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Order under section 254(1) of Income Tax Act PER PAWAN SINGH JUDICIAL MEMBER: 1. This appeal u/s 253 of Income Tax Act (‘Act’) is directed by the assessee against the order of Commissioner (Appeals) 31, Mumbai, dated 11 July 2014 26 for AY 2008-09. The assessee has raised following grounds of appeal: (i) The learned CIT(A) erred in concluding that liability of Rs. 6,34,12,696/- due to Paradigm Geophysical Sdn Bhd Malaysia has ceased to exist on 31 March 2008 and hence confirming the addition of AO of this amount to the total income of assessee in the relevant assessment year. (ii) Without prejudice to the above, the learned Commissioner (Appeal) erred in confirming the action of AO in not allowing a deduction under section 10A on the amount of Rs. 6,34,126,96/- added by him without appreciating that the remission of liability form part of section 41(1) and hence the same is required to be considered in computing deduction under section 10A.
2. The brief facts of the case are that the return of income was filed by assessee on 30 September 2008 declaring total income at Nill under the normal provision and M/s Paradigm Ggeophysical (I) Private Limited AY 2008-09 taxable income at Rs. 28,85,008/-under the computation of book profit. The assessment was completed under section 143(3) on 31st of January 2012. While framing assessment the AO besides the other addition made the disallowance on account of cessation of liability of Rs. 8,44,05,218/-. Aggrieved by the order of AO assessee filed appeal before Commissioner (Appeals). The Commissioner (Appeals) after considering the contention of the assessee restricted the disallowance at Rs. 6,34,12,696/- holding that an amount of Rs. 2,09,92,522/- has already disallowed by the assessee under section 40(a) in A Y 2007-08, and directed the AO to verify the facts from the record and in case the same is found correct the appropriately relief may be allowed to the assessee after verification of fact. Further aggrieved by the order of Commissioner (Appeal) the assessee has filed the present appeal before us.
We have heard the ld AR of the assessee the ld DR for the revenue and perused the material available on record. The learned AR of the assessee argued that the remission letter from Paradigm Geophysical Sdn Bhd Malaysia confirming the crystallization of remission clearly shows that the cessation occurred only in the financial year 2008-09. The income arising of cessation of liability would arise only in the financial year 2008-09 (Assessment Year (2009-10) and not in the year under consideration. The ld AR for assessee further argued that the decision of remission was taken only after the management discussion in June/ July 2008, which is duly disclosed in the letter dated 21st August 2008. It was further argued that in the letter dated 21 August 2008 it is clearly demonstrated that the debt was existing in the books of creditor as on 31st mark 2008 and was waived only in June/July 2008. This letter was submitted before AO during the assessment proceedings as well as before ld Commissioner (Appeals) and the same was not considered by them. With regard to the notes of account the ld AR of the assessee argued that the contention regarding the AS requirement under the companies act was not disputed by the revenue authorities. On the other hand ld DR for revenue supported the order of authorities below and would argue that the remission letter M/s Paradigm Ggeophysical (I) Private Limited AY 2008-09 submitted by the assessee does not contain any date. The assessee has used this document as per their convenience. The remission of liability/transaction is between the associated enterprise who had a joint economic interest. The assessee has adopted a device by taking the liability easily to subsequent assessment year with a view to avoid the tax.
We have considered the rival contention of the parties and gone through the orders of authorities below. The AO while framing assessment noticed that assessee book Management Fees and other expenses charged by Paradigm Geophysical Malaysia (PMG) (group company) prior to Financial Year 2007-08 amounting to Rs. 8,44,05,218/-which was outstanding as on 31 March 2008. In August 2008 PGM allegedly informed the assessee that outstanding amount is no longer payable and it has been waived off. The affect has been given to the financial statement for the year ended on 31 March 2008 for this event and the income and profit before tax would have been higher by Rs. 8,44,05,218/-. The AO issued show cause notice to the assessee as to why this income should not be taxed during the current year as liability ceased to exist during the ongoing year itself. The assessee submitted its reply and contended that remission letter from Paradigm Geophysical Malaysia confirming that crystallization on remission occurred only in Financial Year 2008- 09, the same would be and has been considered as income only for Financial Year 2008-09. The contention of the assessee was not accepted by AO concluding that it is a transaction between Associated Enterprises who would have joint economic interest. The AO also concluded that by shifting the income to the subsequent assessment year in which the assessee has returned a loss of Rs. 10,59,90,776/- thus the assessee has managed to get off without paying any tax. Before the Commissioner (Appeals) the assessee contended that the assessee out of the Management Fees of Rs.8,44,05,218 /- an amount of Rs. 2,09,92,522 /-has already disallowed in AY 2007-08 and the addition have been erroneously. The assessee in alternative contended that AO not allowed the deduction under section 10A to the extent of Rs. 1,76,70,396/-. During the first appellate proceeding it was also M/s Paradigm Ggeophysical (I) Private Limited AY 2008-09 contended that AO made the addition on account of cessation of liability by adopting colorable device holding that liability no longer payable in the subsequent Assessment Year i.e. 2009-10. The ld Commissioner (Appeals) after considering the contention of the assessee concluded as under:
“ 7.3. I have considered the facts of the case, submission of the appellant vis-a-vis is the observation of AO, in the order under section 143(3) of the Act. The contention and the submission of the appellant are being discussed and decided as under: i. The appellant has relied upon AS4 and is stated that the auditor has even the information relating to the waiver of liability in compliance thereof. In this regard at it is mentioned that as per para 8.2 of AS2(which has been reproduced by the appellant in its submission as above), adjustment to the asset and liability are required for events occurring after the balance-sheet that provide additional information materially affecting the determination of amounts relating to conditions existing at the balance-sheet date. In view of this specific provision in the accounting standard itself, even if the contention of the appellant that waiver took place after balance-sheet, the adjustment was required to be made by filing computation of income along with the return. Contention of the appellant is therefore not acceptable. ii. The appellant further stated that it has provided documents which prove the liabilities stood as on 31.03.2008 and the same was waived in August 2008. In this regard it is mentioned that assessing officer on page 3 of his order has referred to the undated letter which is being relied upon by the appellant. A copy of this letter has been produced before me during the course of appellate proceedings. On perusal of the same it is noted that this letter does not bear the date and hence cannot be entertained as evidence that the waiver took place after 31.03.2008. Further, in the said letter there is no reference of meeting held in June/July 2008. Despite affording opportunity to the appellant during the course of assessment proceeding and also during the appeal proceeding before me, it failed to provide copy of minutes of so-called meeting held in June/July 2008 and accordingly, the contention of the appellant that the waiver took place after 31.03.2008 remains unsubstantiated. The case law relied upon by the appellant are based on the facts distinguishable to that of the appellant and hence the ratio is not applicable on the facts of the appellant’s case. Contention of the appellant is therefore not acceptable. iii. The appellant has contended that the AO has nothing on record to prove that the remission of liability took place in the current year. In this regard it is mentioned that the onus is on the appellant to prove that it’s claim of the liability being written off in the next financial year is correct. As mentioned earlier, the appellant has failed to prove the same with documentary evidence and hence this contention of the appellant is not acceptable. iv. The appellant had stated that it has no colorable device to avoid tax as claimed by the AO. In this regard, it is mentioned that the reference has been drawn by the AO observing that by shifting the taxability of the amount waived to next year 4 M/s Paradigm Ggeophysical (I) Private Limited AY 2008-09 when there is a loss, the assessee has made an attempt to avoid the tax in this year. This inference has also been drawn by AO observing that the transaction is between associated enterprises who would have a actual economic interest, the assessee has not submitted any proof for any meaningful negotiation for having taken place which resulted in crystallization of remission of liability, and also based on account of the inability of the appellant to prove that the waiver did not take place in the current financial year. Hon’ble Bombay High Court in case of Killick Nixon Ltd Versus DCIT 81 CCH 066 on similar facts observed that whenever there is reason to believe that the appellant is not real, then they taxing authorities are entitled to look into surrounding circumstances to find out the reality and apply the test of human probabilities. The judgment of Hon’ble Supreme Court in Vodafone International Versus Union of India makes it clear that a colorable device cannot be part of tax planning. Such transaction cannot be considered to be a part of tax planning or legitimate avoidance of tax liability. The case law relied upon by the appellant are not with the reference to section 41(1) and hence not applicable to the facts of the appellant’s case. In view of these facts and legal position, contention of the appellant is rejected. v. The appellant without prejudice submitted that out of the management fees of Rs. 8,44,85,218/-an amount of Rs. 2 099 2522/-was already disallowed by the assessee under section 40(a) in AY 2007-08 on account of non-deduction of TDS and hence same has resulted into double disallowance. The AO is directed to verify this fact from records and in case the same is found correct, appropriate relief may be allowed to the appellant after due verification of facts.”
With the above observation, we have noticed that the ld Commissioner (Appeal) consider all relevant material and granted adequate relief available to the assessee. The various decisions placed on record by ld AR of the assessee are factually different, ratio of which are not applicable on the peculiarities on the facts of the present case. Hence, we do not find any infirmity in the order for our interference.
The assessee in alternative raised Ground No. 2 in the present appeal that ld Commissioner (Appeals) erred in confirming the action of AO in not allowing proportionate deduction under section 10A.
The ld AR of assessee has not argued anything in support of this ground of appeal
except filing a written note. Thus the ld DR has no option to controvert the submission of assessee.
8. We have perused the order of authorities below. The assessing officer in para 5 of his order has considered the applicability of section 10A and disallowed holding that section 10A would apply only to the income that has been brought 5