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Income Tax Appellate Tribunal, “C” BENCH, MUMBAI
Before: SHRI MAHAVIR SINGH, JM & SHRI MANOJ KUMAR AGGARWAL,
Date of hearing 26-07-2016 Date of pronouncement 10-08-2016 O R D E R PER MANOJ KUMAR AGGARWAL (AM) : The instant appeal has been filed by Revenue for Assessment Year 2009-10 assailing the order of Commissioner of Income Tax (appeals)- 19 [CIT(A)], Mumbai on the following Grounds of Appeal:-
1. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) is right in deleting the addition made u/s. 41(1) of Rs. 4,11,27,086/- without appreciating the fact that assessee was not able to produce confirmation for the said amount.
2. Whether on the facts and in the circumstances of the case and in law, the Ld.CIT(A) is right in deleting the addition of Rs. 21,19,41,871/- being 15% of the total expenses claimed, despite the fact that the assessee could not produce evidence to support the admissibility of these expenses u/s. 37(1) of the Income-tax Act, 1961, in spite of opportunities given.
3. The appellant prays that the order of the CIT(A) on the grounds be set aside and that of the Assessing Officer to be restored.
The facts in brief, are that the assessee is a Resident company who had filed its Return of Income for A.Y. 2009-10 during September 2009. The case was selected for scrutiny and assessment u/s. 143(3) thereof was completed by Assessing Officer (‘AO’) vide order dated 23.12.2011. The assessee declared the loss of Rs. 13,07,21,418/- in return of income which was recomputed at income of Rs. 14,68,55,429/- after making certain additions and disallowances. The assessee was engaged in the business of manufacturing of steel profiles and coils during assessment year in question. It obtained unsecured loans from agents/dealers amounting to Rs. 9,48,44,079/-, the details and confirmation of which was called for by the AO. The assessee failed to file the requisite confirmation in respect of unsecured loans amounting to Rs. 4,11,27,086/- and accordingly, AO treated the same as income of the assessee and made additions under section 41(1). Similarly, assessee failed to file supporting documents in respect of various expenses viz. salary, electricity, water charges etc. and simply furnished bifurcation of these expenses despite being provided with several opportunities to substantiate the same.
Therefore, a blanket / adhoc disallowance of 15% of these expenses was made by AO and completed the assessment.
Aggrieved, the assessee preferred first appeal before CIT(A) which was disposed off partly in favour of assessee by CIT(A) vide its order dated 23.07.2012. With respect to addition u/s. 41(1), the assessee contested that unsecured loans represent capital transactions and section 41(1) has no applicability to such transactions. Further, there is no cessation of unsecured loans and the same remain repayable and liability thereof has not ceased. The assessee relied on judgment of Supreme Court in the case of CIT Vs. Sugauli Sugar Works Pvt. Ltd. (1999) 236 ITR 518 wherein it was observed that unless there is a cessation of liability, income cannot be added as per the provisions of section 41(1) of the Act. To apply section 41(1), two things have to be established concurrently:-
(i) the explicit remission of the liability as against the presumed or unilateral. (ii) the liability must have been incurred for expenses, which must have been debited to profit & loss account in preceding years.
In the case of assessee, none of the events took place. The submission of the assessee found favour with the CIT(A) and addition on this account were deleted.
Similarly, the assessee made various submissions to reconcile the expenses claimed u/s. 37(1).
He filed the detailed submissions as to expenses incurred on purchase of raw material, manufacturing expenses and other expenses and elaborately explained and substantiate its claim to explain the nature as well as amount of expenses. Upon perusal of submission, CIT(A) allowed substantial relief to assessee on this account and disallowed only 5% of miscellaneous expenses which amounted to Rs. 8,40,718/- thereby providing major relief to the extent of Rs. 21,11,01,153/- to the assessee on this account.
Aggrieved by the stand of the CIT(A), Revenue is in appeal before us.
First, we take up issue of addition u/s. 41(1) made by AO aggregating to Rs, 4,11,27,086/-. The facts which can be culled out from the assessment proceedings are that the assessee has obtained unsecured loans from various parties, the confirmation of which he failed to produce. Nevertheless, it is nowhere disputed that the liability in respect thereof has ceased to exist. CIT(A) has observed that these represents loan transaction and the assessee has not purchased any merchandise from these parties. At this juncture, it would be prudent to reproduce the relevant portion of Section 41(1) which reads as follows:-
41(1) Where an allowance or deduction has been made in the assessment for any years 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,- (a) The first-mentioned person has obtained whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtained by such person or the value of benefit accruing to him shall be deemed to be profits and gains of business or profession and accordingly chargeable to Income-tax as the income of the previous year, whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not; or…….
Therefore, addition u/s. 41(1) can be made only in respect of remission or cessation of trading liabilities, the allowance or deduction of which has been made in the assessment for any year.
The same is not the case here. The Learned counsel for the revenue fairly conceded that this section has no applicability in the instant case but addition can be sustained in other sections viz.
Section 68 etc. The unsecured loan obtained by the assessee are capital in nature and do not represent any trading liability, the deduction of which has been allowed to assessee. Further, the revenue has failed to prove the remission or cessation thereof. So, section 41(1) has no applicability in the case of the assessee. Resultantly, addition made on this account has rightly been deleted by CIT(A) and the same is affirmed by us. To examine whether the addition can be sustained in other sections / provisions is beyond the scope of the subject matter of this appeal.
Regarding disallowance of expenses u/s. 37(1) of CIT(A) has allowed substantial relief to assessee after considering the detail submissions of the assessee in this regard. These submissions were not before AO and these constitute additional evidences for which opportunity should be provided to AO for examination.
Therefore, this issue of disallowance of expenses is remitted back to the AO so as to afford another opportunity to revenue in this regard.