2011 (2) TMI 697 - AT - Income Tax

Addition - Under section 41/(1)/28(iv) - The assessee contention that the remission of the liability has not accrued entirely during the year under consideration but during the long span of time therefore the same cannot be taxed in the assessment year under consideration find that the remission has been admitted by the assessee only in the year under consideration and not in the earlier years - The assessee was making the entries in the books of account right from the beginning but only in the year under consideration in which the issue arises and it was considered as cessation of liability due to afflux of time as well as the assessee has already accepted the non-existence of the trading liability - When the assessee by way of artificial entries showing the payments to creditor and corresponding entry for overdraft without coming out with clean hands then the stand taken by the assessee has no substance - Therefore appeal of the assessee stands dismissed.

Summary

Issues Involved:
1. Addition of Rs. 1,78,74,364/- under Section 41(1)/28(iv).
2. Assessment of the said amount in AY 2007-08.

Detailed Analysis:

1. Addition of Rs. 1,78,74,364/- under Section 41(1)/28(iv):

During the assessment proceedings, the Assessing Officer (AO) identified that the assessee had issued cheques amounting to Rs. 1.61 crores from March 11, 1998, to March 31, 2007, which were not encashed. These cheques were related to various creditors and were shown as an overdraft from Oriental Bank of Commerce. The AO concluded that these entries were a unilateral act of writing off liabilities in the books, as specified in Explanation 1 to Section 41(1). Additionally, the AO noted substantial credits outstanding for the last 8-10 years from various parties, totaling Rs. 1,10,03,146/-.

The AO issued notices under Section 133(6) to verify the addresses of specific parties, but some notices were returned due to incorrect addresses, and some parties stated no outstanding balances as per their records. The assessee argued that all expenses were debited to the work-in-progress (WIP) account and no deduction was claimed, hence no addition should be made under Section 41(1). However, the AO did not accept this explanation, holding that the discharged liability of Rs. 1,78,74,364/- was taxable under Section 41(1)/28(iv) due to the unilateral discharge of liability by book entries.

On appeal, the Commissioner of Income Tax (Appeals) [CIT(A)] confirmed the AO's addition. The assessee contended that since no income was recognized from the project and all expenses were debited to WIP, the remission of liability should not be taxed as income but reduced from WIP. The AO and CIT(A) disagreed, asserting that the remission of liability constituted income.

The Tribunal, considering the rival contentions and the decision of the Hon. Jurisdictional High Court in Solid Containers Ltd. vs. Dy CIT (308 ITR 417), held that the remission of liability, even if not recognized as income from the project, becomes part of the trading activity and is taxable. The Tribunal referenced the Supreme Court's decision in T.V. Sundaram Iyengar and Sons Ltd. (1996) 222 ITR 344, stating that amounts received in the course of trading transactions, even if initially not of income nature, change character over time and become taxable income when they become the assessee's own money.

2. Assessment of the said amount in AY 2007-08:

The assessee argued that the remission of liability did not accrue entirely during the year under consideration but over a long period, hence it should not be taxed in AY 2007-08. The Tribunal found that the remission was admitted by the assessee only in the year under consideration and not earlier. The issue arose and was considered as cessation of liability due to the efflux of time and the assessee's acceptance of the non-existence of the trading liability. The Tribunal concluded that the assessee's artificial entries and lack of transparency invalidated their contention.

In conclusion, the Tribunal upheld the CIT(A)'s order, dismissing the assessee's appeal and confirming the addition of Rs. 1,78,74,364/- under Section 41(1)/28(iv) for AY 2007-08. The order was pronounced in the open court on February 28, 2011.