TMI Blog2007 (5) TMI 257X X X X Extracts X X X X X X X X Extracts X X X X ..... ert the impugned sum as taxable under the provisions of Income-tax Act as Business Income of the assessee. It was held that the liability does not partake the nature of any benefit or perquisite for bringing it to tax under the umbrella of business income and the said amount due as a liability to HAL is not to be included as income of the assessee for the year under consideration. Third Member Order - The transaction is truly to be accounted to the credit of the supplier of the machinery, who is the original owner of the property. If the original owner does not claim the amounts due to him, it may be anything but not a cesser of liability of the type which could be assessed u/s 41(1) of the Act, as rightly pointed out by the ld JM. In my view the facts of the case does not go with the facts stated by the Hon'ble Supreme Court in the case of T.V. Sundaram Iyengar Sons Ltd.[ 1996 (9) TMI 1 - SUPREME COURT] In that case the assessee has appropriated the liability to its profit and loss account whereas in this case there has no such appropriation. The assessee is still showing them as outstanding liabilities in its balance sheet from year to year and the liability arose ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the Trade Fair, but the assessee did not return the machinery to HAL. However, subsequently, the machinery was transferred by the assessee company to M/s. Conway Printers Pvt. Ltd. (CPPL) for a total consideration of Rs 7.25 lakhs. The sale proceeds of Rs. 7.25 lakhs received by the assessee company from CPPL were shown in the books of account as deposit under the head 'Sundry Creditors payable to HAL, UK'. The sum of Rs. 7.25 lakhs was received partly on 21-1-1989 and partly on 23-8-1990. Since then, the aforesaid credit has remained outstanding in the books of the assessee and nothing has been paid to HAL. Subsequently, the business of HAL was taken over by another company, Du Point de Nemours Co. Inc. Further, this business was taken over by another company namely Agfa Gevaert, NV, Belgium. The Assessing Officer has observed that the machinery was sent to the assessee company by HAL in the financial year 1985-86. Subsequently, the machinery was sold to CPPL for a sum of Rs. 7.25 lakhs, out of which the sum of Rs. 7 lakhs was received on 21-1-1989 and the balance amount of Rs. 25,000 was received on 23-8-1990. Since then, the said amount of Rs. 7.25 lakhs is being s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in assessment year 1997-98, the commission cannot be taxed as income of the appellant company. Considering these facts, I am of the clear view that the addition which has been made by the Assessing Officer for this amount in question is not justified. Therefore, this addition made by the Assessing Officer is hereby deleted. Thus, the appellant gets relief of Rs. 7,25,000. 4. In the backdrop of the abovementioned facts, the ld. DR forcefully contended before us that the sum of Rs. 7.25 lakhs stands permanently appropriated by the assessee company as nothing has been paid till today and no claim has been made by HAL or by successor companies. It is, therefore, submitted that the ld. CIT(A) was not justified in deleting the addition. 5. The ld. counsel appearing on behalf of the assessee, strongly supported the order of the ld. CIT(A). He contended that the liability in the books of the assessee has not been written off and the said amount is payable by the assessee company to the successor company of HAL. It is argued that merely because the liability has not been paid over a long period of time, it does not cease to exist. The ld. counsel contended that section 41(1) is not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny and neither the assessee has any intention of returning the amount nor the concerned parties are serious about claiming this amount. The amount was payable to HAL which ceased to exist several years back and the successor companies have not come forward to claim this amount. The credit arose during the course of normal business activities of the assessee company as mentioned above. The assessee was acting as an Indenting Agent for HAL on the terms and conditions. of earning commission at the rate of 5 per cent in respect of any transaction undertaken by the assessee company on behalf of HAL. During the course of normal business activities, HAL sent the machinery to the assessee. Thus, the credit arose during the course of normal business activities of the assessee and the assessee has not only enjoyed usufruct of this amount over a period of more than 16 years, for all practical purposes, this amount has been appropriated by the assessee. In these circumstances, the question arises as to whether this amount partakes the character of assessee's business income chargeable to tax. It may be mentioned that the said amount has been brought to the charge of tax by the Assessing Of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a long period unclaimed by the trade parties. By lapse of time, the claim of the deposit became time-barred and the amount attained a totally different quality. It became a definite trade surplus. The assessee itself had treated the money as its own money and taken the amount to its P L account. The amounts were assessable in the hands of the assessee. In the present case also, the assessee, because of the trading operation, has become richer by the amount of Rs. 7.25 lakhs. The only difference is that in the present case, the assessee has not transferred this amount by writing back to the profit loss account. However, in our view, this fact is not a very material fact. There may be a case where the assessee deliberately refuses to write back the amount even though the liability has ceased to exist and for all practical purposes the same has been appropriated by the assessee. Therefore, the issue has to be decided on the basis of the totality of the facts and circumstances and not merely on the basis of the accounting entries passed by the assessee. In our view, the Supreme Court decision in the case of T.V. Sundaram Iyengar Sons Ltd. is squarely applicable to the facts of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me-tax Act. On the other hand, in the present case, the addition has been made under section 28(iv). 9. It may be mentioned here that the Madras High Court, in the case of CIT v. Sundaram Industries Ltd. [2002] 253 ITR 396, followed the Supreme Court decision in the case of T.V. Sundaram Iyengar Sons Ltd. in preference to the case of Sugauli Sugar Works (P.) Ltd. by observing that the former judgment was rendered by a Bench comprising of three Judges whereas the latter decision was rendered by a Bench comprising of two Judges and therefore the decision of a larger Bench must be followed in case of conflict. As mentioned above, the Supreme Court decision in the case of Kesaria Tea Co. Ltd. is not applicable to the facts of the assessee's case. Considering the entire facts and circumstances, we feel that the sum of Rs. 7.25 lakhs is a business benefit which has arisen to the assessee during the course of normal business activities. Therefore, the same has to be brought to the charge of tax as business income. We, therefore, hold that the ld. CIT(A) was not justified in deleting the addition. His order is, therefore, reversed and that of the Assessing Officer restored on this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de the issue vide order dated 6-12-2000. At page 6 of his order, the ld. CIT(A) has observed that the Assessing Officer has tried to make a good case in favour of the Department, but he had not provided adequate opportunity to the assessee to submit its explanation. Therefore, this issue was restored back to the Assessing Officer for allowing opportunity to the assessee. During the course of fresh assessment proceedings, the Assessing Officer once again allowed opportunity to the assessee and the assessee was required to furnish complete present addresses and confirmations from the parties or to produce the parties before him. However, the assessee merely filed copies of accounts as appearing in its books of account in respect of certain creditors for goods. In respect of certain other creditors for goods, the assessee was able to furnish the details and evidence. The Assessing Officer eventually made addition of Rs. 70,845. This addition has been deleted by the ld. CIT(A) for similar reasons as indicated by him in deleting the earlier addition of Rs. 7.25 lakhs. 13. The arguments submitted before us by both the parties are more or less the same as submitted in connection with t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee is concerned. The existence of the party is proved and the genuineness of the credit is also established. Therefore, with regard to this amount of Rs. 5,000, the order of the ld. CIT(A) is confirmed. (d) G.S. Quality - Rs. 2,920: This party responded to the summons issued by the Assessing Officer at the time of original assessment and replied vide letter dated 28-1-2000 that they did not supply any material to the assessee company and no money is due from them. During the course of fresh assessment proceedings, no explanation or material was filed by the assessee. In view of the categorical denial by this party, we hold that the Assessing Officer was justified in making the addition and therefore his order on this issue is restored. (e) Suman Arts Printers - Rs. 3,475: This party also responded to the summons issued at the time of original assessment and replied vide letter dated 31-1-2000. This reply may be reproduced below: Copy of account of the party for the period from 1989-90 to 31-3-1995 is enclose herewith. As per our books of account, an amount of Rs. 1,545 was due from the party. This amount has been written off on 30-11-1994, since we were not able to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee to show that the liability was continuing. Therefore, on this issue, the order of the Assessing Officer is restored. (i) The Printers (Mysore) Ltd. - Rs. 8,000: This party had responded by filing a letter dated 31-1-2000 during the course of original assessment proceedings and stated as under: Since our accountant is on one month leave, we are unable to attend the hearing on 1-2-2000. Kindly allow us another 15 days to enable us to attend the hearing or make written submission with regard to the details you have asked for in the above said notice. The Assessing Officer, in his original assessment order has mentioned that no reply was received from this party even after 15 days and therefore enquiries were conducted over telephone with one Shri R. Bhuvaneshwari, AGM (Finance) and he informed the Assessing Officer that as far as the records are concerned, nothing is due from M/s. AGMPL. He also told that they have not dealt with M/s. AGMPL and therefore the question of any recovery does not arise. These facts were confronted to the assessee at the time of fresh assessment proceedings and the assessee was asked to produce the party. However, the assessee failed to p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he said amount of Rs. 7.25 lakhs is being shown as credit payable to HAL by the assessee company in its books of account, since the money has been received on the sale of the machinery. The said liability has been accepted by the revenue from year to year. During the course of assessment proceedings relating to year under consideration, i.e., assessment year 1997-98, the Assessing Officer raised a query regarding the amount due and payable to HAL. In reply the assessee pointed out the total facts in connection with this transaction and also the fact that M/s. HAL has now merged its business with M/s. Agfa Gevaert NV, Belgium. The Assessing Officer brushing aside the contentions of the assessee observed that the assessee has not remitted the entire sale proceeds to the foreign suppliers and defrauded the revenue. Rejecting the contentions of the assessee, the Assessing Officer made an addition of Rs. 7.25 lakhs on account of cessation of liability observing that in reality there is not any cost to the assessee, because it is a free sample . It was further held by the Assessing Officer that the assessee is showing a hypothetical liability of a creditor in the balance sheet, which ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the order of CIT(A) and claimed that the aforesaid amount has not been written off by the assessee company in its books of account, Mere non-payment of the long due liability for a long period does not bring about the cessation of the liability. The learned AR for the assessee further contended that the addition made under section 41(1) of the Income-tax Act is not correct in the facts of the case and relied on the decisions of Hon'ble Supreme Court in the case of Sugauli Sugar Works (P.) Ltd. and Kesaria Tea Co. Ltd. 5. In the facts of the present case, it is difficult to comprehend how the said receipt can be treated as income of the assessee company unless there is a finding on record that the said liability to pay has ceased. The assessee is showing the said amount as a liability in its balance sheet from year to year. The machinery was handed over to M/s. Conway Printers Pvt. Ltd., after taking approval from HAL and the amount received by them is being shown in the books of account of the assessee as a deposit from them. The amount has remained to the credit of M/s. Conway Printers Pvt. Ltd. The amount due and payable to HAL could not be deposited in the bank account of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s considered by Three Judges Bench of Hon'ble Supreme Court in the case of T.V. Sundaram Iyengar Sons Ltd. which held as under: Held , that if a common sense view of the matter were taken, the assessee, because of the trading operation, had become richer by the amount which it transferred to its profits and loss account. The moneys had arisen out of ordinary trading transactions. Although the amounts received originally were not of income nature, the amounts remained with the assessee for a long period unclaimed by the trade parties. By lapse of time, the claim of the deposit became time-barred and the amount attained a totally different quality. It became a definite trade surplus. The assessee itself had treated the money as its own money and taken the amount to its profits and loss account. The amounts were assessable in the hands of the assessee . 7. Their Lordships of Hon'ble Supreme Court in Kesaria Tea Co. Ltd.'s case following the decision in Sugauli Sugar Work (P.) Ltd.'s case, and distinguishing the ratio of T.V. Sundaram Iyengar Sons Ltd.'s case and held that even in case where the liability is written back the same cannot be deemed to be t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income unless there is a finding that the assessee does not have any liability to return the money to TIFIL.......At best it is a case of diverting TIFIL funds for the use of this assessee, but then, in such a situation also, it does not become income of the assessee because the monies so diverted continue to be refundable. The assessee does not get this money in exercise of his right over the money. Just because the assessee has not paid the amount till now cannot be reason enough to jump to the conclusion that there is no liability to return the money either. 11. In the facts of the present case before us, no unilateral act of writing back the said amount has been made by the assessee. The assessee continues to recognize the liability of a sum of Rs. 7.25 lakhs payable to HAL in its account. Mere non-payment of the amount to HAL does not in any manner convert the impugned sum of Rs. 7.25 lakhs as taxable under the provisions of Income-tax Act as business income of the assessee. No doubt, in terms of section 28(iv) of the Income-tax Act the value of any benefit or perquisite whether convertible into money or not arising from business or the exercise of a profession is chargea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ir 1987. It was mutually agreed that if the machinery could not be sold at the aforesaid exhibition, it would be returned to HAL and if the same is sold away, then payment should be made directly to Lloyds Bank in England. It appears that the machinery could not be sold at the Trade Fair and the assessee did not return the machinery to HAL. However, subsequently, the machinery was sold by the assessee company to M/s. Conway Printers (P.) Ltd. (CPPL) for a total consideration of Rs. 7.25 lakhs. The payment of the said sale of machinery was received on 21-1-1989 to the extent of Rs. 7 lakhs and the balance of Rs. 25,000 was received on 23-8-1990. The sale proceeds so received was shown by the assessee company in its books of account as deposit under the head 'Sundry Creditors payable to HAL, UK'. Subsequently, the business of HAL was taken over by another company, Du Point de Nemours Co. Inc. Further, this business was taken over by another company namely Agfa Gevaert, NV, Belgium. The said amount of Rs. 7.25 lakhs was shown as outstanding liability to HAL by the assessee company in its books of account. During the course of assessment proceedings for the assessment year 19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Till today, neither the assessee company has paid this amount to HAL or its successor companies nor those companies have claimed this amount. According to the Accountant Member, there was no material or evidence in the form of any correspondence to establish that this amount is being claimed by the successor companies. The assessee received the sale proceeds in January 1989 and for a period of more than 16 years the assessee company has used this amount for its own business without any liability even for payment of interest. The circumstances according to him prove beyond any doubt that for all practical purposes, this amount has been appropriated by the assessee company and neither the assessee has any intention of returning the amount nor the concerned parties are serious about claiming this amount. The amount was payable to HAL which ceased to exist several years back and the successor companies have not come forward to claim this amount from the assessee-company. The learned Accountant Member applied the ratio laid down by the Hon'ble Supreme Court in the T.V. Sundaram Iyengar Sons Ltd. and according to him this decision squarely applicable to the facts of the assessee&# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a Tea Co. Ltd. and even if the liability is written back the same cannot be deemed to be the income of the year under section 41(1) of the Income-tax Act, even upon the expiry of the period of limitation prescribed under the Limitation Act. She refused to follow the decision of the Hon'ble Supreme Court in the case of T.V. Sundaram Iyengar Sons Ltd., as according to her, in that case the assessee has transferred the unclaimed credit balances available in his deposit account to its profit and loss account, thereby converting the character of the credit balances into that of income by its own action, whereas in the case of the assessee the outstanding balances were shown as liabilities to the supplier of the machinery. According to her the liability of Rs. 7.25 lakhs does not partake the nature of any benefit or perquisite for bringing it to tax under the umbrella of business income even under section 28(iv) of the Act. 5. The CIT(DR) has filed written submission. The CIT(DR) reiterated the facts and strongly supported the order of the learned Accountant Member. According to him by lapse of time the claim of deposit became time barred. It became a definite trade surplus. If ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laim the dues from the assessee. The liability to make the payment has not ceased to exist. The amounts in question, therefore, cannot be taxed either under section 28(iv) or under section 41 (1) of the Act as appreciated by the Commissioner (Appeals) as also by the learned Judicial Member. It is wrong to say that the assessee has appropriated the amounts in question without the same being credited to the Profit Loss Account. It is just like any other trading liability. The mere fact that the suppliers have not claimed the money nor the assessee has paid the money does not bring the amounts in question chargeable to tax in the hands of the assessee under section 28(iv) or section 41 (1) of the Act. The facts of the case are clearly governed by the decision of the Hon'ble Supreme Court in Sugauli Sugar Works (P.) Ltd. and Kesaria Tea Co. Ltd., wherein the Apex Court has already stated that the unilateral act on the part of the assessee by way of writing of its P L Account did not necessary mean the liability has ceased in the eyes of law. 6. I have carefully considered the contents of the submission made by the CIT(DR) as also the arguments of the learned counsel for the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isions the assessee should have appropriated the sums in question to its profit and loss account. Here is a case where the assessee has not appropriated any sums to its profit and loss account. In other words, the sum does not represent income not credited to the profit and loss account in the earlier years which the Hon'ble Bombay High Court was concerned with. It is a case of sale of somebody's asset and not even a part of its regular business receipts. The question of its appropriation in the manner aforesaid has not also taken place. Therefore, it is difficult to apply the provisions of section 28(iv) to the facts of the case when the assessee has been acknowledging this outstanding amount as liabilities to its principal from year to year in its balance sheet. 7. Again the Hon'ble Bombay High Court in Mahindra Mahindra Ltd. v. CIT [2003] 261 ITR 501. was concerned with the import of capital assets and loan granted by the foreign company. The High Court in this case was concerned with the fact that where the assessee is a manufacturer of jeeps. It entered into an agreement with an American company which agreed to sell to the assessee dies, welding equipments and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der section 36(1)(iii) or section 37. In the circumstances, section 41(1) of the Act was not applicable. Although the facts of the case are slightly different but clearly points out that the amounts in question received by the assessee in the instant case cannot be brought to tax under section 28(iv) of the Act. 8. Now, I shall take up the second issue whether the amounts in question are liable to be taxed under section 41 (1) of the Act. I am again persuaded by the decision of the Hon'ble Bombay High Court in Mahindra Mahindra Ltd. herein they have categorically stated that where the assessee had not obtained any deduction in respect of expenditure or trading liability, the question of the same amount being brought to tax under section 41(1) does not arise. Now, I have examined whether the assessee in this case has obtained any deduction by debiting the amount into profit and loss account in the earlier years. The fact of the matter is that the assessee has not. The transaction in question was between the principal and the agent and the asset belonged to the principal and there is no question of the assessee claiming any deduction in its profit and loss account for the tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... show the character of these receipts has changed merely by passage of time. 10. In the light of the discussion, I am in complete agreement with the view expressed by the learned Judicial Member that the amount in question cannot be included the income of the assessee for the year under consideration. The matter will now be placed before the regular Bench to dispose of the appeal in conformity with the majority opinion. ORDER Per Ms. Sushmna Chawla, Judicial Member.- In this case, the appeal filed by the revenue was heard by the Division Bench of this Tribunal. As a result of difference of opinion in respect of ground No. 1 between the Accountant Member and the Judicial Member, the following issue was referred to a Third Member by the Hon'ble President, ITAT, under section 255 (4) of the Income-tax Act, 1961: Whether, on the facts and in the circumstances of the case, the sum of Rs. 7,25,000 received by the assessee in the year 1989, during the normal course of carrying on its business but shown as outstanding liability in the books of account till date, can be brought to the charge of tax under section 28 of the Income-tax Act, 1961, as profit, gain or benefit ..... X X X X Extracts X X X X X X X X Extracts X X X X
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