2011 (12) TMI 777 - AT - Income Tax

Summary

Issues Involved:
The appeal challenges the correctness of the CIT(A)'s order regarding the assessment under section 143(3) of the Income Tax Act, 1961 for the assessment year 2005-06. The issues include taxability of income under section 41 of the IT Act and addition made by the AO on different grounds without complying with the provisions of the Act and principles of natural justice.

Taxability under Section 41 of the IT Act:
The assessee, a franchise for providing computerized information, received a sum of Rs.10,00,000 as advance against gross consideration on termination of franchise. The Assessing Officer brought this amount to tax under section 41(1) of the Act, considering the liability to repay the advance had ceased. The CIT(A) upheld this taxability under section 28(iv) by reasoning that there was no intention to repay the liability and no evidence of the creditor claiming the amount back. The CIT(A) referred to legal precedents to support the taxability under section 28(iv). However, the Appellate Tribunal noted that the amount was received in a previous year, and there was no development in the relevant year to make it taxable under section 28(iv). As there was no cessation of liability and the amount was never claimed as a deduction, the Tribunal directed the Assessing Officer to delete the addition of Rs.10 lakhs, upholding the assessee's grievance.

Addition Made by AO on Different Grounds:
The assessee raised an additional ground challenging the addition made by the AO on different grounds without complying with the provisions of the Act and principles of natural justice. The Tribunal, after considering the rival contentions and the factual matrix of the case, found no legally sustainable basis for the taxability of the income. The Tribunal observed that the year in question was not the year of receipt nor a year where any material development occurred to alter the character of the receipt. As there was no cessation of liability and the amount was not claimed as a deduction, the Tribunal directed the Assessing Officer to delete the impugned addition of Rs.20 lakhs, thereby allowing the appeal.