If liability had not been written of, it could not be said that it had ceased to exist u/s 41(1)

If amount of advance received for making export stood as a liability in books of account, and same had not been written of, it could not be said that liability had ceased to exist; additions under section 41(1) could not be made

IN THE ITAT MUMBAI BENCH 'A'

Aasia Business Ventures (P.) Ltd.

v.

Income Tax Officer -6 (3)(4)*

B.R. Mittal, JUDICIAL MEMBER
AND Rajendra, ACCOUNTANT MEMBER

IT APPEAL NO. 430 (MUM.) OF 2011
[ASSESSMENT YEAR 2007-08]

NOVEMBER  8, 2013 

Section 41(1), read with section 28(iv), of the Income-tax Act, 1961 - Remission or cessation of trading liability [Conditions precedent] - Assessment year 2007-08 - Ten years back, assessee received a sum as advance for export of goods and same had been appearing in books of account of assessee till date - Assessee did not make export against said advance nor said amount was returned - Said amount was shown as advance in balance sheet of assessee - Whether since amount had not been written off in books of account, it could not be said that any liability had ceased to exist and same could not be added to income of assessee - Held, yes [Para 7][In favour of assessee]

FACTS

■		During the course of assessment proceeding the Assessing Officer observed from balance sheet that under the head 'current liabilities' an amount was reflected being advance against exports.
■		On inquiry, the assessee stated that the said amount was received from a Mauritius company Amas in 1997 in order to buy goods for the purpose of exports. Subsequently, exports could not be made as the required goods could not be identified and balance was still due and payable. The assessee also filed a confirmation from the party before the Assessing Officer.
■		The Assessing Officer found that—
-			The assessee had not made any export in lieu of advance received even after ten years of receipt of advance.
-			As per relevant FEMA Notification and Regulation, the assessee was required for shipment of goods within one year and advance received in foreign exchange were used by the assessee for the purpose other than for export to the entity from whom advance had been received.
-			The Mauritius company was a 40 per cent shareholder in the assessee-company but it was unable to furnish the balance sheet of that company.
-			The assessee had failed to discharge the onus of creditworthiness of the party.
-			There was cessation of liability.
■		The Assessing Officer taxed the advance as income under section 41(1) and added back to the total income of the assessee.
■		On appeal, the Commissioner (Appeals) after considering the said regulation of FEMA, concluded that the assessee had received a clear cut benefit by way of the said advance for a trading liability. That amount was not a notional receipt. The assessee had not been able to establish the trade it had undertaken or was being undertaken and that the liability exists. He therefore, confirmed the action of the Assessing Officer.
■		On appeal before Tribunal:

HELD

■		The assessee had not made export against the said advance. The amount is not returned till date. Moreover, the assessee has admittedly stopped export business and is in the business of advisory as well as in share dealing. It is not in dispute that the said amount is shown as advance in the balance sheet of the assessee. The said liability is also shown as on 31-3-2007. Therefore, the liability has been acknowledged by the assessee. Since amount has not been written off by the assessee in its books of account, it cannot be said that the liability has ceased to exists. The Commissioner (Appeals) and Assessing Officer are not justified to apply provisions of section 41(1). It is also observed that the Assessing Officer has doubted the genuineness of the transaction as well as creditworthiness of the lender/payee. Since the said amount received by the assessee in January, 1997 and the same was appearing in the books of account of the assessee, genuineness of the transaction as well as creditworthiness of the party could not be considered in the assessment year under consideration for making the said addition under section 41(1) read with section 28(iv). [Para 7]
■		Be that as it may, it is the fact that the assessee has not written back the said amount to its profit and loss account, the provisions of section 28(iv) which provides value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession shall be chargeable to Income Tax under the head "profit and gains of business or profession" could not be applied as the said benefit has not arisen to the assessee because the assessee is showing the said amount as its liability in the balance-sheet year after year. Therefore, the said amount cannot be added as income of the assessee under section 28(iv). [Para 8]

Per Court

■

If the Assessing Officer was of the view that the assessee has violated provisions of FEMA by not making the export within the period of one year as per Regulation 16 of the FEMA Regulation dated 3-5-2000 and the said transaction was a sham transaction in the guise of receiving advance for making export, the Assessing Officer should have taken up the matter with RBI to make an enquiry in this respect. [Para 11]

CASE REVIEW

CIT v. Tamilnadu Warehousing Corpn. [2007] 292 ITR 310/[2008] 170 Taxman 123 (Mad.)(para 7) and CIT v. Smt. Sita Devi Juneja [2010] 325 ITR 593/187 Taxman 96 (Punj. & Har.) (para 7) followed.

Jayram Holdings (P.) Ltd. v. ITO [IT Appeal No. 6914 (Mum.) of 2010, order dated 4-7-2012] (para 9) applied.

CASES REFERRED TO

Solid Containers Ltd. v. Dy. CIT [2009] 308 ITR 417/178 Taxman 192 (Bom.) (para 4), Jayram Holdings (P.) Ltd. v. ITO [IT Appeal No. 6914 (Mum.) of 2010, dated 4-7-2012] (para 6), CIT v. Tamilnadu Warehousing Corpn. [2007] 292 ITR 310/[2008] 170 Taxman 123 (Mad.)(para 7),CIT v. Smt. Sita Devi Juneja [2010] 325 ITR 593/187 Taxman 96 (Punj. & Har.) (para 7) and CIT v. Chase Bright Steel Ltd. [1987] 177 ITR 128/42 Taxman 146 (Bom.) (para 7).

Keshav B. Bhujle and S.K. Mutsaddi for the Appellant. Javed Akhtar for the Respondent.

ORDER

B.R. Mittal, Judicial Member - The assessee has filed this appeal for A.Y. 2007-08 against the order of learned CIT(A) dated 20.10.2010.

2. The only ground is as to whether learned CIT(A) has erred in confirming the action of the Assessing Officer to make addition of Rs. 3,04,38,400/- u/s. 41(1) read with section 28(iv) of the Act by treating advance against export received from Amas Mauritius Ltd. by the assessee on 24.1.1997 as its income by treating the said transaction as sham transaction in the assessment year under consideration.

3. Relevant facts are that the assessee is presently engaged in giving advisory services and traded in shares. Earlier assessee was a trader in SKO-Superior Kerosene Oil. It imported SKO and was selling the same in domestic market. During the course of assessment proceedings, the Assessing Officer observed from the balance-sheet as on 31.3.2007 that under the head "current liabilities" an amount of Rs. 3,04,38,400/- is reflected being advance against exports. On an inquiry, assessee stated that the said amount of Rs. 3,04,38,400/- was received as an advance against exports on 24.1.1997 (USD 8,50,000) from M/s. Amas Mauritius Ltd. in order to buy goods for the purpose of export. Subsequently, exports could not be made as the required goods could not be identified and balance is still due and payable as on 31.1.2007. The assessee also filed a confirmation from the party before the Assessing Officer.

4. The Assessing Officer has stated that the assessee has not made any export in lieu of advance received even after ten years of receipt of advance He has submitted that the assessee was no longer required to carry out export in lieu of advance, nor was the amount repaid till date. The Assessing Officer has stated that as per FEMA Notification No. 23/RB-2000 dated 3.5.2000 and as per Regulation 16, inter-alia the assessee is required to ensure that the shipment of goods is made within one year from the date of receipt of advance payment. The assessee has violated the said Regulation. He has concluded that the money received by the assessee was not for the purpose of any export to be made to M/s. Amas Mauritius Ltd. but for its own consumption which the assessee is not able to substantiate. The Assessing Officer has further examined the genuineness of the transaction, creditworthiness of the party i.e. M/s. Amas Mauritius Ltd. and identity of the party. The Assessing Officer has stated that the assessee has failed to discharge the onus to prove the identity of the party. He has also stated that the advance received in foreign exchange were used by the assessee for the purpose other than for export to the entity from whom advance had been received. Therefore advance received was not for the purpose of any export and doubted the genuineness of the transaction. Besides above, the Assessing Officer has also stated that the assessee could not furnish balance-sheet from M/s. Amas Mauritius Ltd. to establish that liability still subsist. The Assessing Officer has also stated that M/s. Amas Mauritius Ltd. is a 40% shareholder in the assessee-company and it is more surprising that the assessee is unable to furnish the balance sheet of its majority shareholder i.e. M/s. Amas Mauritius Ltd. He has concluded that by not producing the balance-sheet the assessee has failed to discharge the onus of creditworthiness of the party. In view of the above the Assessing Officer has concluded that the advance against export amounting to Rs. 3,04,38,400/- is treated as cessation of liability and taxed as income u/s. 41(1) of the Act and added back to the total income of the assessee. In this regard, the Assessing Officer placed reliance on the decision of Hon'ble Bombay High Court in the case of Solid Containers Ltd. v. Dy.CIT [2009] 308 ITR 417/178 Taxman 192. Being aggrieved, the assessee filed the appeal before learned CIT(A).

5. Learned CIT(A) has stated that he has examined the details of the case. He has stated that the assessee had shown to receive Rs. 3,04,38,400/- from M/s. Amas Mauritius Ltd., a company registered in Mauritius on 24.1.1997 for the purpose of export of goods. However, no export has been made by the assessee against advance received. That the assessee has not been able to detail the goods that were to be exported. That no documentary evidence has been produced by the assessee to show or prove the export was intended. He has further stated that it also transpires that there was no formal agreement between the assessee and the concern advancing the amount. He has further stated that the assessee has claimed before the Assessing Officer that it was planning to import onions and marine products for subsequent export to Mauritius which indicated a change in the very nature of business venture claimed to have been undertaken by the assessee. Learned CIT(A) has stated that these activities was never established by the assessee in the Memorandum of Understanding and AOA. He has stated that the assessee has not been able to establish the very reason that it has received the money from and the origin of the money. Learned CIT(A) after considering the Regulation 16 of FEMA dated 3.5.2000, which we have already mentioned hereinabove, has concluded that the assessee has received a clear cut benefit by way of the said advance for a trading liability. This amount is not a notional receipt. The assessee has not been able to establish the trade it had undertaken or was being undertaken and that the liability exists. Learned CIT(A) has concluded that the Assessing Officer has rightly held that the transaction was a sham transaction and therefore confirmed the action of the Assessing Officer for making the addition by invoking provisions of section 41(1) read with section 28(iv) of the Act. Hence this appeal by the assessee.

6. At the time of hearing, learned AR besides making submissions as made before the authorities below submitted that the liability to refund the said amount still exists in the books of account of the assessee and the same has not been written off. Therefore it cannot be added as income of the assessee u/s. 41(1) or u/s. 28(iv) of the Act as it has not become money of the assessee because of efflux of time. Learned AR submitted that a letter written to RBI vide letter dated 27.12.2011 for refund of the said amount without interest or exchange difference and the approval of RBI is awaited. Learned AR filed a copy of the said letter to substantiate its submission. He further submitted that the decision of Hon'ble Bombay High Court in the case of Solid Containers Ltd. (supra) is not applicable as in the said case loan which was taken during the previous year relevant to assessment year under consideration for business purpose was written back as a result of consent terms arrived at between the assessee and lender. It was in that context it was held that provisions of section 41(1) were applicable. He submitted that liability still exists in the books and therefore it cannot be added to the income of the assessee. On the other hand, learned Departmental Representative relied on the order of learned CIT(A) and submitted that considering the fact that the advance was received in 1997 and the goods are yet to be exported, the said advance has to be treated as income of the assessee by efflux of time and amount is to be added u/s. 41(1) and/or 28(iv) of the Act. Learned AR in rejoinder submitted that similar issue had also been considered by ITAT, Mumbai Bench in the case of Jayram Holdings (P.) Ltd. v. ITO [ITA No. 6914/Mum/2010, order dated 4.7.2012] and filed copy of the said order to substantiate his submission.

7. We have carefully considered the orders of the authorities below and submissions of the representative of the parties. We have also gone through the relevant pages of the paper book to which our attention was drawn at the time of hearing and have also considered the cases relied upon by the Assessing Officer as well as referred by learned AR (supra). It is a fact that the assessee received a sum of Rs. 3,04,38,400/- from M/s. Amas Mauritius Ltd. on 24.1.1997 as an advance for the purpose of export of goods and the same has been appearing in the books of account of the assessee till date. It is also fact that the assessee neither has made export against the said advance nor the amount has been returned till date. Moreover, the assessee has admittedly stopped export business and is in the business of advisory as well as in share dealing. It is not in dispute that the said amount is shown as advance in the balance sheet of the assessee. The said liability is also shown as on 31.3.2007. Therefore the liability has been acknowledged by the assessee. Since amount has not been written off by the assessee in its books of account, it cannot be said that the liability has ceased to exists. Hon'ble Madras High Court has held in the case of CIT v. Tamilnadu Warehousing Corpn. [2007] 292 ITR 310/[2008] 170 Taxman 123 that the amount representing liabilities which were shown year after year could not be added back u/s. 41(1) of the Act, 1961. The same view has also been taken by Hon'ble P&H High Court in the case of CIT v. Smt. Sita Devi Juneja [2010] 325 ITR 593/187 Taxman 96. Bombay High Court has also held in the case of CIT v. Chase Bright Steel Ltd. [1987] 177 ITR 128/42 Taxman 146 that the issue of limitation is not applicable for cessation of liability for the purpose of section 41(1) of the Income Tax Act. In view of above, we agree with learned AR that learned CIT(A) and Assessing Officer are not justified to apply provisions of section 41(1) of the Act. We also observe that the Assessing Officer has doubted the genuineness of the transaction as well as creditworthiness of the lender/payee. We are of the considered view that since the said amount received by the assessee in January, 1997 and the same was appearing in the books of account of the assessee, genuineness of the transaction as well as creditworthiness of the party could not be considered in the assessment year under consideration for making the said addition u/s. 41(1) read with section 28(iv) of the Act.

8. Be that as it may, it is the fact that the assessee has not written back the said amount to its profit and loss account, we are of the considered view that the provisions of section 28(iv) which provides value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession shall be chargeable to Income Tax under the head "profit and gains of business or profession" could not be applied as the said benefit has not arisen to the assessee because the assessee is showing the said amount as its liability in the balance-sheet year after year. Therefore, we are of the considered view that the said amount cannot be added as income of the assessee u/s. 28(iv) of the Act.

9. We may also state that on and identical facts similar issue has also been considered by the ITAT, Mumbai Bench in the case of Jayram Holdings (P.) Ltd. (supra) and the Tribunal has held that the provisions of section 41(1) and/or section 28(iv) of the Act cannot be applied to make the said addition of advance received by the assessee in that case in A.Y. 1997-98 if the amount was not written off and the liability still subsist. The decision of ITAT dated 4.7.2012 squarely apply to the facts of the case under consideration before us.

10. Hence, in view of above, the grounds of appeal taken by the assessee are allowed by deleting the addition made by the authorities below.

11. Before we part with this appeal, we may state that if the Assessing Officer was of the view that the assessee has violated provisions of FEMA by not making the export within the period of one year as per Regulation 16 of the FEMA Regulation dated 3.5.2000 and the said transaction was a sham transaction in the guise of receiving advance for making export, the Assessing Officer should have taken up the matter with RBI to make an inquiry in this respect.

12. In view of the above ground of appeal taken by the assessee is allowed.

13. In the result, appeal of the assessee is allowed.

Refer: [2014] 41 taxmann.com 84 (Mumbai - Trib.)