Aggrieved, Revenue is in appeal before us. Learned DR adverted our attention to the reasons given by the Assessing Officer to highlight that the provision of section 41 (1) was invoked not only on account of the fact that the sister concern showed the liability as NPS but also because the circumstantial evidence clearly indicate to the fact that the funds were never utilised for business and it was only a device by the assessee with its sister concern so as to create a liability which is no longer payable; Since section 41 (1) was invoked by the Assessing Officer, the assessee might have shown to have made part- payments to the sister concern which again casts a shadow of doubt as to whether the transaction was real, particularly in view of the fact that it was a transaction with a sister concern and the entire circumstances do not indicate as to why such huge liability had to be taken upon itself without any apparent benefit therefrom.
8. Learned DR further submitted that assessee had never explained before the Assessing Officer with regard to the capital liability and revenue liability and it could not explain as to why such discounting arrangement has to be agreed upon. Despite detailed observations of the Assessing Officer, the learned CIT(A) has wrongly concluded that the Assessing Officer has given more emphasis to the fact that GFIL had 'written off' the amount, overlooking the fact that the Assessing Officer had clearly mentioned that M/s. GFIL classified these liabilities as "non-performing assets". Learned CIT(A) has also taken into consideration certain facts which were not placed before the Assessing Officer. For example, it was not stated before the Assessing Officer that in the subsequent years payments were made. It was also not clarified as to what is the benefit that the assessee was expecting from the said deal. However, the learned CIT(A) jumped to the conclusion that it was not a case which attracts the provisions of section 41 (1) of the Act. He thus, strongly objected to the conclusion 7 reached by the learned CIT(A) and thus supported the Orders passed by the Assessing Officer.
9. On the other hand, learned Counsel, appearing on behalf of the assessee, strongly relied upon the reasons given by the learned CIT(A). Adverting our attention to paras 5 to 8 of the CIT(A) order, it was contended that section 41 (1) of the Act would get attracted only in the event of remission or cessation of liability whereas, in the instant case, sufficient proof was adduced before the CIT(A) that even in the subsequent years the liability was partially discharged and thus there is no case for invoking the provisions of section 41 (1) of the Act. Learned Counsel has also adverted our attention to the RBI guidelines, from page 34 of the paper book as well as page 58 of the paper book (schedule for payments), to submit that in the event of non-payment of two instalments by any entity, an asset has to be classified as "NPA" and all the income accruing has to be written-off till actual realisation of the same. Learned Counsel for the assessee has also relied upon the decision of Hon'ble Bombay High Court (in the case of SI Group India Limited vs. ACIT and another 42 DTR 1) in support of its contention that in order to invoke the provisions of section 41 (1) of the Act it must be shown that there is a remission or cessation of a trading liability and consequently the benefit must enure to the assessee and, in the absence of proving the same, provisions of section 41 (1) cannot be invoked. Learned Counsel has also referred to the decision of ITAT 'H' Bench, Mumbai in assessee's own case for the assessment year 1998-99 (while dealing with the issue concerning deduction under section 36(1)(iii) and valuation of closing stock) wherein the Bench observed that there is a temporary lull in the business, in the circumstances of the case, and thus it cannot be considered as a dis-continuance of the business. Learned Counsel, thus strongly relied upon the Order passed by the learned CIT(A).
810. We have carefully considered the rival submissions and perused the record. At the out set, it may be noticed that in order to appreciate the issue before us, the salient features of section 41 (1) has to be taken into consideration. The marginal heading of section 41 reads "profits chargeable to tax" and section 41 (1) says that "if an allowance or deduction has been made in the assessment for any year in respect of losses/expenditure or trading liability incurred by the assessee and subsequently, during the previous year, if the assessee obtained any benefit in respect of such trading liability by way of remission or cessation thereof, the same has to be deemed to be the "profits and gains of business or profession" and accordingly chargeable to Income Tax Act.
11. It is not in dispute that in the initial year the assessee has treated it as a loss/expenditure/trading liability and it was accepted as such except to the extent of Rs. 25 lakhs. However, in the year under consideration the Assessing Officer analysed the facts in detail to highlight that the benefit obtained as a trading liability in the earlier years was not in fact a trading liability and it was a colourable transaction entered into between the assessee and its sister concern and, therefore, it no longer remains as a trading liability and, under the peculiar circumstances, it has to be considered as a remission or cessation of such so-called trading liability. Therefore, the Assessing Officer has invoked the provisions of section 41 (1) of the Act. It is not in dispute that the assessee has not furnished relevant material before the Assessing Officer and it was not the case of the assessee before the Assessing Officer that in the subsequent years part of the liability was discharged. The main plank of the charge of the Assessing Officer is that by the so-called arrangement of "discounting transactions" no benefit whatsoever could have been obtained by the assessee and assessee has not explained in detail its case before the Assessing Officer which further necessitated the Assessing Officer to draw an adverse inference and to come to the conclusion that it was only an 9 arrangement between the assessee and its associate concern and by this arrangement assessee has debited a sum of Rs.4.79 crores in its books of accounts and credited the liability which is no longer payable. Under these peculiar circumstances, in our considered opinion, the learned CIT(A) erred in taking into consideration the additional material without putting the same to the Assessing Officer. For example, the factum of partial discharge of liabilities in the subsequent years was not available with the Assessing Officer.
12. Since the transaction was with a sister concern and there is no basis for creating such liability, merely because a liability is created it would not have been accepted by CIT(A) as an existing liability, merely because part of the amount was shown to have been repaid in the subsequent years, after the Assessing Officer sought to invoke the provisions of section 41 (1) of the Act in the assessment year 2003-2004. In the interest of substantial justice, the learned CIT(A) ought to have remitted the matter to the file of the Assessing Officer for fresh examination of the facts with a direction to the Assessing Officer to furnish full details as to what was the benefit that was expected of by the assessee from the so-called "discounting transaction". The record does not indicate as to whether any benefit could have been obtained by the assessee, even at the first instance, out of so-called arrangement. Under these peculiar circumstances, the onus is upon the learned CIT(A) to call for further details to examine the issue in the correct perspective, to understand as to whether it was a case of trading liability and even if it is a trading liability in the earlier years whether it can still be considered as a trading liability in the year under consideration and if it is not to be considered as a trading liability, whether the same can be considered as a remission or cessation of such liability atleast in the year under consideration.
13. It is well settled that the powers of the CIT(A) are co- terminus with that of the Assessing Officer and even if a mistake has been committed by the Assessing Officer an assessment should not be 10 set aside or quashed on that limited ground and it is the duty of the first appellate authority to correct such mistakes. In the case of Kapurchand Shrimal vs. CIT (1981) 131 ITR 451 the Apex Court observed that "appellate authority has the jurisdiction as well as the duty to correct all the errors in the proceedings under appeal and to issue, if necessary, appropriate directions to the authority against whose decision the appeal is preferred, to dispose of the appeal or any part of the matter afresh".
14. Having regard to the over all circumstances of the case, we are of the view that in the interest of substantial justice, the order of the learned CIT(A) deserves to be set aside and we hereby direct the Assessing Officer to reconsider the matter in accordance with law. Needless to observe that if there are payments made by the assessee to M/s. GFIL in the subsequent years and if it was accepted by the Assessing Officer in the subsequent years that may be one of the relevant factors to consider as to whether it was a bonafide trading liability which still continue to exist. However, the assessee has to furnish the details in respect of the issues highlighted by the Assessing Officer i.e., what was the purpose sought to be achieved by the assessee by entering into the agreement with the sister concern with regard to the discounting transaction and if it can be projected then there would have been some benefit to the assessee out of it, it can well be treated as a trading liability as otherwise merely because it was considered as a trading liability in the first year, it cannot continue to remain as a trading liability atleast in the year in which it was noticed that it was a colourable transaction.
15. Admittedly, the assessee had not been carrying on any business in the years under consideration and from the agreement entered into with the associate concern assessee appears to have not obtained any benefit from the time the agreement was entered into. It cannot be said that assessee was not aware of the activities of the sister concern and assessee cannot plead that it is naive to the fact 11 that there are no chances of making fair profit. Therefore, it is for the assessee to highlight as to what prompted it to enter into such transaction and how it had benefited the assessee in any of these earlier years as well as in the years under consideration. The expression "cessation" or "remission" of liability was subject matter of consideration by various Courts and various principles were laid down which can act as guiding factors in order to consider as to what can be classified as remission or cessation of trading liability. At the time of passing the consequential order, the Assessing Officer is free to take into consideration all these aspects and to reconsider the issue in accordance with law. With these observations, we hereby restore the issue to the file of the Assessing Officer for fresh consideration.
16. In the result, the appeal filed by the Revenue is treated as allowed for statistical purposes.
Order pronounced in the open Court, on this the 21st day of December, 2010.
Sd/- Sd/-
(RAJENDRA SINGH) (D. MANMOHAN)
ACCOUNTANT MEMBER VICE PRESIDENT
Dated : 21st December, 2010
VBP/-
Copy to
1. ACIT 2 (1), Aayakar Bhavan, R.No. 575, 5th Floor, M.K. Road, Mumbai 400 020
2. M/s. Basil Exports (P) Ltd. Devidas Mansion, 3rd Floor, Mereweather Road, Colaba, Mumbai - 39 PAN AAACB3294Q
3.Commissioner of Income Tax (Appeals)-II, Mumbai
4.C.I.T.,M.C.II, Mumbai
5.DR "H" Bench
6.Guard File.
BY ORDER True copy ASSTT. REGISTRAR, ITAT, MUMBAI