ACIT vs. SHRI. S.V. BHARATH, BANGALORE

Facts apropos are that assessee had filed return for the impugned assessment year declaring loss of Rs.11,06,692/-. AO during the course of assessment found that there was a credit of Rs.41,25,123/- in the capital account of the assessee. Through this credit assessee had squared up unsecured loan of an equivalent amount. AO was of the opinion that there was extinguishment of liability to that extent and he made an addition of Rs.41,25,123/-.

In its appeal before the CIT (A), argument of the assessee was that it had approached banks and financial institutions for loan and for the purpose of showing a healthy financial position before such authorities, included a part of the unsecured loans from the creditors in the capital account of the proprietor. As per the assessee loan creditors were all proved and confirmations filed. Since the loan creditors were genuine, argument of the assessee was that transfer of such loan creditors from unsecured loans to capital account of the proprietor did not generate any real income.

CIT (A) was appreciative of these contentions. According to him, there was an opening balance of Rs.30.09 lakhs against nine creditors and there were fresh credits of Rs.70.05 lakhs from twenty creditors during the ITA.134/Bang/2014 Page - 3 relevant previous year. Assessee had repaid a sum of Rs.96.45 lakhs during the relevant previous year and the balance remaining at the end was Rs.4.5 lakhs, due to seven creditors. As per the CIT (A), the sum of Rs.96.45 lakhs included Rs.41,25,123/- which was a transfer from loan account to the capital account of the assessee, and which did not reflect any actual repayment. According to him it was only a window-dressing of the financial statements attempted by the assessee and did not represent any income at all. He deleted the addition made by the AO.

Now before us, Ld. DR submitted that Section 41(1) of the Act, squarely applied. According to him assessee could not demonstrate that there was no cessation of liability by the act of transferring the loans due to its creditors to the proprietor’s capital account.

Nobody appeared on behalf of the assessee.

We have perused the orders and heard the contentions of the Ld. DR. Section 41(1) of the Act, read as under : Section 41 (1) Where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee (hereinafter referred to as the first-mentioned person) and subsequently during any previous year,— ITA.134/Bang/2014 Page - 4

In our opinion, none of the authorities have verified whether the ingredients required to be satisfied as per the above section, for invoking it have been satisfied. No verification has been done whether the loans which got squared up due to the transfer from creditors’ account to the proprietor’s capital account represented any expenditure for which deduction was claimed by the assessee in any earlier assessment years. We are therefore of the opinion that the matter requires a fresh look by the AO.

In the result, appeal of the Revenue is allowed for statistical purposes.