2019 (1) TMI 1276 - HC - Income Tax

Addition of as remission of trading liability u/s 41(1) - book entry passed by the assessee by reducing the creditor s balance and increasing the assessee s capital balance - gift from the maternal uncle - Held that - The confirmation letter as produced by the assessee can only be treated to be an afterthought insofar as absolving the liability under Section 41(1). We hence, uphold the assessment under Section 41(1) and we hold that existence of adverse business situation is not a requirement under Section 41(1) to find remission of trading liability. We answer the questions of law in favour of the Revenue and against the assessee; but, however notice that the assessee had raised a contention that the liability as seen from the account of M/s.Veeriah Reddiar cannot be fully considered as a trading liability. It is also to be noticed that the remission of trading liability can be deemed to be an income arising from the profit and loss accounts only to the extent of the actual credits outstanding in the creditors account wiped off on the basis of the book adjustments made by the assessee. The question whether there is any liability other than a trading liability insofar as the outstanding credits found in the account of M/s.Veeriah Reddiar also has to be verified by the AO. Though we find the assessment made under Section 41(1) to be proper, we remand the matter to the AO for the limited purpose of limiting the addition under Section 41(1) to that of the trading liability wiped off from the account of M/s.Veeriah Reddiar. The assessee shall produce sufficient material to substantiate the liability having arisen other than under trade between the two. Appeal allowed with a remand to the limited extent of ascertaining the actual quantum to be made addition of as remission of trading liability under Section 41(1).

Summary

Issues:
1. Addition of ? 75 lakhs to the capital account of the assessee as a gift from the maternal uncle.
2. Validity of the assessment under Section 41(1) of the Income Tax Act, 1961.
3. Treatment of the alleged gift as remission of trading liability.
4. Burden of proof on the Revenue regarding the nature of the gift.
5. Interpretation of the findings and conclusions of the Tribunal in the case.

Issue 1: Addition of ? 75 lakhs as a gift:
The Tribunal confirmed the addition of ? 75 lakhs to the capital account of the assessee, which was claimed to be a gift from the maternal uncle. However, the Assessing Officer found business transactions between the maternal uncle and the assessee, leading to the conclusion that the amount was not a gift but part of a business transaction. The Tribunal noted that if the amount was genuinely a gift, there would be no addition under Section 41(1) of the Income Tax Act.

Issue 2: Validity of the assessment under Section 41(1):
The Tribunal considered the validity of the assessment under Section 41(1) of the Act. It was found that the book adjustments made by the assessee, wiping off the outstanding credit in the business account of the creditor firm by crediting the capital account, did not absolve the liability under Section 41(1). The Tribunal upheld the assessment under Section 41(1) and clarified that the existence of an adverse business situation is not a prerequisite to finding remission of trading liability.

Issue 3: Treatment of the alleged gift as remission of trading liability:
The Court emphasized that the remission of trading liability can be deemed as income arising from profit and loss accounts only to the extent of the actual credits outstanding in the creditor's account wiped off through book adjustments. The Tribunal remanded the matter to the Assessing Officer to ascertain the actual quantum to be added as remission of trading liability, limiting it to the trading liability wiped off from the creditor's account.

Issue 4: Burden of proof on the Revenue:
The Court addressed the burden of proof regarding the nature of the alleged gift. It noted that the Revenue was not required to put on blinkers and could consider surrounding circumstances to determine the reality of the situation. The Tribunal's decision to put the burden of proof on the Revenue was deemed unwarranted and the Court found in favor of the Revenue on this issue.

Issue 5: Interpretation of Tribunal's findings and conclusions:
The Court analyzed the questions of law raised by another Division Bench regarding the Tribunal's findings. It concluded that the Tribunal's approach and findings were not circumlocutory or perverted, but rather logical and in accordance with the law. The Court upheld the Tribunal's decision while also directing further verification by the Assessing Officer regarding the nature of the liability between the parties.

In conclusion, the Court allowed the appeal with a remand for the limited purpose of determining the actual quantum to be added as remission of trading liability under Section 41(1) of the Income Tax Act. Each party was directed to bear their respective costs in the matter.