Income Tax Appellate Tribunal - Mumbai
The Income Tax Officer Ward 6(1)(2) vs Ahuja Graphic Machinery (P) Ltd., ... on 14 June, 2007
Equivalent citations: [2007]109ITD71(MUM), (2007)111TTJ(MUM)445
ORDER
G.E. Veerabhadrappa, Vice-President
1. There being a difference of opinion between the Members constituting the Division Bench, the Hon'ble President has referred, under Section 255(4) of the I.T. Act, 1961, the following point of difference to me as a Third Member to resolve the controversy:
Whether, on the facts and in the circumstances of the case, the sum of Rs. 7,25,000/- received by the assessee in the year 1989, during the normal course of carrying on its business, but shown as outstanding liability in the books of account till date, can be brought to the charge of tax Under Section 28 of the Income-tax Act, 1961, as profit, gain or benefit of business in the assessment year under appeal?
2. The assessee is a limited company. During the assessment year in question, it was acting as an Indenting Agent for M/s. Hawson Algraphy Ltd. (HAL), London. In the Financial Year 1985-86, HAL sent one machinery to the assessee company to be exhibited in PAMEX Trade Fair 1987. It was mutually agreed that if the machinery could not be sold at the aforesaid exhibition, it would be returned to HAL and if the same is sold away, then payment should be made directly to Lloyds Bank in England. It appears that the machinery could not be sold at the Trade Fair and the assessee did not return the machinery to HAL. However, subsequently, the machinery was sold by the assessee company to M/s. Conway Printers Pvt. Ltd. (CPPL) for a total consideration of Rs. 7.25 lakhs. The payment of the said sale of machinery was received on 21.1.1989 to the extent of Rs. 7 lakhs and the balance of Rs. 25,000/- was received on 23.8.1990. the sale proceeds so received was shown by the assessee company in its books of account as deposit under the head 'Sundry Creditors payable to HAL, UK'. Subsequently, the business of HAL was taken over by another company, Du Point de Nemours & Co. Inc. Further, this business was taken over by another company namely Agfa Gevaert, NV, Belgium. The said amount of Rs. 7.25 lakhs was shown as outstanding liability to HAL by the assessee company in its books account. During the course of assessment proceedings for the assessment year 1997-98 the Assessing Officer raised query regarding the Amount due and payable to HAL as shown in its books. The assessee explained the facts as narrated above and claimed that the liability did not cease to exist. However, rejecting the claim of the assessee, the Assessing Officer made an addition of Rs. 7.25 lakhs on the ground that there was cessation of liability. It was also observed by him that "in reality there is not any cost to the assessee, because it is a free sample". The Assessing Officer was of the view that the assessee was showing a hypothetical liability of a creditor in the balance sheet, which was ceased to exist because HAL had made no demand to sale proceeds of such free sample and revival of liability is not possible at all in the future. Before the CIT(A), a copy of letter dated 25.06.2001 from Agfa Gevaert NV, Belgium confirming the transaction was filed and it was claimed that the assessee has not credited this amount to the Profit & Loss Account, but shown as liability payable to Agfa Gevaert NV, Belgium. The CIT(A) on consideration of these facts concluded that no benefit has arisen to the assessee under the provisions of Section 41(1) of the Income-tax Act, as the assessee company had never made any claim for allowance or deduction for this amount. The said amount had never been allowed as loss or expenditure or trading liability incurred by the assessee, therefore, there is no question of any diminution or cessation of this amount being trading liability or loss or expenditure of the assessee company. The CIT(A) further was of the view that at best the assessee's income shall be restricted to commission at the rate of 5% of the value of the machinery sold through the assessee, which would be taxable in the year of sale of machinery i.e. assessment year 1989-90 and in the instant year, no commission income can be taxed in the hands of the assessee company.
3. The revenue has challenged these findings of the CIT(A) before the Tribunal and the learned Accountant Member appreciated the facts that the transaction took place in the year 1985-86 when HAL sent the machinery to the assessee company on certain terms and conditions as mentioned above. The machinery was not returned and it was sold by me assessee in the year 1989 and the sale proceeds were reflected in the books of account of the assessee to the credit of HAL. Till today, neither the assessee company has paid this amount to HAL or its successor companies nor those companies have claimed this amount. According to the Accountant Member, there was no material or evidence in the form of any correspondence to establish that this amount is being claimed by the successor companies. The assessee received the sale proceeds in January 1989 and for a period of more than 16 years the assessee company has used this amount for its own business without any liability even for payment of interest. The circumstances according to him prove beyond any doubt that for all practical purposes, this amount has been appropriated by the assessee company and neither the assessee has any intention of returning the amount nor the concerned parties are serious about claiming this amount. The amount was payable to HAL which ceased to exist several years back and the successor companies have not come forward to claim this amount from the assessee-company. The learned Accountant Member applied the ratio laid down by the Hon'ble Supreme Court in the case of CIT v. T.V. Sundaram Iyengar & Sons Ltd. 222 ITR 344 (SC) and according to him this decision squarely applicable to the facts of the assessee's case although the amounts in question have not been written back to the Profit & Loss Account. According to him this fact was not a very material fact. There may be a case where the assessee deliberately refuses to write back the amount even though the liability has ceased to exist and for all practical purposes the same has been appropriated by the assessee. According to him the issue has to be decided on the basis of the totality of the facts and circumstances and not merely on the basis of the accounting entries passed by the assessee company. The learned Accountant Member, on the other hand, did not agree with the contention of the assessee that the latter decision of the Hon'ble Supreme Court in the case of Chief CIT v. Kesaria Tea Co. Ltd. 254 ITR 434 and also the decision in CIT v. Saugauli Sugar Works Pvt. Ltd. 236 ITR 518 have any application to the facts of the assessee's case. The learned Accountant ember was of the view that the sum of Rs. 7.25 lakhs is assessable as business benefit which has arisen to the assessee during the course of normal business activities of the assessee. Therefore, the same has to be brought to tax as business income of the assessee.
4. The learned Judicial Member, however, did not agree with these findings. According to her, it is difficult to comprehend how the said receipt in question can be treated as income of the assessee unless there is a finding on record that the said liability has ceased to exist. She appreciated the fact that the amounts have shown as liability in its balance sheet from year to year. She also appreciated the fact that the business of HAL was being transferred to various concerns, the assessee was not sure to whom the said amount is to be paid. She also examined the facts and reached a conclusion that the transaction in question has not been found to be non-genuine and merely because the number of years have lapsed from the date of realization of money on the sale of the machinery to date, there is no merit in the argument that the liability has got extinguished. The said amount received on the sale of machinery entrusted to the assessee can under any circumstances partake the nature of income in the hands of the assessee for the year under consideration. She applied the principle laid down by the Hon'ble Supreme Court in the case of CIT v. Sugauli Sugar Works Pvt. Ltd. 236 ITR 518 and also the decision in the case of Chief CIT v. Kesaria Tea Co. 254 ITR 434 and even if the liability is written back the same cannot be deemed to be the income of the year under Section 41(1) of the Income-tax Act, even upon the expiry of the period of limitation prescribed under the Limitation Act. She refused to follow the decision of the Hon'ble Supreme Court in the case of CIT v. T.V. Sundaram Iyengar and Sons Ltd. 222 ITR 344, as according to her, in that case the assessee has transferred the unclaimed credit balances available in his deposit account to its profit and loss account, thereby converting the character of the credit balance s into that of income by its own action, whereas in the case of the case the outstanding balances were shown as liabilities to the supplier of the machinery. According to her the liability of Rs. 7.25 lakhs does not partake the nature of any benefit or perquisite for bringing it to tax under the umbrella of business income even under Section 28(iv) of the Act.
5. The CIT(DR) has filed written submission. The CIT(DR) reiterated the facts and strongly supported the order of the learned Accountant Member. According to him by lapse of time the claim of deposit became time barred. It became a definite trade surplus. If the amount is received during the course of transaction even though it is not taxable in the year of receipt as being of revenue character, the amount changes its character when the amount becomes the assessee's own money because of limitation or by any other statutory or contractual right. When such a thing happens, common sense demands that the amount should be treated as income of the assessee. He heavily relied on the decision of the Hon'ble Supreme Court in the case of CIT v. T.V. Sundaram Iyengar and Sons Ltd. 222 ITR 344. The CIT(DR) submitted that the only difference is that in the present case the assessee has not transferred this mount by writing back to the profit and loss account. However, according to him this is not a very material fact. There may be a case where the assessee deliberately refuses to write back the amount even though the liability has ceased to exist and for all practical purposes the sum has been appropriated by the assessee. The observation made by the learned Accountant Member in this regard are far more relevant and appropriate to decide the fact of the receipt of the amount in question. The CIT(DR) again submitted that the issue has to be decided on the basis of the totality of the facts and circumstances and not merely on the basis of the accounting entries passed by the assessee. On the other hand, the learned counsel for the assessee strongly supported the findings of the learned Judicial Member. According to him the facts of the case are not similar to the facts in the case of T.V. Sundaram Iyengar & Sons Ltd. (supra) which the revenue is relying on. The learned counsel for the assessee pointed that the issue is that the assessee was acting as an indenting agent for HAL on the terms and conditions of earning commission at the rate of 5%. It is the machinery which was exhibited in PAMEX Trade Fair 1987 was sent by HAL on certain terms and conditions It is also the fact that the machinery could not be sold at the said exhibition and the assessee did not return the said machinery to its original owner. Subsequently, the machinery was sold and the sale proceeds are accounted and credited to its legal owner because of so-many developments in the case of HAL and the assessee was not sure to whom the money was to be returned due to frequent succession of the business of the owner of the machinery. But a rightful owner is always free to claim the dues from the assessee. The liability to make the payment has not ceased to exist. The amounts in question, therefore, cannot be taxed either under Section 28(iv) or under Section 41(1) of the Act as appreciated by the Commissioner (Appeals) as also by the learned Judicial Member. It is wrong to say that the assessee has appropriated the amounts in question without the same being credited to the Profit & Loss Account. It is just like any other trading liability. The mere fact that the suppliers have not claimed the money nor the assessee has paid the money does not bring the amounts in question chargeable to tax in the hands of the assessee under Section 28(iv) or Section 41(1) of the Act. The facts of the case are clearly governed by the decision of the Hon'ble Supreme Court in Sugauli Sugar Works Pvt. Ltd. and Kesaria Tea Co. (supra), wherein the apex court has already stated that the unilateral act on the part of the assessee by way of writing of its P & L Account did not necessary mean the liability has ceased in the eyes of law.
7. I have carefully considered the contents of the submission made by the CIT(DR) as also the arguments of the learned counsel for the assessee. I have carefully perused the dissenting order as also the facts of the case which are brought on record in all these orders. On the facts of the case there appears to be absolutely no difference between the members who constituted a Division Bench. Now the only questions whether the amounts in question can be brought to tax under 28(iv) or under Section 41(1) of the Act. Section 28 of the Act gives the items of income that are chargeable to income-tax under the head 'profits and gains of business or profession : Sub-section (iv) of Section 28 which has been taken in aid by the revenue to bring the amount in question to tax as business income reads as under:
28 Profits and gains of business or profession The following income shall be chargeable to income-tax under the head 'Profits and gains of business or profession' xx xx xx
(iv) "The value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession.
This clause was inserted in Section 28 by the Finance Act 1964 with effect from 1st April, 1964. The value of any benefit or perquisite arising from business or the exercise of a profession is chargeable to income-tax as part of the income from business/profession under this section and it is deemed to be income under Section 2(24) of the Act. This clause does not apply to the receipts in cash. The sum credited by the assessee to the profit and loss account of the unclaimed advances received from customers and unclaimed excess commission received and unclaimed collections from principals are assessabtey4rider Section 28(iv) of the Act, since the said sums have close and direct nexus with the assessee's business and have the result of not only reducing the assessee's trade; liabilities and enhancing its profits but also increasing is capital. This was so held, by the Hon'ble Bombay High Court in Protos Engineering Co. P. Ltd. v. CIT (1995) 211 ITR 919 (Bom). However, it has been held that the benefit should have arisen to the assessee by appropriation of the excess commission or advance receipts against supplies, etc. received in earlier years and not credited to the profit and loss account in those years had a close and direct nexus with the business of the assessee and definitely amounted to a benefit to the assessee. In other words to apply these provisions the assessee should have appropriated the sums in question to its profit and loss account. Here is a case where the assessee has not appropriated any sums to its profit and loss account. In other words, the sum,does not represent income not credited to the profit and loss account in the earlier years which the Hon'ble Bombay High Court was concerned with. It is a case of sale of somebody's asset and not even a part of its regular business receipts. The question of its appropriation in the manner aforesaid has not also taken place. Therefore, it is difficult to apply the provisions of Section 28(iv) of the Act to the facts of the case when the assessee has been acknowledging this outstanding amount as liabilities to its principal from year to year in its balance sheet.
8. Again the Hon'ble Bombay High Court in Mahindra & Mahindra Ltd. v. CIT was concerned with the import of capital assets and loan granted by the foreign company. The High Court in this case was concerned with the fact that where the assessee is a manufacturer of jeeps. It entered into an agreement with an American company which agreed to sell to the assessee dies, welding equipments and die models toolings for production of special types of jeeps by the assessee in India. The price of the toolings was agreed at $ 6,50,000 CIF., Bombay. The import of the toolings was approved by the Govt. of India. Since the assessee could not secure foreign exchange, the American company agreed to provide a loan of an amount of US $ 6,50,000 repayable after 10 years in instalments with interest at 6 per cent-free of income-tax. Consequently, in terms of the approval granted by the Central Government the assessee received the loan for securing the toolings from the American company for which the assessee gave three promissory notes dated September 16,1965, October 28, 1965 and November 19, 1965 in all for US $ 6,50,000. Accordingly, the toolings were supplied by the American company. In February 1976 the American company was taken over and as a term thereof it had been agreed to waive the principal amount of loan advanced to the assessee and to cancel the promissory notes as and when they matured. The assessee filed its return for the assessment year 1976-77. In Part III of the return had shown the amount of Rs. 57,74,064/- as cessation of its liability towards the American company. The Income-tax Officer came to the conclusion that with the waiver of the loan the credits represented income and not a liability. Accordingly, the Assessing Officer held that the sum of Rs. 57,74,064/- was taxable under Section 28 of the Income-tax Act. However, the CIT(A) was of the that the waiver of the loan amount of Rs. 57,74,064/- amounted to remission of trading liability and consequently, the said amount was taxable under Section 41(1) of the Act, According to the Tribunal, Section 28(iv) was not applicable because benefit of waiver was not received by the assessee in kind. The Tribunal took the view that even Section 41(1) of the Act was not applicable because there was no cessation of trading liability. The Hon'ble Bombay High Court observed 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% 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. Although the facts of the case are slightly different but clearly points out that the amounts in question received by the assessee in the instant case cannot be brought to tax under Section 28(iv) of the Act.
9. Now, I shall take up the second issue whether the amounts in question are liable to be taxed under Section 41(1) of the Act. I am again persuaded by the decision of the Hon'ble Bombay High Court in Mahindra and Mahindra Ltd. (supra) wherein they have categorically stated that where the assessee had not obtained any deduction in respect of expenditure or trading liability, the question of the same amount being brought to tax under Section 41(1) does not arise. Now, I have examined whether the assessee in this case has obtained any deduction by debiting the amount into profit and loss account in the earlier years. The fact of the matter is that the assessee has not. The transaction in question was between the principal and the agent and the asset belonged to the principal and there is no question of the assessee claiming any deduction in its profit and loss account for the transaction which it had entered in respect of this. The transaction is truly to be accounted to the credit of the supplier of the machinery, who is the original owner of the property. If the original owner does not claim the amounts due to him, it may be anything but not a cesser of liability of the type which could be assessed under Section 41(1) of the Act, as rightly pointed out by the learned Judicial Member. In my view the facts of the case does not go with the facts stated by the Hon'ble Supreme Court in the case of CIT v. T.V. Sundaram Iyengar and Sons Ltd. 222 ITR 344. In that case the assessee has appropriated the liability to its profit and loss account whereas in this case there has no such appropriation. The assessee is still showing them as outstanding liabilities in its balance sheet from year to year and the liability arose as a debt which is required to account for the receipt on behalf of the principal. In my view there is no question of cesser of liability. The Hon'ble Supreme Court examined this case in the case of CIT v. Sugauli Sugar Works Pvt. Ltd. 236 ITR 518 (SC) wherein the apex court held again that the expiry for the period of limitation prescribed under Limitation Act could not extinguish the debt but it would prevent the creditor from enforcing the debt, has been well settled. If the principle is applied, it is clear that mere entry in the books of account of the debtor made unilaterally without any act on the part of the creditor will not enable the debtor to say that the liability has come to an end,. Apart from that, that will not by itself confer any benefit on the debtor as contemplated by that section.
10. Again the Hon'ble Supreme Court in the case of Chief Commissioner of Income-tax v. Kesaria Tea Co. Ltd. 254 ITR 434 (SC) (consisting of 3 judges) had followed the decision of CIT v. Sugauli Sugar Works P. Ltd. 236 ITR 58 and distinguished the facts in the case of CIT v. T.V. Sundaram Iyengar and Sons Ltd. (1996) 22 ITR 344 (SC). In the facts of the present case admittedly the decision of the Hon'ble Supreme Court in CIT v. T.V. Sundaram Iyengar and Sons Ltd. (supra) cannot be applied because the sums in question are not appropriated or written off to the profit and loss account and, therefore, in my view the decision of the Hon'ble Supreme Court in CIT v. Kesaria Tea Co. Ltd. (supra) clearly takes the assessee away from being taxed on such amounts which has still shown as trading liabilities in the books of account of the assessee. There is no material to show the character of these receipts has changed merely by passage of time.
11. In the light of the discussion, I am in complete agreement with the view expressed by the learned Judicial Member that the amount in question cannot be included the income of the assessee for the year under consideration. The matter will now be placed before the regular Bench to dispose of the appeal in conformity with the majority opinion.
Sd.
(G.E. Veerabhadrappa) VICE-PRESIDENT
1. As there is a difference of opinion, the matter is being referred to the Hon'ble President of ITAT with a request that following question may be referred to a Third Member or pass such order as the Hon'ble President may think fit.
Whether, on the facts and in the circumstances of the case, the sum of Rs. 7,25,000 received by the assesee in the year 1989, during the normal course of carrying on its business, but shown as outstanding liability in the books of account till date can be brought to the charde of tax Under Section 28 of the Income Tax Act, 1961, as profit, gain or benefit of business in the assessment year under appeal.
(SUSHMA CHOWLA) (K.K. BOLIYA) JUDICIAL MEMBER ACCOUNTANT MEMBER K.K. Boliya, Accountant Member
1. This departmental appeal arises from the order dated 23.7.2002 of CIT(A)-VI, Mumbai The first ground of appeal raised by the Revenue is as under:
On the facts and circumstances of the case and in law, the CIT(A) erred in deleting the addition of Rs. 7,25,000/- shown in the accounts as outstanding liability for 14 years, for which no payment had been demanded by the creditor, if any and the assessee company too even not knowing as to who is the ecact creditor, implying that the said amount of Rs. 7,25,000/- had been rightly taced in the AY 97-98.
2. The relevant facts, briefly stated, are that the assessee was acting as an Indenting Agent for M/s Hawson Algraphy Ltd. (HAL), London. In the Financial Year 1985-86, HAL sent one machinery to the assessee company to be exhibited in PAMEX Trade Fair 1987. It was mutually agreed that if the machinery could not be sold at the aforesaid exhibition, it would be returned to HAL and if the same is sold away, then payment should be made directly to Lloyds Bank in England It appears that the machinery could not be sold at the Trade Fair, but the assessee did not return the machinery to HAL. However, subsequently, the machinery was transferred by the assessee company to M/s Conway Printers Pvt. Ltd. (CPPL) for a total consideration of Rs. 7.25 lakhs. The sale proceeds of Rs. 7.25 lakhs received by the assessee company from CPPL .were shown in the books of account as deposit under the head Sundry Creditors payable to HAL, UK. The sum of Rs. 7.25 lakhs was received partly on 21.1.89 and partly on 23.8.90. Since then, the aforesaid credit has remained outstanding in the books of the assessee and nothing has been paid to HAL. Subsequently, the business of HAL was taken over by another company, Du Point de Nemours & Co. Inc. Further, this business was taken over by another company namely Agfa Gevaert, NV, Belgium. The AO has observed that the machinery was sent to the assessee company by HAL in the financial year 85-86. Subsequently, the machinery was sold to CPPL for a sum of Rs. 7.25 lakhs, out of which the sum of Rs. 7 lakhs was received on 21.1.89 and the balance amount of Rs. 25,000/- was received on 23.8.90. Since then, the said amount of Rs. 7.25 lakhs is being shown in the books of the assessee company by way of credit payable to HAL. However, nothing has been paid by the assessee company and for all practical purposes, the aforesaid amount stands appropriated by the assessee. The AO, therefore, held that this amount was assessee's income chargeable to tax as the benefit directly arose from business activity of the assessee. He, therefore, added the impugned sum to the assessee's income.
The ld CIT(A) considered the factual position and deleted the addition with the following observations contained at Paras 2.4 and 2.5 of his order:
I have considered the facts as stated by the AO and as submitted by the ld. AR of the appellant. On consideration of the same, it is seen that the appellant is still acknowledging the debt of Rs. 7.25 lakhs to be payable to successor of HAL and the successor as on today is Agfa Gevaert NV, Belgium which is having the manufacturing branch in UK in the name of Agfa Gevaert, UK manufacturing graphic systems. Therefore, the benefit has not arisen to the appellant under the provisions of Section 28(iv) of the IT Act, nor has it been the deemed profit as per the provisions of Section 41(1) of the Act, as because, the appellant company has never made any claim for allowance or deduction for this amount in the assessment for any year, as because, it was not the loss, expenditure or trading liability incurred by the appellant and it has never been allowed as such to the appellant in any assessment year. Therefore, no question has arisen of any remission or cessation of this amount being trading liability or loss or expenditure of the appellant company. The appellant is still showing this amount as liability in its balance sheet. Therefore, the decision as relied upon by the appellant as cited above is clearly applicable to the facts of the appellant's case. Since the appellant is an indenting agent of HAL, whose machine has been sold to the appellant and therefore, the income at the most for commission @ 5% of the value of the machines sold through appellant can be taxed as income. But this income is again liable to be taxed in the year during which the machine was sold. The machine was sold to M/s CPPL in January, 1989. This date falls within the accounting period relevant to AY 89-90. Therefore, in AY 97-98, the commission cannot be taxed as income of the appellant company.
Considering these facts, I am of the clear view that the addition which has been made by the AO for this amount in question is not justified. Therefore, this addition made by the AO is hereby deleted. Thus, the appellant gets relief of Rs. 7.25,000/-.
4. In the backdrop of the abovementioned facts, the ld. DR forcefully contended before us that the sum of Rs. 7.25 lakhs stands permanently appropriated by the assessee company as nothing has been paid till today and no claim has been made by HAL or by successor companies. It is, therefore, submitted that the ld. CIT(A) was not justified in deleting the addition.
5. The ld. counsel appearing on behalf of the assessee strongly supported the order of the ld. CIT(A). He contended that the liability in the books of the assessee has not been written off and the said amount is payable by the assessee company to the successor company of HAL. It is argued that merely because the liability has not been paid over a long period of time, it does not cease to exist. The ld. counsel contended that Section 41(1) is not applicable to the facts of the present case because in the books of account, the credit has not been written off. The ld. counsel strongly relied on the following Supreme Court decisions:
i. CIT v. Sugauli Sugar Works Pvt. Ltd. 236 ITR 518.
ii. Chief CIT v. Kesaria Tea Co. 254 ITR 434.
During the course of the hearing, the ld. counsel for the assessee was informed by the Bench about the Supreme Court decision in the case of CIT v. T.V. Sundaram Iyengar & Sons Ltd. 222 JTR 344, wherein a different view was adopted by the Supreme Court. The ld. counsel was also informed that the judgment in the case of T.V. Sundaram Iyengar & Sons Ltd. was rendered by a larger bench comprising three judges whereas the Supreme Court decision in the case of Sugauli Sugar Works Pvt. Ltd. was rendered by a Bench comprising of two judges. Therefore, the issue has to be considered and decided in consonance with the judgment in the case of T.V. Sundaram Iyengar & Sons Ltd. The ld. counsel pointed out that the judgment in the case of Kesaria Tea Co. has been rendered by a Bench comprising of three judges and they have followed the Supreme Court decision in the case of Sugauli Sugar Works Pvt. Ltd.
6. We have given a careful consideration to: the rival submissions and have gone through the relevant facts as also the precedents referred to above. Insofar as the factual position is concerned, there is no dispute. The transaction took place in the year 85-86 when HAL sent the machinery to the assessee company on certain terms and conditions as mentioned above. The machinery was not returned and was sold by the assessee in the year 1989 and the sale proceeds were reflected in the books of account of the assessee to the credit of HAL. Till today, neither the assessee company has paid this amount to HAL or its successor companies nor these companies have claimed this amount. There is no material or evidence in the form of any correspondence to establish that this amount is being claimed by the successor companies. The assessee received the sale proceeds in January 89 and for a period of more than 16 years, the assessee company has used this amount for its own business without any liability even for payment of interest. The circumstances prove beyond any doubt that for all practical purposes, this amount has been appropriated by the assessee company and neither the assessee has any intention of returning the amount nor the concerned parties are serious about claiming this amount. The amount was payable to HAL which is ceased to exist several years back and the successor companies have not come forward to claim this amount The credit arose during the course of normal business activities of the assessee company as mentioned above. The assessee was acting as an Indenting Agent for HAL on the terms and conditions of earning commission at the rate of 5% in respect of any transaction undertaken by the assessee company on behalf of HAL. During the course of normal business activities, HAL sent the machinery to the assessee. Thus, the credit arose during the course of normal business activities of the assessee and the assessee has not only enjoyed usufruct of this amount over a period of more than 16 years, for all practical purposes, this amount has been appropriated by the assessee. In these circumstances, the question arises as to whether this amount partakes the character of assessee's business income chargeable to tax. It may be mentioned that the said amount has been brought to the charge of tax by the AO Under Section 28(iv) of the IT Act. Almost a similar question arose before the Supreme Court in the case of T.V. Sundaram Iyengar & Sons Ltd. The facts and ratio of this case are reproduced below from the headnote:
If an amount is received in the course of a trading transaction, even though it is not taxable in the year of receipt as being of revenue character, the amount changes its character when the amount becomes the assessee's own money because of limitation or by any other statutory or contractual right. When such a thing happens, common sense demands that the amount should be treated as income of the assessee.
The ITO found that for the AYs 1982-83 and 83-84, the assessee had transferred an amount of Rs. 17,381/- to the P & L. account of the company during the accounting period ended on 31.3.82 (AY 82-83), and an amout of Rs. 38,975/- during the accounting period ended on 31.3.83 (AY 83-84). But these amounts were not included in the total income of the assessee. The sums were stated to be credit balances standing in favour of the customers of the company. Since these balances were not claimed by the customers, the amounts were transferred by the assessee to the P&L account. The ITO was of the view that because the surplus had arisen as a result of trade transactions, the amounts had the character of income and had to be added as income of the assessee for the purpose of income tax assessment. The additions were deleted by the CIT(A), and this was upheld by the Tribunal An application was made to the Tribunal to refer the question of law arising out of the order of the Tribunal to the High Court The application was dismissed by the Tribunal. The High Court on an application held that the question was concluded by the decision of that court in the case of CIT v. A.V.M. Ltd . On a petition for special leave to appeal to the Supreme Court, leave was granted and the question proposed to be raised was treated as referred:
Held, that if a commonsense view of the matter were taken, the assessee, because of the trading operation, had become richer by the amount which it transferred to its P&L account The moneys had arisen out of ordinary trading transactions. Although the amounts received originally were not of income nature, the amounts remained with the assessee for a long period unclaimed by the trade parties. By lapse of time, the claim of the deposit became time-barred and the amount attained a totally different quality. It became a definite trade surplus. The assessee itself had treated the money as its own money and taken the amount to its P&L account. The amounts were assessable in the hands of the assessee.
In the present case also, the assessee, because of the trading operation, has become richer by the amount of Rs. 7.25 lakhs. The only difference is that in the present case the assessee has not transferred this amount by writing back to the profit & loss account. However, in our view, this fact is not a very material fact. There may be a case where the assessee deliberately refuses to write back the amount even though the liability has ceased to exist and for all practical purposes the same has been appropriated by the assessee. Therefore, the issue has to be decided on the basis of the totality of the facts and circumstances and not merely on the basis of the accounting entries passed by the assessee. In our view, the Supreme Court decision in the case of T.V. Sundaram Iyengar & Sons Ltd. Is squarely applicable to the facts of the assesee's case.
7. It would be appropriate to make a reference to the Supreme Court decisions relied upon by the ld. counsel for the assessee. In the case of Sugauli Sugar Works Pvt. Ltd., it was observed by the Supreme Court that the principle that expiry of period of limitation prescribed under the Limitation Act could not extinguish the debt, but it would only prevent the creditor from enforcing the debt, has been well settled. It was held by the Supreme Court that if this principle is applied, it would become clear that mere entries in the books of account of the debtor made unilaterally without any act on the part of the creditor will not enable the debtor to say that the liability has come to an end. It was also observed that this will not by itself confer any benefit on the debtor as contemplated by Section 41(1).
8. The ratio of the case of Kesaria Tea Co. Ltd. may be' reproduced below from the headnote:
Held, affirming the decision of the High Court, that the Appellate Tribunal as well as the High Court were justified in coming to the conclusion that the purchase tax liability of the assessee had not ceased finally during the year in question : despite the finality attained by the judgment in Neroth Oil Mills case (1982) 49 STC 249 (Ker.), the other issues having bearing on the exigibility of purchase tax still remained and the dispute between the assessee and the Sales Tax Department continued. The unilateral act on the part of the assessee by way of writing off the liability in its accounts did not necessarily mean that the liability had ceased in the eye of law.
It may be, mentioned that the Supreme Court, in the case of Kesaria Tea Co. Ltd. distinguished the decision in the case of T.V. Sundaram Iyengar & Sons Ltd. and followed the case of Sugauli Sugar Works Pvt. Ltd. In our view, both these cases do not apply to the facts of the assessee's case. In the case of Kesaria Tea Co. Ltd., which has been rendered by three judges, the assessee made a provision towards purchase tax liability. This liability was written back in the accounts even though the Sales Tax Department was pursuing the claim. Therefore, it was held that the liability did not come to an end merely on account of unilateral writing back in the books of account of the assessee. It may also be mentioned that both these cases interpret Section 41(1) of the IT Act. On the other hand, in the present case, the addition has been made Under Section 28(iv).
9. It may be mentioned here that the Kerala High Court, in the case of Sundaram Industries Ltd. 253 ITR 396, followed the Supreme Court decision in the case of T.V. Sundaram Iyengar & Sons Ltd in preference to the case of Sugauli Sugar Works Pvt. Ltd., by observing that the former judgment was rendered by a Bench comprising of three judges whereas the latter decision was rendered by a Bench comprising of two judges and therefore the decision of a larger bench must be followed in case of conflict. As mentioned above, the Supreme Court decision in the case of Kesaria Tea Co. Ltd. is not applicable to the facts of the assessee's case. Considering the entire facts and circumstances, we feel that the sum of Rs. 7.25 lakhs is a business benefit which has arisen to the assessee during the course of normal business activities. Therefore, the same has to be brought to the charge of tax as business income. We, therefore, hold that the ld. CIT(A) was not justified in deleting the addition. His order is, therefore, reversed and that of the AO restored on this issue.
10. The ground No. 2 raised by the Department is as under:
The ld. CIT(A) erred in deleting the addition Under Section 41(1) of Rs. 70,845/- without appreciating that the assessee could not prove the existence of these Labilities and erred further in admitting additional evidence in contravention of Rule 46A of the IT Rules without giving opportunity to the AO.
11. The facts are that the assessment was originally completed by the AO Under Section 143 on 23.3.2000. During the course of the assessment proceedings, the AO found that there were various sundry creditors, which were outstanding in the books of account of the assessee prior to the financial year 1993-94. These credits had not been paid back by the assessee. The AO asked the assessee to furnish complete present addresses of the creditors and the assessee complied with this requirement. The AO issued summons Under Section 131 on 18.1.2000, 19.1.2000 on the various creditors. Some of the summons were returned undelivered by the postal authorities with the remarks such as 'party not known', 'party left' etc. Some other parties responded and categorically denied having any dealings with the assessee. The AO confronted the assessee with this fact vide letter dated 8.3.2000 and the assessee filed a reply on 13.3.2000. It was contended by the assessee that the creditors were very old and it was likely that they must have shifted from their old addresses or closed down their business. The assessee claimed that further enquiries be carried out by the AO. It was also pointed out to the AO that the assessee has no means to enforce attendance of these parties as the creditors were very old. The AO observed that when the assessee himself is unaware of the whereabouts of the parties, it is not known how the amount will be repaid to the parties. The AO, therefore concluded that the creditors were bogus or the liabilities have ceased to exist. In the original assessment order, the AO has discussed the factual position with regard to each and every sundry creditor and eventually additions of Rs. 1,83,321/- and Rs. 1,12,723/- were made by the AO
12. This matter came up before the ld. CIT(A), who set aside the issue vide order dated 6.12.2000. At page 6 of his order, the ld. CIT(A) has observed that the AO has tried to make a good case in favour of the Department, but he had not provided adequate opportunity to the assessee to submit its explanation. Therefore, this issue was restored back to the AO for allowing opportunity to the assessee. During the course of fresh assessment proceedings, the AO once again allowed opportunity to the assessee and the assessee was required to furnish complete present addresses and confirmations from the parties or to produce the parties before him. However, the assessee merely filed copies of accounts as appearing in its books of account in respect of certain creditors for goods. In respect of certain other creditors for goods, the assessee was able to furnish the details and evidence. The AO eventually made addition-of Rs. 70,845/-. This addition has been deleted by the ld. CIT(A) for similar reasons as indicated by him in deleting the earlier addition of Rs. 7.25 lakhs.
13. The arguments submitted before us by both the parties are more or less the same as sbmitted in connection with the earlier addition of Rs. 7.25 lakhs. We have considered these arguments and have gone through the facts. The merits of each case may now be discussed below:
(a) M/s Global Tele - Rs. 21,000/- : During the course of original assessment proceedings, summons issued to this party were returned with the remark 'left'. The assessee was unable to furnish correct address or to produce the party or file confirmation. During the fresh assessment proceedings also, the assessee completely failed to give the details required for making further enquiries as directed by the CIT(A). In view of these facts, we hold that the sum of Rs. 21,000/- has been rightly added and the ld. CIT(A) was not justified in deleting the addition The onus is on the assessee to establish that any liability for which deduction has already been allowed in the earlier AYs is continuing and has not ceased to exist Since the assessee is completely unaware about the address of this party and the party is also not coming forth to claim this amount, in view of the Supreme Court decision in the case of T.V. Sundaram Iyengar & Sons Ltd. (supra), the amount becomes assessable in the case of the assessee. The order of the AO with regard to this credit is, therefore, restored.
(b) M/s United Data Base Pvt. Ltd. - Rs. 3,650/- : The summons issued to this party at the time of original assessment was returned with the remark 'not known'. No new material or evidence was produced before the AO during the fresh assessment proceedings. Therefore, for the same reasons, the order of the ld. CIT(A) on this issue is reversed and that of the AO restored.
(c) Shri Sadhana Printers - Rs. 5,000/- : In this case also, the summons issued at the time of original assessment were returned with the remark 'not known'. In the fresh assessment order, the AO has mentioned that Shri Sadhana Printers replied stating, that it has closed its business and is not going to claim its liability in future. On that ground, the addition was made. In our view, there is contradiction in the AO's order. He says that the summons could not be served and thereafter he says that Sadhana Printers replied. In our view, mere submission that the creditor is not going to claim the liability does not result into elimination of the liability, insofar as the assessee is concerned. The existence of the party is proved and the genuineness of the credit is also established. Therefore, with regard to this amount of Rs. 5,000/-, the order of the ld. CIT(A) is confirmed.
(d) M/s G.S Quality - Rs. 2,920/- : This party responded to the summons issued by the AO at the time of original assessment and replied vide letter dated 28.1.2000 that they did not supply any material to the assessee company, and no money is due from them. During the course of fresh assessment proceedings, no explanation or material was filed by the assessee. In view of the categorical denial by this party, we hold that the AO was justified in making the addition and therefore his order on this issue is restored.
(e) M/s Suman Arts Printers - Rs. 3,475/- : This party also responded to the summons issued at the time of original assessment and replied vide letter dated 31.1.2000. This reply may be reproduced below:
Copy of account of the party for the period from 89-90 to 31.3.95 is enclose herewith. As per our books of account, an amount of Rs. 1,545/- was due from the party. This amount has been written off on November 30, 1994, since we were (sic) able to recover the outstanding in spite of personal reminders to the party. In view of this in AY 97-98. we do not show any outstanding from the party. Since the amount was written off in 94-95, we have not approached the party for recovery for the last 4 years.
From the above, it may be seen that the assessee is showing a credit of Rs. 3,475/- whereas the party confirmed only Rs 1,545/-, which was also written off by them in the financial year 94-95. No fresh evidence or material was filed by the assessee during the fresh assessment proceedings. Therefore, on this issue, the AO's order is restored.
(f) M/s Sahitya Sahakar Mudralaya - Rs. 5,000/- : This party had also filed letter dated 28.1.2000 during the course of original assessment proceedings and submitted as under:
It is informed that Mr. M.M. Dalvi who was then proprietor of M/s. Sahitya Sahakr Mudralaya expired on 5.12.99 and as such he is no more. Secondly, we state that on going through the records of the said concern, there is no any account in the name of M/s Ahuja Graphic Machinery Pvt. Ltd. in the books of account since 1.4.90 and as such question does not arise to be a creditor of M/s AGMPL.
Nothing new was furnished during the course of fresh assessment proceedings. Therefore, on this issue, the order of the ld. AO is restored.
(g) M/s Bombay Potteries & Allied Stores - Rs. 11,800/- : During the course of original assessment proceedings, the assessee did not furnish address of this party. During the fresh assessment proceedings as well the assessee failed to furnish the address or confirmation from this party or to produce the party. In view of this, the order of the AO on this issue is restored.
(h) M/s India Offset - Rs. 10,000/- : This party responded during the course of original assessment proceedings and filed lettes dated 10.2.2000, relevant part of which is as under:
In this connection, we write to state that after 1.4.97, we had no transaction with the above company. Ledger copy of our transactions with the above firm for the period 94-95 and 95-96 are enclosed herewith. As could be seen, there are no arrears due to us from the said firm and therefore taking of steps for any recovery does not arise.
During the course of fresh assessment proceedings, no further material or evidence was filed by the assessee to show that the liability was continuing. Therefore, on this issue, the order of the AO is restored.
(i) M/s The Printers (Mysore) Ltd. - Rs. 8,000/- : This party had responded by filing a letter dated 31.1.2000 during the course of original assessment proceedings and stated as under:
Since our accountant is on one month leave, we are unable to attend the hearing on 1.2.2000. Kindly allow us another 15 days to enable us to attend the hearing or make written submission with regard to the details you have asked for in the above said notice.
The AO, in his original assessment order has mentioned that no reply was received from this party even after 15 days and therefore enquiries were conducted over telephone with one Shri R. Bhuvaneshwari, AGM (Finance) and he informed the AO that as far as the records are concerned, nothing is due from M/s AGMPL. He also told that they have not dealt with M/s AGMPL and therefore the question of any recovery does not arise. These facts were confronted to the assessee at the time of fresh assessment proceedings and the assessee was asked to produce the party. However, the assessee failed to produce the party Having regard to these facts, the order of the AO on this issue is restored.
To summarize, with regard to ground No. 2, the order of the ld. CIT(A) is modified inasmuch as the addition to the extent of Rs. 65,845/-,. The AO is directed accordingly.
14. In the result, the departmental appeal is partly allowed.
Order pronounced on 11.2005.
(SUSHMA CHOWLA) (K.K. BOLIYA) Judicial Member Accountant Member Sushma Chowla, Judicial Member
1. I have had the privilege of going through the order proposed by my learned Brother. Two issues have been raised in this appeal filed by the revenue. I agree with the conclusion of my learned Brother as far as the issue raised in Ground No. 2 is concerned. But, I beg to differ on the conclusion of my learned Brother as far as Ground No. 1 is concerned. Therefore, this dissenting order.
2. The facts of the case in brief are as follows:
The assessee was the Indenting Agent for M/s. Hawson Algraphy Ltd. (HAL), London. One machinery was sent by M/s. HAL to the assessee company to be exihibited in PAMEX Trade Fair 1987 in the Financial Year 1985-86 for booking orders for the sale of the said machinery. It was also agreed between the parties that the said machinery may be sold to a buyer during the course of the exhibition, and the sale consideration received on such sale shall directly be credited to the Bank account of the HAL in England. It was further agreed between the parties that the assessee shall be entitled to commission at the rate of 5% on the value of sale of the machinery. The said machinery could not be sold during the course of exhibition, but was subsequently sold by the efforts of the assessee to M/s. Conway Printers Pvt. Ltd., (CPPL) for a total consideration of Rs. 7.25 Lakhs. The payment for the said sale of the machinery was received on 21.01.1989 at Rs. 700 Lakhs and the balnce sum of Rs. 25, 000/- was received on 23.08.1990. The aforesaid machinery was transferred to India as a sample and accordingly no custom duty was paid during the course of its entry in India. The money was ultimately received on 23.08.1990 and since then the said amount of Rs. 7.25 Lakhs is being shown as a liability payable to M/s. HAL by the assessee company in its balance sheet from year to year. The business of HAL was subsequently taken over by another company Dupont de Nemours & Co Inc. and in succession was taken over by Agfa Gevaert NV, Belgium. The said amount of Rs. 7.25 Lakhs is being shown as credit payable to HAL by the assessee company in its books of account, since the money has been received on the sale of the machinery. The said liability has been accepted by the revenue from year to year. During the course of assessment proceedings relating to year under consideration i.e., Assessment Year 1997-98, the Assessing Officer raised a query regarding the amount due and payable to HAL. In reply the assessee pointed out the total facts in connection with this transaction and also the fact that M/s. HAL has now merged its business with M/s. Agfa Gevaert NV, Belgium. The Assessing Officer brushing aside the contentions of the assessee observed that the assessee has not remitted the entire sale proceeds to the foreign suppliers and defrauded the revenue. Rejecting the contentions of the assessee, the Assessing Officer made an addition of Rs. 7.25 Lakhs on account of cessation of liability observing that "in reality there is not any cost to the assessee, because it is a free sample". It was further held by the Assessing Officer that the assessee is showing a hypothetical liability of a creditor in the balance sheet, which has ceased to exist because HAL had made no demand to sale proceeds of free sample and revival of liability is not possible at all in the future. Before the CIT(A) a copy of letter dated 25.06.2001 from Agfa Gevaert NV, Belgium Confirming the transaction was filed and it was claimed that the assessee has not credited this amount to P & L Account, but shown as liability payable to Agfa Gevaert NV, Belgium. The CIT (A) on consideration of the facts of the case concluded that no benefit has arisen to the assessee under the provisions of Section 28(iv) of the I.T. Act, nor any deemed profit has arisen as per the provisions of Section 41(1) of the I.T. Act, as the assessee company had never made any claim for allowance or deduction for this amount in the assessment relating to any year. The said amount had never been allowed as any loss, expenditure or trading liability incurred by the assessee, therefore there is no question of any diminution or cessation of this amount being trading liability or loss or expenditure of the assessee company. The assessee company is showing the said amount as a liability in its balance sheet and there is no merit in the addition made by the Assessing Officer in this regard. The CIT(A) further held that at best the assessee's income shall be restricted to commission at the rate of 5% of the value of the machinery sold through the assessee, which would be taxable in the year of sale of machinery i.e., Assessment Year 1989-90 and in the instant year i.e., Assessment Year 1997-98, no commission income can be taxed in the hands of the assessee company.
3. The learned DR vehemently relied on the order of the Assessing Officer and stated that the assessee as an agent of HAL had obtained the machine for exhibiting in the exhibition. It was agreed between the parties that in case the machinery is sold in the exhibition, the amount shall be transferred to the Bank account of the assessee and in case the said machinery is not sold, the same shall be returned to HAL. The Learned DR pointed out that the CIT(A) while allowing the relief to the assessee has observed that the assessee has not returned back this liability of Rs. 7.25 Lakhs. The Learned DR further stated that the said liability has seized and the addition made by the Assessing Officer in this regard is correct.
4. The learned AR for the assessee vehemently supported the order of CIT(A) and claimed that the aforesaid amount has not been written off by the assessee company in its books of account. Mere non-payment of the long due liability for a long period does not bring about the cessation of the liability. The learned AR for the assessee further contended that the addition made under Section 41(1) of the I.T. Act is not correct in the facts of the case and relied on the decisions of Hon'ble Supreme Court in the case of CIT v. Sugauli Sugar Works Pvt. Ltd. 236 ITR 518 and Chief CIT v. Kesaria Tea Co. 254 ITR 434.
5. In the facts of the present case, it is difficult to comprehend how the said receipt can be treated as income of the assessee company unless there is a finding on record that the said liability to pay has ceased. The assessee is showing the said amount as a liability in its balance sheet from year to year. The machinery was handed over to M/s. Conway Printers Pvt. Ltd., after taking approval from HAL and the amount received by them is being shown in the books of account of the assessee as a deposit from them. The amount has remained to the credit of M/s. Conway Printers Pvt. Ltd. The amount due and payable to HAL could not be deposited in the bank account of the said company, as the company was bought by E I DuPont de Nemours and Co. Inc. & incorporated into DuPont Howson Ltd. The said business was absorbed into Dupont Printing & Publishing in 1992 and then sold in March, 1998 to Agfa Gevaert NV, Belgium. As the business of HAL was being transferred to various concerns, the assessee was not sure to whom the said amount is to be paid. Further, the transaction in question has not been found to be non-genuine and merely because number of years have lapsed from the date of realization of money on the sale of the machinery to date, there is no merit in the argument that the liability has extinguished. In the year under consideration, there is no basis for making the aforesaid addition. What is taxed under the Income Tax is 'Income'. The said amount received on the sale of machinery entrusted to the assessee company can under no circumstances partake the nature of income in the hands of the assessee for the year under consideration. The liability shown from year to year by the assessee company in its books of account has been accepted by the revenue authorities. No change in the settled position has taken place, during the year under consideration in order to convert the aforesaid liability into income for the year under consideration. The assessee is still recognizing its liability to pay the aforesaid amount to Agfa and even Agfa acknowledges the dues receivable from the assessee. There is no merit in the argument that the time limit to recover the said liability has expired. The liability recognized by the assessee has not seized to exit. Their Lordships of Hon'ble Supreme Court in the case of CIT v. Sugault Sugar Works Pvt. Ltd., (supra) had held as under:
...The principle that expiry of the period of limitation prescribed under the Limitation Act could not extinguish the debt but it would only prevent the creditor from enforcing the debt, has been well settled. If that principle is applied, it is clear that mere entry in the books of account of the debtor made unilaterally without any act on the part of the credit will not enable the debtor to say that the liability has come to an end. Apart from that, that will not by itself confer any benefit on the debtor as contemplated by the section.
6. The said decision in Sugauli Sugar Works Pvt. Ltd., was rendered by a Bench of Two Judges. Thereafter, the matter was considered by Three Judges Bench of Hon'ble Supreme Court in the case of CIT v. T.V. Sundaram Iyengar and Sons Ltd. 222 ITR 344, which held as under:
Held, that if a commonsense view of the matter were taken, the assessee, because of the trading operation, had become richer by the amount which it transferred to its profits and loss account. The moneys had arisen out of ordinary trading transactions. Although the amounts received originally were not of income nature, the amounts remained with the assessee for a long period unclaimed by the trade parries. By lapse of time, the claim of the deposit became time-barred and the amount attained a totally different quality. It became a definite trade surplus. The assessee itself had treated the money as its own money and taken the amount to its profits and loss account. The amounts were assessable in the hands of the assessee.
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7. Their Lordships of Hon'ble Supreme Court in Chief CIT v. Kesaria Tea Co. 254 ITR 434 following the decision in Sugauli Sugar Works Pvt. Ltd., and distinguishing the ratio of T.V. Sundaram Iyengar had Sons Ltd (supra) and held that even in case where the liability is written back the same cannot be deemed to be the income of the year under Section 41(1) of the I.T. Act.
8. As per the law relating to precedence, the latest decision is to be followed, for the reason that the latest decision is delivered after considering the existing decisions available on the subject. In the case of Chief CIT v. Kesaria Tea Co. 254 ITR 434, the Supreme Court Bench consisting of three Judges had considered the earlier two Judges bench decision in the case of Sugauli Sugar Works Pvt. Ltd. 236 ITR 518 and also distinguished three Judges bench decision in the case of CIT v. T.V. Sundaram Iyengar and Sons Ltd. 222 ITR 344, and preferred to follow the legal principle-laid down in the earlier division bench decision referred in the case of Sugauli Sugar Works Pvt. Ltd.
9. Leave it apart, the facts of the present case are clearly different from the facts of the case considered by the Supreme Court in CIT v. T.V. Sundaram Iyengar and Sons Ltd. (supra), which related to a case where the assessee had transferred the unclaimed credit balances available in his deposit account to its profit and loss account, thereby converting the character of the credit balances into that of income by its own action. It was in that circumstances, the Supreme Court has held that the conversion of the creditors balances into income admitted by the assessee by transferring balances to its profit and loss account, in fact, amounted to income taxable in the hands of the assessee. But, in the present case, assessee has not transferred the outstanding liability to its profit and loss account and has not thus changed the character of the liability reflected in its balance sheet for so many years in the past. Even on the closing day of the relevant previous, year, the balance is shown, still outstanding. Assessee has not treated outstanding balances in any different manner. There is difference in the facts of the present case and in the case of CIT v. T.V. Sundaram Iyengar and Sons Ltd. (supra).
10. Similar issue arose in the case of Ketan V Parekh v. DCIT in ITA No. 8250/Mum/2003, where an addition of Rs. 4,00,00,000/- was made under Section 4 read with Section 28(iv) of the I.T. Act for not repaying the earnest money received for sale of shares under an option agreement. The Tribunal (Bench in which Judicial Member herein was a Member) after considering the issue at length held as under:
We find it difficult to under stand as to how can the impugned receipt be treated as an income unless there is a finding that the assessee does not have any liability to return the money to TIFIL.... At best it is a case of diverting TIFIL funds for the use of this assessee, but then, in such a situation also, it does not become income of the assessee because the monies so diverted continue to be refundable. The assessee does not get this money in exercise of his right over the money. Just because the assessee has not paid the amount till now cannot be reason enough to jump to the conclusion that there is no liability to return the money either.
11. In the facts of the present case before us, no unilateral act of writing back the said amount has been made by the assessee. The assessee continues to recognize the liability of a sum of Rs. 7.25 Lakhs payable to HAL in its account. Mere non-payment of the amount to HAL does not in any manner convert the impugned sum of Rs. 7.25 Lakhs as taxable under the provisions of Income Tax Act as business income of the assessee. No doubt, in terms of Section 28(iv) of the I.T. Act the value of any benefit or perquisite whether convertible into money or not arising from business or the exercise of a profession is chargeable to income tax under the head income from business or profession. But the aforesaid section applies to benefits or perks, but not to money received as the section clearly stipulates 'whether convertible into money or not. However, the liability of Rs. 7.25 Lakhs does not partake the nature of any benefit or perquisite for bringing it to tax under the umbrella of business income. In view of the above discussion hereabove, I hold that the amount of Rs. 7.25 Lakhs due as a liability to HAL is not to be included as income of the asesee for the year under consideration.
12. In the result, I dismiss the appeal filed by the Revenue.
Dated this, of July, 2006.
SUSHMA CHOWLA JUDICIAL MEMBER Sushma Chowla, Judicial Member
1. In this case, the appeal filed by the revenue was heard by the Division Bench of this Tribunal. As a result of difference of opinion in respect of ground No. 1 between the Accountant Member and the Judicial Member, the following issue was referred to a Third Member by the Hon'ble President, ITAT, under Section 255(4) of the Income Tax Act, 1961:
Whether, on the facts and in the circumstances of the case, the sum of Rs. 7,25,000/- received by the assessee in the year 1989, during the normal course of carrying on its business but shown as outstanding liability in the books of account till date, can be brought to the charge of tax Under Section 28 of the Income Tax Act, 1961, as profit, gain or benefit of business in the Assessment Year under appeal.
2. With regard to the above question referred to the learned Accountant Member of the Bench came to the conclusion that the sum of Rs. 7,25,000/- is a business benefit which had arisen to the assessee during the course of normal business activities and therefore the same has to be brought to the charge of tax as business income. On the other hand, the Judicial Member held that the assessee continues to recognize the liability of a sum of Rs. 7.25 Lakhs payable to HAL in its account and mere non-payment of the account to HAL does not in any manner convert the impugned sum of Rs. 7.25 Lakhs as taxable under the provisions of Income Tax Act as Business Income of the assessee. It was held that the liability of Rs. 7.25 Lakhs does not partake the nature of any benefit or perquisite for bringing it to tax under the umbrella of business income and the said amount of Rs. 7.25 Lakhs due as a liability to HAL is not to be included as income of the assessee for the year under consideration.
3. The Hon'ble Vice President (M), Shri G.E. Veerabhadrappa, as a Third Member vide his order dated 31.05.2007, agreed with the view of the Judicial Member holding that the amount in question cannot be included in the income of the assessee for the year under consideration.
4. Thus, by majority view, we hold that the liability of Rs. 7.25 Lakhs due to HAL does not partake the nature of any benefit or perquisite in terms of Section 28(iv) of the I.T. Act or under the provisions of Section 41(1) of the I.T. Act and the same is not to be included as income of the assessee for the year under consideration.
5. The revenue has also raised the under mentioned ground No. 2:
The learned CIT(A) erred in deleting the addition Under Section 41(1) of Rs. 70,845/- without appreciating that the assessee could not prove the existence of these liabilities and erred further in admitting additional evidence in contravention of Rule 46A of the IT Rules without giving opportunity of the A.O.
6. The Division Bench had agreed with regard to ground No. 2. The order of CIT(A) is to be modified in as much as addition to the extent of Rs. 65,345/- is restored, as per the decision in para 13 of the order of learned Accountant Member, to which conclusion the Judicial Member had agreed.
7. In the result, the appeal filed by the revenue is partly allowed.
Order pronounced in the open court at the time of hearing itself.