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2024 (11) TMI 92 - HC - Income Tax


Issues Involved:

1. Applicability of Section 41(1) of the Income Tax Act, 1961 regarding cessation of liability.
2. Applicability of Section 28(iv) of the Income Tax Act, 1961 concerning benefits arising from business transactions.
3. Allegation of using a colorable device in financial transactions.

Issue-wise Detailed Analysis:

1. Applicability of Section 41(1) of the Income Tax Act, 1961:

The core issue was whether the addition of Rs. 11,23,64,705/- could be made under Section 41(1) of the Income Tax Act, 1961, which pertains to the cessation of liability. The respondent-assessee had received this amount from M/s. Marwar Hotels Private Limited in the financial year 2001-02 for a project that was never implemented. The Assessing Officer (AO) argued that since the liability to repay the amount ceased to exist, it should be added as income. However, the CIT (Appeals) and the Tribunal found that the liability was continuously acknowledged by the assessee in its balance sheet, and there was no evidence of any remission or cessation of liability. The Tribunal noted that the amount was reinvested in shares of the group company and later sold at a loss, indicating no benefit was derived by the assessee. Consequently, both the CIT (Appeals) and the Tribunal concluded that Section 41(1) was not applicable as there was no cessation of liability.

2. Applicability of Section 28(iv) of the Income Tax Act, 1961:

The AO also invoked Section 28(iv) of the Income Tax Act, which deals with benefits arising from business transactions. The CIT (Appeals) held that this section was not applicable because the advances were shown as payable in the balance sheet, and no benefit was derived by the assessee. The Tribunal agreed with this assessment, noting that any alleged benefit from the transaction was not enjoyed by the assessee, as the amount was returned to the same group through share transactions. The Tribunal emphasized that the assessee did not derive any benefit from the transaction, thus ruling out the applicability of Section 28(iv).

3. Allegation of Using a Colorable Device:

The AO alleged that the assessee used a colorable device to avoid tax liability. However, the Tribunal found that even if a colorable device was used, the assessee was not the beneficiary of such a transaction. The Tribunal observed that the amount received as advance was reinvested and returned to the same party, indicating that the assessee did not enjoy the money. The Tribunal concluded that the assessee acted as a conduit rather than a beneficiary, and therefore, no addition could be made on the grounds of a colorable device.

Conclusion:

The High Court upheld the concurrent findings of the CIT (Appeals) and the Tribunal, determining that neither Section 41(1) nor Section 28(iv) were applicable in this case. The court noted that the assessee did not benefit from the transaction and that the liability was continuously acknowledged. The appeal was dismissed as no substantial question of law arose from the Tribunal's order, affirming that the assessee had not derived any benefit that would warrant the addition of the amount as income.

 

 

 

 

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