2012 (2) TMI 81 - HC - Income Tax

Unclaimed credit balances written back - Amount represented small credit balances out of advance received from supplier which could not be adjusted - Amount written back as period of limitation had expired - Salary, wages & Bonus amounting to Rs 59,088 - Explanation 1 to Section 41(1) writing of liability will amount to cessation of liability thus taxable however explanation was inserted from 1st April 97 and have prospective effect and not apply to A/Y 95-96. For Supplier Credit balance - same reasoning is applicable for the year under consideration. Uncashed Cheques amounting to Rs 1,97,758 - there was no claim for deduction in any of the earlier years and, therefore, the amount cannot be added under Section 41(1) of the Act. Unclaimed Dividend - Dividend is appropriation - If it is not allowable as deduction excess cannot be taxed. Provision for doubtful debts - Provision was never allowed as deduction thus cannot be taxed under 41(1)

Issues Involved:
1. Taxability of unclaimed credit balances written off by the assessee.
2. Applicability of Section 41(1) of the Income Tax Act.
3. Applicability of Section 28(iv) of the Income Tax Act.
4. Impact of Explanation 1 to Section 41(1) effective from 1st April, 1997.

Detailed Analysis:

1. Taxability of Unclaimed Credit Balances Written Off by the Assessee:
The primary issue was whether the unclaimed credit balances written off by the assessee in its books of accounts for the year under consideration were taxable under Section 41(1) of the Income Tax Act. The Assessing Officer (AO) had added the amount of Rs. 17,39,263/- to the assessee's income, reasoning that these amounts represented a trading receipt and thus were taxable. The CIT(A) and the Tribunal, however, had differing views on the taxability of these amounts.

2. Applicability of Section 41(1) of the Income Tax Act:
The AO invoked Section 41(1) to tax the written-off amounts, arguing that these represented cessation of liability. The CIT(A) partially upheld the AO's view but provided relief on certain items which were not claimed as deductions in earlier years. The Tribunal, however, concluded that these amounts could not be taxed under Section 41(1) as there was no cessation of liability, especially for uncashed cheques and securities forfeited, which had no prior deduction claims.

3. Applicability of Section 28(iv) of the Income Tax Act:
The assessee contended that Section 28(iv) was not applicable as the written-off amounts did not represent any benefit or perquisite arising from business or profession. The AO's reliance on this section was not upheld by the higher authorities, who found no grounds for its application in this context.

4. Impact of Explanation 1 to Section 41(1) Effective from 1st April, 1997:
The Explanation 1 to Section 41(1), effective from 1st April, 1997, clarifies that the unilateral act of writing off a liability in the books of accounts would be considered as remission or cessation of the liability. However, since the assessment years in question were prior to 1997-98, this explanation was not applicable. The Tribunal and the High Court both noted that for the years under consideration, the mere act of writing off the liability did not amount to cessation of liability.

Judgment Summary:

Salaries, Wages, and Bonus Written Back:
The High Court held that the mere writing back of unclaimed salaries, wages, and bonus could not amount to cessation of liability for the assessment year 1995-96, as Explanation 1 to Section 41(1) was not applicable retrospectively. Therefore, the addition of Rs. 59,088/- was not in accordance with law.

Suppliers' and Customers' Credit Balances:
Similarly, the additions of Rs. 6,39,005/- (suppliers' credit balances) and Rs. 4,33,324/- (customers' credit balances) were also held to be not in accordance with law for the same reasons.

Uncashed Cheques:
The Tribunal found that the amount of Rs. 1,97,758/- for uncashed cheques was not allowed as a deduction in any earlier years, and therefore, could not be added under Section 41(1). The High Court upheld this decision.

Excess Dividend:
The excess dividend of Rs. 14,916/- written back was not taxable under Section 41(1) as dividends are not allowable deductions under the Income Tax Act. The High Court noted the lack of specific mention in the Tribunal's order but proceeded on the basis that it was included in the aggregate figure of unclaimed credit balances.

Excess Provision for Doubtful Debts:
The CIT(A)'s finding that the excess provision for doubtful debts amounting to Rs. 17,133/- was never allowed as a deduction in earlier years was upheld. Thus, this amount could not be added under Section 41(1).

Conclusion:
The High Court answered the substantial question of law in the affirmative, against the revenue and in favor of the assessee. The additions made under the heads of unclaimed salaries, wages, bonus, credit balances, and uncashed cheques were rightly deleted by the Tribunal. The Explanation-1 to Section 41(1) was not applicable to the assessment years in question, and the substantial question of law framed for these years was answered in favor of the assessee.

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