ITO 24 (3)(1), MUMBAI vs. OMPRAKASH N. PARIANI (HUF), MUMBAI

O R D E R PER AMARJIT SINGH, A.M. This appeal filed by the Revenue and Cross Objection filed by the assessee are arising against the order of Commissioner of Income Tax (Appeals)-36, Mumbai for the Assessment Year 2013-14 passed u/s.143(3) of the Income Tax Act, 1961 (in short ‘the Act’).

4.1 During the course of assessment, the Assessing Officer noticed that the assessee had claimed expenditure towards brokerage and commission to the extent of amount of Rs.25,37,600 against the sale of property. The sale of such payments of commission and brokerage is as under :

The Assessing Officer was of the view that the purchase of properties near Zamblewar Temple at Taligao were appearing in the list of investments and no revenue had been recognised in respect of sale of these properties during the year, therefore, the entire brokerage/commission on purchase of these properties was required to be capitalised. Accordingly, the amount of Rs15 lakhs was disallowed and added to the total income of the assessee.

4.2 Aggrieved the assessee filed an appeal before the ld. CIT(A). The ld. CIT(A) allowed the claim of the assessee.

4.3 Heard both the parties and perused the material available on record. The Assessing Officer had disallowed the amount of brokerage and commission incurred by the assessee towards purchase of property listed at Sl.Nos.1 to 3 in the table as referred above in this order. The ld. CIT(A) has deleted the disallowance on the basis of supporting material i.e. copies of the tax audit report u/s.44AB along with the audited balance sheet showing that the impugned properties were reflected in the stock in trade and brokerage commission expenses incurred were of revenue nature. These expenses were incurred for the purpose of business of the assessee and in Schedule F of the current assets in the Balance Sheet, the assessee had shown the immovable property as stock in trade to the amount of Rs.9,71,65,456 including the three properties on which the impugned commission / brokerage expenses were paid. The revenue could not bring any material or record to dispute the aforesaid facts elaborated in the finding of ld. CIT(A), therefore, we do not find any merit in this ground of revenue and same stand dismissed.

5.1 During the course of assessment, the Assessing Officer noted that the assessee has charged interest on loan of Rs.30,12,500 to the profit and loss account. The Assessing Officer opined that the assessee had made investment in the properties out of borrowed funds and no revenue had been recognised on sale of such properties. Regarding loan of advance of Rs.215.55 lakhs, the Assessing Officer was of the view that the assessee failed to show that the same was made out of own fund/interest free borrowings. Therefore the Assessing Officer had made disallowance of proportionate interest to the amount of Rs.25,26,473.

5.2 Aggrieved the assessee filed an appeal before the ld. CIT(A). The ld. CIT(A) has deleted the addition holding that the assessee had made investment in the immovable property held as stock in trade. Therefore the expenses were incurred for the purpose of business. Regarding loan and advances of Rs.215.55 lakhs, the assessee had shown that it was having capital and interest free funds to the amount of Rs.7,72,11,705 which was much higher than the unsecured loan amount of Rs.2,10,50,000. The Hon’ble jurisdictional High Court in the case of Reliance Utilities & Power Limited Vs. CIT 178 Taxman 134 (Bom) (2009) held that if there is interest free funds available to an assessee, sufficient to meet its investment and at the same time the assessee had raised a loan it can be presumed that the investments were from the interest free funds available. In the light of above facts and findings, we do not find any error in the decision of ld. CIT(A). Therefore this ground of Revenue is dismissed.

6.1 During the course of assessment, on perusal of the Balance Sheet, the Assessing Officer noticed that there was outstanding balance of Rs.401.67 lakhs as sundry creditors. On query, the assessee explained that sundry creditors of Rs.401.67 lakhs were utilised for purchase of material for construction and related expenses. The assessee explained that these current and running liabilities were cleared subsequently. However, the Assessing Officer observed that an amount of Rs.3,18,76,848 was shown in the name of Mr. Durgadas Khabar and this liability was carried forward at the same amount from Assessment Year 2006-07 and upto 1.3.2015 the same was shown as unpaid liability. Therefore the Assessing Officer opined that the said liability had beome barred by law of limitation, therefore, the amount of Rs.3,318,76,848 was added to the total income of the assessee u/s.41(1) of the Act.

6.2 Aggrieved the assessee filed an appeal before the ld. CIT(A). The ld. CIT(A) has allowed the appeal of the assessee.

6.3 Heard both the parties and perused the material available on record. Without reiterating the facts during the course of assessment, the Assessing Officer observed that the liability of Rs.3,18,76,848 was unpaid and has been carried forward from Assessment Year 2006-07 in the name of Shri Durgadas Khabar. The Assessing Officer treated the same as cessation of liability under the provisions of section 41(1) of the Act. The ld. CIT(A) has allowed the claim of the assessee. The relevant part of the decision of ld. CIT(A) is as under :

4.4.4 Various judicial pronouncements have been made to settle the applicability of the section 41(1) of the Act. The Hon'ble Mumbai ITAT is case of ITO vs Shailesh D. Shah ITA 7012/M/10 held that where the assessee has just continued the entry in his books of accounts without any intention to pay back the same such action would result in cessation of liability and further relying of Chipsoft Technology 210 Taxman 173 (Del) the Hon'ble ITAT confirmed addition of liability u/s 41(1). In the case of Vardhaman Overseas Ltd. 343 ITR 408 (Del) the Hon'ble High Court Delhi held that section 41(1) does not apply if the amount is not written back in the books of accounts of the creditor. Hon'ble Gujarat High Court in case of CIT vs Bhogilal Ramjibhai Atara (Guj) held that even if there is unclaimed liability of earlier years where even creditors are untraceable and liabilities are non-genuine, then also the addition cannot be made u/s 41(1) since the creditors have not written it back in books of account. 4.4.5 In the preceding and succeeding years Assessment Orders the AO's under scrutiny have held the liability to be a live liability and that the appellant had never claimed any deduction for the same in the past. Further, the appellant was able to furnish confirmation of the loan from the creditor to establish the outstanding nature of the liability and has clearly indicated his intentions of returning the same. At the same time it is also well established that the AO cannot suo-moto conclude that the creditor has remitted his liability or that the liability has otherwise ceased to exist, without bringing on record any material evidence. 4.4.6 In light of the above findings, I have arrived at the conclusion that in the case of the appellant, the addition made u/s 41(1) of the Income Tax Act 1961 is not justifiable as per law. The AO is directed to delete the addition of Rs. 3,18,76,848/- made u/s 41(1) of the IT Act 1961. The ground of appeal no. 4 is Allowed.

The assessee has submitted before the ld. CIT(A) that impugned liability was still payable and it was also submitted the Assessing Officer has accepted it as payable in the preceding and subsequent assessment years.

6.4 In the finding of ld. CIT(A) the case of Vardhaman Overseas Limited 343 ITR 408 (Del) and the decision of Hon'ble High Court of Gujarat in the case of CIT Vs. Bhogilal Ramjibhai Atara (Guj) published on 10.02.2014 were referred. The Hon’ble High Court held that section 41(1) does not apply if the amount is not written back in the books of accounts of the creditors. The Hon'ble High Court of Gujarat in the case of Bogilal Atara vide 43 taxman.com 55 held that even if there is unclaim of liability in the earlier year there even creditors are untraceable and liabilities are non-genuine, then also the addition cannot be made u/s.41(1) of the Act since the creditor has not written it back in books of accounts. In view of the above facts and judicial findings, we do not find any infirmity in the order of ld. CIT(A). This ground of Revenue’s appeal is dismissed.

C.O. No.146/Mum/2019 8. The assessee has filed C.O. in support of the decision of the ld. CIT(A). Since we have dismissed the appeal of Revenue, therefore, the C.O. filed by the assessee become infructuous and the same stand dismissed.