M/S. RAHMAN PROPERTIES LIMITED,GUWAHATI vs. JOINT COMMISSIONER OF INCOME TAX, RANGE-2, GUWAHATI
Facts
The assessee's case was selected for scrutiny for A.Y. 2005-06, and the AO added ₹1.00 crore for written-back current liabilities and ₹1,28,374/- for waived interest, treating them as deemed profit under Section 41(1) of the Income Tax Act. The CIT(A) upheld this addition, concluding that Section 41(1) was applicable even if the liabilities were capital in nature, as the assessee failed to provide sufficient evidence.
Held
The tribunal found that almost all the written-back liabilities/expenses were incurred on capital account for building, plant, machinery, or capitalized rent, and were never charged to the Profit & Loss account. Since Section 41(1) applies only to liabilities/expenses previously allowed as a deduction in computing income, the tribunal held it was not applicable to these capital liabilities. The order of the CIT(A) was set aside, and the AO was directed to delete the addition.
Key Issues
Whether Section 41(1) of the Income Tax Act applies to write-back of liabilities that are capital in nature and were never debited to the Profit & Loss account for computing income.
Sections Cited
Section 41(1), Section 143(1)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, ‘GUWAHATI’ BENCH, GUWAHATI’
IN THE INCOME TAX APPELLATE TRIBUNAL ‘GUWAHATI’ BENCH, GUWAHATI’ (virtual hearing at Kolkata) BEFORE SHRI RAJESH KUMAR, AM AND SHRI MANOMOHAN DAS, JM
ITA No.241/GTY/2019 (Assessment Year:2005-06) Joint commissioner of Income M/s Rahman Properties Limited Tax, range-2, Guwahati C/o Hotel Dynasty, S.S. Road, 5th Floor, Aaykar Bhavan, Lakhtokia, Guwahati-781001, Vs. Christian basti, G.S. Road, Assam Guwahati-781005, Assam (Appellant) (Respondent) PAN No. AACCR0023P Assessee by : Shri Akhilesh Shrivastava, AR Revenue by : Shri Kausik Ray, DR Date of hearing: 09.07.2025 Date of pronouncement: 26.08.2025
O R D E R Per Rajesh Kumar, AM:
This appeal preferred by the assessee against the order of the Commissioner of Income-tax (Appeals), Guwahati (hereinafter referred to as the “Ld. CIT(A)”] dated 15.03.2019 for the A.Y. 2005- 06.
The only issue raised in ground no.1 is against the confirmation of addition by the ld. CIT (A) as made by the ld. AO of ₹1.00 crore u/s 41 of the Act and the issue raised in ground no.2 is against the confirmation of addition of ₹1,28,374/- by the ld. CIT (A) as made by the ld. AO u/s 41(1) of the Act. Thus, the issue involved in both the grounds is same and therefore, they are being disposed off together.
In the appellate proceedings also the ld. CIT (A) upheld the order of the ld. AO by dismissing the appeal of the assessee on this issue despite the submissions of the assessee that provisions of Section 41(1) of the Act were not applicable in the instant case as the same is applicable along only when the liabilities/ expenses which were written back were rooted to the profit and loss account and are of revenue nature alone. But the submission of the assessee did not find favour with the ld. CIT (A) and he dismissed the appeal by holding that the assessee had not furnished any documentary evidences in this regard. The ld. CIT (A) also noted that in the assessment proceedings, the assessee averment that the majority of the expenses were incurred on account of capital transactions remained unapproved.
After hearing the rival contentions and perusing the materials available on record, we find from the evidences filed before us which
“This is in reference to the clarification notice received from your Hon'ble Bench regarding the write-off of certain outstanding payables reflected in our books. We respectfully submit as under: 1.) During the financial year 2004-05, we undertook a comprehensive review of our old liabilities to ensure that our financial statements reflect a true and fair view of our obligations. As a part of this exercise, we wrote off various payables which had been outstanding for a prolonged period and were no longer payable. I would like to clarify that the liabilities written off are related to Capital Expenditure-The list of suppliers written of are as follows:
SLN Name Amount (In Rs.) Amount (In Rs.) O. 1 Mainuddin Ahmed 95,500.00 2 Dee kay Associates 6,89,999.02 3 M/s Steel Alloys 6,99,686.99 4 Outstanding Lease 45,29,500.00 60,14,686.01 5 A S Architectures 16,41,450.99 6 OTIS Elevators Company Ltd 1,60,834.70 7 Singh Hardware 1,70,580.00 S Jain Marble 1,23,440.00 9 S N Trading 2,44,832.29 10 The Eastern Enterprise 1,14,197.00 11 AIDC 1,28,374.00 12 Harish Hardware 7,24,755.25 13 P Enterprise 4,19,151.00 14 Arihant Enterprise 2,32,915.96 15 M K Enterprise 24,782.00 39,85,313.19 TOTAL: 99,99,999.20 2.) The details are as follows: a) Mainuddin Ahmed. i) In the year 1990, bamboo was purchased worth Rs. 95,500 from Mr. Mainuddin Ahmed, who was operating his shop at Bharulumukh, for the construction work of our hotel.
Part Area (in sq ft) Basement 1020 sq ft Graund Floor 1260 sq ft First Floor 2640 sq ft Second Floor 1260 sq ft 1999-00 511,200.00 393,600.00 117,600.00 2000-01 511,200.00 393,600.00 117,600.00 2001-02 511,200.00 393,600.00 117,600.00 2002-03 511,200.00 393,600.00 117,600.00 2003-04 511,200.00 393,600.00 117,600.00 April'04- 213,000.00 164,000.00 49,000.00 Augusf04 Total 9,116,400.00 4,586,900.00 4,529,500.0 0 iii) The outstanding payable amount reflecting in Balancesheet was of Rs. 45,29,500. As this amount is not payableit was written off in FY 2004-05 to reflect the true and fair position of our liabilities in the financial statements and thus the outstanding is written off against the Carry Forward Losses reflecting in our Balancesheet, thus the following entry was passed: Lease rent Payable --------------Dr 45,29,500 To Carry forward Losses ----- Cr 45,29,500 iv) Thus the Lease Rent Payable of Rs 45,29,500was never claimed as expenditure in Profit & Loss Account. v) However there was a mistake, and instead of crediting "Carry forward Losses" it should have been credited in "Building" Account.
Third Floor 1260 sq ft Passage 1080 sq ft total: 8520 sq ft Rent Per Square ft Rs.5 Total Monthly Rent 42,600 Total Yearly Rent 5,11,200 ii) However at the time of preparation of account, the Profit and Loss Account was debited with the actual amount of rent paid and not the amount of rent payable. The total amount spent on construction was Rs. 45,29,500. This amount was treated as a liability to the company as the company had paid only 40% of the tease rent due.The same is debited to Building Account and credited to Lease Rent Payable Account. The calculation is as follows:
Financial Year Rent Payable Rent debited to Balance Rent 1986-87 213,000.00 P/LA/c. 213,000.66" 1987-88 511,200.00 - 511,200.00 1988-89 511,200.00 - 511,200.00 1989-90 511,200.00 117,000.00 394,200.00 1990-91 511,200.00 228,000.00 283,200.00 1991-92 511,200.00 228,000.00 283,200.00 1992-93 511,200.00 228,000.00 283,200.00 1993-94 511,200.00 218,000.00 293,200.00 1994-95 511,200.00 240,000.00 271,200.00 1995-96 511,200.00 237,500.00 273,700.00 1996-97 511,200.00 285,200.00 226,000.00 1997-98 511,200.00 321,600.00 189,600.00 1998-99 511,200.00 351,600.00 159,600.00 vii) Attached: 1.) Balancesheet of 2007-08 2.) Building Ledger of FY 2007-08 3.) Lease Agreement 4.) Receipts of Payment of Lease e) MIS A S Architectures. i) During 1990, we engaged M/s. A.S. Architectures for
SL No. Name Amount (In Rs.) Original Treatment 1 Mainuddin Ahmed 95,500.00 Building 2 Dee kay Associates 6,89,999.02 Electrical Installation 3 Steel Alloys 6,99,686.99 Building 4 Outstanding Lease 45,29,500.00 Already corrected in FY 2007-08 5 AS Architectures 16,41,450.99 Building 6 ons Elevators Company Ltd 1,60,834.70 Plant & Machinery 7 Singh Hardware 1,70,580.00 Building 8 Jain Marble 1,23,440.00 Building 9 SN Trading 2,44,832.29 Furniture & Fixtures 10 The Eastern Enterprise 1,14,197.00 Furniture & Fixtures 11 AIDC 1,28,374.00 No Impact 12 Harish Hardware 7,24,755.25 Building The Revised treatment to correct fixed assets position will be:
Ledger Debit/ Credit Debit Amount Credit Amount Profit & Loss (Appropriation) A/c -Dr 46,65,276.24 To Building A/c Cr 34,55,413.23 To Plant & Machinery A/c Cr 1,60,834.70 To Furniture & Fixtures A/c Cr 3,59,029.29 To Electrical Installations A/c Cr 6,89,999.02 Adjusting these write-offs against fixed assets does not affect the taxable income computation, as: It does not increase or decrease the Profit & Loss Account. Depreciation will stand recomputed based on revised asset cost, ensuring no undue tax benefit.” 06. We have thoroughly examined the above written submission along with evidences and after considering the nature of the above liabilities
In the result, the appeal of the assesseeis allowed.
Order pronounced in the open court on 26.08.2025.
Sd/- Sd/- (MANOMOHAN DAS) (RAJESH KUMAR) (JUDICIAL MEMBER) (ACCOUNTANT MEMBER) Kolkata, Dated: 26.08.2025 Sudip Sarkar, Sr.PS Copy of the Order forwarded to: 1. The Appellant 2. The Respondent 3. CIT DR, ITAT, 4. 5. Guard file. BY ORDER, True Copy//
Sr. Private Secretary/ Asst. Registrar Income Tax Appellate Tribunal, Guwahati
