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Income Tax Appellate Tribunal, MUMBAI BENCH “F” MUMBAI
Before: SHRI M. BALAGANESH & SHRI PAVAN KUMAR GADALE
The assessee has filed the appeal against the order of Commissioner of Income Tax (Appeals)-12, Mumbai [in short ‘the Ld. CIT(A)’], passed order u/s 143(3) and 250 of the Income Tax Act, 1961 (in short ‘the Act’). The assessee has raised following grounds of appeal:
2 Jenam Enterprises Private Limited
Re: Outstanding Trade payables as on 31" March, 2016 treated as cessation of liability and taxed under S.41(1) The Assessing Officer / the Commissioner of Income-tax (Appeals) have erred in treating the trade payables outstanding for several years as 'no longer payable' and taxed the same under section 41(1) as cessation of liability and accordingly disallowed a sum of Rs.18,70,540/- added to the total income declared by the Appellant. The Appellant submits that considering the facts and circumstances of its case and the law prevailing on the subject, unless the outstanding balances of trade payables (sundry creditors) become unenforceable or is written-off by the assesse, the same cannot be brought to tax under section 41(1) of the Act. Further, learned assessing officer and Commissioner Appeals erred in appreciating the fact that the provisions of section 41(1) are not applicable in respect of liability existing in the balance sheet as on 31 March 2016. Hence, the stand taken by the Assessing Officer / the Commissioner of Income-tax (Appeals) in this regard is incorrect, erroneous and misconceived. The Appellant submits that the Assessing Officer be directed to delete the addition and to re-compute its total income and tax thereon accordingly.
2. Re. Notional interest added to the total income on debit balances of sundry
3 Jenam Enterprises Private Limited creditors' and taxed under section 36(1) (iii) of the Act; The Assessing Officer / the Commissioner of Income-tax (Appeals) have erred in taxing the notional interest at the rate of 8% on 'debit balances of sundry creditors' contending that appellant ought to have charged interest on debit balances of sundry creditors' and taxed the same under section 36(1)(iii) of the Act and accordingly disallowed a sum of Rs.8,58,074 added to the total income declared by the Appellant. The Appellant submits that considering the facts and circumstances of its case and the law prevailing on the subject, provisions of section 36(1(iii) is applicable in case of deduction of interest on capital borrowed for the purpose of business or profession and not for taxing or levying tax on the notional interest income on debit balances of sundry creditors. Hence, the stand taken by the Assessing Officer / the Commissioner of Income-tax (Appeals) in this regard is incorrect, erroneous and misconceived. The Appellant submits that the Assessing Officer be directed to delete the addition and to re-compute its total income and tax thereon accordingly.
Re.: Deduction in respect of "Education Cess on income-tax' and "secondary and higher education cess on income-tax' (collectively referred to as "education cess on income-
4 Jenam Enterprises Private Limited tax") while computing total income of the Appellant: The Appellant submits that considering the facts and circumstances of its case and the law prevailing on the subject, "education cess on income-tax', ought to be allowed as a deduction while assessing its income for the year under consideration. The Appellant submits that the Assessing Officer be directed to re-compute its total income and tax thereon after allowing deduction for "education cess on income-tax.
The brief facts of the case are that the assessee company is engaged in the business as dealer of steel items. The assessee has filed the return of income for A.Y.2016-17 electronically on 09.09.2016 with a total income of Rs.64,97,420/-. Subsequently, the case was selected for limited scrutiny under the CASS for verification of (i) whether the current liability shown are genuine, (ii) whether outward foreign remittance is from disclosed sources and appropriate withholding and reporting obligations have been complied with. The A.O. has issued notice u/s 143(2) and 142(1) of the Act along with questionnaire. In compliance to notice, the assessee has made submissions online. The Assessing Officer on perusal of the financial statements found that the assessee has not made payments to some of the creditors which are outstanding for more than two years dealt at Para 4 of the assessment order. The Assessing Officer has called for the details with respect to sundry creditors aggregating to Rs.18,70,540/- which are outstanding
5 Jenam Enterprises Private Limited payable and the same has to be treated as cessation of liability u/s 41(1) of the Act. The assessee has filed the details and some payments are pending due to reconciliation pending with certain parties and remain outstanding in the books of account. The A.O. is of the opinion that the claims which are due are not paid by the assessee and they are no longer liability payable and made addition u/Sec 41(1) of the Act as cessation of liability of Rs.18,70,540/-. On the second issue, in respect of sundry debtors were the assessee is charging interest on overdue balances and reflected in the books of account but whereas in the case of sundry creditors who have debit balance in the accounts and the similar practice of charging interest on debit balance is not calculated by the Assessee. The A.O. considering these facts has applied the prevailing rate of interest @ 8% and disallowed interest u/s 36(1)(iii) of the Act of Rs.8,58,074/- and assessed the total income of Rs.92,36,030/- and passed the order u/s 143(3) of the Act dated 12.12.2018.
3. Aggrieved of the order, the assessee has filed an appeal before the Ld. CIT(A). In the appellate proceedings CIT(A) has considered the grounds of appeal, submissions of the assessee and findings of the Assessing Officer and upheld the action of the Assessing Officer on the disallowances and dismissed the appeal of the assessee. Aggrieved by the order of the Ld. CIT(A), the assessee has filed an appeal before the Honble Tribunal. At the time of hearing none
6 Jenam Enterprises Private Limited appeared on behalf of the assessee and the Ld.DR supported the order of the CIT(A).
We have heard the Ld. DR submissions and the material available on record. The assessee has challenged in Ground of appeal No.1, the action of the CIT(A) confirming the addition of outstanding balance of the sundry creditors/outstanding payable are treated as cessation of liability taxable u/s 41(1) of the Act. The Ld. DR referred to the findings in the assessment order. We find that the assessee has been disclosing the sundry creditors payable, which are outstanding from earlier years and the assessee has not written back the liability, which is not discharged and the assessee has disclosed these facts in the Audited balance sheet and the payment of liabilities still exist in the hands of the assessee. Prima facie, the A.O. and the CIT(A) are of the opinion that assessee need not make payment and are outstanding for more than two years without any material evidence/basis. But the fact remains that the assessee company is a going concern and the assessee is in the business and the liability is enforceable on the assessee by the creditors. Therefore, we considering the facts and circumstances are of the opinion that the action of the Assessing Officer is not tenable and we set aside the order of the Ld. CIT(A) on this disputed issue and direct the Assessing Officer to delete the addition.
7 Jenam Enterprises Private Limited
On the second issue, with respect to charging of interest on the debit balance of the sundry creditors on the notional basis by the Assessing Officer and the interest disallowance u/s 36(1)(iii) of the Act. The observations of the Ld. CIT(A) and the A.O. are that the assessee has not charged interest on debit balance of sundry creditors but charging interest on accrual basis on the sundry debtors/ receivables. We find that the provisions of section 36(1)(iii) of the Act are for interest on barrowing for the business and not for notional interest chargeable on the debit balance of sundry creditors. The A.O. has wrongly considered the sundry debtors and sundry creditors on the same concept/angle. We find there is no necessity for the Assessing Officer to calculate the notional interest on debit balances of sundry creditors. The assessee has to charge such interest as per the agreement, trade practice and mutual understanding with the parties. We are of the opinion that such addition of notional interest cannot be sustained and accordingly direct the Assessing Officer to delete the addition.
The Ground of appeal No. 3 is with respect to deduction in respect of education cess on income tax and secondary and higher education cess on income tax. The Ld.DR submitted that this ground of appeal does not emanates from the order of the CIT(A). We find the submissions of the Ld.DR are true, whereas on this disputed issue there is no discussions or findings of the CIT(A). Whereas,the assessee should file an application for admission of additional ground of appeal and the revenue should be provided
8 Jenam Enterprises Private Limited reasonable opportunity to make the submissions. Hence this ground of appeal cannot be adjudicated and is dismissed.
In the result, the appeal filed by the assessee is partly allowed.
Order pronounced in the open Court on 06/06/2022.