2017 (7) TMI 574 - HC - Income Tax

Addition u/s 41 - amount collected towards the scheme which was expired long ago - cessation of liability - Held that - The assessee had launched a scheme of sales promotion. Under such scheme, the assessee would enroll a member, who would deposit a sum of ₹ 500/with the assessee company. If such a member in turn enrolled four members, he would get one black and white TV set manufactured by the assessee company free of cost. Same benefit would be available to the enrolled members if they fulfilled this condition. The scheme was operative for a period of 12 months. In other words, a member would have to enroll four members within such period of 12 months in order to get the benefit of earning a free TV set. Over a span of couple of years, the assessee collected a huge sum of ₹ 7.87 crores by enrollment membership fee of ₹ 500/each. As is bound to happen, in such a scheme requiring continuous chain reactions, the chain would break at some stage. The amount of ₹ 7.87 crores represents the money deposited by those members. This amount remained with the company over the years without any change whatsoever. The Revenue authorities have found that there was no activity at the hands of the assessee company in connection with the scheme for past several years. Not a single customer had demanded the money back nor the assessee had made any attempt to repay the same. It was only when the Assessing Officer in the present assessment proceedings raised the issue, the assessee made correspondence with the customers. This, the Commissioner (Appeals) correctly categorized as an afterthought. More importantly in all invoices, the signatures of the member customers were missing. Their addresses were not sufficient. Over the years, the company had also invested such amount earning interest and used such interest for its purpose, of course, offering interest income to tax. By all accounts, the assessee has treated such amount as its own. The scheme itself terminated many years back. Limitation of claiming amount back has also seized. There is absolutely no movement or correspondence between the assessee and its members with respect to the claim or with respect to the deposited amounts. - Additions confirmed

Summary

Issues:
Cessation of liability under Section 41 of the Income Tax Act, 1961.

Detailed Analysis:

1. Background and Assessing Officer's Stand:
The appellant contested the judgment of the Income Tax Appellate Tribunal regarding the cessation of liability under Section 41 of the Income Tax Act. The appellant argued that the liability had not ceased to exist during the assessment year 2012-13 and thus should not be added to the income. The Assessing Officer disagreed, noting that the liability dated back 15 to 20 years, and the company had shifted from manufacturing to trading activities. The Assessing Officer considered the liability as ceased due to lack of repayment activity and added the sum to the income.

2. Appeal to Commissioner of Income Tax (Appeals):
The appellant appealed to the Commissioner of Income Tax (Appeals), who upheld the Assessing Officer's decision. The Commissioner highlighted various factors, including the expiration of the scheme after 12 months, lack of customer verifiability, absence of customer signatures on invoices, and no refunds or repayments made by the company. The Commissioner relied on the Supreme Court's decision in CIT v. Sundaram Iyengar & Sons Ltd. to support the addition to the income.

3. Tribunal's Confirmation and Subsequent Appeal:
The Tribunal affirmed the Revenue authorities' view, leading to the appellant's present appeal. The appellant argued against the cessation of liability, citing non-fulfillment of Section 41 conditions. The appellant referenced the Supreme Court's decision in CIT v. Sugauli Sugar Works (P) Ltd. and distinguished the facts from the Sundaram Iyengar case. The appellant also mentioned relevant Gujarat High Court cases.

4. Judgment by the High Court:
The High Court analyzed the peculiar circumstances of the case involving a sales promotion scheme where members deposited money for benefits. The court noted the lack of activity in the scheme for several years, absence of refund demands, and the company's use of the deposited amount for investments. Despite not transferring the amount to the profit and loss account, the court found that the company treated the amount as its own. Citing the Sundaram Iyengar case, the court concluded that the liability had ceased, and the addition to income was justified. The court dismissed the appeal, emphasizing the lack of movement or correspondence regarding the deposited amounts.

5. Conclusion:
The High Court upheld the decision to add the liability amount to the appellant's income, considering the unique circumstances of the case and the lack of activity or refund requests over the years. The court found no reason to interfere with the findings of the Revenue authorities and the Tribunal, leading to the dismissal of the appeal.