The Commissioner of Income Tax - I vs. Aditya Music (India) Ltd.

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT THE HONOURABLE MR.JUSTICE K.VINOD CHANDRAN & THE HONOURABLE MR.JUSTICE ASHOK MENON WEDNESDAY, THE 16TH DAY OF JANUARY 2019 / 26TH POUSHA, 1940 ITA.No.248 of 2012 AGAINST THE ORDER IN ITA 434/COCH/2010 OF I.T.A.TRIBUNAL, COCHIN BENCH, COCHIN. [ASSESSMENT YEAR 2007-08] APPELLANT/APPELLANT: THE COMMISSIONER OF INCOME TAX, KOTTAYAM. BY ADV. SRI.JOSE JOSEPH, SC, FOR INCOME TAX RESPONDENT/RESPONDENT: LATE SRI RAJESH KUMAR T.R., REPRESENTED BY LEGAL HEIR SMT.UMA MAHESWARI, M/S.VEERIAH REDDIAR, ALAPPUZHA-688011. BY ADV.SRI.S.ARUN RAJ OTHER PRESENT: SRI P.K.R. MENON, SENIOR COUNSEL, GOI (TAXES). THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 16.01.2019, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING:

ITA.No.248 of 2012 - 2 - JUDGMENT Vinod Chandran,J.: The question of law raised in this appeal arises from an order of the Tribunal, which confirmed the addition made of Rs.75 lakhs to the capital account of the assessee. The addition was said to be a gift made by the maternal uncle of the assessee. However, the Assessing Officer [for brevity “AO”] found that the maternal uncle and the assessee had business transactions and there was supply made by the proprietorship firm of the maternal uncle to the assessee's firm. There was an outstanding credit balance of Rs.72,55,783/- in the account of the maternal uncle as maintained by the assessee. The assessee, on crediting the capital account in the subject year of Rs.75 lakhs, also debited the business account of the maternal uncle; thus wiping off the outstanding credit of Rs.72,55,783/-. 2. The AO issued notice proposing an addition under Section 41(1) of the Income Tax Act, 1961 [for brevity “the Act”]. The assessee replied that Rs.75 lakhs was a gift from the maternal uncle and also produced a confirmation letter to that end. The AO, however, refused to accept the claim of the assessee that Rs.75 lakhs was a mere gift. The first appellate authority also confirmed the

ITA.No.248 of 2012 - 3 - additions made by the AO. The Tribunal, however, found that if actually a cheque was given as gift, then there would have been no addition made as remission of trading liability. It was also found that there was no requirement that there was no adverse business situation faced by the assessee's business concern to find a remission of trading liability. 3. Another Division Bench of this Court has raised the following questions of law by order dated 05.11.2013: “(1) Whether, on the facts and in the circumstances of the case and considering the reality of the situation, is not the Assessment under Sec.41(1) valid and in accordance with law? (2) Whether, on the facts and in the circumstances of the case and after having found that “the book entry passed by the assessee by reducing the creditor's balance and increasing the assessee's capital balance”, “to be considered for the purpose of invoking the provisions of section 41(1) of the Act”, the Tribunal is right in law in not taking the findings to the legal and logical conclusion, holding that the same “is not the only criteria”, and is not the above approach and the findings in paragraph 12 of the order uncalled for, extraneous to the issue and perverse? (3) Whether, on the facts and in the circumstances of the case and in view of the fact that the

ITA.No.248 of 2012 - 4 - assessee had a trading liability of Rs.75.55 lakhs to the donor, is not the so-called gift of Rs. 75,00,000/- received by the assessee in the nature of remission of liability and taxable under Section 41(1) of the Income Tax Act? (4) Whether, on the facts and in the circumstances of the case and nomenclature being irrelevant and “the taxing authorities were not required to put on blinkers”; “entitled to look into the surrounding circumstances to find out the reality (82 ITR 540 at 545 (SC), the Tribunal is right in law in interfering with the assessment of Rs. 75,00,000/- invoking section 41(1) of the Income Tax Act? (5) (a) Whether the Tribunal is right in law in putting the burden of proof on the Revenue, and is not such an approach and the conclusion in paragraph 12, extraneous unwarranted, uncalled for and perverse? (b) Did the assessee discharge the burden of proof? (6) Whether, on the facts and in the circumstances of the case, is not the approach and findings of the Tribunal in paragraph 12 of the order circumlocutory and perverted and the conclusion equally perverted, quixotic, strange and illegal?” 4. Section 41(1) of the Act specifically speaks inter alia of a deduction made in the assessment for any year in respect of a trading liability incurred by the

ITA.No.248 of 2012 - 5 - assessee to be deemed to be profits and gains of business or profession and accordingly chargeable to income tax. In the subject assessment year, obviously the assessee had made book adjustments insofar as the outstanding credit in the business account of the creditor firm being wiped off on the basis of a credit made to the capital account of the assessee. In such circumstances, the confirmation letter as produced by the assessee can only be treated to be an afterthought insofar as absolving the liability under Section 41(1). We hence, uphold the assessment under Section 41(1) and we hold that existence of adverse business situation is not a requirement under Section 41(1) to find remission of trading liability. We answer the questions of law in favour of the Revenue and against the assessee; but, however notice that the assessee had raised a contention that the liability as seen from the account of M/s.Veeriah Reddiar cannot be fully considered as a trading liability. It is also to be noticed that the remission of trading liability can be deemed to be an income arising from the profit and loss accounts only to the extent of the actual credits outstanding in the creditors account wiped off on the basis of the book adjustments made by the assessee. Further, the question whether there is any liability other than a trading liability insofar as the

ITA.No.248 of 2012 - 6 - outstanding credits found in the account of M/s.Veeriah Reddiar also has to be verified by the AO. Though we find the assessment made under Section 41(1) to be proper, we remand the matter to the AO for the limited purpose of limiting the addition under Section 41(1) to that of the trading liability wiped off from the account of M/s.Veeriah Reddiar. The assessee shall produce sufficient material to substantiate the liability having arisen other than under trade between the two. Appeal allowed with a remand to the limited extent of ascertaining the actual quantum to be made addition of as remission of trading liability under Section 41(1). Parties to suffer their respective costs. Sd/- K.VINOD CHANDRAN JUDGE Sd/- ASHOK MENON JUDGE Vku/-

ITA.No.248 of 2012 - 7 - APPENDIX APPELLANT'S ANNEXURES: ANNEXURE-A ASSESSMENT ORDER U/S.143(3) OF INCOME TAX ACT 1961 DATED 28/12/2009 ANNEXURE-B ITA-44/CIT(A)-IV/KTM/09-10 DT.21/4/2010 ANNEXURE-C ITAT'S CERTIFIED ORDER IN ITA NO. 434/COCH/2010 DATED 5/7/2012. [ true copy ]