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Income Tax Appellate Tribunal, MUMBAI BENCH “E” MUMBAI
Before: SHRI SHAMIM YAHYA ACCOUNTANTMEMBER & SHRI PAVAN KUMAR GADALE
ORDER PER PAVAN KUMAR GADALE, J.M. The assessee has filed the appeal against the order of Commissioner of Income Tax (Appeals)-28, Mumbai passed u/s 143(3) r.w.s. 254 and 250 of the Income Tax Act, 1961. The assessee has raised the fallowing grounds of appeal as under :
1. Ld. CIT(A) erred in confirming addition of Rs.25,25,000/- being amount of loan received by the appellant in earlier year merely on the plea that said creditor written off the same in its books of account as bad debt without considering the Shri Satyanarayan Nangalia 2 fact that the loan taken was not claimed as deduction in any of the year and no benefit was derived by the appellant from the said amount outstanding in the balance sheet while computing its business income in earlier years.
Appellant craves your honours leave to add,alter and amend any ground of appeal
at the time of hearing or before.
3. Appellant craves that the addition made may be deleted.
2. The brief facts of the case, the assessee is engaged in the business of dealing in shares and securities. The assessee has filed return of income on 31.07.2007 declaring a total income of Rs.62,830/- and the case was selected for scrutiny. The A.O. made an addition of cessation of liability u/s 41(1)(a) of the Act of Rs.1,30,15,092/- and disallowance on account of personal use of Rs.12,379/- and passed assesseement order u/s 143(3) of the Act dated 24.12.2009 determining the total income of Rs.1,30,88,301/-.Aggrieved by the order, the assessee has filed an appeal before the Ld. CIT(A) and the. CIT(A) has partly allowed the appeal. On further appeal with the Honble Tribunal and the ITAT in ITA.no7245/M/2010 dated 11-4-2016 has restored the issue to the file of the Assessing Officer with directions to re-examine the addition of cessation of liability u/s 41(1)(a) of the Act .
3. The A.O. as per the directions of Hon’ble Tribunal has issued notice u/s 142(1) of the Act along with the questionnaire on 21.12.2017 requiring the assessee to submit the relevant details referred at Para 3 of the assessment order. In response, the assessee has filed the information and written submissions by letter dated 23.12.2017 . The Assessing Officer found that in the earlier asssesseement the sundry creditors aggregating to Rs.1,30,15,092/- were disallowed on account of cessation of liability u/s 41(1)(a) of the Act in the assessment order u/s 143(3) dated 24.12.2009.
Shri Satyanarayan Nangalia 3 Whereas, the assessee now has discharges/paid off the creditors aggregating to Rs.15,46,985/- and the remaining creditors outstanding payable are Rs.1,14,68,107/-. The assessee has failed to submit the confirmations of creditors. The A.O. has issued the notice u/s 133(6) of the Act on the creditors to test check the outstanding amounts payable. In one case, the A.O. has received confirmation from M/s Brijmohan Sagarmal Capital Services Pvt. Ltd. (BSCSPL) that they have written off the said sum as Bad Debts in its books of account and the assessee does not owe any amount towards BSCSPL. Whereas, in respect of other creditors there is no response nor the data could be reconciled. The Assessing Officer has dealt on the facts and provisions in Para 3.4 &3.5 of the order observing that the un discharge liabilities are yet alive and are still continuing at least from 31.03.1999 and remains outstanding till date. The Assessing Officer is of the view that there is no possibility of creditors being paid by the assessee in future and made addition of Rs.1,14,68,107/ - u/sec41(1) of the act and passed the order u/s 143(3) r.w.s. 254 of the Act dated 29.12.2017.
Aggrieved by the order, the assessee has filed the appeal before the CIT(A). The CIT(A) considered grounds of appeal, directions of the Hon’ble Tribunal, findings of the Assessing Officer and the submissions on the disputed issues. The CIT(A) has meticulously dealt on the observations of the Assessing Officer and relied on the judicial decisions, the provisions of section 41(1)(a) of the Act and the basis of cessation of liability. The CIT(A) has considered the facts and the nature of business of loan creditors and other sundry creditors. Whereas, in respect of a creditor i.e. M/s Brijmohan Sagarmal Capital Services Pvt. Ltd. (BSCSPL), the assessee has failed to substantiate that the amount is payable. When the Assessing Officer has issued notice u/s 133(6) of the Act.
Shri Satyanarayan Nangalia 4 The creditor has confirmed that they have written off the said sum as Bad Debts in its books of account and the assessee does not owe any amount towards BSCSPL. But the assessee has been disclosing in the books of accounts as the amount is outstanding and payable to the creditor. The assessee has received the benefit and there is no liability payable and its in the nature of business income. The CIT(A) is of the opinion that the outstanding amount payable has to be taxed as business income since the creditor has confirmed the written off of amount as Bad debt in their Books of Account and has confirmed the addition of Rs.25,25,000/-. Whereas, in relation to other creditors on account of sale of shares/loan creditors . The CIT(A) has relied on the evidences, facts and judicial decisions and was of the opinion that still there is a liability cast on the assessee to make the payments and observed at page 46 to 48 Para 5.19 to 5.21 of the order and deleted the addition and partly allowed the appeal which is read as under :
“5.19 It is pertinent to note that the above precedent is very much germane for application to the facts of the instant case. In the instant case, the appellant had disclosed the liability in his balance sheet and therefore the same amounts to an acknowledgement of the debt and thus in case where the debt exists there lies no question of remission/cessation and thereby there arises no question of application of section 41(1) of the Act. The only issue for consideration is that where section 41(1) of the Act has no application in view of the discussion above; whether recourse to section 28(iv) of the Act can be taken by the Revenue in order to tax long standing liabilities. This has been a debatable issue whether liabilities written back in the books of account shall be brought to tax u/s.28(iv) of the Act under the guise of receipt of a benefit arising fromexercise of business or profession. A close look at this controversy reveals that firstly there ought to have been a sum written back in the books of the assessee in order to tax the benefit received under the appropriate section of the Act. In the Shri Satyanarayan Nangalia 5 present case, the liabilities are still standing in the books of account and it cannot be deemed that said amounts are no longer payable as already discussed above. At this juncture, where the assessee has factually not received any benefit (whether monetary or non- monetary) since there has been no amount written back in the books of account; the question of applicability of section 28(iv) of the Act does not arise at all.
5.20 Gainful reference is also made to the recent decision of the Hon'ble Supreme Court in the case of CIT v. Mahindra &Mahindra Ltd. (2018) 93 taxmann.com 32 (SC) (supra) which has affirmed the fact that waiver of a loan liability represents benefit in cash or money per se and for invoking provisions of section 28(iv) of the Act, benefit received has to be in some form other than in shape of money and therefore it held that provision's of section 28(iv) of the Act areinapplicable. The relevant portion of its observation is reproduced hereafter:
On a plain reading of section 28(iv), prima facie, it appears that for the applicability of the said provision, the income which can be taxed shall arise from the business or profession. Also, in order to invoke the provision of section 28(iv), the benefit which is received has to be in some other form rather than in the shape of money. In the instant case, it is a matter of record that the amount of Rs.57.74 lakhs is having received as cash receipt due to the waiver of loan. Therefore, the very first condition of section 28(iv) which says any benefit or perquisite arising from the business shall be in the form of benefit or perquisite other than in the shape of money, is not satisfied in the instant case. Hence, in no circumstances, it can be said that the amount of Rs.57.74 lakhs can be taxed under the provisions of section 28(iv)."
5.21 In view of the above elaborate discussion as well as in the attendant factual and legal matrix of the matter, in the final analysis out of the total addition made u/s.41(1)(a) to the tune of Rs.1,14,68,107/- the amount to the tune of Rs.89,43,107/- is directed to be deleted, since, it neither falls u/s. 41(1) nor section 28(iv) of the Act. At the same time, as per discussion above, the addition to / the tune of Rs.25,25,000/- in Shri Satyanarayan Nangalia 6 respect of M/s. BSCSPL is confirmed. Consequently, the ground nos. 1 to 6 are partly allowed.”
Aggrieved by the order of the CIT(A), the assessee has filed an appeal before the Honble Tribunal. The Ld.AR submitted that the CIT(A) has erred in sustaining the part addition as the creditor has written off the amount payable by the assessee in the books of account as Bad debts and confirmed that the assessee is no longer required to make the payment . The Ld.AR further emphasized that the assessee is keeping the loan payable and the assessee neither claimed the amount as deduction in any financial year nor has derived any benefit and supported the arguments with written submissions and judicial decisions and prayed for allowing the appeal. Contra, the Ld. DR supported the order of the CIT(A) on the disputed issue.
We heard the rival submissions and perused the material on record. Prima facie, the sole crux of the disputed issue is with respect to CIT(A) appeal sustaining the addition of outstanding amount payable to sundry creditor. The assessee is engaged in the business of dealing in shares and securities and enter into transactions of purchase and sale of shares and securities on behalf of the clients and obtaining loans which has been disclosed as amount payable in the books of accounts since 31-3-1999 and remains un discharged. The contentions of the Ld.AR that the assessee on the disputed issue has not gain any benefit and has been disclosing in the balance sheet and further the assessee has not claimed any deduction in any of the years and no benefit was derived and supported his arguments with judicial decisions. on perusal of the findings of the CIT(A) in respect of a creditor M/s Brijmohan Sagarmal Capital Services Pvt. Ltd. (BSCSPL) the loan amount received by the assessee Shri Satyanarayan Nangalia 7 from BSCSPL is being disclosed in assessee’s balance sheet as on 31 March 2007 as payable. But the creditor has written off the amount payable by the assessee in the books of account as Bad debts and confirmed that the assessee is no longer required to make the payment. Further the assessee is not required to discharge the loan or pay interest to the loan creditor.
We find the loan amount is outstanding for more than 10 years and in the assessment proceedings, in compliance to notice issued u/s 133(6) of the Act . M/s BSCSPL informed the write off of amount as bad debt in the books of accounts and the assessee is not required to make any payment. We found at para 3.3 of the assesseement order the A.O. has specifically dealt on these facts of Bad debts.The CIT(A) has very methodically dealt on this issue in his order and granted assessee relief in respect of other loan creditors but has confirmed this loan creditor liability as business income. At this juncture we considered it appropriate to refer to the observations of the CIT(A) at page 37 Para 5.8 of the order which is read as under:
“5.8 Further, it is pertinent to note that the addition to the tune of Rs.1,14,68,107/- has been purely made on account of cessation of liability u/s.41 (1)(a) of the Act. In the present case, the total liability of Rs.1,14,68,107/- pertains to loans obtained of Rs.34,40,250/- and other sundry creditors of Rs.80,27,857/- on account of sale of shares done on behalf of the appellant's clients. Out of the loans taken of Rs.34,40,250/-, the appellant has failed to substantiate that a sum of Rs.25,25,000/- pertaining to BrijmohanSagarmalCapital Services P. Ltd (BSCSPL)is still payable. During the course of assessment proceedings, notice u/s 133(6) of the Act was issued wherein the said party had confirmed that Rs.25,25,000/- due from the appellant was written off as bad debts in its books of account. Further, it is also net the case of the appellant that the said loans have not been utilized for the purpose of his business. In the event, the loans standing to the credit in the books of account of the appellant are Shri Satyanarayan Nangalia 8 no longer payable and is therefore a benefit accrued in the course of his business of the appellant. Therefore, in such a scenario benefit that has accrued to the appellant needs to be taxed as his business income u/s. 28(i) of the Act as it can safely be presumed that the same has inextricably and naturally arisen in the furtherance of the due course of business.
Therefore, I find that the AO was absolutely correct in making theaddition of Rs.25,25,000/- in respect of BSCSPL and the same deserves to be suitably upheld. Consequently, indeed, the addition of Rs.25,25,000/- in respect of the said BSCSPL is upheld.”
The Ld. AR has been emphasizing that the loan amount cannot be treated as a income but the fact remains that loan has been obtained by the assessee wholly and exclusively for the purpose of business activities/operations and the liability has to discharged. The assessee is engaged in the business of shares and securities and a stock broker. The assessee was showing payment outstanding for a period more than 10 years and in spite of having knowledge of write off from the loan creditor the assessee cannot be considered as prudent and not acceptable. The Ld.ARs contentions that the assessee has not derived any benefit is devoid of merits. As per the prudent accounting practices, when the loan is obtained, such loan is utilized in the business operations and to generate profits with the markup covering interest component on loans. The Assessee can not make a allegation that no benefit is derived or accrued as the loan is utilized and is included in the cash flow operations and cannot be static. The assessee has failed to substantiate that the amount is still payable and the onus lies on the assessee on these factual aspects to prove the claim. The decisions relied by the assessee are distinguishable on facts and the Ld.AR submissions are unrealistic. We rely on Shri Satyanarayan Nangalia 9 the observations of Hon’ble Supreme Court in the case of CIT vs. T.V. Sundaram Iyengar & Sons Ltd. 222 ITR 344 (SC) held as under:
Business income – trading receipt – If an amount is received in the course of trading transaction, even though it is not taxable in the year of receipt as being of revenue character, the amount changes its character when the amount becomes the assessee’s own money because of limitation or by any other statutory or contractual right – assessee receiving deposits (not being in the nature of security deposits held by the assessee for performatce of contract by his constituents) from his customers in the course of his business, which depleted by adjustment from time to time, unclaimed balances transferred by the assessee to his P&L A/c are his trading receipt, even though the deposits were initially treated as capital receipts, the claim of depositors having become barred by time . 8.1 We support our view based on the ratio of decision of the Hon’ble Supreme Court. Accordingly, we do not find any infirmity in the order of the CIT(A) on this disputed issue and observe the action of the CIT(A) in sustaining the addition as business income is based on the facts, material evidences and the provisions of law. Accordingly, we uphold the CIT(A) decision on this issue and dismiss the grounds of appeal.
In the result, the appeal filed by the assessee is dismissed.