DISHA IMPEX PVT LTD,NEW DELHI vs. ITO WARD 7(3), NEW DELHI

We have heard the rival submissions and perused the material available on record. The assessee is engaged in the business of sourcing and supply of iron ore as well as helps other exporters to source iron ore etc. The return for AY 12-13 has been filed by the assessee declaring loss of ₹42,39,108/-. During the year under consideration, the assessee has brought forward outstanding advances received from parties amounting to ₹13,02,10,698/- under the head “other long term liabilities”. This included a sum of ₹12 crores pertaining to M/s. Star Coal India Pvt. Ltd. The ld AO sought to treat this sum of ₹12 crores as liabilities ceased to exist and accordingly sought to bring the same to tax as income u/s 41(1) of the Act.

Similarly, a sum of ₹6,12,80,000/- was shown as advance received against sale of properties by the assessee, which was also brought forward from earlier years. This was also sought to be treated as income u/s 41(1) of the Act by the ld. AO on the ground that the assessee does not possess any fixed assets and accordingly could not have received any advance against sale of properties. & 6611/Del/2 Disha Impex Pvt. Ltd

Similarly, a sum of ₹97 lakhs was received as advance against sale of materials from three parties. The ld. AO observed that confirmation was not filed from these parties and accordingly concluded that the said liabilities ceased to exist and brought the sums outstanding in their names to tax as income u/s 41(1) of the Act.

With regard to 1st addition of ₹12 crores, it was submitted that in February 2016, Dubai based company, ETA Dubai had expressed its desire to jointly enter into mining activity as well as procure iron ore with an investment and Profit and loss sharing ratio, which was decided as 2:1. Accordingly, ETA Dubai through its subsidiary M/s Star Coal India Private Limited entered into joint-venture with the assessee company for iron ore mines in the Chikmaglur district of Karnataka with M/s. Srinivasa Minerals and Traders Ltd. The Star Coal India Private Ltd made payment of ₹12 crores to the assessee company on 28.02.2006, the assessee company in turn entered into contract with M/s Srinivasa Minerals and Traders Ltd on the same day and paid ₹10,13,50,000/- to M/s Srinivasa Mineral and Traders Ltd. The amount of advance given by M/s. Star Coal India Private Limited to the assessee company was shown in the liability side of the balance sheet of the assessee company as on 31.03.2006 and continued to be shown as such even as on 31.03.2012. The amount given to M/s Srinivasa Minerals and Traders Ltd by the assessee company was reflected in the asset side of the balance sheet of the assessee company as on 31.03.2006 and continued to be shown as such in the balance sheet as on 31.03.2012. It was discovered that M/s. Srinivasa Minerals and Traders Ltd did not own any mine and aggrieved by such misrepresentation and to recover the money paid, the assessee company instituted arbitration proceedings. On 06.07.2008, a settlement was agreed between the assessee company and M/s Star Coal (India) Pvt. Ltd. that the repayment of Rs 12 Cr would be made in 24 equal installments as is evident from Copy of Settlement which is placed at Pages 44 to 45 of the Paper Book filed before us. Thereafter, on 30.11.2011, a settlement deed was entered into between the assessee, M/s Srinivasa Minerals and Traders Ltd. and & 6611/Del/2 Disha Impex Pvt. Ltd partners of M/s Sideshwarra International on 30.11.2011 prior to commencement of arbitration proceedings. On account of above settlement, the assessee withdrew its claim for ongoing arbitration proceedings with M/s Srinivasa Minerals and Traders Ltd. The order of Hon'ble High Court of Karnataka dated 17.12.2011 in respect of arbitration proceedings is placed at Pages 55 to 60 of the Paper Book. As a part of settlement, M/s Sideshwarra International acknowledged vide letter dated 29.10.2014 that Rs. 10.35 Cr. is outstanding in its books for the assessee company. A copy of confirmation obtained from M/s Sideshwarra International is placed at Page 61 of the Paper Book. This was the exact amount outstanding from M/s Sideshwarra International in the books of the assessee as is evident from Page 31 of the Paper Book. Thus, during the year under consideration, the assessee has an outstanding carry forward balance payable to M/s Star Coal (India) Pvt. Ltd. amounting to Rs. 12,00,00,000/- and a corresponding carry forward balance receivable of Rs. 10,34,50,000/- from M/s Sideshwarra International. During of assessment proceedings, the ld. AO has placed doubts on the genuineness of the liability outstanding to M/s Star Coal (India) Pvt. Ltd. amounting to Rs. 12 Cr. The Ld. AO based on surmises and conjectures has assumed that no efforts had been made by M/s Star Coal (India) Pvt. Ltd. to recover back the amount and thus this liability had ceased to exist and such amount of Rs.12 Cr. is not payable by the assessee company and proceeded to make an addition of Rs. 12 Cr by invoking section 41(1) of the Act. The ld. AO has made the addition u/s 41(1) of the Act despite the fact that neither any deduction nor any allowance has been claimed nor any trading liability has been incurred by the assessee in any of the earlier assessment years.

We find that the assessee had continued to show the amount received in the sum of ₹12 crores from M/s. Star Coal Private Ltd as a liability in balance sheet as on 31.03.2012. Hence, the liability does not ceased to exist at all as on 31.03.2012. Accordingly, the provisions of section 41(1) of the Act could not be invoked at all by the ld AO by doubting the genuineness of the liability. The & 6611/Del/2 Disha Impex Pvt. Ltd assessee had given valid explanation for retention of such liability in its balance sheet, which is also supported by pending judicial proceedings in the form of arbitration and out of court settlement entered thereon. It is not in dispute that assessee had not claimed any deduction or any allowance in the year in which this liability was created in earlier years. Hence, absolutely one of the main perquisite of provisions of section 41(1) of the Act is not fulfilled at all so as to press the operation of the said section into service. Hence, we have no hesitation in directing the ld AO to delete the addition made in the sum of ₹12 crores u/s 41(1) of the Act.

With regard to addition of ₹5 crores made on account of advance received from Mr. Rajendra Manikonda against sale of properties, we find that Mr. Rajendra Manikonda entered into a Memorandum of Understanding (MOU) with the assessee on 17.01.2007 for acquiring 20 acres of land in Vasant Vihar at an agreed price of Rs 1,75,00,000/- per acre. For acquisition of such land, Mr. Rajendra Manikonda paid an advance of Rs.5 Cr to the assessee through its two companies, namely- SEM India Systems Pvt Ltd. and Xalted information Systems Pvt. Ltd. The amount was paid to the assessee via three cheques as is evident from the details specified at Page 121 of the Paper Book. Such amount is also appearing as outstanding in the books of the assessee as is evident from Page 30 of the Paper Book. In view of the aforesaid MOU, the assessee company started acquiring land and paid Rs. 1.36 Cr as advance to the seller, a copy of general power of attorney and agreement to sell and purchase entered into between the seller of 110 acres of land and Mr. Ashok Anand is placed at Pages 123 to 129 of the Paper Book. Also, a copy of affidavit of Mr. Ashok Anand dated 06.02.2008 stating that the agreements were entered by him for and on behalf of the assessee company is placed at Page 116 of the Paper Book. However, Mr. Rajendra Manikonda could not pay the balance amount for acquisition of 20 acres of land and thus the advance paid by him to the assessee company has been continued to be acknowledged as payable in the books of the assessee. Since the transaction could not move forward, the amount paid to the assessee & 6611/Del/2 Disha Impex Pvt. Ltd by the two companies namely-SEM India Systems Pvt Ltd. and Xalled Information Systems Pvt Ltd. continues to be shown as liability in the books of the assessee even as on 31.03.2012. Also, the amount paid as advance by the assessee for purchase of land continues to be shown as Advance for Purchase of Property as is evident from Page 31 of the Paper Book. Thus the amount outstanding is nothing but a carry forward balance of earlier years. However, the ld. AO stated that the amount of Rs.5 Cr outstanding as on 31.03.2012 appears to be a sham transaction and treated it as unexplained credits for which no liability seems to exist and thus the same was brought to tax u/s 41(1) of the Act. Aggrieved by the order of ld. AO, assessee filed an appeal before the ld. CIT(A). The assessee company submitted that the amount is still outstanding in the books of the assessee as on 31.03.2012. It was further stated that in order to recover back the amount of Rs. 5 Cr., Mr. Rajendra Manikonda through his legal counsel, served a legal notice to the assessee company. A copy of legal notice received and response thereto is placed at Pages 66 to 69 and Pages 70 to 73 of the Paper Book respectively. A notice was also received from the Official Liquidator of SEM India System Pvt. Ltd. demanding the repayment of advance amount which was paid on behalf of Mr. Rajendra Manikonda for acquiring land at Vasant Vihar. A copy of such notice received from office of Official Liquidator is placed at Page 133 of the Paper Book. Thus the contention of the ld. AO that Mr. Rajendra Manikonda has not made efforts to recover back the amount is factually incorrect. The ld. CIT(A) ignoring the detailed submissions made by the assessee, arbitrarily upheld the order of the ld. AO and confirmed the addition of Rs.5 Cr.

It is a fact that the assessee has received ₹5 crores as advance against the sale of property. It is also a fact that the assessee has neither claimed any allowance nor any deduction of ₹5 crores in the earlier years at the time of creation of such liability. Hence, the main ingredient of applicability of provisions of section 41(1) of the Act is not fulfilled so as to bring the operation of the said section into service. In fact, a notice has been received from the Official & 6611/Del/2 Disha Impex Pvt. Ltd Liquidator of the one of the companies M/s. SEM India systems Private Ltd demanding the repayment of advanced amount from the assessee company which was paid on behalf of Mr Rajendra Manikonda. Even this statutory notice is completely ignored by the lower authorities in the instant case. The assessee had continued to show the amounts received as advance from Mr. Rajendra Manikonda as a liability in its balance sheet as on 31.03.2012. Hence we hold that the liability had not ceased to exist. There is an acknowledgement of debt by the assessee, even as late as on 31.03.2012. While this is so, how the revenue could conclude that the said liability had ceased to exist and apply the provisions of section 41(1) of the Act without even making a preliminary verification of the fact, whether at all any deduction or allowance was claimed by the assessee in earlier years. Even if the transaction is to be construed as sham, the said transaction was not carried out during the year under consideration and the sum of ₹5 crores reflected as advance is a transaction carried forward from earlier years and veracity and genuineness of the transaction should be tested in the year of actual receipt and not in subsequent years. Even this basic established principle was not appreciated by the lower authorities in the instant case. Hence, we have no hesitation to delete the addition made in the sum of ₹5 crores u/s 41(1) of the Act.

With regard to advance received from three parties of ₹97 lakhs against sale of material, the assessee in the year 2007 received an advance from three parties aggregate to ₹97 lakhs towards purchase of iron ore, due to sudden fall in price of iron ore, the parties did not come forward to complete the transaction, though the assessee is willing to complete the transaction. After making ample efforts to persuade to complete the transaction and upon realisation, the transactions are not going to be completed, the entire amount of such advance was offered as income in AY 2014-15 voluntarily by the assessee. Hence, as on 31.03.2012, this sum was indeed reflected as liability by the assessee and the said liability has not ceased to exist as on 31.03.2012, so as to invoke the provisions of section 41(1) of the Act. Either way, the very same sum & 6611/Del/2 Disha Impex Pvt. Ltd has already been offered by the assessee voluntarily in AY 2014-15, which fact is not disputed before us. Hence, we direct the ld AO to delete the addition made in the sum of ₹97 lakhs u/s 41(1) of the Act for AY 2012-13.

Accordingly, the Ground Nos. 1 and 3 raised by the assessee are allowed.

Ground No. 4 raised by the assessee is challenging the disallowance of legal and professional expenses totalling to ₹27,57,315/- on ad hoc basis.

We have heard the rival submissions and perused the material available on record. The assessee has incurred expenses amounting to ₹67,39,291/- during the year under consideration. These expenses were sought to be disallowed by the ld AO on the ground that assessee had not carried out any business during the last 3 years. It was submitted by the assessee that even if no business is carried out, some statutory compliances have to be made by the company as long as assessee company exists and continues, and that employee benefit expenses, rent of premises, legal and professional expenses, travelling expenses, and other administrative and office expenses need to be incurred to protect the interests of the company.

The ld CIT(A) accordingly granted relief in respect of employee benefit cost, rent expenses, vehicle running and maintenance, other administrative and office expenses and depreciation to the tune of ₹39,81,956/- and restricted the disallowance to Rs. 27,57,315/- on account of legal and professional expenses alone. We find that the assessee during the year had earned income of ₹23 lakhs on account of interest and other income. The AO observed that this income is not derived from the operating activities of the assessee and is taxed as „income from other sources‟ and since no business was carried out by the assessee, he had proceeded to disallow the loss claimed by the assessee in the return of income by effectively disallowing all the expenses claimed. As far as incurrence of legal and professional charges claimed by the assessee, the ld. AR before us submitted that assessee has been conducting business and had also & 6611/Del/2 Disha Impex Pvt. Ltd placed a bid in order to secure a tender of Steel Authority of India Ltd. However, the tender did not materialize and was cancelled. Thus, the finding of the ld. AO that the assessee had not been doing any business is not correct. The assessee had been continuously engaged in participating in tender and had been putting all efforts to keep the business alive. It is a settled position of law that it is not necessary that there should be sales/ purchase for claiming expenditure. This observation of the ld. AO is legally incorrect. An expenditure incurred is allowable expenditure in case it has been incurred wholly and exclusively for the purpose of the business. The provisions of Section 37(1) of the Act are very clear and there is no embargo placed like unless there is an income such expenditure will not be allowable. It is settled law that it is not necessary there should be receipts or sales for the commencement of business. A company may not be able to obtain or to execute a single contract for months and yet it may be deemed to carry on business if during the period of lull and inactivity, the business is kept alive and retains its registered office and holds its meetings. It is not necessary that a business to be in existence should have worked all the time. There may be long intervals of inactivity and a concern may still be a going concern though it may for some time, be quite and dormant. The mere fact that a business man has not been able to obtain a contract and the business has for some time been in that sense dormant would not mean that it had ceased to exist if the assessee continues to maintain an establishment and incurs expenses in the expectation that the work would come and the business would be successful.

We find from the above that assessee has been continuously making its efforts to participate in the tender to secure its business for which legal and professional charges are incurred by the assessee. The business of the assessee is still in existence. Hence, these legal and professional charges would be eligible for deduction to the assessee. Accordingly ground No. 4 raised by the assessee is allowed.

In the result, the appeal of AY 12-13 in is allowed. & 6611/Del/2 Disha Impex Pvt. Ltd for AY 2013-14 18. The ground No. 2 raised by the assessee is similar to Ground Nos. 1 to 3.3 in AY 12–13 and hence the decision rendered in AY 12-13 shall apply with equal force qua Ground No. 2 for AY 13-14, except with variance in figures.

Ground No. 1 raised by the assessee is similar to Ground No. 4 raised by the assessee in AY 12-13 and the decision rendered thereon shall apply with equal force qua Ground No. 1 for AY 13-14 also, except with variance in figures.

In the result, appeal of the assessee for AY 13-14 in is allowed for AY 2014-15 21. Ground No. 1 raised by the assessee for AY 14-15 is similar to Ground No. 4 raised in AY 12-13. Hence the decision rendered in AY 12-13 shall apply with equal force for AY 14–15 also qua ground No. 1, except with variance in figures.

In the result, the appeal of the assessee in is allowed.

In the result, all the appeals of the assessee are allowed.