2016 (10) TMI 489 - AT - Income Tax

Addition u/s 41(1)(a) - unilateral remission of liability - Held that - Where the creditor company is confirming to the Assessing officer not once but on couple of occasions through written confirmations that the amount is not payable by the assessee, there is nothing more that the Assessing officer can do to come to a conclusion that the amount is no more payable by the assessee. In our view, given that the assessee is still claiming the amount as payable in its books of accounts, it is a matter where the creditor has taken some unilateral steps whereby it is not demanding or pressing for such payment. The reason could be unilateral write off of old outstanding amounts as not recoverable from the assessee or due to some accounting mismatch as claimed by the assessee. The fact remains that the creditor is no more demanding any such amount from the assessee and has confirmed the same to the Assessing officer. In light of these facts, it is a clear case of unilateral remission of liability in the hands of the assessee. What is relevant is to determine the year of obtaining the benefit as the benefit can be brought to tax in that year itself and not in any other year. In the instant case, M/s Tirupati Balaji Mineral Pvt. Ltd. has confirmed that there are no transactions during the previous year under consideration as well as the fact that there is no opening balance in the account of the assessee maintained in their books of accounts for the year under consideration. It is therefore clear that the unilateral action on the part of M/s Tirupati Balaji Mineral Pvt. Ltd. in remitting the subject amount has not happened in the previous year under consideration. In light of the same, even where the assessee has obtained the benefit by way of remission of its trade liability, the same cannot be brought to tax during the year under consideration as the event of remission has not happened during the year. Hence, the addition of ₹ 3,16,553 under section 41(1)(a) is hereby deleted. Regarding amount payable in respect of M/s Kay Jay Marbles Ceramics Pvt. Ltd all the facts lead the Assessing officer to treat the amount as taxable under section 41(1)(a) of the Act. There is however no evidence to support the proposition that there is a unilateral action on the part of the creditor in terms of remission of liability unlike the case of M/s Tirupati Balaji Minerals Pvt ltd. Further, the assessee continues to show the liability in its books of accounts and has also not done any unilateral write off in its books of accounts. In such situation, merely because the amount is outstanding since 2003, it cannot be inferred that the liability has ceased to exist and the assessee has obtained any benefit by way of remission or cessation of its trading liability. There has to be some positive evidence or action on the part of the assessee or the creditor to support the theory of remission or cessation which is apparently not present in the instant case. Having said that, we donot feel the necessity to examine the contention of the assessee that since the purchases are included in the closing stock, there has been no deduction that has been claimed by the appellant. We leave this contention open. Hence, in light of above, we donot agree with the position adopted by the Revenue that it is case which falls within the four corners of section 41(1)(a) of the Act. Hence, the addition of ₹ 1,81,251 under section 41(1)(a) is hereby deleted.

Summary

Issues Involved:
1. Depreciation on civil works of windmill.
2. Disallowance under Section 40(a)(ia) for non-deduction of TDS on freight payments.
3. Addition under Section 41(1)(a) for cessation of trading liabilities.

Issue-wise Detailed Analysis:

1. Depreciation on Civil Works of Windmill:
- Ground: The assessee contested the partial confirmation of additions by the CIT(A) regarding the non-allowance of depreciation at 80% on all civil works of the windmill.
- Outcome: During the hearing, the assessee's representative did not press this ground. Therefore, this ground of appeal was dismissed as not pressed.

2. Disallowance under Section 40(a)(ia) for Non-deduction of TDS on Freight Payments:
- Contention by Assessee: The assessee argued that the disallowance of ?4,10,188 under Section 40(a)(ia) was unjustified as the recipients of freight had already paid taxes on their incomes and had submitted requisite declarations (Form 15D).
- CIT(A) Findings: The CIT(A) upheld the disallowance, stating that the provisions of Section 194C were not applicable to the assessee as a contractor. Additionally, the second proviso to Section 40(a)(ia), introduced by the Finance Act 2012, was not retrospectively applicable for the assessment year 2006-07.
- ITAT Observations: The ITAT noted that there were conflicting decisions from various High Courts regarding the retrospective applicability of the second proviso to Section 40(a)(ia). Following the principle laid down by the Supreme Court in CIT vs. Vegetable Products Ltd., which favors the assessee in case of conflicting interpretations, the ITAT remitted the matter to the Assessing Officer (AO) for limited verification. The AO was directed to verify whether the recipient of the payment had included the same in their income computation and, if so, to delete the disallowance.

3. Addition under Section 41(1)(a) for Cessation of Trading Liabilities:
- Contention by Assessee: The assessee challenged the addition of ?4,97,804 under Section 41(1)(a), arguing that there was no remission or cessation of trading liabilities.
- Details of Creditors:
- M/s Tirupati Balaji Minerals Pvt. Ltd.: The assessee argued that disputes over quality led to non-payment of ?3,16,553, and the amount continued to appear in the books. The creditor had unilaterally written off the amount, which did not constitute remission or cessation of liability for the assessee.
- M/s Kay Jay Marbles Ceramics Pvt. Ltd.: The assessee argued that the goods purchased were defective and the amount of ?1,81,251 was included in the closing stock. There was no deduction claimed in the profit and loss account, and the creditor had not written off the amount.
- CIT(A) Findings: The CIT(A) confirmed the addition, stating that the liabilities had ceased in terms of Section 41(1)(a) as the creditors had denied any outstanding amounts.
- ITAT Observations:
- M/s Tirupati Balaji Minerals Pvt. Ltd.: The ITAT found that the creditor had confirmed no outstanding amount, indicating a unilateral remission of liability. However, the remission did not occur in the previous year under consideration. Therefore, the addition of ?3,16,553 was deleted.
- M/s Kay Jay Marbles Ceramics Pvt. Ltd.: The ITAT noted that there was no evidence of unilateral remission by the creditor. The liability continued to be shown in the assessee's books, and mere non-response from the creditor did not imply cessation of liability. Therefore, the addition of ?1,81,251 was deleted.

Conclusion:
The appeal was partly allowed. The ground regarding depreciation was dismissed as not pressed. The disallowance under Section 40(a)(ia) was remitted to the AO for verification. The additions under Section 41(1)(a) were deleted.