Delhi H.C : Provision for contingent liability created by amalgamated company at time of making entries with regard to transferred assets and liabilities of amalgamating company could not be added under section 41(1)

High Court Of Delhi

CIT Vs. Siel Holdings Ltd.

Assessment Year : 2007-08

Section : 41(1)

R.V. Easwar And Sanjiv Khanna, JJ.

IT Appeal No. 1222 Of 2011

February 23, 2012

ORDER

Sanjiv Khanna, J. – This appeal by the Revenue under Section 260A of the Income Tax Act, 1961 (‘Act’, for short) in the case of SIEL Holdings Ltd., which is now merged with Usha International Ltd. pertains to the assessment year 2007-08.

2. The Assessing Officer had included/ added an amount of Rs. 50,00,000/- to the taxable income under Section 41(1) of the Act inter alia recording as under:-

“As per the information available during the Assessment Proceeding, it is found that Rs. 50 Lacs (Rs. Fifty Lakhs) has been lying in the form of provision as Contingency Amount in the Liability side of the Balance Sheet read with Schedule 7 of the Audited Accounts. The Assessee was asked to explain and justify continuance of this Contingent Liability. In reply, it has been emphasized by the Assessee that pursuing to scheme of arrangement of Siel Ltd., approved by High Court of Delhi vide order dated 26.08.2003, our company had received certain Investment as Assets and also certain Liabilities. It further submitted that the Assessee Company has to disposed off the Investment and discharge Liabilities. In the latest reply the assessee company has once again pleaded that entry in respect of provision for contingency of Rs. 50 lacs was passed in the books of account at the time of passing the entries for assets and liability taken over by the appellant company from M/s. Siel Ltd. as per the scheme of the arrangement approved by High Court of Delhi. Aforesaid provision had not been made by debiting to P&L account accordingly provisions of sec. 41(1) of IT Act are not applicable. Even this reply has been considered. The assessee, at no point of time, has categorically pleaded that this amount was never debited to the erstwhile P&L A/c of the amalgamated company (i.e. Siel Ltd.) and the same is, accordingly, of Capital Nature. But it has not categorically stated that at no point of time such amounts were not debited in the P&L A/c by the erstwhile company i.e. Siel Ltd. is it not a fact that when the liability of even the erstwhile company gets remitted or cessed, the amalgamating company gains by that much amount. In the present case the assessee company has failed to discharge its onus of proving that the liability still exists- no matter even if it was not debited in the present amalgamating company and in a situation where the assessee company does not categorically brings it on record that these were never debited in the amalgamated company (i.e. Siel Ltd.).”

3. The CIT (Appeals) upheld the said addition after recording the following:-

“The appellant company acquired certain investments as well as certain liabilities under the Scheme of arrangement of M/s. Siel Ltd. approved by Delhi High Court by order dated 26/08/2003, w.e.f. 10/10/02. While entering the investment as well as the liability in the books of the appellant company, a provision for Rs. 50,00,0000/- (sic) (Rs. 50,00,000/-) for contingency was made. This is not trading liability rather it was the liability made out of capital account and Sec. 41(1) has no applicability in the present context. The AO has expressed his apprehension in page 5 of the order that such amount was not debited to the erstwhile company i.e. M/s. Siel Ltd. The appellant has enclosed a certificate from Siel Ltd. (P-18) of written submission dated 25/06/10 where the erstwhile company vide its letter dated 11/05/10 has categorically stated that no entry was made in the books of the said company on account of contingency provision of Rs. 50,00,000/-.

5.2 In order to apply sec. 41(1), the following points are to be kept in view (1) in the course of asstt for an earlier year, allowance or deduction has been made in r/o of trading liability incurred by the assessee; (2) subsequently, a benefit is obtained in respect of such trading liability by way remission or cessation thereof during the year in which such even occurred; (3) in that situation the value of the benefit accruing to the assessee is deemed to be the profits and gains of business which otherwise would not be his income; (4) such value of the benefit is made chargeable to income tax as the income of the previous year in which such benefit was obtained.

In the instant case at the time of amalgamation the appellant has taken over the liability but there is no evidence that it is a liability made out of capital account as claimed by the appellant. The ld. AO has brought on record how such above conditions are satisfied in the present facts of the case and in present circumstances. According to me the AO has brought all material facts to establish that there was cessation of liability within the meaning of Sec. 41(1) and hence such addition is liable to be sustained.”

4. ITAT has deleted the said addition holding inter alia as under: –

“19. From the above, it is clearly indicates that the section is attracted only in respect of expenditure or liability incurred by the assessee where the assessee had obtained any benefit in earlier assessment year. Here we find that assessee has categorically stated that it has not made the provision by way of debit of the profit and loss account. Ld. counsel of the assessee also produced before us the balance sheet and profit & loss account by the earlier period, when the entries were transacted. It was also shown that the same was routed through balance sheet only. A perusal of the account for the period ending 31.3.2003 showed that the same was made by increasing investment by Rs. 50 lacs and creating provision for contingency by Rs. 50 lacs. Thus, in this background the impugned amount was never debited in the profit and loss account. In such situation, in our considered opinion, section 41(1) is not at all applicable and accordingly, we set aside the orders of the authorities below and decide the issue in favour of the assessee.

20. In the result, the appeal filed by the assessee is partly allowed for statistical purposes.”

5. In order to satisfy ourselves as to the nature of the entry and whether the amount of Rs. 50,00,000/- was debited in the account of SIEL Holding Ltd., we had issued notice. Today learned counsel for the Revenue and the assessee have taken us through the papers/paper-book which were filed before the tribunal. The said paper-book includes a copy of scheme of amalgamation as well as balance sheet on 31.03.2003 i.e. first year after the assets and liabilities of SIEL Ltd. were transferred to the respondent-assessee. As per the scheme of amalgamation, SIEL Ltd. had transferred the assets in the form of investments, etc. of Rs. 35 crores. The liabilities of SIEL Ltd., transferred to and taken over by the respondent-assessee were also Rs. 35 crores. This is specifically mentioned in the scheme of amalgamation. However, at the time of making entry in the balance sheet for the year ending 31.03.2003, the investments were enhanced to Rs. 35.50 crores and the liabilities were taken at Rs. 35 crores and provision for contingency of Rs. 50 lakhs was created. This fact was specifically mentioned in the balance sheet for the year ending 31.03.2003 as is clear from the foot note to Schedule 3 relating to “investment” wherein the figure taken was Rs. 35.50 crores and Schedule 5 relating to “current liabilities and provision” in which the provision for contingency of Rs. 50 lakhs has been explained as “provision of contingency is yet to be incurred”. In Schedule 6 under Notes this factum has been mentioned and details have been stated. It is thus clear that the provision had not been, and could not have been, debited to the P & L A/c of SIEL Ltd. This provision was created by the assessee for the first time. In view of the aforesaid position, we fail to understand how Rs. 50 lacs can be added as income by invoking Section 41(1) of the Act. On this aspect we do not find any substantial question of law arises as the findings recorded by the tribunal are correct.

6. The second question raised by the Revenue pertains to disallowance under Section 14A of the Act. ITAT has remitted the matter to the Assessing Officer to apply and compute the disallowance as per the decision of the Bombay High Court in Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT [2010] 328 ITR 81 / 194 Taxman 203 (Bom.). We may note that now Delhi High Court has decided the same issue and held that Rule 8-D is not retrospective and is applicable only from the assessment year 2008-09. The Assessing Officer while computing the disallowance under Section 14A of the Act will apply the judgment of this Court in Maxopp Investment Ltd. v. CIT [2011] 203 Taxman 364 / 15 taxmann.com 390 (Delhi).

7. In view of the aforesaid position we do not find that any substantial question of law arises in respect of the second aspect. With the aforesaid observations, the appeal is dismissed. No costs.

[Citation : 348 ITR 447]

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