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TMI Blog2019 (3) TMI 1290X X X X Extracts X X X X X X X X Extracts X X X X ..... (1) non-trade liabilities nature; (2) absence of act of write off, i.e., cessation of liabilities; and (3) requirement of meeting the un-uniform year of invoking the provisions of section 41(1) and year of reaping of benefits in respect of said liabilities, we are of the opinion that the order of CIT(A) is required to be reversed on this issue. - Decided in favour of assessee. - ITA No.1484/PUN/2016 - - - Dated:- 21-1-2019 - MS. SUSHMA CHOWLA, JM AND SHRI D. KARUNAKARA RAO, AM For The Assessee : Shri Nitesh Joshi Shri P.P. Bhandari For The Revenue : Shri Sanjeev Ghei ORDER PER D. KARUNAKARA RAO, AM : This is the appeal filed by Assessee against the order of CIT(A)-9, Pune, dated 06.04.2016 for the A.Y. 2007-08. The issue raised in the appeal relates to the applicability of the provisions of section 41(1) of the Act to the advances taken against the Bottles and the Cases in the Bottling business and write off in earlier years. 2. Briefly stated relevant facts include that the assessee filed return of income declaring total income at Nil. During assessment proceedings u/s.143 (3) of the Income Tax Act, 1961 (hereinafter referred to as the Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so enhanced the assessment to the tune of ₹ 2,29,63,506/-. In his order, the CIT(A) observed that the total amount advances/deposits, received from the customers on account of supply of the Bottles the Cases to them, is ₹ 5,55,68,474/- and not ₹ 3,26,05,241/- as held by the AO in the assessment. Eventually, the CIT(A) added the addition of gross advance of ₹ 5,55,68,478/- by way of enhancement of the assessment. In this regard, the CIT(A) clearly invoked the provisions of section 41(1) of the Act. In the process, AO/CIT(A) are of the opinion that the deposits/advances fall in the scope of trade debts . In the impugned order, the CIT(A) extracted the written submission made by assessee vide submissions dated 11.12.2015 and 29.02.2016 before confirming /enhancing the assessment. Eventually, the CIT(A) partly allowed the appeal by assessee. 4. Aggrieved with the said decision of the CIT(A), the assessee filed the present appeal with the grounds extracted here as under: Grounds of appeal 1. The Commissioner of Income Tax (Appeals) was wrong in confirming the addition of ₹ 3,26,05,241/-, made by the Assessing Officer by holding that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ived on or after 01.04.1996 till the transfer of business in the year 2000 is of ₹ 2,29,63,506/-. Thus, the total deposits work out to ₹ 5,55,68,474/-. It is an undisputed fact that the assessee claimed depreciation u/s.32 of the Act till the A.Y. 2003-04 in respect of all the Bottles Cases relating to these advances/deposits of ₹ 5,55,68,474/-. Considering the transfer of business in the year 2000, the value of bottles as written off in the books of account for the A.Y. 2006-07 is of ₹ 8,07,55,075/-. As per the assessee, the value and the treatment of Bottles Cases shown as stock- in-trade in the books of account as well as under Income Tax is tabulated as under: Treatment of Bottles and cases shown as stock in trade In books of account Under Income Tax Upto 31/3/2005 Balance ₹ 8,07,55,075 carried over from earlier year Depreciation claimed on WDV till A.Y.2003-04 In financial year 2005-06 (A.Y.2006-07) Value of bottles pertaining to stock of ₹ 8,07,55,075 written off ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nvoke the provisions of section 41(1) in respect of the relatable advances in the A.Y. 2007-08, the year under consideration. As discussed in Para 5 of the Ist appellate order, CIT(A) observed that the AO rightly invoked the provisions of section 41(1) of the Act. Further, the CIT(A) did not disturb the book entry of write off of ₹ 8,07,55,075/- in the A.Y. 2006-07. Thus, the assessee availed the benefit in A.Y. 2006-07 and the benefit is taxed in A.Y. 2007-08. However, the CIT(A) objected to the decision of the AO in restricting the disallowance of current liabilities of advances received prior to 31-03-1996. CIT(A) is of the view that entire advances of ₹ 5,55,68,474/- need to be disallowed u/s.41 of the Act. 6.1 Before the CIT(A), regarding applicability of provisions of section 41(1) of the Act, the assessee submitted that the addition made u/s.41(1) of the Act is not sustainable. He argued stating that there is (a) no cessation of liabilities (b) the liabilities are capital nature in the year under consideration. The write off is done in the preceding assessment year and addition is made in the year under consideration. The assessee submitted that the addition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tstanding deposits amounting to ₹ 5,55,68,474/-as against the breakage expense of ₹ 8,70,55,075/- the value of damaged bottles relates to bottles with third parties. The appellant has showed its inability to bring confirmation of bottles/deposits on record and also physical existence of the said bottles after such a long duration seems to be remote possibility, considering this aspect the whole amount of deposit of ₹ 5,55,68,474/- ( is treated as non refundable and hence added back as income u/s 41 to the total income of the appellant for A.Y. 2007-08. Thus, the Income of the appellant on this issue is enhanced by ₹ 2,29,63,506/- (Rs.5,55,68,474/- less- ₹ 3,26,05,241/- already added back). However, carried forward loss to the extent available may be allowed to adjusted against the enhanced addition after' verification. Thus, the addition on account of cessation of liability u/s. 41 of I.T. Act may be taken as ₹ 5,55,68,474/- as against taken by the AO at ₹ 3,26,05,241/-. Thus, this ground of appeal is not only dismissed, the addition on this ground is enhanced. From the above, it is evident that the CIT(A) enhanced the assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ideration. These amounts need to be paid to the customers as and when the Bottles Cases are returned to the assessee. These Bottles Cases, being fixed assets, are outside the scope of the Trading Liabilities. He further submitted that the Bottles Cases constitutes depreciable fixed asset since 01-04-1996 on which depreciation was claimed and allowed by the AO till the A.Y. 2003-04. Therefore, the advance/deposits received on account of said bottles and cases i.e. fixed depreciable asset, cannot be termed as Trade Liabilities within the meaning of sub section (1) of section 41 of the Act. The capital liabilities are outside the scope of these provisions. In these circumstances, as per Ld. Counsel for the assessee submitted that no incriminating evidence/documents was in possession of the AO to demonstrate that said advances/deposits are no longer payable to the customers by the assessee. The said liabilities of advances/deposits are not written off in the books. From this point of view, Ld. Counsel submitted that it is not a case of cessation of liability within the meaning of the provisions of section 41(1) of the Act. Assessee has to pay the liabilities as and when the Bot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 18 of the Limitation Act, 1963. The assessee s liability to the creditors, thus, subsisted and did not cease nor was it remitted by the creditors. The liability was enforceable in a court of law. The amount was not assessable under section 41(1) . 5) Commissioner Vs. Mahindra and Mahindra Ltd. ( ii) That for the applicability of section 41(1) of the Act, it is a sine qua non that there should be an allowance or deduction claimed by the assessee in any assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee, Then, subsequently, during any previous year, if the creditor remits or waives any such liability, the assessee is liable to pay tax under section 41 of the Act. The assessee had been paying interest at 6 per cent. per annum to K in terms of the contract but never claimed deduction for payment of interest under section 36(1)(iii) a/the Act. The deduction claimed by the assessee in previous assessment years was due to the depreciation of the machine and not on the interest paid by it. Moreover, the purchase effected from K was in respect of plant, machinery and tooling equipment which were capital assets of the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness of the assessee. Assessee claimed depreciation u/s.32 of the Act on this block of assets over the years and AO did not disturb the claim of depreciation. These deposits are undisputedly not written off in the books and hence the liabilities stand payable to the customers as and when the assets are returned by the customers; (2) The assessee grouped the said deposits into two types (a) the deposited collected upto March, 1996; and (b) the deposits collected during 1996to 2006-07; (3) The assessee wrote off these block of Bottles and Cases and derived the benefit to that extent in the A.Y. 2006-07 and not written off the liabilities. However, the AO invoked the provisions of section 41(1) of the Act in the year under consideration for taxing the said benefit to the extent of liabilities remained payable in the books of account; (4) The customers did not return the Bottles and Cases and the amounts might have to be returned as and when the customers returns the same; (5) The assessee claimed depreciation since the A.Y. 1996-97 after capitalizing of the Bottles and Cases and claimed depreciation u/s.32 of the Act. In the year of write off, the block of Bottles and Cases, legally ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess or profession, and accordingly chargeable to income-tax as the income of that previous year. Explanation 1. - For the purposes of this sub-section, the expression loss or expenditure or some benefit in respect of any such trading liability by way of remission or cessation thereof shall include the remission or cessation of any liability by a unilateral act by the first-mentioned person under clause (a) or the successor in business under clause (b) of that sub-section by way of writing off such liability in his accounts. 10.3 From the above, where a deduction in respect of trading liability is incurred by the assessee and subsequently during any previous year assessee obtained some benefit in respect of such trading liability by way of remission or cessation thereof, the value of such benefit shall be deemed as chargeable to income-tax as income of that previous year. The existence of business in that year of taxation is not a requirement of law. From the above provisions, it is clear that the year of obtaining some benefit in respect of such trading liability is deemed to be the taxable income for the said year. Therefore, by hono ..... X X X X Extracts X X X X X X X X Extracts X X X X
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