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2019 (3) TMI 1290 - AT - Income TaxAddition u/s 41(1) - advances taken against the Bottles and the Cases - liability not written off - Value of Bottle write off in earlier years - cessation of liability - HELD THAT - Where a deduction in respect of trading liability is incurred by the assessee and subsequently during any previous year assessee obtained some benefit in respect of such trading liability by way of remission or cessation thereof, the value of such benefit shall be deemed as chargeable to income-tax as income of that previous year. The existence of business in that year of taxation is not a requirement of law. From the above provisions, it is clear that the year of obtaining some benefit in respect of such trading liability is deemed to be the taxable income for the said year. Therefore, by honouring the said law and the discussion given in paras above, we are of the opinion that the A.Y. 2007-08 is not valid year in invoking the provisions of section 41(1) for taxing the value of the benefit. On this ground also, the revenue loses. From all the angles of the (1) non-trade liabilities nature; (2) absence of act of write off, i.e., cessation of liabilities; and (3) requirement of meeting the un-uniform year of invoking the provisions of section 41(1) and year of reaping of benefits in respect of said liabilities, we are of the opinion that the order of CIT(A) is required to be reversed on this issue. - Decided in favour of assessee.
Issues Involved:
1. Applicability of the provisions of Section 41(1) of the Income Tax Act, 1961 to advances taken against Bottles and Cases in the Bottling business and their write-off in earlier years. 2. Confirmation and enhancement of the addition by the CIT(A) regarding the advances/deposits received from customers. Issue-wise Detailed Analysis: 1. Applicability of Section 41(1) of the Income Tax Act, 1961: The core issue in the appeal was whether the provisions of Section 41(1) of the Act applied to the advances taken against Bottles and Cases in the Bottling business and subsequently written off. The Assessing Officer (AO) added ?3,26,05,241/- to the assessee's income by invoking Section 41(1), arguing that these advances were no longer payable and thus constituted income. The CIT(A) further enhanced this addition to ?5,55,68,474/-. The Tribunal found that the AO and CIT(A) treated these advances as "trade debts" and invoked Section 41(1) on the grounds of cessation of liability. However, the Tribunal noted that the assessee did not write off these liabilities in the books, and thus, the liabilities could not be considered ceased. The Tribunal emphasized that the year of obtaining the benefit and the year of invoking Section 41(1) must be the same. Since the benefit of the write-off was obtained in the A.Y. 2006-07, invoking Section 41(1) in A.Y. 2007-08 was unsustainable. 2. Confirmation and Enhancement of Addition by CIT(A): The CIT(A) not only confirmed the AO's addition but also enhanced it, arguing that the entire amount of advances/deposits totaling ?5,55,68,474/- should be disallowed under Section 41(1). The CIT(A) observed that the assessee's inability to provide confirmations from customers and the remote possibility of the physical existence of the bottles justified the addition. The Tribunal, however, disagreed with the CIT(A)'s approach. It held that the advances/deposits were connected to capital assets (Bottles and Cases) and not trading liabilities. Therefore, these amounts could not be taxed under Section 41(1). The Tribunal also pointed out that the assessee's liabilities were not written off in the books, and thus, there was no cessation of liability. Decision of the Tribunal: The Tribunal concluded that the provisions of Section 41(1) were not applicable to the facts of the case for the following reasons: 1. The advances/deposits were related to capital assets and not trading liabilities. 2. There was no cessation of liability as the liabilities were not written off in the books. 3. The year of obtaining the benefit (A.Y. 2006-07) and the year of invoking Section 41(1) (A.Y. 2007-08) were different, which is not permissible under the law. Therefore, the Tribunal allowed the appeal of the assessee, reversing the order of the CIT(A) and deleting the additions made by the AO and CIT(A).
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