2015 (12) TMI 1420 - HC - Income Tax

Addition u/s.41(1)- unclaimed stale draft and pay orders - ITAT deleted the addition - Held that - Section 41(1) can be pressed into service when an allowance or deduction is sought to be made in respect of loss, expenditure or trading liability is incurred by the assessee. In the instant case, the sum of ₹ 58,38,581/- has remained with the assessee owing to the fact that the payees or holders of the draft/pay orders had not encashed them. The language employed by the legislature being unambiguous, it would be incongruous to construe the said sum as either a loss, expenditure or trading liability incurred by the assessee. Hon ble Supreme Court in the case of T.V. Sundaram Iyengar (1996 (9) TMI 1 - SUPREME Court) held that the provisions of s.41(1) were not attracted in the facts of this case because the assessee s liability to pay back the amounts to its customers had not ceased. - Decided in favor of assessee Depreciation on investments on government securities held to maturity - whether such securities were held as a investments and not as stock-in-trade ? - Held that - Admittedly in the instant case, assessee was following the method of accounting namely, at cost or market value, whichever is lower . Further, it is not in dispute that this practice was accepted by the Revenue throughout. Thus, in the light of the above pronouncement in the case of United Commercial Bank (1999 (9) TMI 4 - SUPREME Court) notwithstanding the preparation of the balance sheet and describing the security under a particular nomenclature in compliance with the directions/instructions issued by the RBI, the assessee would be lawfully entitled to submit the tax returns on the real taxable income in accordance with the method of accounting consistently and regularly adopted.- Decided in favor of assessee

Summary

Issues Involved:
1. Deletion of the addition made by the assessing authority under Section 41(1) of the Income Tax Act towards unclaimed 'stale drafts and pay orders'.
2. Depreciation claimed by the assessee on investments in government securities "held to maturity".

Issue-wise Detailed Analysis:

1. Deletion of the Addition under Section 41(1) of the Income Tax Act:
The primary issue is whether the Tribunal was right in deleting the addition of Rs. 58,31,581/- made by the assessing authority under Section 41(1) of the Income Tax Act towards unclaimed 'stale drafts and pay orders'. The Revenue contended that the amount, which remained unclaimed, constituted 'profit' chargeable to tax under Section 41(1). The Tribunal, however, relied on past judgments, including those in the cases of Canara Bank and Vijaya Bank, to conclude that the unclaimed amount did not fall within the definition of 'profit chargeable to tax'. The Tribunal further referenced the Supreme Court's decision in T.V. Sundaram Iyengar & Sons Limited, which clarified that unclaimed amounts that remain with the assessee do not constitute revenue receipts or trading liabilities that have ceased. The High Court upheld the Tribunal's decision, stating that the sum of Rs. 58,31,581/- could not be construed as a loss, expenditure, or trading liability incurred by the assessee, and thus, Section 41(1) was inapplicable.

2. Depreciation on Investments in Government Securities "Held to Maturity":
The second issue concerns the depreciation claim of Rs. 17,59,00,087/- on investments in government securities "held to maturity". The Revenue argued that such securities, being investments, should not be subjected to depreciation. The Tribunal, however, upheld the assessee's method of accounting, which was based on the principle of "cost or market value, whichever is lower". The Tribunal's decision was supported by the Supreme Court's ruling in United Commercial Bank v. Commissioner of Income Tax, which allowed for the preparation of balance sheets in accordance with statutory provisions while also permitting the submission of income tax returns based on the real taxable income as per the consistent method of accounting adopted by the assessee. The High Court concurred with the Tribunal, noting that the assessee was entitled to claim depreciation on the securities "held to maturity" despite their classification, as the practice was consistently followed and accepted by the Revenue.

Conclusion:
The High Court dismissed the appeals, affirming the Tribunal's decisions on both issues. The deletion of the addition under Section 41(1) was upheld as the unclaimed amount did not qualify as profit chargeable to tax. Additionally, the depreciation claim on securities "held to maturity" was validated based on the consistent accounting practice followed by the assessee and supported by Supreme Court precedents. The appeals were dismissed without any orders as to costs.