ACIT CEN CIR 7, MUMBAI vs. SAMARTHA DEVELOPMENT CORPORATION, MUMBAI

The captioned appeal by revenue for Assessment Year [AY] 2010-11 assails the order of Ld. Commissioner of Income Tax (Appeals)-36 [CIT(A)], Mumbai dated 22/07/2014 qua deletion of certain addition u/s 41(1) for Rs.39,61,150/- & Rs.11,11,326/- on account of VAT paid on behalf of others.

Facts leading to the dispute are that the assesse, being resident firm, was assessed u/s 143(3) at Rs.128,90,64,930/- vide Assessing Officer [AO] order dated 22/03/2013 after certain additions / disallowances as against returned income of Rs.128,39,92,460/- e-filed by the assessee on 28/09/2010. The assesse was engaged in construction activities during the impugned AY and suffered additions of Rs.11,11,326/- for VAT paid on behalf of a Trust and Rs.39,61,150/- u/s 41(1) on account of remission / cessation of certain trading liability. Both the additions are subject matter of this appeal. During Assessment proceedings, it was noted that the assessee credited a sum of Rs.406.23 Lacs from a trust namely VJCT and debited the same amount in Profit & Loss Account and further debited a sum of Rs.11,11,326/- on account of VAT paid on behalf of this trust. The assessee attributed the same to VAT deducted by the Trust against execution of works contract undertaken by the assessee for trust. In the alternative, the assessee requested the AO to treat the same as donation given to the said trust by the assessee and provide deduction u/s 80G. However, not convinced with the explanation of the assessee, the same was disallowed and added to the income of the assessee. Further, a perusal of Sundry Creditors revealed that the ledger balances of three creditors did not move since the period prior to 01/04/1993. The assessee contended that the same were mere Samartha Development Corporation Assessment Year-2010-11 deposits and not sundry creditors but could not adduce any evidence in support which led the AO to treat the same as remission / cessation of liability u/s 41(1) and resulted into impugned additions. 3. Aggrieved, the assessee contested both the additions with success before Ld. CIT(A) vide impugned order dated 22/07/2014 where Ld. CIT(A) qua addition u/s 41(1) concluded that the same was not applicable as no deduction with respect to these creditors were ever allowed to the assessee and the same were mere deposits. Similarly, the Ld. CIT(A) found that the VAT payment, being in the nature of business expenditure, was allowable to the assessee. Aggrieved, the revenue is in appeal before us against the relief provided by Ld. CIT(A). 4. The Ld. Departmental Representative [DR] first of all drew our attention to the fact that the correct amount in dispute u/s 41(1) is Rs.29,61,150/- and not Rs.39,61,150/- as an arithmetical error had crept in the computations thereof during quantum assessment. The assessee filed rectification u/s 154 against the same which has since been allowed. The Ld. Counsel for Assessee seconded the same. This being the factual position, we proceed further by holding that the quantum of amount under dispute u/s 41(1) is Rs.29,61,150/- and therefore, our findings shall apply to that extent only. 5. Proceeding further, the Ld. DR contended that the relief has been granted by Ld. CIT(A) without any merits as no evidences could be adduced by the assessee in support of his claim that the sundry creditors were mere deposits in nature. Further, the assessee discharged VAT liability of a third party and therefore, the same could never be classified as expenditure particularly in view of the fact that the assessee, in the alternative, pleaded for grant of deduction u/s 80G against the same by holding / treating the same as donations. 6. Per contra, Ld. Counsel for assessee [AR] submitted various documents in paper-book by way of evidences to suggest that the sundry creditors were mere deposits in nature, the expenditure against which was never claimed by the Samartha Development Corporation Assessment Year-2010-11 assessee. The Ld. AR explained that the assessee acquired certain Land at Versova for construction of residential houses in the year 1974-75 from Ohsiwara Land Development Coporation [OLDC] but the same got cancelled subsequently due to non-observance of payment schedule by the assessee. However, in the meantime, the assessee had sub-divided the plot in smaller plots and transferred its rights therein to various builders and received consideration from these parties which were offered to tax in respective years. However, the assessee had received certain advances from some of the entities pending allotment of rights but the same could never be allotted by the assessee in view of the cancellation of his own right by OLDC. Since, the assessee had contested the cancellation before the court, these parties, in the hope of favorable order, continued their advances with the assessee. Therefore, these are, in fact, sundry debtors with credit balances and mere deposits which could not be added u/s 41(1) as the same do not apply to the fact of the case. In support, the assessee has filed several financial statements of various years starting from year ending 31/03/1985 along with copy of ledger accounts / extracts of respective parties and tax auditor certificate. Reliance has been placed on various judicial pronouncements to contend that as there was no remission or cessation of trading liability and these amounts were mere deposits /advances, additions thereof u/s 41(1) could not be made. 7. Regarding VAT payments, the Ld. AR has contended that the assessee provided services worth Rs.4.06 crores to the Trust which was inclusive of VAT and therefore, VAT paid by the assessee out of the same represented business expenditure of the assessee and hence allowable. Further, VAT to the extent of Rs.9,34,092/- has been paid / deducted by the Trust on behalf of the assessee and the assessee himself has paid VAT of Rs.1,77,234/-, nevertheless, the same constitute VAT expenditure of the assessee as gross amount of services has been credited in the Profit & Loss Account. The copies of respective VAT Samartha Development Corporation Assessment Year-2010-11 challans and VAT returns for relevant period have been placed in the paper book. 8. We have heard the rival contentions and perused the relevant material on record. So far as addition u/s 41(1) for Rs.29,61,150/- is concerned, a perusal of various documents / contentions / submissions prima facie lends support to the arguments of Ld. AR that the said amounts were mere sundry debtors with credit balances and not the sundry creditors. The assessee has submitted additional documents in the shape of financial statements of various years, respective ledger extracts, Tax Auditor’s certificate etc., which, being additional evidences, requires appreciation at the level of Ld. AO. Similarly, the assessee, in support of VAT claim has adduced additional evidences in the form of VAT returns, Challans etc. Therefore, prima facie, finding strengths in the arguments of the Ld. AR against both the additions, without delving much deeper into the merits of the case, we deem it fit to restore both the issues back to the file of Ld. AO for re-appreciation and fresh adjudication as per law in the light of additional evidences submitted by the assessee. The assesse, in turn, is also directed to substantiate his claim forthwith in this regard failing which the Ld. AO shall be at liberty to decide the same on the basis of material available on record. 9. Resultantly, the revenue’s appeal stands allowed for statistical purposes in terms of our above order. Order pronounced in the open court on 12th May, 2017.