2017 (4) TMI 169 - AT - Income Tax

Addition of cessation of liability u/s 41 - Held that - There can hardly be any dispute that the assessee s so-called marketing scheme is very much in the nature of a ponzy one wherein it collected moneys by exploiting aspirations of the lower income strata of the society by issuing the investors in question some marketing coupons valid for a year. Shri Shah fails in proving assessee s bonafides since we find it very much and unjustifiable explanation that there was no coupon holder coming forward to encash the same in lieu of the specified electronic items between assessment years 2008-09 to 2013-14 including the impugned assessment year 2012-13. These facts constrain us to speak about the assessee s marketing scheme alike the pied piper of Hamlin type fleecing poor investors. We further wish to highlight the fact that there is no privity of contract/agreement between the assessee and the above investors since the coupon in question is valid for a clear-cut expressly stated time period of one year wherein the coupon holder is otherwise nowhere in picture. We deem it appropriate to reject assessee s argument that it has been entertaining its coupon holders claims and conclude that the express terms indicated in the coupons in question could not be further given a wider meaning than the specified one. Our detailed discussion hereinabove makes Shri Manish Shah to once again vehemently argue that the impugned liability; if at all is to be added u/s.41(1) of the Act, has not ceased to exist in the impugned assessment year as the period of one year after issuance of the relevant coupons has expired much earlier which is not liable to be accepted as section 153 of the Act prescribing time limit of completion of assessment very well deals with such an instance where the Assessing Officer concerned can reopen assessment in an assessee s case in consequence to this tribunal s findings. We notice that a co-ordinate bench in Mosbacher India Chennai vs. Addl.DIT 2016 (12) TMI 235 - ITAT CHENNAI explains ambit of the above statutory provision in such a case wherein it can be clearly held that the amount in question in assesseble as income in earlier assessment year - Decided against assessee.

Issues Involved:
1. Addition under Section 41(1) for cessation of liability amounting to ?7,87,19,819/-.
2. Validity and performance of the assessee's marketing scheme.
3. Applicability of Section 41(1) in the context of the assessee's liability.
4. Relevance of additional evidence submitted by the assessee.
5. Legal precedents and their applicability to the case.

Detailed Analysis:

1. Addition under Section 41(1) for cessation of liability amounting to ?7,87,19,819/-:
The primary issue in this case is the addition of ?7,87,19,819/- under Section 41(1) of the Income Tax Act, 1961, which pertains to the cessation of liability. The Assessing Officer (AO) concluded that the outstanding customer advances had ceased to exist, as no sales or receipts were recorded since 2008-09. The AO issued 40 Section 133(6) notices but failed to get satisfactory verification, leading to the impugned addition.

2. Validity and performance of the assessee's marketing scheme:
The assessee, a company trading in electronic items, introduced a sales promotion scheme in 1986-87 to promote sales of its black & white TVs. The scheme involved enrolling members who would purchase coupons worth ?500/- each, with the promise of receiving a TV set upon enrolling four more members. The scheme was valid for 12 months, with the possibility of extension upon request. However, the AO and CIT(A) found that the scheme had long lapsed, and the assessee had not provided any evidence of extending the scheme or fulfilling its obligations.

3. Applicability of Section 41(1) in the context of the assessee's liability:
The CIT(A) upheld the addition, reasoning that the liability had ceased to exist, as the scheme was only valid for 12 months and had not been extended. The CIT(A) noted that the money collected under the scheme had been used by the assessee for various investments and advances, treating it as its own money. The CIT(A) distinguished this case from the Supreme Court's judgment in CIT v. Sugauli Sugar Works (P) Ltd., where the liability remained unpaid for 20 years. The CIT(A) cited the Supreme Court's decision in CIT Vs. Sundaram Iyengar & Sons Ltd., which held that money treated as the assessee's own should be considered income.

4. Relevance of additional evidence submitted by the assessee:
The assessee submitted additional evidence to rebut the lower authorities' conclusion that it had not performed its contractual obligations. However, the Tribunal found this evidence irrelevant to the issue at hand, as it pertained to subsequent years and did not address the non-performance of obligations up to the impugned assessment year. Consequently, the additional evidence petition was declined.

5. Legal precedents and their applicability to the case:
The assessee cited the jurisdictional high court's decision in CIT vs. Nitin S. Garg, arguing that old credits without interest should not be added under Section 41(1). However, the Tribunal found this precedent inapplicable, as the assessee's liability was valid for only one year, per the terms indicated in the relevant coupons. The Tribunal also referred to the case of Mosbacher India Chennai vs. Addl.DIT, explaining that the AO could reopen assessments based on Tribunal findings, emphasizing that the liability should be assessed in the respective year of cessation.

Conclusion:
The Tribunal dismissed the assessee's appeal, upholding the addition under Section 41(1) for cessation of liability amounting to ?7,87,19,819/-. The Tribunal found that the assessee's marketing scheme had lapsed, and the liability had ceased to exist. The additional evidence submitted by the assessee was deemed irrelevant, and the legal precedents cited were found inapplicable. The Tribunal also noted that reopening assessments for the respective year of cessation would increase the assessee's tax liability.

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