2022 (10) TMI 680 - AT - Income Tax

Remission of liability u/s. 41(1) - identity of the creditors - Whether transaction between two share holders cannot in anyway affect the capital base of a company nor it can give rise to a remission of liability by a shareholder with regard to the assessee company - whether aggregate value of the liability did not change only the value of the liability got regrouped under some other heads? - CIT-A deleted the addition - HELD THAT - The Canara Bank as creditor of M/s. DAIL filed recovery suit before the Hon'ble Delhi High Court and the Hon'ble Court vide their order dated 23.11.2004 passed an order restraining from dealing with amount received from Data Access America in bank account maintained by the assessee company with ABN Amro bank, Chennai. Canara Bank has filed Civil Appeal before the Hon'ble Delhi High Court and the Hon'ble High Court has passed order on 18.11.2005 and directed all parties, including income-tax department to remit amount received from M/s. Data Access India Ltd. to Canara Bank account. From the above, it is very clear that amount received by the assessee from M/s. Cheran Holdings Pvt. Ltd. does not belong to the assessee, in view of the specific order of the Hon'ble Delhi High Court and thus, it cannot be said that it is unexplained income of the assessee - source of money has been explained by the assessee, including identity of the creditors and further said amount has been transferred through proper banking channel only. CIT(A), after considering relevant facts held that the assessee has identified creditors and hence, deleted additions made by the Assessing Officer towards amount received from M/s. Cheran Holdings Pvt. Ltd. as unexplained income of the assessee. Hence, we are inclined to uphold findings of the learned CIT(A) and reject ground taken by the Revenue.

Summary

Issues:
1. Cessation of liability under section 41(1) on remission of debt.
2. Addition of unexplained cash credit under section 68 of the Income Tax Act.

Issue 1: Cessation of liability under section 41(1) on remission of debt:

The Revenue challenged the order of the CIT(A) regarding the deletion of the disallowance of Rs. 22,36,02,749 on account of remission of liability under section 41(1). The Revenue argued that the remission of liability by a shareholder cannot affect the capital base of a company and that the liability regrouped under different heads did not change. Referring to the decision in Union of India v. J.K. Synthetics Ltd., the Revenue contended that a cessation of liability must be irrevocable for section 41(1) to apply. The Revenue also highlighted the advantages of converting debt into equity and the failure of M/s. Kasturi & Sons Ltd. to claim long-term capital loss. However, the CIT(A) found that the liability was not revivable, and the conversion of debt into equity was beneficial for the company. The tribunal upheld the CIT(A)'s decision, emphasizing that the Revenue failed to prove that the liability could be revived in the future.

Issue 2: Addition of unexplained cash credit under section 68 of the Income Tax Act:

The Revenue contested the deletion of the addition of Rs. 25 crores as unexplained cash credit under section 68. The Assessing Officer believed that the assessee benefited from the amount received from M/s. Cheran Holdings Pvt. Ltd. due to the takeover by M/s. KCP Ltd. The Revenue argued that the CIT(A) erred in deleting the addition, citing the decision of the Kerala High Court regarding cash credits. The Revenue also questioned the source of the funds and the mismatch between the sectors of investment. However, the assessee clarified that the money received was part of a legal battle involving various transactions. The Delhi High Court had ordered the return of the funds, indicating that the money did not belong to the assessee. The tribunal agreed with the CIT(A) that the source of the funds was explained, and the money was transferred through proper banking channels. Therefore, the tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decision to delete the addition of unexplained cash credit.

In conclusion, the tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s decisions on both issues. The judgment emphasized the importance of proving irrevocable cessation of liability for section 41(1) and the necessity of explaining the source of funds for cash credits under section 68.