MACKINNON MACKENZIE & CO.LTD,MUMBAI vs. ITO 2(2)(3), MUMBAI

Grounds of appeal

Brief facts of the case are that the assessee was engaged in the business of shipping agents, carries on the activities like overseas recruitment, management, pension, gratuity fund for foreign shipping companies for which staff was recruited from India beside doing travel agency and cargo handling etc. During the year, the assessee filed its return of income at NIL on 31.10.2007, which was processed under section 143(1) of the Act on 14.8.2008. The case of the assessee was selected for scrutiny and the statutory notices u/s 143(2) and 142(1) were issued and served on the assessee. The company has accumulated losses of almost 6.00 crores. The company had incurred huge losses year after year due to unfavourable business conditions. During the course of assessment proceedings, the AO observed from perusal of note No.4(vii) which is an extract of Audit report and reads as under :

Grounds no.1 and 2 are interconnected and against the confirmation of addition of Rs 1,79,53,595 by the ld.CIT(A) as made by the AO towards sundry creditors‟ balances of Calcutta Branch and the issue in ground no.2 is against the non allowance and non adjustment of loss on account of sundry debtors of Rs.1,80,72,562, the details whereof were not available. The AO made the addition in respect of outstanding sundry credit balances to the total income of the assessee u/s 41(1) of the Act on the ground that these creditors have remained unpaid for long time and these were not written back despite the facts that the assessee was not knowing even the names of the said creditors to whom the payments to be made.

In the appellate proceedings, the ld. CIT(A) confirmed the addition on the ground that the assessee was not in a position to furnish the details of sundry creditors by rejecting the contentions of the assessee that records were not possible to be produced on account of the destruction of records in the fire and the termination of staff of Calcutta Branch after the outbreak of fire in the office. The ld. CIT(A) further observed that these creditors‟ advances were lying outstanding for so many years despite the fact that the assessee did not know the details of these creditors in view of the fact that a note by the auditor of the company stating that according to the information and in the opinion of the statutory auditor of the company these amounts should be written back. The ld. CIT(A) after considering the arguments of the “ 3.5. i. I have considered the submission of the AR and perused the assessment order and remand report of the AO. During the assessment proceedings on a specific query of the AO, the appellant failed to furnish names of the creditors, their addresses, details of outstanding dues, confirmed copy of accounts, etc. The submission made before the AO were reiterated before me during the appellant proceedings. Even during the appellate proceedings, the appellant has failed to give basic detail regarding shown creditors in the balance sheet which are lying for so many years. It is also not plea of the appellant that any amount of interest is being paid to the said creditors. No prudent businessman will leave any amount with anybody without any interest or without making any recovery of the same during the passage of time. It is rather surprising that tile appellant has not been able to furnish even the name of the said creditors. In view of these facts and circumstances of the case and for the reasons as given by the AO in assessment order and remand report, the AO is justified in making addition of RS.1 ,79,53,595/- to the income of the appellant. [3.5.ii. The claim of the appellant by filing the additional ground for the corresponding deduction of unrecovered debtors of the amount of RS.1,80,72,562/-, is not correct in view of the provision of the I.T.Act any unrecoverable amount of debtors can be claimed as bad debts after actually writing off in the books of account u/s.36(vii) of the 1.T.Act. Therefore. the claim of the appellant deserves to be rejected and additional ground is accordingly dismissed”

The ld. AR submitted before us that addition by AO u/s 41(1) of the Act in respect of sundry creditors as confirmed by the ld.CIT(A) were appearing in the company accounts for many years and these creditors related to Calcutta Branch. He further submitted that in the devastating fire which broke out in Calcutta on 7.11.1998, these records and documents of the assessee were burnt following which the office had to be closed and the employees of the 6 company were also terminated. The assessee company tried itself to recover, retrieve and reconstruct the details of these papers and details of the creditors. However, the efforts of the company were also hampered because of the heavy downpour and flood in Mumbai on 26.7.2005. The company also tried to extract the details from auditors of the company that also proved futile and even details of the company was not able to furnish the details. The ld. AR further argued that non-filing of details qua sundry creditors did not in any manner prove that the liability/sundry creditors become non-existent or ceased to exist. So much so that the sundry debtors‟ details and addresses were also not found following which the company could not file any suit against the debtors or in some cases the following the suits against the debtors would be uneconomical, keeping in view precarious financial position of the company. The ld. AR also stated that year after year the company was filing its return of income submitting annual accounts before all the authorities including Company Law Board. While making the addition the authorities below have relied upon the two decisions which were clearly distinguishable as under : i) Solid Containers Ltd V/s DCIT (308 ITR 417) (Bom), wherein the Hon‟ble Bombay High Court has held that loan taken for trading activities ultimately, upon waiver the amount was retained in business by the Assessee. The income has become assessee‟s income and was assessable to tax whereas in the present case the amount continued to be reflected in the liability and therefore squarely distinguishable. ii) In the case of CIT V/s T V Sundaram Iyengar and Sons Ltd reported at 222 ITR 344 (SC). In this case, the assessee who had written off the 7 credits and had credited the amount to the profit and loss account but while filing the return that was not shown as income by pleading that the receipt was of capital in nature and should not be treated as revenue expenditure without being written back. The Hon‟ble Supreme Court has held that by lapse of time the nature of amount attained a totally different character quality and became a definite trade surplus particularly because assessee itself had treated the money as its own money and taken the amount to its profit and loss account. Whereas the facts in the present case were totally different. The assessee had not obtained waiver of these creditor and the creditors have no in no way given up their rights on these amount. The ld. AR further argued that merely because these creditors were very old would not be justification to treat as income.

In defence of his arguments the ld.AR heavily relied upon the following case laws: i) CIT V/s Sugauli Sugar Works (P) Ltd (236 ITR 518)(SC) ii) New Commercial Mills Co Ltd V/s DCIT 73 TTJ 893(Ahd) iii) CIT V/s Vardhman Overseas Ltd reported at 343 ITR 408 (Del) The ld.AR finally prayed that it was unequivocally clear that the in the balance sheet these amounts were outstanding for many years and therefore cannot be treated as ceased liability under the provisions of section 41(1) of the Act specially when the assessee was the corporate entity acknowledging these credits by showing the same in the balance sheet and thus conclusion drawn by the ld. CIT(A) was totally wrong and unwarranted in these view of the facts and should be reversed. In the alternative, the ld.AR submitted that the addition of Rs.1,79,53,595/- was made under section 41(1) on the ground that the balances were old and the assessee was not in a position to furnish any details The same was the position with respect to sundry debtors of Kolkata branch amounting to Rs.1,80,72,562/-. The ld. AR submitted that the assessee has 8 ITA No.2392/M/2012 made counter claim before the AO and ld.CIT(A) on same analogy that the amount of sundry debtors should be allowed to be adjusted against the amount of sundry creditors. However, the same was not allowed on the ground that the assessee‟s claim of outstanding debts could not be considered for want of compliance under section 36(1)(iv) of the Act. The ld.AR submitted that the part of the total creditors represented the money payable by the assessee to its member from the money receivable from the client for the services rendered by the assessee. The ld. AR further argued that the condition of section 36(1)(vii) were not required to be fulfilled because whole amount has not gone to credit of profit and loss account. It was the business loss and should be allowed u/s 37 of the Act and therefore the assessee should be allowed reduction and adjustment of the amounts of sundry debtors against the amount of sundry debtors.

On the other hand, the ld.DR vehemently opposed the arguments of the ld.AR by submitting that the credit balances were 10 to 15 days old for which the assessee was not having any details and addresses. The ld. DR argued that no efforts were made by the assessee-company to find out the addresses and details of these creditors and the ld.DR prayed that the matter be restored to the file of the AO so that the exact position could be found out in this regard.

We have carefully considered the rival contentions and perused the material placed before us including the orders of authorities below and case laws relied upon by the parties. The undisputed facts of the case are that the fire broke out in the office premises of the assessee at Calcutta on 7.11.1998 and the entire records were burnt following which its office of the Calcutta Branch was closed down and employees there were also terminated. The company‟s effort to reconstruct its record and registers of details of sundry creditors and sundry debtors were also proved futile due to heavy downpour in Mumbai on 26.7.2005 and the company did not have any records to be furnished before the lower authorities. The addition made by the AO in the assessment proceedings qua these sundry credit balances were further confirmed by the ld.CIT(A). The assessee has been showing all these sundry creditors and sundry debtors in its balance sheet from 10 to 14 years which were filed before the various authorities and was also suffering losses year after year and as a result accumulated loss over the years were to the tune of Rs.6.00 crores. Now, the issue before us whether the sundry creditors of Rs.1,79,53,595/- which were continued to be shown as payable in the accounts of the company in respect of its Calcutta Branch could be added u/s 41(1) of the Act primarily for the reasons that the assessee failed to furnish details, addresses and confirmations of the said creditors whereas the company has filed all the details in respect of all other branches before the lower authorities.

Upon perusal of the above decisions, it is clear that mere outstanding balances for many years would not justify the conclusion that there was cessation of liability u/s 41(1) of the Act. The appellant has also acknowledged the credits and shown them in the balance sheet. In our opinion, the ratio laid down in the above decisions squarely covers the case of the assessee. Whereas, the cases relied upon by the revenue in the case of Solid Containers Ltd (supra) and T V Sundaram Iyengar and Sons Ltd(supra) are clearly distinguishable on facts. In view of this discussion hereinabove and in the light of ratio laid down in the various decisions supra, we set aside the order of the ld.CIT(A) and direct the AO to delete the amount of Rs.1,79,53,595/-. Ground No.1 is decided in favour of the assessee.

Since we have decided ground no.1 of this appeal in favour of the assessee, there is no need to decide ground No.2 hence dismissed.

Grounds of appeal no.3 and 4 are against the confirmation of addition of Rs.1,02,99,091/- being advances received from the customers Rs.43,89,471/- an amount held on behalf of principal and Rs.1,66,212/- being monies received from Kenyan Government u/s 28(iv) of the Act.

The ld. AR vehemently submitted before us that the ld.CIT(A) confirmed the order of the AO by observing that the assessee could not furnish the details of these amounts upholding by invoking the provisions of section 28(iv) of the Act. The ld. AR submitted that the provisions of section 28(iv) of the Act were not applicable to the transactions involving the monies and that only applicable to the benefits and perquisites and not the money received by the assessee in the normal course of business. In defence of his arguments the ld.AR relied upon the following case law: i) CIT V/s Alchemic Pvt Ltd reported in 130 ITR 168 (Guj); ii) Iskraemeco Regent Ltd (196 Taxman 103) (Mad High Court); iii) Ravinder Singh and Amptjer V/s CIT (205 ITR 353) (Delhi High Court); iv) ITO V/s Ahuja Graphic Machinery (P) Ltd (109) ITD 71 (Mum)(TM). The ld. AR submitted that the provisions of section 28(iv) of the Act provides for the assessment of the value of any benefit or perquisite arising from the business or the exercise of a profession as income of the assessee and these provisions do not deal with actual receipt of money which has been held in the aforesaid judgements issued by the various High Courts and the Tribunal that sundry creditors balance do not fall within the purview of section 28(iv) of the Income Tax Act, 1961 and they involve actual money/financial transactions.

The ld. AR further submitted that the genuineness of the liability under various heads was enquired into by the revenue authorities in the scrutiny assessment for the assessment year 2003-04 by referring to the assessment orders filed at pages 66 to 70 of the paper book. The ld.AR submitted that that the claim of the assessee was accepted by the department and the position remained unchanged in subsequent years, when the assessments were made u/s 143(3) of the Act for the assessment years 2004-05 and 2005-06 as placed at pages 71 to 78 of the paper books. The ld. AR further stated that similar qualifying notes were given in the balance sheet in last several years including balance sheet for assessment year 2003-04, 2004-05 and 2005-06 as placed at pages 1 to 6, 14 to 19 and 27 to 32 of the paper book respectively and such notes only bring to the attention of the management the need necessity to take only necessary action against the outstanding balances of the certain companies. The Auditors have not expressed any opinion that these amounts should be written back and therefore the action of the ld. CIT(A) is not justified in upholding the order of the AO that these liabilities have ceased. The ld. AR, therefore, argued that there has been no inquiry and no subsequent development which required different stand therefore the principle of resjudicatta, the additions u/s 41(1) were unwarranted. The ld. AR relied upon the following decision CIT V/s Excel Industries Ltd (358 ITR 295), Radhasoamy Satsang V/s CIT (193 ITR 321 (SC), CIT V/s Gopal Purohit (34 17 DTR 52). The ld. AR submitted that these credit balances have been existing for several preceding years and after making due inquiries the revenue has accepted in assessment year 2003-04 and subsequent years. Since there was no development in the current assessment year and therefore the addition u/s 28(iv) was wholly unjustified and should be reversed.

The ld. DR on the other hand heavily relied upon the orders of authorities below and submitted that authorities below have rightly sustained the addition as made by the AO as the assessee could not submit the necessary details qua the addresses and PAN and confirmations thereof and therefore the liabilities which were outstanding for more than 10 years could not to be said to be existing for which the assessee has nothing to say as to whom to be paid and how much to be paid. The ld. DR prayed before the Bench that the order of the ld. CIT(A) should be upheld.

We have carefully considered the rival contentions and perused the material placed before us including the orders of authorities below. The undisputed facts are that the assessee received advances from the customers, amounts held from principals and amounts held on behalf of Kenyan Government amounting to Rs 1,02,99,091,Rs 43,89,471/- and Rs.1,66,212/- respectively. The authorities below have added the same as income u/s 28(iv) by relying on the decision in the case of Solid Containers Ltd (supra) and T V Sundaram Iyengar and Sons Ltd (supra), whereas as a matter of fact under 18 ITA No.2392/M/2012 section 28(iv) the taxation of benefit and perquisites are dealt with. For the sake of convenience, the provisions of section 28(iv) are reproduced below: “Profits and gains of business or profession.

The following income shall be chargeable to income-tax under the head "Profits and gains of business or profession",— (i); (ii) (iiia) (iv) the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession; The perusal of the aforesaid provision reveals that the section applies for the value of any benefit or perquisite. We therefore find merits in the argument of the ld.AR that where money received or held from the creditors the provisions of section 28(iv) cannot be invoked. The case of the assessee is supported by following decisions: In the case of Alchemic Pvt Ltd(supra), the Hon‟ble Gujarat High Court  has held as under : “7. So far as the question of section 28(iv) of the Act is concerned, section 28(iv) provides that that income falling under clause (iv) of section 28 shall be chargeable to income-tax under the head "Profits and gains of business or profession". Clause (iv) provides:

Therefore, the transaction in the present case being a loan transaction having no application with respect to Section 28(iv) of the Income-tax Act, the same cannot be termed as an income within the purview of Section 2(24) of the said Act. In other words, inasmuch as Section 28(iv) is not applicable to the transactions on hand, it cannot be termed as income which can be made taxable as receipt. Hence, such a receipt which does not have any character of an income being that of a loan cannot be made exigible to tax. In the case of Ahuja Graphic Machinery (P) Ltd, the Mumbai Bench of  the Tribunal has held as under : “6. I have carefully considered the contents of the submission made by the CIT(DR) as also the arguments of the learned counsel for the assessee. I have carefully perused the dissenting order as also the facts of the case which are brought on record in all these orders. On the facts of the case there appears to be absolutely no difference between the members who constituted a Division Bench. Now the only questions whether the amounts in question can be brought to tax under section 28(iv) or under section 41(1) of the Act. Section 28 of the Act gives the items of income that are chargeable to income-tax under the head „Profits and gains of business or profession‟ : Sub-section (iv ) of section 28 which has been taken in aid by the revenue to bring the amount in question to tax as business income reads as under:

We find that the case of the assessee is squarely covered by the ratio laid down by the above mentioned three decisions. Moreover, that these amounts have been verified in the assessment years 2003-04, 2004-05 and 2005-06 by the department in the proceedings under section 143(3) of the Act. The assessee filed returns of income which were accepted by the revenue as is clear from the assessment orders placed by the assessee at pages 66 to 70- AY- 2003-04, pages 71 to 78 for the assessment year 2004-05 and 2005-06. We also find that in the facts of assessee there was no new development which warranted to the tax authorities to take different view than the view so taken by the authorities in earlier years. We find support from the decision of the Hon‟ble Supreme Court in the case of Excel Industries Ltd(supra), wherein it has been held as under : “28. Secondly, as noted by the Tribunal, a consistent view has been taken in favour of the assessee on the questions raised, starting with the assessment year 1992-93, that the benefits under the advance licences or under the duty entitlement pass book do not represent the real income of the assessee. Consequently, there is no reason for us to take a different view unless there are very convincing reasons, none of which have been pointed out by the learned counsel for the Revenue”.

In the result, the appeal of the assessee is allowed. Order pronounced in the open court on 11th May, 2017. Sd sd (D.T.GARASIA) (RAJESH KUMAR) Judicial Member Accountant Member म ुंबई Mumbai; ददन ुंक Dated :11.5.2017 Sr.PS:SRL: