2021 (12) TMI 648 - AT - Income Tax

Cessation of liability u/s 41(1) - Incomplete project - advances from various persons against the Tower D E of Bhadralok Project - possession of concerned properties not given not even advances received - HELD THAT - The section 41(1) applies where a trading liability was allowed as a deduction in an earlier year in computing the business income of the assessee and the assessee has obtained a benefit in respect of such trading liability in a later year by way of remission or cessation of the liability. The assessee has submitted that it has launched a scheme i.e. Towers D and E at Bhadralok Project. It has received advances from prospective buyers. However, when residential flats in Tower D E were under construction and possession of the same were not handed over to the respective buyers, the assessee has shown these advances as liability, because there prevailed contingency as to finalization of sale. Assessee has received trade advance for sale of certain flats to prospective buyers which were ultimately not construed by it and incomplete project was sold under the head work-in-progress . It has not returned money to these customers in the last fifteen years. It has not created an arrangement with buyer of the WIP that these customers would get flats at reduced price by the amount received by the assessee as advance. It has simply retained these amounts under the garb of liability without paying any taxes. The judgment Hon ble Supreme Court in the case of Sundaram Iyengar Son Ltd. 1996 (9) TMI 1 - SUPREME COURT is fully applicable on the facts of the present case. Therefore, we allow appeal of the Revenue.

Summary

Issues Involved:
1. Applicability of Section 41(1) of the Income-tax Act, 1961 regarding cessation of liability.
2. Treatment of advances and maintenance deposits received by the assessee.

Issue-wise Detailed Analysis:

1. Applicability of Section 41(1) of the Income-tax Act, 1961 regarding cessation of liability:
The primary issue revolves around whether the provisions of Section 41(1) are applicable to the advances and maintenance deposits received by the assessee. The Revenue contended that the liabilities shown by the assessee in its balance sheet had ceased and should be treated as income under Section 41(1). The assessee argued that the advances and deposits were still liabilities and had not ceased. The Tribunal noted that Section 41(1) applies when a trading liability allowed as a deduction in an earlier year ceases to exist or is remitted in a later year, thereby becoming taxable in that year. The Tribunal examined the facts and found that the advances received for Towers "D" and "E" were not repaid or adjusted against any sale proceeds, and the maintenance deposits were also not refunded to the respective societies. The Tribunal concluded that these liabilities had ceased to exist and should be treated as income under Section 41(1).

2. Treatment of advances and maintenance deposits received by the assessee:
The Tribunal analyzed the treatment of advances received from prospective buyers for Towers "D" and "E" and maintenance deposits collected from members of Vishwamitri Township and Bhadralok Tower A, B, and C. The assessee had shown these amounts as liabilities in its balance sheet. The Tribunal noted that the advances were received for the construction and sale of flats, but the project was sold as "work-in-progress" without constructing the flats. The Tribunal observed that the advances were not returned to the customers, and the maintenance deposits were not refunded to the societies. The Tribunal referred to the judgment of the Hon'ble Gujarat High Court in the case of Gujtron Electronics P. Ltd., where it was held that unclaimed amounts retained by the assessee for a long period should be treated as trade receipts. The Tribunal concluded that the advances and maintenance deposits had ceased to be liabilities and should be treated as income.

Conclusion:
The Tribunal allowed the appeal of the Revenue, reversing the findings of the CIT(A) and restoring the assessment order. The Tribunal held that the advances and maintenance deposits received by the assessee had ceased to be liabilities and should be treated as income under Section 41(1) of the Income-tax Act, 1961. The Tribunal emphasized that the assessee had retained these amounts for a long period without repaying them to the respective parties, and the liabilities had ceased to exist. The Tribunal's decision was pronounced on 14th December 2021 at Ahmedabad.