Case Law Details
ITO Vs Schoeller Technologies India Pvt. Limited (ITAT Mumbai)
The assessee was making consistent losses for the last several years and therefore, the promoter company was supporting the assessee in continuing its survival. The sums payable to the promoter towards commission, knowhow fees and royalty are outstanding constantly for 2012-13 onwards. The accumulated losses of the company is ₹2.57 crores and therefore, the sum payable to the holding company remained unpaid. Part of the sum was received as loan and a sum of ₹3,01,66,005/- was on account of various expenditure incurred by the assessee in earlier years. The learned CIT (A) noted that the learned Assessing Officer did not have any evidence that above sum has become an income of the assessee by remission or cessation of the liability to pay to the holding company. He held that unless the liability for payment ceases, the amount could not have been taxed under Section 41(1) of the Act. He further relied upon several judicial precedents where, it has been held that non-payment of outstanding liability where the liability still exists, cannot be added under Section 41(1) of the Act. He noted that assessee is showing liability in his books of account and therefore, same exists. The transfer of sum of ₹33,23,957/- which has already been offered by the assessee cannot make the other outstanding liability as income of the assessee. On careful examination of section 41(1) of the Act, we also find that assessee has not obtained any amount in respect of the above liability outstanding and there is no remission of the liability. Unless, there is an evidence of remission or cessation of liability, provisions of Section 41(1) of the Act does not apply. In fact, in this case assessee has acknowledged the existence of liability in its balance sheet year to year, shown relationship with the creditor and reasons for non-payment. In view of this, we do not find any infirmity in the order of the learned CIT (A) in deleting the above addition. Accordingly, the order of the learned CIT (A) is confirmed. The appeal of the learned Assessing Officer is dismissed.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
1. This appeal is filed by Income Tax Officer, 15(3), Mumbai, (the learned Assessing Officer) for A.Y. 2015-16 against the order passed by the Commissioner of Income-tax (Appeals)-24, Mumbai [the learned CIT (A)] in case of Schoeller Technologies India Pvt. Ltd (assessee), who has also filed cross objection.
2. In ITA No.2407/Mum/2019, the appeal is filed by the Income Tax Officer, Ward 15(3)(3), Mumbai (the learned Assessing Officer) raising following grounds of appeal:-
“1. On the fact and circumstances of the was correct in case, whether the Ld. CIT (A) law, in deleting the addition made under section 41(1) of the Income-tax Act, 1961, amounting to Rs. 3,12,73,991/- not written off by the assessee company in respect of unpaid expenses like commission, Royalty, knowledge know-how fees etc., ignoring the fact that the assessee company has already paid/claimed and therefore the assessee’s case falls within the purview of “cessation of liabilities” for the purpose of section 41(1) of the Act?
2) On the facts and in the circumstances of the case, whether the Ld. CIT(A) was correct in law, in allowing the ground of the assessee, in spite of the fact that the assessee failed to explain and justify as to why only Rs. 33,23,957/- out of Rs. 3,45,97,948/- is no longer payable.
3) On the facts and circumstances of the case and in law, whether the Ld. CIT (A) was correct in law, in merely holding that the Assessing Officer was not justified in bringing to tax Rs. 3,12,73,991/- as remission of liability under section 41(1) of the Act and directing the Assessing Officer to delete the addition, without adjudication that why assessee company written back the amount payable to the promoter company?
4) The appellant prays that the order of the Ld. CIT (A) on the above grounds be set aside and that of the AO be restored.
5) The applicant craves leave to add, amend or alter any grounds or add new ground, which may be necessary.”
03. The assessee filed Cross Objection no. 02/Mum/2021 raising following grounds:-
“1. The Ld. CIT Appeals erred in adding Rs. 24,12,250/- by confirming the addition without considering that the expenditure is incurred wholly an exclusively for the business merely due to the fact that the same is transferred from Mr. Sanjeev Swamy account to the Douceur Sportswear Mfg Co Pvt. Ltd.
2. The Assesses officer erred in making addition merely due to the fact there is a mismatch between the books and annual information report.”
04. Brief fact of the case referred to from the orders of the lower authorities shows that Assessee Company engaged in the business of processing textiles for the use of defense personnel.
05. It filed its return of income for A.Y. 2015-16 on 31st October, 2015 at ₹8,15,210/-. The case of the assessee was picked up for scrutiny.
06. During the course of scrutiny, the learned Assessing Officer noted that assessee is liable to pay ₹3,12,73,991/-to Scholler Textile AG for various expenses such as commission, royalty, knowhow fees which were debited in earlier years. As the amount was outstanding for a long time, the learned Assessing Officer questioned that why the above amount are pending for payment. The learned Assessing Officer also noticed that a Sum of ₹33,23,957/-with respect to this Scholler Textile AG and ₹11,70,000/-payable to Shrenik Zaveri were written back during the year.
07. Assessee submitted that Scholler Textile AG hold 74% of the share capital and is a promoter of the company. As the assessee is having financial difficulties due to falling turnover and losses, therefore, this amount could not be paid and hence, outstanding.
08. The learned Assessing Officer found that assessee himself has written back ₹ 33,23,957/- during the year and offered the same as income, however, assessee has not filed any response for non taxability of the balance sum of ₹3,12,73,991/-. The learned Assessing Officer noted that the amount is in the books of assessee since, 2013 and there is no transaction thereafter. Therefore, he held that there is remission of liability of the balance amount of ₹3,12,73,991/- and same was added under Section 41(1) of the Act.
09. Assessee has also debited ₹24,36,640/- as selling and distribution expenses where ₹24,12,250/- was paid to Mr. Sanjeev Swamy, being one of the Director of the assessee company. The learned Assessing Officer noted that for A.Y. 2014-15, the above sum was disallowed as business promotion expenditure, therefore, why it should not be disallowed in A.Y. 2015-16 also.
010. Assessee submitted that these expenses were incurred towards promoting the product of the company and for looking after working of the company. This was not disallowed for this year because of the efforts of Mr. Sanjeev Swamy.
011. The learned Assessing Officer noted that no tax has been deducted from payment. Further, on verification, he found that though the above sum was claimed to be paid to Mr. Sanjeev Swamy as business promotion expenses, was in fact credited to the account of Douceur Sportswear Mfg Co Pvt. Ltd. The assessee could not produce the accounts from that company, therefore, the learned Assessing Officer held that assessee has failed to prove whether these expenses were incurred wholly and exclusively for the purpose of business and hence, disallowed. There was some AIR mismatch of income of 7,95,698/-, which was also added to the income of the assessee.
012. Accordingly, assessment order under Section 143(3) of the Act was passed on 27th December, 2017 determining the total income of the assessee at ₹3,52,97,150/-.
013. The assessee preferred an appeal before the learned CIT (A), who passed an order on 14th January, 2019. With respect to the addition under Section 41(1) of the Act, the learned CIT (A) held that the learned Assessing Officer failed to satisfy the basic requirement under Section 41(1) of the Act. Hence, he deleted the addition. With respect to the disallowance of ₹24,12,250/-, he confirmed the action of the learned Assessing Officer as no further evidence were produced. With respect to the AIR mismatch, he upheld the addition of ₹7,95,698/- as no further evidences were produced.
014. Therefore, the learned Assessing Officer is aggrieved with the order of the learned CIT (A) in deleting the addition of ₹3,12,73,991/- under Section 41(1) of the Act and assessee’s cross objection is against the confirmation of disallowance of ₹24,12,250/-.
015. At the time of hearing, assessee requested for withdrawal of the cross objection. The learned Departmental Representative did not have any objection and therefore, the Cross Objection of the assessee is dismissed as withdrawn.
016. Now, therefore the only issue remains with respect to the appeal of the learned Assessing Officer about deletion of addition under Section 41(1) of the Act.
017. We have heard the parties. The learned Departmental Representative supported the order of the learned Assessing Officer and the learned Authorized Representative supported the order of the learned CIT (A).
018. The facts are clear that Scholler Textiles AG is the promoter of the assessee company. The assessee was making consistent losses for the last several years and therefore, the promoter company was supporting the assessee in continuing its survival. The sums payable to the promoter towards commission, knowhow fees and royalty are outstanding constantly for 2012-13 onwards. The accumulated losses of the company is ₹2.57 crores and therefore, the sum payable to the holding company remained unpaid. Part of the sum was received as loan and a sum of ₹3,01,66,005/- was on account of various expenditure incurred by the assessee in earlier years. The learned CIT (A) noted that the learned Assessing Officer did not have any evidence that above sum has become an income of the assessee by remission or cessation of the liability to pay to the holding company. He held that unless the liability for payment ceases, the amount could not have been taxed under Section 41(1) of the Act. He further relied upon several judicial precedents where, it has been held that non-payment of outstanding liability where the liability still exists, cannot be added under Section 41(1) of the Act. He noted that assessee is showing liability in his books of account and therefore, same exists. The transfer of sum of ₹33,23,957/- which has already been offered by the assessee cannot make the other outstanding liability as income of the assessee. On careful examination of section 41(1) of the Act, we also find that assessee has not obtained any amount in respect of the above liability outstanding and there is no remission of the liability. Unless, there is an evidence of remission or cessation of liability, provisions of Section 41(1) of the Act does not apply. In fact, in this case assessee has acknowledged the existence of liability in its balance sheet year to year, shown relationship with the creditor and reasons for non-payment. In view of this, we do not find any infirmity in the order of the learned CIT (A) in deleting the above addition. Accordingly, the order of the learned CIT (A) is confirmed. The appeal of the learned Assessing Officer is dismissed.
019. In the result, the appeal of the learned Assessing Officer and Cross Objection of the assessee, are dismissed.
Order pronounced in the open court on 18.07.2022.
