ITO 8(1)(2), MUMBAI vs. BELA INVESTMENT & FINANCE CO. LTD, MUMBAI

1. The learned Commissioner of Income Tax (A) erred in confirming the addition of Rs.13,12,608/- u/s.41 of the Act through liabilities were in existence as on balance sheet date.

2. The learned Commissioner of Income Tax (A) erred in confirming the addition of the above liabilities though the said liabilities are not written back in Books of Account and the liability remains to be payable on demand and in fact were paid in respect of three parties and copies of accounts were filed during the hearing before Commissioner of Income Tax (A).

3. The learned Commissioner of Income Tax (A) erred in confirming the addition of the outstanding balances of the above parties u/s.41 though the appellant had never claimed any allowance and / or deduction in respect of the said liabilities in the earlier year/s

4. The learned Commissioner of Income Tax (A) erred in confirming the disallowance of depreciation of Rs.15,847/- on Deep Freezer.

5. The appellant craves leave to add, amend, modify, substitute, and or cancel any of the grounds of appeal”

4 and 3702/Mum/2016 5. The issue raised in grounds of appeal no.1,2 and 3 is against the confirmation of addition of Rs.13,12,608/- by the ld.CIT(A) as made by the AO u/s 41 of the Income Tax Act, 1961 in respect of liabilities in existence as on balance sheet date and were paid in the subsequent years.

6. During the course of assessment proceedings, the assessee was called upon for details of sundry creditors as on the date of end of the financial year which were duly filed by the assessee along with the confirmations. However, the AO noted that the parties in respect of Alpic A/c Rushabh, Alpic A/c Grrenwood, Deepak Jawalkar and Warna Industries Ltd, the assessee did not file any confirmations and accordingly, the AO issued show cause notice to the assessee dated 27.11.2012 calling upon the assessee as to why the said creditors should not be added u/s 41(1) of the Act to the total income of the assessee treating it as income of the assessee for which no explanation was offered by the assessee and accordingly added the same to the total income of the assessee. Aggrieved by the order of AO, the assessee preferred an appeal before the ld.CIT(A) who also confirmed the said addition by relying on the various decisions and passing a very detailed order after considering the submissions and contentions of the assessee. The ld. CIT(A) primarily relying on the decision of the Hon’ble Jurisdictional High Court in the case of CIT V/s General Electrodes and Equipment Ltd (1985) 155 ITR 78 (Bom) and the decision in the case of Protes Engineers Co.Pvt Ltd V/s CIT 5 and 3702/Mum/2016 (1995) 211 ITR 919 (Bom) by holding that there was a direct nexus with the business of the assessee of these unclaimed balances and therefore covered under the provisions of section 28(iv) of the Act as benefit accrued from the business of the assessee. Accordingly, the ld.CIT(A) confirmed the action of the AO. Further aggrieved by the order of ld.CIT(A), the assessee is in appeal before this Tribunal.

7. Before us, the ld.AR vehemently submitted that the balances were outstanding in the books of account on the last day of financial year and were in fact outstanding and paid subsequently and therefore, the ld.CIT(A) has grossly erred on facts and in law in confirming the addition as made by the AO u/s 41(1) of the Act by going step further by holding that the said unclaimed balances were the benefit accruing to the assessee and were covered under the provisions of section 28(iv) of the Act. The ld. AR further argued that so long as the liability shown in the balance sheet it should not be treated as either cessation of liability in terms of provision of section 41(1) of the Act or benefit accruing under section 28(iv) of the Act and therefore, the ld.AR vehemently prayed before the Bench that the order of ld.CIT(A) deserved to be reversed and AO be directed to delete the addition.

6 and 3702/Mum/2016 9. We have carefully considered the rival contentions and perused the materials placed before us including the orders of authorities below. We find that the balances which were outstanding on the date of balance-sheet were treated as income of the assessee under section 41(1) of the Act by treating the same as ceased liability and the ld.CIT(A) upheld the addition made by the AO by treating the same as benefit accruing to the assessee from the business u/s 28(iv) of the Act. In our opinion, the ld.CIT(A) has failed to appreciate the fact so long as the liability as shown in the balance sheet at the end of the year the same cannot be considered as benefit accruing to the assessee specially when these were paid in the subsequent years by the assessee. It is a settled legal position that so long the liability is shown as payable the same cannot be treated as ceased to exist. Under these circumstances, we are not in agreement with the ld.CIT(A) that the creditors in respect of which the assessee did not file any confirmations were benefit accrued to the assessee u/s 28(iv) of the Act. Accordingly, we are inclined to set aside the order of First Appellate Authority and direct the AO to delete the addition. Resultantly, the appeal of the assessee is allowed.

I.T.A. No.3702/Mum/2016

Order pronounced in the open court on 24th April, 2017.