Income Tax Appellate Tribunal - Ahmedabad
Raju G.Shah, Ahmedabad vs Department Of Income Tax
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IN THE INCOME TAX APPELLATE TRIBUNAL
AHMEDABAD BENCH "C" AHMEDABAD
Before S/Shri Mahavir Singh, JM and D.C.Agrawal, AM
ITA No.2875/Ahd/2007
Asst. Year :2004-05
Dy. CIT, Cen.Circle 2(2), Vs. Shri Raju Gulabhai Shah,
Ahmedabad. Prop.Kothi Sons, A/2,
Jalvihar Flats, B/h Ajanta
Commercial Centre,
Ashram Road, Ahmedabad.
(Appellant) (Respondent)
..
Appellant by :- Shri Rajdeep Singh, Sr.DR
Respondent by:- Shri S. N. Soparkar, AR
ORDER
Per D.C. Agrawal, Accountant Member.
This is an appeal filed by the Revenue raising following grounds:-
(1) The learned CIT(A) erred in law and on facts of the case in restricting the disallowance of Rs.2,49,361/- made by A.O. on account of non-business expenses to Rs.10,736/-.
(2) The learned CIT(A) erred in law and on facts of the case in deleting the addition of Rs.5,15,109/- made on account of non-
business expenses in nature of payment made to Kartik Nagar Co- op Housing Society.
(3) The learned CIT{A) erred in law and on facts of the case in restricting the addition of Rs. 1,50,263/- in respect of old sundry creditors to Rs.28,094/- only without appreciating that assessee had failed to produce details and evidences to prove the genuineness of such old liabilities during the .course of assessment proceedings.
ITA No.2875/Ahd/2007Asst. Year 2004-05
2. The facts of the case are that assessee is doing the business in trading in steam coal and also engaged in construction and developing colonies.
3. The first ground relates to the disallowance of expenditure. During the course of assessment proceedings, the AO found that assessee has claimed following expenditure in the return of income though they were found debited in the profit and loss account.
-bank commission Rs.2074/- -entertainment exp. Rs.6942/- -interest on sharafi advances Rs.148625/- -interest to bank Rs.1720/- -salary expenses Rs.90000/- Total Rs.2,49,361/-
It was explained to the AO that assessee is maintaining two sets of accounts; one is business set and the other is personal set. The business set is audited as per provisions of section 44AB whereas personal set of accounts contain transactions other than business transactions but while computing taxable income certain expenses which were incurred for business transactions and which were not debited in the business set of books, are now claimed in the return of income. The AO did not accept the above explanation and held that assessee failed to establish the nexus of these expenditure with the business or with interest income declared.
4. The ld. CIT(A) deleted the addition of Rs.2,38,621/- out of total addition of Rs.2,49,361/-. The ld. CIT(A) held that the assessee has been following the practice of debiting interest expenditure in his personal books of account though in fact it is related to the proprietary business concern. In the earlier year also, similar practice was followed. The 2 ITA No.2875/Ahd/2007 Asst. Year 2004-05 borrowed funds have been employed for the purpose of business but the interest paid thereon was debited in the personal books of the assessee. Further the assessee paid interest of Rs.90,000/- to Ms. Pragna N. Shah who was working as office supervisor and marketing manager of the assessee. Her services were fully utilized in the business carried out by the assessee. Earlier a salary of Rs.5,000/- was claimed and allowed way back in F.Y.1993-94. Now her salary has been increased to Rs.7,500/- per month. The genuineness of payment of salary has not been doubted. Thus salary payment of Rs.90,000/- and interest payment of Rs.1,48,625/- are clearly related to the business of the assessee.
5. We have heard the parties and perused the material on record. There is no case for interference in the order of ld. CIT(A). The reasons are that even though assessee is maintaining two sets of books one personal and other for proprietary business,but nature and character of expenditure is not in dispute. No case has been made out that capital on which interest was paid was not utilized for the proprietary business of assessee but was invested elsewhere. Once it is not disputed that borrowed capital has been utilized for the purpose of proprietary business, then interest thereon is clearly allowable expenditure. If rendering of services by Ms. Pragna N. Shah is not doubted then payment of salary to her cannot be disallowed. Though the maintenance of two sets of accounts may not be entirely proper but there is no investiigation into nature of such set of books and into the nature of transaction rendered therein. Any financial entry made therein cannot escape the provisions of the Act. Be it may, the expenditure directly related to the business cannot be disallowed. This ground is accordingly dismissed.
3 ITA No.2875/Ahd/2007Asst. Year 2004-05
6. The second ground relates to claim of expenditure of Rs.5,15,109/-. The facts relating to this issue are that assessee has been undertaking the development work of co-operative housing society in his proprietary concern. During the current assessment year assessee has shown development charges @ Rs.31 lacs but while filing the return of income it claimed deduction of Rs.5,15,109/- on the ground that this sum has been paid to Kartiknagar Housing Society towards minor repairs to be carried to their buildings as a result of earth-quake. This Kartiknagar Housing Society was developed by the assessee and was handed over to the Members but on account of earth-quake it developed cracks and suffered some damage. The Office-bearers of the Society claimed damages from the developer. The assessee accordingly undertook to carry out the repairs. There were also directions of the State Government to the Builders to carry out necessary repairs to the buildings developed/constructed by them; in case they have suffered damages in earth-quake. As a consequence the assessee entered into an agreement with the Office-bearers of the Society who estimated the extent of repairs at Rs.5,15,109/- which was paid by the assessee. It claimed deduction of this expenditure against development charges earned during this year on the ground that firstly there was direction from the State Government and secondly it has to keep its good-will. The ld. AO disallowed the claim on the ground that there was no liability of the assessee post completion of the project. The AO, however, made the disallowance under section 69C of the Act and made the addition.
7. The ld. CIT(A) allowed the claim. He held that once sum of Rs.5,15,109/- is recorded in the books then it cannot be unexplained and, therefore, cannot be taxed under section 69C. The payment was made through account payee cheque and recipients have also confirmed in 4 ITA No.2875/Ahd/2007 Asst. Year 2004-05 writing to the receipt of said payment. He also observed that assessee had received development charges of Rs.54,40,000/- from Kartiknagar Co- operative Housing Society Ltd. during the Asst. Year 1999-00 to 2003-
04. The ld. CIT(A) held that -had this payment not been made by the assessee he would have suffered a severe set back in the promotion of the business and he would have also been held by the State Government as a defaulter. Thus payment is out of commercial expediency and is, therefore, allowable deduction under section 37(1). Merely because there is a wrong entry, it does not alter the character of payment.
8. We have heard the parties and carefully perused the material on record. The main contention of the ld. DR is that above payment is not a charge on earning of income this year. Therefore, payment made post development of a society cannot be allowed. Whereas the main focus of argument of ld. AR is that assessee is still in the business of development and if he does not comply with the directions of the State Government and does not undertake the moral responsibility of repairing the damages done to the construction made by him in a natural calamity then his business image would severely suffer and, therefore, his business interest will get set back.
9. We agree with the argument of ld. AR on this issue. Assessee is still in the business of development. It is undisputed that Kartiknagar Society was developed by the assessee. It carries footprints and name of assessee. The acceptability of the assessee as a developer and marketing of the product made by the assessee would, in future, largely depend upon the responsibility in undertaking the repairs to the building constructed by him and damaged in natural calamity like earth-quake. Hon. Supreme Court in Sri Venkatanaryna Rice Mill Contractors Co. vs. CIT (1997) 223 5 ITA No.2875/Ahd/2007 Asst. Year 2004-05 ITR 101 (SC) held that where assessee makes contribution to a public welfare fund which is directly connected or related to carrying on the business of the assessee or which relates to any benefit to assessee's business, it has to be regarded as an allowable deduction under section 37(1) of the IT Act. Similarly Hon. Supreme Court in S. A. Builders Ltd. vs. CIT(A) & Anr. (2007) 288 ITR 1 (SC) held that if an expenditure is incurred for commercial expediency then it will be an allowable deduction. Hon. Gujarat High Court in CIT vs. Raipur Manufacturing Co. Ltd. (1972) 84 ITR 508 (Guj) held that where assessee made the payment to a liquidator of the society whose funds were lost in defalcation which resulted in loss/deposits in the society was held as related to the business of the assessee as it was incurred wholly and exclusively for the purpose of assessee company's business. Even though it might be apparently a case of cash payment but the members who had made deposits were the employees of the assessee company and, therefore, for smooth functioning of the Mill premises and to avoid strike and stoppage of work, payment made by the assessee was held as for business purposes. Accordingly, we hold that payment made by the assessee to the office bearers of Kirtinagar Co-operative Housing Society for carrying out repairs to the buildings was for business purposes of the assessee and allowable under section 37(1). This ground of Revenue also fails.
10. Last ground relates to addition of Rs.1,50,263/- on account of old sundry creditors. The AO found that following sundry creditors are outstanding in the balance sheet for long:-
1. Bhikubhai N. Shah Rs.21,200/-
2. Trimurthy minerals Rs.1,00,969/-
3. Shivabhai N. Prajapati Rs.28,094/-
Total Rs.1,50,263/- 6 ITA No.2875/Ahd/2007 Asst. Year 2004-05
These balances were brought forward from year to year. The AO treated them as unexplained and made addition under section 68. The ld. CIT(A) reduced the addition to Rs.28,094/-.
11. We have heard the parties and carefully perused the material on record. In our considered view there is no case for interference in the order of ld. CIT(A). The reasons are that these creditors did not appear for the first time in Asst. Year 2004-05 and therefore, no addition can be made under section 68 in this year. Further these additions cannot be sustained under section 41(1) as there is no condition for remission and/or cessation of the liability. We rely on the following judgments :-
Chief CIT Vs. Kesaria Tea Co. Ltd. 254 ITR 434 (SC) CIT v. Chetan Chemicals Pvt. Ltd. [2004] 267 ITR 0770-[Guj] Govindbhai C. Patel vs. DCIT, ITA No.1675/Ahd/2009 October 30, 2009. CIT vs. Goyal M.G. Gases Ltd. (2010) 321 ITR 437 (Del) Prism Cement Ltd. vs. Joint CIT (2006) 285 ITR (A.T.) 43 (ITAT, Mum) Mindtek (India) Ltd. vs. ITO (2010) 122 ITD 486 (Bom) Narayanan Chettiary Industries vs. ITO 277 ITR426 (Mad) Smartalk (P) Ltd. vs. ITO ACIT vs. Smartalk (P) Ltd. (2009) 313 ITR (A.T.) 96 (ITAT-Mum) Mahindra and Mahindra Ltd. vs. CIT CIT vs. Mahindra and Mahindra Ltd. (2003) 261 ITR 501 (Bom) On this issue in ITA No.424/Ahd/2006 Asst. Year 2002-03 in the case of Shri Rajesh Mukundlal Shah vs. ITO & ITA No.609/Ahd/2006 Asst. Year 2002-03 ITO vs. Shri Rajesh Mukundlal Shah, the Tribunal has also held that under such circumstances provisions of section 41(1) cannot be invoked. The observations of the Tribunal are as under :-
"9. We have heard both the parties and gone through the facts of the case as also the decisions relied upon. The provisions of sec.41(1) stipulate that where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability 7 ITA No.2875/Ahd/2007 Asst. Year 2004-05 incurred by the assessee and subsequently during any previous year, the assessee obtains whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtained or the value of benefit accruing to him shall be deemed to be profits and gains of business or profession and accordingly chargeable to income-tax as the income of that previous year, whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not. The Id. CIT(A) without even adverting to the decisions cited on behalf of t the assessee, sustained the addition made by the AO u/s 41(1) of the Act. Undisputed ly, the assessee did not receive any benefit nor the amount has been transferred to profit and loss account and thus, the amount did not become the assessee's own money. In these circumstances, as concluded by the Hon'ble jurisdictional High Court in Bharat Iron and Steel Industries(supra), the provisions of sec. 41{1}(a) are not attracted.
9.1 Hon'ble jurisdictional High Court in the case of CIT Vs. Silver Cotton Mills Co. Ltd., 254 ITR 728(Guj) held that simply because the period of limitation had come to an ond for the purpose of filing a suit for recovery of the said amount or for taking appropriate action against the assessee, it cannot be said that there was a cessation of liability. The liability still remains, though it may not be enforceable at law on account of the provisions of the law of limitation. Relying upon the decision in the case of Sugauli Sugar Works (P.) Ltd. [1999] 236ITR518.(SC). Hon'ble jurisdictional High Court further held that unless there is a cessation of liability or there is a remission of liability by the creditor, the liability subsists and, therefore, even if the entries are made to write back the expenditure, the amount so written back cannot be added in the income of the assessee as per the provisions of section 41 (1) of the Act.
9.2 Hon'ble Bombay High Court in another case of CIT Vs. Chase Bright Steel Ltd. 177 ITR 128 (Bombay) while relying upon their judgment in J. K. Chemicals Ltd. Vs. CIT, f 19661 62 ITR 34 held that the liability of an assessee does not cease merely because the liability has become barred by limitation. The liability ceases when it has become barred by limitation and the assessee has unequivocally expressed its intention not to honour the liability even when demanded.
9.3 Hon'ble Supreme Court in the case of Bombay Dyeing & Manufacturing Co. Ltd. v. State of Bombay, AIR 1958 SC 328, in para 23 of their decision observed as follows :8 ITA No.2875/Ahd/2007
Asst. Year 2004-05 "23. It has been already mentioned that when a debt becomes time barred, it does not become extinguished but only unenforceable in a court of law."
9.4 Hon'ble Supreme Court in the case of Sugauli Sugar Works (P.) Ltd. [1999] 236 ITR 518 held that unless there is a cessation of liability, income cannot be added as per the provisions of section 41(1) of the Act. Similarly, Hon'ble Gujarat High Court in the case of CIT Vs. Chetan Chemicals Pvt. Ltd. 267 ITR 770 (Guj) held that:
"On a reading of the provisions, it is apparent that before the section can be invoked, it is necessary that an allowance or a deduction has been granted during the course of assessment for any year in respect of toss, expenditure or trading which is incurred by the assessee, and subsequently during any previous year the assessee obtains, whether in cash or in any other manner, any amount in respect of such trading liability by way of remission or cessation of such liability. In that case, either the amount obtained by the assessee or the value of the benefit occurring to the assessee can be deemed to the profits and gains of business or profession and can be brought to tax as income of the previous year in which such amount or benefit is obtained. In the facts of the case on hand, without entering into the aspect as to whether the liability to repay the loans would be a trading liability or not, it is an admitted position that there had been no allowance or deduction in any of the preceding years and, hence, there is 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 of business or profession." In the facts of the present case, it cannot 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."
9.5 In the light of view taken by the Hon'ble Supreme Court and jurisdictional High Court in the aforesaid decisions, it is apparent that unless there is a cessation of liability or there is a remission of liability by the creditor, the liability subsists and, therefore, even if the entries are made to write back the expenditure, the amount so written back cannot be added in the income of the assessee as per the provisions of section 41(1) of the Act. In the instant case, there is nothing to suggest that the assessee has obtained any benefit either by way of remission or cessation of any 9 ITA No.2875/Ahd/2007 Asst. Year 2004-05 liability while the aforesaid liabilities are continually admitted by the assessee in their balance-sheet. In these circumstances, we have no alternative but to vacate the findings of the ld. CIT(A) and delete the addition sustained by the ld. CIT(A). Therefore, ground nos. 3 to 5 in the appeal of the assessee are allowed while ground nos. 1 & 2 in the appeal of the Revenue are dismissed."
Accordingly, we do not find any merit in the ground raised by the Revenue and the same is dismissed.
12. In the result, the appeal filed by the Revenue is dismissed.
Order was pronounced in open Court on 30.11.10.
Sd/- sd/-
(Mahavir Singh) (D.C. Agrawal)
Judicial Member Accountant Member
Ahmedabad,
Dated : 30.11.10.
Mahata/-
Copy of the Order forwarded to:-
1. The Assessee.
2. The Revenue.
3. The CIT(Appeals)-
4. The CIT concerns.
5. The DR, ITAT, Ahmedabad
6. Guard File.
BY ORDER,
Deputy/Asstt.Registrar
ITAT, Ahmedabad
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ITA No.2875/Ahd/2007
Asst. Year 2004-05
1.Date of dictation 3/11/2010.
2.Date on which the typed draft is placed before the Dictating 22/11/2010 Member................Other Member................
3.Date on which the approved draft comes to the Sr.P.S./P.S.............
4.Date on which the fair order is placed before the Dictating Member for pronouncement..............
5.Date on which the fair order comes back to the Sr.P.S./P.S...............
6.Date on which the file goes to the Bench Clerk...........
7.Date on which the file goes to the Head Clerk.............
8.The date on which the file goes to the Asstt. Registrar for signature on the order........................
9.Date of Despatch of the Order.................
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