Gujarat H.C : the ingredients of Sec. 41 are not satisfied inasmuch as the appellant has not claimed any deduction or allowance in respect of the trading liability and the said trade liability has not ceased to exist during the A.Y.-2012-13 and therefore, the amount could not be added in the income under Section 41 of the Income Tax Act

High Court Of Gujarat

Gujtron Electronics (P.) Ltd. Vs. ITO

Section : 41(1)

Assessment Year : 2012-2013

Akil Kureshi And Biren Vaishnav, JJ.

Tax Appeal No. 462 Of 2017

Civil Application (OJ) No. 511 Of 2017

July  12, 2017

ORDER

Akil Kureshi, J. – Appellant is aggrieved by the judgment of the Income Tax Appellate tribunal dated 10.01.2017. Following questions are presented for our consideration.

“I. Whether in the facts and circumstances of the case, the Tribunal was justified in not appreciating that in the present case, the ingredients of Sec. 41 are not satisfied inasmuch as the appellant has not claimed any deduction or allowance in respect of the trading liability and the said trade liability has not ceased to exist during the A.Y.-2012-13 and therefore, the amount could not be added in the income under Section 41 of the Income Tax Act?

II. Whether in the facts and circumstances of the case, the Tribunal was justified in not appreciating that in the present case, the ingredients of Sec. 41 are not satisfied inasmuch as the appellant has not obtained any benefit by way of remission or cessation of the liability and therefore, the amount could not be added in the income under Section 41 of the Income Tax Act?

III. Whether in the facts and circumstances of the case, the ITAT erred in not appreciating that there was no cessation of liability and therefore the outstanding liability in balance sheet as on 31.03.2012 under the head of ‘trade payable advance from the customers’ should be added u/s. 41(1) of the Act to the assessee’s total income ?

IV. Whether in the facts and circumstances of the case, the ITAT erred in not appreciating that the “trade payable advance” from “Customers amounting to Rs. 7,87,19,819/- has not written off and has not been transferred to profit and loss account and therefore the ratio laid down in the case of Commissioner of Income Tax v. Sundaram Iyengar and Sons. Ltd. would not apply in the present case?

V. Whether in the facts and circumstances of the case, the Tribunal was justified in holding that the judgment of this Hon’ble Court in the case of CIT vs. Nitin S. Garg would not apply in the present case, since the appellant’s liability were valid for a period of one year only ?”

2. Though multiple questions are presented, the issue pertains to cessation of the assessee’s liability. We are concerned with the assessment year 2012-13. While framing the assessment for the said year, the Assessing Officer noticed that assessee company had shown outstanding trade liability under the head ‘customer advances’, which included a sum of Rs. 7.87 crores (rounded off). Such advances were brought forward from the earlier years. The Assessing Officer therefore issued a show cause notice requiring the assessee to file details of such advances. In response to the queries, the assessee explained that the same were in the nature of the advances received from the retail customer under the Sales Promotion Scheme launched by the assessee in the financial year 1986-87. It was a scheme for sales promotion of the company’s black and white TV sets. As per the scheme, the assessee had collected a sum of Rs. 500/- from each customer by sale of coupons. Upon such customer enrolling four members who would purchase such coupons, he would be entitled to receive a TV set free of cost. Such newly enrolled members would also be eligible to such benefit on them in turn enrolling four new members each.

3. The Assessing Officer called upon the assessee to show cause why such amount of Rs. 7.87 crores be not added back as cessation of liability. The assessee opposed the proposal contending that the principles of section 41(1) of the Income Tax Act, 1961 (‘the Act’ for short) are not applicable. The liability has not seized and the assessee continues to show the same as a liability.

4. The Assessing Officer did not accept the stand of the assessee. He noted that the liability was nearly 15 to 20 years back in relation to Sales Promotion Scheme, when the company was engaged in the manufacturing of goods. Since many years, the company is no longer engaged in such manufacturing activity and is now engaged only in trading of electronic appliances. The scheme itself suggested that it was valid for a period of 12 months. Since years there was no activity of any repayment of the amounts nor the amounts have been collected by the customers. The assessee’s attempt to point out that fresh offer was made to the customers was discarded as an afterthought. It was noticed that all throughout this liability had remained constant. The assessee had also admitted that the fund was used by parking it in investments from which the company had earned interest. Such interest was also offered to tax. Inter alia on such grounds, the Assessing Officer held that this was a case of cessation of liability and therefore added the said sum to the income of the assessee.

5. The assessee carried the matter in appeal. Commissioner of Income Tax (Appeals) undertook a detailed examination of materials on record and confirmed the view of the Assessing Officer. In particular, the appellate Commissioner referred to the following factors:

I. The advertisement under which the scheme was launched envisaged the time limit of 12 months from the date of enrollment of a customer as a member of the scheme. It was provided that the proposal or discount offered will automatically expire after such date.

II. The outstanding amounts were as old as 12 to 15 years or more when the company was manufacturing black and while TV sets. Since the year 1988-89, the company is no longer engaged in such manufacturing activity.

III. The addresses of the members/customers were also not verifiable since they were incomplete providing only the Tehsils and Districts. There was no signatures of the customers on these invoices.

IV. The letters sent by the assessee to the past customers to show that company is still in correspondence, had all been issued by the company after commencement of the assessment proceedings and after the Assessing Officer had raised questions about the liability.

V. Since financial year 2006-07, the total outstanding liability was shown to Rs. 7.87 crores and since then, there was no activity in connection with the scheme. The assessee was not in contact with the customers. The stand that the customers were still inquiring with the company was not established in any manner.

VI. The assessee could not show even one instance where in case of even one customer, the deposit amount was returned.

6. In view of such circumstances, the Commissioner of Income Tax (Appeals) rejected the assessee’s appeal placing reliance on the decision of the Supreme Court in case of CIT v. Sundaram Iyengar & Sons Ltd. [1996] 222 ITR 344/88 Taxman 429 making following observations:

“3.2.4 With all due respect to the judgments by the Hon’ble Apex Court, High Courts and Tribunals on section 41(1) and section 28(iv), I am of the view that there are situations where the facts and circumstances of an appellant’s case cannot be compared to those which prevailed in the cases before the Hon’ble Courts and hence case-laws cannot be applied generally to every appellant. As has been discussed above, the situation in this case is peculiar since the customers have paid only Rs. 500/- each to the appellant in pursuance of a scheme which has long lapsed. This amount of Rs. 500/- collected from the customers all over the country has resulted in a corpus of over Rs. 7 crores with the appellant which it has been using as its own money over the years to make various investments (discussed earlier in the order). The appellant has itself admitted that these customers are from very remote areas and a perusal of the sample vouchers and invoices presented by the appellant also shows that only vague addresses have been noted down. Thus, it is highly unlikely that after a period of 10-15 years, these customers would claim an amount of Rs. 500/- from the appellant. The appellant however very conveniently is still showing these amounts as its liability though it itself is not clear as to whom it has to reply this money. Moreover, as quoted from the advertisement taken out by the appellant itself while launching this claim, it has been clearly stated in the same that the scheme would lapse in 12 months and that no refunds given. Thus, it is very clear from this advertisement itself that the customer would forgo the Rs. 500/- coupon, if he or she did not claim the same within a year.

3.2.5 Not only this, the appellant has used the entire money as its own money over the years and as mentioned in para 3.2.1 (vi) above, has made substantial investments out of this money. It has received interest on the same and has also paid taxes on the same. Thus, it is very clear that this amount is being treated as its own income by the appellant. These circumstances and facts are very different from the facts in all the case-laws relied on by the appellant and therefore cannot be applied to the appellant’s case. Thus looking at the totality of facts and the detailed discussion above, and considering: the view taken by the Hon Supreme Court in CIT v. Sundaram Iyengar & Sons Ltd., I am of the view that the addition was correctly made by the A.O. The addition of Rs. 7,87,19,819/- made by the Assessing Officer is confirmed and the ground of appeal is dismissed.”

7. The assessee carried the issue before the Tribunal. The Tribunal confirmed the view of the Revenue authorities. Hence the present appeal.

8. Learned counsel for the appellant submitted that this was not a case of cessation of liability. The conditions laid down under section 41 of the Act were not fulfilled. The authorities therefore, committed a serious error in adding the said sum to the income of the assessee. She further submitted that the ratio laid down by the Supreme Court in case of CIT v. Sugauli Sugar Works (P.) Ltd. [1999] 236 ITR 518/102 Taxman 713 would apply. She submitted that the facts in case of Sundaram Iyengar (supra) were different. Unlike in the said case, the assessee has not transferred the amount in its profit and loss accounts. Our attention was also drawn to two decisions this Court in case of CIT v. Bhogilal Ramjibhai Atara [2014] 43 taxmann.com 55/222 Taxman 313 (Guj.) and in case of CIT v. Nitin S. Garg [2012] 22 taxmann.com 59/208 Taxman 16 (Guj.).

9. Facts of the present case, as concurrently held by the two Revenue authorities and the Tribunal are somewhat peculiar. The assessee had launched a scheme of sales promotion. Under such scheme, the assessee would enroll a member, who would deposit a sum of Rs. 500/- with the assessee company. If such a member in turn enrolled four members, he would get one black and white TV set manufactured by the assessee company free of cost. Same benefit would be available to the enrolled members if they fulfilled this condition. The scheme was operative for a period of 12 months. In other words, a member would have to enroll four members within such period of 12 months in order to get the benefit of earning a free TV set. Over a span of couple of years, the assessee collected a huge sum of Rs. 7.87 crores by enrollment membership fee of Rs. 500/- each.

10. As is bound to happen, in such a scheme requiring continuous chain reactions, the chain would break at some stage. The amount of Rs. 7.87 crores represents the money deposited by those members. This amount remained with the company over the years without any change whatsoever. The Revenue authorities have found that there was no activity at the hands of the assessee company in connection with the scheme for past several years. Not a single customer had demanded the money back nor the assessee had made any attempt to repay the same. It was only when the Assessing Officer in the present assessment proceedings raised the issue, the assessee made correspondence with the customers. This, the Commissioner (Appeals) correctly categorized as an afterthought. More importantly in all invoices, the signatures of the member customers were missing. Their addresses were not sufficient. Over the years, the company had also invested such amount earning interest and used such interest for its purpose, of course, offering interest income to tax.

11. In view of the concurrent findings of the Revenue authorities and the Tribunal through which the above established facts emerged, we have no reason to interfere. The decision of the Supreme Court in case of Sundaram Iyengar(supra) would apply. In the said case, the Court had held and observed as under:

“In the present case, the money was received by the assessee in the course of carrying on his business. Although it was treated as deposit and was of capital nature at the point of time it was received, by efflux of time the money has become the assessee’s own money. What remains after adjustment of the deposits has not been claimed by the customers. The claims of the customers have become barred by limitation. The assessee itself has treated the money as its own money and taken the amount to its profit and loss account. There is no explanation from the assessee why the surplus money was taken to its profit and loss account even if it was somebody else’s money. In fact, as Atkinson J. pointed out that what the assessee did was the commonsense way of dealing with the amounts.”

12. It is true that unlike in case of Sundaram Iyengar (supra), the assessee has not taken such amount in its profit and loss account. Nevertheless, by all accounts, the assessee has treated such amount as its own. The scheme itself terminated many years back. Limitation of claiming amount back has also seized. There is absolutely no movement or correspondence between the assessee and its members with respect to the claim or with respect to the deposited amounts.

13. Under the circumstances, we do not see any reason to interfere. Tax Appeal is therefore dismissed.

14. In view of order passed in main Tax Appeal No. 462 of 2017, Civil Application (OJ) No. 511 of 2017 will not survive and accordingly, the same is also disposed of.

[Citation : 397 ITR 462]