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Income Tax Appellate Tribunal, “D” Bench, Mumbai
Before: Shri Ravish Sood & Shri N.K. Pradhan
O R D E R
PER RAVISH SOOD, JM
The present appeal filed by the revenue is directed against the order passed by the CIT(A)-52, Mumbai, dated 16.11.2017, which in turn arises from the order passed by the A.O under Sec.143(3) of the Income Tax Act, 1961 (for short „Act‟), dated 28.03.2016 for A.Y. 2013-14. The revenue has assailed the impugned order on the following grounds of appeal: “1. On the facts and circumstances of the case and in law, the ld. CIT(A) erred in deleting the addition of Rs.73,36,425/- made by the assessing officer within the provision of section 41(1) of the I.T Act even when the assessee could not prove the genuineness and existence of such trade liability.
2. On the facts and circumstances of the case and in law, the Id CIT(A) erred in deleting the addition of Rs.73,36,425 made by the assessing officerwithin P a g e | Deputy Commissioner of Income Tax, Central Circle-4(2) Vs. M/s Sri Radhakrishna the provision section the I .T Act without appreciating the fact that the decision of Hon'ble ITAT, Mumbai „A‟ Bench in the case of in the case of Asht Laxmi Diamond & JewelleryVs. Income-tax Officer, 21(1)(1), Mumbai. IT APPEAL NO. 6182 (MUM) OF 2011 [AY 2007-08] and the decision of Hon'ble High Court of Rajasthan in the case of Rama Steel Rolling Mills & General Engg. Works vs. Income-tax Officer, Ward 3(1) [2013] 35 taxmann.com 262 (Rajasthan) are squarely covered in favour of the revenue on identical facts and circumstances.
3. On the facts and circumstances of the case and in law, the Id CIT(A) erred in deleting the disallowance of Rs.4,84,307/- made by the assessing officer within the provision of section 37(l) of the I.T Act being interest paid on service-tax holding the same to be compensatory in nature without appreciating the fact that the assessee was not required to pay such interest, had the service tax been paid in time.
4. The appellant craves, leave to add, to amend and/or to alter any of the grounds of appeal, if need be. The appellant, therefore, prays that on the grounds stated above, the order of the Ld. CIT(A)-52, Mumbai, may be set aside and that of the Assessing Officer be restored.”
2. Briefly stated, the assessee company which is engaged in the business of custom house agent (CHA), clearing and forwarding, transportation and logistics had e-filed its return of income for A.Y. 2013-14 on 11.10.2013, declaring its total loss at (-) Rs.39,87,581/-. The return of income filed by the assessee company was processed as such under Sec.143(1) of the Act. Subsequently, the case of the assessee was selected for scrutiny assessment under Sec.143(2).
During the course of the assessment proceedings it was observed by the A.O that the assessee had outstanding „trade payables‟ of Rs.73,36,425/- in its „books of account‟ for the last more than 3 (three) years. It was observed by the A.O, that the „opening‟ and „closing‟ balances in the accounts of the respective parties had remained the same and there were no transactions even during the year under consideration. Also, it was observed by the A.O, that the assessee had not furnished the complete names of the parties along with their addresses and PAN‟s. Apart there from, it was observed by him that the confirmations of the parties that were filed by the assessee also did not inspire any confidence as regards their P a g e | Deputy Commissioner of Income Tax, Central Circle-4(2) Vs. M/s Sri Radhakrishna creditworthiness or financial strength. Accordingly, the A.O held a conviction that as the aforesaid unsubstantiated liabilities were outstanding for more than a year, therefore, they were to be treated as a „liability no longer required‟ and brought to tax under Sec.41(1) of the Act. On the basis of his aforesaid observations, the A.O added the aforesaid amount of Rs. 73,36,425/- under Sec.41(1) of the Act. Further, it was observed by the A.O that the assessee during the year had „debited‟ an amount of Rs.4,84,307/- in its Profit and loss account under the head “Other expenses-service tax interest”. The A.O was of the view that as the aforesaid claim of expenses raised by the assessee was in respect of penal interest that was paid to the Service tax department, therefore, the same could not be allowed as a deduction under Sec. 37(1) of the Act. On the basis of his aforesaid observations the A.O assessed the loss at Rs. 97,79,760/-, vide his order passed under Sec. 143(3), dated 28.03.2016.
Aggrieved, the assessee carried the matter in appeal before the CIT(A). As regards the addition of the „trade payables‟ of Rs. 73,36,425/- made by the A.O under Sec.41(1) of the Act, it was observed by the CIT(A), that merely because they were outstanding for a long period could not have justified addition of the same by invoking the aforesaid statutory provision. It was observed by the CIT(A), that the A.O had no evidence with him to conclude that there was a final remission or cessation of the outstanding liability or any part of it. In fact, it was noticed by the CIT(A), that as there was no unilateral write back by the assessee of the said liability in its profit and loss account, therefore, Explanation (1) of Sec.41(1) could not have been invoked. Apart there from, it was observed by the CIT(A) that as the credit entries were not made in the „books of accounts‟ of the assessee during the year under consideration, therefore, the provisions of Sec.68 also could not have been invoked. On the basis of his aforesaid P a g e | Deputy Commissioner of Income Tax, Central Circle-4(2) Vs. M/s Sri Radhakrishna observations the CIT(A) deleted the addition of Rs. 73,36,425/- made by the A.O. Insofar the disallowance of the interest on service tax of Rs. 4,84,307/-was concerned, it was observed by the CIT(A), that the payment of the said amount was towards interest on account of delay in deposit of the amount of service tax as envisaged in Sec.75 of the Finance Act, 1994. The CIT(A) was of the view that as the aforesaid payment of interest was compensatory in nature and not by way of a penalty, therefore, the same was rightly claimed by the assessee as a deduction under Sec. 37(1) of the Act.
The revenue being aggrieved with the order of the CIT(A) has carried the matter in appeal before us. The ld. Departmental Representative (for short „D.R‟) relied on the order of the A.O. It was submitted by the ld. D.R, that as the liabilities aggregating to Rs.73,36,425/- were outstanding in the „books of account‟ of the assessee for more than last 3 years, therefore, the A.O had rightly added the same under Sec. 41(1) of the Act. As regards the disallowance of the claim of interest paid on service tax of Rs.4,84,307/-, it was submitted by the ld. D.R, that as the same was in the nature of a payment towards penal interest, therefore, it was not allowable as a deduction under Sec.37 of the Act.
Per contra, the ld. Authorized Representative (for short „A.R‟) for the assessee relied on the order passed by the CIT(A). It was submitted by the ld. A.R, that merely for the reason that the liabilities towards the creditors were outstanding in the „books of account‟ of the assessee for the last many years, those could not have been held to have ceased by the A.O. It was submitted by the ld. A.R that now when the assessee had acknowledged its liability towards the aforementioned parties, therefore, it was not permissible on the part of the A.O to have disallowed the same under Sec.41(1) of the Act. In P a g e | Deputy Commissioner of Income Tax, Central Circle-4(2) Vs. M/s Sri Radhakrishna support of his aforesaid contention the ld. A.R relied on the judgment of the Hon‟ble High Court of Delhi in the case of CIT, Delhi-II Vs. Jain Exports (P) Ltd. (2013) 35 taxman.com 540 (Del). Also, support was drawn by the ld. A.R from the order of the ITAT, Mumbai in the case of Madan Mohla Vs. ITO (2017) 83 taxmann.com 338 (Mum). As regards the interest on late payment of service tax of Rs.4,84,307/-, it was submitted by the ld. A.R, that as the payment of the said amount was compensatory in nature, therefore, the A.O had erred in concluding that the same was not allowable as a deduction under Sec.37 of the Act. In support of his contention that the interest on late payment of service tax was allowable as a deduction under Sec. 37 of the Act, reliance was placed by the ld. A.R on the orders of the coordinate benches of ITAT, Delhi, viz. (i) M/s Remfry & Sagar Consultants Vs. ACIT, Circle 15(1), New Delhi (ITA No,.5887/Del/2011, dated 20.07.2012) ; and (ii) DCIT Vs. Messee Dusseldorf India (P) Ltd. (2010) 129 TTJ 81 (Del). Accordingly, it was submitted by the ld. A.R, that as the CIT(A) after duly appreciating the facts of the case in the backdrop of the settled position of law had rightly vacated the additions/disallowance made by the A.O, therefore, the appeal filed by the revenue was bereft of any force of law and did not merit acceptance.
We have heard the authorized representatives for both the parties, perused the orders of the lower authorities and the material available on record, as well as the judicial pronouncements relied upon by them. We shall first advert to the addition of Rs.73,36,425/- made by the A.O under Sec.41(1) of the Act, which had been deleted by the CIT(A). As is discernible from the assessment order, the aforesaid addition of Rs. 73,36,425/- was made by the A.O for the standalone reason that the liability of the assessee towards the said creditors was outstanding in its „books of accounts‟ for more than 3 P a g e | Deputy Commissioner of Income Tax, Central Circle-4(2) Vs. M/s Sri Radhakrishna years. Accordingly, merely for the reason that „trade payables‟ of Rs.73,36,425/- were outstanding in the „books of accounts‟ of the assessee for last many years the A.O had characterised the same as a ceased liability. Apart there from, we find that the A.O had also doubted the genuineness of the said outstanding liability of Rs. 73,36,425/- of the assessee towards the aforesaid sundry creditors.
We have given a thoughtful consideration to the issue before us and find substantial force in the contention advanced by the ld. A.R, that merely for the reason that the aforesaid „trade payables‟ were outstanding in the „books of account‟ of the assessee for the last many years, they could not have been held to have ceased in terms of Sec. 41(1) of the Act. As per Sec.41(1), it is only where allowance of deduction has been made in the assessment for any year in respect of loss, expenditure or trade liability incurred by the assessee (hereinafter referred to as the first mentioned person) and subsequently during any previous year, the first mentioned person has obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtained by such person or the value of benefit accruing to him shall be deemed to be profits and gains of business or profession and accordingly chargeable to income-tax as the income of that previous year, whether the business or profession in respect of which the allowance of deduction has been made is in existence in that year or not. In our considered view, the A.O before characterising an outstanding liability as a ceased liability remains under a statutory obligation to show that the assessee had obtained some benefit in respect of such trading liability by way of remission or cessation thereof, during the year. We are of a strong conviction that on the standalone basis that a „trade liability‟ is outstanding in the „books of P a g e | Deputy Commissioner of Income Tax, Central Circle-4(2) Vs. M/s Sri Radhakrishna account‟ of an assessee for several years cannot suffice for bringing the same within the realm of the provisions of Sec.41(1) of the Act. Our aforesaid view is fortified by the judgment of the Hon’ble High Court of Delhi in the case of CIT, Delhi-II Vs. Jain Exports (P) Ltd. (2013) 217 Taxman.com 54 (Del). In the aforesaid case, the Hon‟ble High Court had observed that in order to attract the provisions of Sec. 41(1) of the Act, it is necessary that there should be a cessation or remission of liability. It was further observed by the Hon‟ble High Court, that as the assessee before them had acknowledged its „debt‟ payable to the creditor under consideration, and there was no material to indicate that the parties had contracted to extinguish the liability, therefore, it could not be concluded that the said debt owed by the assessee towards the said party stood extinguished. Accordingly, we are of the considered view that as in the case before us the CIT(A) had rightly observed that in the absence of any evidence to conclude that there was a final remission or cessation of a „trading liability‟ or any part of it, therefore, the provisions of Sec.41(1) could not have been invoked by the A.O. As regards the adverse inferences drawn by the A.O in respect of the genuineness of the transactions under consideration, we are of the considered view, that as the respective amounts had not been „credited‟ in the „books of account‟ of the assessee during the year under consideration, therefore, for the said reason itself the provisions of Sec.68 were clearly ousted and no addition of the said amount could have been made in the hands of the assessee under the said statutory provision during the year under consideration. We thus not finding any infirmity in the order of the CIT(A), to the extent he had vacated the addition of Rs.76,36,425/- made by the A.O u/ss. 41(1)/68 of the Act, therefore, uphold the same. The Grounds of appeal No.1 and 2 raised by the revenue are dismissed.
P a g e | Deputy Commissioner of Income Tax, Central Circle-4(2) Vs. M/s Sri Radhakrishna 9. We shall now advert to the disallowance made by the A.O of the interest on service tax of Rs.4,84,307/- paid by the assessee, which thereafter had been vacated by the CIT(A). As is discernible from the orders of the lower authorities, the assessee had paid the aforesaid amount of interest on account of delay in payment of service tax. The A.O was of the view, that as the assessee had to make the payment of the aforesaid interest because of violation of service tax rules, therefore, the same being in the nature of a penal payment was not allowable as a deduction under Sec.37(1) of the Act. However, the CIT(A) did not find favour with the view taken by the A.O, and observed, that as the payment of interest was compensatory in nature, therefore, the same was rightly claimed as a deduction u/s 37 by the assessee. We have given a thoughtful consideration to the issue before us and are unable to persuade ourselves to subscribe to the view taken by the A.O. We find that Sec.75 of the Finance Act, 1994, which envisages levy of interest on late service tax payment is compensatory in nature and cannot be characterised as a levy of penalty. In fact, the levy of penalty under the Service Tax Act is contemplated in Sec.76 of the Finance Act, 1994. Accordingly, as the payment of interest on late service tax payment by the assessee is found to be compensatory in nature, therefore, the same in our considered view could not have been held as not allowable as a deduction under Sec.37(1) of the Act. We thus finding no infirmity in the order of the CIT(A), who in our considered view had rightly vacated the disallowance of the interest on late service tax payment of Rs.4,84,307/- made by the A.O, uphold his order to the said extent. The Ground of appeal
No.3 raised by the revenue is dismissed.
10. The Ground of appeal No. 4 raised by the revenue being general in nature is dismissed as not pressed.