IN THE ITAT BANGALORE BENCH ‘B’
Smt. Victoria Roberts
Assistant Commissioner of Income-tax
IT APPEAL NO. 88 (BANG.) OF 2012
[ASSESSMENT YEAR 2008-09]
Date of pronouncement –14.09.2012
N.V.Vasudevan, Judicial Member
This is an appeal by the assessee against the order dated 23-11-2011of CIT(A), Mysore, relating to AY: 2008-09.
2. The only issue that arises for consideration in this appeal is as to whether the revenue authorities were justified in making the addition of Rs. 25,51,792.86 to the total income of the assessee by invoking provisions of sec. 41(1)(a) of the IT Act, 1961 (herein after referred to as “The Act”). The material facts of the case are as follows;
3. The assessee is an individual. She is engaged in the business of trading in Copper anodes, PCB drives and other items, besides deriving income as commission agent. For the assessment year 2008-09, the assessee filed return of income declaring a total income of Rs. 25,51,750/-. The AO found from the balance sheet of the assessee that on 31-03-2008, a sum of Rs. 55,21,457.86 was reflected in the name of M/s International Metal and Chemicals, USA (M/s IMC), as sundry creditors. As on 31-03-2007 the amount payable to the aforesaid parties was Rs. 25,30,792.86. The AO called upon the assessee to give a confirmation from the creditor. The assessee submitted that in respect of the opening balance as on 31-03-2007 of Rs. 25,30,792.86, the same was with held by M/s IMC because of some dispute between M/s IMC and M/s Synergy Dooray Automative Ltd (hereinafter referred to as M/s Synergy, Visakapatnam). The assessee also submitted that the disputes were with regard to transaction between M/s IMC and M/s Synergy, Visakapatnam in respect of which the Assessee had acted as Commission agent for which the Assessee was to receive commission from IMC.
4. The AO however made an addition of Rs. 25,30,792.86 to the total income of the Assessee by invoking the provisions of Sec.41(1)(a) of the Act observing as follows;
“Since the assessee has acted as commission agent for the transaction, the supplier i.e M/s IMC, USA has not paid; the commission to the assessee. Therefore, the assessee has appropriated the credit of Rs. 25,30,792.86 towards the commission receivable. Thus, the credit of Rs. 25,30,792.86 ceased to exist as on 31-03-2008. Therefore, the said sum of Rs. 25,30,792.86 is added under the provisions of sec.41(1)(a) of the Act.
5. Against the order of the AO, the Assessee preferred appeal before CIT(A). Before the CIT(A), the assessee submitted she was involved in the business of trading in Copper Anodes, PCB drives and other items and IMC was one of her main supplier. The Assessee for the purpose of its trading business used to import certain goods from IMC on credit basis. The Assessee had a running account with M/s IMC and the assessee used to make payments to M/s IMC promptly. The Assessee as on 31-03-2007 had shown a sum of Rs. 25,30,762.86 as payable to IMC for the goods imported from them. The said outstanding liability was also shown in the balance sheet annexed to the assessment year 2007-08.
6. The Assessee further submitted that M/s IMC wanted to diversify its business in India and were looking for certain other Indian customers to market their product. M/s IMC approached the Assessee to look for an Indian customer for its products and the appellant identified M/s Synergy, Vishakapatnam. M/s IMC started supplying its goods to M/s Synergy, Vishakapatnam and M/s IMC was carrying on its business with M/s Synergy, Vishakapatnam. The assessee was to receive commission for identifying the Indian customer on fulfillment of the terms and conditions. The quantum of the commission was not finalized.
7. The Assessee pointed out that the AO erroneously concluded that the Assessee withheld the amount of Rs. 25,30,792.86 due to M/s IMC because certain dispute arose between M/s IMC, USA and M/s Synergy, Visakapatnam, and thus, the supplier M/s IMC did not pay the commission to the assessee and hence the assessee has appropriated the credit of Rs. 25,30,792.86 towards the commission receivable and brought to tax the entire sum of Rs. 25,30,792.86 as income by invoking the provisions of sec.41(1)(a) of the Act.
8. The Assessee also submitted that it was a fact that there arose a difference between M/s IMC and the assessee as regards the payments due to M/s IMC by M/s Synergy, Visakapatnam for which M/s IMC held the assessee responsible for non-payment for the goods supplied to M/s Synergy, Vishakapatnam. The Assessee submitted that this fact has nothing to do with the payment of outstanding by the Assessee to M/s IMC.
9. The Assessee reiterated that there was no remission or cessation of liability payable to M/s IMC much less the sum of Rs. 245,30,792.86. The Assessee pointed out that she maintained business relationship with M/s IMC and there was continuity of business with M/S.IMC and that the business transactions between the assessee are still in operation and the said outstanding continues to be shown in the books of account of the appellant as liability, and is running account. The Assessee submitted that as on 31-03-2008, the assessee has shown a sum of Rs. 55,21,457/-as payable to M/s IMC in its books of account. On the above facts the Assessee submitted that the addition of a sum of Rs. 25,30,792.86 made by the AO by invoking the provisions of sec.41(1)(a) of the Act cannot be sustained.
10. The CIT(A) firstly, held that the assessee did not file any confirmation of outstanding dues to M/s IMC. The CIT(A) thereafter found that as on 01-04-2007, there was a opening balance of Rs. 25,30,792.86 and this continued even in FY: 2008-09 and 2009. The CIT(A) was therefore, of the view that the assessee was with holding the aforesaid sum because, it had to receive commission from M/s IMC in respect of the transaction between M/s IMC and M/s Synergy, Visakapatnam. The CIT(A) also noticed that the assessee had also filed a winding up petition against M/s Synergy, Vishakapatnam, on behalf of M/s IMC. Therefore, the CIT(A) was of the view that a sum of Rs. 25,30,792.86 was retained by the assessee as commission for services rendered in connection with the transaction between M/s IMC and M/s Synergy, Visakapatnam. In this regard, the CIT(A) also drew an adverse inference, because for the assesseee’s failure to file a confirmation from M/s IMC. The CIT(A) accordingly, confirmed the order of the AO giving rise to the present appeal by the assessee before the Tribunal.
11. The learned counsel for the assessee reiterated the stand of the assessee as put forth before the lower authorities. The learned DR reiterated the stand of the revenue as reflected in the order of the CIT(A).
12. We have considered the rival submissions. Sec.41(1) of the Act, provides that where as allowance or deduction has been made in respect of loss, expenditure or trading liability and subsequently, the assessee obtains whether in cash or in any other manner whatsoever, any amount in respect of such los or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount so obtained by such person or the value of benefit accruing to him shall be deemed to be profits and gains of business or profession and accordingly chargeable to income tax as the income of the previous year, whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not of such liability in respect of such loss, expenditure or trading liability, it is chargeable to tax. Sec.41(1) actually contains two limbs and caters to two different situation;
(a) Where an allowance or deduction has been made in respect of any loss expenditure incurred by the assessee in an earlier year, and subsequently, the assessee receives any amount in respect of such loss or expenditure in a later year.
(b) Where an allowance or deduction has been made in respect of any trading liability incurred by the assessee in an earlier year, and in later year, and in a later year, the assessee receives any benefit in respect of such trading liability by way of remission or cessation thereof.
Sec.41(1) is a deeming fiction and seeks to tax receipt or benefit which may not strictly be ‘income’, the burden to prove that a particular benefit or receipt falls within the four corners of the provisions of sec.41(1) lies upon the revenue. In other words, it shall be incumbent upon the Assessing Officer to prove with the help of material or evidence that a deduction or allowance has been allowed to the assessee in earlier years and after such deduction or allowance having been allowed, the assessee has obtained any amount or benefit in respect of the same for which deduction or allowance has been allowed. The Assessing Officer shall have further to prove that such benefit has been obtained by the assessee in a particular previous year. If any of the ingredients of sec.41(1) is missing, he revenue will fail to rope the value of the benefit in the tax net in a particular year. These ingredients have necessarily to be proved and cannot be presumed.
13. In our view, the conclusion drawn by the CIT(A) are purely on surmises. There is no evidence on record, to show that a sum of Rs. 25,30,792.86 which was admittedly, liability payable by the assessee to M/s IMC was adjusted towards the commission payable to the assessee by M/s IMC. The fact that no confirmation was filed from M/s IMC cannot lead to the conclusion that there was a cessation or remission of liability of the assessee to M/s IMC warranting invocation of provisions of sec.41(1) of the IT Act, 1961. The reliance placed by the learned counsel for the Assessee on the decision of the Hon’ble Delhi High Court in the case of CIT v. Shri Vardhman Overseas Ltd.  343 ITR 408 supports the plea of the Assessee. In that case the Assessee wrote of the liability by crediting the amounts outstanding in the profit and loss account but showed them as liability in the Balance Sheet. The Hon’ble Delhi High Court held that the fact that the liability is reflected in the balance sheet of the Assessee was an acknowledgement of liability which can be relied upon by the credit for saving limitation of time for action by legal proceedings u/s.18 of the Limitation Act, 1963. In the present case there is not even such a write off in the profit and loss account. In such circumstances, we are of the view that the action of the revenue authorities in brining to tax the disputed amount by invoking provisions of Sec.41(1) of the Act cannot be sustained. Even assuming that the Commissioner has sustained the addition on the basis that a sum of Rs. 25,30,792.86 is commission income of the assessee, the same is without any evidence and is purely on surmises. We therefore, hold that the addition made by the AO and sustained by the CIT(A) deserves to be deleted. We accordingly, direct that the addition be deleted.
14. In the result, the appeal filed by the assessee is allowed.