2009 (7) TMI 876 - AT - Income Tax

Additions u/s 41(1) - deep freezer deposits - period of holding 5 to 10 years - The assessee after manufacturing ice cream is also marketing after appointing various dealers all over the region. For this, the assessee has purchased deep freezers for keeping ice cream and supplying the same to the dealers against deposits for deep freezers. The assessee treated this deep freezer deposits in the books of account as an asset and treated this as deep freezer deposits over all the years. - Held that - provisions of section 41(1) of the Act cannot be applied to the facts of this case as the twin conditions as prescribed in section 41(1) the Act have not been satisfied, i.e., during the assessment year in question the assessee must have received some benefits by way of cessation or remission of liability and the amounts must have been allowed as deduction or allowance in respect of these expenditure or trading liability incurred by the assessee and that is not a case in the present fact. - the action of the Assessing Officer in treating the deep freezer deposits account at ₹ 11,60,000 as income of the assessee is against the provisions of the Act - Decided against the revenue.

Issues Involved:
1. Addition of deep freezer deposits under section 41(1) of the Income-tax Act.
2. Penalty under section 271(1)(c) of the Income-tax Act.

Detailed Analysis:

1. Addition of Deep Freezer Deposits under Section 41(1) of the Income-tax Act:
The primary issue in this appeal was whether the addition of Rs. 11,60,000, representing deep freezer deposits, could be made under section 41(1) of the Income-tax Act. The assessee contended that these deposits were liabilities reflected in the balance sheet and not written off, thus section 41(1) was not applicable. The Assessing Officer (AO) had observed that these deposits were outstanding for over 5 to 10 years and were unclaimed. The AO issued notices under section 133(6) to verify the deposits, but most notices were returned unserved. Consequently, the AO added these unclaimed balances to the income under section 41(1).

The Commissioner of Income-tax (Appeals) confirmed the AO's action, citing the Supreme Court's decision in CIT v. T.V. Sundaram Iyengar and Sons Ltd., which held that unclaimed amounts from trading transactions, if not claimed over a long period, should be treated as income.

However, the Tribunal found that the assessee had not transferred these amounts to the profit and loss account and continued to treat them as liabilities in the balance sheet. The Tribunal referred to the Gujarat High Court's decision in CIT v. Silver Cotton Mills Co. Ltd., which clarified that for section 41(1) to apply, there must be a remission or cessation of liability. Since the liability still existed and was not written off, section 41(1) did not apply. The Tribunal also referred to CIT v. Chetan Chemicals (P.) Ltd., which emphasized that without remission or cessation, the liability remains, even if unenforceable by law.

The Tribunal concluded that the AO's addition was not justified as the conditions of section 41(1) were not met. The addition was deleted, and the assessee's appeal was allowed.

2. Penalty under Section 271(1)(c) of the Income-tax Act:
The Revenue's appeal concerned the penalty imposed under section 271(1)(c) for concealment of income. Since the Tribunal had already allowed the assessee's appeal regarding the quantum addition, the basis for the penalty no longer existed. Consequently, the penalty could not survive, and the Revenue's appeal was dismissed.

Conclusion:
The Tribunal allowed the assessee's appeal, deleting the addition of Rs. 11,60,000 under section 41(1) of the Income-tax Act, as the conditions for applying this section were not met. The Revenue's appeal for penalty under section 271(1)(c) was dismissed, as the quantum addition was reversed.

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