Sec 41(1) applies where deduction is allowed in earlier years in computing business income and assessee obtained benefit on the remession of the same in the next year

IN THE INCOME TAX APPELLATE TRIBUNAL

(DELHI BENCH “B” NEW DELHI)

BEFORE SHRI G.D. AGRAWAL, HON’BLE VICE-PRESIDENT

AND SHRI RAJPAL YADAV: HON’BLE JUDICIAL MEMBER

ITA No. 4646/Del/2010

Assessment Year: 2002-03

Assistant Commissioner of IT,

Circle 10(1),

New Delhi.

(Appellant)

Vs.

M/s. Delhi State Mineral

Development Corporation Ltd.,

N-36, Bombay Life Building,

Connaught Place, N.Delhi.

(PAN: AAACD1236E)

 (Respondent)

Appellant by: Shri Vikas Suryavanshi, Sr. DR

Respondent by: Shri RS Singhvi, CA

ORDER

PER RAJPAL YADAV: JUDICIAL MEMBER

The revenue is in appeal before us against the order of Learned CIT(Appeals) dated 23.08.2010 passed for assessment year 2002-03. The grievance of the revenue is that Learned CIT(Appeals) has erred in deleting the additions made by the Assessing Officer with the aid of section 41(1) of

the Income-tax Act, 1961.

2. The brief facts of the case are that the assessee is a corporation owned by the State Government of Delhi. It has filed its return of income on 30^th October 2002 declaring nil income. An assessment order was passed under section 143(3) on 18.2.2005. The assessee has shown existing liability.

Learned Assessing Officer harbored a belief that these liabilities have ceased to exist and, therefore, additions to be made. He made the following the additions:

i) Rs.16,25,575- the liability representing interest payable to DSIDC;

ii) Rs.9,16,951- liability representing royalty payable to the State Government;

iii) Rs.3,52,278 - salary payable by the assessee;

iv) Rs.3,76,507 – representing expenses payable by the assessee.

3. Dissatisfied with the additions, assessee carried the matter in appeal before the Learned CIT(Appeals). Learned first appellate authority has deleted the additions on the ground that liability to pay did not cease to exist and no addition can be made under sec. 41(1) of the Income-tax Act, 1961.

4. Before us, Learned DR relied upon the order of the Assessing Officer whereas the learned counsel for the assessee relied upon the order of the Learned CIT(Appeals). He further pointed out that the issue in dispute is squarely covered in favour of the assessee by the decision of Hon'ble jurisdictional High Court rendered in the case of CIT vs. Shri Vardhman Overseas Ltd. Reported in 69 DTR (Del.) 379.\

5. We have heard the rival contentions and gone through the record carefully. Before learned first appellate authority, assessee has filed written submissions wherein it has explained the nature of each liability and how it is still in existence. The submissions made by the assessee have been reproduced by the learned first appellate authority and the same read as under:

“a) Interest liability of M/s. DSIDC – 16,25,572/-

This liability is not in the nature of trading liability of the company as the liability is relating to loan taken from Government of India by M/s. DSIDC which was at that time a merged entity with DSMDC. However, when DSMDC was demerged into an independent entity, the assets and liability represented by loan and interest were transferred to DSMDC along with the corresponding liability and same is still appearing in the books of account of DSMDC. The DSMDC has no business activities as mining operations in Delhi were prohibited by Delhi Administration and it has again been decided to merge DSMDC with DSIDC. The merger proceedings are in progress and necessary approval has been accorded by Board of both the companies and the matter is at the final stage and accordingly the action of the Assessing Officer in treating the same as cessation of liability in terms of provisions of sec. 41(1) is highly uncalled for and arbitrary and against the legal principles as clarified above.

This is not a case of trading liability and even otherwise the assessee has not obtained any benefit for claim of deduction and further the assessee has not written back the amount as non payable in the books of account and as such provisions of sec. 41(1) are not applicable. The outstanding balance being relating to the Government undertaking, there is no case of any presumption or adverse inference.

b) Royalty Payable (Court permit fee) Rs. 9,16,951/-

The Assessing Officer has not understood the nature and character of liability and parties involved in the matter. It has been observed and accepted by the Assessing Officer himself that the royalty is payable to Delhi Government and as such there cannot be any presumption that there was any remission or cessation. Further, as against provisions of the liability, the assessee himself has made advance payments towards this liability to the extent of Rs.2,46,608 and the balance of liability is to be paid after proper reconciliation. In fact, the Assessing Officer himself has observed that the liability is deemed to be not payable and there is no specific finding that same is not payable at all or same has been written back. The finding of the Assessing Officer is without proper appreciation of facts and based on presumption and surmises. The legal principle explained above shall be relevant in respect of this item also and accordingly the addition made by the Assessing Officer is not justified and sustainable.

c) Salary payable to employees – Rs.3,52.278/-

This amount is relating to salary payable to the employees’ pending final settlement of accounts. The liability on account of salary to employees is a statutory obligations of the employer and when the claim in respect of the liability has been allowed, there cannot be any presumption that same is not payable or assessee has obtained any remission or cessation. The presumption of Assessing Officer that same is deemed to be not payable is highly uncalled for and same is contrary to requirement of provisions of sec. 41(1). In the light of legal principles explained above, the Assessing Officer is not justified to make addition in respect of the same by invoking provisions of sec. 41(1).

d) Expenses payable and other liabilities – Rs.3,76,507/-

In respect of this item also the Assessing Officer has made presumption that same is deemed to be not payable and applied provisions of sec. 41(1). In this connection, we are pleased to give the details of outstanding liability as on 31.3.2002 and the fact that each of the item of liability was examined and assessee itself has written back the liability to the extent of Rs.7,91,054 as not payable and same was already declared as income. However, the balance liability was considered by the management as existing and payable and as such it is not for the Assessing Officer to make presumption that same is not payable. This is a case of Government Company and appraisal is made at every stage in respect of each item of liability and it is on the basis of final decision or approval based on facts of the case that appropriate decision is taken. The action of the Assessing Officer being illegal, arbitrary and contrary to provisions of sec. 41(1) and principle laid down by various legal authorities explained above and as such there is no basis for any such addition. The appellant made another submission vide letter dated 28.4.06 vide which copy of account in respect of such outstanding balances have been filed. It was further submitted that DSMDC Ltd. is an associate concern of Delhi State Industrial Dev. Corporation Ltd. (DSIDC Ltd.) and same is in the process of merger with DSIDC Ltd.”

6. Hon'ble Delhi High Court in the case of Vardhman Overseas Ltd. (supra) has observed that section 41(1) has been incorporated in the Act to cover a particular facts situation. Section applies where a trading liability was allowed as a deduction in earlier years in computing the business income of the assessee and the assessee has obtained a benefit in respect of such trading liability in later year by way of remission or cessation of the liability. In such a case, the section says that whatever benefit has arisen to the assessee in the later year by way of remission of the liability will be brought to tax in that year. The principle behind the section is that a provision intended to ensure that the assessee does not get away with a double befit once by way of a deduction in an earlier assessment year and again by not being taxed on the benefit received by him in a later year with reference to the liability earlier allowed as a deduction. In this case, four years have elapsed and the Assessing Officer took a view that the liability has ceased to exist. It was held that merely elapse of four years is not sufficient to say that the liability ceased to exist unless it has been written back in the books of account. In the present case also, the assessee has not written back the liability and Assessing Officer failed to demonstrate that liability has ceased. Learned first appellate authority while deleting the addition put reliance upon the judgment of the Hon'ble Supreme Court in the case of CIT vs. Kesaria Tea Co. Ltd. Reported in 254 ITR 435 and CIT vs. Sugauli Works Ltd. Reported in 236 ITR 518. According to these judgments, unless the liabilities are written off in the books of account, provisions of section 41(1) cannot be applied. On due consideration of the order of the Learned CIT(Appeals) in the light of authoritative pronouncements of the Hon'ble Supreme Court as well as of Hon'ble Delhi High Court, we do not see any reason to interfere in the order of the Learned CIT(Appeals). In view of the above discussion, the appeal of the revenue is dismissed.

Decision pronounced in the open court on 22.06.2012

                                                       Sd/-                            Sd/-

                                          (G.D. AGRAWAL)  (RAJPAL YADAV)

                                          VICE-PRESIDENT  JUDICIAL MEMBER

Dated: 22/06/2012

Mohan Lal

Copy forwarded to:

1) Appellant

2) Respondent

3) CIT

4) CIT(Appeals)

5) DR:ITAT

ASSISTANT REGISTRAR