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2012 (3) TMI 81 - HC - Income TaxProvision for Contingent liability not made by way of debit to P&l A/c - passed in the books of account of transferee company at the time of take over of assets and liability as per the scheme of the arrangement Revenue invoking Section 41(1) Held that - In present case, provision was made by increasing investment and creating provision for contingency by corrosponding amount, i.e. routed through balance sheet only and not by way of debit to P&L A/c. Thereby, assessee had not obtained any benefit in earlier A.Y. Hence, order of Tribunal holding inapplicability of Section 41(1) is upheld Decided against the Revenue. Dis-allowance u/s 14A Held that - Since ITAT has remitted the matter to the A.O. therefore it is directed to A.O. to compute in light of judgement in case of Maxopp Investment Ltd. vs. CIT (2011 - TMI - 208569 - Delhi High Court).
Issues:
1. Addition of Rs.50,00,000/- to taxable income under Section 41(1) of the Income Tax Act, 1961. 2. Disallowance under Section 14A of the Act. Issue 1: Addition of Rs.50,00,000/- under Section 41(1) of the Income Tax Act: The Assessing Officer added Rs.50,00,000/- to the taxable income under Section 41(1) of the Act based on the provision for Contingency Amount in the Balance Sheet of the company. The CIT (Appeals) upheld the addition, stating that the liability was not a trading liability but a liability from the capital account, making Section 41(1) inapplicable. The CIT (Appeals) also emphasized that the liability was taken over during amalgamation, and the Assessing Officer provided material facts to establish the cessation of liability under Section 41(1). However, the ITAT deleted the addition, noting that Section 41(1) is attracted only if the assessee has obtained a benefit from a trading liability in an earlier assessment year. The ITAT found that the provision was not debited in the profit and loss account, and the amount was routed through the balance sheet only. The ITAT concluded that Section 41(1) was not applicable in this case, overturning the decisions of the authorities below. The High Court examined the balance sheet and scheme of amalgamation to determine if the Rs.50,00,000/- was debited in the account of the company. It was found that the provision for contingency was created for the first time by the assessee and could not have been debited to the P & L A/c of the amalgamated company. Therefore, the High Court agreed with the ITAT's decision to delete the addition under Section 41(1) as no substantial question of law arose from the tribunal's findings. Issue 2: Disallowance under Section 14A of the Act: The ITAT remitted the matter of disallowance under Section 14A of the Act to the Assessing Officer to compute it in line with the decision of the Bombay High Court. The Delhi High Court clarified that Rule 8-D is not retrospective and is applicable only from the assessment year 2008-09. The Assessing Officer was directed to apply the judgment of the Delhi High Court in ITA No. 687/2009 while computing the disallowance under Section 14A of the Act. The High Court found no substantial question of law arising from this aspect and dismissed the appeal without costs. In conclusion, the High Court upheld the ITAT's decision to delete the addition under Section 41(1) and provided guidance on the computation of disallowance under Section 14A of the Act based on relevant court judgments.
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