2023 (12) TMI 1225 - AT - Income Tax

Additions u/s 41(1) - Cessation of liability - Freezer Deposit (security deposit) considered as lapsed liability u/s 41(1) - Relevant in which such incomes taxable - assessee-company manufactured ice creams and frozen foods, sold it through distributors from whom it obtained deposits in lieu of installing deep freezers at their premises - HELD THAT - There is, we observe, no dispute on the primary facts. That is, the refundable deposits, to secure the assessee s interest, are accepted from it s dealer by the assessee on provision of equipment to them, which is though subject to depreciation. Though refundable only on termination of the agreement, the amount refundable reduces at a definite rate for each year (or part thereof) of the agreement, corresponding with the rate of depreciation, i.e. @25% p.a. The amount refundable thus reduces at a defined rate each passing year. This ascertained reduction in the amount refundable and, thus, the ceasing of the assessee s liability qua deposit is regarded as it s income by Revenue. How, one wonders, being axiomatic, could that be disputed, signify as it does the right to receive, case law on which is legion The amount having been already received, income arises to that extent; the assessee acquiring a dominion or unqualified right over the same. That the assessee may not have appropriated it as it s income in it s accounts is another matter, it being trite that that the passing or, as the case may be, non-passing of accounting entries is not determinative of the matter. Accounting entries do not create income, but only recognize it. Non-booking of income in accounts would be to no consequence Sutlej Cotton Mills Ltd. v. CIT 1978 (9) TMI 1 - SUPREME COURT . Reliance on case law, de hors the facts and ratio, is of no moment, rendered in fact of no consequence in view of identity of the ratio or the principle of law relied upon. The assessee s challenge, in fact, is not based on merits per se , but on precedence, which we have again found to be in agreement with the Revenue s case, i.e., cessation of liability signifying accrual of income. For the reasons unknown, this cessation has, as it appears, in assessee s view, coincided with the termination of agreement, which represents the fundamental flaw in assessee s case. It is not the amount refundable, which is only on the said termination, but that non-refundable, which is independent of termination, which results in accrual of income. True, termination also signifies the amount refundable, but then that is only the amount not non-refundable, since determined at the expiry of each year. The exercise is to be carried out at each year-end, determining the deposit amounts no longer refundable. There being no dispute on quantum at any stage, we have no hesitation in according our approval to the impugned addition. We are conscious that the said sum or part thereof may have been booked as income in the subsequent years, i.e., on termination of the relevant agreements. It is, however, again trite that income is liable to be taxed for the right year, and it being taxed in another year is no ground for it being not brought to tax for the right year CIT v. British Paints India Ltd. 1990 (12) TMI 2 - SUPREME COURT ; CIT vs. Chunilal V. Mehta Sons P. Ltd. 1971 (8) TMI 4 - SUPREME COURT . Disallowance u/s 14A - expenditure incurred on earning exempt income - HELD THAT - Until and unless there is diversion of funds, of which there is no whisper, the term loan, as indeed working capital loan/advance, are for business purposes, would not stand to be allocated, which is only qua common expenses. The assessee has also claimed that it has sufficient funds of it s own, i.e. vis-a-vis the investment yielding non-taxable income, being at an average of Rs. 305 lakhs and Rs. 19 lakhs respectively, and that therefore no part of the tax-free investment could be regarded as financed from interest bearing borrowings. The matter is completely factual. It is only in the absence of the assessee exhibiting it s case with reference to facts and figures that the average formula prescribed u/r. 8D comes into play. The comparison as made is misplaced. The term loan, for example, does not finance the fixed assets to the extent of 100%, so that the balance is by own capital, as indeed the repayment of the term loan, increasing the share self-financed to that extent. Similarly, for the working capital borrowing, which also entails margin money. Money has no bones and, therefore, it is only the fund flow statement (or Balance Sheets as at the end of the year/s) that would clarify the financing pattern of the taxable assets and, by implication, of the non-taxable or the tax-free investment. No such exercise has been done at any stage for us to issue any finding in the matter. No interference, therefore, apart from the exclusion of the term loan aforesaid is warranted in computing disallowance u/s. 14A. Assessee s appeal is partly allowed.

Summary

Issues Involved:
1. Condonation of delay in filing the appeal.
2. Addition on account of lapsed liability in respect of refundable deposits.
3. Disallowance under section 14A of the Income Tax Act.

Summary:

Condonation of Delay:
The appeal was delayed by 135 days due to non-conveyance of the impugned order as per the National Faceless Appeal Scheme (NFAS). The delay was condoned as the facts averred were not contested by the Revenue, and the appeal was admitted.

Addition on Lapsed Liability:
The principal adjustment to the returned income was an addition on account of lapsed liability concerning refundable deposits for deep freezers provided to distributors and dealers. The Revenue considered the reduction in the refundable amount due to depreciation as a lapsed liability and brought it to tax. The assessee argued that this issue had already been decided in its favor for the previous year (AY 2014-15) by the Tribunal, and the Revenue had withdrawn its appeal before the High Court due to low tax-effect. The Tribunal acknowledged the identity of facts and the issue, and following judicial precedence, deleted the addition made under section 41(1) of the Income Tax Act.

Disallowance under Section 14A:
The disallowance under section 14A was contested by the assessee on the grounds that the interest allocated included interest on term loans used for taxable income. The Tribunal noted that the matter is factual and requires a detailed examination of the financing pattern of taxable and non-taxable investments. The Tribunal excluded the term loan from the disallowance computation but upheld the rest of the disallowance due to a lack of factual clarity provided by the assessee.

Conclusion:
The appeal was partly allowed, with the addition on account of lapsed liability being deleted and partial relief granted on the disallowance under section 14A. The order was pronounced on December 11, 2023.