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Income Tax Appellate Tribunal, “A” BENCH, AHMEDABAD
Before: SHRI RAJPAL YADAV, VICE- & SHRI PRADIPKUMAR KEDIA
आदेश/O R D E R
PER RAJPAL YADAV, VICE-PRESIDENT
Revenue is in appeal before the Tribunal against order of the ld.CIT(A)-III, Baroda dated 5.8.2011 passed for Asstt.Year 2007-08.
This appeal was listed on the board on 9.1.2012. Shri Mehul Patel, the ld.counsel appeared on behalf of the assessee. Thereafter, it has been adjourned continuously on his request. However, in the month of July, 2021, he pleaded no instruction, and requested that fresh notice be issued upon the assessee. He has sent address of the assessee as “Yuvraj Industries Ltd., C/o. Mr.Ajay V. Shah, 501, Suryakiran Apartments, Opp: Banker Heart Institute, Old Padra Road,
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Vadodara, Gujarat”. Fresh notice was issued at this address. Earlier also number of notices were issued to the assessee, but no one has come present on behalf of the assessee. Therefore, under compelling reasons, we proceed ex parte qua assessee-respondent, and decide the issue after hearing the ld.DR.
Revenue has taken three grounds of appeal. However, its substantial grievances are pleaded in ground no.1, which reads as under: “1 (a) On the facts and in the circumstances of the case and in law the learned CIT(A) has erred in holding that the provisions of section 41(1) are not applicable merely because the assessee is still showing the liability of Rs.1,69,35,279/- in its balance sheet as advance against booking without considering the fact that the said property has been disposed off during the year.
(b) On the facts and in the circumstances of the case and in law, the C1T(A) has erred in holding that the provisions of section 41(1) are not applicable merely because the assessee is still showing the liability of Rs.1,42,98,315/- in its balance sheet as maintenance deposits even though the deposits were taken in the year 1995 and possession of concerned properties have already been given to the customers.”
Brief facts of the case are that the assessee has filed its return of income on 30.10.2007 declaring total loss at Rs.(-)3,32,38,250/-. The case of the assessee was selected for scrutiny assessment and requisite notices were issued and served upon the assessee. On scrutiny of the accounts, the ld.AO found that certain liabilities shown in the balance- sheet have been ceased. Therefore, he issued a show cause notice to the assessee. The show cause notice, reply of the assessee and finding of the AO is worth to note, which reads as under:
“CESSATION OF LIABILITY U/S.41(1)
Vide order sheet entry dated 4.12.2009, the assessee was to stated as under:- [1] You have taken advances from various persons against the Tower D & E of Bhadralok Project amounting to Rs.1,69,35,279 during the years 1999-2000 to 2004-2005. It is noted that you have not paid a
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single rupee till 31.3.2007, rather as on date. In these circumstances, you are requested to show cause as to why the said advance of Rs.1,69,35,279 should not be treated as your income u/s.41(l) of the Income-tax Act, 1961.
[2] Like-wise, it is also noted that you have taken deposit in respect of the following Block of Vishwamitri Town Ship as under -
A - Rs.40,56,700 B - Rs.41,03,300 C - Rs.41,87,100
3% maintenance deposit - Rs.19,51,315.
You are also requested to show cause as to why these deposits aggregating to Rs.1,42,98,415 should not be treated as your income as per the provisions of section 41(1) of the Income-tax Act, 1961.
3.2. The assessee vide its letter dated 21.12.2009, the assessee has stated that suits were filed against the company and its directors by Bank of India, Kalbadevi Br. Mumbai, CBI Mumbai, Anchor Health & Beauty Care Pvt. Ltd., Shikhar Leasing & Trading Ltd., Members of Bhadralok, Members of Vishwamitry Township and many other. The assessee company and its directors were under pressure from all around to pay the loan liabilities since FY.2004-2005. To pay liabilities assessee was trying to raise funds by selling its property. However, in view of lots of disputes / litigations, immediate consideration payments demand by the assessee and many were not ready to buy assets viz. Hotel Yuvraj, Baroda, Bhadralok Project, Hotel Yurvraj, Surat and office premises at Baroda. The assessee could finalise sales deal in various years and able to settle dues of Tourism Finance Corporation Ltd., Bank of India, Anchor Health & Beauty Care Pvt. Ltd. and Shikher Leasing & Financing Ltd. Financial crisis, pending suits, disposing of assets of the company and huge past years accumulated losses resulted in halting / closure of revenue earning activity of various divisions of the assessee company. The assessee company was / is under such a critical position and to come out from major legal issues, it had to sell out assets on a terms as suitable to the buying party. Buyer's hands were up and the assessee was not in a position to make any negotiation at all and the assessee has to compromise with itself. Further, as a result of losses exceeds net worth of the company, the company is declared as a sick industrial company by BIFR, New Delhi vide order dated 28.7.2008.
3.3. In respect of Tower D & E, it is stated that residential flats were under construction, possession not handed over and there prevails contingency as to finalization of sale and therefore amounts received from members are in the advance booking deposits. The assessee has received money as a advance for the purpose of sale that is to take place in future. Till the finalization of sale, the assessee is holding the amount as a trustee and the money so received are money in trust. The assessee has given preference and priority to make repayment to
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secure and strong loan parties alone. Amount outstanding as at 31.3.2007 Rs.1,69,35,279 were true liabilities and in fact refundable to respective parties. The assesee has filed confirmation letters from some of the parties. In respect of other members, name and address has been given.
3.4. In respect of maintenance deposits collected by the assessee has furnished maintenance deposit refund claim letters received from Bhadralok Association, for Vishwamitry Maintenance deposit the society has filed suits against the assessee in court and, therefore, the assessee unable to collect the confirmation. It is stated by the assessee that all the past records are mixed up, held by lawyer and due to time bound assessment proceedings, the assessee is not in a to submit agreements with each party for booking /maintenance.
3.5. The assessee has requested not to treat the advances / deposits aggregating to Rs.3,12,33,694 should not held to be income of the assessee in the present year u/s.41(l) of the Income-tax Act, 1961.
3.6. I have considered the reply filed by the assessee. The same is not tenable. It is the contention of the assessee that the assessee has to repay these booking advances s to the respective person / parties and that they have filed suits against the assessee to recover the deposits / advances given. The assessee's contention was not supported by any corroborative evidence. With regard to the booking advance taken against Tower D & E of Bhadralok Project amounting to Rs.1,69,35,279, the current fact of the case is that the assessee has sold the whole work-in-progress of Rs.6,70,67,029 of D & E Tower to Asman Trading Pvt. Ltd. for a consideration of Rs.2,92,00,000. In present, the assessee has nothing to do with Tower D & E of Bhadralok project. In the sale deed of D & E Tower of Bhadralok, it is not mentioned anywhere that the assessee has to repay this advance to the persons from whom it has taken advance against the booking or it has to repay this advance to the purchaser Asman Trading Pvt. Ltd. The assesee has taken these advances during long interval of time from the year 1995-1996 onwards to 2003-2004. But till date from the 2003-2004, the assessee has not repaid a single rupee to any of the depositors.
3.7. With respect to the maintenance deposit taken from the members of Vishwamitri Township and from the members Bhadralok Tower A, B and C, the assessee has taken these deposits against the maintenance of the respective society of different Towers. On that time, the assessee has shown it as liability in its books of account. The assessee has taken these deposits very long back in the year 1995 when the project was begun. The assessee has completed these projects and sold the entire units to customers. The customers have also taken possession and are residing in these houses. But till date the assessee has not repaid these maintenance deposits to the respective societies. The assessee's contention that the Societies has written letters to the assessee for payment of the maintenance deposit, which is not a valid proof that the assessee is going to repay these deposits to respective societies. The assessee has
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bifurcated its sale consideration of the flats into maintenance deposit and actual sale consideration to avoid the payment of legitimate taxes on the total consideration. This is clear from the fact that the assessee has not repaid a single amount to the societies against which it has taken the maintenance deposit from the members. Thus, it is proved beyond doubt that this is a colourable device adopted by the assessee to minimize its tax liability.
3.8. In the instant case, the amounts were not in the nature of deposits as stated by the assessee because the amounts were not given back to the societies. The deposits were taken in the course of trade. The unclaimed surplus retained by the assessee would be its trade receipt. The money was received by the assessee in the course of carrying on its business. The same was treated as maintenance deposit and was of capital nature at the point of time it was received. Although the amount received originally was not of income nature, the amount remained with the assessee for a long period. By lapse of time, the claim of the deposit become time barred and the amount attain a totally different quality. It becomes a definite trade surplus. Here in this case, the assessee has not paid the said deposits / booking advances to any of the members / societies and also not going to pay the same because he has sold his entire business of construction. This is nothing but cessation of liability in the hands of the assessee u/s.41(l) of the Income-tax Act, 1961. Reliance is placed on the decision of the Hon. Supreme Court in the case of CIT v/s. T.V. Sundaram lyengar & Sons Ltd. [88 Taxman 429]. Therefore, an addition of Rs.3,12,33,694 is made to the total income of the assessee. Penalty proceedings u/s.271(l)(c) of the Income-tax Act, 1961 are separately initiated.
4.0. Subject to above remarks and after discussion, the total income of the assessee is computed as under:-
Total loss as per return of income Rs.3,32,38,250 Add:- As discussed in para 3.8. Rs.3.12.33,694 Total loss Rs. 20,04.556
On appeal, the ld.CIT(A) has deleted the addition by putting reliance upon order of the ITAT in the case of CIT Vs. Alidhara Texpro Engineers P.Ltd. reported (2011) 43 SOT 1 (Ahd); ACIT Vs. Nitin S. Garg, ITA No.169/Ahd/2009. He also put reliance upon Hon’ble Supreme Court’s decision in the case of CIT Vs. Sugauli Sugar Works P.Ltd., 102 TAXMAN 713 (SC). Thus, the finding recorded by the ld.CIT(A) in para 4.3.4 on this issue read as under: “4.3.4 When the facts of the present case is analysed in the light of these decisions, it is seen that the advances for the maintenance and a part of the booking advances are still being demanded back by the creditors. The balance part of the booking advance is also being
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acknowledged in the balance sheet and the AO has not brought anything on record to show that the appellant has obtained any benefit, whether in cash or in any other manner whatsoever regarding these liabilities. Hence the provisions of the section 41(1) are not applicable to the facts of the present case.
4.3.5 The AO has relied upon the decision in the case of CIT V. TV Sundaram lyenger & Sons Ltd. But in this case, the assessee had itself written back the unclaimed time barred credit balances in its profit and loss . This is not the situation in the present case. The appellant is still the liabilities in its profit and loss account and there is noting in record these have become time barred or that these have appellant's money due some statutory or contractual provisions.
Hence, the treatment of these credit balances by the AO as income of the assessee is not correct. Accordingly, these additions are deleted and this ground of appeal is allowed.”
The ld.DR while impugning finding of the ld.CIT(A) contended that facts in these cases are of different nature. The assessee has collected advances from the prospective buyers of the flats as well as deposits for providing maintenance. However, it has neither given flats nor utilized the maintenance of that purpose. The AO has specifically recorded a finding that Tower D & E of Bhadralok Project for which it has taken advance of Rs.1,69,35,279/- has been sold by the assessee to Asman Trading P.Ltd. It has worked out the value under the head “work-in- progress” of Rs.6.70 crores. This project was sold for a consideration of Rs.2.92 crores. Thus, he pointed out that the assessee has nothing to do for adjustment of these advances towards ultimate sale proceeds of the flat buyers. In other words the advances taken from the flat buyers was not going to be adjusted against cost of the flats, ultimately if any given to these buyers, because the assessee has already sold the project. It failed to produce that the advances received from the buyers was adjusted against the money it has received from Asman Trading P.Ltd. (“ASTPL”). Thus, he submitted that the liability towards those advance has been ceased, and therefore, this receipt ought to have been recognized as income in the hands of the assessee. He relied upon the judgment of Hon’ble Gujarat High Court in the case of Gujtron
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Electronics P.Ltd. Vs. ITO, 83 taxmann.com 389 (Guj). He placed on record copy of this decision.
We have considered submission of the ld.CIT-DR and gone through the record with his assistance. The section 41(1) applies where a trading liability was allowed as a deduction in an earlier year in computing the business income of the assessee and the assessee has obtained a benefit in respect of such trading liability in a 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 or cessation of the liability will be brought to tax in that year. The principle behind the section is that the provision is intended to ensure that the assessee does not get away with a double benefit - once by way of 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.
The assessee has submitted that it has launched a scheme i.e. Towers “D” and “E” at Bhadralok Project. It has received advances from prospective buyers. However, when residential flats in Tower “D” & “E” were under construction and possession of the same were not handed over to the respective buyers, the assessee has shown these advances as liability, because there prevailed contingency as to finalization of sale. In its submission under para no. n & o, it has highlighted following facts:
“n) Now, without prejudice to any of the above, in respect of booking advances of Towers "D" and "E,", the Ld. Assessing Officer has mentioned in Para 3.6 of his assessment order, that the assessee company has sold Tower "D" and “E" to Asman Trading Pvt. Ltd. for consideration of Rs.2,92,00,000/- and therefore it has nothing to do with the towers. Further, he has noted in the assessment order that since there is no mention about the repayment of advances in the sale deed with Asman Trading Pvt. Ltd., therefore the advances are no more repayable and the liability has ceased to exist,
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o) However, here we would like to invite Your Honour's kind reference that although the appellant company had sold Towers D and E, it had to repay these advances to the respective members only. This was because the project had ceased and no construction work was to be done. The appellant company was already facing huge financial crisis and huge statutory liabilities and any consideration realized from sale of assets was utilized in offsetting statutory dues.”
A perusal of the above would indicate that the assessee has received advances from buyers of the flats. However, without constructing these flats, it has sold the whole project by treating it as “work-in-progress”. In its reply, it has submitted that WIP was valued at Rs.6.70 crores and the project was ultimately sold for a consideration of Rs.2.92 crores. The question before us is, whether the receipt received by the assessee as advance during the course of its business can attain character of any cessation of liability. There is no dispute with regard to the fact that intention behind this receipt was for construction of the flats and sale thereof. Thus, it was an ordinary trading receipt in the line of assessee’s business, though in the accounts, it was recognized as advance from the customers. It is to be appreciated that moment the assessee has valued WIP that means, it has incurred expenditure which were crystallized in the form of WIP. This WIP has been sold at lower price, and the business has been closed down with regard to this project. In such situation what treatment could be made to the advance received from the prospective buyers ? To our mind, once it is percolated in the WIP and these advances would ultimately be set off against ultimate sale consideration, then it is to be construed that on sale of WIP, reduction of such advance constructively taken by the assessee as an expenditure. It has been separately recognized as a liability also. But no one has come present on behalf of the assessee before the Tribunal. It is almost more than 20 years from the receipt of these advances. The assessee has neither sold flats to the customers nor recognized receipts from the customers as its income for taxation. On efflux of time, we gathered intention of the assessee that it is not going to repay these amounts to these customers neither it
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is going to sell flats to them. With that background, we would like to make reference to the judgment of Hon’ble Gujarat High Court in the case of Gujtron Electronics (supra). In this case, the assessee has shown a liability of Rs.7.87 crores under the head customer advances. It revealed that in the financial year 1986-87, the assessee had launched a sale promotion scheme for the sale of black and white TV sets. As per the scheme, the assessee has collected a sum of Rs.500/- from each customer by sale of coupons. Upon such customer in turn enrolling other four members each, who also had purchased such coupons, would entitle to receive TV set free of cost. The same benefit would be available to newly enrolled members as well upon fulfillment of conditions. This collection of Rs.500/- in this chain has accumulated to Rs.7.87 crores and the assessee has been showing it under the head liability continuously. In this background, the Hon’ble High Court has confirmed order of the Tribunal whereby the Tribunal has held that liability to pay has ceased. The relevant discussion of the Hon’ble High Court in this behalf read as under:
“8. Learned counsel for the appellant submitted that this was not a case of cessation of liability. The conditions laid down under section 41 of the Act were not fulfilled. The authorities therefore, committed a serious error in adding the said sum to the income of the assessee. She further submitted that the ratio laid down by the Supreme Court in case of CIT v. Sugauli Sugar Works (P.) Ltd. [1999] 236 ITR 518/102 Taxman 713 would apply. She submitted that the facts in case of Sundaram Iyengar (supra) were different. Unlike in the said case, the assessee has not transferred the amount in its profit and loss accounts. Our attention was also drawn to two decisions this Court in case of CIT v. Bhogilal Ramjibhai Atara [2014] 43 taxmann.com 55/222 Taxman 313 (Guj.) and in case of CIT v. Nitin S. Garg [2012] 22 taxmann.com 59/208 Taxman 16 (Guj.).
Facts of the present case, as concurrently held by the two Revenue authorities and the Tribunal are somewhat peculiar. The assessee had launched a scheme of sales promotion. Under such scheme, the assessee would enroll a member, who would deposit a sum of Rs. 500/- with the assessee company. If such a member in turn enrolled four members, he would get one black and white TV set manufactured by the assessee company free of cost. Same benefit would be available to the enrolled members if they fulfilled this condition. The scheme was operative for a period of 12 months. In other words, a member would
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have to enroll four members within such period of 12 months in order to get the benefit of earning a free TV set. Over a span of couple of years, the assessee collected a huge sum of Rs. 7.87 crores by enrollment membership fee of Rs. 500/- each.
As is bound to happen, in such a scheme requiring continuous chain reactions, the chain would break at some stage. The amount of Rs. 7.87 crores represents the money deposited by those members. This amount remained with the company over the years without any change whatsoever. The Revenue authorities have found that there was no activity at the hands of the assessee company in connection with the scheme for past several years. Not a single customer had demanded the money back nor the assessee had made any attempt to repay the same. It was only when the Assessing Officer in the present assessment proceedings raised the issue, the assessee made correspondence with the customers. This, the Commissioner (Appeals) correctly categorized as an afterthought. More importantly in all invoices, the signatures of the member customers were missing. Their addresses were not sufficient. Over the years, the company had also invested such amount earning interest and used such interest for its purpose, of course, offering interest income to tax.
In view of the concurrent findings of the Revenue authorities and the Tribunal through which the above established facts emerged, we have no reason to interfere. The decision of the Supreme Court in case of Sundaram Iyengar (supra) would apply. In the said case, the Court had held and observed as under:
"In the present case, the money was received by the assessee in the course of carrying on his business. Although it was treated as deposit and was of capital nature at the point of time it was received, by efflux of time the money has become the assessee's own money. What remains after adjustment of the deposits has not been claimed by the customers. The claims of the customers have become barred by limitation. The assessee itself has treated the money as its own money and taken the amount to its profit and loss account. There is no explanation from the assessee why the surplus money was taken to its profit and loss account even if it was somebody else's money. In fact, as Atkinson J. pointed out that what the assessee did was the commonsense way of dealing with the amounts."
It is true that unlike in case of Sundaram Iyengar (supra), the assessee has not taken such amount in its profit and loss account. Nevertheless, by all accounts, the assessee has treated such amount as its own. The scheme itself terminated many years back. Limitation of claiming amount back has also seized. There is absolutely no movement or correspondence between the assessee and its members with respect to the claim or with respect to the deposited amounts.
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We further make reference to the decision of Hon’ble Delhi High Court referred by the ld.CIT-DR in the case of CIT Vs. Chipsoft Technology P.Ltd., 26 taxmann.com 109 (Del). In this case, the assessee had shown unpaid liability to an extent of Rs.38.51 lakhs on account of its employees due pertained to certain salary payments related back to 2000-01. The assessment year involved before the Hon’ble High Court was of Asstt.Year 2005-06. The dues were to be paid to roughly 170 employees. The assessee could not provide complete details of the employees or confirmation. The ld.AO construed that the liability has ceased. However, on appeal, the ld.CIT(A) deleted the addition which were upheld by the Tribunal. However, the Hon’ble High Court concurred with the AO and confirmed the addition. The Hon’ble Court has considered all the decisions relied upon by the assessee, viz. CIT Vs. Sundaram Iyengar & Sons Ltd., 222 ITR 334. This decision has been relied upon by the AO also. Head note of this decision reads as under:
“..The assessee had received certain deposits from customers in the course of carrying on his business, which were originally treated as capital receipts. Since these credit balances standing in favour of assessee's customers, were not claimed by the customers, the assessee transferred such amounts to its profit and loss account. The assessee did not include such amounts in its total income. The Assessing Officer was of the view that because the surplus had arisen as a result of trade transactions, the amounts had a character of income, and accordingly he added the same in its income. On appeal, the Commissioner (Appeals) accepting assessee's contention held thai such an amount could not be treated as income either under section 41{1) or under section 28, since these were excess trading advances given by the clients to the assessee. Therefore, lie deleted the addition made by the Assessing Officer. The Tribunal held that the amount received in course of trade was of capital nature, the Tribunal, thereafter, straightway applied the principle of Morley v. Tattersall [1939J 7 ITR 316 (CA) and held since it was of a capital nature at the time of the receipt, it could not become assessee's income later on.
The Tribunal also rejected reference application under section 256(2) on the ground that no question of law arose. The High Court held that the question sought to be agitated was completely concluded by the decision of that Court in the case of CITv, A.VM. Ltd. [1984] 146 ITR 355 and rejected application made under section 256(2).”
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In the light of proposition laid down in all these judgment, if we look into the facts of the present case, then it would reveal that the assessee has received trade advance for sale of certain flats to prospective buyers which were ultimately not construed by it and incomplete project was sold under the head “work-in-progress”. It has not returned money to these customers in the last fifteen years. It has not created an arrangement with buyer of the WIP that these customers would get flats at reduced price by the amount received by the assessee as advance. It has simply retained these amounts under the garb of liability without paying any taxes. The judgment Hon’ble Supreme Court in the case of Sundaram Iyengar & Son Ltd. (supra) is fully applicable on the facts of the present case. Therefore, we allow appeal of the Revenue and reverse finding of the ld.CIT(A), and restore that of the assessment order.
In the result, appeal of the Revenue is allowed.
Order pronounced in the Court on 14th December, 2021 at Ahmedabad.
Sd/- Sd/- (PRADIPKUMAR KEDIA) (RAJPAL YADAV) ACCOUNTANT MEMBER VICE-PRESIDENT