Delhi H.C : The AO under the provisions of s. 41(1) of the IT Act, 1961 (hereinafter referred to as the ‘said Act’) on account of alleged cessation of liability

High Court Of Delhi

CIT vs. Saden Vikas India Ltd.

Section 41(1)

Asst. Year 2002-03

Badar Durrez Ahmed & Siddharth Mridul, JJ.

IT Appeal No. 14 of 2010

15th January, 2010

Counsel Appeared :

Subhash Bansal, for the Appellant : None, for the Respondent

JUDGMENT

BADAR DURREZ AHMED, J. :

CM 198 of 2010 The delay in refiling the appeal is condoned. This application stands disposed of. IT Appeal No. 14 of 2010 The Revenue is aggrieved by the Tribunal’s order dt. 14th Nov., 2008 passed in ITA No.4233/Del/2005 in respect of the asst. yr. 2002-03. The CIT(A) as well as the Tribunal deleted the addition of Rs. 50 lacs made by the AO under the provisions of s. 41(1) of the IT Act, 1961 (hereinafter referred to as the ‘said Act’) on account of alleged cessation of liability. It appears that the assessee had received an order from Premier Automobiles Ltd. (PAL) for supply of components for Fiat Automobiles manufactured by the latter. PAL advanced a sum of Rs. 50 lacs to the assessee towards capital cost to be incurred by the assessee for development/procurement of tools, jigs, dies, fixtures and moulds required for manufacture of products by the assessee to be supplied by them to PAL. Immediately after the said order was placed and the said sum of money was advanced by PAL, a strike took place in the plant of PAL at Kurla, as a result of which PAL had to suspend production and all transactions. Consequently, PAL requested the assessee to subscribe the amount of Rs. 50 lacs advanced by the former to the latter in debentures of PAL’s sister concern, namely, PAL Enterprises (P) Ltd. (hereinafter referred to as ‘Enterprises’). Consequent to the said request by PAL, the assessee invested the said sum of Rs. 50 lacs in 12 per cent optionally convertible debentures of Enterprises. However, both PAL and Enterprises ran into difficulties and the assessee never received any interest from Enterprises and even the prospect of recovery of the maturity value of the debentures became uncertain. In this context, the board of directors of the assessee company considered the question of writing off the said amount of Rs. 50 lacs and it was decided that the said amount be written off both in the debit and credit side of the balance sheet. The assessee’s stand throughout has been that the said writing off had no effect on the P&L a/c.

The AO, however, did not agree with the explanation given by the assessee and made the addition of Rs. 50 lacs, invoking the provisions of s. 41(1) of the said Act. The CIT(A) decided in favour of the assessee and deleted the addition. It was held that as no income ever accrued nor any benefit was obtained by the assessee in the said transaction, no income in the form of cessation of liabilities arose in the present case. The CIT(A) also returned a finding that there was no indication or material on the basis of which the assessee could be said to have derived any income or benefit from the sum of Rs. 50 lacs received from PAL. It was concluded that there was no finding by the AO that the assessee was allowed any deduction or allowance in respect of the said sum of Rs. 50 lacs in the past assessment years so as to tax it under the provisions of s. 41(1) of the said Act and, therefore, it was concluded that the assessee was entitled to write off the said amount.

The said view was accepted by the Tribunal also. We have examined the impugned order and we find that the Tribunal has set out the facts in detail and also examined the relevant terms in respect of the advance of Rs. 50 lacs which are mentioned in the letter dt. 22nd May, 1996. The said terms have been set out in the impugned order itself. The Tribunal noted that from the said terms it was clear that the assessee had received the sum of Rs. 50 lacs only on the capital account for infrastructure on behalf of PAL and that the assessee had a right to use such capital assets for manufacture of air-conditioning systems for cars to be produced by PAL. It was also noted by the Tribunal that it was an undisputed fact that the amount of Rs. 50 lacs written off was not allowed as deduction nor does it represent trading liability which had gone to the computation of income for earlier years. Therefore, writing off the said amount would not attract provisions of s. 41(1) of the said Act. After referring to several decisions of the Supreme Court and other High Courts, the Tribunal concluded as under :

10. From the judicial pronouncements discussed above it is clear that provisions of s. 41(1) can be pressed into operation only in the cases where any expenditure or loss has been allowed in any of the assessment year and assessee derives any benefit in the relevant assessment year or assessee had incurred any trading liability which has entered into computation of income in earlier years and assessee obtains some benefit in the relevant assessment year. In the instant case the amount received by the assessee at the instructions of PAL was invested in debentures of Pal Enterprises Ltd., a sister concern of M/s PAL. In fact the assessee was left with no amount with him. On paper he was debtor of PAL to the extent of Rs. 50 lacs and creditor to PAL Enterprises Ltd. to the same extent. By writing back the amount standing in the books of account the assessee had not obtained any benefit in the year under consideration. The amount of Rs. 50 lacs was not entered in computation in any of the earlier years nor was any claim of expenditure or loss was made in earlier years therefore provisions of s. 41(1) are not applicable. The decision of Hon’ble Supreme Court in the case of CIT vs. T.V. Sundaram Iyengar & Sons (P) Ltd. (supra) is also not applicable to the facts of case before us. Both the amounts on debit and credit side have been written back/off resulting in no benefit to the assessee. The assessee had not become richer by any amount so as to apply the ratio of the decision of Hon’ble Supreme Court in the case of CIT vs. T.V. Sundaram Iyengar & Sons (P) Ltd. (supra). Accordingly, in our considered view learned CIT(A) was justified in deleting the addition.”

5. We are of the view that the Tribunal has arrived at a correct conclusion and has correctly appreciated the provisions of s. 41(1) of the said Act. No error can be discerned from either the order of the CIT(A) or that of the Tribunal. In any event, no substantial question of law arises for our consideration. The appeal is dismissed.

[Citation : 320 ITR 538]

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