2019 (10) TMI 836 - AT - Income Tax

Addition u/s 41 - proof of remission or cessation of a trading liability - HELD THAT - In the case before us the CIT(A) had rightly observed that in the absence of any evidence to conclude that there was a final remission or cessation of a trading liability or any part of it, therefore, the provisions of Sec.41(1) could not have been invoked by the A.O. As regards the adverse inferences drawn by the A.O in respect of the genuineness of the transactions under consideration, we are of the considered view, that as the respective amounts had not been credited in the books of account of the assessee during the year under consideration, therefore, for the said reason itself the provisions of Sec.68 were clearly ousted and no addition of the said amount could have been made in the hands of the assessee under the said statutory provision during the year under consideration. We thus not finding any infirmity in the order of the CIT(A), to the extent he had vacated the addition made by the A.O u/ss. 41(1)/68 of the Act, therefore, uphold the same Disallowance of the interest on service tax - deduction u/s 37(1) disallowed - HELD THAT - CIT(A) did not find favour with the view taken by the A.O, and observed, that as the payment of interest was compensatory in nature, therefore, the same was rightly claimed as a deduction u/s 37 by the assessee. We have given a thoughtful consideration to the issue before us and are unable to persuade ourselves to subscribe to the view taken by the A.O. We find that Sec.75 of the Finance Act, 1994, which envisages levy of interest on late service tax payment is compensatory in nature and cannot be characterised as a levy of penalty. Levy of penalty under the Service Tax Act is contemplated in Sec.76 of the Finance Act, 1994. Accordingly, as the payment of interest on late service tax payment by the assessee is found to be compensatory in nature, therefore, the same in our considered view could not have been held as not allowable as a deduction under Sec.37(1) of the Act. We thus finding no infirmity in the order of the CIT(A), who in our considered view had rightly vacated the disallowance of the interest on late service tax payment made by the A.O, uphold his order to the said extent.

Summary

Issues Involved:

1. Deletion of the addition of ?73,36,425/- under Section 41(1) of the Income Tax Act.
2. Deletion of the disallowance of ?4,84,307/- under Section 37(1) of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Deletion of the Addition of ?73,36,425/- under Section 41(1) of the Income Tax Act:

The Assessing Officer (A.O) observed that the assessee had outstanding 'trade payables' of ?73,36,425/- in its 'books of account' for more than three years. The A.O noted that there were no transactions during the year under consideration and the balances remained the same. The assessee did not provide complete details of the parties involved. The A.O concluded that these liabilities were unsubstantiated and should be treated as 'liability no longer required,' thus taxable under Section 41(1). Consequently, the A.O added ?73,36,425/- to the income of the assessee.

The Commissioner of Income Tax (Appeals) [CIT(A)] disagreed with the A.O, stating that merely because the liabilities were outstanding for a long period did not justify their addition under Section 41(1). The CIT(A) emphasized that there was no evidence of a final remission or cessation of the liability. Further, the CIT(A) noted that since there was no unilateral write-back by the assessee, Explanation (1) of Section 41(1) could not be invoked. Additionally, as the credit entries were not made during the year under consideration, Section 68 could not be applied. Thus, the CIT(A) deleted the addition of ?73,36,425/-.

The Income Tax Appellate Tribunal (ITAT) upheld the CIT(A)'s decision. It noted that the A.O had characterized the liability as ceased merely because it was outstanding for several years. The ITAT emphasized that the A.O must show that the assessee obtained some benefit by way of remission or cessation of the liability to invoke Section 41(1). The ITAT referenced the Delhi High Court's judgment in CIT vs. Jain Exports (P) Ltd., which held that acknowledgment of debt by the assessee and lack of evidence of extinguishment of liability meant Section 41(1) could not be applied. The ITAT found no infirmity in the CIT(A)'s order and dismissed the revenue's appeal on this ground.

2. Deletion of the Disallowance of ?4,84,307/- under Section 37(1) of the Income Tax Act:

The A.O disallowed an amount of ?4,84,307/- debited as "Other expenses-service tax interest" in the Profit and Loss account, considering it as penal interest and not allowable under Section 37(1). The CIT(A) overturned this, stating that the payment was compensatory in nature for the delay in service tax deposit as per Section 75 of the Finance Act, 1994, and not a penalty.

The ITAT agreed with the CIT(A), noting that interest on late payment of service tax under Section 75 of the Finance Act, 1994, is compensatory and not penal. The ITAT referenced the distinction between interest and penalty, with penalty being covered under Section 76 of the Finance Act, 1994. Consequently, the ITAT upheld the CIT(A)'s decision to allow the deduction under Section 37(1) and dismissed the revenue's appeal on this ground.

Conclusion:

The ITAT dismissed the revenue's appeal, upholding the CIT(A)'s order in its entirety. The additions and disallowances made by the A.O were found to be unjustified based on the statutory provisions and judicial precedents. The decision emphasized the requirement for concrete evidence to invoke Sections 41(1) and 68 and clarified the nature of interest payments under the Finance Act, 1994.