2011 (5) TMI 1001 - AT - Income Tax

Summary

Issues Involved:
1. Addition of Rs. 10,26,943/- as income u/s 41(1) due to outstanding royalty.
2. Addition of Rs. 3,58,845/- as income u/s 41(1) due to outstanding advances from trade parties.
3. Addition of Rs. 10,16,054/- as income due to outstanding security deposits.

Summary:

1. Addition of Rs. 10,26,943/- as income u/s 41(1) due to outstanding royalty:
The first dispute concerns the addition of Rs. 10,26,943/- as income u/s 41(1) due to outstanding royalty from M/s. Permolca, a foreign company. The AO treated the liability as ceased to exist since it was outstanding since 1992 and the assessee had agreed to write it back in A.Y. 2009-10. The CIT(A) upheld this view. However, the tribunal noted that an outstanding liability can be treated as income u/s 41(1) only when it ceases to exist, and the revenue must provide material evidence for this. The tribunal cited the Supreme Court judgment in CIT Vs Sagauli Sugar Works Pvt. Ltd. (236 ITR 518) and the Punjab & Haryana High Court judgment in CIT Vs Smt. Sitadevi Juneja (325 ITR 593), which support that mere passage of time does not extinguish liability. The tribunal found no evidence that the creditor had forgone the claim and thus deleted the addition.

2. Addition of Rs. 3,58,845/- as income u/s 41(1) due to outstanding advances from trade parties:
The second dispute involves the addition of Rs. 3,58,845/- as income u/s 41(1) due to outstanding advances from trade parties. The AO noted the amount was outstanding for several years and treated it as income since the assessee agreed to write it back in A.Y. 2009-10. The CIT(A) confirmed this addition. The tribunal reiterated that for a liability to be treated as income u/s 41(1), there must be material evidence showing the liability has ceased. The tribunal found no such evidence and noted that some recoveries had been made, reducing the liability to Rs. 2,17,536/- in A.Y. 2009-10. Therefore, the tribunal deleted the addition.

3. Addition of Rs. 10,16,054/- as income due to outstanding security deposits:
The third dispute pertains to the addition of Rs. 10,16,054/- as income due to outstanding security deposits. The AO treated these deposits as trading receipts, citing the Supreme Court judgment in Punjab Distillery Industries Ltd. Vs CIT (35 ITR 516). The CIT(A) upheld this view. However, the tribunal distinguished this case from Punjab Distillery Industries Ltd., noting that the deposits were not part of sale considerations but were taken to protect trading interests. The tribunal cited the Madras High Court judgment in CIT Vs AVM Ltd. (146 ITR 355), which held that such deposits could not be taxed u/s 41(1) if no deduction had been claimed in earlier years. The tribunal found no evidence that the parties had forgone the claim and thus deleted the addition.

Conclusion:
The tribunal allowed the appeal of the assessee, deleting all the additions made by the AO and confirmed by the CIT(A). The decision was pronounced in the open court on 25.05.2011.