The DCITVapi Circle,, Vapi v. M/s. Shree Gajanan Paper & Board Pvt. Ltd.,, Vapi

ITA 2817/AHD/2008 | 2005-2006
Pronouncement Date: 30-09-2010 | Result: Partly Allowed

Appeal Details

RSA Number 281720514 RSA 2008
Bench Ahmedabad
Appeal Number ITA 2817/AHD/2008
Duration Of Justice 2 year(s) 1 month(s) 23 day(s)
Appellant The DCITVapi Circle,, Vapi
Respondent M/s. Shree Gajanan Paper & Board Pvt. Ltd.,, Vapi
Appeal Type Income Tax Appeal
Pronouncement Date 30-09-2010
Appeal Filed By Department
Order Result Partly Allowed
Bench Allotted A
Tribunal Order Date 30-09-2010
Date Of Final Hearing 20-09-2010
Next Hearing Date 20-09-2010
Assessment Year 2005-2006
Appeal Filed On 07-08-2008
Judgment Text
- 1 - IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH A AHMEDABAD BEFORE S/SHRI MAHAVIR SINGH JM AND D.C.AGRAWAL AM DY. CIT VAPI CIRCLE VAPI. VS. SHREE GAJANAN PAPER & BOARDS P. LTD. PLOT NO.781/1 40 SHED AREA GIDC VAPI. (APPELLANT) .. (RESPONDENT) APPELLANT BY :- SHRI ANIL KUMAR CIT DR RESPONDENT BY:- SHRI MEHUL K. PATEL & SHRI GOPAL KRISHNAN IYER ARS O R D E R PER D.C. AGRAWAL ACCOUNTANT MEMBER . THIS IS AN APPEAL FILED BY THE REVENUE RAISING FOL LOWING GROUNDS :- (1) ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN L AW THE LD. CIT(A) HAS ERRED IN DELETING THE ADDITION OF RS.6 7 6 780/- MADE ON ACCOUNT OF BAD DEBTS CLAIMED IN RESPECT OF AMOUN T DUE FROM M/S PACKWELL WITHOUT CONSIDERING THE FACT THAT THER E WAS NO AMOUNT OUTSTANDING AS ON 1.4.04 FROM M/S PACKWELL A S PER THE BOOKS OF ACCOUNTS MAINTAINED BY ASSESSEE COMPANY. (2) ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN L AW THE LD. CIT(A) HAS ERRED IN DELETING THE ADDITION OF RS.29 12 304/- BY HOLDING THAT THE SAME WAS CAPITAL RECEIPT AND HENCE NOT LIABLE TO TAX WITHOUT CONSIDERING THE FACT THAT THE AO HAD HE LD THE SAME AS REVENUE RECEIPT ON THE GROUND THAT THE PRINCIPAL AMOUNT OF LOAN WAS WAIVED BY THE GSFC AND AFTER THAT CHARACTE R AND NATURE OF SUCH LOAN WAS CHANGED AND IT BECAME THE M ONEY OF ASSESSEE. ITA NO.2817/AHD/2008 ASST. YEAR :2005-06 ITA NO.2817/AHD/2008 ASST. YEAR 2005-06 2 (2.1) THE LD. CIT(A) HAS ERRED IN HOLDING THE RECEIPT AS CAPITAL RECEIPT WHEN IT IS A CASE OF CESSION OF LIABILITY A ND IT IS CLEARLY TAXABLE UNDER SECTION 41(1) OF THE ACT. (3) ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN L AW THE LD. CIT(A) HAS ERRED IN DELETING THE ADDITION ON ACCOUN T GROSS PROFIT DIFFERENCE OF RS.29 81 671/- WITHOUT CONSIDE RING THE FACT THAT ASSESSEE HAD INFLATED CERTAIN EXPENDITURE IN T HE POST SURVEY PERIOD TO NULLIFY THE EFFECT OF DISCLOSURE OF ADDIT IONAL INCOME MADE. (3.1) THE LD. CIT(A) HAS ERRED IN ACCEPTING THE FACTS/EXP LANATIONS WHICH WERE NOT PRODUCED BEFORE THE AO AND WITHOUT G IVING AN OPPORTUNITY TO REBUT THE SAME. THIS IS AN INFRINGEM ENT 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 FIN ALIZING THE ASSESSMENT FOLLOWING ADDITIONS WERE MADE:- BAD DEBTS RS.06 76 780/- AMOUNT WAIVED BY GSFC RS.29 12 304/- GROSS PROFIT DIFFERENCE RS.29 81 671/- RS.65 70 755/- 3. IN RESPECT OF BAD DEBT OF RS.6 76 780/- THE AO O BSERVED THAT ASSESSEE HAS CLAIMED DEDUCTION OF BAD DEBTS IN RESP ECT OF DEBTS RECOVERABLE FROM M/S PACKWELL. THE AO FOUND THAT LE DGER EXTRACT OF M/S PACKWELL IN THE BOOKS OF THE ASSESSEE COMPANY SHOWE D A BALANCE OF RS.13 61 185/- RECEIVABLE BUT IT WAS TRANSFERRED TO ANOTHER CONCERN M/S PUNCH AND PACK ON 31/3/2004 BY JOURNAL VOUCHER ENTR Y BY FOLLOWING REMARKS :- BEING AMOUNT TRANSFERRED TO FORMER ACCOUNT (PUNCH & PACK) BEING AGENT AND HAVING PRIMARY RESPONSIBILITY FOR COLLECTING TH E AMOUNT. ITA NO.2817/AHD/2008 ASST. YEAR 2005-06 3 THUS THE AMOUNT OF RS.13 65 185/- WAS TRANSFERRED T O M/S PUNCH & PACK WHO WERE THE AGENT OF THE ASSESSEE COMPANY AND WERE RESPONSIBLE FOR COLLECTING THE MONEY. SUBSEQUENTLY IN ASST. YEAR 20 05-06 THE ASSESSEE RETRANSFERRED THE SUM OF RS.13 61 185/- FROM THE AC COUNT OF M/S PUNCH & PACK TO THE ACCOUNT OF M/S PACKWELL. IT RECEIVED A SUM OF RS.6 86 405/- AS FINAL SETTLEMENT AND ACCORDINGLY WRITTEN OFF THE BALANCE SUM OF RS.6 76 780/- BY TRANSFERRING THE SAME TO THE PROFI T AND LOSS ACCOUNT. THE LD. AO DISALLOWED THE CLAIM ON THE GROUND THAT THE AMOUNT WAS NOT RECEIVABLE FROM M/S PACKWELL AFTER 31.3.2004 AS IT WAS THE SOLE RESPONSIBILITY OF M/S PUNCH & PACK TO COLLECT THE A MOUNT TO WHICH IT WAS TRANSFERRED BY THE ASSESSEE COMPANY ON 31.3.2004. T HE LD. CIT(A) ON THE OTHER HAND ALLOWED THE CLAIM BY HOLDING THAT THE AM OUNT IS BAD DEBT AND ALLOWABLE UNDER SECTION 36. 4. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PER USED THE MATERIAL ON RECORD. IN OUR CONSIDERED VIEW THERE IS NO CASE FOR INTERFERENCE IN THE ORDER OF LD. CIT(A). THE REASONS ARE THAT THE AMOUN T WAS ACTUALLY DUE FROM M/S PACKWELL AND FOR BUSINESS CONSIDERATION IT WAS TRANSFERRED TO PUNCH & PACK. MERELY BECAUSE THE RESPONSIBILITY TO RECOVER THE AMOUNT WAS PUT ON M/S PUNCH & PACK IT DID NOT MEAN THAT AM OUNT WAS NOT DUE FROM PACKWELL. EVEN IF M/S PUNCH & PACK WOULD HAVE TAKEN THE RESPONSIBILITY TO RECOVER THE AMOUNT DUE FROM M/S P ACKWELL BUT IT CANNOT BE SAID THAT IT WAS DUE FROM M/S PUCH & PACK. NOTWI THSTANDING EVEN IF AMOUNT IS STATED TO BE DUE FROM M/S PUNCH & PACK A ND IF ASSESSEE WRITES THEM OFF IN THE BOOKS OF ACCOUNT THE CLAIM HAS TO B E ALLOWED IN VIEW OF THE DECISION OF THE HONBLE SUPREME COURT IN THE CA SE OF T. R. F. LTD. VS CIT 323 ITR 397 IN WHICH IT WAS HELD AS UNDER: THIS POSITION IN LAW IS WELL-SETTLED. AFTER 1 ST APRIL 1989 IT IS NOT NECESSARY FOR THE ASSESSEE TO ESTABLISH THAT TH E DEBT IN FACT HAS BECOME IRRECOVERABLE. IT IS ENOUGH IF THE BAD D EBT IS WRITTEN ITA NO.2817/AHD/2008 ASST. YEAR 2005-06 4 OFF AS IRRECOVERABLE IN THE ACCOUNTS OF THE ASSESSE E. HOWEVER IN THE PRESENT CASE THE ASSESSING OFFICER HAS NOT EXA MINED WHETHER THE DEBT HAS IN FACT BEEN WRITTEN OFF IN ACCOUNTS OF THE ASSESSEE. WHEN BAD DEBT OCCURS THE BAD DEBT ACCOUN T IS DEBITED AND THE CUSTOMERS ACCOUNT IS CREDITED THUS CLOSI NG THE ACCOUNT OF THE CUSTOMER. IN THE CASE OF COMPANIES THE PROVISION IS DEDUCTED FROM SUNDRY DEBTORS. AS STATE D 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-MENT IONED ASPECT ONLY AND THAT TOO ONLY TO THE EXTENT OF THE WRITE OFF. THUS ONCE THE AMOUNT IS RECOVERABLE FROM THE ASSESS EE OR EVEN IF FROM M/S PUNCH & PACK AND IT WAS CLAIMED IN THE PROFIT A ND LOSS ACCOUNT IN AN EARLIER YEAR AND NOW IT IS WRITTEN OFF IN THE BOOK S OF CURRENT YEAR THEN IT IS SUFFICIENT FOR ALLOWING THE CLAIM. AS A RESULT T HIS GROUND OF REVENUE IS REJECTED. 5. THE NEXT ISSUE IS REGARDING RS.29 12 304/- AS IN COME UNDER SECTION 41(1) BUT NOT UPHELD BY LD. CIT(A). DURING THE COUR SE OF ASSESSMENT PROCEEDINGS THE AO FOUND THAT ASSESSEE HAS CREDITED RS.29 12 384/- AS CAPITAL RESERVE BEING PRINCIPAL AMOUNT OF TERM LOAN WAIVED BY GUJARAT STATE FINANCE CORPORATION (GSFC IN SHORT). THE ASSE SSEE COMPANY HAD TAKEN LOAN FROM GSFC IN THE COURSE OF BUSINESS BUT PART OF THE AMOUNT WAS WAIVED THIS YEAR. THE AO HELD THAT THIS AMOUNT HAS BECOME ASSESSEES OWN MONEY THEREFORE IT SHOULD BE TREAT ED AS INCOME OF THE ASSESSEE. THE MOMENT AMOUNT WAS WAIVED IT CHANGED T HE NATURE AND CHARACTER AND FROM CAPITAL IT CONVERTED TO REVENUE. 6. THE LD. CIT(A) HOWEVER DELETED THE ADDITION BY HOLDING THAT RECEIPT WAS ON CAPITAL ACCOUNT. ITA NO.2817/AHD/2008 ASST. YEAR 2005-06 5 7. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PER USED THE MATERIAL ON RECORD. IN OUR CONSIDERED VIEW THERE IS NO CASE FOR INTERFERENCE IN THE ORDER OF LD. CIT(A) AS THE AMOUNT OF LOAN WAIVED BY GSFC CANNOT BE TAXED AS INCOME UNDER SECTION 41(1) IN VIEW OF THE FOLLOWING AUTHORITIES IN SUPPORT OF THIS PROPOSITION. (I) CHIEF CIT VS. KESARIA TEA CO. LTD. 254 ITR 434 (SC) THE QUESTION IS WHETHER THE CIRCUMSTANCES CONTEMPLA TED BY SECTION 41(1) EXIST SO AS TO ENABLE THE REVENUE TO TAKE BACK WHAT HAS BEEN ALLOWED EARLIER AS BUSINESS EXPENDITURE AND TO INCLUDE SUCH AMOUNT IN THE INCOME OF THE RELEVANT ASSESSMENT YEAR I.E. 198586. FN OR DER TO APPLY SECTION 41(1) IN THE CONTEXT OF THE FACTS OBTAINING IN THE PRESENT CASE THE FOLLOWING POINTS ARE TO BE KEPT IN VIEW : (1] IN TH E COURSE OF ASSESSMENT FOR AN EARLIER YEAR ALLOWANCE OR DEDUCTION HAS BEE N MADE IN RESPECT OF TRADING LIABILITY INCURRED BY THE ASSESSEE ; (2) SU BSEQUENTLY A BENEFIT IS OBTAINED IN RESPECT OF SUCH TRADING LIABILITY BY WA Y OF REMISSION OR CESSATION THEREOF DURING THE YEAR IN WHICH SUCH EVE NT OCCURRED ; (3] IN THAT SITUATION THE VALUE OF THE BENEFIT ACCRUING TO THE ASSESSEE IS DEEMED TO BE THE PROFIT AND GAINS OF BUSINESS WHICH OTHERW ISE WOULD NOT BE HIS INCOME ; AND (4J SUCH VALUE OF THE BENEFIT IS MADE CHARGEABLE TO INCOME- TAX AS THE INCOME OF THE PREVIOUS YEAR WHEREIN SUCH BENEFIT WAS OBTAINED. THE LEARNED SENIOR COUNSEL APPEARING FOR THE INCOME -TAX DEPARTMENT HAS CONTENDED THAT THE ASSESSEE ITSELF TOOK STEPS TO WR ITE OFF THE LIABILITY ON ACCOUNT OF PURCHASE TAX BY MAKING NECESSARY ADJUSTM ENTS IN THE BOOKS WHICH ITSELF IS INDICATIVE OF THE FACT THAT THE LIA BILITY CEASED FOR ALL PRACTICAL PURPOSES AND THEREFORE THE ADDITION OF T HE AMOUNT OF RS. 3 20 758 DEEMING THE SAME AS INCOME OF THE YEAR 198 5-86 UNDER SECTION 41(1) IS WELL JUSTIFIED OF THE ACT. BUT WHAT THE A SSESSEE HAS DONE IS NOT CONCLUSIVE. AS OBSERVED BY THE TRIBUNAL A UNILATER AL 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 E YE OF LAW. IN FACT THIS IS THE VIEW TAKEN BY THIS COURT IN CIT V. SUGAULI SUGA R 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 TH E CONTROVERSY RELATES TO THE PERIOD ANTERIOR TO THE INTRODUCTION OF EXPLANAT ION 1 TO SECTION 41(1). THE DECISION OF THIS COURT IN CIT V. T. V. SUNDARAM IYENGAR AND SONS ITA NO.2817/AHD/2008 ASST. YEAR 2005-06 6 LTD. (1996) 222 ITR 344 HAS BEEN CITED BY LD. COUNS EL FOR THE APPELLANT. WE FIND NO RELEVANCE OF THIS DECISION TO THE DETERM INATION OF THE QUESTION INVOLVED IN THE PRESENT CASE. THE FACTUAL MATRIX AN D THE PROVISION OF LAW CONSIDERED THEREIN IS ENTIRELY DIFFERENT. (II) CIT V. CHETAN CHEMICALS PVT. LTD. [2004] 267 I TR 0770-[GUJ] ON A READING OF SECTION 41(1) OF THE INCOME-TAX ACT 1961 IT IS APPARENT THAT BEFORE THE SECTION CAN BE INVOKED AN ALLOWANCE OR A DEDUCTION MUST HAVE BEEN GRANTED DURING THE COURSE OF ASSESSMENT F OR ANY YEAR IN RESPECT OF LOSS EXPENDITURE OR TRADING LIABILITY WHICH IS INCURRED BY THE ASSESSEE AND SUBSEQUENTLY DURING ANY PREVIOUS YEAR THE ASSES SEE OBTAINS WHETHER IN CASH OR IN ANY OTHER MANNER ANY AMOUNT IN RESPE CT OF SUCH TRADING LIABILITY BY WAY OF REMISSION OR CESSATION OF SUCH LIABILITY. IN THAT CASE EITHER THE AMOUNT OBTAINED BY THE ASSESSEE OR THE V ALUE OF THE BENEFIT ACCRUING TO THE ASSESSEE CAN BE DEEMED TO BE THE PR OFITS AND GAINS OF BUSINESS OR PROFESSION AND CAN BE BROUGHT TO TAX AS INCOME OF THE PREVIOUS YEAR IN WHICH SUCH AMOUNT OR BENEFIT IS OB TAINED. THE ASSESSEE A PRIVATE LIMITED COMPANY WAS INCORP ORATED IN THE YEAR 1974-75. SINCE 1976 THE COMPANY CARRIED ON COMMERC IAL PRODUCTION OF VARIOUS INORGANIC CHEMICALS. THE COMPANY MAINTAINED ITS ACCOUNTS AS PER THE MERCANTILE SYSTEM OF ACCOUNTING. IN THE COURSE OF CARRYING ON ITS BUSINESS THE COMPANY HAD OBTAINED UNSECURED LOANS FROM VARIOUS CREDITORS AND IN THE LIGHT OF THE FINANCIAL DIFFIC ULTIES FACED BY THE COMPANY THE CREDITORS APPROACHED THE HIGH COURT BY FILING VARIOUS COMPANY PETITIONS. DURING THE COURSE OF THOSE PROCE EDINGS A COMPROMISE WAS REACHED BETWEEN THE ASSESSEE-COMPANY AND ITS CREDITORS WHEREIN AS PER THE TERMS OF THE COMPROMISE CERTAIN CREDITORS REMITTED UNSECURED LOANS AMOUNTING TO RS. 1 77 052. AT THE S AME TIME INTEREST WHICH HAD ACCRUED IN FAVOUR OF THE CREDITORS AMOUNT ING TO RS. 2 96 171 WAS ALSO REMITTED. SUCH REMITTED INTEREST WAS DECLA RED BY THE ASSESSEE FOR THE ASSESSMENT YEAR 1982-83 AS INCOME LIABLE TO TAX UNDER SECTION 41(1) OF THE INCOME-TAX ACT WHILE FILING ITS RETURN OF IN COME BUT THE REMISSION OF LOANS AMOUNTING TO RS. 1 77 052 WAS NOT RETURNED AS INCOME LIABLE TO TAX. THE INCOME-TAX OFFICER TREATED THE AFORESAID R EMISSION OF LOANS AS A BENEFIT ACCRUING TO THE COMPANY DURING THE COURSE O F ITS BUSINESS ACTIVITY AND BROUGHT IT TO TAX BY INVOKING THE PROVISIONS OF SECTION 28(IV) OF THE ACT. THE COMMISSIONER (APPEALS) CONFIRMED THE ASSES SMENT ORDER AND THE ASSESSEE 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 : ITA NO.2817/AHD/2008 ASST. YEAR 2005-06 7 HELD _ THAT IT WAS AN ADMITTED POSITION THAT THERE HAD BEEN NO ALLOWANCE OR DEDUCTION IN ANY OF THE PRECEDING YEARS AND HEN CE THERE WAS NO QUESTION OF APPLYING THE PROVISION AS SUCH. SECTION 28 OF THE ACT DEALS WITH PROFITS AND GAINS OF BUSINESS OR PROFESSION AN D CLAUSE (IV) THEREOF SAYS THAT THE VALUE OF ANY BENEFIT OR PERQUISITE W HETHER 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 C OULD NOT BE SAID THAT THE ASSESSEE-COMPANY WAS CARRYING ON BUSINESS OF OBTAIN ING 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 RS. 1 77 052 ARISING AS A RESULT OF REMIS SION 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 2009. SECTION 41(1) OF IT ACT 1961 CONCERNS A TRADING LI ABILITY AND NOT OTHER TYPES OF LIABILITY. WHERE THE ASSESSEE RECEIVED SOME AMOUNT AS A LIABIL ITY WHICH WAS NOT CLAIMED AS DEDUCTION OR EXPENSES IN ANY OF THE YEAR S AND THE SAME WAS WRITTEN OFF AS COMPENSATION/DAMAGES FOR RELINQUISHM ENT OF RIGHT TO SUE IN COURT OF LAW THE PROVISIONS OF SECTION 41(1) OR SE CTION 68 WOULD NOT APPLY TO THE WRITING OFF THAT LIABILITY. (IV) CIT VS. GOYAL M.G. GASES LTD. (2010) 321 ITR 4 37 (DEL) HELD _ DISMISSING THE APPEAL THAT THE ASSESSEE DID NOT CLAIM NOR WAS ALLOWED ANY DEDUCTION OR BENEFIT OF ALLOWANCE BY WAY OF ALLOWAB LE EXPENDITURE AND TRADING LIABILITY AND THE SUM HAVING BEEN CREDITED TO THE PROFIT AND LOSS ACCOUNT HAD BEEN SUBJECTED TO TAX AS PART OF BOOK PROFIT UNDER SECTI ON 115JB OF THE ACT. THE CONCLUSIONS OF THE TRIBUNAL WERE BASED ON A CORRECT APPRECIATIO N OF LAW AND THEREFORE NOT TO BE INTERFERED WITH. (V) PRISM CEMENT LTD. VS. JOINT CIT (2006) 285 ITR (A.T.) 43 (ITAT MUM) FOR INVOKING THE PROVISIONS OF SECTION 41(1) OF THE INCOME-TAX ACT 1961 AN ALLOWANCE OR DEDUCTION MUST HAVE BEEN GRANTED DURIN G THE COURSE OF ASSESSMENT FOR ANY YEAR IN RESPECT OF LOSS EXPENDITURE OR TRADING LIABILITY INCURRED BY THE ASSESSEE AND SUBSEQUENTLY DURING ANY PREVIOUS YEAR THE ASSE SSEE MUST OBTAIN WHETHER IN CASH OR IN ANY OTHER MANNER WHATSOEVER ANY AMOUNT IN RES PECT OF SUCH TRADING LIABILITY BY WAY OF REMISSION OR CESSATION OF SUCH LIABILITY. UN LESS AND UNTIL THE LIABILITY WHICH HAS ITA NO.2817/AHD/2008 ASST. YEAR 2005-06 8 CEASED OR BEEN REMITTED DURING THE ASSESSMENT YEAR HAS BEEN DEBITED AND CLAIMED TO THE PROFIT AND LOSS ACCOUNT AND ALLOWED IN EARLIER YEARS IT CANNOT BE TREATED TO BE AN INCOME UNDER SECTION 41(1). IF THAT LIABILITY WAS N OT ALLOWED OR ITS DEDUCTION WAS NOT GRANTED IN EARLIER YEARS IT WOULD NOT ASSUME THE C HARACTER OF INCOME CHARGEABLE TO TAX IN A LATER YEAR BY VIRTUE OF SECTION 41(1). (VI) MINDTEK (INDIA) LTD. VS. ITO (2010) 122 ITD 48 6 (BOM) (VII) NARAYANAN CHETTIARY INDUSTRIES VS. ITO 277 IT R426 (MAD) ALL THE INCOME TAX AUTHORITIES TREATED THE AMOUNT O F RS.23 66 695 (THE AMOUNT WHICH WAS WRITTEN OFF BY THE SISTER CONCERN OF THE ASSESSEE) AS INCOME IN THE HANDS OF THE ASSESSEE AND TAXED IT UN DER SECTION 41(1) OF THE INCOME-TAX ACT 1961. ON APPEAL THE ASSESSEE CONTEN DED THAT THERE WAS NO FINDING THAT THERE WAS DEDUCTION OF ALLOWANCE MA DE IN THE ASSESSMENT OF THE ASSESSEE FOR ANY YEAR AND HENCE THE PROVISIO NS OF SECTION 41(1) HAD NO APPLICATION. HELD THAT SECTION 41(1) CREATES A LEGAL FICTION AN D HENCE HAS TO BE STRICTLY COMPLIED WITH IF ANY ADDITION TO THE INCOME IS SOUG HT 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 LIA BILITY 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 ASSESSME NT OF THE ASSESSEE IN AN EARLIER YEAR. THEREFORE THE ORDER OF THE TRIBUN AL WAS SET ASIDE AND THE MATTER WAS REMITTED TO THE TRIBUNAL FOR FRESH CONSI DERATION 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 RESE RVE ACCOUNT COULD NOT BE TAXED EITHER UNDER SECTION 28(IV) OR SECTION 41(1) OF THE ACT AS WAIVER OF LOA N WAS NEITHER COVERED UNDER SECTION 28(IV) OR SECT ION 41(1) OF THE ACT. THE PROVISIONS OF SECTION 10(3) C OULD 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 THE ASSESSEE. THE ASSESSING OFFICER WOULD NOT INCLUDE T HE SUM OF RS. 2.45 CRORES AS INCOME OF THE ASSESSEE SINCE IT WAS UTILISED TO REPAY THE AMOUNT DUE TO THE BANK OF AMERICA ON ACCOUNT OF LOAN TAKEN FOR THE PURPOSE OF BUSINESS AND THE AMOUNT WAS CRED ITED TO THE CAPITAL RESERVE ACCOUNT BEING THE CONTRIBUTION MADE BY THE SHAREHOLDER FOR REPAYING I TS LIABILITIES IN ORDER TO FULFIL ITS GUARANTEE OBL IGATIONS. THEREFORE THE AMOUNT CREDITED IN THE CAPITAL RESERV E ACCOUNT WAS NOT TAXABLE UNDER SECTION 10 OF THE ACT. (IX) MAHINDRA AND MAHINDRA LTD. VS. CIT CIT VS. MAHINDRA AND MAHINDRA LTD. (2003) 261 ITR 5 01 (BOM) (II) THAT IN ORDER TO APPLY SECTION 41(1) AN ASSES SEE SHOULD HAVE OBTAINED A DEDUCTION IN THE ASSESSMENT FOR ANY YEAR IN RESPECT OF LOSS EXPENDI TURE OR TRADING LIABILITY INCURRED BY THE ASSESSEE. THE ITA NO.2817/AHD/2008 ASST. YEAR 2005-06 9 ASSESSEE HAD NOT OBTAINED SUCH ALLOWANCE OR DEDUCTI ON IN RESPECT OF EXPENDITURE OR TRADING LIABILITY. THE ASSESSEE HAD PAID INTEREST AT 6 PER CENT. OVER A PE RIOD OF TEN YEARS ON RS. 57 74 064. IN RESPECT OF T HAT INTEREST THE ASSESSEE NEVER GOT DEDUCTION UNDER SE CTION 36(1)(III) OR SECTION 37. IN THE CIRCUMSTANCE S SECTION 41(1) OF THE ACT WAS NOT APPLICABLE. SECOND LY EVEN ASSUMING THAT THE ASSESSEE HAD GOT DEDUCTION ON ALLOWANCE SECTION 41(1) WAS NOT APPLIC ABLE BECAUSE SUCH DEDUCTION WAS NOT IN RESPECT OF LOSS EXPENDITURE OR TRADING LIABILITY. LASTLY THE TOOLINGS CONSTITUTED CAPITAL ASSETS AND NOT STOCK-I N-TRADE. THEREFORE TAKING INTO ACCOUNT ALL THE ABOVE FACTS SECTION 41(1) OF THE ACT WAS NOT APPLICABLE. SINCE THE ABOVE AMOUNT OF LOAN NEVER PASSED THROUGH PROFIT AND LOSS ACCOUNT IT CANNOT BE TAXED AS INCOME UNDER SECTION 41(1). ACCORDINGLY THIS GROUND OF REVENUE IS ALSO REJECTED. 8. THE NEXT GROUND IS REGARDING ADDITION OF RS.29 8 1 671/- ON ACCOUNT OF GROSS PROFIT. DURING THE COURSE OF ASSESSMENT P ROCEEDINGS THE AO FOUND THAT DETAILS OF INDIAN WASTE ARE NOT MAINTAIN ED PROPERLY. HE FOUND FOLLOWING DEFECTS:- A) THE REGISTER MAINTAINED BY THE ASSESSEE COMPANY IS PRIMARY RECORD AND CANNOT BE IGNORED AND THE BOOKS OF ACCOUNT ARE WRITTEN ON THE BASIS OF THESE PRIMARY RECORDS. B) WHILE VERIFYING THE REGISTER IT WAS NOTICED THA T - I) IN SOME CASES AFTER CONSIDERING THE QUANTITY RE CEIVED TOTAL QUANTITY IS TAKEN WRONGLY. II) IN SOME CASES THE CLOSING BALANCE OF RAW MATER IAL WAS NOT DETERMINED CORRECTLY AFTER CONSIDERING OPENING BALA NCE QUANTITY RECEIVED AND QUANTITY ISSUED. III) IN SOME OF THE CASES THE QUANTITY RECEIVED WA S NOT ADDED TO ARRIVE AT THE TOTAL BALANCE AVAILABLE WITH THE ASSESSEE CO MPANY. IV) IN SOME CASES THE QUANTITY WAS ISSUED FOR PRODU CTION BUT THE EFFECT OF THE SAME WAS NOT GIVEN TO ARRIVE AT CLOSING BALA NCE. V) IN SOME OF THE CASES THE FIGURES ARE OVERWRITTE N WITHOUT ANY BASIS AND SUPPORTING EVIDENCE. C) IT IS ALSO OBSERVED IN SOME CASES THAT AFTER CON SIDERING THE MATERIAL ISSUED FOR PRODUCTION STOCK BALANCE TURNS NEGATIVE WHICH IS NOT POSSIBLE AND CORRECT UNDER ANY CIRCUMSTANCES. ITA NO.2817/AHD/2008 ASST. YEAR 2005-06 10 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 226645 20430 226975 56610 170365 15/03/05 170365 20600 170365 44790 125579 18/03/05 20235 20320 20235 37500 20235 20/03/05 26995 0 26995 22200 26995 21/03/05 26995 0 26995 20920 26995 22/03/05 26995 0 26995 36600 26995 23/03/05 26995 0 26995 21700 26995 24/03/05 26995 45510 31005 29800 31005 25/03/05 31005 45075 65670 45340 16730 26/03/05 16730 17575 24305 32800 6405 29/03/05 8840 0 8840 6000 6240 30/03/05 0 210000 0 86865 114235 QUANTITY DETAILS OF RAW MATERIAL OF IMPORTED WASTE PAPER DATE OPENING BALANCE QTY.RECEIVED TOTAL QTY.ISSUED CLOSING BALANCE 30/03/05 304845 - 304845 37490 395675 IT WAS EXPLAINED TO THE AO THAT IT WAS A CLERICAL M ISTAKE AND OVERSIGHT BUT THE ASSESSEE FAILED TO GIVE CORRECT CLOSING STOCK. THE AO THEREFORE HELD THAT ONCE PRIMARY RECORDS ARE NOT CORRECT THEN BOOK RESULTS DESERVE TO BE REJECTED. A SURVEY UNDER SECTION 133A WAS CARRIED OUT ON 9.9.04 AT THE BUSINESS PREMISES OF THE ASSESSEE AND ABOVE DEFECTS WERE NOTICED. DURING THE COURSE OF ASSESSMENT PROCEEDINGS THE AO NOTICE D 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 PO ST SURVEY PERIOD THE AO WORKED OUT THE ADDITION OF RS.29 81 671/-. 9. THE LD. CIT(A) DELETED THE ADDITION BY HOLDING T HAT THE VARIATIONS ARE NOT FOUND TO BE MORE THAN EVEN 1%. ITA NO.2817/AHD/2008 ASST. YEAR 2005-06 11 10. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PE RUSED THE MATERIAL ON RECORD. IN OUR CONSIDERED VIEW THE AO HAS RIGHTL Y REJECTED THE BOOKS AS THE DEFECTS WERE NOT RECONCILED. THE CHART GIVEN BY THE AO CLEARLY SHOWS THAT INSPITE OF ISSUING QUANTITIES THE CLOSIN G BALANCE HAD REMAINED THE SAME FOR SEVERAL DAYS. IF IT WAS A CLERICAL MIS TAKEN THEN CORRECTIONS OUGHT TO HAVE DONE AND PRESENTED TO THE AO AS POINT ED 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 EXPLA INED AS TO WHY ITS PROFIT MARGIN IS LOW IN POST SURVEY PERIOD WHEN HE CONTIN UED TO DO THE SAME BUSINESS THROUGHOUT THE YEAR. WE FIND THAT THERE IS NO REASONABLE CAUSE FOR DECLARING LOWER PROFITS IN POST SURVEY PERIOD A S COMPARED TO PRE- SURVEY PERIOD. ACCORDINGLY WE CONFIRM THE ORDER OF AO IN APPLYING THE SAME PROFIT RATES TO THE POST SURVEY PERIOD SALES A S WERE SHOWN BY THE ASSESSEE ON PRE-SURVEY PERIOD SALES. ACCORDINGLY AD DITION AS WORKED OUT BY THE AO IS CONFIRMED. THIS GROUND OF REVENUE IS A LLOWED. 12. IN THE RESULT THE APPEAL OF THE REVENUE IS PAR TLY ALLOWED. ORDER WAS PRONOUNCED IN OPEN COURT ON 30/9/10. SD/- SD/- (MAHAVIR SINGH) (D.C. AGRAWAL) JUDICIAL MEMBER ACCOUNTANT ME MBER AHMEDABAD DATED : 30/9/10. MAHATA/- ITA NO.2817/AHD/2008 ASST. YEAR 2005-06 12 COPY OF THE ORDER FORWARDED TO :- 1. THE ASSESSEE. 2. THE REVENUE. 3. THE CIT(APPEALS)- 4. THE CIT CONCERNS. 5. THE DR ITAT AHMEDABAD 6. GUARD FILE. BY ORDER DEPUTY / ASSTT.REGISTRAR ITAT AHMEDABAD 1.DATE OF DICTATION 23 /9/2010. 2.DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE TH E DICTATING 29/9/2010 MEMBER.OTHER MEMBER. 3.DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR. P.S./P.S. 4.DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE DICTATING MEMBER FOR PRONOUNCEMENT.. 5.DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR .P.S./P.S 6.DATE ON WHICH THE FILE GOES TO THE BENCH CLERK .. 7.DATE ON WHICH THE FILE GOES TO THE HEAD CLERK . 8.THE DATE ON WHICH THE FILE GOES TO THE ASSTT. REG ISTRAR FOR SIGNATURE ON THE ORDER 9.DATE OF DESPATCH OF THE ORDER..