2021 (7) TMI 1404 - AT - Income Tax

Addition u/s 41(1) - advance received by the assessee for sale of his flat originally pursuant to MOU entered into with the purchaser - since the said purchaser expressed his inability to pay the remaining part of the consideration for the property, the MOU was cancelled by the assessee AND assessee is bound to refund the advance received which he had no sufficient funds to refund the advance to the party, the same were refunded in installments - amounts received as advance for sale of property is a capital receipt and is certainly not a trading receipt - CIT-A deleted addition - whether CIT(A) was correct in accepting the proof of payments submitted by the assessee before him which were never produced before the AO in contravention to the provisions of' Rule 46A of the Income Tax Rules, 1962? - HELD THAT - As on 31/03/2019, there were no amounts payable by the assessee to said party. This cannot be construed as any additional evidence as it is only submission of mere fact of repayments made to the said party which were submitted at the behest of the ld CIT(A). Even before us, the Revenue had not brought any contrary evidence to prove that the said liability was not repaid. In the first instance, the addition ought not to have been made u/s.41(1) of the Act in the facts of the instant case as we have already stated hereinabove that assessee has been continuing to show it as liability as on 31/03/2015 in his balance sheet. AO having made an unwarranted addition in the hands of the assessee cannot claim recourse to Rule 46A violation by merely taking the ground before us when the said provision of Section 41(1) of the Act could not have been applied by him in the eyes of law. CIT(A) had not granted relief to the assessee by relying on the said table. He had granted relief on the ground that no deduction has been claimed by the assessee in earlier years and hence, provisions of Section 41(1) of the Act could not be invoked in the instant case. Moreover, the ld. CIT(A) had also appreciated the fact that assessee had continued to show the liability in his books and that the liability had not ceased to exist. Hence, the ground No.1 raised by the Revenue on the alleged violation of Rule 46A of the IT Rules is hereby dismissed. In view of the aforesaid observations, both the grounds of the Revenue are dismissed.

Summary

Issues:
1. Acceptance of proof of payments submitted by the assessee in contravention to Rule 46A of the Income Tax Rules, 1962.
2. Treatment of outstanding liabilities in the books of account as income under Section 41(1) of the Income Tax Act, 1961.

Issue 1: Acceptance of proof of payments submitted by the assessee in contravention to Rule 46A:
The Revenue contended that the Commissioner of Income Tax (Appeals) erred in accepting the proof of payments submitted by the assessee, which were not produced before the Assessing Officer as per Rule 46A of the Income Tax Rules. The Appellate Tribunal noted that the assessee, a Bollywood actor, received advance payments against the sale of a property. The Tribunal found that the subsequent repayment details were furnished before the Commissioner of Income Tax (Appeals) and no contrary evidence was presented by the Revenue to prove non-repayment. The Tribunal held that the ground of Rule 46A violation was dismissed as the addition under Section 41(1) of the Act was not applicable, and the liability was shown in the balance sheet consistently.

Issue 2: Treatment of outstanding liabilities as income under Section 41(1) of the Income Tax Act:
The Revenue argued that the outstanding liability of the assessee should be treated as income under Section 41(1) of the Income Tax Act due to the cessation of liability. The Assessing Officer added the liability amount to the assessee's income, disregarding the capital nature of the receipt and the absence of deduction claims in previous years. The Tribunal observed that the liability was genuine, as evidenced by continued acknowledgment and repayments by the assessee. The Tribunal held that the liability did not cease to exist as it was reflected in the balance sheet, and the provisions of Section 41(1) were not applicable. The Tribunal dismissed the Revenue's grounds, upholding the Commissioner of Income Tax (Appeals) decision.

In conclusion, the Appellate Tribunal dismissed the Revenue's appeal, emphasizing that the liability in question was a capital receipt, not a trading liability, and the provisions of Section 41(1) were not applicable. The Tribunal upheld the decision of the Commissioner of Income Tax (Appeals) based on the genuineness of the liability and the consistent treatment in the balance sheet.