The Commissioner Of Income Tax, Alwar v. M/S. Vijay Solvex Limited, Bhagwati Sadan, Swami Dayanandmarg, Alwar

HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH ATJAIPUR D.B. Income Tax Appeal No. 169 / 2012 The Commissioner of Income Tax, Alwar. ----Appellant Versus M/s. Vijay Solvex Limited, Bhagwati Sadan, Swami DayanandMarg, Alwar. ----Respondent _____________________________________________________ For Appellant(s) : Mr. Anil Mehta with Mr. Sameer SharmaFor Respondent(s) : Mr. Sanjay Jhanwar with Ms. Archana Mr. Amol Vyas _____________________________________________________ HON'BLE MR. JUSTICE K.S.JHAVERI HON'BLE MR. JUSTICE INDERJEET SINGHJudgment 04/08/2017 1. By way of this appeal, the appellant has assailed thejudgment and order of the Tribunal whereby Tribunal has partlyallowed the appeal of the department as well as assessee. 2.This court while admitting the appeal on 19.8.2015 framedfollowing substantial questions of law:- “(1) Whether the findings of the Tribunal areperverse in deleting the addition ofRs.75,00,000/- made by the AO u/s 145(3)because of the books of accounts suffered fromdefects and the correct and true state of affairsof business could not be ascertained? (2) Whether the Tribunal has legally justified inholding that the construction of room wasentitled for depreciation @ 80% by treating it as a part of wind mill for depreciation purposesspecifically when as per the rules only 10%depreciation was allowable? (3) Whether the Tribunal was legally justified inconfirming the findings of the CIT(A) and holdingthat Rs.10,20,73,725/- was not liable to tax u/s2(22)(e) on account of funds received from thecompany in which the assessee was holdingmore than 10% share capital? (4) Whether the findings of the Tribunal areperverse in holding that no disallowance under14A for interest of Rs.1,06,76,964/- waspossible alongwith the observation that the AOwas free to examine this issue afresh, withoutsetting aside this issue to the file of the AO? (5) Whether the findings of the Tribunal areperverse in reversing the findings of the CIT(A)and deleting the addition made on account ofunverified sundry creditors specifically when theassessee failed to produce confirmations fromsuch creditors? (6) Whether the findings of the Tribunal areperverse in deleting the entire disallowance offoreign travelling expenses, partially confimredby the CIT(A) when the tours was undertakenfor other than business purposes and nobusiness was shown to have been producedthere from? ” 3.Issue no.1 & 2 are covered by the decision of this court inITA No.371/2011 (CIT, Alwar vs. M/s Vijay Solvex Ltd.) decidedon 3.8.2017, therefore the same are answered in favour of theassessee. 4.Issue No.3 & 4 are covered in the light of Circulardt.12.6.2017 which we have reproduced in tax appealno.136/2012 (CIT, Alwar vs. M/s Deepak Vegpro Pvt Ltd.) decidedon 3.8.2017 where clause 2 & 3 reads as under:- “2.The Board has observed that someCourts in the recent past have held that tradeadvances in the nature of commercialtrnasactions would not fall within the ambit ofthe provisions of Section 2(22)(e) of the Act.Such views have attained finality. 2.1 Some illustrations/examples of tradeadvances/commercial transactions held to benot covered under Section 2(22)(e) of the Actare as follows: i. Advances were made by a company to asister concern and adjusted against the duesfor job work done by the sister concern. Itwas held that amounts advanced for businesstransactions do not fall within the definition ofdeemed dividend under Section 2(22)(e) ofthe Act. (CIT vs. Creative Dyeing & PrintingPvt. Ltd., Delhi High Court). “2.The Board has observed that someCourts in the recent past have held that tradeadvances in the nature of commercialtrnasactions would not fall within the ambit ofthe provisions of Section 2(22)(e) of the Act.Such views have attained finality. 2.1 Some illustrations/examples of tradeadvances/commercial transactions held to benot covered under Section 2(22)(e) of the Actare as follows: i. Advances were made by a company to asister concern and adjusted against the duesfor job work done by the sister concern. Itwas held that amounts advanced for businesstransactions do not fall within the definition ofdeemed dividend under Section 2(22)(e) ofthe Act. (CIT vs. Creative Dyeing & PrintingPvt. Ltd., Delhi High Court). ii. Advance was made by a company to itsshareholder to install plant and macinery atthe shareholder’s premises to enable him todo job work for the company so that thecompany could fulfill an export order. It washeld that as the assessee proved businessexpediency, the advance was not covered bysection 2(22)(e) of the Act. (CIT vs. AmrikSingh, P & H High Court). iii. A floating security deposit was given by acompany to its sister concern against the useof electricity generators belonging to thesister concern. The company utilised gasavailable to it from GAIL to generateelectricity and supplied it to the sister concernat concessional rates. It was held that thesecurity deposit made by the company to itssister concern was a business transactionarising in the normal course of businessbetween two concerns and the transaction didnot attract section 2(22)(e) of the Act. (CIT,Agra vs. Atul Engineering Udyog, AllahabadHigh Court). 3. In view of the above it is, a settled positionthat trade advances, which are in the natureof commercial transactions would not fallwithin the ambit of the word ‘advance’ insection 2(22)(e) of the Act. Accordingly,henceforth, appeals may not be filed on thisground by Officers of the Department and those already filed, in Courts/ Tribunals maybe withdrawn/not pressed upon.” 5.Regarding 14A, counsel for the respondent Mr. Jhanwarpointed out that the issue is squarely covered by the decision ofBombay High Court in Godrej & Boyce MFG. Co. Ltd. vs. DeputyCommissioner of Income Tax & anr. reported in (2010) 328 ITR 81which has been now confirmed by the Supreme Court in (2017) 81taxmann.com 111 (SC) wherein it has been observed as under:- “36. Section 14A as originally enacted bythe Finance Act of 2001 with effect from1.4.1962 is in the same form and languageas currently appearing in Sub-section (1)of Section 14A of the Act. Sections 14A (2)and (3) of the Act were introduced by theFinance Act of 2006 with effect from1.4.2007. The finding of the Bombay HighCourt in the impugned order that Sub-sections (2) and (3) of Section 14A isretrospective has been challenged by theRevenue in another appeal which ispresently pending before this Court. Thesaid question, therefore, need not andcannot be gone into. Nevertheless,irrespective of the aforesaid question, whatcannot be denied is that the requirementfor attracting the provisions of Section14A(1) of the Act is proof of the fact thattheexpendituresoughttobedisallowed/deducted had actually beenincurred in earning the dividend income.Insofar as the Appellant-Assessee isconcerned, the issues stand concluded inits favour in respect of the AssessmentYears 1998-1999, 1999-2000 and 2001-2002. Earlier to the introduction of Sub-sections (2) and (3) of Section 14A of theAct, such a determination was required tobe made by the Assessing Officer in hisbest judgment. In all the aforesaidassessment years referred to above it washeld that the Revenue had failed toestablish any nexus between theexpenditure disallowed and the earning of the dividend income in question. In theappeals arising out of the assessmentsmade for some of the assessment yearsthe aforesaid question was specificallylooked into from the standpoint of therequirements of the provisions of Sub-sections (2) and (3) of Section 14A of theAct which had by then been brought intoforce. It is on such consideration thatfindings have been recorded that theexpenditure in question bore no relation tothe earning of the dividend income andhence the Assessee was entitled to thebenefit of full exemption claimed onaccount of dividend income. 37. We do not see how in the aforesaid factsituation a different view could have beentaken for the Assessment Year 2002-2003.Sub-sections (2) and (3) of Section 14A ofthe Act read with Rule 8D of the Rulesmerelyprescribeaformulafordetermination of expenditure incurred inrelation to income which does not formpart of the total income under the Act in asituation where the Assessing Officer is notsatisfied with the claim of the Assessee.Whether such determination is to be madeon application of the formula prescribedunder Rule 8D or in the best judgment ofthe Assessing Officer, what the lawpostulates is the requirement of asatisfaction in the Assessing Officer thathaving regard to the accounts of theAssessee, as placed before him, it is notpossible to generate the requisitesatisfaction with regard to the correctnessof the claim of the Assessee. It is onlythereafter that the provisions of Section14A(2) and (3) read with Rule 8D of theRules or a best judgment determination, asearlierprevailing,wouldbecomeapplicable. 38. In the present case, we do not find anymention of the reasons which hadprevailed upon the Assessing Officer, whiledealing with the Assessment Year 2002-2003, to hold that the claims of theAssessee that no expenditure was incurredto earn the dividend income cannot beaccepted and why the orders of theTribunal for the earlier Assessment Years were not acceptable to the AssessingOfficer, particularly, in the absence of anynew fact or change of circumstances.Neither any basis has been disclosedestablishing a reasonable nexus betweenthe expenditure disallowed and thedividend income received. That any part ofthe borrowings of the Assessee had beendiverted to earn tax free income despitethe availability of surplus or interest freefunds available (Rs. 270.51 crores as on1.4.2001 and Rs. 280.64 crores as on31.3.2002) remains unproved by anymaterial whatsoever. While it is true thatthe principle of res judicata would notapply to assessment proceedings under theAct, the need for consistency and certaintyand existence of strong and compellingreasons for a departure from a settledposition has to be spelt out whichconspicuously is absent in the presentcase. In this regard we may remindourselves of what has been observed bythis Court in Radhasoami Satsang v.Commissioner of Income Tax (1992) 193ITR (SC) 321 [At Page 329]. We are aware of the fact that strictlyspeaking res judicata does not apply toincome tax proceedings. Again, eachassessment year being a unit, what isdecided in one year may not apply in thefollowing year but where a fundamentalaspect permeating through the differentassessment years has been found as a factone way or the other and parties haveallowed that position to be sustained bynot challenging the order, it would not beat all appropriate to allow the position tobe changed in a subsequent year.” 6.Regarding issue no.5, the finding of the tribunal reads asunder:- 64. On the other hand, the ld. Counsel of theassessee invited attention of the Bench on thewritten submissions at pages 24 to 26. Thewritten submissions of the assessee are as under :- We are aware of the fact that strictlyspeaking res judicata does not apply toincome tax proceedings. Again, eachassessment year being a unit, what isdecided in one year may not apply in thefollowing year but where a fundamentalaspect permeating through the differentassessment years has been found as a factone way or the other and parties haveallowed that position to be sustained bynot challenging the order, it would not beat all appropriate to allow the position tobe changed in a subsequent year.” 6.Regarding issue no.5, the finding of the tribunal reads asunder:- 64. On the other hand, the ld. Counsel of theassessee invited attention of the Bench on thewritten submissions at pages 24 to 26. Thewritten submissions of the assessee are as under :- “ We may point out that section 41(1) isapplicable where any loss, expenditure ortrading liability has been allowed as deductionand subsequently there is a remission orcessation thereof or such amount isunilaterally written back by the assessee. Inthe present case, there is no such remission orcessation nor there any unilateral write back ofsuch liability. The lower authorities have alsonot brought any evidence that the other partyhas written off these amounts in their books ofaccounts during the year. Only because theassessee could not file the confirmation or theamount is not paid or the person has notclaimed the payment, it can’t be presumedthat the liability has ceased to exist during theyear. The amount is otherwise coming fromearlier years and therefore addition can’t bemade during the year under consideration. It is to be noted that in subsequent years, the liability in respect of following creditors has been paid. The detailsof the same is as under:- S.No.Name of the PartyOpening Balance Date of Payment1.Shivam Securities-Cr. 19,489/-19,03.2009For exp (PB 212)2.Manohar Lal Kejriwal-2,094/-Running accountBroker (PB 213)3.Jiwa Ram-Broker (PB 1,803/-Running account214)4.Elkay Company-Broker 4,745/-Running account(PB 215)Total28,131/- In respect of remaining creditors, the amountis payable. There is no material with the lowerauthorities to presume that liability has ceasedto exist. Hence, addition made u/s 41(1) isuncalled for. Reliance is placed on the following cases:- CIT Vs. Sadul Textiles Ltd 167 ITR 634 (Raj) Itwas held that amounts representing unclaimed bonus and unclaimed wages though timebarredhad not resulted in remission or cessation oftrading liability and hence could not be taxedunder section 41(1) of the Income-tax Act,1961. Goodricke Group Ltd. Vs. CIT 338 ITR 116(Cal.) (HC) The words "obtained, whether in cash or in anyother manner, whatsoever, any amount inrespect of such loss or expenditure" incurred inany previous year in section 41(1)(a) of theIncome-tax Act, 1961, refer to the actualreceiving of cash of that amount. The amountmay be actually received or it may be adjustedby way of any adjustment entry or a creditnote or in any other form when the cash or theequivalent of the cash can be said to have beenreceived by the assessee. But it must be theobtaining of the actual amount which iscontemplated by the Legislature when it usedthe words "has obtained, whether in cash or inany other manner whatsoever, an amount in respect ofsuch loss or expenditure in the past". Thequestion whether the liability is actually barredby limitation is not a matter which can bedecided by considering the assessee's casealone but has to be decided only if the creditoris before the concerned authority. In theabsence of the creditor, it is not possible for theauthority to come to a conclusion that the debtis barred and has become unenforceable. Theremay be circumstances which may enable thecreditor to come with a proceeding forenforcement of the debt even after expiry ofthe normal period of limitation as provided inthe Limitation Act. manner whatsoever, an amount in respect ofsuch loss or expenditure in the past". Thequestion whether the liability is actually barredby limitation is not a matter which can bedecided by considering the assessee's casealone but has to be decided only if the creditoris before the concerned authority. In theabsence of the creditor, it is not possible for theauthority to come to a conclusion that the debtis barred and has become unenforceable. Theremay be circumstances which may enable thecreditor to come with a proceeding forenforcement of the debt even after expiry ofthe normal period of limitation as provided inthe Limitation Act. In the present case, assessee credited to itsprofit and loss account a sum of Rs. 5,02,646as liabilities no longer required to be writtenback since the cheques for the amount issuedto the creditorswere not presented within thevalidity period. The assessee claimed that thesum was liable to be excluded from the profitas per the profit and loss account and could notbe taxed under section 41(1) of the Act sincethe action of the assessee in writing off theamount was a unilateral act and there was noremission or cessation of the trading liabilitynor had the assessee obtained any cash or anyamount in respect of such expenditure or any benefit within the meaning of section 41(1).The Assessing Officer treated the amount asthe assessee's income under section 41(1).This was upheld by the Commissioner(Appeals) and the Tribunal. On appeal to theHigh Court held that it had not beenestablished that due to non-encashment of thecheques in question, the money involved hadbecome the money of the assessee because oflimitation or by any other statutory orcontractual right. The amount was notassessable under section 41(1). CIT Vs. Tamilnadu Warehousing Corporation292 ITR 310 (Madras) It was held that theassessee had continued to show the admittedamount of Rs.8,22,925 as liability in thebalance-sheet. The undisputed fact was that itwas a liability reflected in the balance-sheet.Once it was shown as liability by the assessee,the Commissioner was wrong in holding that itwas assessable under section 41(1) of the Act.Unless and until there is a cessation of liability,section 41(1) is not applicable. Uttam Air Products (P) Ltd Vs DCIT 99 TTJ 718(Del) It was held that, the balance of thecreditor was outstanding in the books of theassessee for a considerable period of time. Theessential dispute is as to whether in theabsence of any written off by the assessee andalso in the absence of any tangible proof of thesupplier having given up its claim, the revenueis not justified in ignoring the liability andmaking out a case for cessation of liability,when it is undisputed that the same has beenshown in the balance sheet as creditor,indicating thereby that the amount stood payable. ITO Vs R B Sethi Moolchand Nemichand (P) Ltd14 ITD 473 (JP)(TM) It was held thatadmittedly the amount had not beentransferred to the P & L account at all by theassessee. Transfer to P & L account becomessignificant only to show that there is acessation of liability at least from the point ofview of the assessee. When the assesseetreated the liabilities in the instant case aspayable and outstanding it could not be saidthat the said liabilities ceased to exist justbecause there was delay in payment. Victor Cycle (P) Ltd Vs ACIT 90 TTJ 776 (Chd)It was held that the liability in question are outstanding for the past 4 years and the samehave been accepted as such by theDepartment. There is no material on recordthat the assessee had no intention of honoringthe debt. The liability existed in the account ofthe assessee and the same has not beenwritten back by the assessee. There being nocessation of liability or remission of liability,same could not be charged to tax u/s 41(1). Victor Cycle (P) Ltd Vs ACIT 90 TTJ 776 (Chd)It was held that the liability in question are outstanding for the past 4 years and the samehave been accepted as such by theDepartment. There is no material on recordthat the assessee had no intention of honoringthe debt. The liability existed in the account ofthe assessee and the same has not beenwritten back by the assessee. There being nocessation of liability or remission of liability,same could not be charged to tax u/s 41(1). DCIT Vs Thakker Developers 115 TTJ 841(Pune) It was held that for applicability of s.41(1), ‘receipt’ of amount or benefit is anecessary condition. There being no materialon record to show that assessee was in receiptof any amount of benefit, no addition under s.41(1) could be made on the ground thatamount shown as outstanding liabilities hadbecome barred by limitation.” 65. After considering the orders of the AO andld. CIT (A) and submissions, we find thatassessee deserves to succeed in this ground.There is no dispute about liability of theassessee which is coming from last year. Thisliability has not been ceased to exist. Variouscase laws relied upon by assessee which arementioned above, are in favour of the case ofthe assessee. Therefore, in view of these factsand circumstances, we hold that since liabilityhas not ceased to exist, making addition undersection 41(1) was not justified. Accordingly, theaddition is deleted. 7.In view of the order passed by the tribunal, issue no.6 doesnot arise for consideration. 8.In that view of the matter, the issues are answered in favour of the assessee and against the department. 9.The appeal stands dismissed. (INDERJEET SINGH)J. (K.S.JHAVERI)J. Brijesh 101.