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TMI Blog2010 (9) TMI 1202X X X X Extracts X X X X X X X X Extracts X X X X ..... er that character and nature of such loan was changed and it became the money of assessee. (2.1) The ld. CIT(A) has erred in holding the receipt as capital receipt when it is a case of cession of liability and it is clearly taxable under section 41(1) of the Act. (3) On the facts and circumstances of the case and in law, the ld. CIT(A) has erred in deleting the addition on account gross profit difference of ₹ 29,81,671/- without considering the fact that assessee had inflated certain expenditure in the post survey period to nullify the effect of disclosure of additional income made. (3.1) The ld. CIT(A) has erred in accepting the facts/explanations which were not produced before the AO and without giving an opportunity to rebut the same. This is an infringement of Rule 46A of the Income-tax Rules, 1962. 2. The facts of the case are that assessee company is engaged in the business of manufacturing MG Kraft Paper. While finalizing the assessment following additions were made:- Bad debts Rs.06,76,780/- Amount waived by GSFC Rs.29,12,304/- Gross Profit difference ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT 323 ITR 397 in which it was held as under: This position in law is well-settled. After 1st April, 1989, it is not necessary for the assessee to establish that the debt, in fact, has become irrecoverable. It is enough if the bad debt is written off as irrecoverable in the accounts of the assessee. However, in the present case, the Assessing Officer has not examined whether the debt has, in fact, been written off in accounts of the assessee. When bad debt occurs, the bad debt account is debited and the customer s account is credited, thus, closing the account of the customer. In the case of Companies, the provision is deducted from Sundry Debtors. As stated above, the Assessing Officer has not examined whether, in fact, the bad debt or part thereof is written off in the accounts of the assessee. This exercise has not been undertaken by the Assessing Officer. Hence, the matter is remitted to the Assessing Officer for de novo consideration of the above-mentioned aspect only and that too only to the extent of the write off. Thus once the amount is recoverable from the assessee or even if from M/s Punch Pack and it was claimed in the profit and loss account in an earlier y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tended that the assessee itself took steps to write off the liability on account of purchase tax by making necessary adjustments in the books, which itself is indicative of the fact that the liability ceased for all practical purposes and therefore, the addition of the amount of ₹ 3,20,758 deeming the same as income of the year 1985-86 under section 41(1) is well justified of the Act. But, what the assessee has done is not conclusive. As observed by the Tribunal, a unilateral action on the part of the assessee byway of writing-off the liability in its accounts does not necessarily mean that the liability ceased in the eye of law. In fact, this is the view taken by this court in CIT v. Sugauli Sugar Works (P.) Ltd. (1999) 236 ITR 518, We, therefore, find no substance in the contention advanced on behalf of the appellant. Incidentally, we may mention that the controversy relates to the period anterior to the introduction of Explanation 1 to section 41(1). The decision of this court in CIT v. T. V. Sundaram Iyengar and Sons Ltd. (1996) 222 ITR 344 has been cited by ld. Counsel for the appellant. We find no relevance of this decision to the determination of the question inv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e approached the Tribunal. The Tribunal held that the remission of unsecured loans could not be subjected to tax by invoking the provisions of section 28(iv) read with section 41(1). On a reference : Held,_ that it was an admitted position that there had been no allowance or deduction in any of the preceding years and, hence, there was no question of applying the provision as such. Section 28 of the Act deals with profits and gains of business or profession and clause (iv) thereof says that the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession shall be chargeable as income under the head Profits and gains of business or profession . In the facts of the present case, it could not be said that the assessee-company was carrying on business of obtaining loans and that the remission of such loans by the creditors of the company was a benefit arising from such business. The Tribunal was right in holding that the amount of ₹ 1,77,052 arising as a result of remission of unsecured loans was not taxable in the hands of the assessee. (iii) Govindbhai C. Patel vs. DCIT, ITA No.1675/Ahd/2009 October 30, 200 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee for any year and hence the provisions of section 41(1) had no application. Held that section 41(1) creates a legal fiction and hence has to be strictly complied with if any addition to the income is sought to be made by the Revenue. Unless an allowance or deduction had been made in an earlier year in respect of loss, expenditure or trading liability there can be no addition under section 41(1). There was no finding of the Tribunal that any deduction or allowance was made in the assessment of the assessee in an earlier year. Therefore, the order of the Tribunal was set aside and the matter was remitted to the Tribunal for fresh consideration in accordance with law. (viii) Smartalk (P) Ltd. vs. ITO ACIT vs. Smartalk (P) Ltd. (2009) 313 ITR (A.T.) 96 (ITAT-Mum) Held, that the amount credited to the capital reserve account could not be taxed either under section 28(iv) or section 41(1) of the Act as waiver of loan was neither covered under section 28(iv) or section 41(1) of the Act. The provisions of section 10(3) could not be invoked for charging any income to tax as section 10 deals with only such incomes, which are not to be included in the total income of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dering opening balance, quantity received and quantity issued. iii) in some of the cases, the quantity received was not added to arrive at the total balance available with the assessee company. iv) in some cases the quantity was issued for production but the effect of the same was not given to arrive at closing balance. v) in some of the cases, the figures are overwritten without any basis and supporting evidence. c) It is also observed in some cases that after considering the material issued for production, stock balance turns negative, which is not possible and correct under any circumstances. The partial details of such instances of the facts mentioned above are as under :- Date Opening balance Qty.received Total Qty.issued Closing balance 31/10/04 530245 17545 607790 71200 536590 28/11/04 1070045 54250 0 67300 565695 14/03/05 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... noticed that GP margin in the pre-survey period is 7.91% whereas it is 6.36% in the post survey period. No satisfactory explanation was given as to the difference and accordingly applying the GP rate of 7.91% in the post survey period the AO worked out the addition of ₹ 29,81,671/-. 9. The ld. CIT(A) deleted the addition by holding that the variations are not found to be more than even 1%. 10. We have considered the rival submissions and perused the material on record. In our considered view the AO has rightly rejected the books as the defects were not reconciled. The chart given by the AO clearly shows that inspite of issuing quantities the closing balance had remained the same for several days. If it was a clerical mistaken then corrections ought to have done and presented to the AO as pointed out by him. 11. So far as the application of gross profit rate is concerned, we are of the view that assessee has not satisfactorily explained as to why its profit margin is low in post survey period, when he continued to do the same business throughout the year. We find that there is no reasonable cause for declaring lower profits in post survey period as compared to presur ..... X X X X Extracts X X X X X X X X Extracts X X X X
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