Entries write back in absence of explanation is assessable as income

Brief of the case:

Tribunal examined that whether addition can be made on account of net increase in the assessee’s capital during the year on account of write back as well as write off of some old credits and debits appearing in her accounts. After examining the facts and circumstances of the case tribunal held that in the absence of cessation of liability the disputed sum is confirmed as income u/s 56 and under the head income from other sources. The issue find support with the decision of apex court in TV Sundaram Iyenger 1996] 222 ITR 344 (SC) and standing to fall to be assessed u/s 56 (1) & 56 (2).

Facts of the case:

• On verification of return of assessee it was observed that a net increase of Rs. 28,09,953/- is reflecting in assessee’ s account, being the difference between the amount of sundry creditors written back and of sundry debtors written off, at Rs.30,42,500/- and Rs.2,32,547/- respectively, to her capital account. The assessee claimed the same to be unsecured loans, received some 15 years ago.
• AO found that assessee being unable to substantiate her claim, could only furnish names of the parties. Assessee even could not explain the reason for the write back.The same was treated as income from other sources by the AO.
• CIT(A) confirmed the decision of AO.

Contention of the revenue:

• The amounts have not been shown to be received on capital account.
• The credit to the assessee’s capital account being during the current year, the impugned sum can only be considered as having been received during that year. The provision of section 56(2) shall, therefore, apply. Reliance stands placed by it on the decision in the cases of CIT vs. P. Mohanakala (2007) 291 ITR 278 (SC) and Major Metals Ltd. vs. Union of India (2013) 359 ITR 450 (Bom) toemphasize that the doubtful nature of the transaction and the manner in which the sums were found credited in the books of account maintained by the assessee are to be duly taken into consideration by the Revenue authorities.
• The issue was squarely covered by decision of Hon’ble Supreme Court in the case of CIT Vs. T.V. SundramIyengar [1996] 222 ITR 344 (SC) where apex court observed that write back entries liable to be assessable u/s.28 as business income.
• The amounts were clearly not loans. No interest was ever paid on the amounts, which were consistently shown in accounts as ‘amounts payable’. The amount being credited to the capital account for the current year clearly represented a receipt for that year, attracting section 56(2)(vi), as none of the excepted payers, as listed at clauses (a) to (g) thereof, were applicable.

Contention of the assessee:

• Neither section 41(1) nor, consequently, section 59(1) would apply. The impugned sums had not been claimed or allowed in the assessment for any preceding year, and neither did she have any trading relations with the creditors.Hence these provisions did not apply to the case of assessee.
• There is as also no scope for the application of the decision in the case of T.V. SundramIyengar (supra) in the light of the above.
• The amounts having been received years ago; rather, about 15 years ago, section 56(2)(vi) also could not be invoked.

Held by the tribunal:

• The impugned entry would not result in income accruing to the assessee in-as-much as no net accretion to the capital has been shown, the onus for which is on the Revenue.
• A reversal of a wrong entry, having no income or expense implication, cannot, by any stretch of imagination, result in income. Book entries do not create income but merely recognize it.
• The Revenue has wholly failed to discharge the onus on it to show that any income has either arisen or stood received by the assessee during the year, which could only be by showing that the credit written back, stated to be fictitious by the assessee, was actually not so but represented an actual liability of the assessee, so that she has actually gained to that extent.

Comments by the Author:

Income is defined u/s. 2(24) as a term of widest amplitude, which would include any sum in the nature of income. Income, by definition, is always conceived in terms of addition to capital. When, therefore, what is received stands established as capital, there is no question of it being considered as accretion thereto and, hence, as income.