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2007 (5) TMI 257 - AT - Income TaxApplicability Of sec. 41 - Remission Or Cessation Of Trading Liability - difference of opinion between the Members - Third Member Order - Whether the sum received by the assessee in the year 1989, during the normal course of carrying on its business, but shown as outstanding liability in the books of account till date, can be brought to the charge of tax u/s 28, as profit, gain or benefit of business in the assessment year under appeal? - Assessee acting as an Indenting Agent for Hawson Algraphy Ltd. (HAL), London - HELD THAT - Ld AM came to the conclusion that the sum received is a business benefit which had arisen to the assessee during the course of normal business activities and therefore the same has to be brought to the charge of tax as business income. Judicial Member held that the assessee continues to recognize the liability of a sum payable to HAL in its account and mere non-payment of the account to HAL does not in any manner convert the impugned sum as taxable under the provisions of Income-tax Act as Business Income of the assessee. It was held that the liability does not partake the nature of any benefit or perquisite for bringing it to tax under the umbrella of business income and the said amount due as a liability to HAL is not to be included as income of the assessee for the year under consideration. Third Member Order - The transaction is truly to be accounted to the credit of the supplier of the machinery, who is the original owner of the property. If the original owner does not claim the amounts due to him, it may be anything but not a cesser of liability of the type which could be assessed u/s 41(1) of the Act, as rightly pointed out by the ld JM. In my view the facts of the case does not go with the facts stated by the Hon'ble Supreme Court in the case of T.V. Sundaram Iyengar Sons Ltd. 1996 (9) TMI 1 - SUPREME COURT In that case the assessee has appropriated the liability to its profit and loss account whereas in this case there has no such appropriation. The assessee is still showing them as outstanding liabilities in its balance sheet from year to year and the liability arose as a debt which is required to account for the receipt on behalf of the principal. In my view there is no question of cesser of liability. The Hon'ble Supreme Court examined this case in the case of Sugauli Sugar Works (P.) Ltd. 1999 (2) TMI 5 - SUPREME COURT wherein the Apex Court held again that the expiry for the period of limitation prescribed under Limitation Act could not extinguish the debt but it would prevent the creditor from enforcing the debt, has been well settled. If the principle is applied, it is clear that mere entry in the books of account of the debtor made unilaterally without any act on the part of the creditor will not enable the debtor to say that the liability has come to an end. Apart from that, that will not by itself confer any benefit on the debtor as contemplated by that section. Thus, by majority view, we hold that the liability due to HAL does not partake the nature of any benefit or perquisite in terms of section 28(iv) or under the provisions of section 41(1) and the same is not to be included as income of the assessee for the year under consideration. In the result, the appeal filed by the revenue is partly allowed.
Issues Involved:
1. Deletion of addition of Rs. 7,25,000 shown as outstanding liability. 2. Deletion of addition under section 41(1) of Rs. 70,845. Issue-wise Detailed Analysis: 1. Deletion of Addition of Rs. 7,25,000 Shown as Outstanding Liability Facts and Background: The assessee, acting as an Indenting Agent for Hawson Algraphy Ltd. (HAL), London, received machinery to be exhibited in PAMEX Trade Fair 1987. The machinery was not sold at the exhibition and was subsequently sold to M/s. Conway Printers Pvt. Ltd. (CPPL) for Rs. 7.25 lakhs. The sale proceeds were shown as a liability payable to HAL in the assessee's books. Over time, HAL's business was taken over by Du Pont de Nemours & Co. Inc. and later by Agfa Gevaert NV, Belgium. The amount remained unpaid, and the Assessing Officer added it to the assessee's income, arguing it had been appropriated by the assessee. CIT(A) Decision: The CIT(A) deleted the addition, stating that the liability was still acknowledged by the assessee and had not ceased to exist. The amount had not been claimed as a deduction in any assessment year, so it could not be considered as income under sections 28(iv) or 41(1) of the Income-tax Act. Arguments: - Revenue: Argued that the amount had been appropriated by the assessee, as neither HAL nor its successors had claimed it. - Assessee: Contended that the liability still existed in the books and had not been written off, citing Supreme Court decisions in CIT v. Sugauli Sugar Works (P.) Ltd. and Chief CIT v. Kesaria Tea Co. Ltd. Tribunal's Analysis: - Accountant Member: Held that the amount had effectively been appropriated by the assessee and should be taxed under section 28(iv), relying on the Supreme Court's decision in T.V. Sundaram Iyengar & Sons Ltd. - Judicial Member: Disagreed, stating that the liability had not ceased and the amount could not be taxed as income under section 28(iv) or 41(1), following the Supreme Court's decisions in Sugauli Sugar Works (P.) Ltd. and Kesaria Tea Co. Ltd. Third Member Decision: The Third Member agreed with the Judicial Member, concluding that the amount could not be taxed as income. The liability was still recognized by the assessee, and there was no cessation of liability. Final Judgment: By majority view, the amount of Rs. 7,25,000 due to HAL does not partake the nature of any benefit or perquisite under section 28(iv) or under section 41(1) and is not to be included as income for the year under consideration. 2. Deletion of Addition under Section 41(1) of Rs. 70,845 Facts and Background: The Assessing Officer found various sundry creditors outstanding in the assessee's books prior to the financial year 1993-94. Summons issued to these creditors were either returned undelivered or the creditors denied any dealings with the assessee. The Assessing Officer added Rs. 70,845 to the assessee's income, concluding that these liabilities had ceased to exist. CIT(A) Decision: The CIT(A) deleted the addition, stating that the Assessing Officer had not provided adequate opportunity to the assessee to submit its explanation. Tribunal's Analysis: - Global Tele (Rs. 21,000): Summons returned with the remark 'left'. The assessee failed to provide a correct address or produce the party. The addition was restored. - United Data Base (P.) Ltd. (Rs. 3,650): Summons returned with the remark 'not known'. The addition was restored. - Shri Sadhana Printers (Rs. 5,000): The party replied that it had closed its business and would not claim the liability. The addition was deleted. - G.S. Quality (Rs. 2,920): The party denied any dealings with the assessee. The addition was restored. - Suman Arts Printers (Rs. 3,475): The party confirmed only Rs. 1,545, which was written off in 1994-95. The addition was restored. - Sahitya Sahakar Mudralaya (Rs. 5,000): The party had no record of dealings with the assessee. The addition was restored. - Bombay Potteries & Allied Stores (Rs. 11,800): The assessee failed to furnish the address or confirmation. The addition was restored. - India Offset (Rs. 10,000): The party confirmed no arrears due. The addition was restored. - The Printers (Mysore) Ltd. (Rs. 8,000): The party confirmed no dealings with the assessee. The addition was restored. Final Judgment: The Tribunal modified the CIT(A)'s order, restoring the addition to the extent of Rs. 65,845. Conclusion: The appeal by the revenue was partly allowed. The addition of Rs. 7,25,000 was not included as income for the year under consideration, while the addition of Rs. 65,845 was restored.
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