Case Law Details

Case Name : Principal CIT Vs M/s Tinna Finex Ltd. (Delhi High Court)
Appeal Number : ITA 113/2016
Date of Judgement/Order : 15/02/2016
Related Assessment Year : 2009-10
Courts : All High Courts (1347) Delhi High Court (463)

Brief of the Case

Delhi High Court held In the case of Principal CIT vs. M/s Tinna Finex Ltd. that the Tribunal has correctly followed the decision of this court in CIT v. Shivali Construction 355 ITR 218. The loan transactions were on the capital account and the writing off the loan was also on capital account and did not find place in the Profit and Loss Account.  Apart from this it has been found as a matter of fact that the assessee had not got the benefit of any allowance or deduction in the assessment for any prior year in respect of loss, expenditure or trading liability incurred by assessee.  Thus the cessation of the liability by itself would not lead to the attraction of the provisions of Section 41(1) in the subsequent year when the liability ceased to exist.

Facts of the Case

The assessee company is engaged in the business of finance and export. In the year in question there was no business activity except for the receipt of interest and some hire charges.  Against the gross receipts of Rs 6,54,900/- the company claimed an expenditure of Rs 10,83,949/- resulting in a loss of Rs 4,29,049/-.During the assessment proceedings the Assessing Officer noted that an amount of Rs 5,64,85,956/- shown as secured and unsecured loans as on 31.03.2008 in the balance sheet of the respondent company was reduced to Nil as on 31.03.2009.  The assessee was asked to explain this change and in response the assessee indicated that this was based upon a family settlement between the group members. The assessee submitted that no trading transaction was involved in the writing off the said loans and, therefore, the provisions of Section 41(1) would not be attracted.  However, the Assessing Officer invoked the provisions of Section 41(1) and made an addition of Rs 5,64,85,956/- to the income of the assessee.

Held by CIT (A)

CIT (A) deleted the addition made by the Assessing Officer and found that Section 41(1) was not attracted.

Held by ITAT

ITAT dismissed the appeal of the revenue. The Tribunal placed reliance on, inter alia, a decision of this court in Commissioner of Income-tax-III v. Shivali Construction (P) Ltd, 355 ITR 218. It was held that the AO has made the addition of Rs 5.64 crores by invoking provision of sec. 41(1) of the Income-tax without stating how the provision are applicable to the assessee’s case.  Mere cessation of liability does not result into fit case of sec. 41(1). Assessee has submitted that assessee was not incurred any loss/expenditure/trading liability which is subsequently recovered by him is taxable as income in the year of recovery. Further held that it is well settled law that where no deduction / allowance has been made in respect of loss, exp/liability in the assessment year or in any earlier years, cessation of such liability cannot be taxed under section 41(1).

 Held by High Court

 High Court held that the Tribunal has correctly followed the decision of this court in CIT v. Shivali Construction 355 ITR 218.  The loan transactions were on the capital account and the writing off the loan was also on capital account and did not find place in the Profit and Loss Account.  Apart from this it has been found as a matter of fact that the respondent / assessee had not got the benefit of any allowance or deduction in the assessment for any prior year in respect of loss, expenditure or trading liability incurred by the respondent / assessee.  Thus the cessation of the liability by itself would not lead to the attraction of the provisions of Section 41(1) in the subsequent year when the liability ceased to exist.

A similar decision of this court is also reported in Commissioner of Income-Tax v. Tosha International Ltd, (2011) 331 ITR 440.  Since the issue on law already stands settled by the said decisions of this court, no substantial question of law arises for our consideration.

Accordingly, appeal disposed of.

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