2010 (1) TMI 652 - AT - Income Tax

Addition - Cessation of liability - Assessee is an exporter of beverages and kitchen utensils - assessee received certain amounts as trade advance and also made substantial exports during the year under consideration - The Assessing Officer in the light of Notification No. FEMA 23/2000-RB dated 3-5-2000 issued by Reserve Bank of India (RBI for short) wherein regulations relating to export of goods and services from India were laid down found assessee has contravened the stipulations - in the instant case as contended by the ld. C.A. vide letter dated 5-1-2005 seeking clarifications from RBI indirectly assessee acknowledges the liability to make the repayment - Assessee also acknowledges that the assessee has used the money for investment i.e. some other purposes than the intended exports - Accordingly the appeal of the Revenue fails and it is dismissed

Summary

Issues Involved:
1. Justification of CIT (Appeals) in deleting the addition of Rs.9,77,29,799 made by the Assessing Officer.
2. Compliance with RBI regulations regarding export advances.
3. Determination of whether the trade advance ceased to be a liability and became income.

Detailed Analysis:

1. Justification of CIT (Appeals) in Deleting the Addition:

The primary issue was whether the CIT (Appeals) was justified in deleting the amount of Rs.9,77,29,799 added by the Assessing Officer as the income of the assessee. The Assessing Officer had added this amount to the income of the assessee on the grounds that it represented a non-refundable trade advance. The CIT (Appeals) disagreed with the Assessing Officer, finding that the assessee had refunded the trade advance to Uniglobe General Trading Company, UAE (UGTC) with the permission of the Reserve Bank of India (RBI). The CIT (Appeals) observed that the liability did not cease to exist as the amount was repatriated, and thus, there was no basis for the addition.

2. Compliance with RBI Regulations:

The Assessing Officer noted that the assessee had contravened RBI regulations as per Notification No. FEMA 23/2000-RB dated 3-5-2000, which stipulates that export advances must be utilized within one year, or prior approval from RBI is required for any delay. The assessee received the last advance on 19-01-2004 and did not make the required exports within the stipulated period. The Assessing Officer found that the assessee utilized the advance for investments in immovable properties without obtaining necessary permissions from RBI, which led to the conclusion that the amount should be added to the income.

3. Determination of Whether the Trade Advance Became Income:

The Assessing Officer concluded that the trade advance had ceased to be a liability and became income based on several observations:
- The assessee did not export goods within the stipulated time.
- The foreign buyer did not enforce repayment.
- The assessee utilized the advance for other purposes.
- The liability was considered to have ceased by operation of law and omissions by the parties.

The CIT (Appeals), however, found that the liability existed as the assessee repatriated the amount after obtaining RBI's permission. The CIT (Appeals) disagreed with the Assessing Officer's reliance on the Supreme Court judgment in Commissioner of Income-tax vs. T.V. Sundaram Iyengar and Sons Ltd., as the facts were distinguishable.

Separate Judgments by Tribunal Members:

- Ld. Accountant Member (A.M.): Confirmed the CIT (Appeals) order, holding that the facts of the case did not align with the T.V. Sundaram Iyengar & Sons case. The A.M. found that the trade advance was repatriated, and thus the liability did not cease to exist.

- Ld. Judicial Member (J.M.): Allowed the Revenue's appeal, holding that the amount ceased to be a liability during the year under consideration and should be included in the income. The J.M. agreed with the Assessing Officer that the amount fell within the inclusive definition of 'income.'

Third Member Decision:

The Third Member agreed with the A.M., concluding that the liability did not cease to exist as the assessee acknowledged the liability and repatriated the amount with RBI's permission. The Third Member held that the facts of the case did not warrant the application of the T.V. Sundaram Iyengar & Sons judgment, and the appeal of the Revenue was dismissed.

Conclusion:

The Tribunal ultimately upheld the CIT (Appeals) decision, finding that the trade advance did not cease to be a liability and was not income. The matter was referred back to the regular Bench for passing a consequential order.