2014 (1) TMI 543 - AT - Income Tax

Addition on account of Suspense Account Treating it as income u/s 28(iv) of the Act Held that - As per the provisions of section 28(iv) of the Act, the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession is chargeable to Income Tax under the head profits and gains of business or profession Following CIT vs. Bhavnagar Bone and Fertiliser C. Ltd. 1986 (7) TMI 37 - GUJARAT High Court - there must be a nexus between the business of the assessee and the benefit which the assessee has derived in order to attract the provisions of section 28(iv) of the Act - There is no nexus established in the present case between the business of the assessee and the benefit which the assessee has alleged to have derived from the credit balance in the suspense account. The benefit, if any, as a result of difference in the balance sheet thus was derived by the assessee in A.Y. 1985-86 itself and the resultant addition u/s 28(iv) of the Act could have been made only in that year and certainly not in the year under consideration wherein the suspense account balance carried forward for 20 years was simply reflected in the balance sheet There appears to be the reason why no addition on account of suspense balance was made by the A.O. in the assessment completed in the case of the assessee - the assessee is following cash system of accounting and as held in CIT vs. American Consulting Corporation 1979 (8) TMI 40 - ORISSA High Court - Income u/s 28(iv) on account of benefit can be assessed to tax only on receipt basis - there is nothing brought on record by the Revenue to show that any such benefit was actually received by the assessee in cash on account of suspense account balance - thus, the addition made by the A.O. u/s 28(iv) of the Act on account of suspense account balance pertaining to the earlier year is not sustainable Decided in favour of Assessee.

Summary

Issues:
Addition of Rs.1,05,56,849/- to income under section 28(iv) of the Income Tax Act, 1961 based on credit balance in the suspense account.

Analysis:
The appeal concerned the addition of Rs.1,05,56,849/- to the income of a partnership firm engaged in clearing and forwarding business. The amount was reflected as a credit balance in the suspense account on the liability side of the balance sheet. The Assessing Officer (AO) treated this balance as income under section 28(iv) of the Income Tax Act, 1961, considering it a source of funds for the firm. The firm's explanation that the amount was unidentifiable due to seized books of account and was carried forward since 1985-86 was not accepted by the AO. The AO held that the funds were used for excess partner withdrawals, constituting a benefit to the firm.

The firm appealed to the Commissioner of Income Tax (Appeals) [CIT(A)], arguing that the balance had no impact on the income for the relevant year and was covered by a Settlement Commission order for 1985-86. The CIT(A) upheld the AO's decision, stating that the liability had ceased over time and the balance was not payable, thus constituting a benefit under section 28(iv) of the Act. The firm then appealed to the Appellate Tribunal.

The Tribunal noted the lack of nexus between the firm's business and the alleged benefit from the suspense account balance. It highlighted that the balance related to 1985-86, was reconciled based on estimated income under the Settlement Commission order, and was not received as a cash benefit in the relevant year. The Tribunal emphasized that income under section 28(iv) must be assessed on a receipt basis for cash system accounting firms. As no evidence of actual benefit received in cash was presented, the Tribunal deemed the addition unsustainable and allowed the firm's appeal.

In conclusion, the Tribunal ruled in favor of the firm, overturning the addition to income under section 28(iv) based on the credit balance in the suspense account. The decision highlighted the importance of establishing a direct nexus between business activities and alleged benefits for tax assessment under the Income Tax Act, 1961.