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Income Tax Appellate Tribunal, “B” BENCH, KOLKATA
Before: Shri P.M. Jagtap , & Shri S.S.Viswanethra Ravi
This appeal of the revenue arises out of the order of the CIT(A)-XXX, Kolkata in Appeal No. 152/CIT(A)-XXX/Wd-10(1)/2011-12 dated 20-11-2012 for the assessment year 2007-08 against the order of assessment framed u/s. 143(3) of the Income Tax Act, 1961 (hereinafter referred to as the ‘Act’).
The revenue has raised the following grounds of appeal :- 1) On the facts and in the circumstances of the case Ld. CIT(A) has erred in holding that the liability of the assessee in respect of wages has not ceased to exist.
2) On the facts and circumstances of the case Ld. CIT(A) has erred in holding that liability in respect of Investment Allowance Reserve was not claimed in the P&L Account, and hence could not be added u/s. 41(1) of I.T. Act 1961.
1 M/s. The Bihar Cotton Mills Ltd
3) On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in appreciating the merits of the case.
Brief history is that the assessee did not carry out any business activity during the year under consideration and declared at NIL income through its return of income filed on 08-01-2008.
During the course of assessment that the assessee has shown liability of Rs.42,48,307/- under Schedule-7 in audited balance sheet out of which AO found that the Rs.22,18,360/- as other miscellaneous liabilities. The finding of the AO was that the assessee failed to furnish the details of such miscellaneous liabilities. He added the same by treating it ceased liability.
In appeal before the CIT-(A), the assessee submitted that the said liability or miscellaneous liability is existing and the same has not ceased to exist and it was submitted that its Auditor prepared and consolidated all liabilities relating to the workers under different heads of expenses into one head i.e. Other Miscellaneous Liability. Further, the factory of the Assessee was taken over by the Bihar State Financial Corporation on 01.04.1981 and the liabilities are very much in existence as on that date and the amount is still payable to each worker in accordance with a detailed list prepared as outstanding a copy of which examined and acknowledged by the CIT-A in the course of Appeal proceedings. After considering the submissions of the assessee, the CIT-A has opined as under:
2.2 The submissions of the Appellant have been considered and it is seen that the said liability i.e. miscellaneous liability mentioned by the AO is on account of unpaid wages etc. i.e the prior period expenses the total of 2 M/s. The Bihar Cotton Mills Ltd which was Rs.22,18,360/- as on 31-3-2007 and that the details of the same had been filed before the AO. It is further seen that there was no complete cessation, as the amounts are still payable to the workers by the Appellant company and the claims for which has not been forgone by the claimant i.e. the workers. Therefore the same cannot be considered as cessation of liability even if recovery is barred by limitation. It is further seen that the decision Kohinoor Mills Co. Ltd. Vs. C.I.T is directly applicable in the case of the Appellant wherein it was held that even though recovery of any claim wages was barred by limitation, legally debt subsisted and hence there was no cessation of liability. The amount therefore, could not be added to the income. Further the facts in the case of the Appellant wherein it is seen that the liability is towards the workers etc. and is still existing therefore there is no cessation of liability. Accordingly considering the facts in the case of the Appellant and the decision in the above mentioned case laws it is held that the liability of Rs.22,18,360/- classified his miscellaneous liability could not be considered to have ceased u/s. 41(1) of the I.T.Act and therefore the addition made by the AO was not justified and the same is deleted.(Relief Rs.22,18,360/).
The revenue before us submitted that the assessee did not file any kind of details of liability before the AO, but, the assessee filed details of outstanding payable to the workers before the CIT-(A). On which CIT(A) has given relief to the assessee, which is against to the procedure contemplated under Rule 46A of the I.T Rules 1962 and prayed to send back the issue to the file of the AO for verification of such details, in turn, the ld.AR of the assessee also submits, in fact, all the details were available before the AO, but could not note down on which date it was filed before the AO. The Ld. AR of the assessee drew our attention to page no.3 of the paper book and conceded no objection in remanding the issue to the file of AO for verification.
We find that the details of relevant liabilities were not produced by the assessee before AO and the same furnished before CIT(A) for the first time were relied upon by him to give relief to the asessee without giving any opportunity
3 M/s. The Bihar Cotton Mills Ltd to AO. There is, therefore, violation of Rule 46A and this position is not disputed even by Ld. A/R. We, therefore, set aside the matter to AO. Accordingly, ground no.1 is allowed for statistical purposes.
Regarding ground no-2, the AO found that an amount of Rs.10,50,000/- under the head investment allowance reserve and. The AO added the same by treating it ceased liability on the ground that the amount of Reserve has not been utilized for acquiring ‘plant & machinery’ within the period of 8 years from the date of creation and for not filing any evidence by the assessee.
On appeal, the CIT(A) after considering the submissions of the assessee held as under:-
“3.1 In Appeal it has been submitted that the reserve was created in A.Yr. 1977-78 and if the provision of law is strictly adhered to then addition should have been made in 1977-78 and not in the current year. Further that the addition of this amount u/s. 41(1) is not tenable in law because the said "Reserve" was not created by an allowance or deduction made in assessment for any year in respect of loss, expenditure or trading liability incurred by the Appellant. Reliance was also placed on the decision of the Kolkata High Court in CIT Vs. A. Tosh & Sons (P) Ltd. in 107 CTR 233. The Appellant also filed photocopy of Audited Accounts for Financial Years 1975- 76 as well as 2006-07 indicating the "Reserve and Surplus" and current liability.
3.2 The submissions of the Appellant have been considered and it is seen that the Reserve in question i.e. the Investment Allowance, Reserve was not created by a deduction or claim in the Profit&' Loss Account. Therefore the addition made by the AO u/s. 41(1) is not justified as the same did not relate to trade or any other liability and not in respect of any loss or expenditure in the Profit & Loss/trading
4 M/s. The Bihar Cotton Mills Ltd liability. Further in view of the. decision of the decision of the Kolkata High Court in CIT Vs. A. Tosh & Sons (P) Ltd., supra where the Hon'ble High Court has held that the assessee having, never claimed any deduction in respect of sums credited in P&L Account provision of section 41(1) could not be applied. Therefore the addition of this amount u/s 41(1) by the A.O is not justified because the 'Reserve' was not created by an allowance or deduction in any year in respect of any Loss, Expenditure or Trading Liability incurred by the Appellant. Therefore the addition made by the AO is not justified and the same is deleted (Relief Rs. 10,50,000/-).
Before us, the Ld. DR submits that as per section 32A which under dispute is discontinued. It ceased to exist. However, he relied on the order of the AO. The Ld.AR submits that the assessee created a provision for investment allowance reserve. The assessee did not avail any deduction on such reserve.
Heard rival submissions and perused the relevant material on record. We find Sub-Section (1) of Section 32A is clear that there shall be a deduction equal to the 25% of actual cost of machinery or plant installed in the immediately succeeding previous year that in respect of investment reserve created for the business purpose. Sub-Section (6) of Section 32AB defines that if, said investment reserve is not utilized within the specified time and the same is deemed to be profit and gain of business of that previous year. In the present case, the said amount appears to be created in the A.Y 1997-78 debiting to the P & L account and there was no dispute that the factory of assessee was taken over by the Bihar State Financial Corporation on 01.04.1981, then the question would arise whether the AO could add a sum of Rs.10,50,000/- as ceased liability u/s 41(1) of the Act. In our opinion, the AO can add the same as deemed profit and gain of business of that previous year under Sub-Section (6) of Section 32AB of the Act. In the present case investment reserve was created in the A.Y 1997-78 and there was no business
5 M/s. The Bihar Cotton Mills Ltd activity of the assessee since 01-04-1981 and the AO can not treat the unutilized investment reserve as deemed profit and gain of business of the year under consideration i.e 2007-08 under Sub-Section (6) of Section 32AB of the Act and the addition under section 41(1) of the Act can not be applied taking into consideration that the assessee was not claimed any deduction in respect of amount Rs. 10,50,000/- under the head investment allowance reserve credited to Profit & Loss account, Therefore, we find no infirmity in the order of CIT-A in finding that the addition of amount Rs. 10,50,000/- u/s 41(1) of the Act by the A.O is not justified as the investment reserve was not created by an allowance or deduction in any year in respect of any Loss, Expenditure or Trading Liability incurred by the assessee. Thus, ground-2 fails, accordingly, the same is dismissed and addition of Rs. 10,50,000/- is deleted.
In the result, the appeal of the revenue is partly allowed for statistical purposes.
THIS ORDER IS PRONOUNCED IN OPEN COURT ON 08 /06/2016