2016 (7) TMI 691 - AT - Income Tax

Liability in respect of wages - assessee s failure to furnish the details of such miscellaneous liabilities - Held that - The details of relevant liabilities were not produced by the assessee before AO and the same furnished before CIT(A) for the first time were relied upon by him to give relief to the asessee without giving any opportunity to AO. There is, therefore, violation of Rule 46A and this position is not disputed even by Ld. A/R. We, therefore, set aside the matter to AO. Addition of ceased liability - addition under the head investment allowance reserve - whether the amount of Reserve has not been utilized for acquiring plant & machinery within the period of 8 years from the date of creation and for not filing any evidence by the assessee - Held that - Sub-Section (1) of Section 32A is clear that there shall be a deduction equal to the 25% of actual cost of machinery or plant installed in the immediately succeeding previous year that in respect of investment reserve created for the business purpose. Sub-Section (6) of Section 32AB defines that if, said investment reserve is not utilized within the specified time and the same is deemed to be profit and gain of business of that previous year. In the present case, the said amount appears to be created in the A.Y 1997-78 debiting to the P & L account and there was no dispute that the factory of assessee was taken over by the Bihar State Financial Corporation on 01.04.1981, then the question would arise whether the AO could add a sum of ₹ 10,50,000/- as ceased liability u/s 41(1) of the Act. In our opinion, the AO can add the same as deemed profit and gain of business of that previous year under Sub-Section (6) of Section 32AB of the Act. In the present case investment reserve was created in the A.Y 1997-78 and there was no business activity of the assessee since 01-04-1981 and the AO can not treat the unutilized investment reserve as deemed profit and gain of business of the year under consideration i.e 2007-08 under Sub-Section (6) of Section 32AB of the Act and the addition under section 41(1) of the Act can not be applied taking into consideration that the assessee was not claimed any deduction in respect of amount ₹ 10,50,000/- under the head investment allowance reserve credited to Profit & Loss account, Therefore, we find no infirmity in the order of CIT-A in finding that the addition of amount ₹ 10,50,000/- u/s 41(1) of the Act by the A.O is not justified as the investment reserve was not created by an allowance or deduction in any year in respect of any Loss, Expenditure or Trading Liability incurred by the assessee. - Decided in favour of assessee

Summary

Issues:
1. Whether the liability of the assessee in respect of wages has ceased to exist.
2. Whether the liability in respect of Investment Allowance Reserve was claimed in the P&L Account and could be added u/s. 41(1) of the Income Tax Act, 1961.
3. Whether the CIT(A) erred in appreciating the merits of the case.

Analysis:

Issue 1: Liability of wages
The revenue contended that the assessee failed to provide details of liabilities before the AO, leading to the CIT(A) granting relief without following the procedure under Rule 46A. The Tribunal found a violation of Rule 46A and remanded the matter to the AO for verification, allowing ground no.1 for statistical purposes.

Issue 2: Investment Allowance Reserve
The AO added an amount under Investment Allowance Reserve as a ceased liability due to non-utilization within the specified time. The CIT(A) held that the reserve was not created by a deduction in the P&L Account, thus the addition under section 41(1) was not justified, and the amount was deleted. The Tribunal upheld this decision, dismissing ground no.2.

Issue 3: Appreciation of merits
The Tribunal found that the AO could not treat the unutilized investment reserve as deemed profit and gain of the business under Section 32AB, as the reserve was not created by an allowance or deduction. The Tribunal upheld the CIT(A)'s decision to delete the addition under section 41(1) for the investment reserve, resulting in the appeal of the revenue being partly allowed for statistical purposes.

This detailed analysis of the judgment highlights the key issues, arguments presented, and the decisions made by the authorities involved in the case.