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IN THE HIGH COURT OF KARNATAKA DHARWAD BENCH DATED THIS THE 27th DAY OF NOVEMBER, 2017 PRESENT THE HON’BLE MRS. JUSTICE S.SUJATHA AND THE HON’BLE Dr. JUSTICE H. B. PRABHAKARA SASTRY INCOME TAX APPEAL No.100016/2014 BETWEEN: 1. THE COMMISSIONER OF INCOME TAX, C.R. BUILDING, NAVANAGAR, HUBLI.
THE ASST. COMMISSIONER OF INCOME TAX,
CIRCLE 2(1),
HUBLI.
… APPELLANTS (BY SRI.Y.V. RAVIRAJ, ADV.)
AND:
KARNATAKA VIKAS GRAMEEN BANK,
HEAD OFFICE,
BELGAUM ROAD,
DHARWAD.
…RESPONDENT (BY SRI. A. SHANKAR AND SHASHANK HEGDE, ADVS.)
THIS APPEAL IS FILED UNDER SECTION 260A OF THE INCOME TAX ACT, 1961 AGAINST THE ORDER PASSED IN ITA NO.113/BANG/2012, ON THE FILE OF THE INCOME TAX APPELLATE TRIBUNAL, BANGALORE BENCH ‘C’, THE APPEAL FILED BY THE ASSESSEE FOR THE ASSESSMENT YEAR 2008-09 IS DISMISSED.
2 THIS APPEAL COMING ON FOR ADMISSION THIS DAY, S.SUJATHA J., DELIVERED THE FOLLOWING:
JUDGMENT
This appeal is filed by the Revenue under Section 260A of the Income Tax Act, 1961 (for short, ‘the Act’) challenging the order of the Income Tax Appellate Tribunal, Bengaluru Bench “C” (for short, ‘the ITAT’) in ITA No.113/Bang/2012, dated 28.11.2013 raising the following substantial question of law for consideration:
Whether on the facts and circumstances of the case and in law the Tribunal was right in holding that the addition made by the assessing authority under Section 41(1) of the Income Tax Act, being the addition made an account of stale draft and pay orders when the records of the assessee showed as there was cessation of liability on an amount of Rs.13,94,212?
The respondent-assessee is a regional rural bank engaged in the business of banking and also making investment in Government and other securities. For the A.Y. 2008-09, the assessee filed its return of income declaring a total income of Rs.93,22,72,000/-. The assessment proceedings were taken up by the assessing
3 authority by issuing notice under Section 143(2) read with Section 129 of the Act on 27.08.2010, which came to be concluded by making various additions. Among the various additions made by the assessing authority, an addition made under Section 41(1) of the Act, on account of ‘Stale Draft and Pay orders’ is the subject matter of this appeal.
On the additions made by the assessing authority, the assessee preferred an appeal before the Commissioner of Income Tax (Appeals), which came to be upheld. On further appeal before the ITAT, the additions made by the assessing authority confirmed by the Commissioner of Income Tax (Appeals) was set-aside. Being aggrieved, the Revenue is in appeal.
Sri. Y.V. Raviraj, learned counsel appearing for the Revenue would submit that the Tribunal has grossly erred in not appreciating that the “Stale drafts and pay orders” represented unclaimed amounts of the customers and
4 constituted trading receipt. The ITAT ought to have appreciated that there was cessation of liability to an extent of Rs.13,94,212/-, which was rightly treated by the assessing authority as income of the respondent-assessee under Section 41(1) of the Act.
Sri. A. Shankar and Shashank Hegde, learned counsel appearing for the assessee supporting the order of the ITAT submitted that the amount involving remission of liability which is alleged to have ceased subsequently must be necessarily an item of expenditure or allowance for which the deduction was actually allowed to the assessee towards the liability incurred. In the case of a loan representing money borrowed, no deduction whatsoever is allowed or allowable under any provision of the income tax and therefore the remission of the liability in respect thereof arising from the write off by the creditor and even the credit of such amount by the assessee-debtor to the reserve account cannot attract
5 liability to income tax in the hands of the debtor. The issue has been squarely covered by the decision of the Division Bench of this Court in ITA No.100014/2014 and connected matter (DD 14.12.2015), whereby this Court has answered the substantial question of law in favour of the assessee against the Revenue.
Heard the learned counsel for the parties and perused the material on record.
It is not in dispute that the substantial question of law raised in this appeal is squarely covered by the judgment of this Court rendered by the Division Bench of this Court in the very same assessee’s case for the A.Y.2008-09, in ITA No.100014/2014 and connected matter (DD 14.12.2015), has observed as under: 18. A careful perusal of the above provision leads us to infer that Section 41(1) can be pressed into service when an allowance or deduction is sought to be made in respect of loss, expenditure or trading liability is incurred by the assessee. In the instant
6 case, the sum of Rs.58,38,581/- has remained with the assessee owing to the fact that the payees or holders of the draft/pay orders had not encashed them. The language employed by the legislature being unambiguous, it would be incongruous to construe the said sum as either a loss, expenditure or trading liability incurred by the assessee. While dealing with a situation of unclaimed amount, the Hon’ble Supreme Court in the case of T.V. Sundaram Iyengar, has held as follows:- “12. We are unable to uphold the decision of the Tribunal. The amounts were not in the nature of security deposits held by the assessee for performance of contract by its constituents. As it appears from the facts of the case, the amounts were depleted by adjustments made from time to time. The CIT(A) found that the assessee wrote back to the amounts to its P&L a/c because the various trading parties did not claim these amounts for a long time. The amounts represented credit balances in the name of the trading parties and was taken to its P&L A/c. The CIT(A) held that these amounts were not revenue receipts but were of capital nature. The provisions of Section 41(1) were not attracted in the facts of this case because the assessee’s liability to pay back the amounts to its customers had not ceased. The Tribunal agreed with this view.”
(underlining is by us)
7 19. The Tribunal adverting to the above ruling has rightly deleted the sum of Rs.58,38,581/- added by the assessing authority by holding it as unsustainable in law.”
In view of the aforesaid, the order of the ITAT is justifiable in holding that an amount of Rs.13,94,212/- being shown as liabilities on account of stale draft shall not be treated as income liable for tax under Section 41(1) of the Act. The substantial question of law raised by the Revenue is answered in favour of the assessee and against the Revenue. The appeal stands dismissed.
Sd/- JUDGE
Sd/- JUDGE
JTR