2021 (3) TMI 1067 - AT - Income Tax

Cessation of liability u/s. 41(1) - trading liability ceased to exist - HELD THAT - In the present case the assessee had received the amount in the course of its business which are originally treated as an advance. These deposits neither claimed nor returned to the party concerned. There is no dispute that this impugned amount was received in the course of carrying on the normal course of business of the assessee the amount was written off by the other party who was given this to the assessee and there was no necessity of fulfilment of contract which was originally entered by the assessee as ILC Industry Limited has written of it. Since the advance was taken in the course of normal business affairs of the assessee and it was unclaimed amount and not required to returned by the assessee will be its trade receipts. Because of the trading operation the assessee had received it and it become richer by the amount on written of by the ILC Industry Limited in its books of account. Though the amount received originally were not of income nature the amount remained with the assessee for a long period unclaimed by the third parties i.e. ILC Industries Limited and become definite trade surplus and to be treated as taxable income. If an amount received in the course of trading transaction even though it is not taxable in the year of receipt as being the revenue character the amount changes its character when the amount becomes assessee s own money because of written of by ILC Industry Limited in its books of account and there was no contractual obligation on the part of the assessee to perform its obligation and it should be treated as income of the assessee. Being so we are of the opinion that the lower authorities are justified in treating the amount as income of the assessee u/s 41 of the I.T.Act. Where the assessee s business profit was enhanced on account of addition by invoking the provisions of section 41(1) the assessee is entitled to deduction u/s 10B on the enhanced profit - In the case of Yahoo Software Development (P.) Ltd. 2020 ( 5) TMI 53 - ITAT BANGALORE disallowance u/s. 40(a)(ia) was made and business income was enhanced on this count exemption u/s. 10A was granted on the enhanced income. In the case of Anthelio Business Technologies (P.) Ltd. 2017 (1) TMI 257 - ITAT MUMBAI deduction u/s. 10B was granted on account of enhancement of income due non-deduction of tax at source by invoking the provisions of section 40(a)(i). The assessee received business income through convertible foreign exchange and as such reduced the same by claiming various expenditure without deduction of tax at source. Non-disallowance of expenditure increased business income of assessee in actual terms. In the present case the assessee received amount from the local party M/s. ILC Industries Ltd. and the assessee has not received the earnings in convertible foreign exchange. Being so this cannot be equated with disallowance made u/s. 40(a)(i) or 40(a)(ia) of the Act. Therefore we reject the alternative ground of the assessee also. Appeal by the assessee is dismissed.

Summary

Issues Involved:
1. Validity of the assessment order under section 143(3) read with section 147.
2. Applicability of section 41(1) regarding cessation of liability.
3. Eligibility for deduction under section 10B on enhanced business profit.

Detailed Analysis:

1. Validity of the Assessment Order under Section 143(3) Read with Section 147:
The appellant challenged the assessment order on the grounds that it was void-ab-initio since it was completed without supplying the reasons recorded under section 148 despite a request made by the appellant. However, during the hearing, the appellant's counsel did not press these grounds, leading to their dismissal.

2. Applicability of Section 41(1) Regarding Cessation of Liability:
The primary issue was whether the amount of ?4,17,71,395, which was written off by M/s. ILC Industries Ltd. as bad debt, should be added to the assessee's income under section 41(1). The facts revealed that the assessee had received ?10 crores as an advance for the supply of iron ore fines, against which ?5.60 crores was adjusted due to a dispute. The remaining amount was shown as a credit balance in the assessee's books.

The Assessing Officer (AO) reopened the assessment and added the amount under section 41(1), which was confirmed by the CIT(Appeals). The CIT(A) denied the exemption under section 10B on the enhanced business profit, citing the Supreme Court's decision in Goetze (India) Ltd. v. CIT.

The Tribunal analyzed the nature of the transaction and the applicability of section 41(1). It was observed that the amount received was for business purposes and was in the nature of circulating capital. The Tribunal referred to various case laws, including Logitronics Pvt. Ltd. v. CIT, Solid Containers Ltd. v. Dy. CIT, and others, to conclude that the waiver of the advance received in the course of business should be treated as income under section 41(1). The Tribunal upheld the lower authorities' decision to treat the amount as income.

3. Eligibility for Deduction under Section 10B on Enhanced Business Profit:
The assessee argued that if the business profit was enhanced due to the addition under section 41(1), they should be entitled to a deduction under section 10B. The Tribunal considered judgments in Yahoo Software Development (P.) Ltd. v. DCIT and Anthelio Business Technologies (P.) Ltd. v. ITO, where deductions were allowed on enhanced income due to disallowances under sections 40(a)(i) and 40(a)(ia).

However, the Tribunal distinguished these cases, noting that the assessee in the present case did not receive earnings in convertible foreign exchange. Therefore, the Tribunal rejected the alternative ground for deduction under section 10B.

Conclusion:
The Tribunal dismissed the appeal, confirming the addition under section 41(1) and denying the deduction under section 10B on the enhanced business profit. The judgment emphasized the nature of the transaction and the applicability of relevant sections and case laws in reaching its decision.