Ita/9/2021 Of Deputy Registrar Of Co Operative v. Income Tax Officer Ward -1

I.T.A No.9/2021 1 IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 19 DAY OF APRIL, 2023 PRESENT THE HON’BLE MR. JUSTICE P.S. DINESH KUMAR AND THE HON’BLE MR. JUSTICE C.M. POONACHA INCOME TAX APPEAL NO.9 OF 2021 BETWEEN: DEPUTY REGISTRAR OF CO-OPERATIVE SOCIETIES, CHITRADURGA LIQUIDATOR OF THE ASSESSEE M/S. VANI VILAS CO-OPERATIVE SUGAR FACTORY LTD VEDAVATHI NAGAR CHALLAKERE ROAD HIRIYUR, CHITRADURGA DISTRICT (REPRESENTED BY ITS DEPUTY REGISTRAR OF CO-OPERATIVE SOCIETIES AND OFFICIAL LIQUIDATOR SRI. B.R. KRISHNAMURTHY S/O SRI. B.R. RANGA SETTY AGED ABOUT 58 YEARS) PAN: …APPELLANT (BY SHRI. NARENDRAKUMAR J. JAIN, ADVOCATE) AND: INCOME TAX OFFICER, WARD -1 “AYAKARA BHAVAN” TAMATAKAL ROAD, MEDEHALLY CHITRADURGA-577 502 …RESPONDENT (BY SHRI. K.V. ARAVIND, SENIOR STANDING COUNSEL) I.T.A No.9/2021 THIS ITA IS FILED UNDER SEC.260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED 02.09.2020 PASSED IN ITA NO.2474/BANG/2018, FOR THE ASSESSMENT YEAR 2013-2014 PRAYING TO FORMULATE THE SUBSTANTIAL QUESTION OF LAW STATED THEREIN AND ALLOW THE APPEAL AND SET ASIDE THE IMPUGNED ORDER OF THE INCOME TAX APPELLATE TRIBUNAL, BENGALURU C BENCH, BEARING IN ITA NO. 2474/BANG/2018 FOR THE ASSESSMENT YEAR 2013-2014 DATED 02.09.2020, ORIGINAL ORDER OF THE TRIBUNAL IS ENCLOSED HEREWITH AS ANNEXURE A AND ETC. THIS ITA, HAVING BEEN HEARD AND RESERVED FOR JUDGMENT ON 20.3.2023 COMING ON FOR PRONOUNCEMENT OF JUDGMENT, THIS DAY, P.S.DINESH KUMAR J, PRONOUNCED THE FOLLOWING:- JUDGMENT This appeal by the Assessee, directed against the order dated September 02, 2020 in ITA No. 2474/Bang/2018 passed by the ITAT[1]has been admitted to consider the following question of law: Whether in the facts and circumstances of the case, the Tribunal has erred in not appreciating that the appellant has neither filed its return of income nor was any assessment done in the case of the appellant and thus interest was not claimed as deduction and therefore, provisions of Section 41(1) of the Act are not applicable for waiver of such interest? 1 Income Tax Appellate Tribunal I.T.A No.9/2021 2. Heard Shri.Narendra Jain, learned Advocate for the Assessee and Shri. K.V. Aravind, learned Senior Standing Counsel for the Revenue. 3. Briefly stated the facts of the case are, assessee is a co-operative sugar factory. It stopped its operation in the year 2004 and it is under the control of Liquidator. It had availed loans from various Co-operative banks and failed to pay interest accrued on the loans. The Government of Karnataka waived the interest payable by the assessee to the co-operative banks. 4. Assessee filed its return declaring ‘Nil’ income for A.Y.[2] 2013-14 and claimed that Rs 6,23,97,844/- as interest waiver from various banks on the ground that interest is not claimed as expenses in earlier years. The AO[3] passed an assessment order[4]under Section 143(3) of the Income Tax Act, 1961[5], rejecting the claim holding 2 Assessment 3 Assessing Officer 4 Dated 22.03.2016 5 ‘the Act’ for short I.T.A No.9/2021 that the expenses should be claimed in the year in which it accrues and the assessee cannot avail the benefits of carry forwarded losses as no returns have been filed for earlier years. 5. On appeal, CIT(A)[6], Davangere, allowed assessee’s appeal holding that such expenditures were not claimed, therefore never allowed in any earlier years and the applicability of Section 41(1) of the Act, 1961 did not arise and directed the AO to delete the addition made. Aggrieved by the order, Revenue preferred an appeal before ITAT. The ITAT vide order dated September 02, 2019, allowed Revenue’s appeal and set aside the order passed by the CIT(A) and remanded the matter to the AO. Aggrieved by the ITAT’s order, assessee has preferred this appeal. 6 Commissioner of Income Tax (Appeals) I.T.A No.9/2021 that the expenses should be claimed in the year in which it accrues and the assessee cannot avail the benefits of carry forwarded losses as no returns have been filed for earlier years. 5. On appeal, CIT(A)[6], Davangere, allowed assessee’s appeal holding that such expenditures were not claimed, therefore never allowed in any earlier years and the applicability of Section 41(1) of the Act, 1961 did not arise and directed the AO to delete the addition made. Aggrieved by the order, Revenue preferred an appeal before ITAT. The ITAT vide order dated September 02, 2019, allowed Revenue’s appeal and set aside the order passed by the CIT(A) and remanded the matter to the AO. Aggrieved by the ITAT’s order, assessee has preferred this appeal. 6 Commissioner of Income Tax (Appeals) I.T.A No.9/2021 6. Shri. Narendra Jain, for the assessee, praying to allow the appeal, submitted that: The ITAT has erred in not appreciating that assessee has neither filed its return of income nor made an assessment and thus interest was not claimed as deduction and therefore, provisions of Section 41(1) of the Act are not applicable for waiver of interest; The ITAT has erred in not appreciating that assessee has neither filed its return of income nor made an assessment and thus interest was not claimed as deduction and therefore, provisions of Section 41(1) of the Act are not applicable for waiver of interest; Assessee claimed Rs.6,23,97,844/- towards interest waived by various banks as one-time settlement on the ground that interest expense was not claimed as deduction in respective years; interest waived by various banks as one-time settlement on the ground that interest expense was not claimed as deduction in respective years; the return of income was not filed for the earlier years. Therefore, the interest expenditure was not claimed as deduction. Accordingly, interest waiver of Rs 6,23,97,844/- is not taxable under Section 41(1) of the Act; years. Therefore, the interest expenditure was not claimed as deduction. Accordingly, interest waiver of Rs 6,23,97,844/- is not taxable under Section 41(1) of the Act; I.T.A No.9/2021 the ITAT adopted a via-media solution and directed that statement of total income should be prepared for every year from the financial statements of the Appellant; the ITAT adopted a via-media solution and directed that statement of total income should be prepared for every year from the financial statements of the Appellant; the addition under Section 41(1) of the Act can be made only if Assessee had claimed the expenditure as deduction in the earlier years and obtained remission or benefit in respect of such expenditure in subsequent year; the addition under Section 41(1) of the Act can be made only if Assessee had claimed the expenditure as deduction in the earlier years and obtained remission or benefit in respect of such expenditure in subsequent year; one of the conditions for the applicability of Section 41(1) of the Act is actual allowance of expense in assessment. There must have been actual allowance made for expenditure or trading liability in the Assessment of an assessee in an earlier year. It is necessary to record a finding that the amount had been allowed as deduction in earlier years, in absence of which such amount will not be assessable. one of the conditions for the applicability of Section 41(1) of the Act is actual allowance of expense in assessment. There must have been actual allowance made for expenditure or trading liability in the Assessment of an assessee in an earlier year. It is necessary to record a finding that the amount had been allowed as deduction in earlier years, in absence of which such amount will not be assessable. I.T.A No.9/2021 7. In support of his contentions, Shri. Narendra Jain has placed reliance on following authorities: i.CIT Vs.Rayala Corporation (P) Ltd[7]; ii.CIT Vs. Lal Textiles Finishing Mills (P) Ltd[8] 8. Opposing the appeal, Shri.K.V.Aravind, for the I.T.A No.9/2021 7. In support of his contentions, Shri. Narendra Jain has placed reliance on following authorities: i.CIT Vs.Rayala Corporation (P) Ltd[7]; ii.CIT Vs. Lal Textiles Finishing Mills (P) Ltd[8] 8. Opposing the appeal, Shri.K.V.Aravind, for the Revenue, submitted that, assessee has not filed the returns of income for the claim for the earlier years and no claim has been made by filing the returns of income. The direction given by the ITAT is only to carry out the exercise on factual matrix of the case. 9. We have carefully heard the rival contentions and perused the records. 10. Undisputed fact of the case is, assessee stopped its operation in the year 2004 and it is under the control of Liquidator. Assessee has not filed its return from A.Y. 2003-04 onwards. As per mercantile system of accounting, assessee had been accounting for interest 7 [2013] 36 taxmann.com285 (Madras) 8 (1989)180 ITR 45 I.T.A No.9/2021 expenses every year in its books of accounts showing it as payable. 11. Shri. Jain’s argument in sum and substance is, assessee has not filed its return of income after A.Y. 2003-04. Therefore, the interest expenditure was not claimed as deduction. Accordingly, interest waiver of Rs 6,23,97,844/- is not taxable under Section 41(1) of the Act. 12. Section 41(1) of the Act reads as follows: 41. (1) Where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee (hereinafter referred to as the first-mentioned person) and subsequently during any previous year- (a) the first-mentioned person has obtained", whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure" or some benefit in respect of such trading liability" by way of remission or cessation thereof, the amount 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 that previous year, whether the business or profession in respect of I.T.A No.9/2021 which the allowance or deduction has been made is in existence in that year or not; or (b) the successor in business has obtained", whether in cash or in any other manner whatsoever, any amount in respect of which loss or expenditure was incurred by the first-mentioned person or some benefit in respect of the trading liability referred to in clause (a) by way of remission or cessation thereof", the amount obtained by the successor in business or the value of benefit accruing to the successor in business shall be deemed to be profits and gains of the business or profession, and accordingly chargeable to income-tax as the income of that previous year. 13. One of the essential requirements of Section 41(1) of the Act is that there should be an allowance or deduction made in the assessment for any year in respect of loss or expenditure or trading liability. The AO has recorded a finding in para 3 of its order that the assessee has not filed the returns for the claim for the earlier years and thus no claim has been made by filing returns of income. 14. Shri. Jain is right in his submission that Section 41(1) of the Act shall be applicable only when I.T.A No.9/2021 allowance is made in any assessment or reassessment for any year. In the present case, no assessment or reassessment has been made for any A.Ys. Therefore, no allowance or deductions are claimed for any A.Ys. 15. We have also perused the authority relied upon by assessee. In Rayala Corporation, the High Court of Madras has held as follows: 14. Shri. Jain is right in his submission that Section 41(1) of the Act shall be applicable only when I.T.A No.9/2021 allowance is made in any assessment or reassessment for any year. In the present case, no assessment or reassessment has been made for any A.Ys. Therefore, no allowance or deductions are claimed for any A.Ys. 15. We have also perused the authority relied upon by assessee. In Rayala Corporation, the High Court of Madras has held as follows: “14. As far as the present case is concerned, in the context of Section 139(9) of the Act, with the return filed treated as non est in the eye of law, we hold that the expression "where an allowance or deduction has been made in the assessment for any year" has to be read as any allowance or deduction considered in the assessment for the purpose of invoking Section 41(1) of the Act. For the applicability of Section 41(1) of the Act, the prerequisite condition is that an allowance or deduction has been made in the assessment for any of the years in respect of an expenditure, loss or trading liability incurred by the assessee and subsequently during any previous year, the assessee has received remission or obtained refund of the said amount. Thus Section 41(1) creates a legal fiction and hence, has to be strictly complied with if any addition to the income is sought to be made by the Revenue Narayanan Chettiary Industries (supra). Thus unless the amount had been allowed as a deduction in the I.T.A No.9/2021 earlier years, the question of invoking Section 41(1) does not arise.” (Emphasis Supplied) 16. The CIT(A) has rightly recorded in para 4 of its order that: “It is clear that, such expenditures were not claimed, therefore never allowed in any earlier years. There was never an assessment, so the question of applicability of Sec. 41(1) does not arise. In view of this, the AO is directed to delete the addition made. thus, the ground succeeds.” 17. It is not in dispute that assessee has not filed return of income in the earlier A.Ys. claiming deduction of interest and no assessment or reassessment has been made for any A.Ys. Hence, Section 41(1) of the Act is not applicable and we find no error in the CIT(A)’s order. 18. Hence, the following: ORDER (a)Appeal is allowed. (b)The questions of law are answered in favour of the assessee and against the Revenue. I.T.A No.9/2021 (c)ITA No. 2474/Bang/2018 passed by the ITAT dated September 09, 2020 is set-aside. (d)ITA No. CIT(A)/10009/DVG/2016-17 passed by CIT(A), Davangere dated June 01, 2018 is restored. by CIT(A), Davangere dated June 01, 2018 is restored. No costs. Sd/-JUDGE Sd/- JUDGE SPS