Ita/248/2012 Of Commissioner Ofincome Tax v. Sri Rajesh Kumar T.r.(Late)

IN THE HIGH COURT OF KERALA AT ERNAKULAMPRESENT THE HONOURABLE MR.JUSTICE K.VINOD CHANDRAN & THE HONOURABLE MR.JUSTICE ASHOK MENON WEDNESDAY, THE 16TH DAY OF JANUARY 2019 / 26TH POUSHA, 1940 ITA.No.248 of 2012 AGAINST THE ORDER IN ITA 434/COCH/2010 OF I.T.A.TRIBUNAL, COCHINBENCH, COCHIN. APPELLANT/APPELLANT: THE COMMISSIONER OF INCOME TAX,KOTTAYAM. BY ADV. SRI.JOSE JOSEPH, SC, FOR INCOME TAX RESPONDENT/RESPONDENT: LATE SRI RAJESH KUMAR T.R.,REPRESENTED BY LEGAL HEIR SMT.UMA MAHESWARI, M/S.VEERIAH REDDIAR, ALAPPUZHA-688011. BY ADV.SRI.S.ARUN RAJ OTHER PRESENT: SRI P.K.R. MENON, SENIOR COUNSEL, GOI (TAXES). THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 16.01.2019, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: Vinod Chandran,J.: JUDGMENT The question of law raised in this appeal arisesfrom an order of the Tribunal, which confirmed the additionmade of Rs.75 lakhs to the capital account of the assessee.The addition was said to be a gift made by the maternaluncle of the assessee. However, the Assessing Officer [forbrevity “AO”] found that the maternal uncle and theassessee had business transactions and there was supplymade by the proprietorship firm of the maternal uncle tothe assessee's firm. There was an outstanding creditbalance of Rs.72,55,783/- in the account of the maternaluncle as maintained by the assessee. The assessee, oncrediting the capital account in the subject year of Rs.75lakhs, also debited the business account of the maternaluncle; thus wiping off the outstanding credit ofRs.72,55,783/-. 2. The AO issued notice proposing an additionunder Section 41(1) of the Income Tax Act, 1961 [forbrevity “the Act”]. The assessee replied that Rs.75 lakhswas a gift from the maternal uncle and also produced aconfirmation letter to that end. The AO, however, refusedto accept the claim of the assessee that Rs.75 lakhs was amere gift. The first appellate authority also confirmed the additions made by the AO. The Tribunal, however, found thatif actually a cheque was given as gift, then there wouldhave been no addition made as remission of tradingliability. It was also found that there was no requirementthat there was no adverse business situation faced by theassessee's business concern to find a remission of tradingliability. 3. Another Division Bench of this Court has raised the following questions of law by order dated 05.11.2013: “(1) Whether, on the facts and in the circumstances ofthe case and considering the reality of thesituation, is not the Assessment under Sec.41(1)valid and in accordance with law?the case and considering the reality of thesituation, is not the Assessment under Sec.41(1)valid and in accordance with law? (2) Whether, on the facts and in the circumstances ofthe case and after having found that “the bookentry passed by the assessee by reducing thecreditor's balance and increasing the assessee'scapital balance”, “to be considered for thepurpose of invoking the provisions of section41(1) of the Act”, the Tribunal is right in lawin not taking the findings to the legal andlogical conclusion, holding that the same “is notthe only criteria”, and is not the above approachand the findings in paragraph 12 of the orderuncalled for, extraneous to the issue andperverse?the case and after having found that “the bookentry passed by the assessee by reducing thecreditor's balance and increasing the assessee'scapital balance”, “to be considered for thepurpose of invoking the provisions of section41(1) of the Act”, the Tribunal is right in lawin not taking the findings to the legal andlogical conclusion, holding that the same “is notthe only criteria”, and is not the above approachand the findings in paragraph 12 of the orderuncalled for, extraneous to the issue andperverse? Whether, on the facts and in the circumstances ofthe case and in view of the fact that thethe case and in view of the fact that the assessee had a trading liability of Rs.75.55lakhs to the donor, is not the so-called gift ofRs.75,00,000/- received by the assessee in thenature of remission of liability and taxableunder Section 41(1) of the Income Tax Act?Whether, on the facts and in the circumstances ofthe case and nomenclature being irrelevant and“the taxing authorities were not required to puton blinkers”; “entitled to look into thesurrounding circumstances to find out the reality(82 ITR 540 at 545 (SC), the Tribunal is right inlaw in interfering with the assessment of Rs.75,00,000/- invoking section 41(1) of the IncomeTax Act?lakhs to the donor, is not the so-called gift ofRs.75,00,000/- received by the assessee in thenature of remission of liability and taxableunder Section 41(1) of the Income Tax Act?Whether, on the facts and in the circumstances ofthe case and nomenclature being irrelevant and“the taxing authorities were not required to puton blinkers”; “entitled to look into thesurrounding circumstances to find out the reality(82 ITR 540 at 545 (SC), the Tribunal is right inlaw in interfering with the assessment of Rs.75,00,000/- invoking section 41(1) of the IncomeTax Act? (5) (a)Whether the Tribunal is right in law inputting the burden of proof on the Revenue, andis not such an approach and the conclusion inparagraph 12, extraneous unwarranted, uncalledfor and perverse?putting the burden of proof on the Revenue, andis not such an approach and the conclusion inparagraph 12, extraneous unwarranted, uncalledfor and perverse? (b)Did the assessee discharge the burden ofproof?proof?(6) Whether, on the facts and in the circumstances ofthe case, is not the approach and findings of theTribunal in paragraph 12 of the ordercircumlocutory and perverted and the conclusionequally perverted, quixotic, strange andillegal?”the case, is not the approach and findings of theTribunal in paragraph 12 of the ordercircumlocutory and perverted and the conclusionequally perverted, quixotic, strange andillegal?” 4. Section 41(1) of the Act specifically speaks inter alia of a deduction made in the assessment for anyyear in respect of a trading liability incurred by the assessee to be deemed to be profits and gains of businessor profession and accordingly chargeable to income tax. Inthe subject assessment year, obviously the assessee hadmade book adjustments insofar as the outstanding credit inthe business account of the creditor firm being wiped offon the basis of a credit made to the capital account of theassessee. In such circumstances, the confirmation letter asproduced by the assessee can only be treated to be anafterthought insofar as absolving the liability underSection 41(1). We hence, uphold the assessment underSection 41(1) and we hold that existence of adversebusiness situation is not a requirement under Section 41(1)to find remission of trading liability. We answer thequestions of law in favour of the Revenue and against theassessee; but, however notice that the assessee had raiseda contention that the liability as seen from the account ofM/s.Veeriah Reddiar cannot be fully considered as a tradingliability. It is also to be noticed that the remission oftrading liability can be deemed to be an income arisingfrom the profit and loss accounts only to the extent of theactual credits outstanding in the creditors account wipedoff on the basis of the book adjustments made by theassessee. Further, the question whether there is anyliability other than a trading liability insofar as the outstanding credits found in the account of M/s.VeeriahReddiar also has to be verified by the AO. Though we findthe assessment made under Section 41(1) to be proper, weremand the matter to the AO for the limited purpose oflimiting the addition under Section 41(1) to that of thetrading liability wiped off from the account of M/s.VeeriahReddiar. The assessee shall produce sufficient material tosubstantiate the liability having arisen other than undertrade between the two.Appeal allowed with a remand to the limited extentof ascertaining the actual quantum to be made addition ofas remission of trading liability under Section 41(1).Parties to suffer their respective costs. Sd/- K.VINOD CHANDRANJUDGE Vku/- Sd/- ASHOK MENONJUDGE APPENDIX APPELLANT'S ANNEXURES: ANNEXURE-A ASSESSMENT ORDER U/S.143(3) OF INCOME TAX ACT 1961 DATED 28/12/2009 ANNEXURE-BITA-44/CIT(A)-IV/KTM/09-10 DT.21/4/2010 ANNEXURE-CITAT'S CERTIFIED ORDER IN ITA NO. 434/COCH/2010 DATED 5/7/2012. [ true copy ]